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EXHIBIT 99.1
INFORMATION STATEMENT
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THE NEW D&B CORPORATION
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
------------------------
MOODY'S CORPORATION
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
This Information Statement is being furnished in connection with the
distribution (the "Distribution") to holders of common stock, par value $0.01
per share (the "D&B Common Stock"), of The Dun & Bradstreet Corporation ("D&B")
of all of the outstanding shares of common stock, par value $0.01 per share (the
"New D&B Common Stock"), of The New D&B Corporation ("New D&B"). As of September
30, 2000 (the "Distribution Date"), New D&B will be comprised of businesses
which accounted for approximately 88.2% of D&B's assets as of December 31, 1999
and 71.4% of D&B's revenues in 1999. See "The New D&B Corporation Business".
Shares of New D&B Common Stock will be distributed to holders of D&B Common
Stock of record as of the close of business on September 20, 2000 (the "Record
Date"). Each such holder will receive one share of New D&B Common Stock for
every two shares of D&B Common Stock held on the Record Date. Certificates
representing shares of New D&B Common Stock will be mailed on October 2, 2000 or
as promptly as practicable thereafter. No consideration will be paid by D&B's
stockholders for shares of New D&B Common Stock. Prior to the date hereof, there
has not been any established "regular way" trading market for the New D&B Common
Stock, although a "when-issued" market commenced on September 18, 2000. Shares
of New D&B Common Stock have been accepted for listing on the New York Stock
Exchange (the "NYSE") under the symbol "DNB". See "The Distribution--Listing and
Trading of New D&B Common Stock and Moody's Common Stock". In connection with
the Distribution, New D&B will change its name to "The Dun & Bradstreet
Corporation" and D&B will change its name to "Moody's Corporation".
After the Distribution, D&B's only remaining business will be the Moody's
Business (as defined below). See "Moody's Corporation Business". The symbol
under which shares of D&B Common Stock (which, for periods from and after the
Distribution, will be referred to herein as "Moody's Common Stock") will trade
on the NYSE will become "MCO". See "The Distribution--Listing and Trading of New
D&B Common Stock and Moody's Common Stock".
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY RECIPIENTS OF NEW D&B COMMON STOCK AND
CONTINUING HOLDERS OF MOODY'S COMMON STOCK.
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NO STOCKHOLDER APPROVAL OF THE DISTRIBUTION IS REQUIRED OR SOUGHT. WE ARE
NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
Stockholders of D&B with inquiries related to the Distribution should
contact EquiServe Trust Company, N.A., the Distribution Agent for the
Distribution, at (800) 222-7850 or Investor Relations for D&B at (908) 665-5026.
The date of this Information Statement is September 20, 2000.
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TABLE OF CONTENTS
PAGE
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Questions and Answers About The Distribution................ ii
Information Statement Summary............................... 1
Businesses of The New D&B Corporation And Moody's
Corporation............................................... 1
The Distribution............................................ 2
The New D&B Corporation (Accounting Successor to D&B)
Summary Financial Data.................................... 7
Moody's Corporation Summary Financial Data.................. 8
Forward-Looking Statements.................................. 10
Risk Factors................................................ 11
The Distribution............................................ 19
Relationship Between The New D&B Corporation and Moody's
Corporation After
The Distribution.......................................... 24
Dividend Policies........................................... 30
The New D&B Corporation (Accounting Successor to D&B)
Capitalization............................................ 31
The New D&B Corporation (Accounting Successor to D&B)
Selected Financial Data................................... 33
The New D&B Corporation (Accounting Successor to D&B)
Unaudited Consolidated Pro Forma Condensed Financial
Statements................................................ 35
The New D&B Corporation (Accounting Successor to D&B)
Unaudited Consolidated Pro Forma Condensed Statements of
Operations................................................ 36
The New D&B Corporation (Accounting Successor to D&B)
Unaudited Consolidated Pro Forma Condensed Balance
Sheet..................................................... 40
The New D&B Corporation (Accounting Successor to D&B)
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 42
The New D&B Corporation Business............................ 56
The New D&B Corporation Management and Executive
Compensation.............................................. 64
The New D&B Corporation Security Ownership by Certain
Beneficial Owners and Management.......................... 73
Description of The New D&B Corporation Capital Stock........ 75
Moody's Corporation Capitalization.......................... 83
Moody's Corporation Selected Financial Data................. 84
Moody's Corporation Unaudited Combined Pro Forma Condensed
Financial Statements...................................... 86
Moody's Corporation Unaudited Combined Pro Forma Condensed
Statements of Operations.................................. 87
Moody's Corporation Unaudited Combined Pro Forma Condensed
Balance Sheet............................................. 89
Moody's Corporation Notes to Unaudited Combined Pro Forma
Condensed Financial Statements............................ 90
Moody's Corporation Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 91
Moody's Corporation Business................................ 101
Moody's Corporation Management and Executive Compensation... 107
Moody's Corporation Security Ownership by Certain Beneficial
Owners and Management..................................... 114
Description of Moody's Corporation Capital Stock............ 116
Available Information....................................... 123
Reports of The New D&B Corporation.......................... 124
Index to Financial Statements............................... F-1
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QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION
Q1: WHAT IS THE DISTRIBUTION?
A: The Distribution is the method by which The Dun & Bradstreet Corporation will
be separated into two publicly traded companies: (a) The New D&B Corporation
and (b) Moody's Corporation. Pursuant to the Distribution, D&B will
distribute to its stockholders in a tax-free dividend one share of New D&B
Common Stock for every two shares of D&B Common Stock held as of the close of
business on the record date of the Distribution. Immediately after the
Distribution, D&B's stockholders will still own all of D&B's current
businesses, but they will own them through their separate investments in The
New D&B Corporation and Moody's Corporation.
Q2: WHAT IS THE NEW D&B CORPORATION?
A: The New D&B Corporation is the leading worldwide provider of business
information and related decision-support services and is a leader in
commercial receivables management services. New D&B maintains the largest and
most comprehensive database of business credit, marketing and purchasing
information of its kind. This database is the platform upon which New D&B
delivers to its customers -- through various electronic, print and other
media -- quality business information and related products and services. The
New D&B Corporation is a new company that was formed to effect the
Distribution and is currently a subsidiary of D&B. In connection with the
Distribution, it will change its name to "The Dun & Bradstreet Corporation".
Q3: WHAT IS MOODY'S CORPORATION?
A: Moody's Corporation is a global leader in the publishing and dissemination of
credit opinions, ratings, research and risk analysis. Moody's helps its
clients analyze fixed-income securities, derivatives, insurance and other
obligations by providing reliable, credible and independent assessments of
credit risk. After the Distribution, D&B's only business will be the Moody's
business and its principal subsidiary will be Moody's Investors Service, Inc.
Accordingly, in connection with the Distribution, D&B will change its name to
"Moody's Corporation".
Q4: WHY IS D&B SEPARATING ITS BUSINESSES?
A: D&B believes that separating its businesses in the Distribution will better
position both New D&B and Moody's to achieve their strategic and financial
objectives, benefitting both customers and stockholders of the companies. D&B
believes the separation will enhance management focus on the businesses,
allowing each company to allocate resources and set compensation policies to
meet its own strategic requirements. D&B also believes the separation will
provide New D&B and Moody's with additional financial flexibility to pursue
growth opportunities and will lead to better investor understanding of the
different businesses.
Q5: HAS D&B DONE THIS BEFORE?
A: D&B successfully effected a spin-off of Cognizant Corporation and ACNielsen
Corporation in November 1996 and a spin-off transaction in which R.H.
Donnelley Corporation became an independent company in June 1998.
Q6: WHY IS THIS TRANSACTION STRUCTURED AS A DISTRIBUTION?
A: The Distribution is the most tax-efficient means of separating D&B's
businesses. D&B has received a ruling from the IRS that for federal income
tax purposes the Distribution of the shares of New D&B Common Stock to D&B
stockholders will be tax-free to D&B and its stockholders, except to the
extent that cash is received for fractional interests of New D&B Common
Stock.
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Q7: WHAT WILL D&B STOCKHOLDERS RECEIVE IN THE DISTRIBUTION?
A: In the Distribution, D&B stockholders will receive one share of New D&B
Common Stock, and one associated Right under New D&B's stockholder rights
plan, for every two shares of D&B Common Stock they own as of the record date
of the Distribution. Immediately after the Distribution, D&B's stockholders
will still own their shares of D&B Common Stock and the same stockholders
will still own all of D&B's businesses, but they will own them as two
separate investments rather than as a single investment. After the
Distribution, the certificates representing the "old" D&B Common Stock will
represent such stockholders' interests in the Moody's businesses and the
certificates representing the New D&B Common Stock that stockholders receive
in the Distribution will represent their interest in the New D&B businesses.
Fractional shares of New D&B Common Stock will not be distributed. Fractional
shares of New D&B Common Stock will be aggregated and sold in the public
market by the Distribution Agent, and the aggregate proceeds (net of
brokerage fees) will be distributed ratably to those stockholders otherwise
entitled to such fractional shares.
Q8: WHAT DOES A D&B STOCKHOLDER NEED TO DO NOW?
A: D&B stockholders do not need to take any action. The approval of the D&B
stockholders is not required to effect the Distribution and D&B is not
seeking a proxy from any stockholders. D&B STOCKHOLDERS SHOULD NOT SEND IN
THEIR D&B SHARE CERTIFICATES. D&B STOCKHOLDERS WILL AUTOMATICALLY RECEIVE
THEIR SHARES OF NEW D&B COMMON STOCK WHEN THE DISTRIBUTION IS EFFECTED.
Q9: WHERE CAN D&B STOCKHOLDERS GET MORE INFORMATION?
A: D&B stockholders with additional questions related to the Distribution should
contact EquiServe Trust Company, N.A., the Distribution Agent for the
Distribution, at P.O. Box 2500, Jersey City, NJ 07310-2500, Attention:
Investor Relations, telephone number: (800) 222-7850. Questions may also be
directed to Investor Relations for D&B at One Diamond Hill Road, Murray Hill,
NJ 07974, telephone number: (908) 665-5026.
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INFORMATION STATEMENT SUMMARY
The following is a summary of certain information contained in this
Information Statement. This summary is included for convenience only and should
not be considered complete. This summary is qualified in its entirety by the
more detailed information and financial statements contained elsewhere in this
Information Statement. In this Information Statement, unless the context
otherwise requires, "D&B" refers to The Dun & Bradstreet Corporation on or prior
to the Distribution Date, and "Moody's" refers to Moody's Investors Service,
Inc. (a D&B subsidiary) prior to the Distribution Date and to D&B (which will
change its name to "Moody's Corporation") from and after the Distribution Date.
In this Information Statement, unless the context otherwise requires, "New D&B"
refers to The New D&B Corporation, which is the company whose shares will be
distributed in the Distribution and which will change its name to "The Dun &
Bradstreet Corporation" in connection with the Distribution. Certain capitalized
terms used in this summary are defined elsewhere in this Information Statement.
BUSINESSES OF THE NEW D&B CORPORATION AND
MOODY'S CORPORATION
The New D&B Corporation....... The New D&B Corporation is a newly created
Delaware corporation, the business of which
will consist of Dun & Bradstreet, Inc. ("D&B
Inc."), a leading worldwide provider of
business information products and services as
well as commercial receivables management
services (the "New D&B Business").
Clifford L. Alexander, Jr. is currently
Chairman and Chief Executive Officer and a
director of D&B. Mr. Alexander will resign from
his position as Chief Executive Officer of D&B
effective upon the Distribution. Allan Z. Loren
is currently Chairman and Chief Executive
Officer of D&B Inc. and a director of D&B and
New D&B. Mr. Loren will resign from his
position as a director of D&B effective upon
the Distribution and will be the Chairman and
Chief Executive Officer and a director of New
D&B after the Distribution. Currently, the
Board of Directors of New D&B is comprised of
Mr. Loren, Ronald L. Kuehn, Jr., Victor A.
Pelson, Michael R. Quinlan and Naomi O.
Seligman (each of whom currently is a director
of D&B). New D&B expects to supplement its
Board of Directors with additional outside
directors in the months following the
Distribution. See "The New D&B Corporation
Management and Executive Compensation--The New
D&B Corporation Board of Directors". In
addition to Mr. Loren, it is anticipated that
the other executive officers of New D&B at the
time of the Distribution will be the persons
who are serving as executive officers of D&B
immediately prior to the Distribution, and such
persons will resign from their positions at D&B
effective upon the Distribution. New D&B
anticipates that organizational changes
currently under consideration may result in the
naming of additional executive officers. See
"The New D&B Corporation Management and
Executive Compensation--The New D&B Corporation
Executive Officers".
Moody's Corporation........... As a result of the Distribution, the global
credit rating, research and risk management
businesses (the "Moody's Business") currently
conducted by D&B will remain with D&B.
Therefore, in connection with the Distribution,
D&B will change its name to "Moody's
Corporation".
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John Rutherfurd, Jr. is currently President of
Moody's Investors Service, Inc. and a director
of D&B and, after the Distribution, will be the
President and Chief Executive Officer and a
director of Moody's Corporation. At the time of
the Distribution, the other directors of
Moody's Corporation will be Mr. Alexander (who
will be the company's non-executive Chairman),
Hall Adams, Jr., Mary Johnston Evans, Robert R.
Glauber and Henry A. McKinnell, Jr. (each of
whom currently is a director of D&B). Moody's
expects to supplement its Board of Directors
with additional outside directors in the months
following the Distribution. See "Moody's
Corporation Management and Executive
Compensation--Moody's Corporation Board of
Directors". In addition to Mr. Rutherfurd, the
other executive officers of Moody's Corporation
immediately after the Distribution will be
drawn from the current management of Moody's.
See "Moody's Corporation Management and
Executive Compensation--Moody's Executive
Officers".
THE DISTRIBUTION
Form of Transaction; Basis of
Presentation................ The Distribution is the method by which D&B
will be separated into two publicly traded
companies: The New D&B Corporation and Moody's
Corporation. In the Distribution, D&B will
distribute to its stockholders shares of New
D&B Common Stock, which will represent a
continuing interest in the businesses of D&B
that will be conducted by New D&B. After the
Distribution, D&B's only business will be the
Moody's Business, and the shares of D&B Common
Stock held by D&B stockholders will represent a
continuing ownership interest only in that
business. In connection with the Distribution:
(a) D&B will change its name to "Moody's
Corporation" (and, accordingly, for periods
from and after the Distribution, D&B Common
Stock will be referred to herein as "Moody's
Common Stock"), and (b) New D&B will change its
name to "The Dun & Bradstreet Corporation".
Stockholders should note that notwithstanding
the legal form of the Distribution described
above whereby D&B expects to spin off New D&B,
because of the relative significance of the New
D&B Business to D&B, New D&B will be treated as
the "accounting successor" to D&B for financial
reporting purposes. Therefore, the historical
financial information for New D&B included
herein is that of D&B and does not reflect the
separation of the New D&B Business from the
Moody's Business resulting from the
Distribution. However, in light of the
Distribution, the historical financial
statements of New D&B, as accounting successor
to D&B, have been restated herein to present
Moody's as a discontinued operation.
The historical financial information for
Moody's has been prepared on a stand-alone
basis as described in Note 1 to the Financial
Statements of Moody's Corporation included
elsewhere in this Information Statement. Such
historical financial information includes
allocations of certain D&B corporate assets,
liabilities and expenses.
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Shares to be Distributed...... The Distribution will be made to holders of
record as of the close of business on the
Record Date of issued and outstanding shares of
D&B Common Stock. Each holder of D&B Common
Stock on the Record Date will receive as a
dividend one share of New D&B Common Stock for
every two shares of D&B Common Stock held as of
the close of business on the Record Date. Based
on the 162,427,039 shares of D&B Common Stock
outstanding as of September 20, 2000, the
Distribution will consist of 81,213,520 shares
of New D&B Common Stock.
The Board of Directors of New D&B has adopted a
stockholder rights plan. Certificates
evidencing shares of New D&B Common Stock
issued in the Distribution will therefore
represent the same number of New D&B Rights (as
defined below) to be issued under the New D&B
Rights Plan. See "Description of The New D&B
Corporation Capital Stock--The New D&B
Corporation Rights Plan". Unless the context
otherwise requires, references herein to the
New D&B Common Stock include the related New
D&B Rights.
D&B stockholders will not have to make any
payment or surrender or exchange certificates
representing shares of D&B Common Stock in
order to receive their pro rata share of the
Distribution. NO VOTE OF HOLDERS OF D&B COMMON
STOCK IS REQUIRED OR SOUGHT IN CONNECTION WITH
THE DISTRIBUTION.
Fractional Share Interests.... Fractional shares of New D&B Common Stock will
not be distributed. Fractional shares of New
D&B Common Stock will be aggregated and sold in
the public market by the Distribution Agent,
and the aggregate cash proceeds (net of
brokerage commissions) will be distributed
ratably to those stockholders otherwise
entitled to such fractional interests. See "The
Distribution--Manner of Effecting the
Distribution."
Record Date................... The Record Date is September 20, 2000. In order
to be entitled to receive shares of New D&B
Common Stock in the Distribution, holders of
shares of D&B Common Stock must be stockholders
as of the close of business on the Record Date.
Distribution Date............. The "Distribution Date" is September 30, 2000.
Distribution Agent............ EquiServe Trust Company, N.A. will be the
Distribution Agent (the "Distribution Agent")
for the Distribution.
Federal Income Tax
Consequences of the
Distribution................ D&B has received a ruling from the Internal
Revenue Service ("IRS") to the effect that the
Distribution will be tax-free for Federal
income tax purposes, except to the extent that
cash is received in lieu of fractional
interests in New D&B Common Stock. D&B
stockholders will apportion their tax basis in
D&B Common Stock held immediately before the
Distribution among such D&B Common Stock (which
will represent each such stockholder's interest
in Moody's after the Distribution), and New D&B
Common Stock received in the Distribution
(including fractional shares of New D&B Common
Stock), based on the relative fair market
values of the D&B Common Stock and the New D&B
Common Stock. D&B will provide appropriate
information to each
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holder of record of D&B Common Stock as of the
close of business on the Record Date concerning
the basis allocation. See "The
Distribution--Federal Income Tax Consequences
of the Distribution".
Stock Exchange Listing and
Trading....................... Prior to the date hereof, there has not been
any established "regular way" trading market
for the New D&B Common Stock. Shares of New D&B
Common Stock have been accepted for listing on
the NYSE under the symbol "DNB", and trading on
a "when-issued" basis commenced on September
18, 2000. On the first NYSE trading day
following the Distribution Date, "when-issued"
trading (i.e., a trade which is completed only
if the subject security is actually issued) in
respect of the New D&B Common Stock will end
and "regular-way" trading (i.e., normal NYSE
trading) will begin. See "The
Distribution--Listing and Trading of New D&B
Common Stock and Moody's Common Stock".
Moody's Common Stock (i.e., the "old" D&B
Common Stock) will continue to trade on the
NYSE, but the symbol under which it trades will
change from "DNB" to "MCO". However, because of
the significant changes that will take place at
D&B as a result of the Distribution, the
trading market for Moody's Common Stock after
the Distribution may be significantly different
from that for D&B Common Stock prior to the
Distribution. See "The Distribution--Listing
and Trading of New D&B Common Stock and Moody's
Common Stock".
Relationship Between The New
D&B Corporation and Moody's
Corporation After the
Distribution................ After the Distribution, neither New D&B nor
Moody's will have any ownership interest in the
other and each of New D&B and Moody's will be
an independent public company. New D&B and D&B
will enter into certain agreements governing
the relationships between New D&B and Moody's
subsequent to the Distribution and providing
for the allocation of tax, employee benefits
and certain other liabilities and obligations
arising from periods prior to the Distribution,
including contingent liabilities relating to
certain litigation. These agreements will
include, among other things, provisions with
respect to the issuance of stock options to
employees of New D&B and Moody's. See
"Relationship Between The New D&B Corporation
and Moody's Corporation After the
Distribution".
Certain Indebtedness and
Minority Interest Financing... In connection with the Distribution, D&B has
borrowed funds to repay in full its commercial
paper obligations. Also in connection with the
Distribution, responsibility for D&B's
obligations under the minority interest
financing (relating to the investment
partnership described in Note 12 to D&B's
Consolidated Financial Statements and Notes
thereto included elsewhere in this Information
Statement) will be allocated to New D&B. It is
currently estimated that New D&B also will
assume a portion of the indebtedness of D&B and
will receive a portion of the cash of D&B in
amounts such that the net indebtedness of New
D&B (plus the minority interest obligations)
will approximate the net indebtedness of
Moody's at the time of the Distribution and
after giving
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effect to the matters discussed in "The
Distribution--Certain Indebtedness and Minority
Interest Financing".
Dividend Policies............. The payment and level of cash dividends by New
D&B and Moody's after the Distribution will be
subject to the discretion of each company's
Board of Directors. It is anticipated that
Moody's initially will pay a quarterly dividend
between $.04 and $.06 per share. In addition,
it is anticipated that New D&B initially will
not pay dividends and will use future earnings
to finance operations, expand its Internet and
e-commerce-related business and to fund a share
repurchase program to offset the dilutive
effect of shares issued under employee benefits
arrangements. However, future dividend
decisions, in each case, will be based on, and
affected by, a number of factors, including the
respective operating results and financial
requirements of each company on a stand-alone
basis as well as applicable legal and
contractual restrictions. See "Dividend
Policies".
Antitakeover Provisions....... The Restated Certificate of Incorporation and
Amended and Restated By-laws of New D&B contain
provisions that may have the effect of
discouraging an acquisition of control of New
D&B not approved by its Board of Directors.
Such provisions may also have the effect of
discouraging third parties from making
proposals involving an acquisition or change of
control of New D&B, although such proposals, if
made, might be considered desirable by a
majority of the stockholders of New D&B. Such
provisions could further have the effect of
making it more difficult for third parties to
cause the replacement of the Board of Directors
of New D&B. These provisions (and the
provisions of the stockholders rights plan
described below) have been designed to (i)
minimize the prospects of changes in control
that could jeopardize the tax-free nature of
the Distribution by assuring meaningful Board
involvement in any such proposed transactions
and (ii) enable New D&B to develop its
businesses and foster its long-term growth
without disruptions caused by the threat of a
takeover not deemed by its Board of Directors
to be in the best interests of New D&B and its
stockholders. Certain provisions of the
Distribution Agreement to be entered into
between D&B and New D&B that are also intended
to preserve the tax-free nature of the
Distribution may also have the effect of
discouraging third parties from making
proposals involving an acquisition or change of
control of New D&B or Moody's. See
"Relationship Between The New D&B Corporation
and Moody's Corporation After the
Distribution--Distribution Agreement".
New D&B has adopted a stockholder rights plan.
The stockholder rights plan is designed to
protect stockholders in the event of an
unsolicited offer and other takeover tactics.
The provisions of the stockholder rights plan
may render an unsolicited takeover of New D&B
more difficult or less likely to occur or might
prevent such a takeover. See "Description of
The New D&B Corporation Capital Stock--The New
D&B Corporation Rights Plan".
New D&B is subject to provisions of Delaware
corporate law which may restrict certain
business combination transactions. See
"Description of The New D&B Corporation Capital
Stock--Delaware General Corporation Law".
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See also "Description of The New D&B
Corporation Capital Stock--Provisions of The
New D&B Corporation Restated Certificate of
Incorporation and Amended and Restated By-laws
Affecting Change in Control".
Review of Antitakeover
Measures by Independent Board
Committee................... The Board of Directors of New D&B will
establish an independent committee of the Board
to review the New D&B stockholder rights plan
and other antitakeover measures. Within two
years following the Distribution, this
committee will report to the Board as to
whether such measures continue to be in the
best interests of New D&B's stockholders. If it
deems appropriate, the independent committee
will recommend to the Board that all or some of
such measures should be modified or terminated.
See "Description of the New D&B Corporation
Capital Stock--Review of Antitakeover Measures
by Independent Board Committee".
Risk Factors.................. Stockholders should carefully consider the
matters discussed under the section entitled
"Risk Factors" in this Information Statement.
* * *
This Information Statement is being furnished by D&B solely to provide
information to stockholders of D&B who will receive New D&B Common Stock in the
Distribution and who will own Moody's Common Stock immediately after the
Distribution. It is not, and is not to be construed as, an inducement or
encouragement to buy or sell any securities of D&B, New D&B or Moody's. The
information contained in this Information Statement is believed by D&B and New
D&B to be accurate with respect to D&B, New D&B and Moody's as of the date set
forth on the cover. Changes may occur after that date, and none of D&B, New D&B
or Moody's will update the information except in the normal course of their
respective public disclosure practices.
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THE NEW D&B CORPORATION
(ACCOUNTING SUCCESSOR TO D&B)
SUMMARY FINANCIAL DATA
The Summary Financial Data of New D&B are derived from the audited annual
and unaudited interim financial statements of D&B, which reflect the Moody's
Business as a discontinued operation. The historical financial statements of D&B
as of December 31, 1998 and 1999 and for each of the years in the three-year
period ended December 31, 1999, and as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000, are contained elsewhere in this Information
Statement. The information set forth below should be read in conjunction with,
and is qualified in its entirety by, the information under "The New D&B
Corporation (Accounting Successor to D&B) Selected Financial Data", "The New D&B
Corporation (Accounting Successor to D&B) Unaudited Consolidated Pro Forma
Condensed Financial Statements" and "The New D&B Corporation (Accounting
Successor to D&B) Management's Discussion and Analysis of Financial Condition
and Results of Operations" and in D&B's Consolidated Financial Statements and
Notes thereto included elsewhere in this Information Statement.
FOR THE YEAR ENDED DECEMBER 31, FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------------------ -----------------------------------
HISTORICAL HISTORICAL
-------------------------------- PRO FORMA(1) ------------------ PRO FORMA(1)
1997 1998 1999 1999 1999 2000 2000
-------- -------- -------- ------------ ------- ------- -------------
(AMOUNTS IN MILLIONS, EXCEPT FOR PER SHARE DATA)
STATEMENT OF OPERATIONS
DATA:
Operating Revenues....... $1,353.6 $1,420.5 $1,407.7 $1,407.7 $703.8 $704.3 $704.3
Income from Continuing
Operations............. $ 93.2 $ 86.2 $ 81.3 $ 89.5 $ 39.3 $ 48.1 $ 52.7
EARNINGS PER SHARE OF
COMMON STOCK FROM
CONTINUING OPERATIONS:
Basic.................... $ .55 $ .51 $ .50 $ .55 $ .24 $ .30 $ 0.33
Diluted.................. $ .54 $ .50 $ .50 $ .55 $ .24 $ .30 $ 0.32
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
Basic.................... 170.8 169.5 162.3 162.3 163.6 161.5 161.5
Diluted.................. 172.6 171.7 164.3 164.3 166.2 162.8 162.8
UNAUDITED EARNINGS PER
SHARE OF COMMON STOCK
FROM CONTINUING
OPERATIONS, ADJUSTED
FOR DISTRIBUTION
RATIO(2):
Basic.................... $ 1.10 $ 1.02 $ 1.00 $ 1.10 $ .48 $ .60 $ .66
Diluted.................. $ 1.08 $ 1.00 $ 1.00 $ 1.10 $ .48 $ .60 $ .64
AS OF DECEMBER 31,
-------------------------------- AS OF JUNE 30,
HISTORICAL --------------------------
-------------------------------- HISTORICAL PRO FORMA(1)
1997 1998 1999 2000 2000
-------- -------- -------- ---------- ------------
(AMOUNT IN MILLIONS) (AMOUNT IN MILLIONS)
BALANCE SHEET DATA:
Total Assets........................ $1,729.4 $1,574.7 $1,574.8 $1,428.4 $1,428.4
Minority Interest Financing......... $ 300.0 $ 300.0 $ 300.0 $ 300.0 $ 300.0
Shareholders' (Deficit) Equity...... $ (527.7) $ (371.0) $ (416.6) $ (302.6) $ 9.1
- ---------------
(1) See "The New D&B Corporation (Accounting Successor To D&B) Unaudited
Consolidated Pro Forma Condensed Financial Statements".
(2) In the Distribution, each D&B shareholder will receive one share of New D&B
Common Stock for every two shares of D&B Common Stock held as of the close
of business on the Record Date.
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MOODY'S CORPORATION
SUMMARY FINANCIAL DATA
The Summary Financial Data of Moody's as of December 31, 1998 and 1999, and
for each of the years in the three-year period ended December 31, 1999, are
derived from the audited financial statements of Moody's included elsewhere in
this Information Statement. Moody's audited financial statements included
elsewhere in this Information Statement are presented as if Moody's was a
stand-alone entity for all periods presented. The Summary Financial Data of
Moody's as of June 30, 2000, and for the six months ended June 30, 1999 and
2000, are derived from the unaudited financial statements of Moody's, and, in
the opinion of management, include all necessary adjustments for a fair
presentation of such data in conformity with generally accepted accounting
principles. The financial data included herein may not necessarily reflect the
results of operations and financial position of Moody's in the future or what
they would have been had it been a separate entity. The information set forth
below should be read in conjunction with, and is qualified in its entirety by,
the Moody's information under "Moody's Corporation Capitalization", "Moody's
Corporation Selected Financial Data", "Moody's Corporation Unaudited Combined
Pro Forma Condensed Financial Statements", "Moody's Corporation Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Moody's Corporation Combined Financial Statements and Notes thereto included
elsewhere in this Information Statement.
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FOR THE YEAR ENDED DECEMBER 31, FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------------------------ ----------------------------------------
HISTORICAL HISTORICAL
--------------------------------------- PRO FORMA(1) ------------------------- PRO FORMA(1)
1997 1998 1999 1999 1999 2000 2000
----------- ----------- ----------- ------------ ----------- ----------- ------------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues(2)................... $ 457.4 $ 513.9 $ 564.2 $ 564.2 $ 284.5 $ 288.7 $ 288.7
Net Income.................... 105.9 142.0 155.6 151.2 75.2 77.6 74.5
PRO FORMA EARNINGS PER SHARE
DATA(3):
Basic......................... $ .62 $ .84 $ .96 $ .93 $ .46 $ .48 $ .46
Diluted....................... .61 .83 .95 .92 .45 .48 .46
SHARES USED IN COMPUTING PRO
FORMA EARNINGS PER SHARE(3):
Basic......................... 170,765,000 169,492,000 162,253,000 162,253,000 163,627,000 161,541,000 161,541,000
Diluted....................... 172,552,000 171,703,000 164,284,000 164,284,000 166,186,000 162,793,000 162,793,000
AS OF DECEMBER 31, AS OF JUNE 30,
--------------------------------- ----------------------------
HISTORICAL
--------------------------------- HISTORICAL PRO FORMA(1)
1997 1998 1999 2000 2000
------- ------- ------- ---------- ------------
(DOLLAR AMOUNTS IN MILLIONS) (DOLLAR AMOUNTS IN MILLIONS)
BALANCE SHEET DATA:
Total Assets....................................... $ 266.5 $ 296.2 $ 283.1 $ 287.7 $ 288.7
Long-Term Debt..................................... -- -- -- -- 275.9
Shareholder's Net Investment....................... (152.9) (192.6) (223.1) (40.9) (316.8)
- ---------------
(1) See "Moody's Corporation Unaudited Combined Pro Forma Condensed Financial
Statements".
(2) The Summary Financial Data above includes the following results related to
the Financial Information Services, Inc. ("FIS") business that was sold in
July 1998 and will not be included in Moody's results in future periods.
Such amounts are set forth below:
FOR THE YEAR
ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
----- ---- ----
(DOLLAR AMOUNTS IN
MILLIONS)
Revenues.................................... $34.3 $18.4
Operating Income............................ 5.8 4.2
Non-operating Income (Expense)(a)........... 12.6 9.2
- ---------------
(a) represents gain on sale of FIS.
(3) The computation of pro forma basic earnings per share for the periods
presented is based upon the historical weighted average number of shares of
D&B Common Stock outstanding, reflecting the Distribution. The computation
of pro forma diluted earnings per share is calculated by dividing net income
by the sum of D&B's historical weighted average common shares outstanding
and potentially dilutive shares of D&B Common Stock which approximates
Moody's potentially dilutive shares. Potentially dilutive common shares are
calculated in accordance with the treasury stock method, which assumes that
proceeds from the exercise of all stock options are used to repurchase D&B
Common Stock at market value. This calculation is based on the fact that, at
the Distribution Date, each outstanding D&B stock option (other than stock
options held by Mr. Loren) will convert into separately exercisable Moody's
Stock Options and New D&B Stock Options (as defined below), regardless of
whether Moody's or New D&B employs such option holder after the
Distribution. At the time of the Distribution, the number of shares of
Moody's Common Stock covered by the Moody's Stock Options will equal the
same number of shares covered by the unexercised historical D&B stock
options. See "Relationship Between The New D&B Corporation and Moody's
Corporation After the Distribution--Employee Benefits Agreement".
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FORWARD-LOOKING STATEMENTS
This Information Statement and other materials filed or to be filed by D&B
and New D&B with the SEC, as well as information included in oral statements or
other written statements made or to be made by D&B and New D&B, contain
statements which constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements appear in
a number of places in this document and include, but are not limited to, all
statements relating to plans for future growth and other business development
activities as well as capital expenditures, financing sources and the effects of
regulation and competition, the terms of the Distribution and all other
statements regarding the intent, plans, belief or expectations of the parties or
their directors or officers. Stockholders are cautioned that such
forward-looking statements are not assurances of future performance or events
and involve risks and uncertainties that could cause actual results and
developments to differ materially from those covered in such forward-looking
statements. These risks and uncertainties include, but are not limited to, the
complexity and uncertainty regarding the development of new high-technology
products; possible loss of market share through competition; introduction of
competing products or technologies by other companies; pricing pressures from
competitors and/or customers; changes in the business information and risk
management industries and markets; the potential emergence of
government-sponsored credit rating agencies; the outcome of any review by
applicable tax authorities of D&B's global tax planning initiatives; the
inability to protect proprietary information and technology or to obtain
necessary licenses on commercially reasonable terms; changes in the volume of
debt securities issued in global capital markets; the possible loss of key
employees to investment or commercial banks or elsewhere; leverage and debt
service, including sensitivity to fluctuations in interest rates; compliance
with covenants in loan agreements; the inability to obtain future financing on
satisfactory terms; changes in interest rates and other volatility in the
financial markets; successful implementation of New D&B's euro plans on a timely
basis and the competitive implication that the conversion to the euro may have
on pricing and marketing strategies; fluctuations in foreign currency exchange
rates; the ability to complete pending restructurings at New D&B in a timely
fashion without adverse effects on operations; proposed U.S., foreign, state and
local legislation and regulations, including those relating to nationally
recognized statistical rating organizations; and the final allocation of assets
and liabilities in connection with the Distribution. Consequently, all the
forward-looking statements contained in this Information Statement are qualified
by the information contained or incorporated herein, including, but not limited
to, the information contained under this heading and in "Risk Factors", "The
Distribution", "The New D&B Corporation (Accounting Successor to D&B)
Capitalization", "The New D&B Corporation (Accounting Successor to D&B)
Management's Discussion and Analysis of Financial Condition and Results of
Operations", "The New D&B Corporation Business", "Moody's Corporation
Capitalization", "Moody's Corporation Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Moody's Corporation
Business". Neither D&B nor New D&B has any obligation to publicly release any
revision to any forward-looking statement contained or incorporated herein to
reflect any future events or occurrences.
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RISK FACTORS
RISKS RELATING TO THE DISTRIBUTION
Potential Taxation
D&B has received a ruling from the IRS to the effect that, among other
things, the Distribution will qualify as a tax-free spin-off under Section 355
of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code").
The IRS ruling is based on certain factual representations made by D&B. If
factual representations were incorrect in a material respect, the ruling could
become invalid. D&B is not aware of any facts or circumstances which would cause
such representations to be incorrect in a material respect. To provide further
assurances that Section 355 of the Internal Revenue Code will apply to the
Distribution, each of D&B and New D&B will agree in the Distribution Agreement
to certain restrictions on their respective future actions and will provide
certain indemnifications in this regard. See "Relationship Between The New D&B
Corporation and Moody's Corporation After the Distribution".
If the Distribution were not to qualify under Section 355 of the Internal
Revenue Code, then, in general, a corporate tax (which would be substantial)
would be payable by the consolidated group, of which D&B is the common parent.
In addition, under the consolidated return rules, each member of the
consolidated group, including New D&B, would be jointly and severally liable for
such tax liability. If the Distribution occurred and it were not to qualify
under Section 355 of the Internal Revenue Code, the resulting tax liability
could have a material adverse effect on the financial position, results of
operations and cash flows of each of New D&B and Moody's. See "Relationship
Between The New D&B Corporation and Moody's Corporation After the
Distribution--Distribution Agreement". D&B currently estimates that the
aggregate tax liability in this regard of New D&B and Moody's would be in the
range of approximately $400 million to $700 million. See "The
Distribution--Federal Income Tax Consequences of the Distribution".
Moreover, if the Distribution were not to qualify under Section 355 of the
Internal Revenue Code, each D&B stockholder receiving shares of New D&B Common
Stock in the Distribution would be treated as if such stockholder had received a
taxable distribution in an amount equal to the fair market value of the New D&B
Common Stock received. See "The Distribution--Federal Income Tax Consequences of
the Distribution".
D&B has received ruling letters from the IRS as to the Federal income tax
consequences of certain internal restructurings which were or are to be effected
by D&B prior to the Distribution. In the Distribution Agreement, each of D&B and
New D&B will agree to certain restrictions on their future actions in connection
with the ruling requests relating to such internal restructurings and will
provide certain indemnifications in this regard. These restrictions will not
materially affect either New D&B or Moody's.
Absence of Prior Trading Market for the New D&B Common Stock
Prior to the date hereof, there has not been any established "regular way"
trading market for New D&B Common Stock. Shares of New D&B Common Stock have
been accepted for listing on the NYSE under the symbol "DNB", and trading on a
"when-issued" basis (i.e., a trade which is completed only if the subject
security is actually issued) commenced on September 18, 2000. New D&B cannot
predict the extent to which investor interest in New D&B will lead to the
development of an active trading market in New D&B Common Stock or how liquid
such a market might become. The initial price of shares of New D&B Common Stock
may not be indicative of prices that will prevail in any future trading market.
See "The Distribution--Listing and Trading of New D&B Common Stock and Moody's
Common Stock".
Effect of Distribution on Trading Market of New D&B Common Stock and Moody's
Common Stock
New D&B Common Stock and Moody's Common Stock (i.e., the "old" D&B Common
Stock) will each trade on the NYSE after the Distribution. However, because of
the significant changes that will take place as a result of the Distribution,
the trading market for each of New D&B Common Stock and Moody's Common
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16
Stock after the Distribution may be significantly different from that for the
D&B Common Stock prior to the Distribution. After the Distribution, New D&B's
only business will be the New D&B Business, with the shares of New D&B Common
Stock held by D&B stockholders representing their continuing interest in that
business and D&B's only remaining business will be the Moody's Business, with
the shares of Moody's Common Stock held by D&B stockholders representing their
continuing interest in that business. The market may view New D&B and Moody's as
"new" companies after the Distribution and it is possible that neither will be
the subject of significant research analyst coverage. It is commonly believed
that the absence of significant research analyst coverage can adversely affect
the value and liquidity of an equity security.
Changes in Trading Prices of New D&B Common Stock and Moody's Common Stock
There can be no assurance as to the prices at which New D&B Common Stock
and Moody's Common Stock will trade after the Distribution Date. Until New D&B
Common Stock is fully distributed and an orderly market develops in New D&B
Common Stock and Moody's Common Stock, the price at which such stocks trade may
fluctuate significantly and, with respect to the New D&B Common Stock, the price
may be lower or higher than the price that would be expected for a fully
distributed issue. Prices for New D&B Common Stock and Moody's Common Stock will
be determined in the marketplace and may be influenced by many factors,
including (i) developments affecting their respective businesses generally and
the impact of those factors referred to below in particular, (ii) investor
perception, (iii) the depth and liquidity of the market for each company's stock
and (iv) general economic and market conditions.
Impact of Post-Distribution Sales on the Price of New D&B Common Stock and
Moody's Common Stock
After the Distribution, substantially all of the shares of New D&B Common
Stock and Moody's Common Stock will be eligible for immediate resale in the
public market. Investment criteria of certain investment funds and other holders
of D&B Common Stock may result in the immediate sale of New D&B Common Stock
and/or Moody's Common Stock after the Distribution to the extent such stock no
longer meets these criteria. Other holders of D&B Common Stock may choose to
sell their shares of Moody's Common Stock or New D&B Common Stock because their
respective dividend policies are expected to differ from D&B's existing dividend
policies. See "Dividend Policies". In addition, fractional shares which would
otherwise be issued in the Distribution will be aggregated by the Distribution
Agent and sold in the open market after the date of the Distribution.
Substantial selling of New D&B Common Stock and/or Moody's Common Stock, whether
as a result of the Distribution or otherwise, could adversely affect the market
price of such stock.
Moody's Transition to an Independent Public Company
Moody's does not have an operating history as an independent company.
Accordingly, the financial statements included herein may not necessarily
reflect the results of operations, financial condition and cash flows that would
have been achieved had Moody's been operated independently during the periods
presented. Historically, D&B has provided substantially all of Moody's corporate
services and employee benefits. While Moody's management believes the costs of
these services and benefits charged to Moody's have been reasonably equivalent
to terms which could have been obtained through arm's-length negotiations with
D&B, these costs may not be indicative of the costs that would have been
incurred if Moody's had performed or provided these services as an independent
company. See "Moody's Corporation Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview". In addition, following
the Distribution, Moody's will be responsible for the additional costs
associated with being an independent public company, including costs associated
with corporate governance, listed and registered securities and investor
relations.
New D&B and Moody's Will Be Less Diversified Than D&B
As a result of the Distribution, each of New D&B and Moody's will be a
smaller and less diversified company than D&B was prior to the Distribution. The
results of operations and financial performance of each of New D&B and Moody's
may therefore be more volatile than the results and financial performance of
D&B.
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17
Common Stock Prices
After the Distribution, the D&B Common Stock will continue to be listed and
traded on the NYSE as Moody's Common Stock. As a result of the Distribution, the
trading price of Moody's Common Stock is expected to be lower than the trading
price of D&B Common Stock prior to the Distribution. The combined trading price
of the Moody's Common Stock and the New D&B Common Stock after the Distribution
may be less than the trading price of the D&B Common Stock prior to the
Distribution.
RISKS RELATING TO THE NEW D&B CORPORATION AND MOODY'S CORPORATION
Contingencies
On July 29, 1996, Information Resources, Inc. ("IRI") filed a complaint in
the United States District Court for the Southern District of New York, naming
as defendants the corporation then known as "The Dun & Bradstreet Corporation"
(which corporation subsequently was renamed R.H. Donnelley Corporation and
herein is referred to as "Donnelley"), A.C. Nielsen Company (a subsidiary of
ACNielsen Corporation) and I.M.S. International, Inc. (a subsidiary of Cognizant
Corporation). At the time of the filing of the complaint, each of the other
defendants was a wholly owned subsidiary of Donnelley.
The complaint alleges various violations of United States antitrust laws,
including purported violations of Sections 1 and 2 of the Sherman Act arising
from tying arrangements, agreements with retailers and other customers,
predatory pricing practices and other matters alleged by IRI. In addition to the
foregoing claims, the complaint alleges a claim of tortious interference with a
contract and a claim of tortious interference with a prospective business
relationship. These claims relate to the acquisition by defendants of Survey
Research Group Limited ("SRG"). IRI alleges SRG violated an alleged agreement
with IRI when it agreed to be acquired by the defendants and that the defendants
induced SRG to breach that agreement.
IRI's complaint alleges damages in excess of $350 million, which amount IRI
asked to be trebled under antitrust laws. IRI also seeks punitive damages in an
unspecified amount. See "The New D&B Corporation Business--Legal Proceedings"
and "Moody's Corporation Business--Legal Proceedings".
In November 1996, Donnelley completed a distribution to its shareholders
(the "1996 Distribution") of the capital stock of ACNielsen Corporation
("ACNielsen") and Cognizant Corporation ("Cognizant"). On October 28, 1996, in
connection with the 1996 Distribution, Cognizant, ACNielsen and Donnelley
entered into an Indemnity and Joint Defense Agreement (the "Indemnity and Joint
Defense Agreement") pursuant to which they have agreed (i) to certain
arrangements allocating potential liabilities ("IRI Liabilities") that may arise
out of or in connection with the IRI action and (ii) to conduct a joint defense
of such action. In particular, the Indemnity and Joint Defense Agreement
provides that ACNielsen will assume exclusive liability for IRI Liabilities up
to a maximum amount to be calculated at such time such liabilities, if any,
become payable (the "ACN Maximum Amount"), and that Donnelley and Cognizant will
share liability equally for any amounts in excess of the ACN Maximum Amount. The
ACN Maximum Amount will be determined by an investment banking firm as the
maximum amount that ACNielsen is able to pay after giving effect to (i) any plan
submitted by such investment bank that is designed to maximize the claims-paying
ability of ACNielsen without impairing the investment banking firm's ability to
deliver a viability opinion (but which will not require any action requiring
stockholder approval), and (ii) payment of related fees and expenses. For these
purposes, financial viability means the ability of ACNielsen, after giving
effect to such plan, the payment of related fees and expenses and the payment of
the ACN Maximum Amount, to pay its debts as they become due and to finance the
current and anticipated operating and capital requirements of its business, as
reconstituted by such plan, for two years from the date any such plan is
expected to be implemented.
In June 1998, Donnelley completed a distribution to its shareholders (the
"1998 Distribution") of the capital stock of D&B and changed its name to R.H.
Donnelley Corporation. In connection with the 1998 Distribution, D&B and
Donnelley entered into an agreement whereby D&B has assumed all potential
liabilities of Donnelley arising from the IRI action and has agreed to indemnify
Donnelley in connection with such potential liabilities.
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During 1998, Cognizant separated into two new companies, IMS Health
Incorporated ("IMS Health") and Nielsen Media Research, Inc. ("NMR"). IMS Health
and NMR are each jointly and severally liable for all Cognizant liabilities
under the Indemnity and Joint Defense Agreement.
Under the terms of the 1998 Distribution Agreement, as a condition to the
Distribution, New D&B will undertake to be jointly and severally liable with
Moody's to Donnelley under the 1998 Distribution Agreement, including any
liabilities arising under the Indemnity and Joint Defense Agreement. However, as
between themselves, each of New D&B and Moody's will agree to be responsible for
50% of any payments to be made with respect to the IRI action pursuant to the
1998 Distribution Agreement, including legal fees or expenses related thereto.
Management is unable to predict at this time the final outcome of the IRI
action or whether the resolution of this matter could materially affect New
D&B's or Moody's results of operations, cash flows or financial position.
In addition, D&B enters into global tax planning initiatives in the normal
course of business, principally through tax free restructurings of both its
foreign and domestic operations. These initiatives are subject to normal review
by tax authorities. It is possible that additional liabilities may be proposed
by tax authorities as a result of these reviews and that some of the reviews
could be resolved unfavorably. At this time, management is unable to predict the
extent of such reviews, the outcome thereof or whether such outcome could
materially affect the results of operations, cash flows or financial position of
either company.
Pursuant to the Distribution Agreement, New D&B and Moody's will agree to
be financially responsible for 50% of any potential liabilities that may arise
with respect to the reviews described above, to the extent such potential
liabilities are not directly attributable to their respective business
operations. See "Relationship Between The New D&B Corporation and Moody's
Corporation After the Distribution--Distribution Agreement".
At this time, management is unable to predict the final outcome of these
matters or whether the resolution of these matters could materially affect the
results of operations, cash flows or financial position of each company. See
"The New D&B Corporation (Accounting Successor to D&B) Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Financial Position--Other" and "Moody's Corporation Management's Discussion and
Analysis of Financial Position and Results of Operations--Liquidity and Capital
Resources--Other".
Certain Antitakeover Provisions
The Restated Certificate of Incorporation and Amended and Restated By-laws
of each of Moody's and New D&B contain provisions that may have the effect of
discouraging an acquisition of control that is not approved by its Board of
Directors. Such provisions may also have the effect of discouraging third
parties from making proposals involving an acquisition or change of control of
New D&B or Moody's, as the case may be, although such proposals, if made, might
be considered desirable by a majority of their respective stockholders. Such
provisions could further have the effect of making it more difficult for third
parties to cause the replacement of the Board of Directors of New D&B and
Moody's. These provisions (and the provisions of the stockholder rights plan
described below) have been designed to enable each of New D&B and Moody's to
develop its businesses and foster its long-term growth without disruptions
caused by the threat of a takeover not deemed by its Board of Directors to be in
the best interests of that company and its stockholders. These provisions will
also help minimize the prospects of changes in control that could jeopardize the
tax-free nature of the Distribution by assuring meaningful Board involvement in
any such transactions. Certain provisions of the Distribution Agreement that are
also intended to preserve the tax-free nature of the Distribution may also have
the effect of discouraging third parties from making proposals involving an
acquisition or change of control of New D&B or Moody's. See "Relationship
Between The New D&B Corporation and Moody's Corporation After the
Distribution--Distribution Agreement".
Moody's and New D&B have each adopted a stockholder rights plan. These
stockholder rights plans are designed to protect stockholders in the event of an
unsolicited offer and other takeover tactics which, in the
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19
opinion of the Board of Directors of New D&B or Moody's, as the case may be,
could impair its ability to represent stockholder interests. The provisions of
these stockholder rights plans may render an unsolicited takeover of New D&B or
Moody's more difficult or less likely to occur or might prevent such a takeover.
See "Description of The New D&B Corporation Capital Stock--The New D&B
Corporation Rights Plan" and "Description of Moody's Corporation Capital
Stock--Moody's Corporation Rights Plan".
Each of New D&B and Moody's is subject to the provisions of Delaware
corporate law which may restrict certain business combination transactions. See
"Description of The New D&B Corporation Capital Stock--Delaware General
Corporation Law" and "Description of Moody's Corporation Capital Stock--Delaware
General Corporation Law".
Multinational Operations
Both New D&B and Moody's maintain offices and derive a significant portion
of their respective revenues from sources outside the U.S. In addition, New D&B
receives a material amount of its revenues denominated in the euro and other
non-U.S. currencies. Operations in several different countries expose New D&B
and Moody's to a number of legal, economic and regulatory risks such as:
- changes in legal and regulatory requirements
- possible nationalization, expropriation, price controls and other
restrictive governmental actions
- restrictions on the ability to convert local currency into U.S. dollars
- currency fluctuation and the conversion to the euro
- export and import restrictions, tariffs and other trade barriers
- difficulty in staffing and managing offices as a result of, among other
things, distance, travel, cultural differences and intense competition
for trained personnel
- longer payment cycles and problems in collecting receivables
- political and economic instability
- potentially adverse tax consequences
Although such factors (other than currency fluctuations) have not historically
had a material adverse effect on the business, financial condition and results
of operations of either New D&B or Moody's, any of such factors could have such
an effect in the future.
Continued Development of Technology Infrastructure is Critical
Each of New D&B and Moody's relies heavily on its computer hardware,
software and systems. If any of these systems does not operate properly or is
disabled, New D&B or Moody's (as the case may be) could suffer financial loss, a
disruption of its business, liability to clients or reputational damage. The
inability to maintain systems that will accommodate an increasing volume of
transactions also could constrain each company's ability to expand. Each of New
D&B and Moody's expects that it will need to continue to upgrade and expand its
systems to avoid disruption of, and constraints on, its operations.
Electronic Media Security Issues May Adversely Affect the Business of New D&B
or Moody's
A significant barrier to online commerce is the secure transmission of
confidential information. There can be no assurance that the computer and
cryptographic technologies that New D&B and Moody's use to transmit data over
public networks will not be compromised. In addition, computer break-ins and
denials of service could jeopardize the security of information stored in and
transmitted through the computer systems and network of New D&B and Moody's,
which could adversely affect their abilities to attract customers, damage their
reputation and subject them to litigation. Although New D&B and Moody's intend
to continue to implement security measures to prevent break-ins, damage and
failure, these measures may not succeed.
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RISKS RELATING TO THE NEW D&B CORPORATION
New D&B Faces Increasing Competition in the Business Information Industry
Business information and related products and services are becoming
increasingly available as the use of the Internet expands and as new providers
of business-to-business information products and services emerge. Competition to
meet the growing demand for reliable, easily accessible commercial information
is intense. New D&B's ability to compete effectively will be based on a number
of factors, including the ability to attract clients that use the Internet to
obtain business information, quality of information, brand perception and the
ability to deliver business information via various media and distribution
channels in formats tailored to client requirements.
New D&B believes that it may experience pricing pressures in the future as
some of its competitors seek to obtain market share by reducing prices. New
D&B's revenues in certain of its traditional product and service lines have
declined as customers migrate to free or lower-cost information services offered
by New D&B or other Internet vendors. In addition, acute price competition in
Europe has had and may continue to have a negative impact on New D&B's results
of operations.
Rapid Technological Advances Could Render New D&B's Products or Services Less
Competitive or Obsolete
The business information industry is characterized by rapid technological
changes, evolving industry standards and the continuous introduction of new
products, services and applications. As a result, New D&B's growth and future
financial performance will continue to depend on its ability to develop
sophisticated applications and technologies to accommodate client preferences,
create new distribution channels, develop and market new products and services
and enhance existing products. There can be no guarantee that, as various
systems and technologies become outdated, New D&B will be able to replace them,
or to replace them as quickly as New D&B's competitors. In addition, there can
be no assurance that products or technologies developed by others will not
render New D&B's products or services less competitive or obsolete.
New D&B May Have Difficulty Attracting and Retaining Skilled Employees to
Execute its Strategic Initiatives
From time to time New D&B has experienced, and expects to continue to
experience, difficulty in hiring and retaining highly skilled employees. New
D&B's future success depends on its ability to attract, retain and motivate
highly skilled employees. Competition for employees in New D&B's industry is
intense, particularly as the demand by "dot-coms" and other companies for
persons with Internet-related skills continues to increase. New D&B may not be
able to retain its key employees or attract, assimilate or retain other highly
qualified employees in the future.
New D&B's Growth is Dependent on its Ability to Penetrate the Electronic
Commerce Market
New D&B's growth depends substantially upon its ability to penetrate the
e-commerce market and convince business information consumers to integrate New
D&B's information into their applications and to use such information in their
transaction decisions. There can be no assurance that a decision by New D&B to
focus on the electronic marketplace will be successful. In addition, the
e-commerce industry is rapidly evolving and there can be no assurance that New
D&B will be able to adapt to changing business conditions.
New D&B expects to increasingly use the Internet as a distribution channel
to provide information-based products and services to its customers. Due to the
popularity of the Internet, it is possible that new laws and regulations may be
adopted dealing with such issues as user privacy, content, taxation and pricing.
Such laws and regulations might increase New D&B's cost of using, or limit New
D&B's ability to use, the Internet as a distribution channel, which in turn
could have a material adverse effect on its business, financial condition and
operating results.
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New D&B's Results are Subject to Fluctuations in Interest Rates and Exchange
Rates
New D&B expects to fund its operations primarily from its operating cash
flows supplemented, as necessary, through its commercial paper programs and/or
other capital market financings. In addition, New D&B operates in more than 37
countries and therefore is exposed to market risk from changes in foreign
exchange rates which could affect its results of operations and financial
condition. In order to reduce the risk from fluctuations in interest rates and
foreign currencies, New D&B may enter into interest rate swap agreements,
forward foreign exchange contracts and/or foreign currency options. These
derivative financial instruments are viewed by New D&B as risk management tools
that are entered into for hedging purposes only; New D&B does not intend to use
derivative financial instruments for trading or speculative purposes. However,
there can be no assurance that New D&B will attempt to or be able to hedge all
of its interest rate and foreign exchange exposure at a satisfactory cost or
that such rate fluctuations will not adversely affect the results of operations
and financial condition of New D&B.
New D&B Does Not Expect to Pay Dividends
Following the Distribution, New D&B does not initially intend to pay
dividends. New D&B expects to use future earnings to finance operations, expand
its Internet and e-commerce-related business and fund a share repurchase program
to offset the dilutive effect of shares issued under New D&B's employee benefit
arrangements.
RISKS RELATING TO MOODY'S
Revenues or Revenue Growth May Decline as a Result of Adverse Market or
Economic Conditions
Unfavorable financial or economic conditions would likely reduce the number
and size of debt issuances and other transactions for which Moody's provides
ratings services. High interest rates, volatility in financial markets or the
interest rate environment, significant political or economic events, defaults of
significant issuers and other market and economic factors may negatively impact
the general level of debt issuances, the debt issuance plans of certain
categories of borrowers and/or the types of credit products being offered.
Because the ratings revenues and results of operations of Moody's are directly
related to the number and size of the transactions in which it participates, it
would be adversely affected by a reduction of the level of debt issuances. A
sustained period of market decline or weakness could have a material adverse
effect on Moody's business and financial results.
Moody's Success Depends on its Ability to Maintain its Professional Reputation
and Brand Name
Moody's depends on its overall reputation and brand name to secure new
engagements and hire qualified professionals. Any event that hurts Moody's
reputation -- including poor performance or errors in ratings (whether real or
perceived) -- may negatively impact Moody's ability to compete. Failure to
maintain its reputation and brand name therefore could seriously harm Moody's
business and financial results.
Employee misconduct, including the improper use or disclosure of
confidential information, has been a recurring problem in the financial services
industry. Moody's runs the risk that such employee misconduct could occur
despite the significant precautions it takes to prevent and detect such
activities. Such misconduct could result in regulatory sanctions as well as
serious harm to Moody's reputation, results of operations and financial
condition.
The Market for Credit Ratings and Research is Intensely Competitive and
Rapidly Evolving
The markets for credit ratings, research and risk management services are
intensely competitive. Moody's competes on the basis of a number of factors,
including quality of ratings, research, reputation, price, geographic scope,
range of products, technological innovation and client service. Moody's faces
increasing competition from Standard & Poor's, the recently combined Fitch
IBCA/Duff & Phelps Credit Rating Co. ("Fitch"), local rating agencies in a
number of jurisdictions and niche companies that provide ratings for particular
types of financial products or issuers (such as A.M. Best Company in the
insurance industry). In
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addition, competitors may develop quantitative methodologies for assessing
credit risk which consumers may deem preferable to or more cost-effective than
the qualitative credit risk assessment methods currently employed by Moody's.
Since Moody's believes that some of its most significant challenges and
opportunities will arise outside the U.S., it will have to compete with rating
agencies that may have a stronger local presence or a longer operating history
in those markets. These local providers or comparable competitors that may
emerge in the future may receive support from local governments or other
institutions. Any of the foregoing may have a negative effect on the customer
base, profitability, financial condition, results of operations or cash flows of
Moody's.
Moody's May Have Difficulty Retaining or Recruiting Professionals for Its
Business
Moody's success depends upon recruiting and retaining highly skilled,
experienced analysts. Competition in the financial services industry for
qualified analysts is intense. Moody's ability to attract analysts could be
impaired if it is unable to offer competitive compensation. Investment banks and
other competitors for analyst talent may be able to offer higher compensation
than Moody's. Moody's also may not be able to identify and hire employees
outside the U.S. with the required experience or skills to perform sophisticated
credit analyses. In addition, former employees may compete with Moody's in the
future. Moody's ability to compete effectively will continue to depend on its
ability to attract new employees and to retain and motivate existing employees.
Quarterly Operating Results of Moody's May Fluctuate, Resulting in a Decline
in Stock Price
Quarterly operating results of Moody's have varied significantly in the
past and could fluctuate significantly in the future. Therefore, there can be no
assurance that quarter-to-quarter comparisons are indicative of future
performance. Moody's quarterly earnings may vary to a significant extent with
the volume of issuances in the worldwide capital markets. In addition, interest
rate cycles and corporate earnings trends may subject Moody's to unfavorable
year to year quarterly earning fluctuations.
Exposure to Litigation From Those Dissatisfied With Ratings Could Adversely
Affect Moody's Business
Moody's faces litigation from time to time from those claiming damages
arising from allegedly inaccurate ratings. In addition, as Moody's international
business expands, these types of claims may increase because foreign
jurisdictions may not have legal protections comparable to those in the U.S.
(such as the First Amendment). These risks often may be difficult to assess or
quantify and their existence and magnitude often remain unknown for substantial
periods of time. See "Moody's Corporation Business--Legal Proceedings" for a
discussion of certain legal matters relating to Moody's.
Moody's Must Adapt to Evolving Laws and Regulations
In the U.S. and other countries, the laws and regulations applicable to
credit ratings and rating agencies continue to evolve. Failure to maintain
governmental authorizations or to comply with local laws and regulations could
negatively impact the ability of Moody's to compete in such jurisdictions. In
addition, when governments adopt regulations that require debt securities to be
rated, establish criteria for credit ratings or authorize only certain entities
to provide credit ratings, the competitive balance among rating agencies and the
level of demand for ratings may be negatively affected. Government-mandated
ratings criteria may also have the effect of displacing objective assessments of
creditworthiness. In these circumstances, issuers may be less likely to base
their choice of rating agencies on criteria such as independence and
credibility, and more likely to base their choice on their assumption as to
which rating agency might provide a higher rating. See "Moody's Corporation
Business--Regulation" for a discussion of the regulatory environment in which
Moody's conducts its businesses.
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THE DISTRIBUTION
INTRODUCTION
On December 15, 1999, the Board of Directors of D&B announced a preliminary
decision to separate New D&B and Moody's in a tax-free distribution of New D&B
to the stockholders of D&B. On September 8, 2000, the D&B Board of Directors
formally approved the Distribution and declared a dividend payable to each
holder of record at the close of business on the Record Date of one share of New
D&B Common Stock for every two shares of D&B Common Stock held by such holder at
the close of business on the Record Date.
D&B has received a tax ruling from the IRS that the receipt by D&B
stockholders of the New D&B Common Stock in the Distribution will be tax-free to
such stockholders and D&B for Federal income tax purposes, except to the extent
that cash is received in lieu of fractional shares of New D&B Common Stock. On
or before the Distribution Date, D&B will deliver certificates for all of the
outstanding shares of New D&B Common Stock to the Distribution Agent for
transfer, and such certificates will be mailed on October 2, 2000 or as promptly
as practicable thereafter.
Questions relating to the Distribution prior to the Distribution Date or
relating to transfers of New D&B Common Stock after the Distribution Date should
be directed to: EquiServe Trust Company, N.A., P.O. Box 2500, Jersey City, NJ
07310-2500, Attention: Investor Relations, telephone number: (800) 222-7850.
Questions may also be directed to Investor Relations for D&B at One Diamond Hill
Road, Murray Hill, NJ 07974, telephone number: (908) 665-5026.
REASONS FOR THE DISTRIBUTION
The Board of Directors of D&B believes that the Distribution is in the best
interests of D&B and D&B's stockholders and that the separation of New D&B will
provide each of New D&B and Moody's with greater managerial and operational
flexibility to respond to changing market conditions in their different business
environments, as well as provide both companies with additional financial
flexibility to pursue growth opportunities. The discussion of the reasons for
the Distribution set forth herein includes forward-looking statements that are
based upon numerous assumptions with respect to the trading characteristics of
the New D&B Common Stock, the ability of New D&B management to successfully take
advantage of growth opportunities and the ability of Moody's to successfully
operate as a stand-alone company. Many of such factors are discussed above under
the captions "Forward-Looking Statements" and "Risk Factors".
Management Considerations. At present, the Moody's Business and the New
D&B Business are conducted as separate operating groups under the direction of
D&B. The Distribution is expected to be beneficial to each of D&B's operating
groups, allowing the management of each group to design and implement corporate
policies and strategies that are based primarily on the business characteristics
of the group and to concentrate its financial resources wholly on its own
operations. New D&B is evolving as an information provider and business
facilitator with an increased focus on Internet services and electronic
commerce. Its business is and will continue to be highly vulnerable to
developing Internet-related competition. As a result, New D&B must concentrate
on shifting the delivery of existing products and services to the Internet and
developing new products and services for e-commerce applications. Moody's, on
the other hand, is expanding its focus on risk management services to fill a
market expertise role while retaining its primary focus on credit ratings
products and services.
Improved Ability to Hire, Retain, and Motivate Key Personnel. The
Distribution will also permit each of New D&B and Moody's to design incentive
compensation programs that relate more directly to its own business
characteristics and performance and will provide each company with a "pure play"
publicly traded equity for use in its compensation programs.
Provide Independent Access to Capital Markets; Facilitate Growth of Both
The New D&B Corporation and Moody's Corporation. New D&B intends to pursue
growth opportunities in its current business areas and focus its strategy on
business-to-business e-commerce and the Internet. After the Distribution, New
D&B will have a capital structure that is expected to facilitate alliances in
the Internet/e-commerce arena as well as
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internal expansion. New D&B expects the separation of the businesses to help it
remain competitive in the information services industry and attain success in
its e-commerce initiatives.
The management of D&B believes that the Distribution will facilitate
Moody's growth in part because it believes that the Moody's Common Stock will
generally trade at higher price/earnings multiples than those at which D&B
Common Stock has recently traded. Such higher multiples would make such stock a
more attractive acquisition currency for Moody's to deliver and, to the extent
such stock is perceived to be a higher-growth stock, a generally more attractive
investment opportunity for investors. Moody's management believes that,
particularly in the non-ratings business, a strong acquisition currency would
accelerate opportunities for growth and enable Moody's to pursue strategic
transactions. In addition, Moody's would be able to finance additional growth
opportunities more cost-effectively through the sale of capital stock with a
higher price/earnings multiple.
Investor Understanding; Public Relations. Investors should be able to
evaluate better the financial performance of each of New D&B and Moody's and
their respective strategies, thereby enhancing the likelihood that each will
achieve an appropriate market valuation. In addition, each company will be able
to focus its public relations efforts on cultivating its own separate identity.
FORM OF TRANSACTION; BASIS OF PRESENTATION
The Distribution is the method by which D&B will be separated into two
publicly traded companies, New D&B and Moody's. In the Distribution, D&B will
distribute to its stockholders shares of New D&B Common Stock, which will
represent a continuing interest in the D&B businesses to be conducted by New
D&B. After the Distribution, D&B's only business will be the Moody's Business,
and the shares of D&B Common Stock held by D&B stockholders will represent a
continuing ownership interest only in that business. In connection with the
Distribution, (i) D&B will change its name to "Moody's Corporation" and (ii) New
D&B will change its name to "The Dun & Bradstreet Corporation".
Stockholders should note that notwithstanding the legal form of the
Distribution described above whereby D&B expects to spin off New D&B, because of
the relative significance of the New D&B Business to D&B, New D&B will be
treated as the "accounting successor" to D&B for financial reporting purposes.
Therefore, the historical financial information for New D&B included herein is
that of D&B with the Moody's Business treated as a discontinued operation.
The historical financial information for Moody's has been prepared on a
stand-alone basis as described in Note 1 to the Moody's Financial Statements
included elsewhere in this Information Statement. Such historical financial
information includes allocations of certain D&B corporate headquarters assets,
liabilities and expenses relating to Moody's.
MANNER OF EFFECTING THE DISTRIBUTION
The Distribution will be made on the Distribution Date to stockholders of
record of D&B at the close of business on the Record Date. Based on the
162,427,039 shares of D&B Common Stock outstanding as of September 20, 2000, the
Distribution will consist of 81,213,520 shares of New D&B Common Stock. Prior to
the Distribution Date, D&B will deliver all outstanding shares of New D&B Common
Stock to the Distribution Agent for distribution. The Distribution Agent will
mail, on October 2 or as promptly as practicable thereafter, certificates
representing the shares of New D&B Common Stock to D&B stockholders of record at
the close of business on the Record Date. D&B stockholders will not be required
to pay for shares of New D&B Common Stock received in the Distribution, or to
surrender or exchange certificates representing shares of D&B Common Stock in
order to receive shares of New D&B Common Stock. No vote of D&B stockholders is
required or sought in connection with the Distribution.
No certificates or scrip representing fractional shares of New D&B Common
Stock will be issued to D&B stockholders as part of the Distribution. In lieu of
receiving fractional shares of New D&B Common Stock, each holder of D&B Common
Stock who would otherwise be entitled to receive a fractional share will receive
cash for such fractional interests. The Distribution Agent will, as soon as
practicable after the Distribution
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Date, aggregate and sell all such fractional interests in open market
transactions at then prevailing market prices. The Distribution Agent, an
independent entity not affiliated with either D&B or New D&B, will have sole
discretion regarding when, how, through which brokers (which will not be
affiliated with D&B or New D&B) and at what prices to make such sales. The
Distribution Agent will distribute the aggregate proceeds (net of brokerage
fees) ratably to D&B stockholders otherwise entitled to such fractional
interests. See "Federal Income Tax Consequences of the Distribution" below for a
discussion of the Federal income tax treatment of fractional share interests.
IN ORDER TO BE ENTITLED TO RECEIVE SHARES OF NEW D&B COMMON STOCK IN THE
DISTRIBUTION, D&B STOCKHOLDERS MUST BE STOCKHOLDERS AT THE CLOSE OF BUSINESS ON
THE RECORD DATE.
The Board of Directors of New D&B has adopted a stockholder rights plan.
Certificates evidencing shares of New D&B Common Stock issued in the
Distribution will therefore represent the same number of New D&B Rights issued
under the New D&B Rights Plan. See "Description of The New D&B Corporation
Capital Stock--The New D&B Corporation Rights Plan". Unless the context
otherwise requires, references herein to the New D&B Common Stock include the
related New D&B Rights.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
D&B has received a ruling letter from the IRS to the effect that, among
other things, the Distribution will qualify as a tax-free spin-off under Section
355 of the Internal Revenue Code. Under Section 355 of the Internal Revenue
Code, in general:
1. Holders of D&B Common Stock will not recognize any income, gain or
loss as a result of the Distribution, except that holders of D&B Common
Stock that receive cash in lieu of fractional shares of New D&B Common
Stock will recognize gain or loss equal to the difference between such cash
and the tax basis allocated to such fractional shares. Any such gain or
loss will constitute capital gain or loss if such fractional shares would
have been held as a capital asset on the Distribution Date.
2. Holders of D&B Common Stock will apportion the tax basis of their
D&B Common Stock between such D&B Common Stock and New D&B Common Stock
(including fractional shares of New D&B Common Stock) received by such
holders in the Distribution in proportion to the relative fair market
values of such stock. D&B will provide appropriate information to each
holder of record of D&B Common Stock as of the close of business on the
Record Date concerning the basis allocation.
3. The holding period for the New D&B Common Stock received in the
Distribution by holders of D&B Common Stock will include the period during
which such holders held the D&B Common Stock with respect to which the
Distribution was made, provided that such D&B Common Stock is held as a
capital asset by such holders on the Distribution Date.
4. The Distribution will not be treated as a taxable disposition of
New D&B by D&B.
Current Treasury regulations require each holder of D&B Common Stock who
receives New D&B Common Stock pursuant to the Distribution to attach to his or
her U.S. Federal income tax return for the year in which the Distribution occurs
a detailed statement setting forth such data as may be appropriate in order to
show the applicability of Section 355 of the Internal Revenue Code to the
Distribution. D&B will convey the appropriate information to each holder of
record of D&B Common Stock as of the close of business on the Record Date.
The IRS ruling is based on certain factual representations made by D&B. If
such factual representations were incorrect in a material respect, such ruling
could become invalid. D&B is not aware of any facts or circumstances which would
cause such representations to be incorrect in a material respect. Each of D&B
and New D&B has agreed to certain restrictions on its future actions to provide
further assurances that Section 355 of the Internal Revenue Code will apply to
the Distribution. See "Relationship Between The New D&B Corporation and Moody's
Corporation After the Distribution--Distribution Agreement". If the Distribution
were not to qualify under Section 355 of the Internal Revenue Code, then in
general, a corporate
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tax would be payable by the consolidated group, of which D&B is the common
parent, based upon the difference between (x) the fair market value of the New
D&B Common Stock and (y) the adjusted basis of such New D&B Common Stock. In
addition, under the consolidated return rules, each member of the consolidated
group, including New D&B, would be jointly and severally liable for such tax
liability. If the Distribution occurred and it were not to qualify under Section
355 of the Internal Revenue Code, the resulting tax liability would have a
material adverse effect on the financial position, results of operations and
cash flows of each of New D&B and Moody's. Pursuant to the Distribution
Agreement, each of D&B and New D&B will agree to indemnify the other company to
the extent that it takes any action that would trigger such tax liability. D&B
estimates that the aggregate tax liability in this regard of New D&B and Moody's
would be in the range of approximately $400 million to $700 million.
Furthermore, if the Distribution were not to qualify as a tax-free
spin-off, each D&B stockholder receiving shares of New D&B Common Stock in the
Distribution would be treated as if such stockholder had received a taxable
distribution in an amount equal to the fair market value of New D&B Common Stock
received, which would result in (i) a dividend to the extent of such
stockholder's pro rata share of D&B's current and accumulated earnings and
profits, (ii) a reduction in such stockholder's basis in D&B Common Stock to the
extent the amount received exceeds such stockholder's share of earnings and
profits and (iii) a gain to the extent the amount received exceeds the sum of
the amount treated as a dividend and the stockholder's basis in the D&B Common
Stock. Any such gain will generally be a capital gain if the D&B Common Stock is
held as a capital asset on the Distribution Date.
D&B has also received ruling letters from the IRS as to the Federal income
tax consequences of certain internal restructurings which were or are to be
effected by D&B prior to the Distribution. In the Distribution Agreement, each
of D&B and New D&B will agree to certain restrictions on their future actions in
connection with the ruling requests relating to such internal restructurings and
will provide certain indemnifications in this regard. These restrictions will
not materially affect either New D&B or Moody's.
D&B STOCKHOLDERS SHOULD CONSULT THEIR OWN ADVISERS AS TO THE SPECIFIC TAX
CONSEQUENCE OF THE DISTRIBUTION, INCLUDING THE APPLICATION AND EFFECT OF
FEDERAL, FOREIGN, STATE AND LOCAL TAX LAWS.
LISTING AND TRADING OF NEW D&B COMMON STOCK AND MOODY'S COMMON STOCK
Prior to the date hereof, there has not been any established "regular way"
trading market for New D&B Common Stock. Shares of New D&B Common Stock have
been accepted for listing on the NYSE under the symbol "DNB", and "when-issued"
trading (i.e., a trade which is completed only if the subject security is
actually issued) commenced on September 18, 2000. On the first NYSE trading day
following the Distribution Date, "when-issued" trading in respect of the New D&B
Common Stock will end and "regular-way" trading (i.e., normal NYSE trading) will
begin.
There can be no assurance as to the prices at which the New D&B Common
Stock will trade before, on or after the Distribution Date. Until the New D&B
Common Stock is fully distributed and an orderly market develops in the New D&B
Common Stock, the price at which it trades may fluctuate significantly and may
be lower or higher than the price that would be expected for a fully distributed
issue. Prices for the New D&B Common Stock will be determined in the marketplace
and may be influenced by many factors, including (i) the depth and liquidity of
the market for New D&B Common Stock, (ii) developments affecting the businesses
of New D&B generally and the impact of the factors referred to in "Risk Factors"
above, (iii) investor perception of New D&B and (iv) general economic and market
conditions.
Shares of New D&B Common Stock distributed to D&B stockholders will be
freely transferable, except for shares of New D&B Common Stock received by
persons who may be deemed to be "affiliates" of New D&B under the Securities Act
of 1933, as amended (the "Securities Act"). Persons who may be deemed to be
affiliates of New D&B after the Distribution generally include individuals or
entities that control, are controlled by, or are under common control with, New
D&B, and may include certain officers and directors of New D&B, as well as
principal stockholders of New D&B. Persons who are affiliates of New D&B will be
permitted to sell their shares of New D&B Common Stock only pursuant to an
effective registration statement
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under the Securities Act or an exemption from the registration requirements of
the Securities Act, such as the exemption afforded by Section 4(1) of the
Securities Act or Rule 144 thereunder.
Moody's Common Stock (i.e., the "old" D&B Common Stock) will continue to
trade on the NYSE after the Distribution, but the symbol under which it trades
will change from "DNB" to "MCO". However, because of the significant changes
that will take place as a result of the Distribution, the trading market for
Moody's Common Stock after the Distribution may be significantly different from
that for D&B Common Stock prior to the Distribution. The market may view Moody's
as a "new" company after the Distribution, and it may not be the subject of
significant research analyst coverage. There can be no assurance as to the
prices at which Moody's Common Stock will trade before, on or after the
Distribution Date and until an orderly market develops in the Moody's Common
Stock, the price at which it trades may fluctuate significantly. Prices for
Moody's Common Stock will be determined in the marketplace and may be influenced
by many factors, including (i) the depth and liquidity of the market for Moody's
Common Stock, (ii) developments affecting the businesses of Moody's, including
the impact of the factors referred to in "Risk Factors" above, (iii) investor
perception of Moody's and (iv) general economic and market conditions.
CERTAIN INDEBTEDNESS AND MINORITY INTEREST FINANCING
At June 30, 2000, D&B had approximately $69.4 million in cash and cash
equivalents, $291.9 million in commercial paper borrowings outstanding and $300
million of minority interest financing. See "The New D&B Corporation (Accounting
Successor to D&B) Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Financial Position--Financing
Arrangements" and "Moody's Corporation Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Financing Arrangements".
In connection with the Distribution, D&B borrowed funds in order to repay
in full its commercial paper obligations. Also in connection with the
Distribution, responsibility for D&B's obligations under the minority interest
financing (relating to the investment partnership described in Note 12 to D&B's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Information Statement) will be allocated to New D&B. It is currently estimated
that New D&B also will assume a portion of the indebtedness of D&B and receive a
portion of the cash of D&B in amounts such that, at the time of the Distribution
and after giving effect to the agreement discussed below and certain other
factors, the net indebtedness of New D&B (plus the minority interest
obligations) will approximate the net indebtedness of Moody's. As indicated
under "Relationship Between The New D&B Corporation and Moody's Corporation
After the Distribution--Employee Benefits Agreement", substantially all
unexercised D&B stock options will be adjusted as of the Distribution Date to
comprise options to purchase Moody's Common Stock and separately exercisable
options to purchase New D&B Common Stock. In light of, among other things, the
numbers of optionees to be employed by New D&B and Moody's, respectively, this
adjustment will result in a substantially greater number of outstanding options
to purchase Moody's Common Stock than would be the case if options were adjusted
so as to become solely options to purchase common stock of the optionee's
employer. Due to this fact and the fact that, consistent with past practice,
each of New D&B and Moody's is expected to maintain a stock purchase program
designed to offset the increased number of shares otherwise attributable to
option exercises, New D&B has agreed to adjust the net indebtedness of the two
companies to compensate Moody's for the disproportionate amount of its estimated
future cash costs in this regard. The exact amount of the adjustment discussed
in the immediately preceding sentence will be determined on a formula basis and
will be dependent upon a variety of factors, including the respective trading
prices of Moody's Common Stock and New D&B Common Stock at the time of the
Distribution. New D&B expects to repay in full any indebtedness so assumed
shortly after the Distribution by raising funds in the commercial paper market.
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RELATIONSHIP BETWEEN THE NEW D&B CORPORATION
AND MOODY'S CORPORATION AFTER THE DISTRIBUTION
New D&B is presently wholly owned by D&B, and the results of operations of
entities that are or will be its subsidiaries have been included in D&B's
consolidated financial results. After the Distribution, D&B (which will change
its name to "Moody's Corporation") will not have any ownership interest in New
D&B, and New D&B will be an independent public company. In addition, after the
Distribution, New D&B will not have any ownership interest in Moody's, and
Moody's will be an independent public company. Furthermore, except as described
below, all contractual relationships existing prior to the Distribution between
D&B and New D&B will be terminated except for contracts specifically set forth
in a schedule to the Distribution Agreement.
Prior to the Distribution, D&B and New D&B will enter into certain
agreements, described below, governing the relationship between Moody's and New
D&B subsequent to the Distribution and providing for the allocation of tax,
employee benefits and certain other liabilities and obligations arising from
periods prior to the Distribution. Copies of the forms of the agreements
described below have been filed as exhibits to the Registration Statement of New
D&B in respect of the registration of the New D&B Common Stock under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition,
D&B will file a Current Report on Form 8-K in connection with the Distribution,
and forms of the agreements will be filed as exhibits to such Report. Such
agreements may be amended by D&B on or prior to the Distribution Date.
The following description summarizes certain terms of such agreements, but
is qualified by reference to the text of such agreements, which are incorporated
herein by reference.
DISTRIBUTION AGREEMENT
D&B (which will become Moody's) and New D&B will enter into the
Distribution Agreement providing for, among other things, certain corporate
transactions required to effect the Distribution and other arrangements between
Moody's and New D&B subsequent to the Distribution.
In particular, the Distribution Agreement defines the assets and
liabilities which are being allocated to and assumed by New D&B and those which
will remain with Moody's. The Distribution Agreement also defines what
constitutes the "New D&B Business" and what constitutes the "Moody's Business".
Pursuant to the Distribution Agreement, D&B is obligated to transfer or
cause to be transferred all its right, title and interest in the assets
comprising the New D&B Business to New D&B and New D&B is obligated to transfer
or cause to be transferred all its right, title and interest in the assets
comprising the Moody's Business to D&B. All assets are being transferred without
any representation or warranty, "as is-where is", and the relevant transferee
bears the risk that any necessary consent to transfer is not obtained. Each
party also agrees to exercise its respective commercially reasonable efforts
promptly to obtain any necessary consents and approvals and to take such actions
as may be reasonably necessary or desirable to carry out the purposes of the
Distribution Agreement and the other agreements summarized below.
In general, pursuant to the terms of the Distribution Agreement, all assets
of D&B that relate primarily to the New D&B Business will be allocated to New
D&B, all assets of D&B that relate primarily to the Moody's Business will be
allocated to Moody's and all remaining assets of D&B (other than cash, which
will be allocated as described under "The Distribution--Certain Indebtedness and
Minority Interest Financing") will be allocated equally between New D&B and
Moody's. The Distribution Agreement also provides for assumptions of liabilities
and cross-indemnities designed to allocate generally, effective as of the
Distribution Date, financial responsibility for (i) all liabilities arising out
of or in connection with the businesses conducted by New D&B to New D&B, (ii)
all liabilities arising out of or in connection with the businesses conducted by
Moody's to Moody's and (iii) substantially all other liabilities as of the
Distribution Date equally between New D&B and Moody's. The liabilities that are
to be allocated equally between New D&B and Moody's include contingent and other
liabilities relating to former businesses of D&B and certain prior business
transactions, which consist primarily of potential liabilities arising from the
legal action initiated by IRI described in "Risk Factors--Risks Relating to The
New D&B Corporation and Moody's Corporation--
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Contingencies", "The New D&B Corporation Business--Legal Proceedings" and
"Moody's Corporation Business--Legal Proceedings", and potential tax liabilities
that may arise with respect to reviews by tax authorities of D&B's global tax
planning initiatives described in "Risk Factors--Risks Relating to The New D&B
Corporation and Moody's Corporation--Contingencies". For a discussion of the
respective businesses of New D&B and Moody's, see "The New D&B Corporation
Business" and "Moody's Corporation Business".
Pursuant to the terms of the 1998 Distribution Agreement, as a condition to
the Distribution, New D&B is required to undertake to be jointly and severally
liable with D&B to Donnelley for any liabilities arising thereunder. The
Distribution Agreement generally allocates financial responsibility for such
liabilities equally between New D&B and Moody's, except that any such
liabilities that relate primarily to the New D&B Business will be New D&B
liabilities and any such liabilities that relate primarily to the Moody's
Business will be Moody's liabilities. Among other things, New D&B and Moody's
will agree that, as between themselves, they will each be responsible for 50% of
any payments to be made in respect of the IRI action under the 1998 Distribution
Agreement, including any legal fees and expenses related thereto.
In connection with the Distribution, D&B borrowed funds to repay in full
its commercial paper obligations. Also in connection with the Distribution,
responsibility for D&B's obligations under the minority interest financing
(relating to the investment partnership described in Note 12 to D&B's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Information Statement) will be allocated to New D&B. It is currently estimated
that New D&B also will assume a portion of the indebtedness of D&B and receive a
portion of the cash of D&B in amounts such that, at the time of the Distribution
and after giving effect to the agreement discussed below and certain other
factors, the net indebtedness of New D&B (plus the minority interest
obligations) will approximate the net indebtedness of Moody's. As indicated
under "Relationship Between The New D&B Corporation and Moody's Corporation
After the Distribution--Employee Benefits Agreement", substantially all
unexercised D&B stock options will be adjusted as of the Distribution Date to
comprise options to purchase Moody's Common Stock and separately exercisable
options to purchase New D&B Common Stock. In light of, among other things, the
numbers of optionees to be employed by New D&B and Moody's, respectively, this
adjustment will result in a substantially greater number of outstanding options
to purchase Moody's Common Stock than would be the case if options were adjusted
so as to become solely options to purchase common stock of the optionee's
employer. Due to this fact and the fact that, consistent with past practice,
each of New D&B and Moody's is expected to maintain a stock purchase program
designed to offset the increased number of shares otherwise attributable to
option exercises, New D&B has agreed to adjust the net indebtedness of the two
companies to compensate Moody's for the disproportionate amount of its estimated
future cash costs in this regard. The exact amount of the adjustment discussed
in the immediately preceding sentence will be determined on a formula basis and
will be dependent upon a variety of factors, including the respective trading
prices of Moody's Common Stock and New D&B Common Stock at the time of the
Distribution. See "The Distribution--Certain Indebtedness and Minority Interest
Financing".
The Distribution Agreement includes provisions governing the administration
of certain insurance programs and the procedures for making claims. The
Distribution Agreement also allocates the right to proceeds and the obligation
to incur deductibles under certain insurance policies.
In the event that any transfers contemplated by the Distribution Agreement
are not effected on or prior to the Distribution Date, the parties will be
required to cooperate to effect such transfers as promptly as practicable
following the Distribution Date, and pending any such transfers, to hold any
asset not so transferred in trust for the use and benefit of the party entitled
thereto (at the expense of the party entitled thereto), and to retain any
liability not so transferred for the account of the party by whom such liability
is to be assumed.
The Distribution Agreement provides that D&B (which will become Moody's)
and New D&B will comply with and otherwise not take action inconsistent with
each representation and statement made to the IRS in connection with D&B's
requests for ruling letters as to certain tax aspects of the Distribution and
certain internal restructuring transactions. Each of D&B and New D&B will agree,
among other things, to maintain its status as a company engaged in the active
conduct of a trade or business, as defined in
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Section 355(b) of the Internal Revenue Code, to continue to own stock of certain
operating subsidiaries constituting control (within the meaning of Section
368(c) of the Internal Revenue Code) of such operating subsidiaries and to
maintain at least 90% of the fair market value of its assets in the form of
stock and securities of certain operating subsidiaries, in each case until the
second anniversary of the Distribution Date. Neither D&B nor New D&B expects
this limitation to inhibit its financing or other activities or its ability to
respond to unanticipated developments. Under the Distribution Agreement, each of
D&B and New D&B will agree that, until two years after the Distribution Date, it
will not (i) merge or consolidate with another corporation, (ii) liquidate or
partially liquidate, (iii) sell or transfer all or substantially all of its
assets, (iv) redeem or repurchase its stock (except in certain limited
circumstances) or (v) take any other action which would result in one or more
persons acquiring a 50% or greater interest in Moody's or New D&B, as the case
may be, unless, prior to taking such action, it obtains a written opinion of a
law firm reasonably acceptable to Moody's or New D&B, as the case may be, or a
supplemental ruling from the IRS that such action will not affect the tax-free
treatment of the Distribution. As a result of the representations in the
requests for ruling letters and the covenants in the Distribution Agreement, the
acquisition of control of either Moody's or New D&B prior to the second
anniversary of the Distribution Date may be more difficult or less likely to
occur because of the potential substantial liabilities associated with a breach
of such representations or covenants. The Distribution Agreement will require
any party thereto that takes or fails to take any action which contributes to a
determination that the Distribution is not tax-free to Moody's or any of its
affiliates, New D&B or any of its affiliates or their respective stockholders to
indemnify the other party and its stockholders against any taxes arising
therefrom. The Distribution Agreement also includes similar indemnification
provisions with respect to actions taken that affect the tax treatment of
certain internal restructuring transactions.
Under the Distribution Agreement, each of D&B and New D&B will agree to
provide to the other party, subject to certain conditions, access to certain
corporate records and information and to provide certain services on such terms
as are set forth in a Data Services Agreement, a Shared Transaction Services
Agreement, an Insurance and Risk Management Services Agreement and a Transition
Services Agreement between such parties.
The Distribution Agreement also provides that, except as otherwise set
forth therein or in any related agreement, all costs or expenses in connection
with the Distribution incurred on or prior to the Distribution Date will be
borne equally by New D&B and Moody's. Each of D&B and New D&B will agree to be
equally liable for any claims arising from or relating to the Registration
Statement on Form 10 filed with the SEC by New D&B and related matters. Except
as set forth in the Distribution Agreement or any related agreement, each party
shall bear its own costs and expenses incurred after the Distribution Date.
TAX ALLOCATION AGREEMENT
D&B (which will become Moody's) and New D&B will enter into a Tax
Allocation Agreement pursuant to which New D&B and Moody's will each pay 50% of
any taxes, or receive 50% of any refunds of taxes, shown as due on any
consolidated or combined U.S. federal, state, local or foreign income or
franchise tax return for taxable periods beginning prior to the Distribution
Date (including the current taxable period to the extent such taxes, refunds or
credits are attributable to the portion of such taxable period up to and
including the Distribution Date).
Any subsequent adjustment of such taxes shall be allocated to New D&B if
such adjustment relates to the businesses conducted by New D&B, to Moody's if
such adjustment relates to the businesses conducted by Moody's, and otherwise
allocated equally between New D&B and Moody's.
All taxes other than consolidated or combined U.S. federal, state, local or
foreign income and franchise taxes will be the responsibility of New D&B if they
are attributable to the New D&B Business and of Moody's if they are attributable
to the Moody's Business.
For taxable periods beginning on or after the Distribution Date (and the
portion of the current taxable period beginning after the Distribution Date),
New D&B and Moody's will be responsible for their own taxes.
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31
EMPLOYEE BENEFITS AGREEMENT
D&B (which will become Moody's) and New D&B will enter into an Employee
Benefits Agreement (the "Employee Benefits Agreement"), which will allocate
responsibility for certain employee benefits matters on and after the
Distribution Date.
The Employee Benefits Agreement provides that Moody's will adopt a new
defined benefit pension plan for its employees and that New D&B will assume and
become the sponsor of the current D&B plan for the benefit of its employees and,
in general, former employees who terminated employment on or prior to the
Distribution Date who are not Moody's employees immediately after the
Distribution. Assets and liabilities of the current D&B pension plan that are
attributable to Moody's employees will be transferred to the new Moody's plan,
along with an amount of surplus under the current D&B pension plan, such that
the total amount transferred to the new Moody's plan should equal up to $88
million. This transfer will be made in accordance with Section 414(l) of the
Internal Revenue Code.
In addition, Moody's will adopt a new savings plan for its employees, and
New D&B will assume and become the sponsor of the D&B savings plan for the
benefit of its employees and former employees who terminated employment on or
prior to the Distribution Date. Unless otherwise elected by Moody's employees,
the account balances of Moody's employees will be transferred to the new Moody's
plan.
Generally, New D&B will assume and become the sponsor of D&B's nonqualified
supplemental pension plans for the benefit of persons who, prior to the
Distribution Date, were participants thereunder. However, with respect to
Moody's employees, New D&B generally will retain only those liabilities that
were vested prior to the Distribution Date. Moody's will guarantee payment of
the benefits under these plans to its employees in the event that New D&B is
unable to satisfy its obligations. New D&B will assume liabilities relating to
the account balances as of the Distribution Date of retired D&B directors and
New D&B directors and Moody's will assume liabilities relating to the account
balances as of the Distribution Date with respect to Moody's directors.
The Employee Benefits Agreement also provides that Moody's will continue to
sponsor its welfare plans for its employees. As of the Distribution Date, New
D&B will sponsor welfare plans for the benefit of its employees and former
employees who terminated employment on or prior to the Distribution Date.
Moody's will be responsible for providing retiree welfare benefits, where
applicable, to its employees and New D&B will be responsible for providing
retiree welfare benefits, where applicable, to its employees and eligible former
employees who terminated employment on or prior to the Distribution Date.
New D&B and Moody's will generally retain the severance liabilities of
their respective employees who terminated employment prior to the Distribution
Date.
With respect to equity-based plans, the Employee Benefits Agreement
generally provides that unexercised D&B stock options held by any individual,
other than Mr. Loren, as of the Distribution Date will be adjusted to comprise
options to purchase Moody's Common Stock ("Moody's Stock Options") and
separately exercisable options to purchase New D&B Common Stock ("New D&B Stock
Options"). Unexercised D&B stock options held by Mr. Loren as of the
Distribution Date will be canceled and Mr. Loren will receive, in lieu thereof,
a replacement grant consisting only of New D&B Stock Options.
The number of shares of Moody's Common Stock covered by the adjusted
Moody's Stock Options will equal the same number of shares covered by the
unexercised D&B stock options. The number of shares of New D&B Common Stock
covered by the New D&B Stock Options will equal 50% (rounded down to the nearest
whole number) of the number of shares covered by the unexercised D&B stock
options.
Following the Distribution, the exercise price per share of a Moody's Stock
Option will equal the product of (i) the excess of (A) the trading price of D&B
as of last trade "regular way" immediately prior to the Distribution over (B)
50% multiplied by the trading price of New D&B as of the last trade "when
issued" immediately prior to the Distribution multiplied by (ii) a fraction, the
numerator of which is the original exercise price per share of the corresponding
unexercised D&B stock option, and the denominator of which equals the trading
price of D&B as of last trade "regular way" immediately prior to the
Distribution. The
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exercise price of a New D&B Stock Option will equal the trading price of New D&B
as of the last trade "when issued" immediately prior to the Distribution
multiplied by a fraction, the numerator of which is the original exercise price
per share of the corresponding unexercised D&B stock option, and the denominator
of which equals the trading price of D&B as of last trade "regular way"
immediately prior to the Distribution.
Following the Distribution, each D&B option holder prior to the
Distribution (other than Mr. Loren) will have the opportunity to obtain New D&B
Common Stock and Moody's Common Stock at the same aggregate exercise price (as
adjusted for the distribution ratio) as if such individual had exercised the D&B
stock options in full prior to the Distribution. In general, the vesting
schedule and the term of each outstanding New D&B Stock Option and Moody's Stock
Option will not be affected by the Distribution except that the vesting and
termination of such options will be dependent upon an employee's continued
employment with Moody's or New D&B, as applicable, following the Distribution.
All outstanding D&B stock appreciation rights will be adjusted in substantially
the same manner as the unexercised D&B stock options.
The table below sets forth information, as of June 30, 2000, regarding
outstanding options to purchase D&B Common Stock and the options to purchase
Moody's Common Stock and New D&B Common Stock that would result therefrom after
giving effect to the Distribution and the adjustments described above. As
indicated above, Mr. Loren currently holds options to purchase 500,000 shares of
D&B Common Stock in respect of which he will receive replacement options to
purchase only shares of New D&B Common Stock in connection with the
Distribution.
D&B MOODY'S NEW D&B
PRIOR TO THE FOLLOWING THE FOLLOWING THE
OPTIONEES(1) DISTRIBUTION DISTRIBUTION DISTRIBUTION(2)
- ------------ ------------ ------------- ---------------
Moody's Employees and Directors.............. 4,845,491 4,845,491 2,422,551
New D&B Employees and Directors.............. 8,308,542 8,308,542 4,153,920
Former Employees and Directors............... 2,481,383 2,481,383 1,240,635
---------- ---------- ---------
Total........................................ 15,635,416 15,635,416 7,817,106
- ---------------
(1) The table excludes the options to purchase 500,000 shares of D&B Common
Stock currently held by Mr. Loren and the options to purchase shares of New
D&B that Mr. Loren would receive in replacement thereof immediately
following the Distribution. The number of shares of New D&B subject to these
options will depend on the relative market prices of the Moody's Common
Stock and the New D&B Common Stock at the time of the Distribution.
(2) The number of shares of New D&B Common Stock covered by the New D&B Stock
Options held by each employee or director will be rounded down to the
nearest whole number with respect to each option grant. Consequently, the
numbers of options to purchase New D&B Common Stock reflected in the table
are slightly less than 50% of the number of options to purchase D&B Common
Stock.
Directors of D&B holding D&B restricted stock as of the Distribution Date
will receive a distribution of one share of New D&B restricted stock for every
two shares of D&B restricted stock held as of the Record Date. The New D&B
restricted stock received in the Distribution will have the same terms and
conditions as the D&B restricted stock on which such distribution was made.
Pursuant to the terms of Mr. Loren's employment agreement, Moody's
restricted stock held by, and New D&B restricted stock distributed to, Mr. Loren
will be canceled immediately after the Distribution and will be replaced with a
new award consisting solely of New D&B restricted stock. The number of shares of
New D&B restricted stock that will be granted to Mr. Loren cannot be determined
at this time as such award will depend on the relative market prices of the
Moody's Common Stock and the New D&B Common Stock at the time of the
Distribution.
D&B phantom stock units and D&B performance share units held by D&B
directors shall be converted into phantom stock units of New D&B and Moody's and
performance share units of New D&B and Moody's, such replacement phantom stock
units and performance share units to have the same terms as the D&B phantom
stock units and D&B performance share units from which they arose.
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If performance targets are met, it is anticipated that Moody's employees
will receive following the end of the performance period (i) a number of shares
of Moody's Common Stock equal to the target number of performance shares plus
(ii) a cash payment equal to the fair market value of a number of shares of New
D&B Common Stock equal to 50% of the target number of D&B performance shares.
Outstanding opportunities for New D&B employees to earn performance shares shall
be canceled as of the Distribution Date, and each individual shall receive a
replacement opportunity consisting of (i) a number of New D&B performance shares
equal to 50% of the target number of D&B performance shares plus (ii) a cash
payment equal to the fair market value of a number of shares of Moody's Common
Stock equal to the target number of D&B performance shares.
Except as otherwise provided in the Employee Benefits Agreement, as of the
Distribution Date, Moody's employees will generally cease participation in D&B
employee benefit plans, and Moody's will generally recognize, among other
things, their respective employees' past service with D&B under their respective
employee benefit plans. Except as specifically provided therein, nothing in the
Employee Benefits Agreement restricts Moody's or New D&B's ability to amend or
terminate any of their respective employee benefit plans after the Distribution
Date.
INTELLECTUAL PROPERTY ASSIGNMENT
D&B and New D&B will enter into an Intellectual Property Assignment (the
"IP Assignment") which provides for the allocation and recognition by and
between these companies of rights under patents, copyrights, software,
technology, trade secrets and certain other intellectual property owned by New
D&B and Moody's and their respective subsidiaries as of the Distribution Date.
See "The New D&B Corporation Business--Intellectual Property" and "Moody's
Corporation Business--Intellectual Property".
SHARED TRANSACTION SERVICES AGREEMENT
D&B and New D&B will enter into a Shared Transaction Services Agreement
providing for the orderly continuation, for a transitional period after the
Distribution Date, of certain of the shared transaction and other services (such
as payroll, accounts payable, general accounting and related computer processing
and support) currently being provided.
DATA SERVICES AGREEMENT
D&B and New D&B will enter into a Data Services Agreement providing for the
orderly continuation, for a transitional period after the Distribution Date, of
certain specified computer processing and related services currently being
provided.
INSURANCE AND RISK MANAGEMENT SERVICES AGREEMENT
D&B and New D&B will enter into an Insurance and Risk Management Services
Agreement providing for the orderly continuation of insurance and risk
management services for a transitional period after the Distribution Date.
TRANSITION SERVICES AGREEMENT
D&B and New D&B will enter into a Transition Services Agreement pursuant to
which the respective parties have agreed to certain basic terms governing the
provision by one party to the other of specified support services for a
transitional period after the Distribution Date.
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DIVIDEND POLICIES
The payment and level of cash dividends by New D&B and Moody's after the
Distribution will be subject to the discretion of the New D&B Board of Directors
and the Moody's Board of Directors, respectively. It is anticipated that Moody's
initially will pay a quarterly dividend of between $.04 and $.06 per share. In
addition, it is anticipated that New D&B initially will not pay dividends and
will use future earnings to finance operations, expand its Internet and
e-commerce-related business and fund a share repurchase program to offset the
dilutive effect of shares issued under employee benefits arrangements. See "Risk
Factors--Risks Relating to The New D&B Corporation--New D&B Does Not Expect to
Pay Dividends". However, the payment and level of cash dividends by each of New
D&B and Moody's will be based on, and affected by, a number of factors,
including the respective operating results and financial requirements of New D&B
and Moody's on a stand-alone basis as well as applicable legal and contractual
restrictions. There can be no assurance that any dividends will be declared or
paid after the Distribution.
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THE NEW D&B CORPORATION
(ACCOUNTING SUCCESSOR TO D&B)
CAPITALIZATION
The following table sets forth the capitalization of D&B as of June 30,
2000, and as adjusted to give effect to the Distribution and the transactions
contemplated thereby. The following data is qualified in its entirety by the
Consolidated Financial Statements of D&B and other information contained
elsewhere in this Information Statement. See "Forward-Looking Statements".
HISTORICAL AS ADJUSTED
JUNE 30, FOR THE
2000 DISTRIBUTION
---------- ------------
(DOLLAR AMOUNTS IN MILLIONS,
EXCEPT PER SHARE DATA)
Cash and Cash Equivalents................................... $ 54.8 $ 54.8
======= =======
Notes Payable............................................... 291.9 16.0(1)
------- -------
Minority Interest........................................... 302.5 302.5
------- -------
Preferred Stock, par value $.01 per share;
authorized -- 10,000,000 shares; issued and
outstanding -- none
Series Common Stock, par value $.01 per share;
authorized -- 10,000,000 shares; issued and
outstanding -- none
Common Stock, par value $.01 per share;
authorized -- 400,000,000 shares; issued -- 171,451,136
shares (historical)....................................... 1.7
issued -- 81,049,679 shares (pro forma)(4)................ .8(3)(4)
Capital Surplus............................................. 226.5 226.5
Retained Earnings (Deficit)................................. (.1) 16.7(2)(3)
Treasury Stock, at cost, 9,351,779 shares -- historical..... (291.4) --(3)
Cumulative Translation Adjustment........................... (200.9) (196.5)(2)
Minimum Pension Liability................................... (38.4) (38.4)
------- -------
Total Equity........................................... (302.6) 9.1
------- -------
Total Capitalization.............................. $ 291.8 $ 327.6
======= =======
- ---------------
(1) In connection with the Distribution, D&B borrowed funds to repay in full its
commercial paper obligations. Also in connection with the Distribution,
responsibility for D&B's obligations under the minority interest financing
(relating to the investment partnership described in Note 12 to D&B's
Consolidated Financial Statements and Notes thereto included elsewhere in
this Information Statement) will be allocated to New D&B. It is currently
estimated that New D&B also will assume a portion of the indebtedness of D&B
and receive a portion of the cash of D&B in amounts such that, at the time
of the Distribution and after giving effect to the agreement discussed below
and certain other factors, the net indebtedness of New D&B (plus the
minority interest obligations) will approximate the net indebtedness of
Moody's. As indicated under "Relationship Between The New D&B Corporation
and Moody's Corporation After the Distribution--Employee Benefits
Agreement", substantially all unexercised D&B stock options will be adjusted
as of the Distribution Date to comprise options to purchase Moody's Common
Stock and separately exercisable options to purchase New D&B Common Stock.
In light of, among other things, the numbers of optionees to be employed by
New D&B and Moody's, respectively, this adjustment will result in a
substantially greater number of outstanding options to purchase Moody's
Common Stock than would be the case if options were adjusted so as to become
solely options to purchase common stock of the optionee's employer. Due to
this fact and the fact that, consistent with past practice, each of New D&B
and Moody's is expected to maintain a stock purchase program designed to
offset the increased number of shares otherwise attributable to option
exercises, New D&B has agreed to adjust the net indebtedness of the two
companies to compensate Moody's for the disproportionate amount of its
estimated future cash costs in this regard. The exact amount of the
adjustment discussed in the immediately preceding sentence will be
determined on a formula basis and will be dependent upon a variety of
factors, including the respective trading prices of Moody's Common Stock and
New D&B
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Common Stock at the time of the Distribution. The adjustment represents the
allocation of net indebtedness at June 30, 2000, between New D&B and
Moody's, such that the net indebtedness of New D&B (including the minority
interest financing) approximates the net indebtedness of Moody's. See "The
Distribution--Certain Indebtedness and Minority Interest Financing".
(2) To reflect, for accounting purposes only, the allocation of the net
liabilities and corresponding cumulative translation adjustment, of the
Moody's Business which is treated as a dividend to shareholders.
(3) To reflect the elimination of treasury stock which shares will be treasury
shares of Moody's Corporation as a result of the legal form of the
transaction.
(4) The adjustment of shares outstanding reflects the Distribution ratio of one
share of New D&B Common Stock for every two shares of D&B Common Stock.
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THE NEW D&B CORPORATION
(ACCOUNTING SUCCESSOR TO D&B)
SELECTED FINANCIAL DATA
The following data is qualified in its entirety by the Consolidated
Financial Statements of D&B and other information contained elsewhere in this
Information Statement. The financial data as of and for each of the years in the
five-year period ended December 31, 1999 have been derived from the audited
financial statements of D&B, which financial statements as of December 31, 1998
and 1999 and for each of the years in the three-year period ended December 31,
1999 are contained elsewhere in this Information Statement. The financial data
as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 have
been derived from the unaudited interim financial statements of D&B contained
elsewhere in this Information Statement. Due to the relative significance of the
New D&B Business to D&B, the Distribution will be accounted for as a reverse
spin-off and, as such, the New D&B Business has been classified as a continuing
operation and the Moody's Business has been classified as a discontinued
operation. See "The Distribution--Form of Transaction; Basis of Presentation".
The following financial data should also be read in connection with the
information set forth under "The New D&B Corporation (Accounting Successor to
D&B) Unaudited Consolidated Pro Forma Condensed Financial Statements" and "The
New D&B Corporation (Accounting Successor to D&B) Management's Discussion and
Analysis of Financial Condition and Results of Operations" and D&B's
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Information Statement.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
HISTORICAL
------------------------------------------------------ PRO FORMA(1)
1995 1996 1997 1998 1999 1999
-------- -------- ---------- -------- -------- ------------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS:
Operating Revenues......... $1,405.6 $1,397.1 $1,353.6 $1,420.5 $1,407.7 $1,407.7
Costs and Expenses(2)...... 1,311.6 1,478.2 1,146.4 1,232.8 1,246.8 1,246.8
-------- -------- -------- -------- -------- --------
Operating Income (Loss).... 94.0 (81.1) 207.2 187.7 160.9 160.9
Non-Operating Expense --
Net(3)................... (68.2) (70.8) (71.5) (30.4) (15.5) (1.8)
-------- -------- -------- -------- -------- --------
Income (Loss) from
Continuing Operations
before Provision for
Income Taxes............. 25.8 (151.9) 135.7 157.3 145.4 159.1
Provision for Income
Taxes.................... 23.7 50.1 42.5 71.1 64.1 69.6
-------- -------- -------- -------- -------- --------
Income (Loss) from:
Continuing Operations.... 2.1 (202.0) 93.2 86.2 81.3 $ 89.5
========
Discontinued Operations,
Net of Income
Taxes(4)............... 319.1 158.2 217.8 193.9 174.7
-------- -------- -------- -------- --------
Income (Loss) before
Cumulative Effect of
Accounting Changes......... 321.2 (43.8) 311.0 280.1 256.0
Cumulative Effect of
Accounting Changes, Net of
Income Tax Benefit(5)...... -- -- (127.0) -- --
-------- -------- -------- -------- --------
Net Income (Loss)............ $ 321.2 $ (43.8) $ 184.0 $ 280.1 $ 256.0
======== ======== ======== ======== ========
BASIC EARNINGS (LOSS) PER
SHARE OF COMMON STOCK:
Continuing Operations...... $ .01 $ (1.19) $ .55 $ .51 $ .50 $ .55
========
Discontinued Operations.... 1.88 .93 1.27 1.14 1.08
-------- -------- -------- -------- --------
Before Cumulative Effect of
Accounting Changes....... 1.89 (.26) 1.82 1.65 1.58
Cumulative Effect of
Accounting Changes, Net
of Income Tax
Benefit(5)............... -- -- (.74) -- --
-------- -------- -------- -------- --------
Basic Earnings (Loss) Per
Share of Common Stock...... $ 1.89 $ (.26) $ 1.08 $ 1.65 $ 1.58
======== ======== ======== ======== ========
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------------
HISTORICAL
--------------- PRO FORMA(1)
1999 2000 2000
------ ------ ------------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS:
Operating Revenues......... $703.8 $704.3 $704.3
Costs and Expenses(2)...... 623.0 605.4 605.4
------ ------ ------
Operating Income (Loss).... 80.8 98.9 98.9
Non-Operating Expense --
Net(3)................... (13.9) (14.4) (6.8)
------ ------ ------
Income (Loss) from
Continuing Operations
before Provision for
Income Taxes............. 66.9 84.5 92.1
Provision for Income
Taxes.................... 27.6 36.4 39.4
------ ------ ------
Income (Loss) from:
Continuing Operations.... 39.3 48.1 $ 52.7
======
Discontinued Operations,
Net of Income
Taxes(4)............... 87.5 87.6
------ ------
Income (Loss) before
Cumulative Effect of
Accounting Changes......... 126.8 135.7
Cumulative Effect of
Accounting Changes, Net of
Income Tax Benefit(5)...... -- --
------ ------
Net Income (Loss)............ $126.8 $135.7
====== ======
BASIC EARNINGS (LOSS) PER
SHARE OF COMMON STOCK:
Continuing Operations...... $ .24 $ .30 $ .33
======
Discontinued Operations.... .53 .54
------ ------
Before Cumulative Effect of
Accounting Changes....... .77 .84
Cumulative Effect of
Accounting Changes, Net
of Income Tax
Benefit(5)............... -- --
------ ------
Basic Earnings (Loss) Per
Share of Common Stock...... $ .77 $ .84
====== ======
33
38
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
HISTORICAL
------------------------------------------------------ PRO FORMA(1)
1995 1996 1997 1998 1999 1999
-------- -------- ---------- -------- -------- ------------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
DILUTED EARNINGS (LOSS) PER
SHARE OF COMMON STOCK:
Continuing Operations...... $ .01 $ (1.19) $ .54 $ .50 $ .50 $ .55
========
Discontinued Operations.... 1.86 .93 1.26 1.13 1.06
-------- -------- -------- -------- --------
Before Cumulative Effect of
Accounting Changes....... 1.87 (.26) 1.80 1.63 1.56
Cumulative Effect of
Accounting Changes, Net
of Income Tax
Benefit(5)............... -- -- (.73) -- --
-------- -------- -------- -------- --------
Diluted Earnings (Loss) Per
Share of Common Stock.... $ 1.87 $ (.26) $ 1.07 $ 1.63 $ 1.56
======== ======== ======== ======== ========
UNAUDITED EARNINGS (LOSS) PER
SHARE OF COMMON STOCK FROM
CONTINUING OPERATIONS,
ADJUSTED FOR DISTRIBUTION
RATIO(6):
Basic...................... $ .02 $ (2.38) $ 1.10 $ 1.02 $ 1.00 $ 1.10
Diluted.................... $ .02 $ (2.38) $ 1.08 $ 1.00 $ 1.00 $ 1.10
OTHER DATA:
Dividends Paid Per Share... $ 2.63 $ 1.82 $ .88 $ .81 $ .74
Dividends Declared Per
Share.................... $ 2.63 $ 1.82 $ 1.10 $ .775 $ .74
Weighted Average Number of
Shares Outstanding:
Basic.................... 169.5 170.0 170.8 169.5 162.3 162.3
Diluted(7)............... 171.6 170.0 172.6 171.7 164.3 164.3
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------------
HISTORICAL
--------------- PRO FORMA(1)
1999 2000 2000
------ ------ ------------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
DILUTED EARNINGS (LOSS) PER
SHARE OF COMMON STOCK:
Continuing Operations...... $ .24 $ .30 $ .32
======
Discontinued Operations.... .52 .53
------ ------
Before Cumulative Effect of
Accounting Changes....... .76 .83
Cumulative Effect of
Accounting Changes, Net
of Income Tax
Benefit(5)............... -- --
------ ------
Diluted Earnings (Loss) Per
Share of Common Stock.... $ .76 $ .83
====== ======
UNAUDITED EARNINGS (LOSS) PER
SHARE OF COMMON STOCK FROM
CONTINUING OPERATIONS,
ADJUSTED FOR DISTRIBUTION
RATIO(6):
Basic...................... $ .48 $ .60 $ .66
Diluted.................... $ .48 $ .60 $ .64
OTHER DATA:
Dividends Paid Per Share... $ .37 $ .37
Dividends Declared Per
Share.................... $ .37 $ .37
Weighted Average Number of
Shares Outstanding:
Basic.................... 163.6 161.5 161.5
Diluted(7)............... 166.2 162.8 162.8
AS OF DECEMBER 31,
---------------------------------------------------- AS OF JUNE 30,
HISTORICAL -------------------------
---------------------------------------------------- HISTORICAL PRO FORMA(1)
1995 1996 1997 1998 1999 2000 2000
-------- -------- -------- -------- -------- ---------- ------------
(AMOUNTS IN MILLIONS) (AMOUNTS IN MILLIONS)
BALANCE SHEET:
Total Assets(8)................ $3,468.6 $1,992.9 $1,729.4 $1,574.7 $1,574.8 $1,428.4 $1,428.4
Minority Interest Financing.... -- -- $ 300.0 $ 300.0 $ 300.0 $ 300.0 $ 300.0
Total Shareholders' Equity
(Deficit).................... $1,158.2 $ (455.3) $ (527.7) $ (371.0) $ (416.6) $ (302.6) $ 9.1
- ---------------
(1) See "The New D&B Corporation (Accounting Successor to D&B) Unaudited
Consolidated Pro Forma Condensed Financial Statements".
(2) 1999 included a charge of $41.2 million in connection with the restructuring
of the Dun & Bradstreet operating company. 1998 included a charge of $28.0
million for reorganization costs associated with the 1998 Distribution. 1996
included charges of $161.2 million for reorganization costs associated with
the 1996 Distribution and a loss of $68.2 million on the sale of American
Credit Indemnity Company, a former subsidiary of Donnelley. 1995 included a
non-recurring charge of $183.0 million partially offset by gains of $90.0
million and $28.0 million from the sale of Interactive Data Corporation and
warrants received in connection with the sale of Donnelley Marketing,
respectively.
(3) 1999 included a gain related to the settlement of litigation of $11.9
million.
(4) Income taxes on Discontinued Operations were $114.8 million, $104.7 million,
$123.1 million, $197.1 million and $99.4 million in 1999, 1998, 1997, 1996
and 1995, respectively, and $56.6 million and $51.8 million for the six
months ended June 30, 2000 and June 30, 1999, respectively.
(5) 1997 included the impact of a change in revenue recognition policies.
(6) In the Distribution, each D&B shareholder will receive one share of New D&B
Common Stock for every two shares of D&B Common Stock held as of the close
of business on the Record Date.
(7) The exercise of options has not been assumed for the year ended December 31,
1996, since the result is antidilutive.
(8) Included Net Assets of Discontinued Operations of $162.3 million, $459.5
million and $1,686.7 million in 1997, 1996 and 1995, respectively.
34
39
THE NEW D&B CORPORATION
(ACCOUNTING SUCCESSOR TO D&B)
UNAUDITED CONSOLIDATED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited consolidated pro forma condensed financial
statements have been prepared giving effect to the Distribution as if it
occurred on June 30, 2000 for the pro forma condensed balance sheet and January
1, 1999 for the pro forma condensed statements of operations. The unaudited
consolidated pro forma condensed balance sheet and statements of operations set
forth below do not purport to represent what New D&B's financial position
actually would have been had the Distribution occurred on the dates indicated or
to project New D&B's operating results for any future period. The pro forma
adjustments are based upon available information and certain assumptions that
D&B management believes are reasonable. The unaudited consolidated pro forma
condensed financial statements set forth below should be read in conjunction
with, and are qualified in their entirety by, the information under "The New D&B
Corporation (Accounting Successor to D&B) Selected Financial Data" and "The New
D&B Corporation (Accounting Successor to D&B) Management's Discussion and
Analysis of Financial Condition and Results of Operations" and in the D&B
Consolidated Financial Statements and Notes thereto included elsewhere in this
Information Statement.
35
40
THE NEW D&B CORPORATION
(ACCOUNTING SUCCESSOR TO D&B)
UNAUDITED CONSOLIDATED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED
JUNE 30, 2000
--------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- -----------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Operating Revenues......................................... $ 704.3 $ 704.3
------- -------
Operating Costs............................................ 267.8 267.8
Selling and Administrative Costs........................... 279.0 279.0
Depreciation and Amortization.............................. 56.4 56.4
Reorganization Costs....................................... 2.2 2.2
------- -------
Operating Income........................................... 98.9 98.9
------- -------
Interest Income............................................ 1.8 $3.6(1) 5.4
Interest Expense........................................... (4.0) 4.0(1) --
Minority Expense........................................... (11.2) (11.2)
Other Expense -- Net....................................... (1.0) (1.0)
------- ---- -------
Non-Operating Expense -- Net............................... (14.4) 7.6 (6.8)
------- ---- -------
Income from Continuing Operations before Provision for
Income Taxes............................................. 84.5 7.6 92.1
Provision for Income Taxes................................. 36.4 3.0(2) 39.4
------- ---- -------
Income from Continuing Operations.......................... $ 48.1 $4.6 $ 52.7
======= ==== =======
EARNINGS PER SHARE OF COMMON STOCK FROM CONTINUING
OPERATIONS:
Basic.................................................... $ .30 $ .33
Diluted.................................................. $ .30 $ .32
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic.................................................... 161.5 161.5
Diluted.................................................. 162.8 162.8
UNAUDITED EARNINGS PER SHARE OF COMMON STOCK FROM
CONTINUING OPERATIONS, ADJUSTED FOR DISTRIBUTION
RATIO(3):
Basic.................................................... $ .60 $ .66
Diluted.................................................. $ .60 $ .64
------- -------
- ---------------
(1) In connection with the Distribution, D&B borrowed funds to repay in full its
commercial paper obligations. Also in connection with the Distribution,
responsibility for D&B's obligations under the minority interest financing
(relating to the investment partnership described in Note 12 to D&B's
Consolidated Financial Statements and Notes thereto included elsewhere in
this Information Statement) will be allocated to New D&B. It is currently
estimated that New D&B also will assume a portion of the indebtedness of D&B
and receive a portion of the cash of D&B in amounts such that, at the time
of the Distribution and after giving effect to the agreement discussed below
and certain other factors, the net indebtedness of New D&B (plus the
minority interest obligations) will approximate the net indebtedness of
Moody's. As indicated under "Relationship Between The New D&B Corporation
and Moody's Corporation After the Distribution--Employee Benefits
Agreement", substantially all unexercised D&B stock options will be adjusted
as of the Distribution Date to comprise options to purchase Moody's Common
Stock and separately exercisable options to purchase New D&B Common Stock.
In light of, among other things, the numbers of optionees to be employed by
New D&B and Moody's, respectively, this adjustment will result in a
substantially greater number of outstanding options to purchase Moody's
Common Stock than would be the case if options were adjusted so as to become
solely options to purchase common stock of the optionee's employer. Due to
this fact and the fact that, consistent with past practice, each of New D&B
and Moody's is expected to maintain a stock purchase program designed to
offset the increased number of shares otherwise attributable to option
exercises, New D&B has agreed to adjust the net indebtedness of the two
companies to compensate Moody's for the disproportionate amount of its
estimated future cash costs in this regard. The exact amount of the
adjustment discussed in the immediately preceding sentence will be
determined on a formula basis and will be dependent upon a
36
41
variety of factors, including the respective trading prices of Moody's
Common Stock and New D&B Common Stock at the time of the Distribution.
The adjustment represents the elimination of one-half of the historical
interest and minority expense which would have resulted if the allocation
of the net indebtedness had occurred as of January 1, 1999.
(2) To reflect the tax effect of the pro forma adjustment at the statutory rate.
(3) In the Distribution, each D&B shareholder will receive one share of New D&B
Common Stock for every two shares of D&B Common Stock held as of the close
of business on the Record Date.
Note: Management currently estimates that one-time pre-tax expenditures for
investment banking, legal, accounting and other professional fees of
approximately $30 million will be required to effect the Distribution.
These costs will be recorded as incurred and are not reflected in the
Unaudited Consolidated Pro Forma Condensed Statement of Operations.
37
42
THE NEW D&B CORPORATION
(ACCOUNTING SUCCESSOR TO D&B)
UNAUDITED CONSOLIDATED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- -----------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Operating Revenue.......................................... $1,407.7 $1,407.7
-------- --------
Operating Costs............................................ 538.3 538.3
Selling and Administrative Costs........................... 539.4 539.4
Depreciation and Amortization.............................. 127.9 127.9
Restructuring Expense...................................... 41.2 41.2
-------- --------
Operating Income........................................... 160.9 160.9
-------- --------
Interest Income............................................ 2.9 $ 8.7(1) 11.6
Interest Expense........................................... (5.0) 5.0(1) --
Minority Expense........................................... (22.4) (22.4)
Other Expense -- Net....................................... 9.0 9.0
-------- ----- --------
Non-Operating Expense -- Net............................... (15.5) 13.7 (1.8)
-------- ----- --------
Income from Continuing Operations before Provision for
Income Taxes............................................. 145.4 13.7 159.1
Provision for Income Taxes................................. 64.1 5.5(2) 69.6
-------- ----- --------
Income from Continuing Operations.......................... $ 81.3 $ 8.2 $ 89.5
======== ===== ========
EARNINGS PER SHARE OF COMMON STOCK FROM CONTINUING
OPERATIONS:
Basic.................................................... $ .50 $ .55
Diluted.................................................. $ .50 $ .55
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic.................................................... 162.3 162.3
Diluted.................................................. 164.3 164.3
UNAUDITED EARNINGS PER SHARE OF COMMON STOCK FROM
CONTINUING OPERATIONS ADJUSTED FOR DISTRIBUTION RATIO(3):
Basic.................................................... $ 1.00 $ 1.10
Diluted.................................................. $ 1.00 $ 1.10
- ---------------
(1) In connection with the Distribution, D&B borrowed funds to repay in full its
commercial paper obligations. Also in connection with the Distribution,
responsibility for D&B's obligations under the minority interest financing
(relating to the investment partnership described in Note 12 to D&B's
Consolidated Financial Statements and Notes thereto included elsewhere in
this Information Statement) will be allocated to New D&B. It is currently
estimated that New D&B also will assume a portion of the indebtedness of D&B
and receive a portion of the cash of D&B in amounts such that, at the time
of the Distribution and after giving effect to the agreement discussed below
and certain other factors, the net indebtedness of New D&B (plus the
minority interest obligations) will approximate the net indebtedness of
Moody's. As indicated under "Relationship Between The New D&B Corporation
and Moody's Corporation After the Distribution--Employee Benefits
Agreement", substantially all unexercised D&B stock options will be adjusted
as of the Distribution Date to comprise options to purchase Moody's Common
Stock and separately exercisable options to purchase New D&B Common Stock.
In light of, among other things, the numbers of optionees to be employed by
New D&B and Moody's, respectively, this adjustment will result in a
substantially greater number of outstanding options to purchase Moody's
Common Stock than would be the case if options were adjusted so as to become
solely options to purchase common stock of the optionee's employer. Due to
this fact and the fact that, consistent with past practice, each of New D&B
and Moody's is expected to maintain a stock purchase program designed to
offset the increased number of shares otherwise attributable to option
exercises, New D&B has agreed to adjust the net indebtedness of the two
companies to compensate Moody's for the disproportionate amount of its
estimated future cash costs in this regard. The exact amount of the
adjustment discussed in the immediately preceding sentence will be
determined on a formula basis and will be dependent upon a
38
43
variety of factors, including the respective trading prices of Moody's
Common Stock and New D&B Common Stock at the time of the Distribution.
The adjustment represents the elimination of one-half of the historical
interest and minority expense which would have resulted if the allocation of
the net indebtedness had occurred as of January 1, 1999 and throughout the
year.
(2) To reflect the tax effect of the pro forma adjustment at the statutory rate.
(3) In the Distribution, each D&B shareholder will receive one share of New D&B
Common Stock for every two shares of D&B Common Stock held as of the close
of business on the Record Date.
Note: Management currently estimates that one-time pre-tax expenditures for
investment banking, legal, accounting and other professional fees of
approximately $30 million will be required to effect the Distribution.
These costs will be recorded as incurred and are not reflected in the
Unaudited Consolidated Pro Forma Condensed Statement of Operations.
39
44
THE NEW D&B CORPORATION
(ACCOUNTING SUCCESSOR TO D&B)
UNAUDITED CONSOLIDATED PRO FORMA CONDENSED BALANCE SHEET
AS OF JUNE 30, 2000
--------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------ ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
ASSETS
Cash and Cash Equivalents............................... $ 54.8 $ 54.8
Other Current Assets.................................... 440.8 440.8
-------- --------
Total Current Assets.................................... 495.6 495.6
Non-Current Assets...................................... 932.8 932.8
-------- --------
Total Assets............................................ $1,428.4 $1,428.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes Payable........................................... 291.9 $(275.9)(1) 16.0
Accrued and Other Current Liabilities................... 681.4 681.4
-------- ------- --------
Total Current Liabilities............................... 973.3 (275.9) 697.4
Long-Term Liabilities................................... 419.4 419.4
Net Liabilities of Discontinued Operations.............. 35.8 (35.8)(2) --
Minority Interest....................................... 302.5 302.5
Stockholders' Equity:
Preferred Stock, par value $.01 per share; authorized --
10,000,000 shares; issued and outstanding -- none
Series Common Stock, par value $.01 per share;
authorized -- 10,000,000 shares; issued and
outstanding -- none
Common Stock, par value $.01 per share; authorized --
400,000,000 shares;
issued -- 171,451,136 shares -- historical
issued -- 81,049,679 shares -- pro forma(4)........... 1.7 (.9)(3) .8
Capital Surplus......................................... 226.5 226.5
275.9(1)
Retained Earnings (Deficit)............................. (.1) 31.4(2) 16.7
(290.5)(3)
Treasury Stock, at cost, 9,351,779
shares -- historical.................................. (291.4) 291.4(3) --
Cumulative Translation Adjustment....................... (200.9) 4.4(2) (196.5)
Minimum Pension Liability............................... (38.4) (38.4)
-------- ------- --------
Total Shareholders' Equity.............................. (302.6) 311.7 9.1
-------- ------- --------
Total Liabilities and Shareholders' Equity.............. $1,428.4 $ -- $1,428.4
======== ======= ========
- ---------------
(1) In connection with the Distribution, D&B borrowed funds to repay in full its
commercial paper obligations. Also in connection with the Distribution,
responsibility for D&B's obligations under the minority interest financing
(relating to the investment partnership described in Note 12 to D&B's
Consolidated Financial Statements and Notes thereto included elsewhere in
this Information Statement) will be allocated to New D&B. It is currently
estimated that New D&B also will assume a portion of the indebtedness of D&B
and receive a portion of the cash of D&B in amounts such that, at the time
of the Distribution and after giving effect to the agreement discussed below
and certain other factors, the net indebtedness of New D&B (plus the
minority interest obligations) will approximate the net indebtedness of
Moody's. As indicated under "Relationship Between The New D&B Corporation
and Moody's Corporation After the Distribution--Employee Benefits
Agreement", substantially all unexercised D&B
40
45
stock options will be adjusted as of the Distribution Date to comprise
options to purchase Moody's Common Stock and separately exercisable options
to purchase New D&B Common Stock. In light of, among other things, the
numbers of optionees to be employed by New D&B and Moody's, respectively,
this adjustment will result in a substantially greater number of outstanding
options to purchase Moody's Common Stock than would be the case if options
were adjusted so as to become solely options to purchase common stock of the
optionee's employer. Due to this fact and the fact that, consistent with
past practice, each of New D&B and Moody's is expected to maintain a stock
purchase program designed to offset the increased number of shares otherwise
attributable to option exercises, New D&B has agreed to adjust the net
indebtedness of the two companies to compensate Moody's for the
disproportionate amount of its estimated future cash costs in this regard.
The exact amount of the adjustment discussed in the immediately preceding
sentence will be determined on a formula basis and will be dependent upon a
variety of factors, including the respective trading prices of Moody's
Common Stock and New D&B Common Stock at the time of the Distribution.
The adjustment represents the allocation of net indebtedness at June 30,
2000 between New D&B and Moody's, such that the net indebtedness of New D&B
approximates the net indebtedness of Moody's. See "The Distribution--Certain
Indebtedness and Minority Interest Financing".
(2) To reflect, for accounting purposes only, the allocation of the net
liabilities and the corresponding cumulative translation adjustment of the
Moody's Business, which is treated as a dividend to shareholders.
(3) To reflect the elimination of treasury stock which shares will be treasury
shares of Moody's Corporation as a result of the legal form of the
transaction.
(4) To adjust shares outstanding to reflect the Distribution ratio of one share
of New D&B Common Stock for every two shares of D&B Common Stock.
41
46
THE NEW D&B CORPORATION
(ACCOUNTING SUCCESSOR TO D&B)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As described under "The Distribution--Form of Transaction; Basis of
Presentation", for financial reporting purposes, New D&B will be treated as the
"accounting successor" to D&B. Therefore, the historical financial information
for New D&B included herein and management's discussion and analysis thereof set
forth below are those of D&B, with the Moody's Business treated as a
discontinued operation.
OVERVIEW
To facilitate an analysis of New D&B's operating results, certain
significant events should be considered.
2000 DISTRIBUTION
On December 15, 1999, D&B announced a preliminary decision to separate into
two publicly traded companies -- New D&B and Moody's. The separation of the two
companies will be accomplished through a tax-free dividend to D&B's stockholders
of New D&B Common Stock, which will represent a continuing interest in
businesses to be conducted by New D&B. After the Distribution, D&B's only
business will be the Moody's Business, and the shares of D&B Common Stock held
by D&B stockholders will represent a continuing ownership interest only in that
business. In connection with the Distribution, D&B will change its name to
"Moody's Corporation", and New D&B will change its name to "The Dun & Bradstreet
Corporation". D&B has received a ruling from the IRS to the effect that the
Distribution will be tax-free for Federal income tax purposes, except to the
extent that cash is received for fractional shares of New D&B Common Stock. New
D&B will consist principally of the business currently conducted by D&B Inc.
RESTRUCTURING CHARGES
During the fourth quarter of 1999, D&B's Board of Directors approved plans
to restructure the D&B operating company. The restructuring comprises three
major components:
- Realigning and streamlining international operations through a series of
office consolidations and organizational changes. To reduce the cost
infrastructure in Europe, actions have been taken to improve efficiencies
in sales and data collection operations.
- Increasing the level of software and product development outsourced to
resources outside the United States and Europe.
- Reengineering the data collection process so that data is collected
telephonically rather than through field centers (15 field data
collection centers have been closed since the restructuring was
announced).
As a result of these actions, a pre-tax restructuring charge of $41.2
million ($27.9 million after-tax, $.17 per share basic and diluted) was included
in operating income in 1999. For management reporting purposes, these charges
were not allocated to any of D&B's business segments. Employee severance costs
from planned terminations of approximately 700 employees comprised $32.7 million
(including severance for two former corporate executives). The severance costs
were based on the amounts that will be paid to the affected employees pursuant
to D&B's policies and certain foreign governmental regulations. The balance of
the charge relates to (1) the write-off of certain assets that were abandoned or
made obsolete or redundant as a result of the restructuring and (2) leasehold
termination obligations arising from office closures. D&B anticipates completion
of the restructuring in fiscal 2000.
The restructuring actions are designed to strengthen customer service
worldwide, improve operating efficiencies and lower structural costs. New D&B
expects savings of approximately $30 million in 2000 and $40 million in 2001
that it intends to reinvest in future revenue growth initiatives.
42
47
During the second quarter of 2000, D&B appointed a new chairman and chief
executive officer for the Dun & Bradstreet operating company, who will become
the chairman and chief executive officer of New D&B following the Distribution.
Under his direction, a team is currently in the process of reviewing and further
developing New D&B's business strategy. The goal of this strategy will be to
transform New D&B into a growth company with an important presence on the
Internet. As the plan develops, it is possible that additional restructuring
charges may become necessary. See "The New D&B Corporation Business--Business
Strategy".
1998 DISTRIBUTION
On June 30, 1998, Donnelley separated into two publicly traded
companies -- D&B and Donnelley. The 1998 Distribution was accomplished through a
tax-free dividend by Donnelley of D&B, which was a new entity comprised
principally of Moody's and the D&B operating company. The New D&B Corporation
changed its name to "The Dun & Bradstreet Corporation", and the continuing
entity (i.e., Donnelley), consisting of R.H. Donnelley Inc. and the DonTech
partnership, changed its name to R.H. Donnelley Corporation. Due to the relative
significance of Moody's and D&B the transaction was accounted for as a reverse
spin-off, and, as such, Moody's and D&B were classified as continuing
operations, and R.H. Donnelley Inc. and DonTech were classified as discontinued
operations. For purposes of effecting the 1998 Distribution and of governing
certain of the continuing relationships between D&B and Donnelley after the
transaction, Donnelley and D&B have entered into various agreements as described
in Note 2 to D&B's Consolidated Financial Statements and Notes thereto included
elsewhere in this Information Statement.
1996 DISTRIBUTION
On November 1, 1996, Donnelley (then known as "The Dun & Bradstreet
Corporation") reorganized into three publicly traded independent companies by
spinning off to stockholders through a tax-free distribution (the "1996
Distribution") two new companies, (1) Cognizant and (2) ACNielsen. In
conjunction with the 1996 Distribution, Donnelley also disposed of Dun &
Bradstreet Software ("DBS") and NCH Promotional Services ("NCH"). After the
transaction was completed, Donnelley's continuing operations consisted
principally of D&B Inc., Moody's and the R.H. Donnelley businesses.
RECLASSIFICATION OF DISCONTINUED OPERATIONS
Pursuant to Accounting Principles Board Opinion ("APB") No. 30, "Reporting
the Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the consolidated financial statements of D&B have been
reclassified to reflect the Distribution and the 1998 Distribution. Accordingly,
revenues, costs and expenses, and cash flows of Moody's and R.H. Donnelley have
been excluded from the respective captions in the Consolidated Statements of
Operations and Consolidated Statements of Cash Flows of D&B. The net operating
results of these entities have been reported, net of applicable income taxes, as
"Income from Discontinued Operations", and the net cash flows of these entities
have been reported as "Net Cash (Used in) Provided By Discontinued Operations".
The assets and liabilities of the Moody's Business have been excluded from the
respective captions in the Consolidated Balance Sheets of D&B and have been
reported as "Net Liabilities of Discontinued Operations".
RESULTS OF OPERATIONS
OPERATING SEGMENTS
Three D&B segments, managed on a geographical basis, provide a
comprehensive array of information-based products and services. Effective
January 1, 2000, responsibility for the management of the Canadian business was
moved from D&B's Asia Pacific and Latin America segment to its U.S. segment,
which is presently called D&B North America. D&B's reportable segments are now
Dun & Bradstreet North America ("D&B North America"), Dun & Bradstreet
Europe/Africa/Middle East ("D&B Europe") and Dun & Bradstreet Asia Pacific/Latin
America ("D&B APLA"). In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of a Business Enterprise
and Related Information", the segment information for all prior years, has been
restated to reflect this change.
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In each of the geographic segments, D&B offers credit information
solutions, marketing information solutions, purchasing information solutions and
receivables management services. For a description of these services, see "New
D&B Business". D&B evaluates performance and allocates resources based on
segment revenue and operating income.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999
Consolidated Results
For the first half of 2000, income from continuing operations of $48.1
million was up 22.4% from prior year's first half income from continuing
operations of $39.3 million. Earnings per share from continuing operations for
the first half of 2000 of $.30 per share, basic and diluted, were up 25.0% from
1999 first half earnings per share from continuing operations of $.24 per share,
basic and diluted. First half 2000 results of continuing operations included
one-time pre-tax reorganization costs, in connection with the Distribution, of
$2.2 million ($.01 per share basic and diluted). For the first half of 2000,
excluding the reorganization costs noted above, income from continuing
operations would have increased 28.0% and earnings per share, basic and diluted,
would have increased 29.2% from prior year's results.
Net income was $135.7 million for the first six months of 2000, up 7.0%
from $126.8 million for the same period in 1999. D&B's net income also included
income from discontinued operations of $87.6 million in the first half of 2000
and $87.5 million in the first half of 1999. Earnings per share for the first
six months of 2000 were $.84 basic and $.83 diluted, including earnings per
share from discontinued operations of $.54 basic and $.53 diluted. Earnings per
share for the first six months of 1999 were $.77 basic and $.76 diluted,
including earnings per share from discontinued operations of $.53 basic and $.52
diluted.
Operating revenues were $704.3 million in the first six months of 2000 and
$703.8 million in the same period in 1999, driven by growth in D&B North
America, offset by declines in D&B Europe and D&B APLA. Excluding the impact of
foreign currency translation, operating revenues increased 2.6% in the first
half of 2000 compared to the first half of 1999. Operating revenue results
reflect a decline in revenues from traditional credit information solution
products. This decline is offset by growth in revenues from value added products
including revenues from alliances with providers of enterprise software
solutions.
Operating expenses decreased 1.7% to $267.8 million in the first six months
of 2000 compared with the same period in 1999, resulting from cost reductions
attributable to the restructuring actions implemented in the fourth quarter of
1999 and the positive impact of foreign currency translation on expenses, which
were partially offset by increased spending on the infrastructure necessary to
offer new products and services. For the first half of 2000 selling and
administrative expenses decreased 2.3% to $279.0 million as a result of cost
reductions and the positive impact of foreign exchange, partially offset by
costs associated with the appointment of the new chairman and chief executive
officer of the Dun & Bradstreet operating company. Depreciation and amortization
decreased 13.4% to $56.4 million for the first six months of 2000 as compared to
the same period in 1999, as a result of lower capitalization in 2000, the
write-off of certain assets as a result of the restructuring actions and the
positive impact of foreign exchange on expenses. During the first half of 2000,
D&B also incurred $2.2 million of costs in connection with the Distribution.
Operating income grew 22.3% to $98.9 million in the first six months of
2000 as compared with the same period in 1999, largely resulting from the cost
reductions and higher D&B North America revenues.
Non-operating expense-net was $14.4 million in the first half of 2000,
compared to $13.9 million from the first half of 1999. An increase in interest
expense (resulting from an increase in commercial paper borrowing) for the
period was offset by a decrease in other expense-net and an increase in interest
income.
D&B's effective tax rate was 43.1% and the underlying rate was 42.0% for
the first six months of 2000 compared to 41.3% for the same period in 1999. The
difference between the effective and underlying rates in 2000 is attributable to
the non-deductibility of certain reorganization costs incurred in the second
quarter of 2000.
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Segment Results
For the first half of 2000, D&B North America revenues of $485.7 million
were up 3.7% from the same period in the prior year. Revenues on a year-to-date
basis decreased 1.1% to $306.8 million for credit information solutions,
increased 10.2% to $118.9 million for marketing information solutions, increased
2.0% to $11.0 million for purchasing information solutions and increased 24.4%
to $49.0 million for receivables management services in comparison with the
first half of the prior year.
The decline in North American revenues from credit information solutions is
attributable to lower usage of traditional products. Increased competition,
including free or lower-cost information available from online vendors and other
Internet sources, the higher risk tolerance of customers in the strong economy
and the difficulty in stimulating usage in customers utilizing monthly contract
plans have negatively impacted usage. In addition, certain customers have been
utilizing lower priced data in their automated credit evaluation systems. The
growth in revenues from marketing information solutions and receivables
management services was largely driven by revenues from value added products.
D&B North America's operating income was $140.8 million for the first half
of 2000, up 12.6% from 1999 first half-operating income of $125.0 million. This
improvement was driven by the modest increase in revenues and the impact of data
collection cost reductions achieved as part of the 1999 fourth quarter
restructuring actions.
D&B Europe's operating revenues for the first half of 2000 decreased 8.1%
to $187.9 million, from the first half of 1999. However, excluding the impact of
foreign exchange, revenues would have increased by 1.1%. In comparing D&B
Europe's revenues for the first half of 2000 with the same period in 1999,
revenues from credit information solutions decreased 9.3% to $135.0 million,
revenues from marketing information solutions decreased 6.2% to $28.9 million,
revenues from purchasing information solutions increased 25.4% to $.8 million
and receivables management services revenues decreased 4.2% to $23.2 million.
Excluding the impact of foreign exchange, D&B Europe would have reported for the
first half of 2000 flat revenues from credit information solutions, an increase
in revenues from marketing information solutions of 1.2%, an increase in
revenues from purchasing information solutions of 31.6% and an increase in
revenues from receivables management services of 7.1%, in each case in
comparison to the first half of 1999.
European revenues from credit information solutions products have been
negatively impacted by ongoing price erosion in the local markets, as well as
continued competition, including availability of free or lower-cost information
from online vendors and other Internet sources. However, the high growth in
revenues from value added products in Europe has resulted in the overall
improvement in revenues, excluding the negative impact of foreign currency
translation.
On a year-to-date basis, D&B Europe reported an operating loss of $15.6
million in the first half of 2000 compared to an operating loss of $17.7 million
in 1999. D&B Europe achieved modest improvements in profitability, while still
investing in the infrastructure necessary to offer new products and services, as
a result of significant cost reductions realized from the restructuring actions
implemented in the fourth quarter of 1999.
D&B APLA reported operating revenues of $30.7 million in the first half of
2000, down 1.3% when compared to $31.1 million in the same period in 1999.
Excluding the impact of foreign exchange, D&B APLA revenues would have decreased
by 3.9%. In comparing the first half of 2000 with the same period in 1999,
credit information solutions revenues decreased 7.6% to $18.9 million, while
marketing information solutions revenues increased 2.4% to $4.5 million and
receivables management services revenues increased 15.7% to $7.3 million.
Excluding the impact of foreign exchange, D&B APLA would have reported for the
first half of 2000 a decrease in revenues from credit information solutions of
11.1%, an increase in revenues from marketing information solutions of 2.5% and
an increase in revenues from receivables management services of 15.6%, in each
case in comparison to the first half of 1999.
For the first half of the year, D&B APLA reported an operating loss of $5.9
million in 2000, compared to an operating loss of $6.1 million in 1999. The
modest improvement in profitability is attributable to cost reductions.
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YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
For the year ended December 31, 1999, D&B reported income from continuing
operations of $81.3 million, or $.50 per share basic and diluted. This compares
with 1998 income from continuing operations of $86.2 million and earnings per
share from continuing operations of $.51 basic and $.50 diluted. 1999 results
included the $41.2 million pre-tax restructuring charge discussed above ($27.9
million after-tax, $.17 per share basic and diluted), and an $11.9 million
pre-tax gain relating to the settlement of outstanding litigation ($6.6 million
after-tax, $.04 per share basic and diluted). Results for 1998 included
reorganization costs associated with the 1998 Distribution of $28.0 million
($23.2 million after-tax, $.14 per share basic, $.13 per share diluted). 1999
net income of $256.0 million included income from discontinued operations of
$174.7 million, while 1998 net income of $280.1 million included income from
discontinued operations of $193.9 million. For the year ended December 31, 1999,
earnings per share of $1.58 basic and $1.56 diluted included earnings per share
from discontinued operations of $1.08 basic and $1.06 diluted. For the year
ended December 31, 1998, earnings per share of $1.65 basic and $1.63 diluted
included earnings per share from discontinued operations of $1.14 basic and
$1.13 diluted.
Operating revenues were $1,407.7 million in 1999 compared with $1,420.5
million in 1998. Excluding the impact of foreign currency translation, D&B
revenues were flat. D&B results reflect decreased demand for standard form
reports and similar credit information solutions, offset by growth in value
added products such as decision-support tools and services and related D&B data
(referred to herein as "Value Added Products") including revenues from
partnerships with providers of enterprise software solutions.
Operating expenses increased .4% to $538.3 million in 1999 compared with
$536.2 million in 1998. Selling and administrative expenses decreased by .6% to
$539.4 million in 1999 compared with $542.4 million in 1998. Costs saved as a
result of D&B's worldwide expense control initiatives were offset by D&B's
investment in Value Added Products, including partnerships with providers of
enterprise software solutions. Operating costs in 1999 also included the $41.2
million charge for the restructuring of the D&B operating company discussed
above. In 1998, operating costs included $28.0 million in reorganization costs
incurred in connection with the 1998 Distribution.
Operating income decreased 14.3% in 1999 to $160.9 million from $187.7
million in 1998. Excluding the $41.2 million restructuring charge in 1999 and
the $28.0 million of reorganization costs in 1998, operating income in 1999
declined 6.3% compared with 1998.
Non-operating expense -- net was $15.5 million in 1999 compared with $30.4
million in 1998. Included in non-operating expense -- net is interest income and
expense, minority expense (which remained level when comparing 1999 and 1998)
and other income (expense) -- net. Interest income of $2.9 million in 1999 was
lower than 1998 due to lower cash levels, while interest expense of $5.0 million
in 1999 was significantly lower than in 1998 as a result of the lower debt
levels in 1999 compared with 1998. Other income (expense) -- net was $9.0
million in 1999 compared with $(2.2) million in 1998. 1999 other income
(expense) -- net included a gain of $11.9 million on the settlement of
litigation that arose from a transaction related to the sale of DBS in 1996.
This gain was offset by other miscellaneous non-operating income and expense
items, which were generally unchanged in 1999 and 1998.
D&B's effective tax rate was 44.1% in 1999 compared with 45.2% in 1998,
while the underlying tax rate was 41.3% in 1999 and 41.0% in 1998. The
difference between the effective and underlying rates resulted from a number of
factors, including taxes imposed on the proceeds from the settlement of
litigation, the non-deductibility of certain restructuring expenses and
refinements of certain estimates.
Income from discontinued operations, net of income taxes, was $174.7
million for the year ended December 31, 1999 and $193.9 million for the year
ended December 31, 1998, with Moody's representing all of such income in 1999
and $160.2 million of such income in 1998. In 1998, the balance of the income
from discontinued operations, net of income taxes, of $33.7 million reflects the
results of Donnelley. Moody's net income of $174.7 million in 1999 grew 9.1%
from $160.2 million in 1998, principally as a result of strong revenue growth.
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Segment Results
D&B North America revenues were $920.0 million in 1999, down 1.0% from 1998
revenues. In comparing 1999 and 1998 revenues, D&B North America's revenues from
credit information solutions decreased 6.0% to $581.0 million, revenues from
marketing information solutions increased 4.8% to $230.1 million, revenues from
purchasing information solutions increased 17.8% to $27.1 million and revenues
from receivable management services increased 18.7% to $81.8 million. The
decline in revenues from credit information solutions resulted from a number of
factors, including sales force reorganization, compensation and training issues,
as well as increased competition, including free or lower-cost information from
online vendors and other Internet sources. In addition, the shift by former
annual contract customers to the monthly discount plan negatively affected
revenues, as selling incremental projects to those customers was more
challenging. The growth in revenues from marketing information solutions,
purchasing information solutions and receivables management services was largely
driven by revenues from Value Added Products, including from partnerships with
providers of enterprise software solutions.
D&B North America's operating income was $255.4 million in 1999, down 4.2%
from $266.5 million in the prior year due to the lower revenues and higher
selling and administrative expenses resulting from the investment in Value Added
Products and partnerships with providers of enterprise software solutions.
D&B Europe's revenues were $420.6 million in 1999, down 1.7% when compared
with 1998 revenues of $427.7 million. Excluding the impact of foreign exchange,
D&B Europe's revenues were up 1.3%. In comparing 1999 with 1998, D&B Europe's
revenues from credit information solutions decreased 5.0% to $297.4 million,
while revenues from marketing information solutions increased 10.7% to $72.2
million and revenues from receivables management services were flat at $49.6
million. D&B Europe also reported revenues from newly introduced purchasing
information solutions of $1.4 million during 1999. Excluding the impact of
foreign exchange, D&B Europe would have reported in 1999 a decrease in revenues
from credit information solutions of 2.2%, an increase in revenues from
marketing information solutions of 14.3% and an increase in revenues from
receivables management services of 2.8% in comparison with 1998. The decline in
European revenues from credit information solutions resulted from ongoing price
erosion in the local credit markets, as well as increased competition, including
the availability of free or lower-cost information from online vendors and other
Internet sources. Revenue growth from marketing information services was largely
attributable to Value Added Products. D&B Europe reported an operating loss of
$8.9 million in 1999, compared with a loss of $4.2 million in 1998. D&B Europe's
loss resulted largely from investment in sales and marketing support for Value
Added Products, including partnerships with providers of enterprise software
solutions and higher costs for new technology and systems in the region. D&B
expects that the restructuring actions implemented in the fourth quarter of 1999
will improve the profitability in D&B Europe by reducing its cost structure.
D&B APLA reported operating revenues of $67.1 million in 1999, up 9.1% from
1998. Excluding the impact of foreign exchange, revenues would have been up
4.3%. In comparing 1999 with 1998, D&B APLA's revenues from credit information
solutions increased 16.0% to $43.6 million, revenues from marketing information
solutions decreased 2.0% to $9.9 million and revenues from receivables
management services decreased 1.4% to $13.6 million. Excluding the impact of
foreign exchange, D&B APLA would have reported in 1999 an increase in revenues
from credit information solutions of 9.2%, a decrease in revenues from marketing
information solutions of 6.4% and a decrease in revenues from receivables
management services of 2.3%, in each case in comparison with 1998. D&B APLA
reported an operating loss of $7.3 million in 1999, compared with a loss of
$11.7 million in 1998. The decrease in operating losses in 1999 compared with
1998 is due to expense control initiatives and revenue improvements.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
For the year ended December 31, 1998, D&B reported income from continuing
operations of $86.2 million and earnings per share from continuing operations of
$.51 basic and $.50 diluted. This compares with 1997 income from continuing
operations of $93.2 million and earnings per share from continuing operations of
$.55 per share basic and $.54 per share diluted. The 1998 results include
reorganization costs associated with
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the 1998 Distribution of $28.0 million ($23.2 million after-tax; $.14 per share
basic, $.13 per share diluted). D&B's basic earnings per share for 1998 were
$1.65 compared with $1.08 per share for 1997, including earnings per share from
discontinued operations of $1.14 and $1.27 for 1998 and 1997, respectively. On a
diluted basis, D&B's earnings per share in 1998 of $1.63 were up from the 1997
diluted earnings per share of $1.07, including diluted earnings per share from
discontinued operations of $1.13 and $1.26 in 1998 and 1997, respectively. The
1997 results include a one-time, non-cash charge for the cumulative effect of
accounting changes ($.74 per share basic, $.73 per share diluted) relating to
certain revenue recognition methods.
Operating revenues grew 4.9% to $1,420.5 million in 1998 from $1,353.6
million in 1997. Revenue growth for 1998 reflects strong growth at D&B North
America offset by a decline at D&B APLA. D&B Europe was essentially unchanged.
Excluding the impact of foreign exchange, operating revenues grew 6.8% in 1998
from 1997.
1998 operating expenses increased 4.5% to $536.2 million, largely
attributable to increased Year 2000 spending, costs incurred by D&B Europe for
new systems and technology and costs associated with the introduction of new
products and services. Selling and administrative expenses increased to $542.4
million in 1998 as compared to $517.7 million in 1997. 1998 operating costs also
included $28.0 million in reorganization costs incurred in connection with the
1998 Distribution.
Operating income in 1998 of $187.7 million decreased 9.4% from $207.2
million in 1997. 1998 operating income included $28.0 million in reorganization
costs incurred in connection with the 1998 Distribution. Excluding
reorganization costs, operating income increased 4.1%. Operating income growth
reflected strong growth at D&B North America, offset by declines at D&B Europe
and D&B APLA.
Non-operating expense -- net of $30.4 million in 1998, primarily comprised
of interest income and expense, minority interest expense and other income
(expense) -- net, decreased by $41.1 million compared with 1997. The significant
decrease was due to significantly lower interest expense and higher interest
income, as 1998 debt levels were lower than 1997 levels (see "--Liquidity and
Financial Position").
In 1998, D&B's effective tax rate from continuing operations was 45.2%,
compared with 31.3% in 1997. This increase resulted from the non-deductibility
of certain reorganization costs.
Income from discontinued operations, net of income taxes, was $193.9
million in 1998 and $217.8 million in 1997. Moody's net income was $160.2
million in 1998 and $125.6 million in 1997. The significant increase was
attributable to strong revenue growth at Moody's. 1998 income from discontinued
operations also included six months of Donnelley operating results totaling
$33.7 million, while 1997 included a full year of Donnelley operating results of
$92.2 million. Donnelley operating income was historically lower during the
first half of the year.
Segment Results
D&B North America's revenues were $929.6 million in 1998, up 8.0% from
1997, including increases in revenues from credit information solutions of 3.1%
to $618.2 million, revenues from marketing information solutions of 18.1% to
$219.5 million, revenues from purchasing information solutions of 46.5% to $23.0
million and revenues from receivables management services of 15.2% to $68.9
million. The growth rates are largely attributable to the growth in revenues
from Value Added Products, which increased by 60.6% to $198.0 million from the
prior year. D&B North America's operating income was $266.5 million in 1998, up
7.0% from the prior year driven principally by the higher revenues, partially
offset by higher expenses incurred for selling, advertising, new product
development and Year 2000 remediation.
D&B Europe's 1998 revenues of $427.7 million were flat compared with 1997,
due largely to the strengthening of the U.S. dollar. D&B Europe's revenues from
credit information solutions decreased .8% to $312.9 million in 1998, its
revenues from marketing information solutions increased 16.6% to $65.2 million
in 1998 and its revenues from receivable management services decreased 9.3% to
$49.6 million in 1998. Excluding the impact of foreign exchange, D&B Europe
would have reported a 3.8% increase in revenues in 1998, including an increase
in revenues from credit information solutions of 2.7%, an increase in marketing
information solutions of 19.7% and a decrease in receivable management services
of 6.3% from 1997. Increases
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in product usage were partially offset by price erosion resulting from the
competitive environment in Europe. D&B Europe reported an operating loss of $4.2
million, reflecting the continued investments in new technology and systems in
Europe and increased Year 2000 remediation costs.
D&B APLA reported a 5.8% decrease in operating revenues to $61.5 million in
1998 from $65.3 million in 1997, resulting from the negative impact of foreign
exchange rates. In 1998, D&B APLA's revenues from credit information solutions
decreased 4.3% to $37.6 million, its revenues from marketing information
solutions decreased 34.0% to $10.1 million and its revenues from receivables
management services increased 29.0% to $13.8 million. Excluding the impact of
foreign exchange, D&B APLA would have reported a 7.3% increase in revenues in
1998, comprising a 10.4% increase in revenues from credit information solutions,
a 2.6% increase in revenues from marketing information solutions and a 2.6%
increase in receivable management revenues. D&B APLA reported an operating loss
of $11.7 million in 1998, compared with an operating loss of $8.1 million in
1997, due to lower reported operating revenues and higher expenses, including
Year 2000 costs and employee-related costs in Asia.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN No. 44"). The
interpretation provides guidance for certain issues relating to stock
compensation involving employees that arose in applying APB Opinion No. 25.
Among other issues, FIN No. 44 clarifies (a) the definition of an employee for
purposes of applying APB Opinion No. 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. The provisions of FIN No. 44 are effective
July 1, 2000, except for the provisions regarding modifications to fixed stock
option awards which reduce the exercise price of an award, which apply to
modifications made after December 15, 1998. Provisions regarding modifications
to fixed stock option awards to add reload features apply to modifications made
after January 12, 2000. D&B believes that it is in compliance with this
guidance.
In December 1999, the staff of the SEC issued Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
summarizes some of the staff's interpretations of the application of generally
accepted accounting principles to revenue recognition. The staff provided this
guidance due, in part, to the large number of revenue-recognition issues that it
has encountered in registrant filings. In June 2000, SAB 101B, "Second
Amendment: Revenue Recognition in Financial Statements", was issued, which
defers the effective date of SAB 101 until the fourth quarter of 2000. D&B
believes that it currently is in compliance with this guidance.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities on the balance sheet and measurement
of those instruments at fair value. If certain conditions are met, a derivative
may be designated specifically as: (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm commitment
(a fair value hedge); (b) a hedge of the exposure to variable cash flows of a
forecasted transaction (a cash flow hedge); or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. In June 1999, the Financial
Accounting Standards Board issued SFAS No. 137 delaying the effective date of
SFAS No. 133. The provisions of SFAS No. 133 are effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. D&B currently hedges
foreign-currency-denominated transactions and expects to adopt SFAS No. 133
beginning January 1, 2001. The effect of adopting SFAS No. 133 is not expected
to have a material effect on D&B.
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MARKET RISK SENSITIVE INSTRUMENTS
D&B operates in 37 countries through wholly or majority-owned entities and
principally uses the capital markets to fund its operations. As such, D&B is
exposed to market risk from changes in foreign exchange rates and interest
rates, which could affect its results of operations and financial condition. In
order to reduce the risk from fluctuations in foreign currencies and interest
rates, D&B currently uses forward foreign exchange contracts and in the past has
used interest rate swap agreements. These derivative financial instruments are
viewed by D&B as risk management tools that are entered into for hedging
purposes only. D&B does not use derivative financial instruments for trading or
speculative purposes.
D&B also has investments in fixed-income marketable securities.
Consequently, D&B is exposed to fluctuations in rates on these marketable
securities. Market risk associated with investments in marketable securities is
immaterial and has been excluded from the sensitivity discussions.
A discussion of D&B's accounting policies for financial instruments is
included in the Summary of Significant Accounting Policies in Note 1 to D&B's
Consolidated Financial Statements, and further disclosure relating to financial
instruments is included in Note 7--Financial Instruments with Off-Balance Sheet
Risks for the year ending December 31, 1999. See D&B's Consolidated Financial
Statements and Notes thereto included elsewhere in this Information Statement.
The following analysis presents the sensitivity of the fair value of D&B market
risk sensitive instruments to changes in market rates and prices.
INTEREST RATE RISK
D&B is exposed to market risk through its commercial paper program, in
which it borrows at prevailing short-term commercial paper rates. At December
31, 1999, D&B had $124.7 million of short-term commercial paper outstanding with
various maturities through February 2000, and short-term investments of $47.6
million. At June 30, 2000, D&B had $291.9 million of short-term commercial paper
outstanding with various maturities through August 2000, and cash and cash
equivalents of $54.8 million. As such, the market risk is immaterial when
calculated utilizing estimates of the termination value based upon a 10%
increase or decrease in interest rates from their levels as of June 30, 2000 or
December 31, 1999.
D&B has in the past entered into interest rate swap agreements to manage
exposure to changes in interest rates. Interest rate swaps have allowed D&B to
raise funds at floating rates and effectively swap them into fixed rates that
are lower than those available to it if fixed-rate borrowings were to be made
directly. During 1998, in connection with the 1998 Distribution and repayment of
outstanding notes payable, Donnelley canceled all of its interest rate swap
agreements. D&B has not entered into any interest rate swap agreements since the
1998 Distribution and therefore is not subject to market risk on interest rate
swaps.
FOREIGN EXCHANGE RISK
D&B's non-U.S. operations generated approximately 35% of total revenues in
1999. As of December 31, 1999, approximately 38% of D&B assets were located
outside the U.S., and no single country had a significant concentration of D&B's
aggregate cash balance.
D&B follows a policy of hedging substantially all cross-border intercompany
transactions denominated in a currency other than the functional currency
applicable to each of its various subsidiaries. D&B only uses forward foreign
exchange contracts to implement its hedging strategy. Typically, these contracts
have maturities of six months or less. These forward contracts are executed with
creditworthy institutions and are denominated primarily in the British pound
sterling, the euro and the Swedish krona.
The fair value of foreign currency risk is calculated by using estimates of
the cost of closing out all outstanding forward foreign exchange contracts,
given a 10% increase or decrease in forward rates from their December 31, 1999
levels. At December 31, 1999, D&B had approximately $138 million in forward
foreign exchange contracts outstanding, with various expiration dates through
March 2000 (see Note 7--Financial Instruments with Off-Balance Sheet Risks in
D&B's Consolidated Financial Statements and Notes thereto included elsewhere in
this Information Statement). At December 31, 1999, net unrealized gains related
to D&B forward contracts were $.6 million. If forward rates were to increase by
10% from December 31, 1999
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levels, the unrealized loss on these contracts would be $6.7 million. If forward
rates were to decrease by 10% from December 31, 1999 levels, the unrealized gain
on these contracts would be $7.9 million. However, the estimated potential gain
or loss on forward contracts is expected to be offset by changes in the dollar
value of underlying transactions. Therefore, the net impact of a 10% movement in
foreign exchange rates would be immaterial.
LIQUIDITY AND FINANCIAL POSITION
Management believes that cash flows generated from its operations are
sufficient to fund its operating needs and service debt. D&B accesses the
commercial paper market from time to time to fund working capital needs and
share repurchases. Such borrowings have been supported by D&B's bank credit
facilities. It is expected that operating cash flows, supplemented as needed
with financing arrangements, will be sufficient to meet the needs of New D&B
after the Distribution and with respect to the payment of costs and expenses in
connection therewith.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999
At June 30, 2000, cash and cash equivalents totaled $54.8 million, a
decrease of $54.6 million from $109.4 million held at December 31, 1999. During
the first half of 2000, D&B's payment of $349.3 million to the IRS, as discussed
below under "Other," and the resulting increase in commercial paper borrowings
needed to fund the payment, impacted cash flows.
Operating activities used net cash of $122.3 million during the first half
of 2000 compared to generating net cash of $193.5 million during the same period
in 1999. The $349.3 million payment to the IRS is reflected as a reduction in
continuing operations' accrued income taxes of $174.7 and as a $174.6 million
offset to cash provided by discontinued operations for the six months ended June
30, 2000. Excluding the impact of the payment, cash generated by operating
activities for the six months ended June 30, 2000 would have been $227.0
million, with continuing operations providing $128.2 million and discontinued
operations providing $98.8 million. Cash generated by operating activities for
the six months ended June 30, 1999 was $193.5 million, with continuing
operations providing $93.1 million and discontinued operations providing $100.4
million. The improvement in cash generated by operating activities of continuing
operations results from increased operating income and higher sales and accounts
receivable collections during the first half of 2000 compared with the first
half of 1999.
During the first half of 2000, D&B made payments of $11.7 million related
to the restructuring actions implemented during the fourth quarter of 1999. As
of June 30, 2000, D&B has terminated 359 of the 700 contemplated in the plan.
D&B anticipates completion of the restructuring actions by the end of 2000,
including the payment of the majority of the associated costs.
Net cash used in investing activities was $55.8 million for the first half
of 2000 compared to $59.9 million in 1999, including net cash used in investing
activities of discontinued operations of $23.7 million in the first half of 2000
and $3.4 million in the same period of 1999. Net cash used by discontinued
operations in the first half of 2000 included an acquisition by Moody's of a
financial software products company for $17.4 million. In the first half of
2000, D&B invested $37.7 million for capital expenditures and additions to
computer software and other intangibles compared to $60.8 million in the
comparable period in 1999, due primarily to higher expenditures in the prior
year on systems implemented in 1999.
Net cash provided by financing activities was $125.2 million during the
first half of 2000, compared to net cash used in financing activities of $146.5
million during the first half of 1999. Payments of dividends accounted for $59.8
million in the first half of 2000 compared to $60.5 million in the first half of
1999. As discussed below, D&B's stock repurchases and commercial paper
borrowings also affected the net cash provided by or used for financing
activities.
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YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
At December 31, 1999, cash and cash equivalents totaled $109.4 million, an
increase from $86.7 million at December 31, 1998.
Operating activities generated net cash of $343.7 million in 1999 compared
with $378.8 million from 1998. Cash provided by continuing operations was $128.9
million in 1999 and $156.4 million in 1998. All corporate overhead costs and
interest expense have been borne by the continuing operations of D&B. Higher
payments made in 1999 for income taxes partially offset the modest improvement
in operating cash flows generated by D&B North America. The operating activities
of discontinued operations generated cash of $214.8 million in 1999 and $222.4
million in 1998. Cash flows generated by discontinued operations in 1998 also
included amounts generated by Donnelley of $16.7 million. Moody's cash flows
from operations of $214.8 million in 1999 and $205.7 million in 1998 remain
strong consistent with its operating results.
Net cash used in investing activities totaled $110.4 million in 1999,
compared with $140.2 million in 1998. Net cash used in investing activities of
discontinued operations in 1999 was $12.1 million, while in 1998 discontinued
operations provided $9.7 million in cash from investing activities, resulting
from the proceeds from the sale of Moody's FIS business of $26.5 million. In
1999, spending for capital expenditures, computer software and other intangibles
by continuing operations totaled $109.6 million, compared with $134.4 million in
1998, due to higher expenditures in the prior year for certain back office
systems that were implemented in 1999. Currently, D&B has no material
commitments for capital expenditures.
Net cash used in financing activities was $210.3 million during 1999
compared with $227.3 million in 1998. Payments of dividends accounted for $120.1
million in 1999 compared with $137.4 million in 1998, due to the decrease in
dividends after the 1998 Distribution. As discussed below, D&B's share
repurchase program and commercial paper borrowings also affected the net cash
used in financing activities.
FINANCING ARRANGEMENTS
In June 2000, D&B renewed its $300 million 364-day revolving credit
facility. D&B has an additional $300 million facility maturing in June 2003.
Under these facilities D&B has the ability to borrow at prevailing short-term
interest rates. D&B has had no borrowings outstanding under these facilities
since they were established in June 1998. These facilities have been terminated
in anticipation of the Distribution and New D&B has entered into new facilities
that will remain in effect after the Distribution. During the first half of
2000, D&B increased its net commercial paper borrowings by $167.1 million
largely as a result of the payment to the IRS discussed below. D&B had
commercial paper borrowings outstanding of $291.9 million and $124.7 million at
June 30, 2000 and December 31, 1999, respectively.
In connection with the 1998 Distribution, during June 1998, R.H. Donnelley,
Inc. borrowed $500 million, which was used to repay existing indebtedness
(commercial paper and other short-term borrowings) of Donnelley in the amount of
$287.1 million at the time of the 1998 Distribution. D&B used the excess
proceeds for general corporate purposes, including the payment of reorganization
costs. The $500 million of debt became an obligation of Donnelley upon the 1998
Distribution.
Also in connection with the 1998 Distribution and repayment of
indebtedness, Donnelley canceled all of its interest rate swap agreements and
recorded into income the previously unrecognized fair value loss at the time of
termination. At the time of the cancellation, the fair value of the interest
rate swaps was a loss of $12.7 million, of which $3.8 million ($.6 million in
the first quarter of 1998 and $3.2 million in 1997) had been recognized in
income relating to swaps that did not qualify for settlement accounting. The
previously unrecognized loss of $8.9 million was recorded during the second
quarter of 1998 and included in reorganization costs.
In 1997, $300,000,000 in minority interest financing was raised by
Donnelley when an unrelated investor contributed cash to a Donnelley partnership
in exchange for a limited partner interest. This transaction was allocated to
D&B in connection with the 1998 Distribution. Under the terms of the limited
partnership agreement that governs the minority interest financing, the
unrelated partner is entitled to receive an amount
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per annum equal to 7.47% of its initial investment payable quarterly in arrears,
provided that there are sufficient partnership profits.
Under the terms of the partnership agreement, during or after December
2000, the unrelated partner can initiate a process that can result in
dissolution and liquidation of the partnership as early as February 25, 2001.
The unrelated partner also can initiate a process that can result in dissolution
and liquidation within sixty days following the Distribution if it fails to
consent to the Distribution. Any such dissolution and liquidation can be
prevented if a D&B partner (or its designee) exercises its right to purchase the
unrelated partner's interest in the partnership. In either case, D&B expects
that the purchase option would be exercised and funded through the issuance of
commercial paper by New D&B. D&B believes that such funding would not have a
material adverse effect on New D&B's financial position or results of
operations.
In connection with the Distribution, D&B borrowed funds to repay in full
its commercial paper obligations. Also in connection with the Distribution,
responsibility for D&B's obligations under the minority interest financing will
be allocated to New D&B. It is currently estimated that New D&B also will assume
a portion of the indebtedness of D&B and receive a portion of the cash of D&B in
amounts such that, at the time of the Distribution and after giving effect to
the agreement discussed below and certain other factors, the net indebtedness of
New D&B (plus the minority interest obligations) will approximate the net
indebtedness of Moody's. As indicated under "Relationship Between The New D&B
Corporation and Moody's Corporation After the Distribution--Employee Benefits
Agreement", substantially all unexercised D&B stock options will be adjusted as
of the Distribution Date to comprise options to purchase Moody's Common Stock
and separately exercisable options to purchase New D&B Common Stock. In light
of, among other things, the numbers of optionees to be employed by New D&B and
Moody's, respectively, this adjustment will result in a substantially greater
number of outstanding options to purchase Moody's Common Stock than would be the
case if options were adjusted so as to become solely options to purchase common
stock of the optionee's employer. Due to this fact and the fact that, consistent
with past practice, each of New D&B and Moody's is expected to maintain a stock
purchase program designed to offset the increased number of shares otherwise
attributable to option exercises, New D&B has agreed to adjust the net
indebtedness of the two companies to compensate Moody's for the disproportionate
amount of its estimated future cash costs in this regard. The exact amount of
the adjustment discussed in the immediately preceding sentence will be
determined on a formula basis and will be dependent upon a variety of factors,
including the respective trading prices of Moody's Common Stock and New D&B
Common Stock at the time of the Distribution. See "The Distribution--Certain
Indebtedness and Minority Interest Financing".
STOCK REPURCHASE PROGRAM
In the first half of 2000, D&B repurchased 125,000 shares for $3.5 million
in connection with the D&B Employee Stock Purchase Plan and to offset a portion
of the shares issued under incentive plans. During the first half of 1999, D&B
completed its special stock repurchase program, authorized by its Board of
Directors in June 1998, by purchasing 4.2 million shares for $150.0 million.
During the first half of 1999, D&B also repurchased 1.8 million shares for $65.6
million in connection with D&B's Employee Stock Purchase Plan and to offset
awards made under incentive plans. Proceeds received in connection with D&B's
stock plans were $22.9 million for the first half of 2000 compared to $36.8
million in 1999.
During 1999, D&B completed its special stock repurchase program, authorized
by the Board of Directors in June 1998, by purchasing 4.2 million shares for
$150.0 million. During 1999, D&B also repurchased 2.6 million shares for $87.9
million to offset awards made under stock incentive plans and in connection with
the D&B Employee Stock Purchase Plan. During 1998, D&B repurchased 5.7 million
shares for a total of $150.0 million under the special stock repurchase program
and purchased 2.3 million shares to offset awards made under stock incentive
plans for a total of $70.2 million. Proceeds received in connection with D&B
stock incentive plans were $48.4 million in 1999 compared with $41.0 million in
1998.
New D&B presently intends to commence a systematic share repurchase program
following the Distribution to offset the dilutive effect of shares issued under
New D&B's employee benefits arrangements.
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OTHER
D&B enters into global tax planning initiatives in the normal course of
business, principally through tax free restructurings of both its foreign and
domestic operations. These initiatives are subject to normal review by tax
authorities. It is possible that additional liabilities may be proposed by tax
authorities as a result of these reviews and that some of the reviews could be
resolved unfavorably. At this time, management is unable to predict the extent
of such reviews, the outcome thereof or whether such outcome could materially
affect New D&B's results of operations, cash flows or financial position.
Pursuant to the Distribution Agreement, New D&B and Moody's will agree to
be financially responsible for 50% of any potential liabilities that may arise
with respect to the reviews described above, to the extent such potential
liabilities are not directly attributable to their respective business
operations. See "Relationship Between The New D&B Corporation and Moody's
Corporation After the Distribution--Distribution Agreement".
The IRS has completed its review of the utilization of certain capital
losses generated during 1989 and 1990. On June 26, 2000, the IRS, as part of its
audit process, issued a final adjustment disallowing the utilization of these
capital losses.
Pursuant to a series of agreements, IMS Health and NMR are jointly and
severally liable to pay one-half, and Donnelley the other half, of any payments
for taxes and accrued interest arising from this matter and certain other
potential tax liabilities that may arise from future audit adjustments after
review by tax authorities relating to various transactions to which IMS Health,
NMR and Donnelley are parties after Donnelley pays the first $137 million.
In connection with the 1998 Distribution, D&B and Donnelley entered into an
agreement whereby D&B has assumed all potential liabilities of Donnelley arising
from these tax matters and has agreed to indemnify Donnelley in connection with
such potential liabilities.
On May 12, 2000, an amended tax return was filed for the 1989 and 1990 tax
periods which reflected the final adjustment in the amount of $561.6 million of
tax and interest due. D&B paid the IRS approximately $349.3 million of this
amount on May 12, 2000, which D&B funded with short-term borrowings. IMS Health
has informed D&B that it paid the IRS approximately $212.3 million on May 17,
2000. Notwithstanding the filing and payments, D&B intends to contest the
assessment of amounts, if any, in excess of the amounts paid. D&B had accrued
its anticipated share of the probable liability arising from the utilization of
these capital losses.
New D&B is involved in legal proceedings of a nature considered normal to
its business. In the opinion of management, although the outcome of such legal
proceedings cannot be predicted with certainty, the ultimate liability of New
D&B in connection with such legal proceedings will not have a material adverse
effect on New D&B's financial position, results of operations and cash flows. In
addition, New D&B has certain other contingencies discussed under "The New D&B
Corporation Business--Legal Proceedings".
New D&B's balances of cash and cash equivalents as of the Distribution, its
cash generated from operations and its debt capacity are expected to be
sufficient to fund, on a long-term and short-term basis, New D&B's operating
needs and service debt.
YEAR 2000
D&B initiated a Year 2000 preparation program in 1996, when it began
identifying Year 2000 related technology risks and developing plans for
appropriate remediation and testing activities. D&B's program was substantially
completed during 1999. As a result of this program, D&B made a smooth transition
to the Year 2000, and its systems are operating in a business-as-usual manner.
D&B does not expect to encounter any significant Y2K-related disruptions in the
future. External and internal costs associated with D&B's Year 2000 program were
expensed as incurred. The aggregate cost of D&B's Year 2000 program was
approximately $78 million. These figures do not include the costs of software
and systems that were replaced or upgraded in the normal course of business.
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NEW EUROPEAN CURRENCY
On January 1, 1999, 11 of the countries in the European Union began a
three-year transition to the euro to replace the national currency of each
participating country. D&B intends to phase in its transition to the euro over
the next two years. D&B has established a task force to address issues related
to the euro. D&B believes that the euro conversion may have a material impact on
its operations and financial condition if it fails to successfully address such
issues. The task force has prepared a project plan and is proceeding with the
implementation of that plan.
D&B's project plan includes the following: ensuring that D&B's information
technology systems that process data for inclusion in D&B's products and
services can appropriately handle amounts denominated in euro contained in data
provided to D&B by third-party data suppliers; modification of D&B products and
services to deal with euro-related issues; and modification of D&B internal
systems (such as payroll, accounting and financial reporting) to deal with
euro-related issues. D&B does not believe that the cost of such modifications
will have a material effect on D&B results of operations or financial condition.
There is no guarantee that all problems will be foreseen and corrected, or that
no material disruption of D&B business will occur. The conversion to the euro
may have competitive implications for D&B pricing and marketing strategies that
could be material in nature; however, any such impact is not known at this time.
DIVIDENDS
D&B paid a quarterly dividend of $.185 per share during the first quarter
of 2000, each quarter of 1999 and the third and fourth quarters of 1998.
Donnelley paid quarterly dividends of $.22 per share during the first half of
1998, resulting in a full-year dividend per share paid of $.74 and $.81 for 1999
and 1998, respectively.
On July 19, 2000, the Board of Directors declared a third quarter 2000
dividend of $.185 per share, payable September 10, 2000 to shareholders of
record at the close of business on August 20, 2000.
The payment and level of cash dividends by D&B are subject to the
discretion of the Board of Directors of D&B, and the payment and level of cash
dividends by New D&B will be subject to the discretion of the Board of Directors
of New D&B. Although New D&B does not currently anticipate paying dividends on
its common stock, dividend decisions will be based on, and affected by, a number
of factors, including the operating results and financial requirements of New
D&B.
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THE NEW D&B CORPORATION
BUSINESS
As described under "The Distribution--Form of Transaction; Basis of
Presentation", for financial reporting purposes, New D&B will be treated as the
"accounting successor" to D&B. Therefore, the historical financial information
included herein with respect to New D&B is that of D&B with Moody's treated as a
discontinued operation. The following description of the New D&B Business does
not include a description of the Moody's Business from which the New D&B
Business is being separated in the Distribution. For a description of the
Moody's Business, see "Moody's Corporation Business" included elsewhere in this
Information Statement.
OVERVIEW
New D&B is the leading worldwide provider of business information and
related decision-support services. It has been in business since 1841 and, in
1999, had $1.4 billion in revenue. New D&B operates offices in 37 countries,
conducts operations in four other countries through minority interests in
joint-venture companies and operates through independent correspondents in more
than 150 additional countries. At the core of New D&B's business is the world's
largest and most comprehensive database of its kind, containing information on
more than 60 million public and private businesses from more than 200 countries.
The database is also the platform from which New D&B offers a sophisticated
array of products, services and applications to consumers of business
information.
New D&B uses multiple channels to deliver its information-based products
and services to its customers through a sales force of approximately 2,700
personnel. Information and reports are available via New D&B's Internet-based
access tools, online information services, telephone, fax, customized
connections with New D&B's computer systems and from New D&B's website, dnb.com.
Customers may also access New D&B information through software applications
scalable for use on individual desktops, in networks and on computer hosts. In
addition, through alliances with major enterprise application software providers
such as Oracle Corporation ("Oracle"), Siebel Systems, Inc. ("Siebel") and SAP
AG, customers can obtain real-time, online access to New D&B's global database
through enterprise applications software.
New D&B provides its customers the tools to understand and manage their
business information. New D&B's customers use the internationally recognized
D-U-N-S(R) Number to identify companies and company affiliations and to provide
links to New D&B's database and other data. As a unique, universal identifier of
more than 60 million businesses around the world, the D-U-N-S(R) Number can help
customers tap opportunities by uncovering prospects and linking related customer
accounts, identifying cross-selling opportunities within the same corporate
family, eliminating duplicate file entries in customer and supplier databases
and reducing operating costs and increasing purchasing power by linking
interrelated suppliers. The D-U-N-S(R) Number is recommended or endorsed by the
U.S. Government, the European Commission, the International Standards
Organization, the United Nations Edifact Council and other global
standard-setting organizations.
Companies throughout the world use New D&B's products and services to
evaluate and make decisions about their working relationships with customers and
suppliers, to improve efficiency and productivity, to identify growth
opportunities and market their products more successfully and to take actions
that increase revenue, cash flow and profits.
New D&B combines its global database, various distribution channels,
application software solutions, D-U-N-S(R) Number's "family tree" hierarchical
information and expertise to provide its customers tools to determine
creditworthiness, predict market demand, pinpoint prospective clients and
increase purchasing efficiency. New D&B's services are designed to help
customers grow profitably by providing them a consistent flow of reliable and
accessible business information. New D&B is also committed to developing
information sources and applications to facilitate faster, smarter decisions in
e-commerce business transactions. Consumers of business information on the
Internet can use New D&B information services to meet many of their transaction
needs.
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BUSINESS STRATEGY
Competition in business-to-business ("B2B") information products and
services has increased substantially in recent years due in large part to the
expanding use of the Internet. This increased competition has created a two-fold
challenge for New D&B. First, in the near to medium term, New D&B must improve
efficiency in the operation of its traditional businesses. Second, in the longer
term, New D&B must extend the leadership position it has earned in its
traditional business to the emerging electronic commerce environment and thereby
achieve its aspiration to transform New D&B into a growth company with an
important presence on the Internet. New D&B currently is developing a program to
meet this two-fold challenge, which it refers to as its "Blueprint for Growth."
While New D&B continues to develop the details of its Blueprint for Growth, the
general parameters of the program are as follows:
- Leveraging a distinctive brand: In its traditional operating
environments, New D&B believes that the Dun & Bradstreet brand name has
come to represent trust and confidence in products and services that help
customers reduce risk in decision-making and improve financial
performance. Key attributes of the brand include: (i) the company's 159
year operating history in B2B commerce, (ii) its base of over 150,000
customers, (iii) its database on over 60 million businesses throughout
the world, (iv) its D-U-N-S numbering system, which is widely recognized
as the global standard for identifying businesses and establishing
linkages between related companies, (v) its trade data on how businesses
pay their suppliers, and (vi) its decision-support tools, scoring models
and other actionable information. One of the fundamental objectives of
the Blueprint for Growth will be to leverage these core brand assets in a
manner designed to assure that the Dun & Bradstreet name continues to
engender the same level of trust and confidence in B2B e-commerce
transactions, where issues of trust and confidence are of paramount
concern, that it does in the traditional marketplace.
- Creating financial flexibility: New D&B expects that implementation of
the Blueprint for Growth will require significant capital investments. In
order to offset the effects of these investments on the company's
operating performance, development of the program involves a
comprehensive analysis of means by which operating costs can be reduced
and, where appropriate, redeployed to areas representing growth
opportunities. New D&B has identified several major areas of
cost-reduction opportunities, including: (i) globalizing administrative
functions, (ii) streamlining data collection and fulfillment, (iii)
rationalizing sales and marketing functions, including simplifying
product offerings and (iv) consolidating and simplifying the company's
technology function. New D&B will also seek to utilize the Web to reduce
data collection and product delivery costs. In addition, New D&B is
reviewing its operations and prospects in each country to decide where it
should maintain, increase or scale down its presence and where it should
leverage partnerships to fulfill basic requirements (e.g., information
collection) and is considering dispositions of non-core businesses and
assets.
- Enhancing the traditional business: An important element of the
Blueprint for Growth is New D&B's belief that there continue to be
opportunities in its traditional business to generate revenue growth and
increase profitability. A comprehensive analysis of New D&B's traditional
business has identified opportunities for targeted growth by increasing
penetration of the small business market and by deepening existing
relationships with large global businesses. New D&B also expects to
accelerate the utilization of the Web as a distribution channel for
products and services.
- Becoming a significant participant in B2B electronic commerce: The
development of electronic commerce has created a number of new challenges
in B2B transactions, relating in substantial part to issues of trust and
confidence. In this environment, for example, buyers and sellers require
new and essentially instantaneous modes of addressing fundamental
concerns such as: Is my trading partner who it claims to be? Is it
qualified to complete the transaction? Will it deliver as promised? New
D&B believes that the company--with its brand, actionable information and
analytical capabilities--is well-positioned to address and ameliorate
such concerns, and several of its current products and services (such as
those offered by eccelerate.com) are already doing so. Accordingly,
another principal element of the Blueprint for Growth is the analysis and
development of means by which New D&B can accelerate the deployment of
its core assets and brand in the e-commerce environment and thereby
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achieve its aspiration of making B2B e-commerce a major component of its
long-term growth. Among the approaches being analyzed are ways to
leverage existing relationships and establish new ones to bring reliable
information products and services to various B2B e-commerce
participants--suppliers, buyers and intermediaries. Potential roles for
New D&B include, but are not limited to: (i) providing identification,
authentication and verification services to buyers and sellers; (ii)
providing sellers credit scores on buyers; (iii) providing buyers ratings
on sellers; and (iv) facilitating collections and receivables management.
- Enhancing the workforce environment--creating a winning culture: New D&B
recognizes that successfully achieving the growth potential of its
Blueprint program will require a talented, motivated and efficient
workforce that is aligned around a common set of strategies and goals.
The program contemplates a number of initiatives in this regard,
including: aligning goals and compensation programs with the Blueprint
Strategy and the drivers of shareholder value creation; changing the
organizational structure to foster accountability and efficiency; more
clearly defining and prioritizing operating goals and the means of
achieving them; and recruiting and developing talented senior personnel
from inside and outside the organization.
New D&B believes that completion and implementation of its Blueprint for
Growth should provide the means to assure improved long term operating
performance in an evolving business environment. However, there can be no
assurance of success in this regard and, in any event, the full realization of
such improvements may require a substantial period of time. Certain actions that
may be taken may result in overall profitability enhancement but lower revenue
for New D&B. Moreover, the program may necessitate restructuring and other
charges in the near term that have the effect of reducing the level of income
that otherwise would be reported for such periods. It is too early to estimate
the amount of such charges, but they may be material.
NEW D&B'S HISTORY
New D&B and its predecessors have been providing credit information
solutions since 1841. New D&B was formed in April 2000, and D&B was formed in
1998 in connection with the 1998 Distribution. D&B's predecessor, Donnelley, was
incorporated under the laws of the State of Delaware on February 6, 1973 and
became the parent holding company of D&B Inc. and its subsidiaries on June 1,
1973.
PRODUCTS AND SERVICES
New D&B's four product lines and their respective contributions to New
D&B's 1999 revenues are set forth below:
PERCENTAGE OF
PRODUCT LINE 1999 REVENUE
- ------------ -------------
Credit Information Solutions................................ 65.5%
Marketing Information Solutions............................. 22.2%
Purchasing Information Solutions............................ 2.0%
Receivables Management Services............................. 10.3%
Credit Information Solutions
Customers use New D&B's credit information solutions to help them extend
commercial credit, approve loans and leases, underwrite insurance, evaluate
clients and make other financial and risk assessment decisions. New D&B's
largest customers for these solutions are major manufacturers and wholesalers,
insurance companies, banks and other credit and financial institutions. Its core
credit solutions are available through a variety of products, including the
Business Information Report, which contains commercial credit information that
may include basic background information, financial and public records data and
information on financial strength and payment history. New D&B's credit
information solutions are delivered primarily through electronic methods,
including desktop and enterprise software applications and the Internet. New
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D&B's credit information solutions are also distributed by a number of other
firms, including leading vendors of online and Internet information services,
such as Lexis-Nexis, Dialog, Dow Jones Interactive and Westlaw, and through
enterprise software vendors such as Oracle, Siebel and SAP.
Marketing Information Solutions
New D&B's marketing information solutions provide business-to-business
marketing information and analysis. Using information from New D&B's global
database, these products and services are designed to help customers conduct
market segmentation, client profiling, prospect selection and marketing list
development. Marketing information solutions are delivered over the Internet,
through online and Internet information services, such as Lexis-Nexis, Dialog,
Dow Jones Interactive and Westlaw, and in print, on diskette, magnetic tape and
CD-ROM. Market Spectrum(TM), a suite of marketing information products and
services, enhances internal customer data with external information and analysis
that can help customers target their most profitable clients and prospects,
analyze market penetration and market segmentation, determine territory
alignment and estimate demand. Marketing information services are also available
through enterprise software vendors such as Siebel and through an alliance
between New D&B and Acxiom.
Purchasing Information Solutions
New D&B's purchasing information solutions help customers understand their
supplier base, provide them the tools to rationalize their supplier rosters,
leverage buying power, minimize supply-related risks and identify and evaluate
new sources of supply. Purchasing information solutions, which leverage
information from New D&B's global database, include the Supplier Spend Analysis,
which integrates customers' supplier data with information from New D&B's global
database and from third parties and then applies analytical and benchmarking
techniques designed to identify opportunities for reducing purchasing costs and
risks; Supplier Assessment Manager(TM), which uses decision-support software to
automate the scoring and monitoring of supplier performance, capabilities and
risks using internal and external information; Standard Product and Service
Codes ("UN/SPSC"), which were developed jointly by New D&B and the United
Nations and which help companies determine the specific types of products and
services comprising the supply base of their firm and allow them to identify
further vendor consolidation opportunities; and a joint purchasing solution
offered through an alliance with SAS Institute, which includes New D&B's
purchasing information solutions and SAS's analytical products.
Receivables Management Services
New D&B offers its customers a full range of accounts receivable management
services, including third party collection of accounts, letter demand services
and receivable outsourcing programs. These services substitute and/or enhance
the customer's own internal management of accounts receivable.
New D&B's receivables management services ("RMS") business collects and
services delinquent commercial receivables on behalf of approximately 30,000
customers, primarily in the business-to-business market. Principal markets
include insurance, telecommunications and transportation industries. RMS also
provides cross-border commercial receivables services in which the RMS worldwide
offices service cross-border claims. Revenues in connection with RMS' collection
services are generally earned on a contingent fee basis.
RMS recently began to expand its business to provide commercial accounts
receivable servicing in the ordinary course for customers who wish to outsource
this function. Services provided in the RMS business include debt verification
and collection, customer service functions and analytical reporting.
Certain jurisdictions require licensing for consumer and commercial debt
collection. RMS and, in some instances, the individual collectors must be
licensed in order to conduct business in these jurisdictions. The laws under
which such licenses are granted generally require annual license renewal and
provide for denial, suspension or revocation for improper actions or other
reasons.
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COMPETITION
All of New D&B's businesses are highly competitive. New D&B competes
directly with a broad range of companies offering information services to
business customers. In addition, business information and related products and
services are becoming increasingly available, principally as a result of the
expansion of the Internet and as new providers of business-to-business
information products and services emerge. New D&B's ability to compete
effectively will be based on a number of factors, including: the ability to
attract local customers to the worldwide information services offered by New
D&B's unique database; reliability of information; brand perception; and the
ability to deliver business information via various media and distribution
channels in formats tailored to client requirements.
New D&B is the market leader in North America in terms of market share and
revenue. The competitive environment varies by country in Europe, Asia and Latin
America. In some countries, leadership positions exist, whereas in others the
markets are highly fragmented. The competition is primarily local, and, because
of New D&B's global database, New D&B believes that it has a competitive edge in
countries outside the U.S. with respect to customers seeking worldwide
information coverage. In certain markets (such as Europe), New D&B has
experienced pricing pressures and may continue to experience pricing pressure in
the future as some of its competitors seek to obtain market share by reducing
prices. See "Risk Factors--Risks Relating to the New D&B Corporation".
In its information services businesses, New D&B faces competition from
in-house operations of the businesses it seeks as customers, from other general
and specialized credit reporting services, other information and professional
services providers, banks, credit insurers and the Internet.
RMS is a leader in the commercial collection industry in terms of market
share and revenue. There are several consumer collection agencies that have
larger receivables portfolios, particularly health-care and credit card
collection providers. The third-party commercial collection market is highly
fragmented, with more than 5,000 collection agencies. The outsourcing market has
relatively fewer competitors due to the need for receivables providers to have
larger-scale operations. Both markets are very price-competitive, with status,
statistical reporting and speed-of-service being key qualitative attributes. RMS
faces competition from numerous other commercial collection agencies, attorneys
who receive claims directly from clients and companies that conduct commercial
collections in-house. In addition, RMS faces potential competition from the
expansion of large consumer agencies into the commercial market.
GEOGRAPHIC BUSINESS SEGMENTS
New D&B manages its business globally through three geographic segments:
North America (i.e., D&B North America), Europe/Africa/Middle East (i.e., D&B
Europe), and Asia Pacific and Latin America (i.e., D&B APLA). Prior to January
1, 2000, New D&B's Canadian business was managed by its Asia Pacific and Latin
America geographic segment. Effective January 1, 2000, management of New D&B's
Canadian business was moved to its U.S. geographic segment to take advantage of
marketing synergies between the U.S. and Canada. Revenues set forth in this
section have been restated to reflect such change. None of New D&B's business
segments is dependent on a single customer or a few customers, such that a loss
of any one would have a material adverse effect on that business segment.
The operations of D&B Europe and D&B APLA are subject to the usual risks
inherent in doing business in certain countries outside of the U.S., including
currency fluctuations and possible nationalization, expropriation, price
controls, changes in the availability of data from public sector sources, limits
on collecting certain types of personal information or on providing information
across borders or other restrictive governmental actions. Management of New D&B
believes that the risks of nationalization or expropriation are reduced because
its basic service is the delivery of information rather than the production of
products that require manufacturing facilities or the use of natural resources.
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Dun & Bradstreet North America
For the first six months of 2000, D&B North America had revenue of $485.7
million, comprised of credit information solutions (63.1%), marketing
information solutions (24.5%), purchasing information solutions (2.3%) and
receivables management services (10.1%). D&B North America had 1999 revenue of
$920.0 million, comprised of credit information solutions (63.2%), marketing
information solutions (25.0%), purchasing information solutions (2.9%) and
receivables management services (8.9%).
Dun & Bradstreet Europe/Africa/Middle East
For the first six months of 2000, D&B Europe had revenue of $187.9 million,
comprised of credit information services (71.8%), marketing information
solutions (15.5%), purchasing information solutions (.4%) and receivables
management services (12.3%). D&B Europe had 1999 revenue of $420.6 million,
comprised of credit information solutions (70.7%), marketing information
solutions (17.2%), purchasing information solutions (.3%) and receivables
management services (11.8%). D&B Europe began offering purchasing information
services in 1999.
D&B Europe has operations in 20 countries and conducts operations in three
other countries through minority interests in joint-venture companies. D&B
Europe is believed to be the largest single supplier of commercial credit
information services in Europe.
Dun & Bradstreet Asia Pacific and Latin America
For the first six months of 2000, D&B APLA had revenue of $30.7 million,
comprised of credit information solutions (61.6%), marketing information
solutions (14.7%), purchasing information solutions (0%) and receivables
management services (23.7%). D&B APLA had 1999 revenue of $67.1 million,
comprised of credit information solutions (65.0%), marketing information
solutions (14.8%), purchasing information solutions (0%) and receivables
management services (20.2%). D&B APLA began offering purchasing information
solutions in 1999.
D&B APLA has operations in 14 countries and conducts operations in 1 other
country through a minority interest in a joint-venture company. D&B APLA
provides cross-border services originating in Latin America through local
affiliates, small local operations centers and an operations center in Florida.
In the Asia Pacific region, D&B APLA has entered into joint-venture and
distribution arrangements to leverage its staff and data sourcing and
distribution capabilities and is exploring additional such opportunities.
INTELLECTUAL PROPERTY
New D&B owns and controls a number of trade secrets, confidential
information, trademarks, trade names, copyrights, patents and other intellectual
property rights that, in the aggregate, are of material importance to New D&B's
business. Management of New D&B believes that each of the "Dun & Bradstreet"
name and related names, marks and logos are of material importance to New D&B.
New D&B is licensed to use certain technology and other intellectual property
rights owned and controlled by others, and, similarly, other companies are
licensed to use certain technology and other intellectual property rights owned
and controlled by New D&B. New D&B considers its trademarks, service marks,
databases, software and other intellectual property to be proprietary, and New
D&B relies on a combination of copyright, trademark, trade secret, patent,
non-disclosure and contract safeguards for protection.
The names of New D&B's products and services referred to herein are
trademarks, service marks or registered trademarks or service marks owned by or
licensed to New D&B or one or more of its subsidiaries.
EMPLOYEES
As of June 30, 2000, the number of full-time equivalent employees of New
D&B was approximately 10,700.
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PROPERTIES
The executive offices of New D&B are located at One Diamond Hill Road,
Murray Hill, New Jersey, in a 184,000-square-foot property owned by New D&B.
This property also serves as the executive offices of D&B North America and D&B
APLA.
New D&B's other properties are geographically distributed to meet sales and
operating requirements worldwide. These properties are generally considered to
be both suitable and adequate to meet current operating requirements, and
virtually all space is being utilized. The most important of these other
properties include the following sites that are owned by New D&B: (i) two
commercial office buildings (totaling 114,200 square feet) in Berkeley Heights,
New Jersey, used as data processing facilities for the U.S. operations; (ii) a
147,000-square-foot office building in Parsippany, New Jersey housing personnel
from the sales, marketing and technology groups of New D&B; and (iii) a
236,000-square-foot office building in High Wycombe, England, that houses
operational and technology services for D&B Europe. New D&B's operations are
also conducted from 71 other offices located throughout the U.S. (all of which
are leased) and 97 non-U.S. office locations (90 of which are leased).
LEGAL PROCEEDINGS
New D&B is involved in legal proceedings of a nature considered normal to
its business. In the opinion of management, although the outcome of such legal
proceedings cannot be predicted with certainty, the ultimate liability of New
D&B in connection with such legal proceedings will not have a material adverse
effect on New D&B's financial position, results of operations and cash flows.
In addition to the matters referred to above, on July 29, 1996, IRI filed a
complaint in the United States District Court for the Southern District of New
York, naming as defendants Donnelley, ACN and IMS. At the time of the filing of
the complaint, each of the other defendants was a subsidiary of Donnelley. The
complaint alleges various violations of United States antitrust laws, including
purported violations of Sections 1 and 2 of the Sherman Act arising from tying
arrangements, agreements with retailers and other customers, predatory pricing
practices and other matters alleged by IRI. In addition to the foregoing claims,
the complaint alleges a claim of tortious interference with a contract and a
claim of tortious interference with a prospective business relationship. These
claims relate to the acquisition by defendants of SRG. IRI alleges SRG violated
an alleged agreement with IRI when it agreed to be acquired by the defendants
and that the defendants induced SRG to breach that agreement. IRI's complaint
alleges damages in excess of $350 million, which amount IRI has asked to be
trebled under antitrust laws. IRI also seeks punitive damages in an unspecified
amount.
On October 15, 1996, defendants moved for an order dismissing all claims in
the complaint. On May 6, 1997, the United States District Court for the Southern
District of New York issued a decision dismissing IRI's claim of attempted
monopolization in the United States, with leave to replead within 60 days. The
Court denied defendants' motion with respect to the remaining claims in the
complaint. On June 3, 1997, defendants filed an answer denying the material
allegations in IRI's complaint, and ACN filed a counterclaim alleging that IRI
had made false and misleading statements about its services and commercial
activities. On July 7, 1997, IRI filed an Amended and Restated Complaint
repleading its alleged claim of monopolization in the United States and
realleging its other claims. By notice of motion dated August 18, 1997,
defendants moved for an order dismissing the amended claim. On December 1, 1997,
the Court denied the motion. Discovery in this case is ongoing. On December 22,
1999, defendants filed a motion for partial summary judgment seeking to dismiss
IRI's non-U.S. antitrust claims. On July 12, 2000, the Court granted the motion
dismissing claims of injury suffered from activities in foreign markets where
IRI operates through subsidiaries or companies owned by joint ventures or
"relationships" with local companies.
In November 1996, Donnelley completed the 1996 Distribution. On October 28,
1996, in connection with the 1996 Distribution, Cognizant, ACNielsen and
Donnelley entered into the Indemnity and Joint Defense Agreement. See "Risk
Factors" for a description of this agreement.
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In June 1998, Donnelley completed the 1998 Distribution. In connection with
the 1998 Distribution, D&B and Donnelley entered into an agreement whereby D&B
has assumed all potential liabilities of Donnelley arising from the IRI action
and agreed to indemnify Donnelley in connection with such potential liabilities.
During 1998, Cognizant separated into two new companies, IMS Health and
NMR. IMS Health and NMR are each jointly and severally liable for all Cognizant
liabilities under the Indemnity and Joint Defense Agreement.
Under the terms of the 1996 Distribution Agreement, as a condition to the
1998 Distribution, D&B undertook to be jointly and severally liable with
Donnelley to Cognizant and ACNielsen. Under the terms of the 1998 Distribution
Agreement, as a condition to the Distribution, New D&B is required to undertake
to be jointly and severally liable with D&B to Donnelley for D&B's obligations
under the 1998 Distribution Agreement, including the liabilities relating to the
IRI action. However, under the Distribution Agreement, as between themselves,
each of New D&B and Moody's will agree to be responsible for 50% of any payments
to be made in respect of the IRI action under the 1998 Distribution Agreement or
otherwise, including any legal fees or expenses related thereto.
Management is unable to predict at this time the final outcome of the IRI
action or whether the resolution of such matter could materially affect New
D&B's results of operations, cash flows or financial position.
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THE NEW D&B CORPORATION
MANAGEMENT AND EXECUTIVE COMPENSATION
Allan Z. Loren is currently the Chairman and Chief Executive Officer of D&B
Inc. and a director of D&B and New D&B. In connection with the Distribution, Mr.
Loren will resign as a director of D&B and will become the Chairman and Chief
Executive Officer of New D&B. In addition to Mr. Loren, it is anticipated that
the other executive officers of New D&B at the time of the Distribution (other
than Clifford L. Alexander, Jr.) will be the persons who are serving as
executive officers of D&B immediately prior to the Distribution, and such
persons will resign from their positions at D&B effective upon the Distribution.
New D&B anticipates that organizational changes currently under consideration
may result in the naming of additional executive officers. See "--The New D&B
Corporation Executive Officers".
THE NEW D&B CORPORATION BOARD OF DIRECTORS
Immediately after the Distribution, New D&B expects to have a Board of
Directors composed of five directors. New D&B expects to supplement its Board of
Directors with additional outside directors in the months following the
Distribution.
The following table sets forth the names, in alphabetical order, and
information as to the persons who are currently serving as directors of New D&B
including information as to service with D&B, if applicable.
DIRECTOR OF PRINCIPAL OCCUPATION
NAME POSITIONS WITH D&B D&B SINCE DURING LAST FIVE YEARS AGE* OTHER DIRECTORSHIPS
- ---- -------------------- ----------------- ---------------------- ---- --------------------
Ronald L. Kuehn, Jr. Director November 18, 1996 Chairman of the 65 AmSouth
Board, El Paso Energy Bancorporation; El
Corporation Paso Energy
(diversified energy Corporation;
company), October Praxair, Inc.;
1999 to present; Protective Life
Chairman, President Corporation;
and Chief Executive Transocean Sedco
Officer, Sonat Inc., Forex Inc.; Union
1986 to October 1999 Carbide Corporation
Allan Z. Loren Director, Chairman & May 30, 2000 Chairman & Chief 62 Hershey Foods
Chief Executive Executive Officer, Corporation; The
Officer, D&B Inc. D&B Inc., May 30, Reynolds and
2000 to present; Reynolds Company;
Executive Vice Venator Group, Inc.;
President and Chief First Knowledge
Information Officer, Partners Inc.;
American Express Plural, Inc.;
Company (worldwide eCustomers.com
travel, financial and (advisory board)
network services
company), May 1994 to
May 5, 2000
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DIRECTOR OF PRINCIPAL OCCUPATION
NAME POSITIONS WITH D&B D&B SINCE DURING LAST FIVE YEARS AGE* OTHER DIRECTORSHIPS
- ---- -------------------- ----------------- ---------------------- ---- --------------------
Victor A. Pelson Director April 20, 1999 Senior Advisor, UBS 63 Carrier
Warburg LLC International, SA;
(investment banking Acterna Corporation;
firm), 1997 to Eaton Corporation;
present; Director and United Parcel
Senior Advisor, Service
Dillon Read, 1996 to
1997; Chairman of
Global Operations
(for what is now
AT&T, Lucent
Technologies and NCR)
and a member of the
AT&T Board of
Directors, 1993 to
1996
Michael R. Quinlan Director April 19, 1989 Director, McDonald's 55 Catalyst; McDonald's
Corporation (global Corporation; May
food service Department Stores
retailer), 1979 to Company
present; Chairman of
the Board, McDonald's
Corporation, March
1990 to May 1999;
Chief Executive
Officer, McDonald's
Corporation, March
1987 to July 1998
Naomi O. Seligman Director June 16, 1999 Senior Partner, 67 John Wiley & Sons,
Ostriker von Simson Inc.; Exodus
(consultants on Communications,
information Inc.; Martha Stewart
technology), June Living Omnimedia,
1999 to present; Inc.; Sun
Co-Founder and Senior Microsystems, Inc.;
Partner, Research Ventro Corporation
Board, Inc., 1975 to
1999
- ---------------
* As of June 30, 2000
DIRECTOR'S COMPENSATION
The compensation program for directors of New D&B to be effective at the
time of the Distribution is under review and has not yet been determined.
Unexercised D&B stock options held by New D&B non-employee directors as of
the Distribution Date will be converted into two separately exercisable options
to purchase shares of New D&B Common Stock and shares of Moody's Common Stock.
Specifically, each unexercised D&B stock option held by a New D&B non-employee
Director will become an option to acquire Moody's Common Stock, and such
individual will receive a replacement stock option exercisable into shares of
New D&B Common Stock. The number of shares covered by each such option and the
exercise prices thereof will be calculated in the manner as described above
under "Relationship Between The New D&B Corporation and Moody's Corporation
After the Distribution--Employee Benefits Agreement". Similarly, other
stock-based grants held by New D&B non-employee Directors as of the Distribution
Date will be converted into comparable grants in respect of shares of New D&B
Common Stock and shares of Moody's Common Stock. These other stock-based grants
include restricted stock, phantom stock units and performance share units.
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COMMITTEES OF THE NEW D&B CORPORATION BOARD OF DIRECTORS
The New D&B Board of Directors has established an Audit Committee and a
Compensation and Benefits Committee. The Audit Committee will initially consist
of Messrs. Pelson (Chairman) and Kuehn and Ms. Seligman. The Compensation and
Benefits Committee will initially consist of Messrs. Kuehn (Chairman), Pelson
and Quinlan.
THE NEW D&B CORPORATION EXECUTIVE OFFICERS
Listed below is certain information as to the persons who will serve as
executive officers of New D&B immediately following the Distribution. New D&B
anticipates that organizational changes currently under consideration may result
in the naming of additional executive officers.
NAME, POSITION WITH NEW D&B AND AGE BIOGRAPHICAL DATA
- ----------------------------------- -----------------
Allan Z. Loren, 62.................... Mr. Loren has served as chairman and chief executive
Chairman and Chief Executive Officer officer of D&B Inc. since May 30, 2000 and a director
of New D&B since September 8, 2000. Prior thereto, he
was executive vice president and chief information
officer of American Express Company (worldwide
travel, financial and network services company) from
1994 to May 2000. Mr. Loren is currently a member of
the Board of Directors of D&B, Hershey Foods
Corporation, The Reynolds and Reynolds Company,
Venator Group, Inc., First Knowledge Partners Inc.
and Plural, Inc. He is also a member of the advisory
board of eCustomers.com.
Frank S. Sowinski, 44................. Mr. Sowinski has served as president -- D&B Inc.
Executive Vice President and since September 1999, and executive vice president of
President of D&B Inc. D&B since October 1999. Prior thereto, Mr. Sowinski
served as senior vice president and chief financial
officer of D&B from November 1996 to September 1999,
as well as executive vice president -- global
marketing of D&B Inc. from October 1997 to September
1999. He also previously served D&B Inc. as executive
vice president -- applications and alliances from
November 1996 to September 1997, as executive vice
president -- applications, mass marketing and
alliances from October 1994 to October 1996, as
executive vice president -- marketing from April 1993
to September 1994 and as senior vice
president -- finance & planning from August 1989 to
March 1993.
Peter J. Ross, 54..................... Mr. Ross has served as senior vice president and
Senior Vice President and business affairs officer of D&B since November 1999.
Business Affairs Officer The Business Affairs function comprises the Legal,
Human Resources and Business Practices departments.
Prior thereto, he served as senior vice president and
chief human resources officer of D&B from November
1996 to November 1999. He is also senior vice
president -- human resources of D&B Inc., a position
he has held since June 1988.
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NAME, POSITION WITH NEW D&B AND AGE BIOGRAPHICAL DATA
- ----------------------------------- -----------------
Chester J. Geveda, Jr., 53............ Mr. Geveda has served as vice president and
Vice President and Controller, controller of D&B and as senior vice
Acting Chief Financial Officer president -- finance of D&B Inc. since November 1996.
In September 1999 he was appointed to the additional
position of acting chief financial officer of D&B.
Prior thereto, he served as senior vice
president -- finance and planning of D&B Inc. from
April 1993 to October 1996 and as senior vice
president -- finance and administration of Dun &
Bradstreet Europe/Africa/Middle East from September
1990 to March 1993.
COMPENSATION OF THE NEW D&B CORPORATION EXECUTIVE OFFICERS
The following table discloses the compensation paid by D&B for services
rendered to D&B in 1999 by the persons who are anticipated to be the chief
executive officer and the other executive officers of New D&B immediately
following the Distribution. Mr. Loren was not employed by New D&B during 1999;
his employment agreement is described below under "--Employment and
Change-in-Control Arrangements". During the period presented, the individuals
were compensated in accordance with D&B's plans and policies. In that
connection, stock-based compensation described in the following tables is
expressed in shares of D&B Common Stock, which, except for stock-based
compensation granted to Mr. Loren, will be canceled and each individual will
receive an adjusted number of shares of New D&B Common Stock and an adjusted
number of shares of Moody's Common Stock following the Distribution. Mr. Loren's
stock-based compensation will be canceled and Mr. Loren will receive an adjusted
number of shares of New D&B Common Stock only. See also "Relationship Between
The New D&B Corporation and Moody's Corporation After the Distribution--Employee
Benefits Agreement".
SUMMARY COMPENSATION TABLE FOR SERVICES WITH D&B
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ----------------------- PAYOUTS
--------------------------------- SECURITIES ----------
OTHER ANNUAL RESTRICTED UNDERLYING LONG-TERM ALL OTHER
NAME AND PRINCIPAL SALARY BONUS(1) COMPENSATION STOCK OPTIONS/ INCENTIVE COMPENSATION
POSITION WITH NEW D&B YEAR ($) ($) ($) AWARD(S) SARS(2) PAYOUTS(3) (4)
- --------------------- ---- ------- -------- ------------ ---------- ---------- ---------- ------------
Allan Z. Loren............... 1999 -- -- -- -- -- -- --
Chairman and Chief
Executive Officer(5)
Frank S. Sowinski............ 1999 447,808 111,014 -- -- 83,200 156,168 29,235
Executive Vice President
and President of D&B Inc.
Chester J. Geveda, Jr. ...... 1999 280,000 62,659 -- -- 35,500 83,564 13,403
Vice President and
Controller, Acting Chief
Financial Officer
Peter J. Ross................ 1999 244,000 59,548 -- -- 38,800 102,249 11,628
Senior Vice President and
Business Affairs Officer
- ---------------
(1) The bonus amounts shown were earned with respect to 1999 and were paid in
2000.
(2) Amounts shown represent the number of non-qualified stock options granted in
1999. Limited SARs were granted in tandem with all listed options.
(3) Amounts shown represent the dollar value of shares of D&B Common Stock
granted in February 1999, based on the achievement of cumulative 1997-1998
performance goals.
(4) Amounts shown represent aggregate D&B contributions for the account of each
named executive officer under the Dun & Bradstreet Profit Participation Plan
("PPP") and the Profit Participation Benefit Equalization Plan ("PPBEP"),
which plans are open to substantially all employees of D&B and certain
subsidiaries. The PPP is a tax-qualified defined contribution plan, and the
PPBEP is a non-qualified plan that provides benefits to participants in the
PPP equal to the amount of D&B contributions that would have been made to
the participants' PPP accounts but for certain Federal tax laws.
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(5) Effective as of May 30, 2000, Mr. Loren was appointed Chairman and Chief
Executive Officer of D&B Inc. and a director of D&B. Mr. Loren was not
employed by D&B during 1999.
OPTION GRANTS ON D&B COMMON STOCK TO THE NEW D&B CORPORATION EXECUTIVES IN LAST
FISCAL YEAR
The following table provides information on fiscal year 1999 grants of
options to the named New D&B executives to purchase shares of D&B Common Stock.
These options will be replaced by options to acquire New D&B Common Stock and
options to acquire Moody's Common Stock. See "Relationship Between The New D&B
Corporation and Moody's Corporation after the Distribution--Employee Benefits
Agreement".
OPTION GRANTS/SAR GRANTS IN LAST FISCAL YEAR TO PURCHASE D&B COMMON STOCK
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/
UNDERLYING SARS
OPTIONS/SARS GRANTED TO EXERCISE OR GRANT DATE
GRANTED(1)(2) EMPLOYEES IN BASE PRICE PRESENT VALUE(3)
NAME (#) FISCAL YEAR ($/SHARE) EXPIRATION DATE ($)
- ---- ------------- ------------ ----------- --------------- ----------------
Allan Z. Loren(4)....... -- -- -- -- --
Frank S. Sowinski....... 83,200 2.35 29.1875 12/21/09 727,334
Chester J. Geveda,
Jr.................... 35,500 1.00 29.1875 12/21/09 310,341
Peter J. Ross........... 38,800 1.10 29.1875 12/21/09 339,190
- ---------------
(1) See "Relationship Between The New D&B Corporation and Moody's Corporation
After the Distribution--Employee Benefits Agreement" for the effect of the
Distribution on D&B Options/SARs.
(2) Options become exercisable in three equal annual installments commencing on
December 21, 2002, the third anniversary of the grant. All option grants to
the named executive officers of New D&B were made in tandem with Limited
SARs. Limited SARs are exercisable only if and to the extent that the
related option is exercisable and are exercisable only during the 30-day
period following the acquisition of at least 20% of the outstanding D&B
Common Stock pursuant to a tender or exchange offer not made by D&B. Each
Limited SAR permits the holder to receive cash equal to the excess over the
related option exercise price of the highest price paid pursuant to a tender
or exchange offer for D&B Common Stock that is in effect at any time during
the 60 days preceding the date upon which the Limited SAR is exercised.
Limited SARs can be exercised regardless of whether D&B supports or opposes
the offer.
(3) Grant date present value is based on the Black-Scholes option valuation
model, which makes the following assumptions: an expected stock-price
volatility factor of 30.0%; a risk-free rate of return of 6.45%; a dividend
yield of 2.40%; and a weighted average exercise date of 5 years from date of
grant. These assumptions may or may not be fulfilled. The amounts shown
cannot be considered predictions of future value. In addition, the options
will gain value only to the extent the stock price exceeds the option
exercise price during the life of the option.
(4) As previously noted, Mr. Loren became Chairman and Chief Executive Officer
of D&B Inc. on May 30, 2000 and was not employed by D&B during 1999.
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AGGREGATE D&B OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR END D&B
OPTION VALUES
The following table provides information on option exercises in 1999 by the
named executives of New D&B and the value of each such executive's unexercised
options to acquire D&B Common Stock at December 31, 1999. In connection with the
Distribution, each outstanding option shall be adjusted as set forth under
"Relationship Between The New D&B Corporation and Moody's Corporation After the
Distribution--Employee Benefits Agreement".
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED,
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES D&B OPTIONS/SARS AT D&B OPTIONS/SARS AT
ACQUIRED ON VALUE FISCAL YEAR-END(1) FISCAL YEAR-END(1)(2)($)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
Allan Z. Loren(3)......... -- -- -- -- -- --
Frank S. Sowinski -- -- 111,509 171,309 869,629 280,677
Chester J. Geveda, Jr. -- -- 101,854 90,828 781,914 189,315
Peter J. Ross............. 816 11,320 120,709 87,422 1,014,948 157,358
- ---------------
(1) See "Relationship Between The New D&B Corporation and Moody's Corporation
After the Distribution--Employee Benefits Agreement" for the effect of the
Distribution on D&B Options/SARs.
(2) Based on the closing price of the Common Stock of $29.50 on December 31,
1999.
(3) As previously noted, Mr. Loren became Chairman and Chief Executive Officer
of D&B Inc. on May 30, 2000 and was not employed by D&B during 1999.
LONG-TERM D&B INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
NO. OF
SHARES, PERFORMANCE OR ESTIMATED FUTURE PAYOUTS
UNITS OR OTHER PERIOD UNTIL UNDER NON-STOCK PRICE-
OTHER MATURATION OR THRESHOLD BASED PLANS TARGET MAXIMUM
NAME(1) RIGHTS(#) PAYOUT (#) (#) (#)
- ------- --------- ------------------ --------- ------------------------ -------
Frank S. Sowinski.... (2) 5/1/99 - 4/30/02 6,000 8,000 10,000
- ---------------
(1) With the exception of Mr. Sowinski, no named executive officer received a
long-term incentive grant during 1999.
(2) The actual number of shares of D&B Common Stock that will be paid out at the
end of the performance period, if any, cannot be determined because the
number of shares earned will be based upon D&B's Common Stock price
appreciation versus that of companies that comprise the Standard & Poor's
500 Index over the performance period. Specifically, Mr. Sowinski will earn:
(i) 6,000 or 8,000 performance shares if D&B's Common Stock share price
appreciation is equal to the 50th or 60th percentile, respectively, of the
S&P 500 for the three-year performance period; (ii) 10,000 performance
shares if such share price appreciation is equal to or greater than the 75th
percentile of the S&P 500; (iii) no performance shares if such share price
appreciation is less than the 50th percentile of the S&P 500; and (iv) a
number of performance shares calculated by interpolating between 6,000 and
8,000 or between 8,000 and 10,000 on a straight-line basis if such share
price appreciation for such period is between the applicable percentiles of
the S&P 500.
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RETIREMENT BENEFITS
The following table sets forth the estimated aggregate annual benefits
payable under D&B's Retirement Account Plan, Pension Benefit Equalization Plan
("PBEP") and Supplemental Executive Benefit Plan ("SEBP") as in effect during
1999 to persons in specified average final compensation and credited service
classifications upon retirement at age 65. Amounts shown in the table include
U.S. Social Security benefits which would be deducted in calculating benefits
payable under these plans. These aggregate annual retirement benefits do not
increase as a result of additional credited service after 20 years.
AVERAGE ESTIMATED AGGREGATE ANNUAL RETIREMENT BENEFIT ASSUMING CREDITED SERVICE OF:
FINAL ---------------------------------------------------------------------------
COMPENSATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS
- ------------ --------------- ----------------- ----------------- -----------------
$ 400,000 $200,000 $ 240,000 $ 240,000 $ 240,000
450,000 225,000 270,000 270,000 270,000
550,000 275,000 330,000 330,000 330,000
700,000 350,000 420,000 420,000 420,000
850,000 425,000 510,000 510,000 510,000
1,000,000 500,000 600,000 600,000 600,000
1,300,000 650,000 780,000 780,000 780,000
1,600,000 800,000 960,000 960,000 960,000
1,900,000 950,000 1,140,000 1,140,000 1,140,000
As of December 31, 1999, the number of full years of credited service under
the plans for Messrs. Loren, Geveda, Ross and Sowinski are 0, 25, 14 and 15,
respectively.
Compensation, for the purpose of determining retirement benefits, consists
of salary, wages, regular cash bonuses, commissions and overtime pay and a
one-time bonus in lieu of salary increases. Severance pay, contingent payments
and other forms of special remuneration are excluded. Bonuses included in the
Summary Compensation Table are normally not paid until the year following the
year in which they are accrued and expensed; therefore, compensation for
purposes of determining retirement benefits varies from the Summary Compensation
Table amounts in that bonuses expensed in the previous year, but paid in the
current year, are part of retirement compensation in the current year, and
current year's bonuses accrued and included in the Summary Compensation Table
are not.
For the reasons discussed above, compensation for determining retirement
benefits for the named executive officers differed by more than 10% from the
amounts shown in the Summary Compensation Table. 1999 compensation for purposes
of determining retirement benefits for Messrs. Loren, Geveda, Ross and Sowinski
was $0, $452,648, $413,885 and $798,333, respectively.
Average final compensation is defined as the highest average annual
compensation during five consecutive 12-month periods in the last ten
consecutive 12-month periods of the member's credited service. Members vest in
their accrued retirement benefit upon completion of five years of service. The
benefits shown in the table above are calculated on a straight-life annuity
basis.
The Retirement Account Plan, together with the PBEP, provides retirement
income based on a percentage of annual compensation. The percentage of
compensation allocated annually ranges from 3% to 12.5%, based on age and
credited service. Amounts allocated also receive interest credits based on
30-year Treasuries with a minimum compounded annual interest credit rate of 3%.
Executives who were close to or eligible to retire as of January 1, 1997 will
receive the higher of benefits provided by the final pay formula in effect prior
to 1997 or by the Retirement Account formula.
The SEBP provides retirement benefits in addition to the benefits provided
under the Retirement Account Plan and the PBEP. The SEBP has the effect of
increasing the retirement benefits under the Retirement Account Plan and the
PBEP to the amounts shown in the preceding table. The SEBP provides maximum
benefits after 20 years (or after 15 years for executives eligible to retire as
of January 1, 1997).
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EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
On May 15, 2000, D&B entered into an employment agreement with Allan Z.
Loren. The term of the employment agreement began on May 30, 2000 and ends on
May 30, 2003, subject to extension upon mutual agreement by the parties. The
employment agreement will be assigned to New D&B simultaneously with the
Distribution. The employment agreement provides that, prior to the Distribution,
Mr. Loren will serve as Chairman and Chief Executive Officer of D&B Inc. and
serve as a member of the Board of Directors of D&B and, after the Distribution,
will serve as Chief Executive Officer and Chairman of the Board of Directors of
New D&B. The employment agreement also provides for an annual base salary of
$700,000 and sign-on bonuses of $700,000 payable on January 2, 2001 and January
2, 2002 (the first payment reduced by the lesser of $291,667 or the annual bonus
Mr. Loren earned from his previous employer). Mr. Loren is also entitled to an
annual bonus if certain performance criteria are attained. The maximum bonus for
fiscal year 2000 and fiscal year 2001 will equal 100% of his annual base salary
and will be based on performance goals in excess of estimated performance by the
Company. The target bonus for fiscal years 2002 and each fiscal year thereafter
will equal 100% of his annual base salary, with a maximum annual bonus of 200%
of his annual base salary. Upon the commencement of his employment, Mr. Loren
was granted a stock option to purchase 500,000 shares of D&B Common Stock with
an exercise price of $30.50 and 75,000 shares of restricted D&B Common Stock. As
of the Distribution Date, the stock option and restricted stock will be
equitably adjusted into a stock option and restricted stock relating solely to
New D&B Common Stock. Subject to Mr. Loren's continued employment, both the
stock option and the restricted stock vest on May 30, 2003. However, if Mr.
Loren is terminated by D&B without cause (as defined in the employment
agreement), terminates his employment for good reason (as defined in the
employment agreement), dies or becomes disabled or a change in control of D&B
(or, after the Distribution, of New D&B) occurs, the stock option and the
restricted stock will immediately vest. In addition, if Mr. Loren's employment
is terminated by D&B (or, after the Distribution, by New D&B) without cause or
Mr. Loren terminates his employment for good reason, Mr. Loren will be entitled
to continued payment of his annual base salary until May 30, 2003 and, to the
extent not previously paid, his sign-on bonuses and his target bonuses for
fiscal year 2002 and fiscal year 2003 (pro rated for the partial year), but in
no event will Mr. Loren receive less than one year's annual base salary plus
$700,000. During the term of his employment and for a period of one year
following his termination of employment, Mr. Loren has agreed not to compete
with the businesses of D&B Inc. and New D&B and has agreed not to solicit or
hire any employees or consultants of D&B Inc. or New D&B.
CHANGE-IN-CONTROL ARRANGEMENTS
D&B has entered into agreements with the executive officers named in New
D&B's Summary Compensation Table above providing for certain benefits upon
actual or constructive termination of employment in the event of a change in
control of D&B. With respect to Messrs. Loren, Ross and Sowinski, if, following
a change in control, the executive is terminated other than for cause or by
reason of death, disability or normal retirement, or the executive terminates
employment for "good reason" (generally, an unfavorable change in employment
status, compensation or benefits or a required relocation), the executive shall
be entitled to receive: (i) a lump sum payment equal to three times the sum of
salary plus annual target bonus then in effect; (ii) continuation of welfare
benefits and certain perquisites for three years; (iii) retiree medical and life
insurance benefits starting at age 55; (iv) outplacement consulting in the
amount of 20% of the sum of salary plus annual target bonus then in effect, but
not exceeding $100,000; (v) immediate vesting of certain entitlements; (vi) a
prorated annual target bonus for the year in which the change in control occurs
and a full target bonus for all other bonus plans in effect at the time of
termination; and (vii) payment of any excise taxes due in respect of the
foregoing benefits. The agreement for Mr. Geveda is substantially the same as
those described above, except that: (1) the lump sum payment is equal to two
times the sum of salary plus bonus opportunity; (2) welfare benefits and certain
perquisites will continue for two years; and (3) outplacement consulting will be
in the amount of 15% of the sum of salary plus guideline bonus opportunity, but
not exceeding $50,000. The obligations under these agreements with these named
executive officers will be liabilities of New D&B.
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SEVERANCE ARRANGEMENTS
D&B has adopted an Executive Transition Plan ("ETP") that provides
severance benefits for D&B's Chief Executive Officer and other designated
executives. The ETP currently provides for the payment of severance benefits if
an eligible executive's employment terminates by reason of a reduction in force,
job elimination, unsatisfactory job performance (not constituting cause) or a
mutually agreed resignation. In the event of an eligible termination, the
executive will be paid 104 weeks of salary continuation and (unless the
executive's employment is terminated by D&B for unsatisfactory performance) the
executive's guideline annual bonus opportunity for the year of termination,
payment of which will be prorated annually over a period equal to the number of
weeks of salary continuation. Salary continuation is payable at the times the
executive's salary would have been paid if employment had not terminated. In
addition, the executive will receive continued medical, dental and life
insurance benefits during the salary continuation period and will be entitled to
such outplacement services during the salary continuation period as are being
provided by D&B. Except in the case of a termination by D&B for unsatisfactory
performance, the executive also will receive: (i) a prorated portion of the
actual bonus for the year of termination that would have been payable to the
executive under the annual bonus plan in which the executive is participating;
(ii) cash payments equal in value to a prorated portion of any
"performance-based awards" under D&B's stock incentive plan, provided that the
executive was employed for at least half of the applicable performance period;
and (iii) financial planning/counseling services during the salary continuation
period to the same extent afforded immediately prior to the termination of
employment. The ETP gives D&B's Chief Executive Officer the discretion to reduce
or increase the benefits otherwise payable to, or otherwise modify the terms and
conditions applicable to, an eligible executive under the ETP, other than the
Chief Executive Officer; the Compensation & Benefits Committee of D&B has this
discretion with respect to the Chief Executive Officer.
Executive officers who do not participate in the ETP are eligible for
severance benefits under D&B's Career Transition Plan ("CTP"). The CTP generally
provides for the payment of benefits if an eligible executive's employment
terminates by reason of a reduction in force, job elimination, unsatisfactory
job performance (not constituting cause) or a mutually agreed resignation. In
the event of an eligible termination, an executive officer will be paid 52 weeks
of salary continuation (26 weeks if the executive is terminated by D&B for
unsatisfactory performance), payable at the times the executive's salary would
have been paid if employment had not terminated. For this purpose, salary
consists of the executive's annual base salary at the time of termination. In
addition, the executive will receive continued medical, dental and life
insurance benefits during the applicable salary continuation period and will be
entitled to such outplacement services during the salary continuation period as
are being provided by D&B. Except in the case of a termination by D&B for
unsatisfactory performance, the executive also will receive: (i) a prorated
portion of the actual bonus for the year of termination that would have been
payable to the executive under the annual bonus plan in which the executive is
participating, provided that the executive was employed for at least six full
months during the calendar year of termination; (ii) cash payments equal in
value to a prorated portion of any "performance-based awards" under D&B's stock
incentive plan, provided that the executive was employed for at least half of
the applicable performance period; and (iii) financial planning/counseling
services during the salary continuation period to the same extent afforded
immediately prior to termination of employment. The CTP gives D&B's Chief
Executive Officer the discretion to reduce or increase the benefits otherwise
payable to, or otherwise modify the terms and conditions applicable to, an
eligible executive under the CTP.
Mr. Loren has waived participation in both the ETP and CTP, subject to the
provisions of the employment agreement with D&B described above. Mr. Sowinski
has been designated as a participant in the ETP, subject to the provisions of an
agreement between Mr. Sowinski and D&B. Under the terms of Mr. Sowinski's
agreement, D&B has agreed that during the period through September 30, 2001: (i)
D&B's Chief Executive Officer will not exercise the discretion referred to in
the immediately preceding paragraph in a manner adverse to Mr. Sowinski without
Board approval; (ii) no decision to effect an involuntary termination of Mr.
Sowinski's employment for unsatisfactory job performance (not constituting
cause) shall be effective unless approved by the Board of Directors of D&B; and
(iii) no other modification of the ETP adverse to Mr. Sowinski shall be
applicable to him without his prior written consent. All other New D&B executive
officers named in the Summary Compensation Table above currently participate in
the CTP.
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THE NEW D&B CORPORATION
SECURITY OWNERSHIP BY
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All the outstanding shares of New D&B Common Stock are currently held by
D&B. The following table sets forth the number of shares of New D&B Common Stock
that are expected to be beneficially owned after the Distribution by each of the
New D&B directors, by each of the executive officers named in The New D&B
Corporation Summary Compensation Table above, by all New D&B directors and
executive officers as a group and by each person known by New D&B to
beneficially own more than 5% of the outstanding shares of D&B Common Stock as
of June 30, 2000 ("New D&B 5% Owners"). Stock ownership information is based on
(i) in the case of directors and executive officers, the number of shares of D&B
Common Stock held as of June 30, 2000, (ii) in the case of the number of shares
held by New D&B 5% Owners, filings with the SEC by such New D&B 5% Owners, and
(iii) the Distribution ratio of one share of New D&B Common Stock for every two
shares of D&B Common Stock. See "The Distribution" and "The New D&B Corporation
Management and Executive Compensation--Compensation of The New D&B Corporation
Executive Officers". Information regarding shares subject to options reflects
shares of D&B Common Stock subject to options as of June 30, 2000 and
exercisable within 60 days thereafter, all of which will be converted into
options that are exercisable into shares of New D&B Common Stock and Moody's
Common Stock as described in "Relationship Between The New D&B Corporation and
Moody's Corporation After the Distribution--Employee Benefits Agreement". Unless
otherwise stated, the indicated persons have sole voting and investment power
over the shares listed. Percentages are based upon the number of shares of D&B
Common Stock outstanding on June 30, 2000 plus, where applicable, the number of
shares that the indicated person or group had a right to acquire within 60 days
of such date. The table also sets forth ownership information concerning "Stock
Units", the value of which is measured by the price of New D&B's Common Stock.
Stock Units do not confer voting rights and are not considered "beneficially
owned" shares under SEC rules. The mailing address for each of the New D&B
directors and executive officers listed below is One Diamond Hill Road, Murray
Hill, New Jersey 07974.
AGGREGATE NUMBER OF
NEW D&B PERCENT OF
SHARES BENEFICIALLY D&B SHARES
NAME OWNED(A)(B)(C) STOCK UNITS OUTSTANDING
- ---- ------------------- ----------- -----------
Chester J. Geveda, Jr. ............................. 70,193 0 *
Ronald L. Kuehn, Jr. ............................... 5,407 3,708 *
Allan Z. Loren...................................... (d) 0 *
Victor A. Pelson.................................... 1,349(e) 266 *
Michael R. Quinlan.................................. 5,399 3,869 *
Peter J. Ross....................................... 77,089 0 *
Naomi O. Seligman................................... 554 0 *
Frank S. Sowinski................................... 67,386 0 *
All current directors and executive officers as a
group (8 persons)................................. 227,377 7,843 *
Harris Associates L.P. and its general partner
Harris Associates, Inc. .......................... 4,980,346(f) 0 6.14%
Two North LaSalle Street, Suite 500
Chicago, Illinois 60602-3790
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AGGREGATE NUMBER OF
NEW D&B PERCENT OF
SHARES BENEFICIALLY D&B SHARES
NAME OWNED(A)(B)(C) STOCK UNITS OUTSTANDING
- ---- ------------------- ----------- -----------
Berkshire Hathaway Inc.,
Warren E. Buffett, OBH, Inc., GEICO Corporation,
Government Employees Insurance Company and
National Indemnity Company ....................... 12,000,000(g)(h) 0 14.81%
1440 Kiewit Plaza
Omaha, Nebraska 68131(g)
- ---------------
* Represents less than 1% of outstanding New D&B Common Stock.
(a) Reflects Distribution ratio of one share of New D&B Common Stock for two
shares of D&B Common Stock.
(b) Includes the maximum number of shares of New D&B Common Stock that may be
acquired within 60 days of June 30, 2000 upon the exercise of vested stock
options as follows: Mr. Geveda, 49,232; Mr. Kuehn, 4,680; Mr. Quinlan,
4,680; Mr. Ross, 60,354; Mr. Sowinski, 55,754; and, as a group, 174,700.
(c) Includes shares of restricted New D&B Common Stock as follows: Mr. Kuehn,
727; Mr. Pelson, 349; Mr. Quinlan, 165; Ms. Seligman, 350.
(d) Pursuant to the terms of Mr. Loren's employment agreement, Mr. Loren was
granted 75,000 shares of restricted D&B Common Stock. Upon the Distribution,
this award will be cancelled and will be replaced with a restricted award
consisting solely of shares of New D&B Common Stock. The number of
restricted shares of New D&B Common Stock to be awarded to Mr. Loren can not
be determined at this time as such award will depend on the relative market
prices of the Moody's Common Stock and the New D&B Common Stock at the time
of the Distribution.
(e) Includes 1,000 shares as to which Mr. Pelson maintains shared voting and
shared investment power.
(f) Harris Associates L.P. and its general partner, Harris Associates, Inc.
("Harris"), jointly filed an amended Schedule 13G with the SEC on September
8, 2000. This Schedule 13G shows that Harris, a registered investment
adviser, had, as of August 31, 2000, shared voting power over 9,960,693
shares, sole dispositive power over 4,709,593 shares, and shared dispositive
power over 5,251,000 shares. The number of shares reflected in this Schedule
13G has been adjusted in the above table in accordance with note (a).
(g) Berkshire Hathaway Inc. and OBH, Inc. (parent holding companies), Warren E.
Buffett, GEICO Corporation, Government Employees Insurance Company and
National Indemnity Company jointly filed an amended Schedule 13G with the
SEC on March 10, 2000. This Schedule 13G indicates that, as of February 29,
2000, (a) each of Mr. Buffett, Berkshire Hathaway Inc., OBH, Inc. and
National Indemnity Company had shared voting power and shared dispositive
power over 24,000,000 shares of D&B Common Stock and (b) each of GEICO
Corporation and Government Employees Insurance Company had shared voting
power and shared dispositive power over 7,859,700 shares of D&B Common
Stock. The number of shares of D&B Common Stock reflected in this Schedule
13G has been adjusted in the above table to reflect ownership in New D&B
Common Stock in accordance with note (a).
(h) The foregoing is listed in the filings described in note (g) above as the
address of each of the filing parties except National Indemnity Company,
whose address is listed as 3024 Harney Street, Omaha, Nebraska 68131, GEICO
Corporation, whose address is listed as 1 GEICO Plaza, Washington DC 20076,
and Government Employees Insurance Company, whose address is listed as 1
GEICO Plaza, Washington, DC 20076.
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DESCRIPTION OF THE NEW D&B
CORPORATION CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The total number of shares of all classes of stock that New D&B has
authority to issue under its Restated Certificate of Incorporation is
220,000,000 shares of which 200,000,000 shares represent shares of New D&B
Common Stock, 10,000,000 shares represent shares of Preferred Stock (the "New
D&B Preferred Stock"), of which 500,000 shares have been designated by the New
D&B Board of Directors as New D&B Series A Junior Participating Preferred Stock,
par value $0.01 per share, and 10,000,000 shares represent shares of Series
common stock (the "New D&B Series Common Stock"). Based on 162,427,039 shares of
D&B Common Stock outstanding as of September 20, 2000, and a distribution ratio
of one share of New D&B Common Stock for every two shares of D&B Common Stock,
81,213,520 shares of New D&B Common Stock will be distributed to holders of D&B
Common Stock on the Distribution Date.
NEW D&B COMMON STOCK
Subject to any preferential rights of any New D&B Preferred Stock or New
D&B Series Common Stock created by the Board of Directors of New D&B, each
outstanding share of New D&B Common Stock will be entitled to such dividends, if
any, as may be declared from time to time by the Board of Directors of New D&B.
See "Dividend Policies". Each outstanding share is entitled to one vote on all
matters on which stockholders generally are entitled to vote (except in certain
instances relating solely to the terms of one or more outstanding series of New
D&B Preferred Stock or New D&B Series Common Stock). In the event of
liquidation, dissolution or winding up of New D&B, holders of New D&B Common
Stock are entitled to receive on a pro rata basis any assets remaining after
provision for payment of creditors and after payment of any liquidation
preferences to holders of New D&B Preferred Stock and New D&B Series Common
Stock.
NEW D&B PREFERRED STOCK AND NEW D&B SERIES COMMON STOCK
Each of the authorized New D&B Preferred Stock and the authorized New D&B
Series Common Stock is available for issuance from time to time in one or more
series at the discretion of the New D&B Board of Directors without stockholder
approval, subject to any applicable stock exchange rules. The New D&B Board of
Directors has the authority to prescribe for each series of New D&B Preferred
Stock or New D&B Series Common Stock it establishes the number of shares in that
series, the voting rights (if any) to which such shares in that series are
entitled, the consideration for such shares in that series and the designation,
powers, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, of the
shares in that series. Depending upon the rights of such New D&B Preferred Stock
or New D&B Series Common Stock, as applicable, the issuance of New D&B Preferred
Stock or New D&B Series Common Stock, as applicable, could have an adverse
effect on holders of New D&B Common Stock by delaying or preventing a change in
control of New D&B, making removal of the present management of New D&B more
difficult or resulting in restrictions upon the payment of dividends and other
distributions to the holders of New D&B Common Stock.
AUTHORIZED BUT UNISSUED CAPITAL STOCK
Delaware law does not require stockholder approval for any issuance of
authorized shares. However, the listing requirements of the NYSE, which would
apply so long as the New D&B Common Stock remained listed on the NYSE, require
stockholder approval of certain issuances equal to or exceeding 20% of the then
outstanding voting power or then outstanding number of shares of New D&B Common
Stock. Additional shares may be issued for a variety of corporate purposes,
including future public offerings to raise additional capital or to facilitate
corporate acquisitions. New D&B currently does not have any plans to issue
additional shares of New D&B Common Stock (other than in connection with
employee and director compensation plans), New D&B Preferred Stock (other than
as required by the New D&B Rights Agreement) or New D&B Series Common Stock.
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One of the effects of the existence of unissued and unreserved New D&B
Common Stock, New D&B Preferred Stock and New D&B Series Common Stock may be to
enable the Board of Directors of New D&B to issue shares to persons supportive
of current management. Such an issuance could render more difficult or
discourage an attempt to obtain control of New D&B by means of a merger, tender
offer, proxy contest or otherwise, and thereby protect the continuity of New
D&B's management and possibly deprive the stockholders of opportunities to sell
their shares of New D&B Common Stock at prices higher than prevailing market
prices. Such additional shares also could be used to dilute the stock ownership
of persons seeking to obtain control of New D&B pursuant to the operation of the
New D&B Rights Plan, which is discussed below.
THE NEW D&B CORPORATION RIGHTS PLAN
The Board of Directors of New D&B has declared a dividend of one preferred
share purchase right (a "New D&B Right") for each outstanding share of New D&B
Common Stock. The dividend will be payable on September 8, 2000 (the "New D&B
Record Date") to D&B, which will be the sole stockholder of record on the New
D&B Record Date. Each New D&B Right entitles the registered holder to purchase
from New D&B one one-thousandth of a share of New D&B Series A Junior
Participating Preferred Stock, par value $0.01 per share (the "New D&B
Participating Preferred Stock"), of New D&B at a price of $125 per one one-
thousandth of a share of New D&B Participating Preferred Stock (as the same may
be adjusted, hereinafter referred to as the "New D&B Participating Preferred
Stock Purchase Price"), subject to adjustment. In connection with the adoption
of the New D&B Rights Plan, it is anticipated that the Board of Directors of New
D&B will establish an independent committee of the Board of Directors of New D&B
to review the New D&B Rights Plan and New D&B's other antitakeover measures. See
"--Review of Antitakeover Measures by Independent Board Committee".
New D&B Rights Agreement
The description and terms of the New D&B Rights are set forth in the New
D&B Rights Agreement, dated as of August 15, 2000 (as the same may be amended
from time to time, the "New D&B Rights Agreement"), between New D&B and
EquiServe Trust Company, N.A., as the New D&B Rights Agent (the "New D&B Rights
Agent").
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (with certain
exceptions, hereinafter referred to in this description of New D&B Rights, a
"New D&B Acquiring Person") has acquired beneficial ownership of 15% or more of
the outstanding shares of New D&B Common Stock or (ii) 10 business days (or such
later date as may be determined by action of the Board of Directors prior to
such time as any person or group of affiliated persons becomes a New D&B
Acquiring Person) following the commencement of, or announcement of an intention
to make, a tender offer or exchange offer the consummation of which would result
in the beneficial ownership by a person or group of 15% or more of the
outstanding shares of New D&B Common Stock (the earlier of such dates
hereinafter referred to in this description of New D&B Rights as the "New D&B
Rights Distribution Date"), the New D&B Rights will be evidenced by the
certificates representing New D&B Common Stock.
The New D&B Rights Agreement provides that, until the New D&B Rights
Distribution Date (or earlier redemption or expiration of the New D&B Rights),
the New D&B Rights will be transferred with and only with the New D&B Common
Stock. Until the New D&B Rights Distribution Date (or earlier redemption or
expiration of the New D&B Rights), New D&B Common Stock certificates will
contain a notation incorporating the New D&B Rights Agreement by reference.
Until the New D&B Rights Distribution Date (or earlier redemption or expiration
of the New D&B Rights), the surrender for transfer of any certificates for
shares of New D&B Common Stock will also constitute the transfer of the New D&B
Rights associated with the shares of New D&B Common Stock represented by such
certificate. As soon as practicable following the New D&B Rights Distribution
Date, separate certificates evidencing the New D&B Rights ("New D&B Rights
Certificates") will be mailed to holders of record of the New D&B Common Stock
as of the close of business on the New D&B Rights Distribution Date and such
separate New D&B Rights Certificates alone will evidence the New D&B Rights.
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The New D&B Rights are not exercisable until the New D&B Rights
Distribution Date. The New D&B Rights will expire on August 15, 2010
(hereinafter referred to in this description of New D&B Rights as the "New D&B
Final Expiration Date"), unless the New D&B Final Expiration Date is advanced or
extended or unless the New D&B Rights are earlier redeemed or exchanged by New
D&B, in each case as described below.
The New D&B Participating Preferred Stock Purchase Price payable, and the
number of shares of New D&B Participating Preferred Stock or other securities or
property issuable, upon exercise of the New D&B Rights are subject to adjustment
from time to time to prevent dilution (i) in the event of a stock dividend on,
or a subdivision, combination or reclassification of, the New D&B Participating
Preferred Stock, (ii) upon the grant to holders of the New D&B Participating
Preferred Stock of certain rights or warrants to subscribe for or purchase New
D&B Participating Preferred Stock at a price, or securities convertible into New
D&B Participating Preferred Stock with a conversion price, less than the
then-current market price of the New D&B Participating Preferred Stock or (iii)
upon the distribution to holders of the New D&B Participating Preferred Stock of
evidences of indebtedness or assets (excluding regular periodic cash dividends
or dividends payable in New D&B Participating Preferred Stock) or of
subscription rights or warrants (other than those referred to above).
The New D&B Rights are also subject to adjustment in the event of a stock
dividend on the New D&B Common Stock payable in shares of New D&B Common Stock
or subdivisions, consolidations or combinations of the New D&B Common Stock
occurring, in any such case, prior to the Rights Distribution Date.
Shares of New D&B Participating Preferred Stock purchasable upon exercise
of the New D&B Rights will not be redeemable. Each share of New D&B
Participating Preferred Stock will be entitled, when, as and if declared, to a
minimum preferential quarterly dividend payment equal to the greater of (i) $10
per share and (ii) 1,000 times the dividend declared per share of New D&B Common
Stock. In the event of liquidation, dissolution or winding up of New D&B, the
holders of the New D&B Participating Preferred Stock will be entitled to a
minimum preferential liquidation payment equal to the greater of: (i) $100 per
share (plus any accrued but unpaid dividends) and (ii) 1,000 times the payment
made per share of New D&B Common Stock. In addition, the Certificate of
Designations for such New D&B Participating Preferred Stock will enable holders
thereof to elect two directors of New D&B, if the equivalent of six quarterly
dividends are then in default. Each share of New D&B Participating Preferred
Stock will have 1,000 votes, voting together with the New D&B Common Stock.
Finally, in the event of any merger, consolidation or other transaction in which
shares of New D&B Common Stock are converted or exchanged, each share of New D&B
Participating Preferred Stock will be entitled to receive 1,000 times the amount
received per share of New D&B Common Stock. These rights are protected by
customary antidilution provisions.
Because of the nature of the New D&B Participating Preferred Stock's
dividend, liquidation and voting rights, the value of the one one-thousandth
interest in a share of New D&B Participating Preferred Stock purchasable upon
exercise of each New D&B Right should approximate the value of one share of New
D&B Common Stock.
In the event that any person or group of affiliated or associated persons
becomes a New D&B Acquiring Person, each holder of a New D&B Right, other than
New D&B Rights beneficially owned by the New D&B Acquiring Person (which will
thereupon become void), will thereafter have the right to receive upon exercise
of a New D&B Right and payment of the New D&B Participating Preferred Stock
Purchase Price, that number of shares of New D&B Common Stock having a market
value of two times the New D&B Participating Preferred Stock Purchase Price.
In the event that, after a person or group has become a New D&B Acquiring
Person, New D&B is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are sold,
proper provision will be made so that each holder of a New D&B Right (other than
New D&B Rights beneficially owned by a New D&B Acquiring Person which will have
become void) will thereafter have the right to receive, upon the exercise
thereof, that number of shares of common stock of the person with whom New D&B
has engaged in the foregoing transaction (or its parent), which number of shares
at the time of such transaction will have a market value of two times the New
D&B Participating Preferred Stock Purchase Price.
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At any time after any person or group becomes a New D&B Acquiring Person
and prior to the acquisition by such person or group of 50% or more of the
outstanding shares of New D&B Common Stock or the occurrence of an event
described in the prior paragraph, the Board of Directors of New D&B may exchange
the New D&B Rights (other than New D&B Rights owned by such person or group
which will have become void), in whole or in part, at an exchange ratio of one
share of New D&B Common Stock, or a fractional share of New D&B Participating
Preferred Stock of equivalent value (or of a share of a class or series of New
D&B's Preferred Stock having similar rights, preferences and privileges), per
New D&B Right (subject to adjustment).
With certain exceptions, no adjustment in the New D&B Participating
Preferred Stock Purchase Price will be required until cumulative adjustments
require an adjustment of at least 1% in such New D&B Participating Preferred
Stock Purchase Price. No fractional shares of New D&B Participating Preferred
Stock will be issued (other than fractions which are integral multiples of one
one-thousandth of a share of New D&B Participating Preferred Stock, which may,
at the election of New D&B, be evidenced by depositary receipts) and in lieu
thereof, an adjustment in cash will be made based on the market price of the New
D&B Participating Preferred Stock on the last trading period to the date of
exercise.
At any time prior to the time a New D&B Acquiring Person becomes such, the
Board of Directors of New D&B may redeem the New D&B Rights in whole, but not in
part, at a price of $0.01 per New D&B Right (hereinafter referred to in this
description of New D&B Rights as the "New D&B Redemption Price"). The redemption
of the New D&B Rights may be made effective at such time, on such basis and with
such conditions as the Board of Directors in its sole discretion may establish.
Immediately upon any redemption of the New D&B Rights, the right to exercise the
New D&B Rights will terminate and the only right of the holders of New D&B
Rights will be to receive the New D&B Redemption Price.
For so long as the New D&B Rights are then redeemable, New D&B may, except
with respect to the New D&B Redemption Price, amend the New D&B Rights in any
manner. After the New D&B Rights are no longer redeemable, New D&B may, except
with respect to the New D&B Redemption Price, amend the New D&B Rights in any
manner that does not adversely affect the interests of holders of the New D&B
Rights.
Until a New D&B Right is exercised, the holder thereof, as such, will have
no rights as a stockholder of New D&B, including, without limitation, the right
to vote or to receive dividends.
A copy of the form of New D&B Rights Agreement has been filed as an exhibit
to the Registration Statement on Form 10 of New D&B in respect of the
registration of the New D&B Common Stock under the Exchange Act. A copy of the
New D&B Rights Agreement is available free of charge from New D&B. The summary
description of the New D&B Rights set forth above does not purport to be
complete and is qualified in its entirety by reference to the New D&B Rights
Agreement, as the same may be amended from time to time, which is hereby
incorporated herein by reference.
CERTAIN EFFECTS OF THE NEW D&B CORPORATION RIGHTS AGREEMENT
The New D&B Rights Agreement is designed to protect stockholders of New D&B
in the event of unsolicited offers to acquire New D&B and other coercive
takeover tactics which, in the opinion of the Board of Directors of New D&B,
could impair its ability to represent stockholder interests. These provisions
also may minimize the prospects of changes in control that could jeopardize the
tax-free nature of the Distribution. The provisions of the New D&B Rights
Agreement may render an unsolicited takeover of New D&B more difficult or less
likely to occur or might prevent such a takeover, even though such takeover may
offer New D&B's stockholders the opportunity to sell their stock at a price
above the prevailing market rate and may be favored by a majority of the
stockholders of New D&B.
NO PREEMPTIVE RIGHTS
No holder of any class of stock of New D&B authorized at the time of the
Distribution will have any preemptive right to subscribe to any securities of
New D&B of any kind or class.
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GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
The terms of Section 203 of the DGCL apply to New D&B since it is a
Delaware corporation. Pursuant to Section 203, with certain exceptions, a
Delaware corporation may not engage in any of a broad range of business
combinations, such as mergers, consolidations and sales of assets, with an
"interested stockholder" for a period of three years from the time that such
person became an interested stockholder unless (a) the transaction that results
in the person becoming an interested stockholder or the business combination is
approved by the board of directors of the corporation before the person becomes
an interested stockholder, (b) upon consummation of the transaction which
results in the stockholder becoming an interested stockholder, the interested
stockholder owns 85% or more of the voting stock of the corporation outstanding
at the time the transaction commenced, excluding shares owned by persons who are
directors and also officers and shares owned by certain employee stock plans or
(c) on or after the time the person becomes an interested stockholder, the
business combination is approved by the corporation's board of directors and by
holders of at least two-thirds of the corporation's outstanding voting stock,
excluding shares owned by the interested stockholder, at a meeting of
stockholders. Under Section 203, an "interested stockholder" is defined as any
person, other than the corporation and any direct or indirect majority-owned
subsidiary, that is (a) the owner of 15% or more of the outstanding voting stock
of the corporation or (b) an affiliate or associate of the corporation and was
the owner of 15% or more of the outstanding voting stock of the corporation at
any time within the three-year period immediately prior to the date on which it
is sought to be determined whether such person is an interested stockholder.
Section 203 does not apply to a corporation that so provides in an amendment to
its certificate of incorporation or by-laws passed by a majority of its
outstanding shares, but such stockholder action does not become effective for 12
months following its adoption and would not apply to persons who were already
interested stockholders at the time of the amendment. New D&B's Restated
Certificate of Incorporation does not exclude New D&B from the restrictions
imposed under Section 203.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period. The provisions of
Section 203 may encourage companies interested in acquiring New D&B to negotiate
in advance with New D&B's Board of Directors, because the stockholder approval
requirement would be avoided if the Board of Directors approves either the
business combination or the transaction which results in the stockholder
becoming an interested stockholder. Such provisions also may have the effect of
preventing changes in the Board of Directors of New D&B. It is further possible
that such provisions could make it more difficult to accomplish transactions
which stockholders may otherwise deem to be in their best interests.
PROVISIONS OF THE NEW D&B CORPORATION RESTATED CERTIFICATE OF INCORPORATION AND
AMENDED AND RESTATED BY-LAWS AFFECTING CHANGE IN CONTROL
Certain provisions of the New D&B Restated Certificate of Incorporation and
Amended and Restated By-laws may delay or make more difficult unsolicited
acquisitions or changes of control of New D&B. It is believed that such
provisions will enable New D&B to develop its business in a manner that will
foster its long-term growth without disruption caused by the threat of a
takeover not deemed by its Board of Directors to be in the best interests of New
D&B and its stockholders. Such provisions could have the effect of discouraging
third parties from making proposals involving an unsolicited acquisition or
change of control of New D&B, although such proposals, if made, might be
considered desirable by a majority of New D&B's stockholders. Such provisions
may also have the effect of making it more difficult for third parties to cause
the replacement of the current Board of Directors of New D&B. These provisions
include (i) the availability of capital stock for issuance from time to time at
the discretion of the Board of Directors (see "--Authorized But Unissued Capital
Stock"), (ii) prohibitions against stockholders calling a special meeting of
stockholders or acting by written consent in lieu of a meeting, (iii)
requirements for advance notice for raising business or making nominations at
stockholders' meetings, (iv) the ability of the Board of Directors to increase
the size of the board and to appoint directors to newly created directorships,
(v) a classified Board of Directors and (vi) higher than majority requirements
to make certain amendments to the By-laws and Certificate of Incorporation.
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No Stockholder Action by Written Consent; Special Meetings
The New D&B Restated Certificate of Incorporation and Amended and Restated
By-laws provide that stockholder action can be taken only at an annual or
special meeting and cannot be taken by written consent in lieu of a meeting. The
New D&B Restated Certificate of Incorporation and Amended and Restated By-laws
also provide that special meetings of the stockholders can be called only by the
Chief Executive Officer of New D&B or by a vote of the majority of the Board of
Directors. Furthermore, the By-laws of New D&B provide that only such business
as is specified in the notice of any such special meeting of stockholders may
come before such meeting.
Advance Notice for Raising Business or Making Nominations at Meetings
The Amended and Restated By-laws of New D&B establish an advance notice
procedure for stockholder proposals to be brought before an annual meeting of
stockholders and for nominations by stockholders of candidates for election as
directors at an annual or special meeting at which directors are to be elected.
Only such business may be conducted at an annual meeting of stockholders as has
been brought before the meeting by, or at the direction of, the Chairman of the
Board of Directors of New D&B, or by a stockholder of New D&B who is entitled to
vote at the meeting who has given to the Secretary of New D&B timely written
notice, in proper form, of the stockholder's intention to bring that business
before the meeting. The chairman of such meeting has the authority to make such
determinations. Only persons who are nominated by, or at the direction of, the
Chairman of the Board of Directors, or who are nominated by a stockholder who
has given timely written notice, in proper form, to the Secretary prior to a
meeting at which directors are to be elected will be eligible for election as
directors of New D&B.
To be timely, a stockholder's notice of business to be brought before an
annual meeting and nominations of candidates for election as directors at any
annual meeting shall be delivered to the Secretary of New D&B at the principal
executive offices of New D&B not less than 90 days nor more than 120 days prior
to the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is advanced by
more than 20 days, or delayed by more than 70 days, from such anniversary date,
notice by the stockholder to be timely must be so delivered not earlier than the
one hundred and twentieth day prior to such annual meeting and not later than
the close of business on the later of the ninetieth day prior to such annual
meeting or the tenth day following the day on which public announcement of the
date of such meeting is first made.
To be timely, a stockholder's notice of nominations of persons for election
to the Board of Directors may be made at such a special meeting of stockholders
if the stockholder's notice shall be delivered to the Secretary of New D&B at
the principal executive offices of New D&B not earlier than the one hundred-
twentieth day prior to such special meeting and not later than the close of
business on the later of the ninetieth day prior to such special meeting or the
tenth day following the day on which public announcement is first made of the
date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting.
The notice of any nomination for election as a director must set forth,
among other things, the name and address of, and the class and number of shares
of New D&B held by, the stockholder who intends to make the nomination and the
beneficial owner, if any, on whose behalf the nomination is being made; the name
and address of the person or persons to be nominated; a representation that the
stockholder is a holder of record of stock of New D&B entitled to vote at such
meeting and intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice; a description of all arrangements
or understandings between the stockholder and each nominee and any other person
or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; such other information regarding
each nominee proposed by such stockholder as would have been required to be
included in a proxy statement filed pursuant to the proxy rules of the SEC had
each nominee been nominated, or intended to be nominated, by the Board of
Directors; and the consent of each nominee to serve as a director if so elected
and other matters set forth in the Amended and Restated By-Laws of New D&B.
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Number of Directors; Filling of Vacancies; Removal
The New D&B Restated Certificate of Incorporation and Amended and Restated
By-laws provide that newly created directorships resulting from an increase in
the authorized number of directors (or any vacancy) may only be filled by a vote
of a majority of directors then in office, although less than a quorum, or by a
sole remaining director. Accordingly, the Board of Directors of New D&B may be
able to prevent any stockholder from obtaining majority representation on the
Board of Directors by increasing the size of the board and filling the newly
created directorships with its own nominees. If any applicable provision of the
DGCL expressly confers power on stockholders to fill such a directorship at a
special meeting of stockholders, such a directorship may be filled at such
meeting only by the affirmative vote of at least 80% in voting power of all
shares of New D&B entitled to vote generally in the election of directors,
voting as a single class. Directors may be removed only for cause, and only by
the affirmative vote of at least 80% in voting power of all shares of New D&B
entitled to vote generally in the election of directors, voting as a single
class. In addition, holders of New D&B Participating Preferred Stock may elect
two directors of New D&B if New D&B has failed to pay the equivalent of six
quarterly dividend payments. See "The New D&B Corporation Rights Plan--New D&B
Rights Agreement".
Classified Board of Directors
The New D&B Restated Certificate of Incorporation provides for New D&B's
Board of Directors to be divided into three classes of directors serving
staggered three-year terms. As a result, approximately one third of New D&B's
Board of Directors will be elected each year. See "The New D&B Corporation
Management and Executive Compensation--The New D&B Corporation Board of
Directors".
New D&B believes that a classified board will help to assure the continuity
and stability of its Board of Directors, and its business strategies and
policies as determined by its Board, because a majority of the directors at any
given time will have prior experiences as directors of New D&B. This provision
should also help to ensure that New D&B's Board of Directors, if confronted with
an unsolicited proposal from a third party that has acquired a block of New
D&B's voting stock, will have sufficient time to review the proposal and
appropriate alternatives and to seek the best available result for all
stockholders.
This provision could prevent a party who acquires control of a majority of
the outstanding voting stock from obtaining control of New D&B's Board of
Directors until the second annual stockholders meeting following the date the
acquiror obtains the controlling stock interest, could have the effect of
discouraging a potential acquiror from making a tender offer or otherwise
attempting to obtain control of New D&B and could thus increase the likelihood
that incumbent directors will retain their positions. Although a classified
board enhances New D&B's ability to negotiate more favorable terms with a
potential acquiror, it does not preclude takeover offers.
Amendments to the Amended and Restated By-laws
The New D&B Restated Certificate of Incorporation provides that the
affirmative vote of the holders of at least 80% in voting power of all the
shares of New D&B entitled to vote generally in the election of directors,
voting together as a single class, shall be required in order for the
stockholders to alter, amend or repeal any provision of the Amended and Restated
By-laws which is to the same effect as provisions contained in the Restated
Certificate of Incorporation relating to (i) the amendment of the Amended and
Restated By-laws, (ii) the classified Board of Directors and the filling of
director vacancies and (iii) calling and taking actions at meetings of
stockholders and prohibiting stockholders from taking action by written consent.
Amendments to the Restated Certificate of Incorporation
The New D&B Restated Certificate of Incorporation requires the affirmative
vote of the holders of at least 80% in voting power of all the shares of New D&B
entitled to vote generally in the election of directors, voting together as a
single class, to alter, amend or repeal provisions of the Restated Certificate
of Incorporation relating to (i) the amendment of the Restated Certificate of
Incorporation and/or the Amended and Restated By-laws, (ii) the classified Board
of Directors and the filling of director vacancies and
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(iii) calling and taking actions at meetings of stockholders and prohibiting
stockholders from taking action by written consent.
REVIEW OF ANTITAKEOVER MEASURES BY INDEPENDENT BOARD COMMITTEE
In connection with the adoption of the New D&B Rights Plan, it is
anticipated that the Board of New D&B will establish an independent committee of
the Board to review the New D&B Rights Plan and New D&B's other antitakeover
measures. Within two years of the Distribution, the independent committee will
report to the Board of Directors of New D&B as to whether the New D&B Rights
Plan and such other measures continue to be in the best interests of the New D&B
stockholders. If it deems appropriate, the independent committee will recommend
to the Board whether all or some of such measures should be modified or
terminated.
INDEMNIFICATION AND LIMITATION OF LIABILITY FOR DIRECTORS AND OFFICERS
The New D&B Restated Certificate of Incorporation provides that New D&B
shall indemnify directors and officers to the fullest extent permitted by the
laws of the State of Delaware. The New D&B Restated Certificate of Incorporation
also provides that a director of New D&B shall not be liable to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the DGCL as the same exists or may hereafter be
amended.
A Delaware corporation may indemnify any person who was, is or is
threatened to be made a party to any threatened, pending or completed action or
suit by reason of the fact that the person was a director, officer, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. In the case of an action or suit by or in the right of the
corporation, the indemnity may include expenses (including attorney fees)
incurred by the person in connection with the defense or settlement of such
action or suit, provided the person acted in good faith and in a manner he or
she reasonably believed to be in, or not opposed to, the corporation's best
interests, provided that no such indemnification is permitted without judicial
approval if the officer, director, employee or agent is adjudged to be liable to
the corporation. In the case of a non-derivative action or suit, the indemnity
may include expenses (including attorney fees), judgments, fines and amounts
paid in settlement incurred by the person in connection of such action or suit,
provided the person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the corporation, and
with respect to any criminal proceedings, had no reasonable cause to believe the
person's conduct was unlawful. To the extent that a present or former director
or officer has been successful on the merits or otherwise in the defense of any
action referred to above, the corporation must indemnify him or her against the
expenses which the officer or director has actually and reasonably incurred.
Section 145 of the DGCL authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against the person and incurred by the person in
any such capacity, arising out of his or her status as such, whether or not the
corporation would otherwise have the power to indemnify him or her under Section
145.
The indemnification rights conferred by the Restated Certificate of
Incorporation of New D&B are not exclusive of any other right to which a person
seeking indemnification may otherwise be entitled. New D&B will also provide
liability insurance for the directors and officers for certain losses arising
from claims or charges made against them, while acting in their capacities as
directors or officers.
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MOODY'S CORPORATION
CAPITALIZATION
The following table sets forth the pro forma historical capitalization of
Moody's as of June 30, 2000 and as adjusted to give effect to the Distribution
and the transactions contemplated thereby. The following data is qualified in
its entirety by the combined financial statements of Moody's presented on a
stand-alone basis and the other information contained elsewhere in this
Information Statement. See "Forward-Looking Statements".
PRO FORMA
HISTORICAL PRO FORMA
AS OF AS ADJUSTED
JUNE 30, FOR THE
2000(1) DISTRIBUTION(2)
---------- ---------------
(DOLLAR AMOUNTS IN MILLIONS,
EXCEPT SHARE AND PER SHARE
DATA)
Cash........................................................ $ 14.6 $ 14.6
====== =======
Long-Term Debt.............................................. -- 275.9
Preferred Stock, par value $.01 per share,
authorized -- 10,000,000 shares, issued and
outstanding -- none.......................................
Series Common Stock, par value $.01 per share, authorized --
10,000,000 shares, issued and outstanding -- none.........
Common Stock, par value $.01 per share, authorized --
400,000,000 shares, issued and outstanding -- 171,451,136
shares, less treasury shares of 9,351,779................. 1.6 1.6
Cumulative Translation Adjustment........................... (3.2) (3.2)
Retained Earnings (Deficit)................................. (39.3) (315.2)
------ -------
Total Equity (Deficit)............................ (40.9) (316.8)
------ -------
Total Capitalization.............................. $(40.9) $ (40.9)
====== =======
- ---------------
(1) The Pro Forma Historical column reflects the recapitalization of Moody's at
the date of the Distribution. See "Moody's Unaudited Combined Pro Forma
Condensed Financial Statements".
(2) In connection with the Distribution, D&B borrowed funds to repay in full its
commercial paper obligations. Also in connection with the Distribution,
responsibility for D&B's obligations under the minority interest financing
(relating to the investment partnership described in Note 12 to D&B's
Consolidated Financial Statements and Notes thereto included elsewhere in
this Information Statement) will be allocated to New D&B. It is currently
estimated that New D&B also will assume a portion of the indebtedness of D&B
and receive a portion of the cash of D&B in amounts such that, at the time
of the Distribution and after giving effect to the agreement discussed below
and certain other factors, the net indebtedness of New D&B (plus the
minority interest obligations) will approximate the net indebtedness of
Moody's. As indicated under "Relationship Between the New D&B Corporation
and Moody's Corporation After the Distribution--Employee Benefits
Agreement", substantially all unexercised D&B stock options will be adjusted
as of the Distribution Date to comprise options to purchase Moody's Common
Stock and separately exercisable options to purchase New D&B Common Stock.
In light of, among other things, the numbers of optionees to be employed by
New D&B and Moody's, respectively, this adjustment will result in a
substantially greater number of outstanding options to purchase Moody's
Common Stock than would be the case if options were adjusted so as to become
solely options to purchase common stock of the optionee's employer. Due to
this fact and the fact that, consistent with past practice, each of New D&B
and Moody's is expected to maintain a stock purchase program designed to
offset the increased number of shares otherwise attributable to option
exercises, New D&B has agreed to adjust the net indebtedness of the two
companies to compensate Moody's for the disproportionate amount of its
estimated future cash costs in this regard. The exact amount of the
adjustment discussed in the immediately preceding sentence will be
determined on a formula basis and will be dependent upon a variety of
factors, including the respective trading prices of Moody's Common Stock and
New D&B Common Stock at the time of the Distribution.
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MOODY'S CORPORATION
SELECTED FINANCIAL DATA
The following data is qualified in its entirety by the Combined Financial
Statements of Moody's Corporation and other information contained elsewhere in
this Information Statement. The Selected Financial Data of Moody's as of
December 31, 1998 and 1999, and for each of the years in the three-year period
ended December 31, 1999, are derived from the audited financial statements of
Moody's included elsewhere in this Information Statement. Moody's audited
financial statements are presented as if Moody's were a stand-alone entity for
all periods presented. The Selected Financial Data of Moody's as of December 31,
1995, 1996 and 1997, and for the years ended December 31, 1995 and 1996, are
derived from the unaudited financial statements of Moody's, and, in the opinion
of Moody's management, include all necessary adjustments for a fair presentation
of such data in conformity with generally accepted accounting principles. The
Selected Financial Data as of June 30, 2000 and for the six months ended June
30, 1999 and 2000 have been derived from the unaudited interim financial
statements of Moody's included elsewhere in this Information Statement, and, in
the opinion of management, include all necessary adjustments for a fair
presentation of such data in conformity with generally accepted accounting
principles. The financial data included herein may not necessarily reflect the
results of operations and financial position of Moody's in the future or what
they would have been had it been a separate entity. The information set forth
below should be read in conjunction with the information under "Moody's
Corporation Capitalization", "Moody's Corporation Unaudited Combined Pro Forma
Condensed Financial Statements", "Moody's Corporation Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Moody's
Corporation Combined Financial Statements and Notes thereto included elsewhere
in this Information Statement.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
HISTORICAL PRO
------------------------------------------------------------------- FORMA(1)
1995 1996 1997 1998 1999 1999
----------- ----------- ----------- ----------- ----------- ------------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
RESULTS OF OPERATIONS(2):
Revenues................ $ 329.7 $ 385.3 $ 457.4 $ 513.9 $ 564.2 $ 564.2
Expenses(3)............. 215.1 252.0 267.4 288.4 293.8 293.8
Non-operating Income
(Expense), Net(4)..... .3 (.3) .2 12.4 8.5 0.7
----------- ----------- ----------- ----------- ----------- ------------
Income Before Provision
for Income Taxes...... 114.9 133.0 190.2 237.9 278.9 271.1
Provision for Income
Taxes................. 26.7 56.0 64.0 95.9 123.3 119.9
----------- ----------- ----------- ----------- ----------- ------------
Income Before Cumulative
Effect of Accounting
Change................ 88.2 77.0 126.2 142.0 155.6 151.2
Cumulative Effect of
Accounting Change, Net
of Income Tax
Benefit(5)............ -- -- (20.3) -- -- --
----------- ----------- ----------- ----------- ----------- ------------
Net Income.............. $ 88.2 $ 77.0 $ 105.9 $ 142.0 $ 155.6 $ 151.2
=========== =========== =========== =========== =========== ============
PRO FORMA EARNINGS PER
SHARE(6):
Basic................... $ .52 $ .45 $ .62 $ .84 $ .96 $ .93
Diluted................. $ .51 $ .45 $ .61 $ .83 $ .95 $ .92
SHARES USED IN COMPUTING
PRO FORMA EARNINGS PER
SHARE(5):
Basic................... 169,522,000 170,017,000 170,765,000 169,492,000 162,253,000 162,253,000
Diluted................. 171,608,000 171,576,000 172,552,000 171,703,000 164,284,000 164,284,000
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------------
HISTORICAL PRO
------------------------- FORMA(1)
1999 2000 2000
----------- ----------- -----------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
RESULTS OF OPERATIONS(2):
Revenues................ $ 284.5 $ 288.7 $ 288.7
Expenses(3)............. 149.6 150.1 150.1
Non-operating Income
(Expense), Net(4)..... (.2) .5 (5.0)
----------- ----------- -----------
Income Before Provision
for Income Taxes...... 134.7 139.1 133.6
Provision for Income
Taxes................. 59.5 61.5 59.1
----------- ----------- -----------
Income Before Cumulative
Effect of Accounting
Change................ 75.2 77.6 74.5
Cumulative Effect of
Accounting Change, Net
of Income Tax
Benefit(5)............ -- -- --
----------- ----------- -----------
Net Income.............. $ 75.2 $ 77.6 $ 74.5
=========== =========== ===========
PRO FORMA EARNINGS PER
SHARE(6):
Basic................... $ .46 $ .48 $ .46
Diluted................. $ .45 $ .48 $ .46
SHARES USED IN COMPUTING
PRO FORMA EARNINGS PER
SHARE(5):
Basic................... 163,627,000 161,541,000 161,541,000
Diluted................. 166,186,000 162,793,000 162,793,000
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AS OF DECEMBER 31, AS OF JUNE 30,
--------------------------------------------- -------------------------
HISTORICAL
--------------------------------------------- HISTORICAL PRO FORMA(1)
1995 1996 1997 1998 1999 2000 2000
------ ------ ------- ------- ------- ---------- ------------
(DOLLAR AMOUNTS IN
(DOLLAR AMOUNTS IN MILLIONS) MILLIONS)
BALANCE SHEET DATA:
Total Assets.......................... $217.8 $271.8 $ 266.5 $ 296.2 $ 283.1 $ 287.7 $ 288.7
Long-Term Debt........................ -- -- -- -- -- -- 275.9
Shareholder's Net Investment.......... 33.5 (83.9) (152.9) (192.6) (223.1) (40.9) (316.8)
- ---------------
(1) See "Moody's Corporation Unaudited Combined Pro Forma Condensed Financial
Statements".
(2) The Selected Financial Data above includes the following amounts related to
the FIS business that was sold in July 1998:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997 1998
----- ----- ----- -----
(DOLLAR AMOUNTS IN MILLIONS)
Revenues................................................ $35.6 $35.6 $34.3 $18.4
Operating Income........................................ 8.1 6.7 5.8 4.2
(3) Moody's expenses include allocation of costs from D&B for centralized
services and other D&B corporate overhead. Expenses related to these
services have been allocated to Moody's based on utilization of specific
services, or, where an estimate could not be determined, based on Moody's
revenue in proportion to D&B's total revenues. Although Moody's management
believes these allocations are reasonable, such allocated costs are not
necessarily indicative of the actual costs that would have been incurred if
Moody's had to provide or obtain these services as a separate entity. The
allocations included in expenses in the Combined Statements of Operations
were $16.0 million, $16.9 million, $15.8 million, $16.4 million and $17.2
million in 1995, 1996, 1997, 1998 and 1999, respectively, and were $8.6 and
$8.9 million for the six months ended June 30, 1999 and 2000, respectively.
(4) Includes gain on sale of FIS of $9.2 million and $12.6 million for the years
ended 1999 and 1998, respectively.
(5) Represents the impact of a change in revenue recognition policies. See Note
1 to the Moody's Corporation Financial Statements and Notes thereto included
elsewhere in this Information Statement.
(6) The computation of pro forma basic earnings per share for the periods
presented is based upon the historical weighted average number of shares of
D&B Common Stock outstanding, reflecting the Distribution. The computation
of pro forma diluted earnings per share is calculated by dividing net income
by the sum of D&B's historical weighted average common shares outstanding
and potentially dilutive shares of D&B Common Stock which approximates
Moody's potentially diluted shares. Potentially dilutive common shares are
calculated in accordance with the treasury stock method, which assumes that
proceeds from the exercise of all stock options are used to repurchase D&B
Common Stock at market value. The calculation is based on the fact that, at
the Distribution Date, each outstanding D&B Stock Option (other than those
stock options held by Mr. Loren) will convert into separately exercisable
Moody's Stock Options and New D&B Stock Options, regardless of whether
Moody's or New D&B employs such option holder after the Distribution. At the
time of the Distribution, the number of shares covered by the Moody's Stock
Options will equal the same number of shares covered by the unexercised
historical D&B stock options. See "Relationship Between The New D&B
Corporation and Moody's Corporation After the Distribution--Employee
Benefits Agreement".
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MOODY'S CORPORATION
UNAUDITED COMBINED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited combined pro forma condensed financial statements
have been prepared giving effect to the Distribution as if it occurred on June
30, 2000 for the pro forma condensed balance sheet and January 1, 1999 for the
pro forma condensed statements of operations. The unaudited combined pro forma
condensed balance sheet and statements of operations set forth below do not
purport to represent what Moody's financial position and results of operations
actually would have been had the Distribution occurred on the dates indicated or
to project Moody's operating results for any future period. The pro forma
adjustments are based upon available information and certain assumptions that
management of Moody's believes are reasonable. The unaudited combined pro forma
condensed financial statements set forth below should be read in conjunction
with, and are qualified in their entirety by, the information under "Moody's
Corporation Selected Financial Data" and "Moody's Corporation Management's
Discussion and Analysis of Financial Condition and Results of Operations" and in
the Moody's Corporation Combined Financial Statements and Notes thereto included
elsewhere in this Information Statement.
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MOODY'S CORPORATION
UNAUDITED COMBINED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA(G)
-------------- -------------- ---------------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues............................................. $ 564.2 $ 564.2
Expenses:
Operating Expenses................................. 184.9 184.9
General and Administrative Expenses................ 95.9 95.9(A)
Depreciation and Amortization...................... 13.0 13.0
----------- -----------
Total Expenses.................................. 293.8 293.8
----------- -----------
Operating Income..................................... 270.4 270.4
----------- -----------
Gain on Sale of Business............................. 9.2 9.2
Interest Income (Expense), Net....................... -- $ (7.6)(C) (7.8)
(.2)(E)
Other Non-operating Expense.......................... (.7) (.7)
----------- ------ -----------
Non-operating Income (Expense), Net.................. 8.5 (7.8) 0.7
----------- ------ -----------
Income Before Provision for Income Taxes............. 278.9 (7.8) 271.1
Provision for Income Taxes........................... 123.3 (3.4)(F) 119.9
----------- ------ -----------
Net Income........................................... $ 155.6 $ (4.4) $ 151.2
=========== ====== ===========
Pro Forma Earnings Per Share:
Basic.............................................. $ .96 $ .93
Diluted............................................ $ .95 $ .92
Shares Used in Computing Pro Forma Earnings Per
Share:
Basic.............................................. 162,253,000 162,253,000
Diluted............................................ 164,284,000 164,284,000
See Notes to Moody's Corporation Unaudited Combined Pro Forma Condensed
Financial Statements
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MOODY'S CORPORATION
UNAUDITED COMBINED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
---------------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA(G)
-------------- -------------- ---------------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues............................................. $ 288.7 $ 288.7
Expenses:
Operating, General and Administrative Expenses..... 141.8 141.8(A)
Depreciation and Amortization...................... 8.3 8.3
----------- -----------
Total Expenses.................................. 150.1 150.1
----------- -----------
Operating Income..................................... 138.6 138.6
----------- -----------
Interest Income (Expense) Net........................ -- $ (3.8)(C1) (5.5)
(1.6)(C2)
(0.1)(E)
Other Non-operating Income, Net...................... .5 .5
----------- ------ -----------
Non-operating Income (Expense), Net.................. .5 (5.5) (5.0)
----------- ------ -----------
Income before Provision for Income Taxes............. 139.1 (5.5) 133.6
Provision for Income Taxes........................... 61.5 (2.4)(F) 59.1
----------- ------ -----------
Net Income........................................... $ 77.6 $ (3.1) $ 74.5
=========== ====== ===========
Pro Forma Earnings Per Share:
Basic.............................................. $ .48 $ .46
Diluted............................................ $ .48 $ .46
Shares Used in Computing Pro Forma Earnings Per
Share:
Basic.............................................. 161,541,000 161,541,000
Diluted............................................ 162,793,000 162,793,000
See Notes to Moody's Corporation Unaudited Combined Pro Forma Condensed
Financial Statements
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MOODY'S CORPORATION
UNAUDITED COMBINED PRO FORMA CONDENSED BALANCE SHEET
AS OF JUNE 30, 2000
--------------------------------------------------------
PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA(G)
---------- ---------- ----------- ------------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
ASSETS:
Current Assets:
Cash...................................... $ 14.6 $ 14.6 $ 14.6
Other Current Assets...................... 145.9 145.9 145.9
------- -------
Total Current Assets.............. 160.5 160.5 160.5
Non-Current Assets.......................... 127.2 127.2 $ 1.0(D) 128.2
------- ------- ------- -------
Total Assets...................... $ 287.7 $ 287.7 $ 1.0 $ 288.7
======= ======= ======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
(DEFICIT):
Current Liabilities......................... $ 200.3(B) $ 200.3 $ 1.0(D) $ 201.3
Long-Term Debt.............................. -- -- 100.9(B1) 275.9
175.0(B2)
Other Liabilities........................... 128.3 128.3 128.3
------- ------- ------- -------
Total Liabilities................. 328.6 328.6 276.9 605.5
------- ------- ------- -------
SHAREHOLDER'S EQUITY (DEFICIT):
Preferred Stock, par value $.01 per share,
Authorized -- 10,000,000 shares, Issued
and Outstanding -- None................ -- -- --
Series Common Stock, par value $.01 per
share, Authorized -- 10,000,000 shares,
Issued and Outstanding -- None......... -- -- --
Common Stock, par value $.01 per share,
Authorized -- 400,000,000 shares,
Issued and Outstanding -- 171,451,136
shares, less Treasury
Shares -- 9,351,779.................... -- 1.6 1.6
Retained Earnings (Deficit)............... (39.3) (275.9) (315.2)
Cumulative Translation Adjustment......... (3.2) -- (3.2)
Shareholder's Net Investment.............. (40.9)
------- ------- ------- -------
Total Shareholder's Equity
(Deficit)....................... (40.9) (40.9) (275.9) (316.8)
------- ------- ------- -------
Total Liabilities and
Shareholder's Equity............ $ 287.7 $ 287.7 $ 1.0 $ 288.7
======= ======= ======= =======
See Notes to Moody's Corporation Unaudited Combined Pro Forma Condensed
Financial Statements
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MOODY'S CORPORATION
NOTES TO UNAUDITED COMBINED PRO FORMA CONDENSED FINANCIAL STATEMENTS
(A) Management of Moody's presently estimates a net increase in annual general
and administrative expenses of approximately $4.5 million associated with
operating as a separate publicly owned company, which expenses are not reflected
in the combined pro forma condensed financial statements.
(B) In connection with the Distribution, D&B borrowed funds to repay in full its
commercial paper obligations. Also in connection with the Distribution,
responsibility for D&B's obligations under the minority interest financing
(relating to the investment partnership described in Note 12 to D&B's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Information Statement) will be allocated to New D&B. It is currently estimated
that New D&B also will assume a portion of the indebtedness of D&B and receive a
portion of the cash of D&B in amounts such that, at the time of the Distribution
and after giving effect to the agreement discussed below and certain other
factors, the net indebtedness of New D&B (plus the minority interest
obligations) will approximate the net indebtedness of Moody's. As indicated
under "Relationship Between The New D&B Corporation and Moody's Corporation
After the Distribution--Employee Benefits Agreement", substantially all
unexercised D&B stock options will be adjusted as of the Distribution Date to
comprise options to purchase Moody's Common Stock and separately exercisable
options to purchase New D&B Common Stock. In light of, among other things, the
numbers of optionees to be employed by New D&B and Moody's, respectively, this
adjustment will result in a substantially greater number of outstanding options
to purchase Moody's Common Stock than would be the case if options were adjusted
so as to become solely options to purchase common stock of the optionee's
employer. Due to this fact and the fact that, consistent with past practice,
each of New D&B and Moody's is expected to maintain a stock purchase program
designed to offset the increased number of shares otherwise attributable to
option exercises, New D&B has agreed to adjust the net indebtedness of the two
companies to compensate Moody's for the disproportionate amount of its estimated
future cash costs in this regard. The exact amount of the adjustment discussed
in the immediately preceding sentence will be determined on a formula basis and
will be dependent upon a variety of factors, including the respective trading
prices of Moody's Common Stock and New D&B Common Stock at the time of the
Distribution.
(B1) To reflect incremental debt of $100.9 million resulting from the allocation
of the net debt from D&B.
(B2) To reflect the May 2000 financing of the $175.0 million of liabilities that
were paid reflecting 50% of the amount paid by D&B in connection with an amended
tax return filed by D&B on May 12, 2000.
(C) Reflecting the effect on interest expense of $100.9 million of incremental
indebtedness based on a weighted average interest rate of 7.5% per annum. A 7.5%
interest rate represents the estimated weighted average rate for the terms of
the debt instruments Moody's expects to issue, based in part on currently
available short-term LIBOR rates and in part on currently available long-term US
Treasury Note rates. A one-eighth percent change in interest rates could
increase or decrease interest expense by $0.1 million.
(C1) Reflecting the effect on interest expense of the incremental $100.9 million
of incremental indebtedness based on a weighted average interest rate of 7.5%
per annum. A one-eighth percent change in interest rates could increase or
decrease interest expense by $0.1 million.
(C2) Reflecting the additional interest expense relating to the $175.0 million
debt incurred in May 2000 to finance the liabilities noted in B2 for the period
May 12, 2000 through June 30, 2000.
(D) To reflect the $1.0 million of deferred financing costs.
(E) To reflect amortization of the $1.0 million of estimated deferred financing
costs. The deferred financing costs will be amortized over the estimated 5-year
life of the debt.
(F) Adjustment to reflect the tax effect of the pro forma adjustments at the
statutory tax rate.
(G) The "Pro Forma Historical" column reflects the recapitalization of Moody's
as of the date of the Distribution.
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MOODY'S CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of financial condition and results of
operations is prepared as if Moody's was a separate entity for all periods
discussed. This discussion should be read in conjunction with the Moody's
Corporation Combined Financial Statements and Notes thereto included elsewhere
in this Information Statement.
OVERVIEW
On December 15, 1999, D&B announced a preliminary decision to separate into
two publicly traded companies--New D&B and Moody's. The separation of the two
companies will be accomplished through a tax-free dividend to D&B's stockholders
of New D&B Common Stock, which will represent a continuing interest in
businesses to be conducted by New D&B. In connection with the Distribution, D&B
will complete an internal reorganization so that, at the time of the
Distribution, the business of New D&B will consist solely of the business of
supplying business, purchasing, credit and marketing information products and
services as well as receivable management services, and the business of D&B will
consist solely of the business of providing ratings and related research and
risk management services. In addition, at the time of the Distribution, D&B will
be renamed "Moody's Corporation" and New D&B will be a new publicly traded
company that will succeed to the name "The Dun & Bradstreet Corporation". Shares
of common stock of D&B will represent a continuing interest in the Moody's
Business.
D&B has received a ruling from the IRS to the effect that the Distribution
will be tax-free for Federal income tax purposes, except to the extent that cash
is received in lieu of fractional shares of New D&B Common Stock.
For purposes of, among other things, governing certain of the ongoing
relations between New D&B and Moody's as a result of the Distribution as well as
to allocate certain tax, employee benefit and other liabilities arising prior to
the Distribution, the companies will enter into various agreements, including a
Distribution Agreement, Tax Allocation Agreement, Employee Benefits Agreement,
Intellectual Property Assignment, Shared Transaction Services Agreement,
Insurance and Risk Management Services Agreement, Data Services Agreement and
Transition Services Agreement. Summaries of these agreements are set forth
elsewhere in this Information Statement.
In general, pursuant to the terms of the Distribution Agreement, all of the
assets of the New D&B Business will be allocated to New D&B and all of the
assets of the Moody's Business will be allocated to Moody's. The Distribution
Agreement also provides for assumptions of liabilities and cross-indemnities
designed to allocate generally, effective as of the Distribution Date, financial
responsibility for (i) all liabilities arising out of or in connection with the
New D&B Business to New D&B, (ii) all liabilities arising out of or in
connection with the Moody's Business to Moody's and (iii) substantially all
other liabilities as of the Distribution Date equally between New D&B and
Moody's. The liabilities that are to be allocated equally between New D&B and
Moody's include contingent and other liabilities relating to former businesses
of D&B and certain prior business transactions, which consist primarily of
potential liabilities arising from the legal action initiated by IRI described
in "Risk Factors--Risks Relating to The New D&B Corporation and Moody's
Corporation-- Contingencies", "The New D&B Corporation Business--Legal
Proceedings" and "Moody's Corporation Business--Legal Proceedings", and
potential tax liabilities that may arise with respect to reviews by tax
authorities of D&B's global tax planning initiatives described in "Risk
Factors--Risks Relating to The New D&B Corporation and Moody's
Corporation--Contingencies". For a discussion of the respective businesses of
New D&B and Moody's, see "The New D&B Corporation Business" and "Moody's
Corporation Business".
Pursuant to the terms of the 1998 Distribution Agreement between D&B and
Donnelley, as a condition to the Distribution, New D&B is required to undertake
to be jointly and severally liable with D&B to Donnelley for any liabilities
arising thereunder. The Distribution Agreement generally allocates the financial
responsibility for liabilities of D&B under the 1998 Distribution Agreement
equally between New D&B and Moody's, except that any such liabilities that
relate primarily to the New D&B Business will be New D&B liabilities and
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96
any such liabilities that relate primarily to the Moody's Business will be
Moody's liabilities. Among other things, New D&B and Moody's will agree that, as
between themselves, they will each be responsible for 50% of any payments to be
made in respect of the IRI action under the 1998 Distribution Agreement,
including any legal fees and expenses related thereto. See "Moody's Corporation
Business--Legal Proceedings".
In connection with the Distribution, D&B borrowed funds to repay in full
its commercial paper obligations. Also in connection with the Distribution,
responsibility for D&B's obligations under the minority interest financing
(relating to the investment partnership described in Note 12 to D&B's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Information Statement) will be allocated to New D&B. It is currently estimated
that New D&B also will assume a portion of the indebtedness of D&B and receive a
portion of the cash of D&B in amounts such that, at the time of the Distribution
and after giving effect to the agreement discussed below and certain other
factors, the net indebtedness of New D&B (plus the minority interest
obligations) will approximate the net indebtedness of Moody's. As indicated
under "Relationship Between The New D&B Corporation and Moody's Corporation
After the Distribution--Employee Benefits Agreement", substantially all
unexercised D&B stock options will be adjusted as of the Distribution Date to
comprise options to purchase Moody's Common Stock and separately exercisable
options to purchase New D&B Common Stock. In light of, among other things, the
numbers of optionees to be employed by New D&B and Moody's, respectively, this
adjustment will result in a substantially greater number of outstanding options
to purchase Moody's Common Stock than would be the case if options were adjusted
so as to become solely options to purchase common stock of the optionee's
employer. Due to this fact and the fact that, consistent with past practice,
each of New D&B and Moody's is expected to maintain a stock purchase program
designed to offset the increased number of shares otherwise attributable to
option exercises, New D&B has agreed to adjust the net indebtedness of the two
companies to compensate Moody's for the disproportionate amount of its estimated
future cash costs in this regard. The exact amount of the adjustment discussed
in the immediately preceding sentence will be determined on a formula basis and
will be dependent upon a variety of factors, including the respective trading
prices of Moody's Common Stock and New D&B Common Stock at the time of the
Distribution.
Due to the relative significance of New D&B as compared to Moody's, the
transaction has been accounted for as a reverse spin-off.
The financial statements reflect the financial position, results of
operations and cash flows of Moody's as if it were a separate entity for all
periods presented. The financial statements include allocations of certain D&B
assets (including prepaid pension assets), liabilities (including postretirement
benefits and corporate and tax obligations) and expenses (including cash
management, legal, accounting, tax, employee benefits, insurance services, data
services and other D&B corporate overhead) relating to Moody's business.
Expenses related to these services have been allocated to Moody's based on
utilization of specific services or, where an estimate could not be determined,
based on Moody's revenues in proportion to D&B's total revenues. Moody's
management believes that these allocations are reasonable. However, the costs of
these services and benefits charged to Moody's are not necessarily indicative of
the costs that would have been incurred if Moody's had performed or provided
these functions as a separate entity. Management of Moody's presently estimates
a net increase in general and administrative expenses of approximately $4.5
million associated with operating as a separate publicly owned company.
The financial information included herein may not necessarily reflect the
results of operations, financial position, changes in shareholder's net
investment and cash flows of Moody's in the future or what they would have been
had it been a separate entity during the periods presented. Unfavorable
financial or economic conditions would likely reduce the number and size of debt
issuances and other transactions for which Moody's provides ratings services.
High interest rates, volatility in financial markets or the interest rate
environment, significant political or economic events, defaults of significant
issuers and other market and economic factors may negatively impact the general
level of debt issuances, the debt issuance plans of certain categories of
borrowers and the types of credit products being offered. Because the ratings
revenues and results of operations of Moody's are directly related to the number
and size of the transactions in which it participates, it would be adversely
affected by a reduction of the level of debt issuances. A sustained period of
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97
market decline or weakness could have a material adverse effect on Moody's
business and financial results. See "Risk Factors" and "Moody's Corporation
Business--Competition".
The financial statements reflect effective tax rates of Moody's on a
separate company basis. These rates reflect the historical benefit of certain of
D&B's global tax planning actions for all periods presented.
Historically, D&B used a centralized cash management system to finance
Moody's operations. Cash deposits from the majority of the Moody's businesses
were transferred to D&B on a daily basis, and D&B funded the majority of Moody's
disbursements from its centralized cash management system. Net distributions to
D&B reflect these intercompany cash activities. No interest was charged or
credited on these transactions with D&B. After the Distribution, Moody's will
have its own bank accounts and control the use of its cash and will not continue
to participate in D&B's cash management system.
OPERATING SEGMENTS
Moody's operates primarily in one reportable business segment -- ratings,
which accounts for approximately 90% of Moody's total revenue. The ratings
segment is composed of four ratings groups: corporate finance, structured
finance, financial institutions and sovereigns, and public finance. Given the
dominance of the ratings segment to Moody's overall results, Moody's does not
separately measure and report operating income for the ratings business. Rather,
revenue is the predominant measure utilized by senior management for assessing
performance and for the allocation of resources, and operating income is
evaluated for Moody's as a whole. Moody's also reports revenue separately for
two geographic areas: U.S. and international.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999
Revenue for the first six months of 2000 was $288.7 million, an increase of
$4.2 million or 1.5% from $284.5 million for the first six months of 1999.
Revenue growth reflected double digit first-half growth in opinion research
products revenue, due to strong demand for services delivered via the Internet
and increased international sales. This was offset by a slight decline in
ratings revenue, where strong gains in international ratings were more than
offset by weakness in U.S. ratings due to an unfavorable capital markets
environment. For the first six months of 2000, the U.S. markets were marked by
declines in debt issuance in the core corporate and public finance markets.
Moody's Risk Management Services (as defined below under "Moody's Corporation
Business -- General") also reported strong revenue growth over 1999, primarily
related to the acquisition of a financial software products company in January
2000.
Ratings revenue was $251.5 million in the first six months of 2000, down
1.5% from $255.3 million in the first six months of 1999. Strong growth in
revenue from international corporate finance and global structured finance
ratings was more than offset by the effects of a decline in securities issuance
in the U.S. capital markets, principally as a result of unsettled market
conditions related to interest rate increases.
Structured finance ratings revenue was $91.5 million for the first half of
2000, an increase of $8.2 million, or 9.8%, from $83.3 million in the first half
of 1999. The increase was principally driven by strong growth in Europe and
Japan and in U.S. asset-backed finance.
Revenue from corporate ratings was $82.8 million in the first half of 2000,
down $2.9 million, or 3.4%, from $85.7 million in the first half of 1999. Growth
in international ratings revenue from issuance in Europe, including from
first-time corporate issuers, was more than offset by the effects of a decline
in U.S. investment grade issuance. In addition, revenue from bank loan ratings
grew more than 80% in the first six months of 2000 compared with the same period
in 1999, and partially offset lower revenue from high yield bond ratings.
Revenue from financial institution and sovereign ratings was $55.6 million
for the first six months of 2000, compared with $54.5 million for the same
period of 1999. Increased international volumes were substantially offset by the
effects of a decline in U.S. debt issuance and U.S. industry consolidation in
this sector.
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Public finance ratings revenue declined 32.1% to $21.6 million for the
first half of 2000, from $31.8 million for the 1999 first half. This decline is
principally the result of a 28% decline in the number of issues in the U.S.
municipal bond market in the first six months of 2000, compared with the same
period of 1999.
Other revenue increased $8.0 million, or 27.4%, to $37.2 million reflecting
strong growth in opinions products revenue due to strong demand for opinion
research products delivered via the Internet and increased international sales.
In addition, revenue for Moody's Risk Management Services increased $3.7 million
compared with the first half of 1999, primarily due to the acquisition of a
financial software products company in January 2000.
Revenue in the United States was $203.2 million for the first half of 2000,
a decline of $16.5 million, or 7.5%, from $219.7 million in the first half of
1999. This decrease reflected lower ratings revenue, principally due to lower
issuance volumes in several market sectors, including corporate and municipal
bonds, commercial mortgage-backed securities and credit derivatives. These
declines were partially offset by strong growth in asset-backed finance and bank
loan ratings revenue, and continued strong increases in opinion research
products revenue.
Moody's international revenue was $85.5 million in the first half of 2000,
an increase of 31.9% over $64.8 million in the same period of 1999. The strong
growth was principally driven by higher ratings revenue, due to increased
volumes of European corporate issuance, including from first-time issuers, and
strong growth in structured ratings in Europe and Japan. The international
growth also reflected continued strong growth in opinion research products
revenue.
Operating, selling and administrative expenses were $141.8 million in the
first half of 2000 compared with $143.0 million in 1999. Excluding increased
costs at Moody's Risk Management Services related to the acquisition of a
financial software products company in January 2000, first half 2000 expenses
declined $5.5 million or 3.8% versus the first half of 1999, reflecting cost
containment efforts in light of low revenue growth. Depreciation and
amortization rose from $6.6 million in the first half of 1999 to $8.3 million in
the first half of 2000. This increase principally reflected $1.7 million of
amortization related to the above-mentioned acquisition.
Moody's operating income of $138.6 million in the first half of 2000 was up
2.7% from $134.9 million in the same period of 1999. Excluding the impact of the
January 2000 acquisition of the financial software products company, operating
income increased 4.6% reflecting the revenue growth and expense decline
discussed above.
Moody's effective tax rate was 44.2% both for the first half of 2000 and
for the first half of 1999.
As a result of the foregoing, Moody's reported net income of $77.6 million
for the six months ended June 30, 2000, compared with $75.2 million for the same
period of 1999. Pro forma basic and diluted earnings per share for the 2000
first half were $0.48. For the first half of 1999, pro forma earnings per share
were $0.46 basic and $0.45 diluted.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Moody's revenue was $564.2 million in 1999, an increase of 9.8% from $513.9
million in 1998. Revenue in 1998 included $18.4 million related to FIS, Moody's
financial publishing business, which was sold in July 1998. Excluding FIS,
Moody's 1999 revenue grew 13.9% from $495.5 million in 1998. The strong revenue
performance reflected double-digit growth in ratings revenue, fueled by
continued expansion of European capital markets and growth in several sectors of
the U.S. market. Moody's 1999 revenue also reflected double-digit growth in
opinion research products, driven by international expansion and new product
introductions.
Moody's ratings revenue was $502.2 million in 1999, an increase of 13.7%
from $441.5 million in 1998. This growth was principally driven by ratings of
corporate bonds, structured products and commercial paper. International ratings
revenue growth was especially strong, as the introduction of the Euro and a
significant increase in merger-related financing drove significant growth in
European capital markets. These revenue gains were partially offset by the
effects of volume declines in the U.S. high yield and municipal markets,
compared to strong performance in these markets in 1998.
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Revenue from corporate ratings was $165.5 million in 1999 compared with
$143.6 million in 1998, an increase of 15.3%. The revenue growth was principally
driven by strong international issuance volumes. Bank loan ratings activity
expanded significantly in 1999 as Moody's rated over $300 billion of new loans,
an increase of 50% over 1998. Revenue from high yield ratings declined in 1999,
as issuance during the year was approximately 32% lower than 1998's record
level.
Structured finance ratings revenue of $172.4 million in 1999 grew 20.6%
over 1998 revenue of $143.0 million. The increase in 1999 revenue was
principally the result of strong growth in the asset-backed and derivatives
markets in the U.S., Europe and Japan. Moody's revenue from ratings of credit
derivatives grew by more than 40% in 1999, as U.S. issuance volumes surged to
record levels.
Revenue from financial institution and sovereign ratings was $104.8 million
in 1999, an increase of 16.3% over $90.1 million in 1998. The increase
principally reflected higher debt issuance in and expanded coverage of the
global banking sector.
Public finance ratings revenue declined 8.2% to $59.5 million in 1999 from
$64.8 million in 1998. The decrease was principally the result of lower
municipal debt issuance in 1999 following 1998's near-record level.
Revenue in the United States was $423.4 million in 1999, an increase of
2.5% over $413.0 million in 1998. Excluding the 1998 revenue of FIS, United
States revenue increased 7.1% in 1999, from $395.3 million in 1998. This
increase was principally the result of gains in structured finance, commercial
paper and bank loan ratings, partially offset by the effects of volume declines
in the high yield and municipal markets.
Moody's international revenue was $140.8 million in 1999 and $100.9 million
in 1998, an increase of 39.5%. Excluding the 1998 revenue of FIS, international
revenue increased 40.5% in 1999, from $100.2 million in 1998. This performance
was principally driven by growth in European capital markets, where the
introduction of the Euro and a significant increase in merger-related financing
drove strong debt issuance. Strong growth was also achieved in ratings of
international asset backed securities, particularly in Europe and Japan.
1999 operating expenses of $184.9 million grew $6.8 million, or 3.8%, from
$178.1 million in 1998. Excluding 1998 operating expense of $8.5 million related
to FIS, 1999 operating expense increased by $15.3 million, or 9.0%. The increase
principally reflected higher compensation and related expenses due to an
increase in the number of analysts, particularly in Europe and the structured
finance business. General and administrative expenses of $95.9 million in 1999
were up $1.0 million compared to $94.9 million in 1998. Excluding $4.6 million
of 1998 general and administrative expenses related to FIS, 1999 expense grew by
$5.6 million, or 6.2%. This increase was principally due to higher compensation
and related costs. Depreciation and amortization expense was $13.0 million in
1999, a decrease of $2.4 million over 1998. Excluding FIS depreciation and
amortization expense of $1.1 million in 1998, the 1999 expense declined by $1.3
million. This reflected lower levels of capital spending in 1998 and 1999 versus
prior years, partly as a result of declining technology costs.
Moody's operating income of $270.4 million in 1999 was up 19.9% from $225.5
million in 1998. Excluding 1998 operating income related to FIS of $4.2 million,
1999 operating income grew 22.2% from $221.3 million in 1998.
Non-operating income, net was $8.5 million in 1999 and $12.4 million in
1998. Non-operating income included pre-tax gains on the sale of FIS of $9.2
million in 1999 and $12.6 million in 1998.
Moody's effective tax rate was 44.2% for 1999, compared with an effective
tax rate of 40.3% in 1998. This increase resulted from an increase in the
percentage of Moody's income allocable to states with high income tax rates and
refinements of certain estimates.
As a result of the foregoing, Moody's reported net income of $155.6 million
in 1999 and $142.0 million in 1998, an increase of 9.6%. Pro forma basic and
diluted earnings per share in 1999 were $0.96 and $0.95, respectively, compared
with pro forma basic and diluted earnings per share of $0.84 and $0.83 in 1998,
respectively. Moody's net income included after-tax gains from the sale FIS of
$5.1 million (pro forma earnings per share of $0.03 basic and diluted) in 1999
and $7.5 million (pro forma earnings per share of $0.04 basic and diluted) in
1998. Excluding these gains, Moody's 1999 net income increased 11.9% over 1998.
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YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Moody's reported revenue of $513.9 million in 1998 was up 12.4% compared
with $457.4 million in 1997. Excluding FIS revenue of $18.4 million in 1998 and
$34.3 million in 1997, Moody's revenue of $495.5 million in 1998 grew 17.1% from
$423.1 million in 1997. This increase was principally due to strong ratings
revenue growth in corporate and municipal bonds, structured finance and
commercial paper. Revenue from opinion research products also achieved
double-digit growth in 1998, driven by new products and continued international
expansion.
Moody's ratings revenue was $441.5 million in 1998, an increase of 16.2%
compared with $379.9 million in 1997. The increase was principally driven by
growth in issuance of corporate and municipal bonds, structured products and
commercial paper.
Revenue from corporate ratings was $143.6 million in 1998, up 12.5% from
$127.7 million in 1997. High yield bond issuance in 1998 reached a record high
for the second consecutive year, growing approximately 23% over 1997. Investment
grade issuance volumes also increased in 1998, in part the result of a favorable
interest rate environment.
Structured finance ratings revenue was $143.0 million in 1998 and $104.1
million in 1997, an increase of 37.4%. This increase was principally the result
of strength in the mortgage-backed and credit derivatives markets in the United
States and Europe. Issuance of commercial mortgage-backed securities increased
by approximately 75% to $80 billion in 1998. In addition, the number of ratings
of credit derivatives rose 73% over the prior year.
Revenue from financial institutions and sovereign ratings of $90.1 million
in 1998 was flat as compared to 1997. Revenue growth was negatively affected by
consolidations in the financial services industry.
Public finance ratings revenue increased 11.7% to $64.8 million in 1998,
compared with $58.0 million in 1997. This increase was principally the result of
near-record U.S. municipal bond issuance in 1998, as lower interest rates fueled
an increase of more than 50% in refinancings.
Revenue in the United States increased by 9.2% to $413.0 million in 1998,
compared with $378.3 million in 1997. Excluding FIS revenue of $17.7 million in
1998 and $33.0 million in 1997, United States revenue of $395.3 million in 1998
grew 14.5% compared with $345.3 million in 1997. This increase resulted
principally from growth in ratings of corporate and municipal bonds, structured
products and commercial paper.
International revenue was $100.9 million in 1998 and $79.1 million in 1997,
an increase of 27.6%. Excluding FIS revenue of $0.7 million in 1998 and $1.3
million in 1997, international revenue of $100.2 million in 1998 grew 28.8%
compared with $77.8 million in 1997. The strong growth reflected gains in
European corporate bonds, broader coverage of banks in Europe and Asia, and
record international structured finance issuance volumes. Opinion research
products revenue also showed strong double-digit growth, driven by new products
and customers.
Operating expenses of $178.1 million were $20.1 million (12.7%) higher than
$158.0 million in 1997. Excluding FIS in both years, operating expenses of
$169.6 million in 1998 were $27.1 million (19.0%) higher than $142.5 million in
1997. The expense growth primarily reflected higher compensation expenses due to
an increase in the number of rating analysts and increased expenses for travel
and outside professional services, all to support revenue growth. General and
administrative expenses of $94.9 million in 1998 were $1.7 million higher than
$93.2 million in 1997. Excluding FIS in both years, general and administrative
expenses of $90.3 million in 1998 were $7.5 million, or 9.1%, higher than $82.8
million in 1997. The increase principally reflected higher compensation costs,
staffing growth in support functions and costs related to new customer support
systems. Depreciation and amortization expense of $15.4 million in 1998 was $0.8
million lower than $16.2 million in 1997. Excluding FIS in both years, 1998
depreciation and amortization expense of $14.3 million was $0.7 million higher
than $13.6 million in 1997.
Operating income was $225.5 million in 1998 and $190.0 million in 1997, an
increase of 18.7%. Excluding the results of FIS, operating income was $221.3
million in 1998 and $184.2 million in 1997, an increase of 20.1%.
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Moody's reported non-operating income of $12.4 million in 1998 and $0.2
million in 1997. 1998 non-operating income included a pre-tax gain of $12.6
million on the sale of FIS.
Moody's effective tax rate was 40.3% for 1998, compared with an effective
tax rate of 33.7% in 1997. This increase resulted from a number of factors,
including an increase in the percentage of Moody's income allocable to states
with high income tax rates and refinements of certain estimates.
As a result of the foregoing, Moody's reported net income of $142.0 million
in 1998 and $105.9 million in 1997, an increase of 34.1%. Pro forma earnings per
share for 1998 were $0.84 basic and $0.83 diluted, compared with 1997 pro forma
earnings per share of $0.62 basic and $0.61 diluted. 1998 results included a
gain of $7.5 million net of related taxes (pro forma earnings per share $0.04
basic and diluted) on the sale of FIS. 1997 results included a one-time,
non-cash charge of $20.3 million after tax (pro forma earnings per share $0.12
basic and diluted) for the cumulative effect of an accounting change with
respect to revenue recognition in connection with monitoring of existing credit
ratings. Excluding the impacts of the sale of FIS and the aforementioned
accounting change, Moody's net income was $134.5 million in 1998, compared with
$126.2 million in 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN No. 44"). The
interpretation provides guidance for certain issues relating to stock
compensation involving employees that arose in applying APB Opinion No. 25.
Among other things, this Interpretation clarifies (a) the definition of an
employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. The provisions of FIN No. 44 are
effective July 1, 2000, except for the provisions regarding modifications to
fixed stock option awards that reduce the exercise price of an award, which
apply to modifications made after December 15, 1998. Provisions regarding
modifications to fixed stock option awards to add reload features apply to
modifications made after January 12, 2000. The effect of adopting FIN No. 44 is
not expected to have a material impact on Moody's.
In December 1999, the staff of the SEC issued Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
summarizes some of the staff's interpretations of the application of generally
accepted accounting principles to revenue recognition. The staff provided this
guidance due, in part, to the large number of revenue recognition issues that it
has encountered in registrant filings. In June 2000, SAB 101B, "Amendment:
Revenue Recognition in Financial Statements", was issued, which defers the
effective date of SAB 101 until the fourth fiscal quarter of 2000. Moody's
believes that it is in compliance with this guidance.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities on the balance sheet and measurement
of those instruments at fair value. If certain conditions are met, a derivative
may be designated specifically as: (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm commitment
(a fair value hedge); (b) a hedge of the exposure to variable cash flows of a
forecasted transaction (a cash flow hedge); or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. In June 1999, the Financial
Accounting Standards Board issued SFAS No. 137 delaying the effective date of
SFAS No. 133. The provisions of SFAS No. 133 are effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. Moody's currently
does not engage in any transactions that would be impacted by the adoption of
SFAS No. 133.
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MARKET RISK SENSITIVE INSTRUMENTS
Moody's maintains operations in 14 countries outside of the United States,
and approximately 20% of its expenses are incurred in currencies other than the
U.S. dollar. Over 90% of Moody's revenues for the year ended December 31, 1999
were billed and collected in U.S. dollars. Fluctuations in the value of foreign
currencies relative to the U.S. dollar may increase the volatility of U.S.
dollar operating results. In 1999 and 1998, foreign currency translation had
immaterial impacts on U.S. dollar revenue growth and operating income growth.
As of December 31, 1999, approximately 6% of Moody's assets were located
outside the U.S. Moody's aggregate cash balance of $3.4 million was not
concentrated in any one country. Non-U.S. monetary assets are maintained in
currencies other than the U.S. dollar, principally in the U.K. and Japan.
Changes in the value of these currencies relative to the U.S. dollar are charged
or credited to shareholder's net investment. The effect of exchange rate changes
during 1999 was not significant.
LIQUIDITY AND CAPITAL RESOURCES
Net cash (used in) provided by operating activities was ($69.6) million and
$87.7 million for the six months ended June 30, 2000 and 1999, respectively. The
first half 2000 activity reflected a payment of approximately $175 million,
representing Moody's 50% share, in connection with an amended tax return filed
by D&B on May 12, 2000 and higher payments for incentive compensation compared
with the same period of 1999.
Net cash used in investing activities was $24.4 million for the first half
of 2000 compared with $3.2 million for the same period of 1999. This increase
was principally due to the acquisition of a financial software products company
in January 2000 for $17.4 million and increased spending on computer equipment.
Net cash from (used in) financing activities consists of net distributions
to and from D&B. Net distributions from D&B were $105.5 million for the first
half of 2000, compared with net distributions to D&B of ($83.2) million in the
first half of 1999. The change in the first half of 2000 principally reflected
funds paid by D&B on behalf of Moody's in connection with an amended tax return
filing.
Net cash provided by operating activities was $197.7 million, $167.6
million and $188.4 million in 1999, 1998 and 1997, respectively. The increase in
1999 compared to 1998 principally reflected the net income growth discussed
above. In addition, faster collections of receivables due in part to new systems
and processes resulted in a reduction in accounts receivable at December 31,
1999 compared with December 31, 1998, despite a significant increase in revenue
for the year.
Net cash (used in)/provided by investing activities totaled ($12.0 million)
in 1999, $13.1 million in 1998, and ($14.9 million) in 1997. 1998 included
proceeds of $26.5 million from the sale of FIS. Capital expenditures were $12.5
million in 1999, $12.0 million in 1998 and $14.9 million in 1997. Capital
expenditures principally include investments in purchasing, developing, and
upgrading computer hardware, software and systems, and in improvements to owned
and leased office facilities. 1998 and 1997 capital spending included $0.4
million and $0.8 million, respectively, related to FIS. Excluding FIS, 1999
capital spending increased $0.9 million compared with 1998 principally to
support staffing growth and expansion of international offices. Excluding FIS,
Moody's capital expenditures in 1998 were $2.5 million less than its capital
expenditures in 1997, in part reflecting declining technology costs. In
addition, the level of spending on building improvements in 1998 was less than
in 1997. Currently, Moody's has no material commitments for capital
expenditures.
Net cash used in financing activities, representing net distributions to
D&B in each year, totaled $186.4 million in 1999, $182.0 million in 1998 and
$174.3 million in 1997.
FINANCING ARRANGEMENTS
At June 30, 2000, D&B had approximately $69.4 million in cash and cash
equivalents, $291.9 million in commercial paper borrowings and $300 million of
indebtedness under minority interest financing. In connection with the
Distribution, D&B borrowed funds to repay in full its commercial paper
obligations. Also
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in connection with the Distribution, responsibility for D&B's obligations under
the minority interest financing (relating to the investment partnership
discussed in Note 12 in D&B's Consolidated Financial Statements and Notes
thereto included elsewhere in this Information Statement) will be allocated to
New D&B. It is currently estimated that New D&B also will assume a portion of
the indebtedness of D&B and receive a portion of the cash of D&B in amounts such
that, at the time of the Distribution and after giving effect to the agreement
discussed below and certain other factors, the net indebtedness of New D&B (plus
the minority interest obligations) will approximate the net indebtedness of
Moody's. As indicated under "Relationship Between The New D&B Corporation and
Moody's Corporation After the Distribution--Employee Benefits Agreement",
substantially all unexercised D&B stock options will be adjusted as of the
Distribution Date to comprise options to purchase Moody's Common Stock and
separately exercisable options to purchase New D&B Common Stock. In light of,
among other things, the numbers of optionees to be employed by New D&B and
Moody's, respectively, this adjustment will result in a substantially greater
number of outstanding options to purchase Moody's Common Stock than would be the
case if options were adjusted so as to become solely options to purchase common
stock of the optionee's employer. Due to this fact and the fact that, consistent
with past practice, each of New D&B and Moody's is expected to maintain a stock
purchase program designed to offset the increased number of shares otherwise
attributable to option exercises, New D&B has agreed to adjust the net
indebtedness of the two companies to compensate Moody's for the disproportionate
amount of its estimated future cash costs in this regard. The exact amount of
the adjustment discussed in the immediately preceding sentence will be
determined on a formula basis and will be dependent upon a variety of factors,
including the respective trading prices of Moody's Common Stock and New D&B
Common Stock at the time of the Distribution. See "The Distribution--Certain
Indebtedness and Minority Interest Financing".
STOCK REPURCHASE PROGRAM
In the first half of 2000, D&B repurchased 125,000 shares for $3.5 million
in connection with the D&B Employee Stock Purchase Plan and to offset a portion
of the shares issued under incentive plans. Proceeds received in connection with
D&B's stock plans were $22.9 million for the first half of 2000.
During 1999, D&B completed its special stock repurchase program, authorized
by the Board of Directors in June 1998, by purchasing 4.2 million shares for
$150.0 million. During 1999, D&B also repurchased 2.6 million shares for $87.9
million to offset awards made under stock incentive plans and in connection with
the D&B Employee Stock Purchase Plan. During 1998, D&B repurchased 5.7 million
shares for a total of $150.0 million under the special stock repurchase program
and purchased 2.3 million shares to offset awards made under stock incentive
plans for a total of $70.2 million. Proceeds received in connection with D&B
stock incentive plans were $48.4 million in 1999 and $41.0 million in 1998.
Moody's presently intends to commence a systematic share repurchase program
following the Distribution to offset the dilutive effect of shares issued under
Moody's employee benefits arrangements. In addition, Moody's expects to commence
a share purchase program following the Distribution to acquire up to $50 million
of Moody's Common Stock.
OTHER
D&B enters into global tax planning initiatives in the normal course of
business, principally through tax free restructurings of both its foreign and
domestic operations. These initiatives are subject to normal review by tax
authorities. It is possible that additional liabilities may be proposed by tax
authorities as a result of these reviews and that some of the reviews could be
resolved unfavorably. At this time, management is unable to predict the extent
of such reviews, the outcome thereof or whether such outcome could materially
affect Moody's results of operations, cash flows or financial position.
Pursuant to the Distribution Agreement, New D&B and Moody's will agree to
be financially responsible for 50% of any potential liabilities that may arise
with respect to the reviews described above, to the extent such liabilities are
not directly attributable to their respective business operations. See
"Relationship Between The New D&B Corporation and Moody's Corporation After the
Distribution--Distribution Agreement".
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The IRS has completed its review of the utilization of certain capital
losses generated during 1989 and 1990. On June 26, 2000, the IRS, as part of its
audit process, issued a final adjustment disallowing the utilization of these
capital losses.
Pursuant to a series of agreements, IMS Health and NMR are jointly and
severally liable to pay one-half, and Donnelley the other half, of any payments
for taxes and accrued interest, arising from this matter and certain other
potential tax liabilities that may arise from future audit adjustments after
review by tax authorities relating to various transactions to which IMS Health,
NMR and Donnelly are parties after Donnelley pays the first $137 million. In
connection with the 1998 Distribution, D&B and Donnelley entered into an
agreement whereby D&B has assumed all potential liabilities of Donnelley arising
from these tax matters and has agreed to indemnify Donnelley in connection with
such potential liabilities.
On May 12, 2000, an amended tax return was filed for the 1989 and 1990 tax
periods which reflected the final adjustment in the amount of $561.6 million of
tax and interest due. D&B paid the IRS approximately $349.3 million of this
amount on May 12, 2000, funded by short-term borrowings. IMS Health informed D&B
that it paid the IRS approximately $212.3 million on May 17, 2000.
Notwithstanding the filing and payments, D&B intends to contest the assessment
of amounts, if any, in excess of the amounts paid. Moody's had accrued its
anticipated share of the probable liability arising from the utilization of
these capital losses.
Moody's is involved in legal proceedings of a nature considered normal to
its business. In the opinion of management, although the outcome of such legal
proceedings cannot be predicted with certainty, the ultimate liability of
Moody's in connection with such legal proceedings will not have a material
effect on Moody's financial position, results of operations and cash flows.
In addition, Moody's has certain other contingencies discussed under
"Moody's Corporation Business--Legal Proceedings".
Moody's existing balances of cash and cash equivalents, cash generated from
operations and debt capacity are expected to be sufficient to fund Moody's
operating needs, service debt and pay dividends, over the next year.
YEAR 2000
Moody's initiated a Year 2000 ("Y2K") preparation program in 1997, when it
began identifying Y2K related technology risks and developing plans for
appropriate remediation and testing activities. Moody's program was
substantially completed during 1999. As a result of this program, Moody's made a
smooth transition to the Year 2000, and its systems are operating in a
business-as-usual manner. Moody's does not expect to encounter any significant
Y2K-related disruptions in the future. External and internal costs associated
with Moody's Y2K program were expensed as incurred. These costs, which do not
include the costs of software and systems that were replaced or upgraded in the
normal course of business, aggregated approximately $2.4 million, of which $0.8
million was incurred during 1999.
DIVIDENDS
Moody's, as a subsidiary of D&B, did not pay dividends directly to D&B
shareholders. Subject to the approval of the Moody's Board of Directors,
following the Distribution, it is anticipated that Moody's will initially pay
quarterly a dividend of between $0.04 and $0.06 per share. The payment and level
of cash dividends by Moody's after the Distribution will be subject to the
discretion of the Moody's Board of Directors.
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MOODY'S CORPORATION
BUSINESS
GENERAL
Moody's is a leading global credit rating, research and risk analysis firm
in terms of market position, revenue, income and a number of other relevant
statistical standards. Moody's publishes credit opinions, research and ratings
on fixed-income securities, issuers of securities and other credit obligations.
Moody's credit ratings and research help investors analyze the credit risks
associated with fixed-income securities. Ratings and research from reliable
third parties also create efficiencies in fixed-income markets and similar
obligations, such as insurance and derivatives, by providing reliable, credible
and independent assessments of credit risk. Moody's global and increasingly
diverse services are designed to increase market liquidity and may reduce
transaction costs.
Founded in 1900, Moody's employs approximately 1,400 employees worldwide.
Moody's maintains offices in 14 countries and has expanded into developing
markets through joint ventures or affiliation agreements with local rating
agencies. Moody's provides ratings and credit research on governmental and
commercial entities in approximately 100 countries. Moody's customers include
investors, depositors, creditors, investment banks, commercial banks, other
financial intermediaries and a wide range of corporate and governmental issuers
of securities. Moody's is not dependent on a single customer or a few customers,
such that a loss of any one would have a material adverse effect on its
business.
Moody's publishes rating opinions and research on a broad range of credit
obligations. These include various corporate and governmental obligations issued
in domestic and international markets, structured finance securities and
commercial paper programs. In recent years, Moody's has moved significantly
beyond its traditional bond ratings activities and has been assigning ratings to
issuers of securities, insurance company obligations, bank loans, derivative
products, bank deposits and other bank debt, managed funds and derivatives. At
the end of 1999, Moody's had ratings on approximately 100,000 corporate
issuances, including industrial corporations, financial institutions,
governmental entities and structured finance issuers, and more than 68,000
public finance obligations. Ratings are disseminated to the public through a
variety of print and electronic media, including real-time systems widely used
by securities traders and investors.
Closely integrated with its ratings services, Moody's provides
investor-oriented credit research for more than 2,800 institutions reaching more
than 15,000 users globally. Moody's publishes more than 100 research products,
including in-depth research on major issuers, industry studies, special comments
and credit opinion handbooks. Detailed descriptions of both the rated issue and
issuer, along with a summary of the rationale for the assignment of the specific
rating, also appear in various Moody's credit research products. These research
products include insurance, utilities, speculative-grade instruments, structured
finance, bank, finance, real estate and global credit research.
Moody's Risk Management Services, Inc., a wholly owned subsidiary of
Moody's ("Moody's Risk Management Services"), develops and distributes credit
risk assessment software used by banks and other financial institutions in their
portfolio management, commercial lending and other activities. Moody's Risk
Management Services also provides modeling tools, analytics, credit education
materials, seminars, computer-based lending simulations and other products and
services that have enabled it to develop continuing relationships with its
clients. On January 27, 2000, Moody's Risk Management Services acquired the
Software Products Group division of Crowe, Chizek and Company LLP, which
division provides credit risk assessment software to financial institutions.
PROSPECTS FOR GROWTH
Over the past decade, the global public fixed-income markets have
significantly increased in outstanding principal amount. Moody's believes that
the global credit markets will continue to increase in size and scope. In
addition, the securities being issued in the global fixed-income markets are
becoming more complex. Moody's expects that these trends will increase the
long-term demand for its high-quality, independent credit opinions.
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The size of the world capital markets is increasing because, in general,
the global political and economic climate has promoted economic growth and more
productive capital investment and market structures. Moody's believes that the
outlook is generally favorable for the continued growth of the world capital
markets, particularly in Europe as a consequence of the economic and monetary
union contemplated by the Treaty on European Union (the "EMU").
Technology, such as the Internet, makes information about investment
alternatives easily available throughout the world. This technology facilitates
issuers' ability to place securities outside their national market and
investors' capacity to obtain information about securities issued outside their
national markets. Issuers and investors are also more readily able to obtain
information about new financing techniques and new types of securities that they
may wish to purchase or sell, many of which may be unfamiliar to them. This
availability of information promotes worldwide financial markets and a more
acute need for credible and globally comparable ratings. In addition, a number
of new capital markets have emerged. Investor and intermediary interests in
domestic currency debt obligations from such markets are now being sold cross-
border in unprecedented volumes.
Another trend that is increasing the size of the world capital markets is
the ongoing disintermediation of financial systems. Issuers are increasingly
financing in the global public capital markets, rather than through traditional
financial intermediaries. Moreover, financial intermediaries are selling assets
in the global public capital markets, in addition to or instead of retaining
those assets. Structured finance securities markets for many types of assets
have developed in many countries and are contributing to these trends.
The complexity of capital market instruments is also growing. Consequently,
assessing the credit risk of such instruments becomes even more of a challenge
for financial intermediaries and asset managers. In the credit markets, reliable
third-party ratings represent an increasingly viable alternative to traditional
in-house research as the geographic scope and complexity of financial markets
grow.
Rating fees paid by issuers account for most of Moody's revenues.
Therefore, a substantial portion of Moody's revenues are dependent upon the
volume of debt securities issued in the global capital markets. Moody's is
therefore affected by the performance of, and the prospects for, the major world
economies and by the fiscal and monetary policies pursued by their governments.
However, annual fee arrangements with frequent debt issuers and annual fees from
commercial paper and medium-term note programs, bank and insurance company
financial strength ratings, mutual fund ratings and other areas are less
dependent on, or independent of, the volume of debt securities issued in the
global capital markets.
Moody's operations are also subject to various politically-related risks
inherent in carrying on business internationally. Such risks include currency
fluctuations and possible nationalization, expropriation, price controls,
changes in the availability of data from public sector sources, limits on
providing information across borders or other restrictive governmental actions.
Management believes that the risks of nationalization or expropriation are
reduced because its basic service is the creation and dissemination of
information, rather than the production of products that require manufacturing
facilities or the use of natural resources.
COMPETITION
Moody's competes with other credit rating agencies and with investment
banks and brokerage firms that offer credit opinions, research and risk analysis
services. Institutional investors also have in-house credit research
capabilities. Moody's most direct competitor in the global credit rating
business is Standard and Poor's Ratings Services ("S&P"), a division of The
McGraw-Hill Companies, Inc. There are some rating markets, based on industry,
geography and/or instrument type, in which Moody's has made investments and
obtained market positions superior to S&P's. In other markets the reverse is
true.
Another rating agency competitor of Moody's is Fitch. Fitch includes the
businesses of Duff & Phelps and Fitch IBCA, which were recently combined in a
merger transaction. Although Moody's and S&P are each larger than Fitch,
competition is expected to be increased -- particularly in Europe -- from the
combination. One or more significant rating agencies also may emerge in Europe
over the next few years in response to the growth in the European capital
markets and development of the EMU. In addition, local providers in non-U.S.
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jurisdictions or comparable competitors that may emerge in the future may
receive support from local governments and other institutions.
Over the last decade, additional rating agencies have been established,
primarily in emerging markets and as a result of local capital market
regulation. Regulators worldwide have recognized that credit ratings can further
regulatory objectives for the development of public fixed-income securities
markets. The result of such regulatory activity has been the creation of several
primarily national ratings agencies in various countries. Certain of these
regulatory efforts may have the unintended effect of producing less credible
ratings over time. Attempts to standardize ratings systems or criteria may make
all rating systems and agencies appear undifferentiated, obscuring variations in
the quality of the ratings providers. In addition, since Moody's believes that
some of its most significant challenges and opportunities will arise outside the
United States, it will have to compete with rating agencies that may have a
stronger local presence or a longer operating history in those markets. These
local providers or comparable competitors that may emerge in the future may
receive support from local government and other institutions.
Regulators of financial institutions are attempting to improve their
approach to supervision. They are shifting away from rule-based systems that
address only specific risk components and from institution-specific protections
towards other supervisory methods. The regulators' evolving approach includes
their making qualitative judgments about the sophistication of each financial
institution's risk management processes and systems, in terms of both market and
credit risk. Although such regulatory trends present opportunities for the use
of Moody's ratings, they may also result in additional competition for Moody's
or regulatory involvement in Moody's regulatory practices.
Credit rating agencies such as Moody's also compete with other means of
managing credit risk, such as credit insurance and credit derivatives.
Competitors that develop quantitative methodologies for assessing credit risk
also may pose a competitive threat to Moody's.
MOODY'S STRATEGY
Moody's intends to focus on the following opportunities:
- Expansion in Financial Centers. Moody's services its customers through
its global network of offices and business affiliations. Moody's
established its first office outside the United States in 1919 (in London)
and currently maintains full-service rating and marketing operations in
global financial centers such as Frankfurt, Hong Kong, London, Paris,
Singapore and Tokyo. Moody's expects that its global network will position
it to benefit from the expansion in worldwide capital markets and thereby
increase revenue. Moody's also expects accelerated growth of its ratings
and research activities as a consequence of financial market integration
under the EMU. Moody's expects to continue its expansion into developing
markets either directly or through joint ventures, affiliations and other
means.
- New Rating Products. Moody's is pursuing numerous initiatives that
expand credit ratings from securities markets to other sectors with
credit risk exposures. Moody's has a committed effort to extend its
credit opinion franchise to the global bank counterparty universe through
emerging market ratings, including bank financial strength ratings.
Insurance financial strength ratings in the property and casualty,
reinsurance, and life insurance markets represent additional growth
opportunities. Moody's has also introduced issuer ratings for
corporations not active in the debt markets. As the loan and capital
markets converge, Moody's expects to continue to expand its rating
coverage of bank loans and project finance loans and securities. Moody's
has also introduced equity mutual fund indices and fund analyzers for
institutional fund managers as well as rating products which help
investors understand mutual fund management quality.
- Internet-Enhanced Products and Services. Moody's is expanding its use of
the Internet and other electronic media to enhance every aspect of client
service. In addition to instant access to Moody's ratings and research,
Moody's website applications enable its Internet clients to prepare
customized reports using ratings data and credit analyses. Internet
delivery also enables Moody's to provide
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services to more individuals within a client organization than
paper-based products and to offer higher-value services because customers
do not need to handle paper-based reports. Moody's expects that access to
these sophisticated applications will increase client use of Moody's
services. At the same time, Moody's expects cost efficiencies to emerge
as clients use desired information and reports via electronic media.
Moody's expects to continue to invest in electronic media to capitalize
on these and other opportunities.
- Additional Opportunities in Securitization. The repackaging of financial
assets has had a profound effect on the fixed-income market. New patterns
of securitization are expected to emerge in the next decade. Although the
bulk of assets securitized in the past five years have been consumer
assets owned by banks, commercial assets -- principally commercial
mortgages, term receivables and corporate loans -- are now increasingly
being securitized. Securitization concepts are rapidly evolving into a
strategic corporate finance tool in Europe and Asia and from ongoing
global development of non-traditional financial instruments, such as
derivatives, future flow securities, hybrids, credit-linked bonds and
catastrophe bonds.
- New Credit Risk Management Services. Moody's will continue to provide
banks and other financial institutions with credit risk management
services. Moody's believes that there will be increased demand for such
services because of recent proposals by international bank regulatory
authorities to recognize banks' internal credit risk management systems
for the purposes of determining regulatory capital.
- Expansion of Credit Research Products. Moody's will continue to expand
its research products by producing and acquiring additional products
through internal development and arrangements with others.
REGULATION
Moody's is registered as an investment adviser under the Investment
Advisers Act of 1940. Moody's has been designated as a Nationally Recognized
Statistical Rating Organization ("NRSRO") by the SEC. The SEC first applied the
NRSRO designation in 1975 to agencies whose credit ratings could be used to
determine net capital requirements for broker-dealers. Congress (in certain
mortgage-related legislation), the SEC (in its regulations under the Securities
Act, the Exchange Act and the Investment Company Act of 1940) and other
governmental and private bodies have used the ratings of NRSROs to distinguish
between, among other things, "investment grade" and "non-investment grade
securities".
In December 1997, the SEC proposed regulations that would define the
criteria for designation as an NRSRO. The proposal states that the SEC would
require rating agencies to have each of the following attributes before it will
grant NRSRO status:
- national recognition, which means that the rating agency is recognized as
an issuer of credible and reliable ratings by the predominate users of
securities rating in the United States,
- adequate staffing, financial resources and organizational structure to
ensure that it can issue credible and reliable ratings of the debt of
issuers, including the ability to operate independently of economic
pressures or control by companies it rates and a sufficient number of
staff members qualified in terms of education and experience to evaluate
an issuer's credit thoroughly and completely,
- use of systematic ratings procedures that are designed to ensure credible
and accurate ratings,
- extent of contacts with the management of issuers, including access to
senior level management of issuers,
- internal procedures to prevent misuse of non-public information and
compliance with such procedures, and
- registration with the SEC as an investment adviser under the Investment
Advisers Act of 1940.
Moody's does not believe that this proposal, if adopted, would have a material
adverse effect on its operations or financial position.
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Moody's is also subject to regulation in certain non-U.S. jurisdictions in
which it operates. In certain countries, governments may provide financial or
other support to local-based rating agencies. In addition, governments may from
time to time establish official rating agencies or credit ratings criteria or
procedures for evaluating local issuers.
In June 1999, the Basle Committee on Banking Supervision proposed a new
capital adequacy framework to replace the framework adopted in 1998. Under the
new framework, risk weights for certain types of claims would be based on
ratings assigned by a credit rating agency. Although the Basle Committee's
proposal (as currently formulated) would institutionalize the role of rating
agencies in the credit assessment of internationally active financial
institutions, proponents of using the internal assessments of banks for making
credit evaluations continue to argue for changes to the proposal. The comment
period on the proposal ended on March 30, 2000 and the Basle Committee plans to
set forth a more definitive proposal later this year. If adopted, the new accord
would then be the subject of rulemaking by the U.S. and international bank
regulatory authorities. In addition, the European Union is considering whether
to adopt similar regulations. Because the timing and content of the proposal are
not yet finalized, Moody's cannot predict at this time the final form of any
such regulation. However, Moody's does not believe that this proposal, if
adopted in its present form, would materially affect its financial position, its
results of operations or the manner in which it conducts its business.
Other legislation and regulation relating to credit rating and research
services has been considered from time to time by local, national and
multinational bodies and is likely to be considered in the future. If enacted,
any such legislation and regulation could significantly change the competitive
landscape in which Moody's operates. Management of Moody's cannot predict
whether these or any other proposals will be enacted or the ultimate impact on
the competitive position, financial condition or results of operations of
Moody's.
INTELLECTUAL PROPERTY
Moody's owns and controls a number of trade secrets, confidential
information, trademarks, trade names, copyrights, patents and other intellectual
property rights that, in the aggregate, are of material importance to Moody's
business. Management of Moody's believes that each of the "Moody's" name and
related names, marks and logos are of material importance to Moody's. Moody's is
licensed to use certain technology and other intellectual property rights owned
and controlled by others, and, similarly, other companies are licensed to use
certain technology and other intellectual property rights owned and controlled
by Moody's. Moody's considers its trademarks, service marks, databases, software
and other intellectual property to be proprietary, and Moody's relies on a
combination of copyright, trademark, trade secret, patent, non-disclosure and
contract safeguards for protection.
The names of Moody's products and services referred to herein are
trademarks, service marks or registered trademarks or service marks owned by or
licensed to Moody's or one or more of its subsidiaries.
EMPLOYEES
As of June 30, 2000, the number of full-time equivalent employees of
Moody's was approximately 1,400.
PROPERTIES
The executive offices of Moody's are located at 99 Church Street, New York,
New York, in a 297,000-square-foot property that will be owned by Moody's
following the Distribution. Moody's operations are also conducted from 4 other
offices located throughout the U.S. (all of which are leased) and 14 non-U.S.
office locations (all of which are leased). These other properties are
geographically distributed to meet sales and operating requirements worldwide.
These properties are generally considered to be both suitable and adequate to
meet current operating requirements, and virtually all space is being utilized.
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LEGAL PROCEEDINGS
Moody's is involved in legal proceedings, claims and litigation arising in
the ordinary course of business. Although the outcome of such matters cannot be
predicted with certainty, in the opinion of management, the ultimate liability
of Moody's in connection with such matters will not have a material adverse
effect on Moody's results of operations, cash flows or financial position.
In addition, on July 29, 1996, IRI filed a complaint in the United States
District Court for the Southern District of New York, naming as defendants
Donnelley, ACN and IMS. At the time of the filing of the complaint, each of the
other defendants was a wholly owned subsidiary of Donnelley. The complaint
alleges various violations of United States antitrust laws, including purported
violations of Section 1 and 2 of the Sherman Act arising from tying
arrangements, agreements with retailers and other customers, predatory pricing
practices and other matters alleged by IRI. In addition to the foregoing claims,
the complaint alleges a claim of tortious interference with a contract and a
claim of tortious interference with a prospective business relationship. These
claims relate to the acquisition by defendants of SRG. IRI alleges SRG violated
an alleged agreement with IRI when it agreed to be acquired by the defendants
and that the defendants induced SRG to breach that agreement. IRI's complaint
alleges damages in excess of $350 million, which amount IRI has asked to be
trebled under antitrust laws. IRI also seeks punitive damages in an unspecified
amount.
On October 15, 1996, defendants moved for an order dismissing all claims in
the complaint. On May 6, 1997, the United States District Court for the Southern
District of New York issued a decision dismissing IRI's claim of attempted
monopolization in the United States, with leave to replead within 60 days. The
Court denied defendants' motion with respect to the remaining claims in the
complaint. On June 3, 1997, defendants filed an answer denying the material
allegations in IRI's complaint, and A.C. Nielsen Company filed a counterclaim
alleging that IRI had made false and misleading statements about its services
and commercial activities. On July 7, 1997, IRI filed an Amended and Restated
Complaint repleading its alleged claim of monopolization in the United States
and realleging its other claims. By notice of motion dated August 18, 1997,
defendants moved for an order dismissing the amended claim. On December 1, 1997,
the Court denied the motion. Discovery in this case is ongoing. On December 22,
1999, defendants filed a motion for partial summary judgment seeking to dismiss
IRI's non-U.S. antitrust claims. On July 12, 2000, the Court granted the motion
dismissing claims of injury suffered from activities in foreign markets where
IRI operates through subsidiaries or companies owned by joint ventures or
"relationships" with local companies.
In November 1996, Donnelley completed the 1996 Distribution. On October 28,
1996, in connection with the 1996 Distribution, Cognizant, ACNielsen and
Donnelley entered into the Indemnity and Joint Defense Agreement. See "Risk
Factors" for a description of this agreement.
In June 1998, Donnelley completed the 1998 Distribution. In connection with
the 1998 Distribution, D&B and Donnelley entered into an agreement whereby D&B
has assumed all potential liabilities of Donnelley arising from the IRI action
and agreed to indemnify Donnelley in connection with such potential liabilities.
During 1998, Cognizant separated into two new companies, IMS Health and
NMR. IMS Health and NMR are each jointly and severally liable for all Cognizant
liabilities under the Indemnity and Joint Defense Agreement.
Under the terms of the 1996 Distribution Agreement, as a condition to the
1998 Distribution, D&B undertook to be jointly and severally liable with
Donnelley to Cognizant and ACNielsen. Under the terms of the 1998 Distribution
Agreement, as a condition to the Distribution, New D&B is required to undertake
to be jointly and severally liable with Moody's to Donnelley for D&B's
obligations under the 1998 Distribution Agreement. However, under the
Distribution Agreement, New D&B and Moody's have agreed that, as between
themselves, they will each agree to be responsible for the payments to be made
in respect of the IRI Action under the 1998 Distribution Agreement or otherwise,
including any legal fees or expenses related thereto.
Management is unable to predict at this time the final outcome of the IRI
Action or whether the resolution of such matter could materially affect Moody's
results of operations, cash flows or financial position.
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MOODY'S CORPORATION
MANAGEMENT AND EXECUTIVE COMPENSATION
John Rutherfurd, Jr. is currently President of Moody's Investors Service,
Inc. and, after the Distribution, will be the President and Chief Executive
Officer and a director of Moody's. Clifford L. Alexander, Jr. is currently
Chairman and Chief Executive Officer of D&B and, after the Distribution, will be
the non-executive Chairman of the Board of Moody's. In addition to Mr.
Rutherfurd, the other executive officers of Moody's immediately after the
Distribution will be drawn from the current management of Moody's Investors
Service, Inc. See "Moody's Corporation Management and Executive
Compensation--Moody's Executive Officers".
MOODY'S BOARD OF DIRECTORS
Immediately after the Distribution, Moody's expects to have a Board of
Directors composed of six directors. Moody's expects to supplement its Board of
Directors with additional outside directors in the months following the
Distribution.
The following table sets forth the names, in alphabetical order, and
information as to the persons who are expected to serve as directors of Moody's
Corporation following the Distribution, including information as to service with
D&B, if applicable.
POSITIONS DIRECTOR OF PRINCIPAL OCCUPATION
NAME WITH D&B D&B SINCE DURING LAST FIVE YEARS AGE* OTHER DIRECTORSHIPS
- ---- ---------------- ----------------- ------------------------ ---- -------------------------
Hall Adams, Jr. ............ Director February 1, 1992 Chairman of the Board 66 McDonald's Corporation,
and Chief Executive Sears, Roebuck and Co.
Officer, Leo Burnett
Company, Inc.
(advertising agency),
January 1987 to December
1991
Clifford L. Alexander, Chairman and February 17, 1993 Chairman and Chief 66 American Home Products
Jr. ...................... Chief Executive Executive Officer, The Corporation, Dreyfus
Officer of The Dun & Bradstreet General Family of Funds,
Dun & Bradstreet Corporation, October Dreyfus Premier Family of
Corporation 1999 to present; Founder Funds, Dreyfus Third
and President, Alexander Century Fund, IMS Health
& Associates, Inc. Incorporated, Mutual of
(private consulting firm America Life Insurance
specializing in Company, WorldCom, Inc.
work-force
inclusiveness), 1981 to
present
Mary Johnston Evans......... Director June 28, 1990 Vice Chairman of the 70 Baxter International
Board, Amtrak (National Inc., Household
Railroad Passenger International, Inc.,
Corporation), 1975 to Saint-Gobain Corporation
1979 and Sunoco, Inc.
Robert R. Glauber........... Director June 17, 1998 Adjunct Lecturer, Center 61 XL Capital Ltd., Federal
for Business and Reserve Bank of Boston,
Government, John F. measurisk.com (for which
Kennedy School of he is chairman), National
Government, Harvard Association of Securities
University, 1992 to July Dealers, Inc.
2000; effective November
1, 2000, Chief Executive
Officer and President,
National Association of
Securities Dealers, Inc.
(NASD)
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POSITIONS DIRECTOR OF PRINCIPAL OCCUPATION
NAME WITH D&B D&B SINCE DURING LAST FIVE YEARS AGE* OTHER DIRECTORSHIPS
- ---- ---------------- ----------------- ------------------------ ---- -------------------------
Henry A. McKinnell, Jr. .... Director October 15, 1997 President and Chief 57 John Wiley & Sons and
Operating Officer, Pfizer, Inc.
Pfizer Inc.
(research-based global
health care company),
May 1999 to present;
President, Pfizer
Pharmaceuticals Group,
1997 to present;
Executive Vice
President, Pfizer Inc.,
1992 to April 1999
John Rutherfurd, Jr. ....... President of May 30, 2000 President, Moody's 60 None
Moody's Investors Service, Inc.,
Investors January 1998 to present;
Service, Inc. Chief Administrative
Officer, Moody's
Investors Service, Inc.,
1996 to January 1998
- ---------------
* As of June 30, 2000.
DIRECTOR'S COMPENSATION
The compensation program of Moody's to be effective at the time of the
Distribution is under review and has not yet been determined.
Unexercised D&B stock options held by Moody's non-employee Directors as of
the Distribution Date will be converted into two separately exercisable options
to purchase shares of New D&B Common Stock and shares of Moody's Common Stock.
Specifically, each unexercised D&B stock option held by a Moody's non-employee
Director will become an option to acquire Moody's Common Stock, and such
individual will also receive a replacement stock option exercisable into shares
of New D&B Common Stock. The number of shares covered by each such replacement
option and the exercise prices thereof will be calculated in the same manner as
described above with respect to Moody's employees under "Relationship Between
The New D&B Corporation and Moody's Corporation After the Distribution--Employee
Benefits Agreement". Similarly, it is anticipated that other restricted stock
and phantom stock units held by Moody's non-employee Directors as of the
Distribution Date will be converted into comparable grants in respect of shares
of New D&B Common Stock and shares of Moody's Common Stock. These other
stock-based grants include restricted stock and phantom stock units.
COMMITTEES OF MOODY'S BOARD OF DIRECTORS
D&B's Board of Directors currently has Audit, Compensation and Benefits,
Board Affairs and Executive Committees with designated specific functions and
areas of oversight as to such committees. The Moody's Corporation Board of
Directors is expected to continue most of such standing committees after the
Distribution. However, no final determination has yet been made as to the
identity or memberships of such committees.
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MOODY'S EXECUTIVE OFFICERS
Listed below is certain information as to the executive officers who have
been selected to serve after the Distribution.
NAME, POSITION WITH MOODY'S INVESTORS SERVICE, INC. AND AGE BIOGRAPHICAL DATA
- ----------------------------------------------------------- -----------------
John Rutherfurd, Jr., 60............................ Mr. Rutherfurd has served as President of
President Moody's Investors Service, Inc. since January
1998. Prior thereto, he was the Chief
Administrative Officer from 1996 until
January of 1998. Mr. Rutherfurd also served
as Managing Director of Moody's Holdings from
1995 until 1996, and served as President of
Interactive Data Corporation ("IDC") (a
wholly owned subsidiary of D&B) from 1985 to
1989 and from 1990 until IDC was sold by D&B
in September of 1995.
Raymond W. McDaniel, 42............................. Mr. McDaniel has served as Managing Director,
Managing Director, International International, of Moody's Investors Service,
Inc. since 1996. Prior thereto, he was the
Managing Director, Europe, from 1993 until
1996. Mr. McDaniel also served as Associate
Director in Moody's Structured Finance Group
from 1989 until 1993, and served as Senior
Analyst in Moody's Mortgage Securitization
Group between 1988 and 1989.
Donald E. Noe, 46................................... Mr. Noe has served as Managing Director,
Managing Director, Credit Rating & Analysis Credit Ratings & Analysis, of Moody's
Investors Service, Inc. since 1996. Prior
thereto, he was the Managing Director,
Structured Finance, of Moody's Investors
Service, Inc. from 1994 until 1996. Mr. Noe
also served as Vice President and Director of
International of Moody's Investors Service,
Inc. from 1988 until 1994, and served as Vice
President of Moody's Financial Institutions
Group between 1986 and 1989.
Debra Perry, 49..................................... Ms. Perry has served as Chief Administrative
Chief Administrative Officer Officer of Moody's Investors Service, Inc.
since 1999. Prior thereto, she was the Group
Managing Director of the Finance, Securities
and Insurance Group of Moody's Investors
Service, Inc. from 1996 until 1999. Ms. Perry
also served as Associate Director of the
Finance and Securities Team of Moody's
Investors Service, Inc. between 1993 and
1996, and as Vice President--Senior Analyst
in Moody's Financial Institutions Group
between 1992 and 1993.
Kenneth J. Pinkes, 51............................... Mr. Pinkes has served as Managing Director
Managing Director and Chief Credit and Chief Credit Officer, Credit Ratings &
Officer, Credit Rating & Analysis Analysis, of Moody's Investors Service, Inc.
since 1996. Prior thereto, he was the Vice
President and Director of Financial
Institutions and Sovereigns of Moody's from
1985 until 1996. Mr. Pinkes also served as
Vice President and Director of Industrials of
Moody's Investors Service, Inc. from 1981
until 1985, and served as Assistant Vice
President and Associate Director of Moody's
Commercial Paper Group between 1979 and 1981.
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COMPENSATION OF MOODY'S CORPORATION EXECUTIVE OFFICERS
The following table discloses the compensation paid by D&B or Moody's for
services rendered to D&B or Moody's in 1999 by Moody's Chief Executive Officer
and by each of the persons who are anticipated to be one of the four other most
highly compensated executive officers of Moody's following the Distribution.
During the period presented, the individuals were compensated in accordance with
D&B's plans and policies. In that connection, stock-based compensation described
in the following tables is expressed in shares of D&B Common Stock, the numbers
of which will be adjusted into a number of shares of New D&B Common Stock and a
number of shares of Moody's Common Stock following the Distribution as described
under "Relationship Between The New D&B Corporation and Moody's Corporation
After the Distribution--Employee Benefits Agreement".
SUMMARY COMPENSATION TABLE
FOR SERVICES WITH D&B OR MOODY'S
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------ ----------------------- ---------
SECURITIES
RESTRICTED UNDERLYING LONG-TERM ALL OTHER
STOCK OPTIONS/ INCENTIVE COMPEN-
NAME AND PRINCIPAL SALARY BONUS OTHER ANNUAL AWARDS SARS PAYOUTS SATION
POSITION WITH MOODY'S YEAR ($) ($)(1) COMPENSATION($) ($) (#)(2) ($)(3) ($)(4)
- --------------------- ---- ------- ------- --------------- ---------- ---------- --------- ---------
John Rutherfurd, Jr. ........ 1999 374,000 581,951 0 0 77,700 161,907 24,744
President
Donald E. Noe................ 1999 325,500 428,807 0 0 29,070 188,470 23,896
Managing Director, Credit
Ratings & Analysis
Kenneth J. Pinkes............ 1999 309,900 365,221 0 0 21,860 188,470 22,477
Managing Director and Chief
Credit Officer, Credit
Ratings & Analysis
Raymond W. McDaniel.......... 1999 248,600 312,144 0 0 19,870 156,168 15,710
Managing Director,
International Finance
Debra Perry.................. 1999 235,000 258,978 0 0 14,960 141,574 12,877
Chief Administrative
Officer
- ---------------
(1) The bonus amounts with respect to 1999 were paid in 2000.
(2) Amounts shown represent the number of non-qualified options granted in 1999.
(3) Amounts shown represent the dollar value of shares of D&B Common Stock
granted in February 1999, based on the achievement of cumulative 1997-1998
performance goals.
(4) Amounts shown represent aggregate D&B contributions for the account of each
named executive officer under the PPP and the PPBEP, which plans are open to
substantially all employees of D&B and certain subsidiaries. The PPP is a
tax-defined contribution plan, and the PPBEP is a non-qualified plan that
provides benefits to participants in the PPP equal to the amount of D&B
contributions that would have been made to the participants' PPP accounts
but for certain Federal tax laws.
OPTION GRANTS ON D&B COMMON STOCK TO MOODY'S CORPORATION EXECUTIVES IN LAST
FISCAL YEAR
The following table provides information on fiscal year 1999 grants of
options to the named Moody's executives to purchase shares of D&B Common Stock.
Upon the Distribution, Moody's executives will have their options to acquire D&B
Common Stock adjusted and will receive options to acquire Moody's Common Stock
and separately exercisable options to acquire New D&B Common Stock. See
"Relationship Between The New D&B Corporation and Moody's Corporation After the
Distribution--Employee Benefits Agreement".
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OPTION GRANTS/SAR GRANTS IN LAST FISCAL YEAR TO PURCHASE D&B COMMON STOCK
NUMBER OF
SECURITIES
UNDERLYING OPTIONS/SARS
OPTIONS/SARS GRANTED TO EXERCISE OR GRANT DATE
GRANTED(1) EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE(2)
NAME (#) FISCAL YEAR ($/SHARE) DATE ($)
- ---- ------------ ------------ ----------- ---------- ----------------
John Rutherfurd, Jr. ..... 77,700 2.20% 29.1875 12/21/09 679,253
Donald E. Noe............. 29,070 0.82% 29.1875 12/21/09 254,130
Kenneth J. Pinkes......... 21,860 0.62% 29.1875 12/21/09 191,100
Raymond W. McDaniel....... 19,870 0.56% 29.1875 12/21/09 173,704
Debra Perry............... 14,960 0.42% 29.1875 12/21/09 130,780
- ---------------
(1) Options become exercisable in three equal annual installments commencing on
December 21, 2002, the third anniversary of the grant.
(2) Grant date present value is based on the Black-Scholes option valuation
model, which makes the following assumptions for the grant expiring on
December 21, 2009: an expected stock-price volatility factor of 30.0%; a
risk-free rate of return of 6.45%; a dividend yield of 2.40%; and a weighted
average exercise date of 5 years from date of grant. These assumptions may
or may not be fulfilled. The amounts shown cannot be considered predictions
of future value. In addition, the options will gain value only to the extent
the stock price exceeds the exercise price during the life of the option.
AGGREGATE D&B OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR END D&B
OPTION VALUES
The following table provides information on option exercises in 1999 by the
named executives of Moody's and the value of each such executive's unexercised
options to acquire D&B Common Stock at December 31, 1999. See "Relationship
Between The New D&B Corporation and Moody's Corporation After the
Distribution--Employee Benefits Agreement" for a description of how such options
will be adjusted in connection with the Distribution.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED,
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED D&B OPTIONS/SARS AT D&B OPTIONS/SARS AT
ON VALUE FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
EXERCISE REALIZED --------------------------- ---------------------------
NAME(1) (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------- -------- -------- ----------- ------------- ----------- -------------
John Rutherfurd, Jr. ...... 10,793 120,048 113,748 164,160 911,714 281,217
Donald E. Noe.............. 10,373 194,124 71,851 99,130 491,272 198,812
Kenneth J. Pinkes.......... 0 0 77,209 85,310 551,145 194,457
Raymond W. McDaniel........ 2,500 44,284 49,511 68,038 355,001 160,909
Debra Perry................ 0 0 36,071 42,564 244,590 71,264
- ---------------
(1) Based on the closing price of the D&B Common Stock of $29.50 on December 31,
1999.
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LONG-TERM D&B INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR(1)
PERFORMANCE ESTIMATED FUTURE PAYOUTS
NO. OF OR OTHER UNDER NON-STOCK PRICE-BASED PLANS
SHARES, UNITS PERIOD UNTIL ---------------------------------------
OR OTHER MATURATION THRESHOLD TARGET MAXIMUM
NAME RIGHTS(#) OR PAYOUT (#) (#) (#)
- ---- ------------- ---------------- ------------ --------- ----------
John Rutherfurd,
Jr. ................ (2) 5/1/99 - 4/30/02 6,000 8,000 10,000
- ---------------
(1) With the exception of Mr. Rutherfurd no other executive officer named in the
Summary Compensation Table received a long-term incentive grant during 1999.
(2) The actual number of shares of Common Stock that will be paid out at the end
of the performance period, if any, cannot be determined because the number
of shares earned will be based upon the Company's Common Stock price
appreciation versus that of the Standard & Poor's 500 Index ("S&P 500") over
the performance period. Specifically, Mr. Rutherfurd will earn (i) 6,000 or
8,000 performance shares if the Company's Common Stock share price
appreciation is equal to the 50th or 60th percentile, respectively, of the
S&P 500 for the three-year performance period; (ii) 10,000 performance
shares if such share price appreciation is equal to or greater than the 75th
percentile of the S&P 500; (iii) no performance shares if such share price
appreciation is less than the 50th percentile of the S&P 500; and (iv) a
number of performance shares calculated by interpolating between 6,000 and
8,000 or between 8,000 and 10,000 on a straight-line basis if such share
price appreciation for such period is between the applicable percentile of
the S&P 500.
RETIREMENT BENEFITS
The following table sets forth the estimated aggregate annual benefits
payable under D&B's Retirement Account Plan, PBEP and SEBP as in effect during
1999 to persons in specified average final compensation and credited service
classifications upon retirement at age 65. As of December 31, 1999, Mr.
Rutherfurd is the only participant in the SEBP. Amounts shown in the table
include U.S. Social Security benefits which would be deducted in calculating
benefits payable under these plans. The aggregate annual retirement benefits do
not increase as a result of additional credited service after 20 years.
ESTIMATED AGGREGATE ANNUAL RETIREMENT BENEFIT ASSUMING CREDITED SERVICE OF:
AVERAGE FINAL -------------------------------------------------------------------------------
COMPENSATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
------------- ----------- ------------- ------------- ------------- -------------
$ 400,000.................... $200,000 $ 240,000 $ 240,000 $ 240,000 $ 240,000
450,000.................... 225,000 270,000 270,000 270,000 270,000
550,000.................... 275,000 330,000 330,000 330,000 330,000
700,000.................... 350,000 420,000 420,000 420,000 420,000
850,000.................... 425,000 510,000 510,000 510,000 510,000
1,000,000.................... 500,000 600,000 600,000 600,000 600,000
1,300,000.................... 650,000 780,000 780,000 780,000 780,000
1,600,000.................... 800,000 960,000 960,000 960,000 960,000
1,900,000.................... 950,000 1,140,000 1,140,000 1,140,000 1,140,000
The number of full years of credited service under the plans for Messrs.
Rutherfurd, Noe, Pinkes, McDaniel and Ms. Perry are 12, 14, 19, 11 and 6,
respectively.
Compensation, for the purpose of determining retirement benefits, consists
of salary, wages, regular cash bonuses, commissions and overtime pay. Severance
pay, contingent payments and other forms of special remuneration are excluded.
Bonuses included in the Summary Compensation Table are normally not paid until
the year following the year in which they are accrued and expensed; therefore,
compensation for purposes of determining retirement benefits varies from the
Summary Compensation Table amounts in that bonuses expensed in the previous
year, but paid in the current year, are part of retirement compensation in the
current year, and current year's bonuses accrued and included in the Summary
Compensation Table are not.
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For the reasons discussed above, compensation for determining retirement
benefits for the named executive officers differed by more than 10% from the
amounts shown in the Summary Compensation Table. 1999 compensation for purposes
of determining retirement benefits for Messrs. Rutherfurd, Noe, Pinkes, McDaniel
and Ms. Perry was $700,273; $681,749; $650,778; $503,016; and $474,068,
respectively.
Average final compensation is defined as the highest average annual
compensation during five consecutive 12-month periods in the last ten
consecutive 12-month periods of the member's credited service. Members vest in
their accrued retirement benefit upon completion of five years of service. The
benefits shown in the table above are calculated on a straight-life annuity
basis.
The Retirement Account Plan, together with the PBEP, provides retirement
income based on a percentage of annual compensation. The percentage of
compensation allocated annually ranges from 3% to 12.5%, based on age and
credited service. Amounts allocated also receive interest credits based on
30-year Treasuries with a minimum compounded annual interest credit rate of 3%.
The SEBP provides retirement benefits in addition to the benefits provided
under the Retirement Account Plan and the PBEP. The SEBP has the effect of
increasing the retirement benefits under the Retirement Account Plan and the
PBEP to the amounts shown in the preceding table.
CHANGE-IN-CONTROL ARRANGEMENTS
D&B has entered into an agreement with Mr. Rutherfurd providing for certain
benefits upon actual or constructive termination of employment in the event of a
change in control of D&B. With respect to Mr. Rutherfurd, if, following a change
in control, the executive is terminated other than for cause or by reason of
death, disability or normal retirement, or the executive terminates employment
for "good reason" (generally, an unfavorable change in employment status,
compensation or benefits or a required relocation), the executive shall be
entitled to receive: (i) a lump sum payment equal to three times the sum of
salary plus guideline bonus opportunity; (ii) continuation of welfare benefits
and certain perquisites for three years; (iii) retiree medical and life
insurance benefits starting at age 55; (iv) outplacement consulting in the
amount of 20% of the sum of salary plus guideline bonus opportunity, but not
exceeding $100,000; (v) immediate vesting of all deferred compensation and
benefit plan entitlements; (vi) a prorated annual target bonus for the year in
which the change in control occurs and a full target bonus for all other bonus
plans in effect at the time of termination; and (vii) payment of any excise
taxes due in respect of the foregoing benefits.
SEVERANCE ARRANGEMENTS
All Moody's executive officers named in the Summary Compensation Table
above currently participate in D&B's CTP. For a description of the CTP, see "The
New D&B Corporation Management and Executive Compensation--Employment and Change
in Control Arrangements--Severance Arrangements".
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MOODY'S CORPORATION
SECURITY OWNERSHIP BY CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
After the Distribution, shares of D&B Common Stock will be shares of
Moody's Common Stock. The following table sets forth the number of shares of D&B
Common Stock, par value $0.01 per share, that are expected to be beneficially
owned after the Distribution by each of the Moody's directors, by each of the
executive officers named in the Moody's Summary Compensation Table above, by
each person known by Moody's to beneficially own more than 5% of the outstanding
D&B Common Stock as of June 30, 2000 ("Moody's 5% Owners"). Stock ownership
information is based on (i) the number of shares of D&B Common Stock held by
directors and executive officers as of June 30, 2000 and (ii) the number of
shares held by Moody's 5% Owners, based upon information filed with the SEC by
such Moody's 5% Owners. Information regarding shares subject to options reflects
shares of D&B Common Stock subject to options as of June 30, 2000 and
exercisable within 60 days thereafter, all of which will be converted into
options that are exercisable into shares of Moody's Common Stock. See
"Relationship Between The New D&B Corporation and Moody's Corporation After the
Distribution--Employee Benefits Agreement". Unless otherwise stated, the
indicated persons have sole voting and investment power over the shares listed.
Percentages are based upon the number of shares of D&B Common Stock outstanding
at June 30, 2000, plus, where applicable, the number of shares of D&B Common
Stock that the indicated person or group had a right to acquire within 60 days
of such date. The table also sets forth ownership information concerning "Stock
Units", the value of which is measured by the price of Moody's Common Stock.
Stock Units do not confer voting rights and are not considered "beneficially
owned" shares under SEC rules.
AGGREGATE NUMBER OF SHARES PERCENT OF SHARES
NAME BENEFICIALLY OWNED(a) STOCK UNITS OUTSTANDING
- ---- -------------------------- ----------- -----------------
Hall Adams, Jr. ......................... 12,895 9,780 *
Clifford L. Alexander, Jr. .............. 112,395 8,275 *
Mary Johnston Evans...................... 52,817(b) 13,171 *
Robert R. Glauber........................ 4,534 758 *
Raymond W. McDaniel...................... 66,548 0 *
Henry A. McKinnell, Jr. ................. 11,760 2,412 *
Donald E. Noe............................ 98,584 0 *
Debra Perry.............................. 50,238 0 *
Kenneth J. Pinkes........................ 100,980 0 *
John Rutherfurd, Jr. .................... 165,606 0 *
All current directors and executive
officers as a group (ten persons)...... 740,983 34,397 *
Harris Associates L.P. and its general
partners,
Harris Associates, Inc. ............... 9,960,693(c) 0 6.14%
Two North LaSalle Street, Suite 500
Chicago, Illinois 60602-3790
Berkshire Hathaway Inc.,
Warren E. Buffett, OBH, Inc., GEICO
Corporation, Government Employee
Insurance Company and National
Indemnity Company...................... 24,000,000(d)(e) 0 14.81%
1440 Kiewit Plaza, Omaha, Nebraska
68131
- ---------------
* Represents less than 1% of outstanding Moody's Common Stock.
(a) Includes the maximum number of shares of Common Stock that may be acquired
within 60 days of June 30, 2000 upon the exercise of vested stock options as
follows: Mr. Adams - 9,360; Mr. Alexander - 109,360; Ms. Evans - 9,360; Mr.
Glauber - 3,000; Mr. McDaniel - 49,511; Dr. McKinnell - 6,181; Mr.
Noe - 71,851; Ms. Perry - 36,071; Mr. Pinkes - 77,209; Mr.
Rutherfurd - 113,748; as a group -
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485,651. Also includes shares of restricted stock as follows: Mr.
Adams - 331; Mr. Alexander - 331; Ms. Evans - 331; Mr. Glauber - 784; and
Dr. McKinell - 975.
(b) Includes 40,770 shares owned by Ms. Evans' spouse as to which Ms. Evans
disclaims beneficial ownership.
(c) Harris Associates L.P. and its general partner, Harris Associates, Inc.
("Harris"), jointly filed an amended Schedule 13G with the SEC on September
8, 2000. This Schedule 13G shows that Harris, a registered investment
adviser, had, as of August 31, 2000, shared voting power over 9,960,693
shares, sole dispositive power over 4,709,593 shares, and shared dispositive
power over 5,251,100 shares.
(d) Berkshire Hathaway Inc. and OBH, Inc. (parent holding companies), Warren E.
Buffett, GEICO Corporation, Government Employees Insurance Company and
National Indemnity Company jointly filed an amended Schedule 13G with the
SEC on March 10, 2000. This Schedule 13G indicates that, as of February 29,
2000, (a) each of Mr. Buffett, Berkshire Hathaway Inc., OBH, Inc. and
National Indemnity Company had shared voting power and shared dispositive
power over 24,000,000 shares of D&B Common Stock and (b) each of GEICO
Corporation and Government Employees Insurance Company had shared voting
power and shared dispositive power over 7,859,700 shares of D&B Common
Stock.
(e) The foregoing is listed in the filings described in note (d) above as the
address of each of the filing parties except National Indemnity Company,
whose address is listed as 3024 Harney Street, Omaha, Nebraska 68131, GEICO
Corporation, whose address is listed as 1 GEICO Plaza, Washington D.C.
20076, and Government Employees Insurance Company, whose address is listed
as 1 GEICO Plaza, Washington, D.C. 20076.
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DESCRIPTION OF MOODY'S
CORPORATION CAPITAL STOCK
Since after the Distribution the capital stock of D&B held by D&B
stockholders will represent a continuing ownership interest in the Moody's
Business, the following summary of D&B's current capital stock structure
describes the capital structure of Moody's from and after the Distribution.
AUTHORIZED CAPITAL STOCK
The total number of shares of all classes of stock that Moody's Corporation
has authority to issue under its Restated Certificate of Incorporation is
420,000,000 shares of which 400,000,000 shares represent shares of Moody's
Common Stock, 10,000,000 shares represent shares of Preferred Stock (the
"Moody's Preferred Stock") and 10,000,000 shares represent shares of Series
common stock (the "Moody's Series Common Stock").
MOODY'S COMMON STOCK
Subject to any preferential rights of any Moody's Preferred Stock or
Moody's Series Common Stock created by the Board of Directors of Moody's, each
outstanding share of Moody's Common Stock will be entitled to such dividends, if
any, as may be declared from time to time by the Board of Directors of Moody's.
See "Dividend Policies". Each outstanding share is entitled to one vote on all
matters on which stockholders generally are entitled to vote (except in certain
instances relating solely to the terms of one or more outstanding series of
Moody's Preferred Stock or Moody's Series Common Stock). In the event of
liquidation, dissolution or winding up of Moody's, holders of Moody's Common
Stock are entitled to receive on a pro rata basis any assets remaining after
provision for payment of creditors and after payment of any liquidation
preferences to holders of Moody's Preferred Stock and Moody's Series Common
Stock.
MOODY'S PREFERRED STOCK AND MOODY'S SERIES COMMON STOCK
Each of the authorized Moody's Preferred Stock and the authorized Moody's
Series Common Stock is available for issuance from time to time in one or more
series at the discretion of the Moody's Board of Directors without stockholder
approval, subject to applicable stock exchange rules. The Moody's Board of
Directors has the authority to prescribe for each series of Moody's Preferred
Stock or Moody's Series Common Stock it establishes the number of shares in that
series, the voting rights (if any) to which such shares in that series are
entitled, the consideration for such shares in that series and the designation,
powers, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, of the
shares in that series. Depending upon the rights of such Preferred Stock or
Series Common Stock, as applicable, the issuance of Moody's Preferred Stock or
Moody's Series Common Stock, as applicable, could have an adverse effect on
holders of Moody's Common Stock by delaying or preventing a change in control of
Moody's, making removal of the present management of Moody's more difficult or
resulting in restrictions upon the payment of dividends and other distributions
to the holders of Moody's Common Stock.
AUTHORIZED BUT UNISSUED CAPITAL STOCK
Delaware law does not require stockholder approval for any issuance of
authorized shares. However, the listing requirements of the NYSE, which would
apply so long as the Moody's Common Stock remained listed on the NYSE, require
stockholder approval of certain issuances equal to or exceeding 20% of the then
outstanding voting power or then outstanding number of shares of Moody's Common
Stock. Additional shares may be issued for a variety of corporate purposes,
including future public offerings to raise additional capital or to facilitate
corporate acquisitions. Moody's currently does not have any plans to issue
additional shares of Moody's Common Stock (other than in connection with
employee and director compensation plans), Moody's Preferred Stock (other than
as required by the Moody's Rights Agreement) or Moody's Series Common Stock.
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One of the effects of the existence of unissued and unreserved Moody's
Common Stock, Moody's Preferred Stock and Moody's Series Common Stock may be to
enable the Board of Directors of Moody's to issue shares to persons friendly to
current management. Such an issuance could render more difficult or discourage
an attempt to obtain control of Moody's by means of a merger, tender offer,
proxy contest or otherwise, and thereby protect the continuity of Moody's
management and possibly deprive the stockholders of opportunities to sell their
shares of Moody's Common Stock at prices higher than prevailing market prices.
Such additional shares also could be used to dilute the stock ownership of
persons seeking to obtain control of Moody's pursuant to the operation of the
Moody's Rights Plan, which is discussed below.
MOODY'S RIGHTS PLAN
On June 3, 1998, the Board of Directors of D&B declared a dividend of one
preferred share purchase right (a "Moody's Right") for each outstanding share of
D&B Common Stock which dividend was paid on June 19, 1998 (the "Moody's Record
Date"). Each Moody's Right entitles the registered holder to purchase from
Moody's one one-thousandth of a share of Moody's Series A Junior Participating
Preferred Stock, par value $0.01 per share (the "Moody's Participating Preferred
Stock"), of Moody's at a price of $100.00 per one one-thousandth of a share of
Moody's Participating Preferred Stock (as the same may be adjusted, hereinafter
referred to as the "Moody's Participating Preferred Stock Purchase Price"),
subject to adjustment. In connection with the adoption of the Moody's Rights
Plan, it is anticipated that the Board of Directors of Moody's will establish an
independent committee of the Board of Directors of Moody's to review the Moody's
Rights Plan and Moody's other antitakeover measures. See "--Review of
Antitakeover Measures by Independent Board Committee".
Moody's Rights Agreement
The description and terms of the Moody's Rights are set forth in the D&B
Rights Agreement, dated as of June 3, 1998 (as the same may be amended from time
to time, the "Moody's Rights Agreement"), between D&B and EquiServe Trust
Company, N.A., as the Moody's Rights Agent (the "Moody's Rights Agent").
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (with certain
exceptions, hereinafter referred to in this description of Moody's Rights, a
"Moody's Acquiring Person") has acquired beneficial ownership of 15% or more of
the outstanding shares of Moody's Common Stock or (ii) 10 business days (or such
later date as may be determined by action of the Board of Directors prior to
such time as any person or group of affiliated persons becomes a Moody's
Acquiring Person) following the commencement of, or announcement of an intention
to make, a tender offer or exchange offer the consummation of which would result
in the beneficial ownership by a person or group of 15% or more of the
outstanding shares of Moody's Common Stock (the earlier of such dates
hereinafter referred to in this description of Moody's Rights as the "Moody's
Rights Distribution Date"), the Moody's Rights will be evidenced by the
certificates representing Moody's Common Stock.
The Moody's Rights Agreement provides that, until the Moody's Rights
Distribution Date (or earlier redemption or expiration of the Moody's Rights),
the Moody's Rights will be transferred with and only with the Moody's Common
Stock. Until the Moody's Rights Distribution Date (or earlier redemption or
expiration of the Moody's Rights), Moody's Common Stock certificates will
contain a notation incorporating the Moody's Rights Agreement by reference.
Until the Moody's Rights Distribution Date (or earlier redemption or expiration
of the Moody's Rights), the surrender for transfer of any certificates for
shares of Moody's Common Stock will also constitute the transfer of the Moody's
Rights associated with the shares of Moody's Common Stock represented by such
certificate. As soon as practicable following the Rights Distribution Date,
separate certificates evidencing the Moody's Rights ("Moody's Rights
Certificates") will be mailed to holders of record of the Moody's Common Stock
as of the close of business on the Moody's Rights Distribution Date and such
separate Moody's Rights Certificates alone will evidence the Moody's Rights.
The Moody's Rights are not exercisable until the Moody's Rights
Distribution Date. The Moody's Rights will expire on June 30, 2008 (hereinafter
referred to in this description of Moody's Rights as the "Moody's Final
Expiration Date"), unless the Moody's Final Expiration Date is advanced or
extended or unless the Moody's Rights are earlier redeemed or exchanged by
Moody's, in each case as described below.
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The Moody's Participating Preferred Stock Purchase Price payable, and the
number of shares of Moody's Participating Preferred Stock or other securities or
property issuable, upon exercise of the Moody's Rights are subject to adjustment
from time to time to prevent dilution (i) in the event of a stock dividend on,
or a subdivision, combination or reclassification of, the Moody's Participating
Preferred Stock, (ii) upon the grant to holders of the Moody's Participating
Preferred Stock of certain rights or warrants to subscribe for or purchase
Moody's Participating Preferred Stock at a price, or securities convertible into
Moody's Participating Preferred Stock with a conversion price, less than the
then-current market price of the Moody's Participating Preferred Stock or (iii)
upon the distribution to holders of the Moody's Participating Preferred Stock of
evidences of indebtedness or assets (excluding regular periodic cash dividends
or dividends payable in Moody's Participating Preferred Stock) or of
subscription rights or warrants (other than those referred to above).
The Moody's Rights are also subject to adjustment in the event of a stock
dividend on the Moody's Common Stock payable in shares of Moody's Common Stock
or subdivisions, consolidations or combinations of the Moody's Common Stock
occurring, in any such case, prior to the Moody's Rights Distribution Date.
Shares of Moody's Participating Preferred Stock purchasable upon exercise
of the Moody's Rights will not be redeemable. Each share of Moody's
Participating Preferred Stock will be entitled, when, as and if declared, to a
minimum preferential quarterly dividend payment equal to the greater of (i) $10
per share and (ii) 1,000 times the dividend declared per share of Moody's Common
Stock. In the event of liquidation, dissolution or winding up of Moody's, the
holders of the Moody's Participating Preferred Stock will be entitled to a
minimum preferential liquidation payment equal to the greater of: (i) $100 per
share (plus any accrued but unpaid dividends) and (ii) 1,000 times the payment
made per share of Moody's Common Stock. Each share of Moody's Participating
Preferred Stock will have 1,000 votes, voting together with the Moody's Common
Stock. Finally, in the event of any merger, consolidation or other transaction
in which shares of Moody's Common Stock are converted or exchanged, each share
of Moody's Participating Preferred Stock will be entitled to receive 1,000 times
the amount received per share of Moody's Common Stock. These rights are
protected by customary antidilution provisions.
Because of the nature of the Moody's Participating Preferred Stock's
dividend, liquidation and voting rights, the value of the one one-thousandth
interest in a share of Moody's Participating Preferred Stock purchasable upon
exercise of each Moody's Right should approximate the value of one share of
Moody's Common Stock.
In the event that any person or group of affiliated or associated persons
becomes a Moody's Acquiring Person, each holder of a Moody's Right, other than
Moody's Rights beneficially owned by the Acquiring Person (which will thereupon
become void), will thereafter have the right to receive upon exercise of a
Moody's Right and payment of the Moody's Participating Preferred Stock Purchase
Price, that number of shares of Moody's Common Stock having a market value of
two times the Moody's Participating Preferred Stock Purchase Price.
In the event that, after a person or group has become a Moody's Acquiring
Person, Moody's is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are sold,
proper provision will be made so that each holder of a Moody's Right (other than
Moody's Rights beneficially owned by a Moody's Acquiring Person which will have
become void) will thereafter have the right to receive, upon the exercise
thereof, that number of shares of common stock of the person with whom Moody's
has engaged in the foregoing transaction (or its parent), which number of shares
at the time of such transaction will have a market value of two times the
Moody's Participating Preferred Stock Purchase Price.
At any time after any person or group becomes a Moody's Acquiring Person
and prior to the acquisition by such person or group of 50% or more of the
outstanding shares of Moody's Common Stock or the occurrence of an event
described in the prior paragraph, the Board of Directors of Moody's may exchange
the Moody's Rights (other than Moody's Rights owned by such person or group
which will have become void), in whole or in part, at an exchange ratio of one
share of Moody's Common Stock, or a fractional share of Moody's Participating
Preferred Stock of equivalent value (or of a share of a class or series of
Moody's Preferred Stock having similar rights, preferences and privileges), per
Moody's Right (subject to adjustment).
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With certain exceptions, no adjustment in the Moody's Participating
Preferred Stock Purchase Price will be required until cumulative adjustments
require an adjustment of at least 1% in such Moody's Participating Preferred
Stock Purchase Price. No fractional shares of Moody's Participating Preferred
Stock will be issued (other than fractions which are integral multiples of one
one-thousandth of a share of Moody's Participating Preferred Stock, which may,
at the election of Moody's, be evidenced by depositary receipts) and in lieu
thereof, an adjustment in cash will be made based on the market price of the
Moody's Participating Preferred Stock on the last trading period to the date of
exercise.
At any time prior to the time a Moody's Acquiring Person becomes such, the
Board of Directors of Moody's may redeem the Moody's Rights in whole, but not in
part, at a price of $0.01 per Moody's Right (hereinafter referred to in this
description of Moody's Rights as the "Moody's Redemption Price"). The redemption
of the Moody's Rights may be made effective at such time, on such basis and with
such conditions as the Board of Directors in its sole discretion may establish.
Immediately upon any redemption of the Moody's Rights, the right to exercise the
Moody's Rights will terminate and the only right of the holders of Moody's
Rights will be to receive the Moody's Redemption Price.
For so long as the Moody's Rights are then redeemable, Moody's may, except
with respect to the Moody's Redemption Price, amend the Moody's Rights in any
manner. After the Moody's Rights are no longer redeemable, Moody's may, except
with respect to the Moody's Redemption Price, amend the Moody's Rights in any
manner that does not adversely affect the interests of holders of the Moody's
Rights.
Until a Moody's Right is exercised, the holder thereof, as such, will have
no rights as a stockholder of Moody's, including, without limitation, the right
to vote or to receive dividends.
A copy of the form of Moody's Rights Agreement has been filed as an exhibit
to the Registration Statement on Form 10 of D&B in respect of the registration
of the D&B Common Stock under the Exchange Act. A copy of the Moody's Rights
Agreement is available free of charge from Moody's. The summary description of
the Moody's Rights set forth above does not purport to be complete and is
qualified in its entirety by reference to the Moody's Rights Agreement, as the
same may be amended from time to time, which is hereby incorporated herein by
reference.
CERTAIN EFFECTS OF THE MOODY'S RIGHTS AGREEMENT
The Moody's Rights Agreement is designed to protect stockholders of Moody's
in the event of unsolicited offers to acquire Moody's and other coercive
takeover tactics which, in the opinion of the Board of Directors of Moody's,
could impair its ability to represent stockholder interests. These provisions
also may minimize the prospects of changes in control that could jeopardize the
tax-free nature of the Distribution. The provisions of the Moody's Rights
Agreement may render an unsolicited takeover of Moody's more difficult or less
likely to occur or might prevent such a takeover, even though such takeover may
offer Moody's stockholders the opportunity to sell their stock at a price above
the prevailing market rate and may be favored by a majority of the stockholders
of Moody's.
NO PREEMPTIVE RIGHTS
No holder of any class of stock of Moody's authorized at the time of the
Distribution will have any preemptive right to subscribe to any securities of
Moody's of any kind or class.
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
The terms of Section 203 of the DGCL apply to Moody's since it is a
Delaware corporation. Pursuant to Section 203, with certain exceptions, a
Delaware corporation may not engage in any of a broad range of business
combinations, such as mergers, consolidations and sales of assets, with an
"interested stockholder" for a period of three years from the time that such
person became an interested stockholder unless (a) the transaction that results
in the person becoming an interested stockholder or the business combination is
approved by the board of directors of the corporation before the person becomes
an interested stockholder, (b) upon consummation of the transaction which
results in the stockholder becoming an interested
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stockholder, the interested stockholder owns 85% or more of the voting stock of
the corporation outstanding at the time the transaction commenced, excluding
shares owned by persons who are directors and also officers and shares owned by
certain employee stock plans or (c) on or after the time the person becomes an
interested stockholder, the business combination is approved by the
corporation's board of directors and by holders of at least two-thirds of the
corporation's outstanding voting stock, excluding shares owned by the interested
stockholder, at a meeting of stockholders. Under Section 203, an "interested
stockholder" is defined as any person, other than the corporation and any direct
or indirect majority-owned subsidiary, that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether such person is
an interested stockholder. Section 203 does not apply to a corporation that so
provides in an amendment to its certificate of incorporation or by-laws passed
by a majority of its outstanding shares, but such stockholder action does not
become effective for 12 months following its adoption and would not apply to
persons who were already interested stockholders at the time of the amendment.
The Restated Certificate of Incorporation of Moody's does not exclude Moody's
from the restrictions imposed under Section 203.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period. The provisions of
Section 203 may encourage companies interested in acquiring Moody's to negotiate
in advance with the Board of Directors of Moody's, because the stockholder
approval requirement would be avoided if the Board of Directors approves either
the business combination or the transaction which results in the stockholder
becoming an interested stockholder. Such provisions also may have the effect of
preventing changes in the Board of Directors of Moody's. It is further possible
that such provisions could make it more difficult to accomplish transactions
which stockholders may otherwise deem to be in their best interests.
PROVISIONS OF MOODY'S CORPORATION RESTATED CERTIFICATE OF INCORPORATION AND
AMENDED AND RESTATED BY-LAWS AFFECTING CHANGE IN CONTROL
Certain provisions of the Moody's Restated Certificate of Incorporation and
Amended and Restated By-laws may delay or make more difficult unsolicited
acquisitions or changes of control of Moody's. It is believed that such
provisions will enable Moody's to develop its business in a manner that will
foster its long-term growth without disruption caused by the threat of a
takeover not deemed by its Board of Directors to be in the best interests of
Moody's and its stockholders. Such provisions could have the effect of
discouraging third parties from making proposals involving an unsolicited
acquisition or change of control of Moody's, although such proposals, if made,
might be considered desirable by a majority of the stockholders of Moody's. Such
provisions may also have the effect of making it more difficult for third
parties to cause the replacement of the current Board of Directors of Moody's.
These provisions include (i) the availability of capital stock for issuance from
time to time at the discretion of the Board of Directors (see "Description of
Moody's Corporation Capital Stock--Authorized But Unissued Capital Stock"), (ii)
prohibitions against stockholders calling a special meeting of stockholders or
acting by written consent in lieu of a meeting, (iii) requirements for advance
notice for raising business or making nominations at stockholders' meetings,
(iv) the ability of the Board of Directors to increase the size of the board and
to appoint directors to newly created directorships, (v) a classified Board of
Directors and (vi) higher than majority requirements to make certain amendments
to the By-laws and Certificate of Incorporation.
No Stockholder Action by Written Consent; Special Meetings
The Moody's Restated Certificate of Incorporation and Amended and Restated
By-laws provide that stockholder action can be taken only at an annual or
special meeting and cannot be taken by written consent in lieu of a meeting. The
Moody's Restated Certificate of Incorporation and Amended and Restated By-laws
also provide that special meetings of the stockholders can be called only by the
Chief Executive Officer of Moody's or by a vote of the majority of the Board of
Directors. Furthermore, the By-laws of Moody's provide that only such business
as is specified in the notice of any such special meeting of stockholders may
come before such meeting.
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Advance Notice for Raising Business or Making Nominations at Meetings
The By-laws of Moody's establish an advance notice procedure for
stockholder proposals to be brought before an annual meeting of stockholders and
for nominations by stockholders of candidates for election as directors at an
annual or special meeting at which directors are to be elected. Only such
business may be conducted at an annual meeting of stockholders as has been
brought before the meeting by, or at the direction of, the Chairman of the Board
of Directors, or by a stockholder of Moody's who is entitled to vote at the
meeting who has given to the Secretary of Moody's timely written notice, in
proper form, of the stockholder's intention to bring that business before the
meeting. The chairman of such meeting has the authority to make such
determinations. Only persons who are nominated by, or at the direction of, the
Chairman of the Board of Directors, or who are nominated by a stockholder who
has given timely written notice, in proper form, to the Secretary prior to a
meeting at which directors are to be elected will be eligible for election as
directors of Moody's.
To be timely, a stockholder's notice of business to be brought before an
annual meeting and nominations of candidates for election as directors at any
annual meeting shall be delivered to the Secretary of Moody's at the principal
executive offices of Moody's not less than 90 days nor more than 120 days prior
to the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is advanced by
more than 20 days, or delayed by more than 70 days, from such anniversary date,
notice by the stockholder to be timely must be so delivered not earlier than the
ninetieth day prior to such annual meeting and not later than the close of
business on the later of the seventieth day prior to such annual meeting or the
tenth day following the day on which public announcement of the date of such
meeting is first made.
To be timely, a stockholder's notice of nominations of persons for election
to the Board of Directors may be made at such a special meeting of stockholders
if the stockholder's notice shall be delivered to the Secretary of Moody's at
the principal executive offices of Moody's not earlier than the one
hundred-twentieth day prior to such special meeting and not later than the close
of business on the later of the ninetieth day prior to such special meeting or
the tenth day following the day on which public announcement is first made of
the date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting.
The notice of any nomination for election as a director must set forth the
name and address of, and the class and number of shares of Moody's held by, the
stockholder who intends to make the nomination and the beneficial owner, if any,
on whose behalf the nomination is being made; the name and address of the person
or persons to be nominated; a representation that the stockholder is a holder of
record of stock of Moody's entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; a description of all arrangements or understandings
between the stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the stockholder; such other information regarding each nominee
proposed by such stockholder as would have been required to be included in a
proxy statement filed pursuant to the proxy rules of the SEC had each nominee
been nominated, or intended to be nominated, by the Board of Directors; and the
consent of each nominee to serve as a director if so elected.
Number of Directors; Filling of Vacancies; Removal
The Moody's Restated Certificate of Incorporation and Amended and Restated
By-laws provide that newly created directorships resulting from an increase in
the authorized number of directors (or any vacancy) may only be filled by a vote
of a majority of directors then in office, although less than a quorum, or by a
sole remaining director. Accordingly, the Board of Directors of Moody's may be
able to prevent any stockholder from obtaining majority representation on the
Board of Directors by increasing the size of the board and filling the newly
created directorships with its own nominees. If any applicable provision of the
DGCL expressly confers power on stockholders to fill such a directorship at a
special meeting of stockholders, such a directorship may be filled at such
meeting only by the affirmative vote of at least 80% in voting power of all
shares of Moody's entitled to vote generally in the election of directors,
voting as a single class. Directors may
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126
be removed only for cause, and only by the affirmative vote of at least 80% in
voting power of all shares of Moody's entitled to vote generally in the election
of directors, voting as a single class. In addition, holders of Moody's
Participating Preferred Stock may elect two directors of Moody's if Moody's has
failed to pay the equivalent of six quarterly payments. See "Moody's Rights
Plan--Moody's Rights Agreement".
Classified Board of Directors
The Moody's Restated Certificate of Incorporation provides for the Board of
Directors of Moody's to be divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the Board of
Directors of Moody's will be elected each year. See "Moody's Corporation
Management and Executive Compensation--Moody's Corporation Board of Directors".
Moody's believes that a classified board will help to assure the continuity
and stability of its Board of Directors, and its business strategies and
policies as determined by its Board, because a majority of the directors at any
given time will have prior experiences as directors of Moody's. This provision
should also help to ensure that the Board of Directors of Moody's, if confronted
with an unsolicited proposal from a third party that has acquired a block of
voting stock of Moody's, will have sufficient time to review the proposal and
appropriate alternatives and to seek the best available result for all
stockholders.
This provision could prevent a party who acquires control of a majority of
the outstanding voting stock from obtaining control of the Board of Directors of
Moody's until the second annual stockholders meeting following the date the
acquiror obtains the controlling stock interest, could have the effect of
discouraging a potential acquiror from making a tender offer or otherwise
attempting to obtain control of Moody's and could thus increase the likelihood
that incumbent directors will retain their positions. Although a classified
board enhances Moody's ability to negotiate more favorable terms with a
potential acquiror, it does not preclude takeover offers.
Amendments to the Amended and Restated By-laws
The Moody's Restated Certificate of Incorporation provides that the
affirmative vote of the holders of at least 80% in voting power of all the
shares of Moody's entitled to vote generally in the election of directors,
voting together as a single class, shall be required in order for the
stockholders to alter, amend or repeal any provision of the Amended and Restated
By-laws which is to the same effect as provisions contained in the Restated
Certificate of Incorporation relating to (i) the amendment of the Amended and
Restated By-laws, (ii) the classified Board of Directors and the filling of
director vacancies and (iii) calling and taking actions at meetings of
stockholders and prohibiting stockholders from taking action by written consent.
Amendments to the Restated Certificate of Incorporation
The Moody's Restated Certificate of Incorporation requires the affirmative
vote of the holders of at least 80% in voting power of all the shares of Moody's
entitled to vote generally in the election of directors, voting together as a
single class, to alter, amend or repeal provisions of the Restated Certificate
of Incorporation relating to (i) the amendment of the Moody's Restated
Certificate of Incorporation and/or the Amended and Restated By-laws, (ii) the
classified Board of Directors of Moody's and the filling of director vacancies
and (iii) calling and taking actions at meetings of stockholders and prohibiting
stockholders from taking action by written consent.
REVIEW OF ANTITAKOVER MEASURES BY INDEPENDENT BOARD COMMITTEE
In connection with the adoption of the Moody's Rights Plan, it is
anticipated that the Board of Directors of Moody's will establish an independent
committee of the Board to review the Moody's Rights Plan and Moody's other
anti-takeover measures. Within two years of the Distribution, the independent
committee will report to the Board as to whether the Moody's Rights Plan and
such other measures continue to be in the best interests of the Moody's
stockholders. If it deems appropriate the independent committee will recommend
to the Board whether all or some of such measures should be modified or
terminated.
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INDEMNIFICATION AND LIMITATION OF LIABILITY FOR DIRECTORS AND OFFICERS
The Moody's Restated Certificate of Incorporation provides that Moody's
shall indemnify directors and officers to the fullest extent permitted by the
laws of the State of Delaware. The Moody's Restated Certificate of Incorporation
also provides that a director of Moody's shall not be liable to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the DGCL as the same exists or may hereafter be
amended.
A Delaware corporation may indemnify any person who was, is or is
threatened to be made a party to any threatened, pending or completed action or
suit by reason of the fact that the person was a director, officer, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. In the case of an action or suit by or in the right of the
corporation, the indemnity may include expenses (including attorney fees)
incurred by the person in connection with the defense or settlement of such
action or suit, provided the person acted in good faith and in a manner he or
she reasonably believed to be in, or not opposed to, the corporation's best
interests, provided that no such indemnification is permitted without judicial
approval if the officer, director, employee or agent is adjudged to be liable to
the corporation. In the case of a non-derivative action or suit, the indemnity
may include expenses (including attorney fees), judgments, fines and amounts
paid in settlement incurred by the person in connection of such action or suit,
provided the person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the corporation, and
with respect to any criminal proceeding, had no reasonable cause to believe the
person's conduct was unlawful. To the extent that a present or former director
or officer has been successful on the merits or otherwise in the defense of any
action referred to above, the corporation must indemnify him or her against the
expenses which the officer or director has actually and reasonably incurred.
Section 145 of the DGCL authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against the person and incurred by the person in
any such capacity, arising out of his or her status as such, whether or not the
corporation would otherwise have the power to indemnify him or her under Section
145.
The indemnification rights conferred by the Restated Certificate of
Incorporation of Moody's are not exclusive of any other right to which a person
seeking indemnification may otherwise be entitled. Moody's will also provide
liability insurance for the directors and officers for certain losses arising
from claims or charges made against them, while acting in their capacities as
directors or officers.
AVAILABLE INFORMATION
New D&B has filed with the SEC a registration statement on Form 10 with
respect to the shares of New D&B Common Stock to be received by the stockholders
of D&B in the Distribution. This Information Statement does not contain all of
the information set forth in the Form 10 Registration Statement and the exhibits
thereof, to which reference is hereby made. Statements made in this Information
Statement as to the contents of any contract, agreement or other documents
referred to herein are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Form 10
Registration Statement, reference is made to such exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Form 10 Registration Statement
and the exhibits thereto may be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Regional Offices of the SEC at Seven World
Trade Center, Suite 1300, New York, New York 10048 and in the Citicorp Center,
Suite 1400, 500 West Madison Street, Chicago, Illinois 60662. You may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330. In addition, copies of the Form 10 Registration Statement and
related documents may be obtained through the SEC Internet address at
http://www.sec.gov.
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REPORTS OF THE NEW D&B CORPORATION
After the Distribution, New D&B will be required to comply with the
reporting requirements of the Exchange Act and, in accordance therewith, to file
reports, proxy statements and other information with the SEC.
After the Distribution, such reports, proxy statements and other
information may be inspected and copied at the public reference facilities of
the SEC listed above and obtained by mail from the SEC as described above.
Application will be made for listing the shares of New D&B Common Stock on the
NYSE and, when such shares of New D&B Common Stock commence trading on the NYSE,
such reports, proxy statements and other information will be available for
inspection at the offices of the NYSE, 20 Broad Street, New York, New York
10005.
Additionally, New D&B will be required to provide annual reports,
containing audited financial statements, to its stockholders in connection with
its annual meetings of stockholders.
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INDEX TO FINANCIAL STATEMENTS
PAGE
----
THE DUN & BRADSTREET CORPORATION
Consolidated Financial Statements (Unaudited):
Consolidated Statements of Operations for the Six Months
Ended June 30, 2000 and 1999........................... F-2
Consolidated Balance Sheets at June 30, 2000 and December
31, 1999............................................... F-3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999........................... F-4
Notes to Unaudited Consolidated Financial Statements...... F-5
Report of Independent Accountants........................... F-14
Consolidated Financial Statements:
Consolidated Statements of Operations for the Three Years
Ended December 31, 1999................................ F-15
Consolidated Balance Sheets at December 31, 1999 and
1998................................................... F-16
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1999................................ F-17
Consolidated Statements of Shareholders' Equity for the
Three Years Ended December 31, 1999.................... F-18
Notes to Consolidated Financial Statements................ F-19
THE NEW D&B CORPORATION
Report of Independent Accountants........................... F-46
Consolidated Financial Statement:
Consolidated Balance Sheet at June 8, 2000................ F-47
Notes to Consolidated Financial Statement................. F-48
MOODY'S CORPORATION
Combined Financial Statements (Unaudited):
Combined Statements of Operations for the Six Months Ended
June 30, 2000 and 1999................................. F-49
Combined Balance Sheets at June 30, 2000 and December 31,
1999................................................... F-50
Combined Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999................................. F-51
Notes to Unaudited Combined Financial Statements.......... F-52
Report of Independent Accountants........................... F-58
Combined Financial Statements:
Combined Statements of Operations for the Three Years
Ended December 31, 1999................................ F-59
Combined Balance Sheets at December 31, 1999 and 1998..... F-60
Combined Statements of Cash Flows for the Three Years
Ended December 31, 1999................................ F-61
Combined Statements of Changes in Shareholder's Net
Investment for the Three Years Ended December 31,
1999................................................... F-62
Notes to Combined Financial Statements.................... F-63
F-1
130
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2000 1999
------------ ------------
(DOLLAR AMOUNTS IN MILLIONS,
EXCEPT PER SHARE DATA)
OPERATING REVENUES.......................................... $ 704.3 $ 703.8
----------- -----------
Operating Expenses.......................................... 267.8 272.2
Selling and Administrative Expenses......................... 279.0 285.7
Depreciation and Amortization............................... 56.4 65.1
Reorganization Costs........................................ 2.2 --
----------- -----------
Operating Costs............................................. 605.4 623.0
----------- -----------
OPERATING INCOME............................................ 98.9 80.8
----------- -----------
Interest Income............................................. 1.8 1.0
Interest Expense............................................ (4.0) (2.0)
Minority Interest Expense................................... (11.2) (11.2)
Other Expense -- Net........................................ (1.0) (1.7)
----------- -----------
Non-Operating Expense -- Net................................ (14.4) (13.9)
----------- -----------
Income from Continuing Operations before Provision for
Income Taxes.............................................. 84.5 66.9
Provision for Income Taxes.................................. 36.4 27.6
----------- -----------
Income from Continuing Operations........................... 48.1 39.3
Income from Discontinued Operations, Net of Income Taxes of
$56.6 and $51.8 for 2000 and 1999, respectively........... 87.6 87.5
----------- -----------
NET INCOME.................................................. $ 135.7 $ 126.8
=========== ===========
BASIC EARNINGS PER SHARE OF COMMON STOCK:
Continuing Operations..................................... $ 0.30 $ 0.24
Discontinued Operations................................... 0.54 0.53
----------- -----------
BASIC EARNINGS PER SHARE OF COMMON STOCK.................... $ 0.84 $ 0.77
=========== ===========
DILUTED EARNINGS PER SHARE OF COMMON STOCK:
Continuing Operations..................................... $ 0.30 $ 0.24
Discontinued Operations................................... 0.53 0.52
----------- -----------
DILUTED EARNINGS PER SHARE OF COMMON STOCK.................. $ 0.83 $ 0.76
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING -- BASIC...... 161,541,000 163,627,000
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING -- DILUTED.... 162,793,000 166,186,000
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
131
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, 2000 DECEMBER 31, 1999
-------------- ------------------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT
PER SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents................................... $ 54.8 $ 109.4
Accounts Receivable -- Net of Allowance of $18.3 in 2000 and
$17.4 in 1999............................................. 332.2 363.7
Other Current Assets........................................ 108.6 133.6
-------- --------
TOTAL CURRENT ASSETS.............................. 495.6 606.7
-------- --------
NON-CURRENT ASSETS:
Property, Plant and Equipment, Net.......................... 221.4 240.3
Prepaid Pension Costs....................................... 242.9 217.2
Computer Software, Net...................................... 135.1 149.8
Goodwill, Net............................................... 148.8 166.6
Other Non-Current Assets.................................... 184.6 194.2
-------- --------
TOTAL NON-CURRENT ASSETS.......................... 932.8 968.1
-------- --------
TOTAL ASSETS................................................ $1,428.4 $1,574.8
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable............................................... $ 291.9 $ 126.2
Accrued Income Taxes........................................ -- 175.4
Other Accrued and Current Liabilities....................... 305.9 382.2
Unearned Subscription Income................................ 375.5 353.2
-------- --------
TOTAL CURRENT LIABILITIES......................... 973.3 1,037.0
-------- --------
PENSION AND POSTRETIREMENT BENEFITS......................... 362.3 365.0
NET LIABILITIES OF DISCONTINUED OPERATIONS.................. 35.8 222.8
OTHER NON-CURRENT LIABILITIES............................... 57.1 64.7
CONTINGENCIES (NOTE 7)
MINORITY INTEREST........................................... 302.5 301.9
SHAREHOLDERS' EQUITY:
Preferred Stock, par value $.01 per share;
authorized -- 10,000,000 shares; issued and
outstanding -- none
Series Common Stock, par value $.01 per share;
authorized -- 10,000,000 shares; issued and
outstanding -- none
Common Stock, par value $.01 per share;
authorized -- 400,000,000 shares; issued -- 171,451,136
shares at June 30, 2000 and December 31, 1999............. 1.7 1.7
Capital Surplus............................................. 226.5 237.3
Retained Earnings........................................... (.1) (105.9)
Treasury Stock, at cost, 9,351,779 and 10,627,327 shares of
Common Stock at June 30, 2000 and December 31, 1999,
respectively.............................................. (291.4) (330.2)
Cumulative Translation Adjustment........................... (200.9) (181.1)
Minimum Pension Liability................................... (38.4) (38.4)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.................................. (302.6) (416.6)
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $1,428.4 $1,574.8
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
132
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
------- ------
(DOLLAR AMOUNTS IN
MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.................................................. $ 135.7 $126.8
Less: Net Income from Discontinued Operations............... 87.6 87.5
------- ------
Income from Continuing Operations........................... 48.1 39.3
Reconciliation of Net Income to Net Cash (Used in) Provided
by Operating Activities:
Depreciation and Amortization............................. 56.4 65.1
Restructuring Payments.................................... (11.7) --
Post employment Benefit Payments.......................... (2.3) (6.5)
Net Decrease in Accounts Receivable....................... 18.0 2.1
Deferred Income Taxes..................................... (4.6) (6.0)
Accrued Income Taxes...................................... (174.7) 3.0
(Decrease) Increase in Long-Term Liabilities.............. (7.3) 6.5
Increase in Other Long-Term Assets........................ (19.9) (5.7)
Net Decrease (Increase) in Other Working Capital Items.... 44.7 (14.1)
Other..................................................... 6.8 9.4
------- ------
Net Cash (Used in) Provided by Operating Activities:
Continuing Operations..................................... (46.5) 93.1
Discontinued Operations................................... (75.8) 100.4
------- ------
Net Cash (Used in) Provided by Operating Activities......... (122.3) 193.5
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Marketable Securities................ 1.2 13.4
Payments for Marketable Securities.......................... (1.1) (13.6)
Capital Expenditures........................................ (15.2) (18.4)
Additions to Computer Software and Other Intangibles........ (22.5) (42.4)
Net Cash Used in Investing Activities of Discontinued
Operations................................................ (23.7) (3.4)
Other....................................................... 5.5 4.5
------- ------
Net Cash Used in Investing Activities....................... (55.8) (59.9)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Dividends........................................ (59.8) (60.5)
Payments for Purchase of Treasury Shares.................... (3.5) (215.6)
Net Proceeds from Stock Plans............................... 22.9 36.8
Increase in Commercial Paper Borrowings..................... 167.1 92.8
Decrease in Other Short-Term Borrowings..................... -- (1.0)
Other....................................................... (1.5) 1.0
------- ------
Net Cash Provided by (Used in) Financing Activities......... 125.2 (146.5)
------- ------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents............................................... (1.7) (0.9)
------- ------
Decrease in Cash and Cash Equivalents....................... (54.6) (13.8)
Cash and Cash Equivalents, Beginning of Year................ 109.4 86.7
------- ------
Cash and Cash Equivalents, End of Period.................... $ 54.8 $ 72.9
======= ======
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
133
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
NOTE 1 INTERIM CONSOLIDATED FINANCIAL STATEMENTS
These interim consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and should be read in conjunction
with the consolidated financial statements and related notes in the 1999 Annual
Report on Form 10-K of The Dun & Bradstreet Corporation (the "Company" or
"D&B"). The consolidated results for interim periods are not necessarily
indicative of results for the full year or any subsequent period. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of financial position, results of
operations and cash flows at the dates and for the periods presented have been
included.
Effective January 1, 2000, responsibility for the management of the D&B
operating company's Canadian business was moved from its Asia Pacific and Latin
America segment ("D&B APLA")to its U.S. segment (now called "D&B North America")
to take advantage of marketing synergies between the U.S. and Canada. As such,
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information," prior
year's segment information has been restated to reflect the change. Certain
other prior-year amounts have been reclassified to conform to the 2000
presentation.
NOTE 2 REORGANIZATION AND DISCONTINUED OPERATIONS
On December 15, 1999, D&B announced a plan to separate into two
independent, publicly traded companies -- The New D&B Corporation ("New D&B")
and Moody's Corporation ("Moody's"). The separation will be accomplished through
a tax-free distribution to the shareholders of D&B (the "Distribution") of all
of the shares of common stock of a newly formed, wholly owned subsidiary
corporation (New D&B) comprising the business of the D&B operating company. In
connection with the Distribution, D&B will complete an internal reorganization
so that, at the time of the Distribution, the business of New D&B will consist
solely of the business of supplying business, purchasing, credit and marketing
information products and services as well as receivable management services (the
"New D&B Business") and the business of D&B will consist solely of the business
of providing ratings and related research and risk management services (the
"Moody's Business"). In addition, at the time of the Distribution, D&B will be
renamed "Moody's Corporation" and New D&B will succeed to the name "The Dun &
Bradstreet Corporation." Shares of common stock of D&B will represent a
continuing interest in the Moody's Business. D&B expects to complete the
Distribution by the end of the third quarter of 2000.
D&B received a tax ruling from the Internal Revenue Service (the "IRS") on
June 15, 2000, that the receipt by D&B stockholders of the New D&B Common Stock
in the Distribution will be tax-free to such stockholders and D&B for Federal
income tax purposes, except to the extent that cash is received in lieu of
fractional shares of New D&B Common Stock.
For purposes of, among other things, governing certain of the ongoing
relations between New D&B and Moody's as a result of the Distribution as well as
to allocate certain tax, employee benefit and other liabilities arising prior to
the Distribution, the companies will enter into various agreements, including a
Distribution Agreement, Tax Allocation Agreement, Employee Benefits Agreement,
Intellectual Property Assignment, Shared Transaction Services Agreement,
Insurance and Risk Management Services Agreement, Data Services Agreement and
Transition Services Agreement. Summaries of these agreements are set forth
elsewhere in the Information Statement.
F-5
134
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
In general, pursuant to the terms of the Distribution Agreement, all of the
assets of the New D&B Business will be allocated to New D&B and all of the
assets of the Moody's Business will be allocated to Moody's. The Distribution
Agreement also provides for assumptions of liabilities and cross-indemnities
designed to allocate generally, effective as of the Distribution Date, financial
responsibility for (i) all liabilities arising out of or in connection with the
New D&B Business to New D&B, (ii) all liabilities arising out of or in
connection with the Moody's Business to Moody's and (iii) substantially all
other liabilities as of the Distribution Date equally between New D&B and
Moody's. The liabilities that are to be allocated equally between New D&B and
Moody's include contingent and other liabilities relating to former businesses
of D&B and certain prior business transactions, which consist primarily of
potential liabilities arising from the legal action initiated by IRI described
in "Risk Factors--Risks Relating to The New D&B Corporation and Moody's
Corporation-- Contingencies", "The New D&B Corporation Business--Legal
Proceedings" and "Moody's Corporation Business--Legal Proceedings", and
potential tax liabilities that may arise with respect to reviews by tax
authorities of D&B's global tax planning initiatives described in "Risk
Factors--Risks Relating to The New D&B Corporation and Moody's
Corporation--Contingencies". For a discussion of the respective businesses of
New D&B and Moody's, see "The New D&B Corporation Business" and "Moody's
Corporation Business".
Pursuant to the terms of a distribution agreement, dated as of June 30,
1998 (the "1998 Distribution Agreement"), between D&B (then known as "The New
Dun & Bradstreet Corporation") and R.H. Donnelley Corporation (then known as
"The Dun & Bradstreet Corporation" and herein referred to as "Donnelley"), as a
condition to the Distribution, New D&B is required to undertake to be jointly
and severally liable with D&B to Donnelley for any liabilities arising
thereunder. The Distribution Agreement generally allocates the financial
responsibility for liabilities of D&B under the 1998 Distribution Agreement
equally between New D&B and Moody's, except that any such liabilities that
relate primarily to the New D&B Business will be New D&B liabilities and any
such liabilities that relate primarily to the Moody's Business will be Moody's
liabilities. Among other things, New D&B and Moody's will agree that, as between
themselves, they will each be responsible for 50% of any payments to be made in
respect of the action by IRI (as described below in Note 7) under the 1998
Distribution Agreement, including any legal fees and expenses related thereto.
The Distribution Agreement provides that, immediately prior to the
Distribution, a portion of D&B's indebtedness (plus certain minority interest
obligations) and a portion of D&B's cash will be allocated to New D&B in amounts
such that at the time of the Distribution and after giving effect to the
agreement discussed below and certain other factors, the net indebtedness of New
D&B (plus the minority interest obligations) will approximate the net
indebtedness of Moody's. As indicated under "Relationship Between The New D&B
Corporation and Moody's Corporation After the Distribution--Employee Benefits
Agreement", substantially all unexercised D&B stock options will be adjusted as
of the Distribution Date to comprise options to purchase Moody's Common Stock
and separately exercisable options to purchase New D&B Common Stock. In light
of, among other things, the numbers of optionees to be employed by New D&B and
Moody's, respectively, this adjustment will result in a substantially greater
number of outstanding options to purchase Moody's Common Stock than would be the
case if options were adjusted so as to become solely options to purchase common
stock of the optionee's employer. Due to this fact and the fact that, consistent
with past practice, each of New D&B and Moody's is expected to maintain a stock
purchase program designed to offset the increased number of shares otherwise
attributable to option exercises, New D&B has agreed to adjust the net
indebtedness of the two companies to compensate Moody's for the disproportionate
amount of its estimated future cash costs in this regard. The exact amount of
the adjustment discussed in the immediately preceding sentence will be
determined on a formula basis and will be dependent upon a variety of factors,
including the respective trading prices of Moody's Common Stock and New D&B
Common Stock at the time of the Distribution.
F-6
135
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Due to the relative significance of New D&B as compared to Moody's, the
transaction has been accounted for as a reverse spin-off. As such, New D&B has
been classified as continuing operations and Moody's as discontinued operations.
Pursuant to Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the
consolidated financial statements of the Company have been reclassified to
reflect the Moody's segment as discontinued operations.
For financial reporting purposes, the assets and liabilities of Moody's
have been separately classified on the consolidated balance sheets as "Net
Liabilities of Discontinued Operations." The following reflects the assets and
liabilities of Moody's at June 30, 2000 and December 31, 1999.
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
Current assets.............................................. $163.9 $178.3
Total assets................................................ 214.4 211.0
Current liabilities......................................... 198.4 377.8
Total liabilities........................................... 250.2 433.8
Net liabilities of discontinued operations.................. 35.8 222.8
The net operating results of Moody's have been reported in the caption
"Income from Discontinued Operations, Net of Income Taxes," in the consolidated
statements of operations. Summarized operating results for Moody's for the six
months ended June 30, 2000 and 1999 were as follows:
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
2000 1999
------- -------
Operating revenues.......................................... $288.7 $284.5
Income before provision for income taxes.................... 144.2 139.3
Net income.................................................. 87.6 87.5
NOTE 3 RECONCILIATION OF WEIGHTED AVERAGE SHARES
SIX MONTHS ENDED
JUNE 30,
------------------
2000 1999
------- -------
(SHARE DATA IN
THOUSANDS)
Weighted average number of shares -- basic.................. 161,541 163,627
Dilutive effect of shares issuable under stock options,
restricted stock and performance share plans.............. 1,053 2,294
Adjustment of shares applicable to stock options exercised
during the period and performance share plans............. 199 265
------- -------
Weighted average number of shares -- diluted................ 162,793 166,186
======= =======
As required by SFAS No. 128, "Earnings per Share," the Company has provided
a reconciliation of basic weighted average shares to diluted weighted average
shares within the table outlined above. The conversion of diluted shares had no
impact on the Company's operating results. Options to purchase 6.3 million and
100,000 shares of common stock of the Company were outstanding at June 30, 2000
and 1999, respectively, but were
F-7
136
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
Company's common stock. The Company's options generally expire 10 years after
the initial grant date.
NOTE 4 COMPREHENSIVE INCOME
The Company's total comprehensive income for the six months ended June 30,
2000 and 1999 were as follows:
SIX MONTHS ENDED
JUNE 30,
------------------
2000 1999
------ ------
Net income.................................................. $135.7 $126.8
Other comprehensive loss -- foreign currency translation
adjustment................................................ (19.8) (13.2)
------ ------
Total comprehensive income.................................. $115.9 $113.6
====== ======
NOTE 5 RESTRUCTURING
During the fourth quarter of 1999, the Company recorded a restructuring
charge of $41.2 million, comprised of severance costs of $32.7 million, the
write off of certain assets made obsolete or redundant and abandoned as a result
of the restructuring of $3.9 million and leasehold termination obligations of
$4.6 million. The restructuring includes: (1) office consolidations and
organization changes in both Europe and other international locations and
improvements in sales and data collection operations in Europe; (2) realigning
and streamlining the Company's global technology organization and outsourcing
certain software and product development to resources outside the United States
and Europe; and (3) migrating data collection in the U.S. to telephonic data
collection and closing 15 U.S. field data collection offices.
The following chart summarizes the activity with respect to the components
of these restructuring actions for the six months ended June 30, 2000:
LEASE
SEVERANCE TERMINATION
COSTS OBLIGATIONS TOTAL
--------- ----------- -----
December 31, 1999...................................... $30.2 $4.5 $34.7
Payments made during the six months ended June 30,
2000................................................. (11.2) (.5) (11.7)
----- ---- -----
June 30, 2000.......................................... $19.0 $4.0 $23.0
===== ==== =====
As of June 30, 2000, the Company had terminated 359 associates in
connection with restructuring and anticipates completing the restructuring
actions by the end of 2000.
NOTE 6 NOTES PAYABLE AND OTHER INDEBTEDNESS
In June 2000, D&B renewed its $300 million 364-day revolving credit
facility. D&B has an additional $300 million facility maturing in June 2003.
Under these facilities D&B has the ability to borrow at prevailing short-term
interest rates. D&B has had no borrowings outstanding under these facilities
since they were established in June 1998. These facilities have been terminated
in anticipation of the Distribution and New D&B has entered into new facilities
that will remain in effect after the Distribution.
F-8
137
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
In connection with the Distribution, D&B borrowed funds to repay in full
its commercial paper obligations. Also in connection with the Distribution, the
Distribution Agreement provides that, immediately prior to the Distribution, a
portion of the indebtedness of D&B (plus certain minority interest obligations)
and a portion of D&B's cash will be allocated to New D&B in amounts such that,
at the time of the Distribution, and after giving effect to the agreement
discussed below and certain other factors, the net indebtedness of New D&B (plus
the minority interest obligations) will approximate the net indebtedness of
Moody's. As indicated under "Relationship Between The New D&B Corporation and
Moody's Corporation After the Distribution--Employee Benefits Agreement",
substantially all unexercised D&B stock options will be adjusted as of the
Distribution Date to comprise options to purchase Moody's Common Stock and
separately exercisable options to purchase New D&B Common Stock. In light of,
among other things, the numbers of optionees to be employed by New D&B and
Moody's, respectively, this adjustment will result in a substantially greater
number of outstanding options to purchase Moody's Common Stock than would be the
case if options were adjusted so as to become solely options to purchase common
stock of the optionee's employer. Due to this fact and the fact that, consistent
with past practice, each of New D&B and Moody's is expected to maintain a stock
purchase program designed to offset the increased number of shares otherwise
attributable to option exercises, New D&B has agreed to adjust the net
indebtedness of the two companies to compensate Moody's for the disproportionate
amount of its estimated future cash costs in this regard. The exact amount of
the adjustment discussed in the immediately preceding sentence will be
determined on a formula basis and will be dependent upon a variety of factors,
including the respective trading prices of Moody's Common Stock and New D&B
Common Stock at the time of the Distribution. New D&B expects to repay in full
any indebtedness so assumed shortly after the Distribution by raising funds in
the commercial paper market.
NOTE 7 CONTINGENCIES
The Company and its subsidiaries are involved in legal proceedings, claims
and litigation arising in the ordinary course of business. Although the outcome
of such matters cannot be predicted with certainty, in the opinion of
management, the ultimate liability of D&B in connection with such matters will
not have a material effect on D&B, results of operations, cash flows or
financial position.
In addition, the Company also has certain other contingencies discussed
below.
Information Resources, Inc.
On July 29, 1996, Information Resources, Inc. ("IRI") filed a complaint in
the United States District Court for the Southern District of New York, naming
as defendants the corporation then known as "The Dun & Bradstreet Corporation"
(i.e. Donnelley), A.C. Nielsen Company (a subsidiary of ACNielsen Corporation)
and I.M.S. International, Inc. (a subsidiary of Cognizant Corporation). At the
time of the filing of the complaint, each of the other defendants was a wholly
owned subsidiary of Donnelley.
The complaint alleges various violations of United States antitrust laws,
including alleged violations of Sections 1 and 2 of the Sherman Act. The
complaint also alleges a claim of tortious interference with a contract and a
claim of tortious interference with a prospective business relationship. These
claims relate to the acquisition by the defendants of Survey Research Group
Limited ("SRG"). IRI alleges SRG violated an alleged agreement with IRI when it
agreed to be acquired by the defendants and that the defendants induced SRG to
breach that agreement.
IRI's complaint alleges damages in excess of $350 million, which amount IRI
asked to be trebled under antitrust laws. IRI also seeks punitive damages in an
unspecified amount. No amount in respect of these alleged damages has been
accrued in the consolidated financial statements of the Company.
F-9
138
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
In November 1996, Donnelley completed a distribution to its shareholders
(the "1996 Distribution") of the capital stock of ACNielsen Corporation
("ACNielsen") and Cognizant Corporation ("Cognizant"). On October 28, 1996, in
connection with the 1996 Distribution, Cognizant, ACNielsen and Donnelley
entered into an Indemnity and Joint Defense Agreement (the "Indemnity and Joint
Defense Agreement") pursuant to which they have agreed (i) to certain
arrangements allocating potential liabilities ("IRI Liabilities") that may arise
out of or in connection with the IRI action and (ii) to conduct a joint defense
of such action. In particular, the Indemnity and Joint Defense Agreement
provides that ACNielsen will assume exclusive liability for IRI Liabilities up
to a maximum amount to be calculated at such time such liabilities, if any,
become payable (the "ACN Maximum Amount"), and that Donnelley and Cognizant will
share liability equally for any amounts in excess of the ACN Maximum Amount. The
ACN Maximum Amount will be determined by an investment banking firm as the
maximum amount that ACNielsen is able to pay after giving effect to (i) any plan
submitted by such investment bank that is designed to maximize the claims-paying
ability of ACNielsen without impairing the investment banking firm's ability to
deliver a viability opinion (but which will not require any action requiring
stockholder approval), and (ii) payment of related fees and expenses. For these
purposes, financial viability means the ability of ACNielsen, after giving
effect to such plan, the payment of related fees and expenses and the payment of
the ACN Maximum Amount, to pay its debts as they become due and to finance the
current and anticipated operating and capital requirements of its business, as
reconstituted by such plan, for two years from the date any such plan is
expected to be implemented.
In June 1998, Donnelley completed a distribution to its shareholders (the
"1998 Distribution") of the capital stock of D&B and changed its name to R.H.
Donnelley Corporation. In connection with the 1998 Distribution, D&B and
Donnelley entered into an agreement whereby the Company has assumed all
potential liabilities of Donnelley arising from the IRI action and agreed to
indemnify Donnelley in connection with such potential liabilities.
During 1998, Cognizant separated into two new companies, IMS Health
Incorporated ("IMS Health") and Nielsen Media Research, Inc. ("NMR"). IMS Health
and NMR are each jointly and severally liable for all Cognizant liabilities
under the Indemnity and Joint Defense Agreement.
Under the terms of the Distribution Agreement, as a condition to the
Distribution, New D&B will undertake to be jointly and severally liable with
Moody's for D&B's obligations to Donnelley under the 1998 Distribution
Agreement, including any liabilities arising under the Indemnity and Joint
Defense Agreement. However, as between themselves, each of New D&B and Moody's
will be responsible for 50% of any payments to be made with respect to the IRI
action pursuant to the 1998 Distribution Agreement, including legal fees or
expenses related thereto.
Management is unable to predict at this time the final outcome of the IRI
action or whether the resolution of this matter could materially affect D&B's
results of operations, cash flows or financial position.
Tax matters
D&B enters into global tax planning initiatives in the normal course of
business, principally through tax free restructurings of both its foreign and
domestic operations. These initiatives are subject to normal review by tax
authorities. It is possible that additional liabilities may be proposed by tax
authorities as a result of these reviews and that some of the reviews could be
resolved unfavorably. At this time, management is unable to predict the extent
of such reviews, the outcome thereof or whether such outcome could materially
affect New D&B's results of operations, cash flows or financial position.
F-10
139
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Pursuant to the Distribution Agreement, New D&B and Moody's will agree to
be financially responsible for 50% of any potential liabilities that may arise
with respect to the reviews described above, to the extent such potential
liabilities are not directly attributable to their respective business
operations. See "Relationship Between The New D&B Corporation and Moody's
Corporation After the Distribution--Distribution Agreement".
The IRS, has completed its review of D&B's utilization of certain capital
losses generated during 1989 and 1990. On June 26, 2000 the IRS, as part of its
audit process, issued a final adjustment disallowing the utilization of these
capital losses.
Pursuant to a series of agreements, IMS Health and NMR are jointly and
severally liable to pay one-half, and Donnelley the other half, of any payments
for taxes and accrued interest arising from this matter and certain other
potential tax liabilities that may arise from future audit adjustments after
review by tax authorities relating to various transactions to which IMS Health,
NMR and Donnelley are parties after Donnelley pays the first $137 million.
In connection with the 1998 Distribution, D&B and Donnelley entered into an
agreement whereby D&B has assumed all potential liabilities of Donnelley arising
from these tax matters and has agreed to indemnify Donnelley in connection with
such potential liabilities.
On May 12, 2000, an amended tax return was filed for the 1989 and 1990 tax
periods which reflected the final adjustment in the amount of $561.6 million of
tax and interest due. D&B paid the IRS approximately $349.3 million of this
amount on May 12, 2000, which D&B funded with short-term borrowings. IMS Health
has informed D&B that it paid to the IRS approximately $212.3 million on May 17,
2000. Notwithstanding the filing and payment, D&B intends to contest the
assessment of amounts, if any, in excess of the amounts paid. D&B had accrued
its anticipated share of the probable liability arising from the utilization of
these capital losses.
NOTE 8 SEGMENT INFORMATION
SIX MONTHS ENDED
JUNE 30,
----------------
2000 1999
------ ------
OPERATING REVENUES:
Dun & Bradstreet North America............................ $485.7 $468.2
Dun & Bradstreet Europe................................... 187.9 204.5
Dun & Bradstreet APLA..................................... 30.7 31.1
------ ------
CONSOLIDATED OPERATING REVENUES............................. $704.3 $703.8
====== ======
OPERATING INCOME (LOSS):
Dun & Bradstreet North America............................ $140.8 $125.0
Dun & Bradstreet Europe................................... (15.6) (17.7)
Dun & Bradstreet APLA..................................... (5.9) (6.1)
------ ------
Total Dun & Bradstreet operating company............... 119.3 101.2
Corporate and other....................................... (20.4) (20.4)
------ ------
CONSOLIDATED OPERATING INCOME............................... $ 98.9 $ 80.8
====== ======
F-11
140
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
SUPPLEMENTAL GEOGRAPHIC AND PRODUCT LINE INFORMATION:
SIX MONTHS ENDED
JUNE 30,
----------------
2000 1999
------ ------
GEOGRAPHIC REVENUES:
United States............................................. $471.0 $454.6
International............................................. 233.3 249.2
------ ------
Consolidated Operating Revenues............................. $704.3 $703.8
====== ======
PRODUCT LINE REVENUES:
Credit Information Solutions.............................. $460.7 $479.4
Marketing Information Solutions........................... 152.3 143.0
Purchasing Information Solutions.......................... 11.8 11.5
Receivables Management Services........................... 79.5 69.9
------ ------
Total Dun & Bradstreet operating company............... $704.3 $703.8
====== ======
NOTE 9 SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN No. 44"). The
interpretation provides guidance for certain issues relating to stock
compensation involving employees that arose in applying Opinion 25. Among other
issues, FIN No. 44 clarifies (a) the definition of an employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The provisions of FIN No. 44 are effective July 1, 2000, except for
the provisions regarding modifications to fixed stock option awards which reduce
the exercise price of an award, which apply to modifications made after December
15, 1998. Provisions regarding modifications to fixed stock option awards to add
reload features apply to modifications made after January 12, 2000. The Company
believes that it is in compliance with this guidance.
In December 1999, the staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 summarizes some of the staff's
interpretations of the application of generally accepted accounting principles
to revenue recognition. The staff provided this guidance due, in part, to the
large number of revenue-recognition issues that it has encountered in registrant
filings. In June 2000, SAB 101B, "Second Amendment: Revenue Recognition in
Financial Statements," was issued, which defers the effective date of SAB 101
until the fourth fiscal quarter of 2000. The Company believes that it is in
compliance with this guidance.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities on the balance sheet and measurement
of those instruments at fair value. If certain conditions are met, a derivative
may be designated specifically as: (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm commitment
(a fair value hedge); (b) a hedge of the
F-12
141
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
exposure to variable cash flows of a forecasted transaction (a cash flow hedge);
or (c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. In June 1999, the Financial
Accounting Standards Board issued SFAS No. 137 delaying the effective date of
SFAS No. 133. The provisions of SFAS No. 133 are effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company
currently hedges foreign-currency-denominated transactions and expects to adopt
SFAS No. 133 beginning January 1, 2001. The effect of adopting SFAS No. 133 is
not expected to have a material effect on the Company.
F-13
142
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of
The Dun & Bradstreet Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
The Dun & Bradstreet Corporation and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for the years
ended December 31, 1999, 1998 and 1997, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the
Company changed certain revenue recognition accounting policies in 1997.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 2, 2000, except as to the effect of the
Distribution described in Note 2 which is as of
June 15, 2000 and Note 15 which is as of May 17, 2000.
F-14
143
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT
PER SHARE DATA)
OPERATING REVENUES.......................................... $ 1,407.7 $ 1,420.5 $ 1,353.6
----------- ----------- -----------
Operating Expenses.......................................... 538.3 536.2 512.9
Selling and Administrative Expenses......................... 539.4 542.4 517.7
Depreciation and Amortization............................... 127.9 126.2 115.8
Restructuring Expense....................................... 41.2 -- --
Reorganization Costs........................................ -- 28.0 --
----------- ----------- -----------
OPERATING INCOME............................................ 160.9 187.7 207.2
----------- ----------- -----------
Interest Income............................................. 2.9 6.3 1.8
Interest Expense............................................ (5.0) (12.0) (53.3)
Minority Interest Expense................................... (22.4) (22.5) (16.9)
Other Income (Expense) -- Net............................... 9.0 (2.2) (3.1)
----------- ----------- -----------
Non-Operating Expense -- Net................................ (15.5) (30.4) (71.5)
----------- ----------- -----------
Income from Continuing Operations before Provision for
Income Taxes.............................................. 145.4 157.3 135.7
Provision for Income Taxes.................................. 64.1 71.1 42.5
----------- ----------- -----------
Income from Continuing Operations........................... 81.3 86.2 93.2
Income from Discontinued Operations, Net of Income Taxes of
$114.8, $104.7 and $123.1 for 1999, 1998 and 1997,
respectively.............................................. 174.7 193.9 217.8
----------- ----------- -----------
Income before Cumulative Effect of Accounting Changes....... 256.0 280.1 311.0
Cumulative Effect of Accounting Changes, Net of Income Tax
Benefit of $87.7.......................................... -- -- (127.0)
----------- ----------- -----------
NET INCOME.................................................. $ 256.0 $ 280.1 $ 184.0
=========== =========== ===========
BASIC EARNINGS PER SHARE OF COMMON STOCK:
Continuing Operations..................................... $ .50 $ .51 $ .55
Discontinued Operations................................... 1.08 1.14 1.27
----------- ----------- -----------
Before Cumulative Effect of Accounting Changes............ 1.58 1.65 1.82
Cumulative Effect of Accounting Changes, Net of Income Tax
Benefit................................................. -- -- (.74)
----------- ----------- -----------
BASIC EARNINGS PER SHARE OF COMMON STOCK.................... $ 1.58 $ 1.65 $ 1.08
=========== =========== ===========
DILUTED EARNINGS PER SHARE OF COMMON STOCK:
Continuing Operations..................................... $ .50 $ .50 $ .54
Discontinued Operations................................... 1.06 1.13 1.26
----------- ----------- -----------
Before Cumulative Effect of Accounting Changes............ 1.56 1.63 1.80
Cumulative Effect of Accounting Changes, Net of Income Tax
Benefit................................................. -- -- (.73)
----------- ----------- -----------
DILUTED EARNINGS PER SHARE OF COMMON STOCK.................. $ 1.56 $ 1.63 $ 1.07
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING -- BASIC...... 162,253,000 169,492,000 170,765,000
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING -- DILUTED.... 164,284,000 171,703,000 172,552,000
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-15
144
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------
1999 1998
-------- --------
(DOLLAR AMOUNTS
IN MILLIONS, EXCEPT
PER SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents................................... $ 109.4 $ 86.7
Accounts Receivable -- Net of Allowance of $17.4 in 1999 and
$13.9 in 1998............................................. 363.7 351.0
Other Current Assets........................................ 133.6 147.8
-------- --------
TOTAL CURRENT ASSETS...................................... 606.7 585.5
-------- --------
NON-CURRENT ASSETS:
Property, Plant and Equipment, Net.......................... 240.3 258.2
Prepaid Pension Costs....................................... 217.2 176.5
Computer Software, Net...................................... 149.8 142.5
Goodwill, Net............................................... 166.6 190.5
Other Non-Current Assets.................................... 194.2 221.5
-------- --------
TOTAL NON-CURRENT ASSETS.................................. 968.1 989.2
-------- --------
TOTAL ASSETS................................................ $1,574.8 $1,574.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable............................................... $ 126.2 $ 36.9
Accrued Income Taxes........................................ 175.4 163.4
Other Accrued and Current Liabilities....................... 382.2 423.2
Unearned Subscription Income................................ 353.2 385.2
-------- --------
TOTAL CURRENT LIABILITIES................................. 1,037.0 1,008.7
-------- --------
PENSION AND POSTRETIREMENT BENEFITS......................... 365.0 369.9
NET LIABILITIES OF DISCONTINUED OPERATIONS.................. 222.8 193.5
OTHER NON-CURRENT LIABILITIES............................... 64.7 71.9
CONTINGENCIES (NOTE 15)
MINORITY INTEREST........................................... 301.9 301.7
SHAREHOLDERS' EQUITY:
Preferred Stock, par value $.01 per share;
authorized -- 10,000,000 shares; issued and
outstanding -- none
Series Common Stock, par value $.01 per share;
authorized -- 10,000,000 shares; issued and
outstanding -- none
Common Stock, par value $.01 per share;
authorized -- 400,000,000 shares; issued -- 171,451,136
shares.................................................... 1.7 1.7
Capital Surplus............................................. 237.3 251.1
Retained Earnings........................................... (105.9) (240.9)
Treasury Stock, at cost, 10,627,327 and 6,396,924 shares of
Common Stock for 1999 and 1998, respectively.............. (330.2) (168.1)
Cumulative Translation Adjustment........................... (181.1) (170.2)
Minimum Pension Liability................................... (38.4) (44.6)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.................................. (416.6) (371.0)
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $1,574.8 $1,574.7
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-16
145
THE DUN & BRADSTREET OPERATING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------- ------- --------
(DOLLAR AMOUNTS IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.................................................. $ 256.0 $ 280.1 $ 184.0
Less: Income from Discontinued Operations................... 174.7 193.9 217.8
------- ------- --------
Income (Loss) from Continuing Operations.................... 81.3 86.2 (33.8)
Reconciliation of Net Income to Net Cash Provided by
Operating Activities:
Cumulative Effect of Accounting Change, Net of Income Tax
Benefit................................................. -- -- 127.0
Depreciation and Amortization............................. 127.9 126.2 115.8
(Increase) Decrease in Note Receivable.................... (6.3) 3.6 46.3
Restructure Charge........................................ 41.2 -- --
Restructuring Payments.................................... (2.6) -- --
Postemployment Benefit Payments........................... (13.4) (15.3) (30.6)
Net (Increase) Decrease in Accounts Receivable............ (22.8) 9.0 (29.9)
Deferred Income Taxes..................................... 16.3 (28.2) (64.4)
Increase (Decrease) in Accrued Income Taxes............... 12.0 159.8 (39.2)
(Decrease) Increase in Long-Term Liabilities.............. (7.3) (105.7) 18.7
Increase in Other Long-Term Assets........................ (36.8) (17.8) (24.6)
Net Increase in Other Working Capital Items............... (69.9) (76.4) (4.3)
Other..................................................... 9.3 15.0 (8.8)
------- ------- --------
Net Cash Provided by Operating Activities:
Continuing Operations..................................... 128.9 156.4 72.2
Discontinued Operations................................... 214.8 222.4 425.4
------- ------- --------
Net Cash Provided by Operating Activities................... 343.7 378.8 497.6
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Marketable Securities................ 22.5 50.9 27.2
Payments for Marketable Securities.......................... (21.8) (50.4) (27.1)
Capital Expenditures........................................ (34.3) (47.2) (35.9)
Additions to Computer Software and Other Intangibles........ (75.3) (87.2) (75.9)
Net Cash (Used in) Provided by Investing Activities of
Discontinued Operations................................... (12.1) 9.7 90.6
Other....................................................... 10.6 (16.0) 9.4
------- ------- --------
Net Cash Used in Investing Activities....................... (110.4) (140.2) (11.7)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Dividends........................................ (120.1) (137.4) (150.6)
Payments for Purchase of Treasury Shares.................... (237.9) (220.2) (60.1)
Net Proceeds from Stock Plans............................... 48.4 41.0 40.8
Increase (Decrease) in Short-Term Borrowings................ 88.8 (385.7) 421.6
Increase in Minority Interest............................... -- -- 300.0
Increase (Decrease) in Other Short-term Borrowings.......... .6 (28.9) (1,090.6)
Net Cash Provided by (Used in) Financing Activities of
Discontinued Operations................................... 1.3 1.1 (1.0)
Proceeds from Debt Assumed by R.H. Donnelley Corporation.... -- 500.0 --
Other....................................................... 8.6 2.8 10.2
------- ------- --------
Net Cash Used in Financing Activities....................... (210.3) (227.3) (529.7)
------- ------- --------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents............................................... (.3) (1.4) (.8)
------- ------- --------
Increase (Decrease) in Cash and Cash Equivalents............ 22.7 9.9 (44.6)
Cash and Cash Equivalents, Beginning of Year................ 86.7 76.8 121.4
------- ------- --------
Cash and Cash Equivalents, End of Year...................... $ 109.4 $ 86.7 $ 76.8
======= ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-17
146
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1999
-----------------------------------------------------------
COMMON
STOCK CUMULATIVE
($1 AND $.01 CAPITAL RETAINED TREASURY TRANSLATION
PAR VALUE) SURPLUS EARNINGS STOCK ADJUSTMENT
------------ ------- -------- --------- -----------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
BALANCE, JANUARY 1, 1997................... $188.4 $ 72.6 $ 456.7 $(1,019.7) $(153.3)
Net Income................................. 184.0
Dividends Declared ($1.10 per share)....... (188.1)
Adjustment to Stock Dividend to
Shareholders of Cognizant and
ACNielsen................................ (11.3)
Treasury Shares Reissued Under Stock
Options, Deferred and Other Compensation
Plans (2,010,091)........................ 7.6 (72.4) 115.6
Treasury Shares Reissued Under Restricted
Stock Plan (20,884)...................... .2
Treasury Shares Acquired (2,271,851)....... (60.1)
Change in Cumulative Translation
Adjustment............................... (9.3)
Change in Minimum Pension Liability........
Unrealized Losses on Investments........... (1.2)
------ ------ ------- --------- -------
Total Comprehensive Income.................
BALANCE, DECEMBER 31, 1997................. 188.4 80.2 367.7 (964.0) (162.6)
------ ------ ------- --------- -------
Dollar Par Common Stock:
Treasury Shares Reissued Under Stock
Options, Deferred and Other Compensation
Plans (1,514,773)........................ (52.6) 85.3
Treasury Shares Acquired (790,800)......... (27.2)
Stock Dividend to Shareholders of
Donnelley................................ 183.5
Adjustment to Penny Par Value.............. (169.6) 169.6
Recapitalization........................... (17.1) .5 (889.3) 905.9
Net Income................................. 280.1
Dividends Declared ($.775 per share)....... (130.4)
Penny Par Common Stock:
Treasury Shares Reissued Under Stock
Options, Deferred and Other Compensation
Plans (837,232).......................... (1.3) 24.3
Treasury Shares Earned Under Restricted
Stock Plan (5,595)....................... .6
Treasury Shares Acquired (7,239,751)....... (193.0)
Common Shares Issued Under Stock Options
and Restricted Stock Plan (159,819)...... 2.1
Change in Cumulative Translation
Adjustment............................... (7.6)
Change in Minimum Pension Liability........
Unrealized Gains on Investments............ .1
------ ------ ------- --------- -------
Total Comprehensive Income.................
BALANCE, DECEMBER 31, 1998................. 1.7 251.1 (240.9) (168.1) (170.2)
------ ------ ------- --------- -------
Net Income................................. 256.0
Dividends Declared ($.74 per share)........ (119.3)
Treasury Shares Reissued Under Stock
Options, Deferred and Other Compensation
Plans and Restricted Stock Plan
(2,420,300).............................. (13.8) .3 71.0
Treasury Shares Reissued Under Employee
Stock Purchase Plan (153,097)............ (.6) 4.8
Treasury Shares Acquired (6,803,800)....... (237.9)
Change in Cumulative Translation
Adjustment............................... (10.9)
Change in Minimum Pension Liability........
Unrealized Losses on Investments........... (1.4)
------ ------ ------- --------- -------
Total Comprehensive Income.................
BALANCE, DECEMBER 31, 1999................. $ 1.7 $237.3 $(105.9) $ (330.2) $(181.1)
====== ====== ======= ========= =======
THREE YEARS ENDED DECEMBER 31, 1999
-----------------------------------------
MINIMUM TOTAL
PENSION SHAREHOLDERS' COMPREHENSIVE
LIABILITY EQUITY INCOME
--------- ------------- -------------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
BALANCE, JANUARY 1, 1997................... $ -- $(455.3)
Net Income................................. 184.0 $184.0
Dividends Declared ($1.10 per share)....... (188.1)
Adjustment to Stock Dividend to
Shareholders of Cognizant and
ACNielsen................................ (11.3)
Treasury Shares Reissued Under Stock
Options, Deferred and Other Compensation
Plans (2,010,091)........................ 50.8
Treasury Shares Reissued Under Restricted
Stock Plan (20,884)...................... .2
Treasury Shares Acquired (2,271,851)....... (60.1)
Change in Cumulative Translation
Adjustment............................... (9.3) (9.3)
Change in Minimum Pension Liability........ (37.4) (37.4) (37.4)
Unrealized Losses on Investments........... (1.2) (1.2)
------ ------- ------
Total Comprehensive Income................. $136.1
BALANCE, DECEMBER 31, 1997................. (37.4) (527.7)
------ ------- ------
Dollar Par Common Stock:
Treasury Shares Reissued Under Stock
Options, Deferred and Other Compensation
Plans (1,514,773)........................ 32.7
Treasury Shares Acquired (790,800)......... (27.2)
Stock Dividend to Shareholders of
Donnelley................................ 183.5
Adjustment to Penny Par Value.............. --
Recapitalization........................... --
Net Income................................. 280.1 $280.1
Dividends Declared ($.775 per share)....... (130.4)
Penny Par Common Stock:
Treasury Shares Reissued Under Stock
Options, Deferred and Other Compensation
Plans (837,232).......................... 23.0
Treasury Shares Earned Under Restricted
Stock Plan (5,595)....................... .6
Treasury Shares Acquired (7,239,751)....... (193.0)
Common Shares Issued Under Stock Options
and Restricted Stock Plan (159,819)...... 2.1
Change in Cumulative Translation
Adjustment............................... (7.6) (7.6)
Change in Minimum Pension Liability........ (7.2) (7.2) (7.2)
Unrealized Gains on Investments............ .1 .1
------ ------- ------
Total Comprehensive Income................. $265.4
BALANCE, DECEMBER 31, 1998................. (44.6) (371.0)
------ ------- ------
Net Income................................. 256.0 $256.0
Dividends Declared ($.74 per share)........ (119.3)
Treasury Shares Reissued Under Stock
Options, Deferred and Other Compensation
Plans and Restricted Stock Plan
(2,420,300).............................. 57.5
Treasury Shares Reissued Under Employee
Stock Purchase Plan (153,097)............ 4.2
Treasury Shares Acquired (6,803,800)....... (237.9)
Change in Cumulative Translation
Adjustment............................... (10.9) (10.9)
Change in Minimum Pension Liability........ 6.2 6.2 6.2
Unrealized Losses on Investments........... (1.4) (1.4)
------ ------- ------
Total Comprehensive Income................. $249.9
BALANCE, DECEMBER 31, 1999................. $(38.4) $(416.6)
====== ======= ======
The accompanying notes are an integral part of the consolidated financial
statements.
F-18
147
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
those of The Dun & Bradstreet Corporation (the "Company" or "D&B") and its
subsidiaries and investments in which the Company has a controlling interest.
Investments in companies over which the Company has significant influence but
not a controlling interest are carried on an equity basis. The effects of all
significant intercompany transactions have been eliminated.
The financial statements of subsidiaries outside the United States and
Canada reflect a fiscal year ended November 30 to facilitate timely reporting of
the Company's consolidated financial results.
As discussed more thoroughly in Note 2, Moody's Corporation and R.H.
Donnelley Corporation are presented as discontinued operations.
CASH EQUIVALENTS. Marketable securities that mature within 90 days of
purchase date are considered cash equivalents and are stated at cost, which
approximates fair value.
MARKETABLE SECURITIES. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," marketable securities at December 31, 1999 and
1998, are classified as "available for sale" and are reported at fair value,
with net unrealized gains and losses reported in shareholders' equity.
The fair value of current and non-current marketable securities was
estimated based on quoted market prices. Realized gains and losses on marketable
securities are determined on the specific identification method.
The Company's marketable securities of $45.4 million and $49.7 million at
December 31, 1999 and 1998, respectively, consisted primarily of debt securities
of the U.S. Government and its agencies.
PROPERTY, PLANT AND EQUIPMENT. Buildings, machinery and equipment are
depreciated principally using the straight-line method over a period of three to
40 years. Leasehold improvements are amortized on a straight-line basis over the
shorter of the term of the lease or the estimated useful life of the
improvement.
COMPUTER SOFTWARE, GOODWILL AND INTANGIBLE ASSETS. Effective January 1,
1999, the Company adopted Statement of Position ("SOP") 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." Among
other provisions, SOP 98-1 requires that entities capitalize certain
internal-use software costs once certain criteria are met. Under SOP 98-1,
overhead, general and administrative and training costs are not capitalized. In
addition, certain computer software costs are capitalized in accordance with
SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased
or Otherwise Marketed," and are reported at the lower of unamortized cost or net
realizable value. Costs incurred in connection with business process
reengineering are expensed as incurred.
Other intangibles result from acquisitions and database enhancements.
Computer software and other intangibles are being amortized, using the
straight-line method, over three to five years and three to 15 years,
respectively. Goodwill represents the excess purchase price over the fair value
of identifiable net assets of businesses acquired and is amortized on a
straight-line basis over five to 40 years.
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
reviews for impairment of long-lived assets and certain identifiable intangibles
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In general, the Company will recognize an
impairment loss when the sum of undiscounted expected future cash flows is less
than the carrying amount of such assets. The measurement for such an impairment
loss is then based on the fair value of the asset.
F-19
148
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
At each balance sheet date, the Company reviews the recoverability of
goodwill, not identified with long-lived assets, based on estimated undiscounted
future cash flows from operating activities compared with the carrying value of
goodwill, and recognizes any impairment on the basis of such comparison. The
recognition and measurement of goodwill impairment is assessed at the
business-unit level.
REVENUE RECOGNITION. The Company recognizes revenue as services are
performed, information is delivered and products and services are used by its
customers. Amounts billed for service and subscriptions are credited to unearned
subscription income and reflected in operating revenues as used over the
subscription term, which is generally one year.
ACCOUNTING CHANGES. Effective January 1, 1997, the Company changed its
revenue recognition method for its business of providing credit information
solutions to recognize revenue as products and services are used by its
customers. Previously, the Company recognized revenue ratably over the contract
period. This change is consistent with the Company's change in focus from a
sales contract basis to a product usage basis. Additionally, the Company changed
its revenue recognition method for its business of providing ratings and related
research and risk management services to recognize revenue over the service
period from previously recognizing revenue and costs at the time of billing. In
the opinion of management, these accounting changes bring revenue recognition
methods more in line with the economics of these businesses and provide a better
measure of operating results.
In accordance with Accounting Principles Board Opinion ("APB") No. 20,
"Accounting Changes," the cumulative effect of changing the accounting for
certain of the Company's revenue recognition policies resulted in a pre-tax
non-cash charge of $214.7 million in 1997 ($127.0 million after-tax or $.74 per
share basic, $.73 per share diluted).
FOREIGN CURRENCY TRANSLATION. For all operations outside the United States
where the Company has designated the local currency as the functional currency,
assets and liabilities are translated using the end-of-year exchange rates, and
revenues and expenses are translated using average exchange rates for the year.
For these countries, currency translation adjustments are accumulated in a
separate component of shareholders' equity, whereas realized transaction gains
and losses are recognized in other income (expense) -- net. For operations in
countries that are considered to be highly inflationary, where the U.S. dollar
is designated as the functional currency, monetary assets and liabilities are
translated using end-of-year exchange rates, and nonmonetary accounts are
translated using historical exchange rates. Translation and transaction gains of
$.1 million, $1.0 million and $.9 million in 1999, 1998 and 1997, respectively,
are recognized in other income (expense) -- net.
EARNINGS PER SHARE OF COMMON STOCK. In accordance with SFAS No. 128,
"Earnings per Share" ("SFAS No. 128"), basic earnings per share are calculated
based on the weighted average number of shares of common stock outstanding
during the reporting period. Diluted earnings per share are calculated giving
effect to all potentially dilutive common shares, assuming such shares were
outstanding during the reporting period.
FINANCIAL INSTRUMENTS. At times, the Company uses forward foreign exchange
contracts and interest rate swaps to hedge existing assets, liabilities and firm
commitments. The Company does not use any derivatives for trading or speculative
purposes.
Gains and losses on forward foreign exchange contracts that qualify as
hedges of existing assets or liabilities are included in the carrying amounts of
those assets or liabilities and are ultimately recognized in income as part of
those carrying amounts. Gains and losses related to qualifying hedges of firm
commitments are also deferred and are recognized in income or as adjustments of
carrying amounts when the hedged transactions occur. For forward foreign
exchange contracts, the risk reduction is assessed on a transaction basis, and
contract amounts and terms are matched to existing intercompany transactions.
F-20
149
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
The Company has used, but no longer uses, interest rate swaps to hedge
interest rate risk on commercial paper. Settlement accounting is accorded to the
swaps that have contractual, periodic payment terms considered to be aligned to
the expected future commercial paper issuances. Periodic swap payments and
receipts under interest rate swaps are recorded as part of interest expense.
Neither the swap contracts nor the gains or losses on these contracts, which are
designated and effective as hedges, are recognized in the financial statements.
If a hedging instrument is sold or terminated prior to maturity, gains and
losses will continue to be deferred until the hedged item is recognized in
income. If a hedging instrument ceases to qualify for settlement accounting, any
subsequent gains and losses are recognized currently in income.
ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates. Estimates are used in the
determination of allowances for doubtful accounts, employee benefits plans,
taxes and contingencies, and depreciation rates for property, plant and
equipment, computer software, goodwill and other capitalized costs, among
others.
RECLASSIFICATIONS. As discussed in Note 2, the consolidated financial
statements have been reclassified to identify separately the results of
operations and cash flows of the Company's discontinued operations. In addition,
certain prior-year amounts have been reclassified to conform to the 1999
presentation.
NOTE 2 REORGANIZATION AND DISCONTINUED OPERATIONS
Pursuant to APB No. 30, "Reporting the Results of Operations -- Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," the consolidated financial
statements of the Company have been reclassified to reflect as discontinued
operations the segment conducted principally by Moody's Investors Service, Inc.
as a result of the expected Distribution and the companies that constituted the
directory information services business segment of the predecessor of D&B as a
result of the 1998 Distribution (as defined below).
Distribution
On December 15, 1999, D&B announced a plan to separate into two
independent, publicly traded companies -- The New D&B Corporation ("New D&B")
and Moody's Corporation ("Moody's"). The separation will be accomplished through
a tax-free distribution to the shareholders of D&B (the "Distribution") of all
of the shares of common stock of a newly formed, wholly owned subsidiary
corporation (New D&B) comprising the business of the D&B operating company. In
connection with the Distribution, D&B will complete an internal reorganization
so that, at the time of the Distribution, the business of New D&B will consist
solely of the business of supplying business, purchasing, credit and marketing
information products and services as well as receivable management services (the
"New D&B Business") and the business of D&B will consist solely of the business
of providing ratings and related research and risk management services (the
"Moody's Business"). In addition, at the time of the Distribution, D&B will be
renamed "Moody's Corporation" and New D&B will succeed to the name "The Dun &
Bradstreet Corporation." Shares of common stock of D&B will represent a
continuing interest in the Moody's Business. D&B expects to complete the
Distribution by the end of the third quarter of 2000.
D&B received a tax ruling from the Internal Revenue Service (the "IRS") on
June 15, 2000, that the receipt by D&B stockholders of the New D&B Common Stock
in the Distribution will be tax-free to such stockholders and D&B for Federal
income tax purposes, except to the extent that cash is received in lieu of
fractional shares of New D&B Common Stock.
F-21
150
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
For purposes of, among other things, governing certain of the ongoing
relations between New D&B and Moody's as a result of the Distribution as well as
to allocate certain tax, employee benefit and other liabilities arising prior to
the Distribution, the companies will enter into various agreements, including a
Distribution Agreement, Tax Allocation Agreement, Employee Benefits Agreement,
Intellectual Property Assignment, Shared Transaction Services Agreement,
Insurance and Risk Management Services Agreement, Data Services Agreement and
Transition Services Agreement. Summaries of these agreements are set forth
elsewhere in the Information Statement.
In general, pursuant to the terms of the Distribution Agreement, all of the
assets of the New D&B Business will be allocated to New D&B and all of the
assets of the Moody's Business will be allocated to Moody's. The Distribution
Agreement also provides for assumptions of liabilities and cross-indemnities
designed to allocate generally, effective as of the Distribution Date, financial
responsibility for (i) all liabilities arising out of or in connection with the
New D&B Business to New D&B, (ii) all liabilities arising out of or in
connection with the Moody's Business to Moody's and (iii) substantially all
other liabilities equally between New D&B and Moody's. The liabilities so
allocated include liabilities arising out of or in connection with former
businesses of D&B and its predecessor as well as certain other transactions
involving D&B and its predecessor.
Pursuant to the terms of the distribution agreement, dated as of June 30,
1998 (the "1998 Distribution Agreement"), between D&B (then known as "The New
Dun & Bradstreet Corporation") and R.H. Donnelley Corporation (then known as
"The Dun & Bradstreet Corporation" and herein referred to as "Donnelley"), as a
condition to the Distribution, New D&B is required to undertake to be jointly
and severally liable with D&B to Donnelley for any liabilities arising
thereunder. The Distribution Agreement generally allocates the financial
responsibility for liabilities of D&B under the 1998 Distribution Agreement
equally between New D&B and Moody's, except that any such liabilities that
relate primarily to the New D&B Business will be New D&B liabilities and any
such liabilities that relate primarily to the Moody's Business will be Moody's
liabilities. Among other things, New D&B and Moody's will agree that, as between
themselves, they will each be responsible for 50% of any payments to be made in
respect of the IRI action (as described below in Note 15) under the 1998
Distribution Agreement, including any legal fees and expenses related thereto.
The Distribution Agreement provides that, immediately prior to the
Distribution, a portion of the indebtedness of D&B (plus certain minority
interest obligations) and a portion of D&B's cash will be allocated to New D&B
in amounts such that, at the time of the Distribution, and after giving effect
to the agreement discussed below and certain other factors, the net indebtedness
of New D&B (plus the minority interest obligations) will approximate the net
indebtedness of Moody's. As indicated under "Relationship Between The New D&B
Corporation and Moody's Corporation After the Distribution -- Employee Benefits
Agreement", substantially all unexercised D&B stock options will be adjusted as
of the Distribution Date to comprise options to purchase Moody's Common Stock
and separately exercisable options to purchase New D&B Common Stock. In light
of, among other things, the number of optionees to be employed by New D&B and
Moody's, respectively, this adjustment will result in a substantially greater
number of outstanding options to purchase Moody's Common Stock than would be the
case if options were adjusted so as to become solely options to purchase common
stock of the optionee's employer. Due to this fact and the fact that, consistent
with past practice, each of New D&B and Moody's is expected to maintain a stock
purchase program designed to offset the increased number of shares otherwise
attributable to option exercises, New D&B has agreed to adjust the net
indebtedness of the two companies to compensate Moody's for the disproportionate
amount of its estimated future cash costs in this regard. The exact amount of
the adjustment discussed in the immediately preceding sentence will be
determined on a formula basis and will be dependent upon a variety of factors,
including the respective trading prices of Moody's Common Stock and New D&B
Common Stock at the time of the Distribution.
F-22
151
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Due to the relative significance of New D&B as compared to Moody's, the
transaction has been accounted for as a reverse spin-off. As such, New D&B has
been classified as continuing operations and Moody's as discontinued operations.
Pursuant to Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations -- Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
the consolidated financial statements of the Company have been reclassified to
reflect the Moody's segment as discontinued operations.
For financial reporting purposes, the assets and liabilities of Moody's
have been separately classified on the consolidated balance sheets as "Net
Liabilities of Discontinued Operations." A summary of these assets and
liabilities at December 31, 1999 and 1998 was as follows:
DECEMBER 31,
----------------------------
1999 1998
------------ ------------
Current assets............................................. $178.3 $178.5
Total assets............................................... 211.0 214.5
Current liabilities........................................ 377.8 344.0
Total liabilities.......................................... 433.8 408.0
Net liabilities of discontinued operations................. 222.8 193.5
The net operating results of Moody's have been reported in the caption
"Income from Discontinued Operations," in the consolidated statements of
operations. Summarized operating results for Moody's for the years ended
December 31, 1999, 1998 and 1997 were as follows:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Operating revenues....................................... $564.2 $513.9 $457.4
Income before provision for income taxes................. 289.5 242.4 196.7
Net income............................................... 174.7 160.2 125.8
1998 Distribution
On June 30, 1998, the company then known as The Dun & Bradstreet
Corporation separated into two publicly traded companies. The separation (the
"1998 Distribution") of the two companies was accomplished through a tax-free
dividend by Donnelley of D&B, which was a new entity comprising Moody's and the
Dun & Bradstreet operating company. That new entity is now known as "The Dun &
Bradstreet Corporation," and the continuing entity, consisting of R.H. Donnelley
Inc., the operating company, and the DonTech partnership, changed its name from
The Dun & Bradstreet Corporation to R.H. Donnelley Corporation (i.e.,
Donnelley). Due to the relative significance of the new entity as compared to
Donnelley, the transaction was accounted for as a reverse spin-off and, as such,
Moody's and the D&B operating company were classified as continuing operations,
and Donnelley and DonTech were classified as discontinued operations. On June 3,
1998, following receipt of a ruling from the IRS that the transaction would be
tax-free to Donnelley and its U.S. shareholders, the Board of Directors of
Donnelley declared a dividend distribution to shareholders of record on June 17,
1998, consisting of one share of D&B for each share of Donnelley common stock
held as of the record date. The 1998 Distribution was effected on June 30, 1998,
and resulted in an increase to the shareholders' equity of $188.5 million.
During the fourth quarter of 1998, adjustments to the dividend of $5.0 million
were recorded as a decrease to the shareholder's equity of D&B, primarily as a
result of employee benefits plan revisions.
For purposes of governing certain of the ongoing relationships between D&B
and Donnelley following the 1998 Distribution, the companies entered into
various agreements, including the 1998 Distribution Agreement and the related
Tax Allocation Agreement, Employee Benefits Agreement, Intellectual Property
Agreement, Shared Transaction Services Agreement, Data Services Agreement and
Transition Services Agreements.
F-23
152
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
The net operating results of the Directory Information Services segment
which is now a part of Donnelley have been reported in the caption "Income from
Discontinued Operations" in the consolidated statements of operations of the
Company. Summarized operating results for this Directory Information Services
segment for the years ended December 31, 1998 and 1997 were as follows:
FOR THE YEAR ENDED
DECEMBER 31,
------------------
1998 1997
------- -------
Operating revenues.......................................... $107.8 $343.4
Income before provision for income taxes.................... 56.2 144.2
Net income.................................................. 33.7 92.0
NOTE 3 SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN No. 44"). The
interpretation provides guidance for certain issues relating to stock
compensation involving employees that arose in applying Opinion 25. Among other
issues, FIN No. 44 clarifies (a) the definition of an employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The provisions of FIN No. 44 are effective July 1, 2000, except for
the provisions regarding modifications to fixed stock option awards which reduce
the exercise price of an award, which apply to modifications made after December
15, 1998. Provisions regarding modifications to fixed stock option awards to add
reload features apply to modifications made after January 12, 2000. The Company
believes that is in compliance with this guidance.
In December 1999, the staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 summarizes some of the staff's
interpretations of the application of generally accepted accounting principles
to revenue recognition. The staff provided this guidance due, in part, to the
large number of revenue-recognition issues that it has encountered in registrant
filings. In June 2000, SAB 101B, "Second Amendment: Revenue Recognition in
Financial Statements," was issued, which defers the effective date of SAB 101
until the fourth fiscal quarter of 2000. The Company believes that it is in
compliance with this guidance.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities on the balance sheet and measurement
of those instruments at fair value. If certain conditions are met, a derivative
may be designated specifically as: (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm commitment
(a fair value hedge); (b) a hedge of the exposure to variable cash flows of a
forecasted transaction (a cash flow hedge); or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. In June 1999, the Financial
Accounting Standards Board issued SFAS No. 137 delaying the effective date of
SFAS No. 133. The provisions of SFAS No. 133 are effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company
currently hedges foreign-currency-denominated transactions and expects to adopt
SFAS No. 133 beginning January 1, 2001. The effect of adopting SFAS No. 133 is
not expected to have a material effect on the Company.
F-24
153
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
NOTE 4 RESTRUCTURING
During the fourth quarter of 1999, the Company recorded a restructuring
charge of $41.2 million, or $27.9 million on an after-tax basis. The
restructuring includes: (1) office consolidations and organization changes in
both Europe and other international locations and improvements in sales and data
collection operations in Europe; (2) realigning and streamlining the Company's
global technology organization and outsourcing certain software and product
development to resources outside the United States and Europe and (3) migrating
data collection in the U.S. to telephonic data collection and closing 15 U.S.
field data collection offices.
The restructuring charge includes $32.7 million related to severance costs
in connection with the termination of approximately 700 associates, including
two former corporate executives. The severance costs were determined based on
the amounts that will be paid pursuant to the Company's policies and certain
foreign governmental regulations. The balance of the charge relates to the
write-off of certain assets made obsolete or redundant and abandoned by the
restructuring and leasehold termination obligations arising from office
closures. The Company anticipates that it will complete the restructuring in
fiscal 2000. The components of the restructuring charge are summarized in the
table below:
D&B NORTH AMERICA D&B EUROPE D&B APLA CORPORATE TOTAL
----------------- ---------- -------- --------- -----
Severance costs........ $15.5 $12.2 $1.3 $3.7 $32.7
Assets written off..... 3.5 .4 -- -- 3.9
Lease termination
obligations.......... 3.1 1.5 -- -- 4.6
----- ----- ---- ---- -----
$22.1 $14.1 $1.3 $3.7 $41.2
===== ===== ==== ==== =====
The restructuring actions are designed to strengthen customer service
worldwide, improve operating efficiencies, lower structural costs and facilitate
investment in future revenue growth initiatives.
During 1999, severance payments of $2.5 million were made to 161 terminated
associates, and payments of $.1 million were made for lease obligations. At
December 31, 1999, $34.7 million of the restructuring reserve remains, of which
$30.2 million relates to severance which is expected to be paid out to the
affected former associates during the next 12 to 18 months, and $4.5 million
relates to lease obligations which is expected to be paid out over the term of
the lease commitments. Assets made obsolete or redundant and abandoned by
restructuring actions have been written off as of December 31, 1999.
NOTE 5 NON-RECURRING ITEMS
During the fourth quarter of 1999, the Company received $11.9 million to
settle litigation that arose from a transaction related to the 1996 sale of the
Dun & Bradstreet software company. The Company recorded the $11.9 million gain
in other income (expense) -- net.
In 1998, the Company incurred pre-tax expenses of $28.0 million in
connection with the separation of Donnelley (primarily professional fees of
$19.1 million and costs resulting from the termination of interest rate swaps of
$8.9 million).
F-25
154
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
NOTE 6 RECONCILIATION OF WEIGHTED AVERAGE SHARES
1999 1998 1997
------- ------- -------
(SHARE DATA IN THOUSANDS)
Weighted average number of shares -- basic.................. 162,253 169,492 170,765
Dilutive effect of shares issuable under stock options,
restricted stock and performance share plans.............. 1,884 2,017 1,629
Adjustment of shares applicable to stock options exercised
during the period and performance share plans............. 147 194 158
------- ------- -------
Weighted average number of shares -- diluted................ 164,284 171,703 172,552
======= ======= =======
As required by SFAS No. 128, the Company has provided a reconciliation of
basic weighted average shares to diluted weighted average shares within the
tables outlined above. Options to purchase 3.0 million, 3.4 million and 3.1
million shares of common stock of the Company were outstanding at December 31,
1999, 1998 and 1997, respectively, but were not included in the computation of
diluted earnings per share because the options' exercise prices were greater
than the average market price of the Company's common stock. The Company's
options generally expire 10 years after the initial grant date.
Upon the 1998 Distribution, employees of the Company were granted
substitute options, preserving the economic value, as closely as possible, of
the options that existed immediately prior to the 1998 Distribution and any
awards or options held by them in respect of Donnelley were canceled.
NOTE 7 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISKS
The Company uses forward foreign exchange contracts and in the past has
used interest rate swap agreements to reduce exposure to fluctuations in foreign
exchange rates and in interest rates. The Company does not use derivative
financial instruments for trading or speculative purposes. If a hedging
instrument ceases to qualify as a hedge, any subsequent gains and losses are
recognized currently in income. Collateral is generally not required for these
types of instruments.
By their nature, all such instruments involve risk, including the credit
risk of non-performance by counterparties. However, at December 31, 1999 and
1998, in management's opinion there was no significant risk of loss in the event
of non-performance of the counterparties to these financial instruments. The
Company controls its exposure to credit risk through monitoring procedures.
FOREIGN EXCHANGE
In order to reduce the risk of foreign currency exchange rate fluctuations,
the Company follows a policy of hedging substantially all cross-border
intercompany transactions denominated in a currency other than the functional
currency applicable to each of its various subsidiaries. The financial
instruments used to hedge these cross-border intercompany transactions are
forward foreign exchange contracts with maturities of six months or less. These
forward contracts are executed with creditworthy institutions and are
denominated primarily in the British pound sterling, the euro and the Swedish
krona. The gains and losses on these forward contracts are recorded to income or
expense and are essentially offset by the gains and losses on the underlying
foreign currency transactions.
At December 31, 1999 and 1998, the Company had approximately $138 million
and $117 million of forward foreign exchange contracts outstanding with various
expiration dates through March 2000 and March 1999, respectively. At December
31, 1999, unrealized gains on these contracts were $.9 million and the
unrealized losses were $.3 million. At December 31, 1998, unrealized gains on
these contracts were $.9 million and the unrealized losses were $.4 million.
F-26
155
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
INTEREST RATE SWAP AGREEMENTS
In the past, the Company has entered into interest rate swap agreements to
manage exposure to changes in interest rates. Interest rate swaps allowed the
Company to raise funds at floating rates and effectively swap them into fixed
rates that were lower than those available to it if fixed-rate borrowings were
to be made directly.
In connection with the 1998 Distribution and repayment of outstanding notes
payable, Donnelley canceled all of its interest rate swap agreements (which
fixed interest rates on $300 million of variable rate debt through January 2005)
and recorded into income the previously unrecognized fair value loss at the time
of termination. At the time of the cancellation, the fair value of the interest
rate swaps was a loss of $12.7 million, of which $3.8 million ($.6 million in
the first quarter of 1998 and $3.2 million in 1997) had been recognized in
income relating to swaps that did not qualify for settlement accounting. The
previously unrecognized loss of $8.9 million was recorded during the second
quarter of 1998 and included in reorganization costs.
NOTE 8 PENSION AND POSTRETIREMENT BENEFITS
PENSION PLANS POSTRETIREMENT BENEFITS
---------------------- ------------------------
1999 1998 1999 1998
--------- --------- ---------- ----------
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligation at January 1.................. $(1,236.2) $(1,227.3) $(214.0) $(216.6)
Service cost..................................... (18.4) (18.2) (2.9) (2.8)
Interest cost.................................... (81.6) (82.6) (13.8) (14.3)
Benefits paid.................................... 88.5 93.8 17.8 17.7
Impact of 1998 Distribution...................... -- 41.4 -- 6.1
Actuarial gain (loss)............................ 94.8 (43.3) 22.1 (1.3)
Plan participant contributions................... -- -- (2.7) (2.8)
--------- --------- ------- -------
Benefit obligation at December 31................ $(1,152.9) $(1,236.2) $(193.5) $(214.0)
========= ========= ======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1........... $ 1,465.1 $ 1,330.2 $ -- $ --
Actual return on plan assets..................... 279.6 264.3 -- --
Employer contribution............................ 24.4 25.3 15.1 14.9
Impact of 1998 Distribution...................... -- (60.9) -- --
Plan participant contributions................... -- -- 2.7 2.8
Benefits paid.................................... (88.5) (93.8) (17.8) (17.7)
--------- --------- ------- -------
Fair value of plan assets at December 31......... $ 1,680.6 $ 1,465.1 $ -- $ --
========= ========= ======= =======
RECONCILIATION OF FUNDED STATUS TO TOTAL AMOUNT
RECOGNIZED
Funded status of plan............................ $ 527.7 $ 228.9 $(193.5) $(214.0)
Unrecognized actuarial (gain) loss............... (380.8) (112.1) (3.3) 18.8
Unrecognized prior service cost.................. 28.7 29.6 -- (2.7)
Unrecognized net transition asset................ (12.5) (24.3) -- --
--------- --------- ------- -------
Net amount recognized............................ $ 163.1 $ 122.1 $(196.8) $(197.9)
========= ========= ======= =======
F-27
156
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
PENSION PLANS POSTRETIREMENT BENEFITS
---------------------- ------------------------
1999 1998 1999 1998
--------- --------- ---------- ----------
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEETS
Prepaid pension costs............................ $ 266.9 $ 224.3 $ -- $ --
Pension and postretirement benefits.............. (162.5) (167.7) (196.8) (197.9)
Intangible assets................................ 20.3 20.9 -- --
Minimum pension liability........................ 38.4 44.6 -- --
--------- --------- ------- -------
Net amount recognized............................ $ 163.1 $ 122.1 $(196.8) $(197.9)
========= ========= ======= =======
The benefit obligation and accumulated benefit obligation for pension plans
with accumulated benefit obligations in excess of plan assets in 1999 were
$176.9 million and $162.5 million, respectively, and in 1998 were $185.9 million
and $167.7 million, respectively. Grantor trusts are used to fund these
obligations. At December 31, 1999 and 1998, the balances of those trusts were
$45.2 million and $46.9 million, respectively.
New D&B will retain the obligation for all pension and postretirement
benefits for personnel who retire from Moody's prior to the Distribution Date.
New D&B will also retain the obligation for all vested benefits accrued by
Moody's active employees under the Company's nonqualified supplemental pension
plans through the date of the Distribution.
Pension obligations and related plan assets under D&B's qualified plan for
active employees of Moody's determined in accordance with Internal Revenue Code
Section 414(l), will be transferred to Moody's at the Distribution Date. Prepaid
pension costs of $49.7 million and $47.9 million are included in net liabilities
of discontinued operations at December 31, 1999 and 1998.
Postretirement benefit obligations for active employees of Moody's will be
transferred to Moody's at the Distribution Date. An obligation of $1.9 million
is included in net liabilities of discontinued operations at December 31, 1999
and 1998, respectively.
PENSION PLANS POSTRETIREMENT BENEFITS
--------------------------- ------------------------
1999 1998 1997 1999 1998 1997
------- ------- ------- ------ ------ ------
COMPONENTS OF NET PERIODIC (INCOME) COST:
Service cost................................... $ 18.4 $ 18.2 $ 18.4 $ 2.9 $ 2.8 $ 3.5
Interest cost.................................. 81.6 82.6 83.4 13.8 14.3 14.6
Expected return on plan assets................. (114.0) (109.4) (100.9) -- -- --
Amortization of transition (asset)
obligation................................... (11.7) 3.1 1.6 -- -- --
Amortization of prior service cost............. 3.8 4.4 4.5 (2.7) (4.4) (4.5)
Recognized actuarial loss (gain)............... 6.6 (10.4) (10.5) -- -- --
------- ------- ------- ----- ----- -----
Net periodic (income) cost..................... $ (15.3) $ (11.5) $ (3.5) $14.0 $12.7 $13.6
======= ======= ======= ===== ===== =====
Net periodic pension (income) cost includes costs attributable to
discontinued operations of $.1 million, $0 and $2.1 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
Net periodic cost for the postretirement benefits includes expense
attributable to discontinued operations of $.3 million, $.3 million and $2.0
million for the years ended December 31, 1999, 1998 and 1997, respectively.
F-28
157
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
ASSUMPTIONS AS OF DECEMBER 31:
Discount rate.................................. 7.75% 6.75% 7.00% 7.75% 6.75% 7.00%
Expected return on plan assets................. 9.75 9.75 9.70 -- -- --
Rate of compensation increase.................. 4.91 3.91 4.46 4.91 3.91 4.46
Cash balance accumulation conversion rate...... 6.50 5.50 5.75 -- -- --
For measurements purposes, a 6.5% annual rate of increase in the per capita
cost of covered health-care benefits was assumed for 2000. The rate was assumed
to decrease gradually to 5.0% for 2021 and remain at that level thereafter.
Assumed health-care cost trend rates have a significant effect on the
amounts reported for the health-care plans. A one-percentage-point change in the
assumed health-care cost trend rates would have the following effects.
1% POINT
--------------------
INCREASE DECREASE
-------- --------
Benefit obligation at end of year........................... $16.3 $(14.9)
Service cost plus interest cost............................. 1.4 (1.3)
PROFIT PARTICIPATION PLAN
The Company also has a profit participation plan covering substantially all
U.S. employees that provides for an employee salary deferral contribution and
Company contributions. Employees may contribute up to 16% of their pay. The
Company contributes an amount equal to 50% of employee contributions, up to 6%
of the employee's pay. The Company also makes contributions to the plan if
certain objectives are met, based on performance over a two-year period. The
Company recognized expense associated with the plan of $12.1 million, $16.4
million and $13.3 million in 1999, 1998 and 1997, respectively. Profit
participation plan expense attributable to discontinued operations was $2.8
million, $2.6 million and $2.4 million in 1999, 1998 and 1997, respectively.
NOTE 9 EMPLOYEE STOCK PLANS
Under its 1998 Key Employees' Stock Incentive Plan, the Company has granted
options to certain associates to purchase shares of its common stock at the
market price on the date of the grant. Options granted in December 1999 vest in
three equal installments, beginning on the third anniversary of the grant, while
other options granted under the plan vest 100% after five years, with the
opportunity for accelerated vesting if certain conditions are met. These options
expire 10 years from the date of the grant. The 1998 Key Employees' Stock
Incentive Plan, adopted upon the 1998 Distribution, provides for the granting of
up to 16.5 million shares of common stock of the Company.
In connection with the Distribution, unexercised D&B stock options held by
Moody's employees as of the Distribution Date will be adjusted to comprise
options to purchase Moody's Common Stock ("Moody's Stock Options") and
separately exercisable options to purchase New D&B Common Stock ("New D&B Stock
Options"). In general, unexercised D&B stock options held by New D&B employees
as of the Distribution Date will become options to acquire Moody's Common Stock,
and such individual will receive replacement stock options exercisable into
shares of New D&B Common Stock. The value of replacement awards will preserve as
closely as possible the value of awards that existed immediately prior to the
Distribution.
The number of shares of Moody's Common Stock covered by the adjusted
Moody's Stock Options will equal the same number of shares covered by the
unexercised D&B stock options. The number of shares of New D&B Common Stock
covered by the New D&B Stock Options will equal 50% percent of the number of
shares covered by the unexercised D&B stock options.
F-29
158
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Unexercised D&B stock options held by former employees and disabled
employees of D&B who terminated employment on or prior to the Distribution Date
will be adjusted in substantially the same manner as options held by Moody's
active employees. All stock appreciation rights will be adjusted or converted in
substantially the same manner as the unexercised D&B stock options.
At the date of the 1998 Distribution, employees of the Company were granted
substitute options and other equity-based awards (under the 1998 Dun &
Bradstreet Corporation Replacement Plan for Certain Employees Holding Dun &
Bradstreet Corporation Equity-Based Awards), preserving the economic value, as
closely as possible, of the awards that existed immediately prior to the 1998
Distribution, and any awards held by them in respect to Donnelley were
surrendered. For employees of Donnelley, awards were adjusted immediately
following the 1998 Distribution to preserve, as closely as possible, the
economic value of the awards that existed immediately prior to the 1998
Distribution. The remaining holders of unexercised options, including retirees
and certain other former employees of the Company, were offered the choice of
converting their options to the Company's or continuing to hold Donnelley
options.
The Company applies APB No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for the stock option plans. The Company
has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant date for awards in 1999, 1998 and 1997 (excluding awards granted to
employees of discontinued operations) consistent with the provisions of SFAS No.
123, the Company's income from continuing operations and earnings per share
would have been reduced to the pro-forma amounts indicated below:
1999 1998 1997
----- ----- -----
Income from continuing operations:
As reported............................................... $81.3 $86.2 $93.2
Pro forma................................................. $75.5 $81.2 $91.2
Basic earnings per share of common stock from continuing
operations:
As reported............................................... $ .50 $ .51 $ .55
Pro forma................................................. $ .47 $ .48 $ .53
Diluted earnings per share of common stock from continuing
operations:
As reported............................................... $ .50 $ .50 $ .54
Pro forma................................................. $ .46 $ .47 $ .53
The pro forma disclosures shown are not representative of the effects on
income and earnings per share in future years.
F-30
159
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
AFTER CONVERSION PRIOR TO
1998 AT 1998 1998
1999 DISTRIBUTION DISTRIBUTION DISTRIBUTION 1997
--------- ------------ ------------ ------------ ---------
Expected dividend yield........... 2.40% 2.75% 2.75% 3.3% 3.3%
Expected stock volatility......... 30% 20% 20% 20% 20%
Risk-free interest rate........... 6.41% 5.38% 5.42% 5.53% 5.73%
Expected holding period........... 5.0 years 6.0 years 2.3 years 4.5 years 4.5 years
Options outstanding at December 31, 1999 were originally granted during the
years 1990 through 1999 and are exercisable over periods ending not later than
2009. At December 31, 1999, 1998 and 1997, options for 7,899,386 shares,
8,527,343 shares and 8,133,155 shares of common stock of the Company,
respectively, were exercisable and 9,087,997 shares, 12,427,373 shares and
1,450,195 shares of the Company, respectively, were available for future grants
under the plans.
Changes in stock options for the three years ended December 31, 1999, are
summarized as follows:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE($)
---------- --------
Options outstanding at January 1, 1997...................... 15,416,460 21.59
Granted................................................... 3,151,980 30.01
Exercised................................................. (2,008,234) 20.38
Surrendered or expired.................................... (840,878) 22.97
----------
Options outstanding at December 31, 1997.................... 15,719,328 23.36
Granted................................................... 87,390 32.84
Exercised................................................. (1,305,111) 20.77
Surrendered or expired.................................... (336,444) 24.53
----------
Options outstanding at June 30, 1998........................ 14,165,163 23.63
Attributable to 1998 Distribution........................... (1,206,985) 24.78
----------
Options outstanding at June 30, 1998........................ 12,958,178 23.52
==========
Options converted at July 1, 1998........................... 13,734,489 22.19
Granted................................................... 4,171,907 32.47
Exercised................................................. (1,095,003) 18.84
Surrendered or expired.................................... (432,396) 26.35
----------
Options outstanding at December 31, 1998.................... 16,378,997 24.92
Granted................................................... 3,656,224 29.31
Exercised................................................. (2,286,242) 19.99
Surrendered or expired.................................... (825,818) 29.26
----------
Options outstanding at December 31, 1999.................... 16,923,161 26.32
==========
The options outstanding at December 31, 1999 include 5,112,074 of options
held by employees of Moody's.
The weighted average fair value of options granted during 1999, 1998 and
1997 was $8.78, $7.13 and $5.52, respectively.
F-31
160
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
The following table summarizes information about stock options outstanding
at December 31, 1999:
STOCK OPTIONS OUTSTANDING STOCK OPTIONS
------------------------------------- EXERCISABLE
WEIGHTED ---------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE($) SHARES PRICE($)
- ------------------------ ---------- ----------- -------- --------- --------
$14.84 - $23.35..................... 7,188,764 5.1 years 21.01 6,557,689 20.96
$24.00 - $34.22..................... 9,734,397 8.6 years 30.25 1,341,697 28.48
---------- ---------
16,923,161 7,899,386
========== =========
The plans also provide for the granting of stock appreciation rights
("SARs") and limited stock appreciation rights ("LSARs") in tandem with stock
options to certain key employees. Upon the 1998 Distribution, the Donnelley SARs
and LSARs were adjusted or converted in substantially the same manner as the
unexercised Donnelley stock options. At December 31, 1999 and 1998, there were
78,353 and 30,400 SARs and 761,191 and 1,518,215 LSARs attached to stock
options, which are exercisable only if, and to the extent that, the related
option is exercisable and, in the case of LSARs, only upon the occurrence of
specified contingent events.
Upon the 1998 Distribution, restricted stock of Donnelley that had been
granted to key associates of the Company under the 1989 Key Employees Restricted
Stock Plan was forfeited and replaced with D&B Common Stock, preserving the
economic value that existed immediately prior to the 1998 Distribution. During
1999 and 1998, no new awards of restricted stock were granted, and during 1998,
36,620 shares of D&B Common Stock were replaced. During 1997 restricted share
grants of 20,000 were awarded under the plan. There were no forfeitures during
1999, 1998 and 1997. The restrictions on the majority of such shares lapse over
a period of three years from the date of the grant, and the cost is charged to
compensation expense ratably.
Under the 1998 Key Employees' Stock Incentive Plan, key employees may be
granted shares of the Company's stock based on the achievement of two-year
revenue growth goals or other key operating objectives, where appropriate. At
the end of the performance period, Company performance at target will yield the
targeted amount of shares, whereas Company performance above or below target
will yield larger or smaller share awards, respectively. Awards that were
outstanding at the 1998 Distribution were canceled and replaced, preserving the
economic value that existed prior to the 1998 Distribution. Recorded in selling
and administrative expenses was compensation expense of $14.9 million, $16.0
million and $14.6 million in 1999, 1998 and 1997, respectively, for the 1998 Key
Employees' Stock Incentive Plan. The expense attributable to discontinued
operations was $11.2 million, $5.0 million and $5.0 million in 1999, 1998 and
1997, respectively.
NOTE 10 INCOME TAXES
Income (loss) from continuing operations before provision for income taxes
consisted of:
1999 1998 1997
------ ------ ------
U.S. .................................................... $173.1 $166.6 $127.6
Non-U.S. ................................................ (27.7) (8.9) 8.1
------ ------ ------
$145.4 $157.3 $135.7
====== ====== ======
F-32
161
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
The provision (benefit) for income taxes consisted of:
1999 1998 1997
------ ------ ------
Current tax provision:
U.S. Federal........................................... $ 40.9 $ 90.1 $ 59.7
State and local........................................ 2.8 (2.5) 26.4
Non-U.S. .............................................. 4.1 11.7 20.8
------ ------ ------
Total current tax provision.............................. 47.8 99.3 106.9
------ ------ ------
Deferred tax provision (benefit):
U.S. Federal........................................... 12.9 (36.5) (31.4)
State and local........................................ .6 7.0 (26.6)
Non-U.S. .............................................. 2.8 1.3 (6.4)
------ ------ ------
Total deferred tax provision (benefit)................... 16.3 (28.2) (64.4)
------ ------ ------
Provision for income taxes............................... $ 64.1 $ 71.1 $ 42.5
====== ====== ======
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for financial
statement purposes.
1999 1998 1997
---- ---- -----
Statutory tax rate.......................................... 35.0% 35.0% 35.0%
State and local taxes, net of U.S. Federal tax benefit...... 1.5 1.9 .1
Non-U.S. taxes.............................................. 4.7 8.2 10.7
Recognition of ordinary losses.............................. -- (6.7) (12.8)
Non-recurring reorganization costs.......................... 3.4 4.0 --
Other....................................................... (.5) 2.8 (1.7)
---- ---- -----
Effective tax rate.......................................... 44.1% 45.2% 31.3%
==== ==== =====
Income taxes paid were $165.1 million, $136.5 million and $170.3 million in
1999, 1998 and 1997, respectively. Income taxes refunded were $26.7 million,
$32.1 million and $37.6 million in 1999, 1998 and 1997, respectively.
Deferred tax assets (liabilities) comprised the following at December 31:
1999 1998 1997
------ ------ ------
Deferred tax assets:
Operating losses....................................... $ 59.5 $ 48.3 $ 53.7
Postretirement benefits................................ 63.0 77.7 54.0
Intangibles............................................ 48.5 56.1 54.1
Postemployment benefits................................ 2.9 2.7 9.7
Restructuring and reorganization costs................. 10.2 16.1 3.5
Bad debts.............................................. 3.8 3.3 6.5
Other.................................................. .4 1.9 6.6
------ ------ ------
Total deferred tax assets................................ 188.3 206.1 188.1
Valuation allowance...................................... (59.5) (48.3) (53.7)
------ ------ ------
Net deferred tax asset................................... 128.8 157.8 134.4
------ ------ ------
F-33
162
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
1999 1998 1997
------ ------ ------
Deferred tax liabilities:
Tax-leasing transactions............................... (18.3) (20.4) (22.1)
Depreciation........................................... (3.8) (14.4) (17.5)
------ ------ ------
Total deferred tax liability............................. (22.1) (34.8) (39.6)
------ ------ ------
Net deferred tax asset................................... $106.7 $123.0 $ 94.8
====== ====== ======
At December 31, 1999, undistributed earnings of non-U.S. subsidiaries
aggregated $133.9 million. Deferred tax liabilities have not been recognized for
these undistributed earnings because it is management's intention to reinvest
such undistributed earnings outside the U.S. If all undistributed earnings were
remitted to the U.S., the amount of incremental U.S. Federal and foreign income
taxes payable, net of foreign tax credits, would be $49.8 million.
During the three-year period ended December 31, 1983, the Company invested
$304.4 million in tax-leasing transactions, varying in length from 4.5 to 25
years. These leases provided the Company with significant benefits from tax
deductions in excess of taxable income for Federal income tax purposes. These
amounts are included in deferred income taxes.
NOTE 11 NOTES PAYABLE AND OTHER INDEBTEDNESS
Notes payable consisted of the following at December 31:
1999 1998
------ -----
Commercial paper............................................ $124.7 $35.9
Bank notes.................................................. 1.5 1.0
------ -----
$126.2 $36.9
====== =====
The Company had commercial paper borrowings of $124.7 million at December
31, 1999. The interest rates on these commercial paper borrowings ranged from
5.82% to 6.00%.
In June 2000, the Company renewed its $300 million 364-day revolving credit
facility. The Company has an additional $300 million facility maturing in June
2003. Under these facilities, the Company has the ability to borrow at
prevailing short-term interest rates. The Company has had no borrowings
outstanding under these facilities since they were established in June 1998.
These facilities are expected to be terminated at or around the time of the
Distribution. In connection with the Distribution, New D&B is expected to enter
into new facilities that will remain in effect after the Distribution.
At December 31, 1999, the Company also had non-committed lines of credit of
$27.1 million with $1.5 million of borrowings outstanding under these lines of
credit as of that date. These arrangements have no material commitment fees or
compensating balance requirements.
The weighted average interest rates on commercial paper and notes payable
at December 31, 1999 and 1998, were 5.90% and 6.06%, respectively.
Interest paid totaled $4.5 million, $12.1 million and $49.6 million for the
years ended December 31, 1999, 1998 and 1997, respectively.
In connection with the 1998 Distribution, during June 1998 R.H. Donnelley
Inc. borrowed $350 million under the R.H. Donnelley Inc. credit facility and
issued $150 million of senior subordinated notes under the R.H. Donnelley Inc.
indenture. This $500 million of debt remained an obligation of R.H. Donnelley
Inc. after the 1998 Distribution. A portion of the proceeds of this borrowing
was used by Donnelley to repay outstanding
F-34
163
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
indebtedness at the time of the 1998 Distribution of $287.1 million. The
remainder of the proceeds was used for general corporate purposes, including the
payment of costs and expenses associated with the reorganization.
In connection with the Distribution, D&B will borrow funds in order to
repay in full D&B's commercial paper obligations. Also in connection with the
Distribution, the Distribution Agreement provides that, immediately prior to the
Distribution, a portion of the indebtedness of D&B (plus certain minority
interest obligations) and a portion of D&B's cash will be allocated to New D&B
in amounts such that, at the time of the Distribution and after giving effect to
the agreement discussed below and certain other factors, the net indebtedness of
New D&B (plus the minority interest obligations) will approximate the net
indebtedness of Moody's. As indicated under "Relationship Between The New D&B
Corporation and Moody's Corporation After the Distribution--Employee Benefits
Agreement", substantially all unexercised D&B Stock Options will be adjusted as
of the Distribution Date to comprise options to purchase Moody's Common Stock
and separately exercisable options to purchase New D&B Common Stock. In light
of, among other things, the numbers of optionees to be employed by New D&B and
Moody's, respectively, this adjustment will result in a substantially greater
number of outstanding options to purchase Moody's Common Stock than would be the
case if options were adjusted so as to become solely options to purchase common
stock of the optionee's employer. Due to this fact and the fact that, consistent
with past practice, each of New D&B and Moody's is expected to maintain a stock
purchase program designed to offset the increased number of shares otherwise
attributable to option exercises, New D&B has agreed to adjust the net
indebtedness of the two companies to compensate Moody's for the disproportionate
amount of its estimated future cash costs in this regard. The exact amount of
the adjustment discussed in the immediately preceding sentence will be
determined on a formula basis and will be dependent upon a variety of factors,
including the respective trading prices of Moody's Common Stock and New D&B
Common Stock at the time of the Distribution. New D&B expects to repay in full
any indebtedness so assumed shortly after the Distribution by raising funds in
the commercial paper market.
NOTE 12 INVESTMENT PARTNERSHIP
During 1993, the Company participated in the formation of a limited
partnership to invest in various securities, including those of the Company.
Third-party investors held limited-partner and special investors' interests
totaling $500 million. During the fourth quarter of 1996, the Company redeemed
these partnership interests. This redemption was financed with short-term
borrowings.
The partnership is presently engaged in the business of licensing database
assets and computer software. One of the Company's subsidiaries serves as
managing general partner, and two subsidiaries hold limited-partner interests.
Each of these subsidiaries will be a subsidiary of New D&B after the
Distribution. In April 1997, the partnership raised $300 million of minority
interest financing from an unrelated investor. This transaction was allocated to
D&B in connection with the 1998 Distribution. Under the terms of the limited
partnership agreement that governs the minority interest financing, the
unrelated partner is entitled to receive an amount per annum equal to 7.47% of
its initial investment payable quarterly in arrears, provided that there are
sufficient partnership profits. The partnership agreement allocates other items
of profit, gain, loss, and deductions among the partners. At December 31, 1999
and 1998, the third-party investment in this partnership was included in
minority interest.
Under the terms of the partnership agreement, during or after December
2000, the unrelated partner can initiate a process that can result in
dissolution and liquidation of the partnership as early as February 25, 2001.
The unrelated partner also can initiate a process that can result in dissolution
and liquidation within sixty days following the Distribution if it fails to
consent to the Distribution. Any such dissolution and liquidation can be
prevented if a D&B partner (or its designee) exercises its right to purchase the
unrelated partner's interest in
F-35
164
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
the partnership. In either case, D&B expects that the purchase option would be
exercised and funded through the issuance of commercial paper by New D&B. D&B
believes that such funding would not have a material adverse effect on New D&B's
financial position or results of operations.
For financial reporting purposes, the results of operations, assets,
liabilities and cash flows of the partnership described above are included in
the Company's consolidated financial statements. In connection with the
Distribution, New D&B will assume D&B's obligations with respect to the
investment partnership.
NOTE 13 CAPITAL STOCK
Under D&B's Restated Certificate of Incorporation, D&B has authority to
issue 420,000,000 shares with a par value of $.01 per share, of which
400,000,000 represent shares of common stock, 10,000,000 represent shares of
preferred stock and 10,000,000 represent shares of series common stock. The
preferred and series common stock can be issued with varying terms, as
determined by the Board of Directors.
On June 30, 1998, 171,291,317 shares of D&B common stock were distributed
to the shareholders of Donnelley. Since D&B has been treated as the successor
entity in the 1998 Distribution for accounting purposes, the Company's
historical financial statements reflect the recapitalization of D&B in
connection with the 1998 Distribution, including the elimination of treasury
shares (which shares became treasury shares of Donnelley), the adjustment of the
par value of the preferred stock and the common stock to $.01 per share and the
authorization of the series common stock, preferred stock and common stock of
D&B.
In connection with the 1998 Distribution, the Company entered into a Rights
Agreement with First Chicago Trust Company of New York designed to protect
shareholders of the Company in the event of unsolicited offers to acquire the
Company and other coercive takeover tactics which, in the opinion of the Board
of Directors, could impair its ability to represent shareholder interests. Under
the Rights Agreement, each share of the common stock has a right that trades
with the stock until the right becomes exercisable. Each right entitles the
registered holder to purchase 1/1000 of a share of Series A junior participating
preferred stock, par value $.01 per share, at a price of $150 per 1/1000 of a
share, subject to adjustment. The rights will generally not be exercisable until
a person or group ("Acquiring Person") acquires beneficial ownership of, or
commences a tender offer or exchange offer that would result in such person or
group having beneficial ownership of 15% or more of the outstanding common
stock.
In the event that any person or group becomes an Acquiring Person, each
right will thereafter entitle its holder (other than the Acquiring Person) to
receive, upon exercise, shares of stock having a market value of two times the
exercise price in the form of the Company's common stock or, where appropriate,
the Acquiring Person's common stock. The Company may redeem the rights, which
expire in June 2008, for $.01 per right, under certain circumstances.
NOTE 14 LEASE COMMITMENTS
Certain of the Company's operations are conducted from leased facilities,
which are under operating leases that expire over the next 10 years. The Company
also leases certain computer and other equipment under operating leases that
expire over the next five years. These leases are frequently renegotiated or
otherwise changed as advancements in computer technology produce opportunities
to lower costs and improve performance. Additionally, the Company has agreements
with various third parties to purchase certain data processing and
telecommunications services extending beyond one year. Rental expenses under
operating leases were $71.8 million, $59.6 million and $73.8 million for the
years ended December 31, 1999, 1998 and
F-36
165
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
1997, respectively. Future minimum lease payments under noncancelable leases at
December 31, 1999, are as follows (in millions):
THERE-
2000 2001 2002 2003 2004 AFTER TOTAL
----- ----- ----- ----- ---- ------ ------
$48.5 $31.4 $17.5 $12.3 $7.6 $14.8 $132.1
NOTE 15 CONTINGENCIES
The Company and its subsidiaries are involved in legal proceedings, claims
and litigation arising in the ordinary course of business. Although the outcome
of such matters cannot be predicted with certainty, in the opinion of
management, the ultimate liability of D&B, in connection with such matters will
not have a material effect on D&B's results of operations, cash flows or
financial position.
In addition, the Company also has certain other contingencies discussed
below.
Information Resources, Inc.
On July 29, 1996, Information Resources, Inc. ("IRI") filed a complaint in
the United States District Court for the Southern District of New York, naming
as defendants the corporation then known as "The Dun & Bradstreet Corporation"
(i.e., Donnelley), A.C. Nielsen Company (a subsidiary of ACNielsen Corporation)
and I.M.S. International, Inc. (a subsidiary of Cognizant Corporation). At the
time of filing of the filing of the complaint, each of the other defendants was
a wholly owned subsidiary of Donnelley.
The complaint alleges various violations of United States antitrust laws,
including purported violations of Sections 1 and 2 of the Sherman Act arising
from tying arrangements, agreements with retailers and other customers,
predatory pricing practices and other matters alleged by IRI. In addition to the
foregoing claims, the complaint also alleges a claim tortious interference with
a contract and a claim of tortious interference with a prospective business
relationship. These claims relate to the acquisition by defendants of Survey
Research Group Limited ("SRG"). IRI alleges SRG violated an alleged agreement
with IRI when it agreed to be acquired by the defendants and that the defendants
induced SRG to breach that agreement.
IRI's complaint alleges damages in excess of $350 million, which amount IRI
asked to be trebled under antitrust laws. IRI also seeks punitive damages in an
unspecified amount. No amount in respect of these alleged damages has been
accrued in the consolidated financial statements of the Company.
In November 1996, Donnelley completed a distribution to its shareholders
(the "1996 Distribution") of the capital stock of ACNielsen Corporation
("ACNielsen") and Cognizant Corporation ("Cognizant"). On October 28, 1996, in
connection with the 1996 Distribution, Cognizant, ACNielsen and Donnelley
entered into an Indemnity and Joint Defense Agreement (the " Indemnity and Joint
Defense Agreement") pursuant to which they have agreed (i) to certain
arrangements allocating potential liabilities ("IRI Liabilities") that may arise
out of or in connection with the IRI action and (ii) to conduct a joint defense
of such action. In particular, the Indemnity and Joint Defense Agreement
provides that ACNielsen will assume exclusive liability for IRI Liabilities up
to a maximum amount to be calculated at such time such liabilities, if any,
become payable (the "ACN Maximum Amount"), and that Donnelley and Cognizant will
share liability equally for any amounts in excess of the ACN Maximum Amount. The
ACN Maximum Amount will be determined by an investment banking firm as the
maximum amount that ACNielsen is able to pay after giving effect to (i) any plan
submitted by such investment bank that is designed to maximize the claims-paying
ability of ACNielsen without impairing the investment banking firm's ability to
deliver a viability opinion (but which will not require any action requiring
stockholder approval), and (ii) payment of related fees and expenses. For these
purposes, financial viability means the ability of ACNielsen, after giving
effect to such plan, the payment of related fees and expenses and the payment of
the ACN Maximum Amount, to pay its debts as they become due and to finance the
current and anticipated operating and capital requirements of its business, as
reconstituted by such plan, for two years from the date any such plan is
expected to be implemented.
F-37
166
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
In June 1998, Donnelley completed a distribution to its shareholders (the
"1998 Distribution") of the capital stock of D&B and changed its name to R.H.
Donnelley Corporation. In connection with the 1998 Distribution, D&B and
Donnelley entered into an agreement whereby the Company has assumed all
potential liabilities of Donnelley arising from the IRI action and agreed to
indemnify Donnelley in connection with such potential liabilities.
During 1998, Cognizant separated into two new companies, IMS Health
Incorporated ("IMS Health") and Nielsen Media Research, Inc. ("NMR"). IMS Health
and NMR are each jointly and severally liable for all Cognizant liabilities
under the Indemnity and Joint Defense Agreement.
Under the terms of the Distribution Agreement, as a condition to the
Distribution, New D&B will undertake to be jointly and severally liable with
Moody's for D&B's obligations to Donnelley under the 1998 Distribution
Agreement, including any liabilities arising under the Indemnity and Joint
Defense Agreement. However, as between themselves, each of New D&B and Moody's
will be responsible for 50% of any payments to be made with respect to the IRI
action pursuant to the 1998 Distribution Agreement, including legal fees or
expenses related thereto.
Management is unable to predict at this time the final outcome of the IRI
Action or whether the resolution of this matter could materially affect the
Company's results of operations, cash flows or financial position.
Tax matters
D&B enters into global tax planning initiatives in the normal course of
business, principally through tax free restructurings of both its foreign and
domestic operations. These initiatives are subject to normal review by tax
authorities. It is possible that additional liabilities may be proposed by tax
authorities as a result of these reviews and that some of the reviews could be
resolved unfavorably. At this time, management is unable to predict the extent
of such reviews, the outcome thereof or whether such outcome could materially
affect New D&B's results of operations, cash flows or financial position.
Pursuant to the Distribution Agreement, New D&B and Moody's will agree to
be financially responsible for 50% of any potential liabilities that may arise
with respect to the reviews described above, to the extent such potential
liabilities are not directly attributable to their respective business
operations. See "Relationship Between The New D&B Corporation and Moody's
Corporation After the Distribution Agreement--Distribution Agreement".
The IRS, as part of its audit process, is continuing its review of D&B's
utilization of certain capital losses generated during 1989 and 1990. On May 9,
2000, the IRS issued a summary report disallowing the utilization of these
capital losses. D&B expects to receive a final adjustment disallowing the
utilization of these capital losses from the IRS during the second quarter of
2000.
Pursuant to a series of agreements, IMS Health and NMR are jointly and
severally liable to pay one-half, and Donnelley the other half, of any payments
for taxes and accrued interest arising from this matter and certain other
potential tax liabilities that may arise from future audit adjustments after
review by tax authorities, relating to various transactions to which IMS Health,
NMR and Donnelley are parties, after Donnelley pays the first $137 million.
In connection with the 1998 Distribution, D&B and Donnelley entered into an
agreement whereby D&B has assumed all potential liabilities of Donnelley arising
from these tax matters and has agreed to indemnify Donnelley in connection with
such potential liabilities.
F-38
167
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
On May 12, 2000, an amended tax return was filed for the 1989 and 1990 tax
periods which reflected the May 9, 2000 report in the amount of $561.6 million
of tax and interest due. D&B paid the IRS approximately $349.3 million of this
amount on May 12, 2000, which D&B funded with short-term borrowings. IMS Health
has informed D&B that it paid to the IRS approximately $212.3 million on May 17,
2000. Notwithstanding the filing and payment, D&B intends to contest the
assessment if any of amounts, if any, in excess of the amounts paid. D&B has
accrued its anticipated share of the probable liability arising from the
utilization of these capital losses.
NOTE 16 SUPPLEMENTAL FINANCIAL DATA (IN MILLIONS)
OTHER CURRENT ASSETS:
AT DECEMBER 31, 1999 1998
- --------------- ------ ------
Deferred taxes.............................................. $ 17.2 $ 23.9
Prepaid expenses............................................ 116.0 122.5
Other....................................................... .4 1.4
------ ------
$133.6 $147.8
====== ======
AT DECEMBER 31, 1999 1998
- --------------- ------ ------
PROPERTY, PLANT AND EQUIPMENT -- NET:
Buildings................................................... $170.9 $175.1
Machinery and equipment..................................... 352.6 358.4
------ ------
523.5 533.5
Less: accumulated depreciation.............................. 320.6 315.7
------ ------
202.9 217.8
Leasehold improvements, less: accumulated amortization of
$34.1 and $32.0........................................... 10.3 12.9
Land........................................................ 27.1 27.5
------ ------
$240.3 $258.2
====== ======
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ ----- ----- -----
OTHER INCOME (EXPENSE) -- NET:
Other expense............................................... $(2.9) $(2.2) $(3.1)
Litigation settlement....................................... 11.9 -- --
----- ----- -----
$ 9.0 $(2.2) $(3.1)
===== ===== =====
F-39
168
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
COMPUTER
SOFTWARE GOODWILL
-------- --------
COMPUTER SOFTWARE AND GOODWILL -- NET:
January 1, 1998............................................. $122.6 $192.7
Additions at cost........................................... 81.5 5.1
Amortization................................................ (52.7) (5.8)
Other deductions and reclassifications...................... (8.9) (1.5)(1)
------ ------
December 31, 1998........................................... 142.5 190.5
Additions at cost........................................... 70.5 .7
Amortization................................................ (63.0) (5.9)
Other deductions and reclassifications...................... (.2) (18.7)(1)
------ ------
December 31, 1999........................................... $149.8 $166.6
====== ======
- ---------------
(1) Impact of foreign currency fluctuations.
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
January 1, 1997............................................. $11.3
Additions charged to costs and expenses..................... 9.0
Write-offs.................................................. (8.7)
-----
December 31, 1997........................................... 11.6
Additions charged to costs and expenses..................... 7.5
Write-offs.................................................. (5.2)
-----
December 31, 1998........................................... 13.9
Additions charged to costs and expenses..................... 8.3
Write-offs.................................................. (4.8)
-----
December 31, 1999........................................... $17.4
=====
NOTE 17 SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" the segment information is being reported
consistent with the Company's method of internal reporting, which excludes
divested operations from the segments. Effective January 1, 2000, responsibility
for the management of the Canadian business was moved from D&B's Asia Pacific
and Latin America segment to its U.S. Segment now referred to as its North
America segment. All prior years' segment information has been restated to
reflect the change. The Company's reportable segments are Dun & Bradstreet North
America, Dun & Bradstreet Europe/Africa/Middle East ("D&B Europe") and Dun &
Bradstreet Asia Pacific/Latin America ("D&B APLA"). The three Dun & Bradstreet
segments, managed on a geographical basis, provide business-to-business credit,
marketing and purchasing information and receivables management services. The
accounting policies of the segments are the same as those described in Note
1 -- Summary of Significant Accounting Policies. The Company evaluates
performance and allocates resources based on segment operating income.
Intersegment sales are immaterial and no single customer accounted for 10% or
more of total revenues.
F-40
169
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
OPERATING REVENUES:
Dun & Bradstreet North America.............................. $ 920.0 $ 929.6 $ 860.7
Dun & Bradstreet Europe..................................... 420.6 427.7 426.1
Dun & Bradstreet APLA....................................... 67.1 61.5 65.3
-------- -------- --------
Total Dun & Bradstreet operating company.................... 1,407.7 1,418.8 1,352.1
All Other................................................... -- 1.7 1.5
-------- -------- --------
Consolidated Total.......................................... $1,407.7 $1,420.5 $1,353.6
======== ======== ========
OPERATING INCOME (LOSS):
Dun & Bradstreet North America.............................. $ 255.4 $ 266.5 $ 249.0
Dun & Bradstreet Europe..................................... (8.9) (4.2) .6
Dun & Bradstreet APLA....................................... (7.3) (11.7) (8.1)
-------- -------- --------
Total Dun & Bradstreet operating company.................... 239.2 250.6 241.5
All Other(1)................................................ (78.3) (62.9) (34.3)
-------- -------- --------
Consolidated Total.......................................... 160.9 187.7 207.2
Non-Operating Expense -- Net................................ (15.5) (30.4) (71.5)
-------- -------- --------
Income from Continuing Operations before Provision for
Income Taxes.............................................. $ 145.4 $ 157.3 $ 135.7
======== ======== ========
DEPRECIATION AND AMORTIZATION:(2)
Dun & Bradstreet North America.............................. $ 65.8 $ 61.9 $ 56.5
Dun & Bradstreet Europe..................................... 52.8 55.1 51.6
Dun & Bradstreet APLA....................................... 5.3 5.6 4.8
-------- -------- --------
Total Dun & Bradstreet operating company.................... 123.9 122.6 112.9
All Other(1)................................................ 4.0 3.6 2.9
-------- -------- --------
Consolidated Total.......................................... $ 127.9 $ 126.2 $ 115.8
======== ======== ========
CAPITAL EXPENDITURES:
Dun & Bradstreet North America.............................. $ 15.5 $ 20.6 $ 19.4
Dun & Bradstreet Europe..................................... 15.7 19.9 14.8
Dun & Bradstreet APLA....................................... 2.3 5.2 1.6
-------- -------- --------
Total Dun & Bradstreet operating company.................... 33.5 45.7 35.8
All Other................................................... .8 1.5 .1
-------- -------- --------
Consolidated Total.......................................... $ 34.3 $ 47.2 $ 35.9
======== ======== ========
ADDITIONS TO COMPUTER SOFTWARE AND OTHER INTANGIBLES:
Dun & Bradstreet North America.............................. $ 40.7 $ 44.5 $ 45.2
Dun & Bradstreet Europe..................................... 27.9 35.8 28.5
Dun & Bradstreet APLA....................................... .4 .8 2.2
-------- -------- --------
Total Dun & Bradstreet operating company.................... 69.0 81.1 75.9
All Other................................................... 6.3 6.1 --
-------- -------- --------
Consolidated Total.......................................... $ 75.3 $ 87.2 $ 75.9
======== ======== ========
F-41
170
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
ASSETS:
Dun & Bradstreet North America.............................. $ 432.4 $ 426.7 $ 450.1
Dun & Bradstreet Europe..................................... 536.6 599.9 581.0
Dun & Bradstreet APLA....................................... 50.3 51.5 55.4
-------- -------- --------
Total Dun & Bradstreet operating company.................... 1,019.3 1,078.1 1,086.5
Discontinued Operations..................................... -- -- 162.3
All Other (primarily domestic pensions and taxes)........... 555.5 496.6 480.6
-------- -------- --------
Consolidated Total.......................................... $1,574.8 $1,574.7 $1,729.4
======== ======== ========
SUPPLEMENTAL GEOGRAPHIC AND PRODUCT LINE INFORMATION:
OPERATING REVENUES:
United States............................................... $ 891.5 $ 904.2 $ 833.7
International............................................... 516.2 516.3 519.9
-------- -------- --------
Consolidated Total.......................................... $1,407.7 $1,420.5 $1,353.6
======== ======== ========
LONG-LIVED ASSETS:
United States............................................... $ 433.3 $ 399.2 $ 354.6
International............................................... 399.8 441.3 443.4
-------- -------- --------
Consolidated Total.......................................... $ 833.1 $ 840.5 $ 798.0
======== ======== ========
PRODUCT LINE REVENUE:
Credit Information Solutions................................ $ 922.0 $ 968.7 $ 954.2
Marketing Information Solutions............................. 312.2 294.8 257.0
Purchasing Information Solutions............................ 28.5 23.0 15.7
Receivable Management Services.............................. 145.0 132.3 125.2
-------- -------- --------
Total Dun & Bradstreet operating company.................... $1,407.7 $1,418.8 $1,352.1
======== ======== ========
- ---------------
(1) The following table itemizes key components of "All Other":
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
OPERATING INCOME (LOSS):
Corporate and Other......................................... $(37.1) $(34.9) $(34.3)
Restructuring Expense....................................... (41.2) -- --
Reorganization Costs........................................ -- (28.0) --
------ ------ ------
Total "All Other"........................................... $(78.3) $(62.9) $(34.3)
====== ====== ======
(2) Includes depreciation and amortization of Property, Plant and Equipment,
Computer Software, Goodwill and Other Intangibles.
F-42
171
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
NOTE 18 QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
-------- ------- ------------ ----------- ----------
1999
Operating Revenues:
Dun & Bradstreet North America....... $241.6 $226.6 $219.3 $232.5 $ 920.0
Dun & Bradstreet Europe.............. 98.8 105.7 96.9 119.2 420.6
Dun & Bradstreet APLA................ 13.6 17.5 18.2 17.8 67.1
------ ------ ------ ------ --------
Consolidated Operating Revenues... $354.0 $349.8 $334.4 $369.5 $1,407.7
====== ====== ====== ====== ========
Operating Income (Loss):
Dun & Bradstreet North America....... $ 70.5 $ 54.5 $ 56.8 $ 73.6 $ 255.4
Dun & Bradstreet Europe.............. (15.1) (2.6) (7.2) 16.0 (8.9)
Dun & Bradstreet APLA................ (3.8) (2.3) (.5) (.7) (7.3)
------ ------ ------ ------ --------
Total Dun & Bradstreet operating
company......................... 51.6 49.6 49.1 88.9 239.2
All Other(1)......................... (12.1) (8.3) (5.7) (52.2) (78.3)
------ ------ ------ ------ --------
Consolidated Operating Income.......... $ 39.5 $ 41.3 $ 43.4 $ 36.7 $ 160.9
====== ====== ====== ====== ========
Income:
Continuing Operations, Net of Income
Taxes(2).......................... $ 19.4 $ 19.9 $ 21.5 $ 20.5 $ 81.3
Discontinued Operations, Net of
Income Taxes...................... 41.0 46.5 44.6 42.6 174.7
------ ------ ------ ------ --------
Net Income............................. $ 60.4 $ 66.4 $ 66.1 $ 63.1 $ 256.0
====== ====== ====== ====== ========
Basic Earnings Per Share of Common
Stock:
Continuing Operations................ $ .12 $ .12 $ .13 $ .13 $ .50
Discontinued Operations.............. .25 .29 .28 .26 1.08
------ ------ ------ ------ --------
Basic Earnings Per Share of Common
Stock............................. $ .37 $ .41 $ .41 $ .39 $ 1.58
====== ====== ====== ====== ========
Diluted Earnings Per Share of Common
Stock:
Continuing Operations.................. $ .12 $ .12 $ .13 $ .13 $ .50
Discontinued Operations................ .24 .28 .28 .26 1.06
------ ------ ------ ------ --------
Diluted Earnings Per Share of Common
Stock................................ $ .36 $ .40 $ .41 $ .39 $ 1.56
====== ====== ====== ====== ========
F-43
172
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
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
-------- ------- ------------ ----------- ----------
1998
Operating Revenues:
Dun & Bradstreet North America....... $232.3 $219.9 $226.2 $251.2 $ 929.6
Dun & Bradstreet Europe.............. 92.4 106.6 98.9 129.8 427.7
Dun & Bradstreet APLA................ 13.3 16.5 15.9 15.8 61.5
------ ------ ------ ------ --------
Total Dun & Bradstreet operating
company......................... 338.0 343.0 341.0 396.8 1,418.8
All Other............................ .6 .3 .1 .7 1.7
------ ------ ------ ------ --------
Consolidated Operating Revenues........ $338.6 $343.3 $341.1 $397.5 $1,420.5
====== ====== ====== ====== ========
Operating Income (Loss):
Dun & Bradstreet North America....... $ 68.4 $ 52.0 $ 62.9 $ 83.2 $ 266.5
Dun & Bradstreet Europe.............. (15.2) (2.8) (2.9) 16.7 (4.2)
Dun & Bradstreet APLA................ (5.4) (2.0) (1.6) (2.7) (11.7)
------ ------ ------ ------ --------
Total Dun & Bradstreet operating
company......................... 47.8 47.2 58.4 97.2 250.6
All Other(1)......................... (15.1) (33.7) (7.5) (6.6) (62.9)
------ ------ ------ ------ --------
Consolidated Operating Income.......... $ 32.7 $ 13.5 $ 50.9 $ 90.6 $ 187.7
====== ====== ====== ====== ========
Income (Loss) from:
Continuing Operations, Net of Income
Taxes(3).......................... $ 11.6 $ (3.4) $ 27.6 $ 50.4 $ 86.2
Discontinued Operations, Net of
Income Taxes...................... 51.9 64.7 41.1 36.2 193.9
------ ------ ------ ------ --------
Net Income............................. $ 63.5 $ 61.3 $ 68.7 $ 86.6 $ 280.1
====== ====== ====== ====== ========
Basic Earnings (Loss) Per Share of
Common Stock:
Continuing Operations................ $ .07 $ (.02) $ .16 $ .30 $ .51
Discontinued Operations.............. .30 .38 .24 .22 1.14
------ ------ ------ ------ --------
Basic Earnings Per Share of Common
Stock................................ $ .37 $ .36 $ .40 $ .52 $ 1.65
====== ====== ====== ====== ========
Diluted Earnings (Loss) Per Share of
Common Stock(4):
Continuing Operations................ $ .07 $ (.02) $ .16 $ .30 $ .50
Discontinued Operations.............. .30 .37 .24 .22 1.13
------ ------ ------ ------ --------
Diluted Earnings Per Share of Common
Stock................................ $ .37 $ .35 $ .40 $ .52 $ 1.63
====== ====== ====== ====== ========
F-44
173
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
- ---------------
(1) The following table itemizes the components of the "All Other" category of
Operating Income (Loss):
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
-------- ------- ------------ ----------- --------
Operating Loss:
1999:
Restructuring Expense...... $ -- $ -- $ -- $(41.2) $ (41.2)
Corporate and Other........ (12.1) (8.3) (5.7) (11.0) (37.1)
------ ------ ------ ------ --------
Total................. $(12.1) $ (8.3) $ (5.7) $(52.2) $ (78.3)
====== ====== ====== ====== ========
1998:
Reorganization Costs....... $ (.5) $(27.5) $ -- $ -- $ (28.0)
Corporate and Other........ (14.6) (6.2) (7.5) (6.6) (34.9)
------ ------ ------ ------ --------
Total................. $(15.1) $(33.7) $ (7.5) $ (6.6) $ (62.9)
====== ====== ====== ====== ========
(2) Income from Continuing Operations, Net of Income Taxes included an after-tax
gain on the settlement of outstanding litigation of $6.6 million and
after-tax restructuring expenses of $27.9 million in the quarter ended
December 31, 1999.
(3) Income from Continuing Operations, Net of Income Taxes included after-tax
reorganization costs of $.5 million and $22.7 million incurred in the
quarters ended March 31 and June 30, 1998, respectively.
(4) The number of weighted average shares outstanding changes as common shares
are issued for employee plans and other purposes or as shares are
repurchased. For this reason, the sum of quarterly earnings per share may
not be the same as earnings per share for the year.
F-45
174
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of The New D&B Corporation:
In our opinion, the accompanying consolidated balance sheet presents
fairly, in all material respects, the financial position of The New D&B
Corporation and its subsidiary at June 8, 2000 in conformity with accounting
principles generally accepted in the United States. This financial statement is
the responsibility of the Company's management; our responsibility is to express
an opinion on this financial statement based on our audit. We conducted our
audit of this statement in accordance with auditing standards generally accepted
in the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall balance sheet presentation. We believe that our audit of the balance
sheet provides a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
New York, New York
June 8, 2000
F-46
175
THE NEW D&B CORPORATION
CONSOLIDATED BALANCE SHEET
JUNE 8, 2000
ASSETS
Cash........................................................ $10.00
======
LIABILITIES AND SHAREHOLDER'S EQUITY
Common Stock, par value $.01 per share; authorized -- 1,000
shares; issued and outstanding -- 1,000 shares............ $10.00
======
The accompanying notes are an integral part of the consolidated financial
statement.
F-47
176
THE NEW D&B CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
NOTE 1. ORGANIZATION
The consolidated balance sheet includes the balance sheet of The New D&B
Corporation (the "Company") and its wholly owned subsidiary, New D&B Inc. The
Company and New D&B Inc. were incorporated under the General Corporation Law of
the State of Delaware on April 25, 2000 and April 26, 2000, respectively. The
Company has the authority under its Certificate of Incorporation to issue 1,000
shares of common stock, par value $.01 per share, 1,000 shares of which were
issued to The Dun & Bradstreet Corporation ("D&B") on April 26, 2000. The
activities of the Company and New D&B Inc. to date have been solely related to
their incorporation. Neither company has commenced operations. On June 7, 2000,
D&B funded the issuance of the Company's common stock.
NOTE 2. PROPOSED REORGANIZATIONS
On December 15, 1999, the Board of Directors of D&B announced a plan to
distribute all of the outstanding shares of the common stock of the Company to
the stockholders of D&B (the "Distribution"). Pursuant to the Distribution, the
stockholders of D&B will receive one share of the Company for every two shares
of D&B. The Company expects to issue additional shares of common stock of the
Company to D&B in order to effect the Distribution.
Through a series of transactions to be effected prior to the Distribution,
the businesses of the Dun & Bradstreet operating company will become part of the
Company. After the Distribution, the Company will operate as an independent
company providing commercial credit, businesses marketing and purchasing
information and commercial receivables management services. In connection with
the Distribution, the Company will be renamed "The Dun & Bradstreet
Corporation."
NOTE 3. AMENDED CERTIFICATE OF INCORPORATION
Prior to the date of the Distribution, the Company will file a Restated
Certificate of Incorporation that will authorize the issuance of 220,000,000
shares of all classes of stock of which 10,000,000 shares will represent shares
of preferred stock, par value $.01 per share, 200,000,000 shares will represent
shares of common stock, par value $.01 per share, and 10,000,000 shares will
represent shares of series common stock, par value $.01 per share.
F-48
177
MOODY'S CORPORATION
COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30,
--------------------------
2000 1999
----------- -----------
REVENUES.................................................... $ 288.7 $ 284.5
EXPENSES:
Operating, general and administrative expenses............ 141.8 143.0
Depreciation and amortization............................. 8.3 6.6
----------- -----------
OPERATING INCOME............................................ 138.6 134.9
Non-operating income (expense), net......................... .5 (.2)
----------- -----------
Income before provision for income taxes.................... 139.1 134.7
Provision for income taxes.................................. 61.5 59.5
----------- -----------
NET INCOME.................................................. $ 77.6 $ 75.2
----------- -----------
UNAUDITED PRO FORMA BASIC EARNINGS PER SHARE OF COMMON
STOCK..................................................... $ .48 $ .46
----------- -----------
UNAUDITED PRO FORMA DILUTED EARNINGS PER SHARE OF COMMON
STOCK..................................................... $ .48 $ .45
----------- -----------
SHARES USED IN COMPUTING PRO FORMA EARNINGS PER SHARE:
WEIGHTED AVERAGE SHARES OUTSTANDING -- BASIC................ 161,541,000 163,627,000
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING -- DILUTED.............. 162,793,000 166,186,000
=========== ===========
The accompanying notes are an integral part of the combined financial
statements.
F-49
178
MOODY'S CORPORATION
COMBINED BALANCE SHEETS (UNAUDITED)
(DOLLAR AMOUNTS IN MILLIONS)
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
ASSETS
Current assets:
Cash...................................................... $ 14.6 $ 3.4
Accounts receivable, net of allowances of $24.8 and $24.5
in 2000 and 1999, respectively......................... 94.5 84.4
Other current assets...................................... 51.4 84.9
------- -------
Total Current Assets.............................. 160.5 172.7
Property and equipment, net................................. 43.0 43.3
Prepaid pension costs....................................... 51.3 49.7
Intangibles, net............................................ 15.4 2.2
Other assets................................................ 17.5 15.2
------- -------
Total Assets...................................... $ 287.7 $ 283.1
======= =======
LIABILITIES AND SHAREHOLDER'S NET INVESTMENT
Current liabilities:
Accounts payable and accrued liabilities.................. $ 81.5 $ 275.1
Deferred revenue.......................................... 118.8 100.4
------- -------
Total Current Liabilities......................... 200.3 375.5
Other liabilities........................................... 128.3 130.7
------- -------
Total Liabilities................................. 328.6 506.2
------- -------
Commitments and contingencies (See Notes 3 and 4)
Shareholder's Net Investment................................ (40.9) (223.1)
------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S NET
INVESTMENT...................................... $ 287.7 $ 283.1
======= =======
The accompanying notes are an integral part of the combined financial
statements.
F-50
179
MOODY'S CORPORATION
COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLAR AMOUNTS IN MILLIONS)
SIX MONTHS
ENDED JUNE 30,
---------------------
2000 1999
------- ------
Cash flows from operating activities:
Net income................................................ $ 77.6 $ 75.2
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization.......................... 8.3 6.6
Deferred income taxes.................................. .1 (.1)
Changes in assets and liabilities, exclusive of assets and
liabilities of acquired business:
Increase in accounts receivable, net................... (8.0) (4.9)
(Increase) decrease in other current assets............ 33.3 (.1)
Increase in prepaid pension costs...................... (1.6) (.9)
(Increase) decrease in other assets.................... (.2) (.1)
Decrease in accounts payable and accrued liabilities... (193.8) (10.4)
Increase in deferred revenue........................... 17.0 19.0
(Decrease) increase in other liabilities............... (2.3) 3.4
------- ------
Net cash provided by (used in) operating
activities.......................................... (69.6) 87.7
------- ------
Cash flows from investing activities:
Net additions to property and equipment................... (5.5) (3.4)
Additions to computer software............................ (1.1) --
Acquisition of business................................... (17.4) --
Other..................................................... (.4) .2
------- ------
Net cash provided by (used in) investing activities.... (24.4) (3.2)
------- ------
Cash flows from financing activities:
Net distributions from (to) Dun & Bradstreet.............. 105.5 (83.2)
------- ------
Net cash provided by (used in) financing activities....... 105.5 (83.2)
------- ------
Effect of exchange rate changes on cash..................... (.3) --
------- ------
Increase in cash............................................ 11.2 1.3
Cash, beginning of period................................... 3.4 4.0
------- ------
Cash, end of period......................................... $ 14.6 $ 5.3
======= ======
The accompanying notes are an integral part of the combined financial
statements.
F-51
180
MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
1. BACKGROUND AND BASIS OF PRESENTATION
DISTRIBUTION
On December 15, 1999, The Dun & Bradstreet Corporation ("D&B") announced a
plan to separate into two independent, publicly traded companies -- The New D&B
Corporation ("New D&B") and Moody's Corporation ("Moody's" or "the Company").
The separation will be accomplished through a tax-free distribution to the
shareholders of D&B (the "Distribution") of all of the shares of common stock of
a newly formed, wholly owned subsidiary corporation (New D&B) comprising the
business of the D&B operating company. In connection with the Distribution, D&B
will complete an internal reorganization so that, at the time of the
Distribution, the business of New D&B will consist solely of the business of
supplying business, purchasing, credit and marketing information products and
services as well as receivable management services (the "New D&B Business") and
the business of D&B will consist solely of the business of providing ratings and
related research and risk management services (the "Moody's Business"). In
addition, at the time of the Distribution, D&B will be renamed "Moody's
Corporation" and New D&B will succeed to the name "The Dun & Bradstreet
Corporation." Shares of common stock of D&B will represent a continuing interest
in the Moody's Business. D&B expects to complete the Distribution by the end of
the third quarter of 2000.
D&B received a tax ruling from the Internal Revenue Service (the "IRS") on
June 15, 2000 that the receipt by D&B stockholders of the New D&B Common Stock
in the Distribution will be tax-free to such stockholders and D&B for Federal
income tax purposes, except to the extent that cash is received in lieu of
fractional shares of New D&B Common Stock.
For purposes of, among other things, governing certain of the ongoing
relations between New D&B and Moody's as a result of the Distribution as well as
to allocate certain tax, employee benefit and other liabilities arising prior to
the Distribution, the companies will enter into various agreements, including a
Distribution Agreement, Tax Allocation Agreement, Employee Benefits Agreement,
Intellectual Property Assignment, Shared Transaction Services Agreement,
Insurance and Risk Management Services Agreement, Data Services Agreement and
Transition Services Agreement. Summaries of these agreements are set forth
elsewhere in the Information Statement.
In general, pursuant to the terms of the Distribution Agreement, all of the
assets of the New D&B Business will be allocated to New D&B and all of the
assets of the Moody's Business will be allocated to Moody's. The Distribution
Agreement also provides for assumptions of liabilities and cross-indemnities
designed to allocate generally, effective as of the Distribution Date, financial
responsibility for (i) all liabilities arising out of or in connection with the
New D&B Business to New D&B, (ii) all liabilities arising out of or in
connection with the Moody's Business to Moody's and (iii) substantially all
other liabilities as of the Distribution Date equally between New D&B and
Moody's. The liabilities that are to be allocated equally between New D&B and
Moody's include contingent and other liabilities relating to former businesses
of D&B and certain prior business transactions, which consist primarily of
potential liabilities arising from the legal action initiated by IRI described
in "Risk Factors--Risks Relating to The New D&B Corporation and Moody's
Corporation-- Contingencies", "The New D&B Corporation Business--Legal
Proceedings" and "Moody's Corporation Business--Legal Proceedings", and
potential tax liabilities that may arise with respect to reviews by tax
authorities of D&B's global tax planning initiatives described in "Risk
Factors--Risks Relating to The New D&B Corporation and Moody's
Corporation--Contingencies". For a discussion of the respective businesses of
New D&B and Moody's, see "The New D&B Corporation Business" and "Moody's
Corporation Business".
Pursuant to the terms of a distribution agreement, dated as of June 30,
1998 (the "1998 Distribution Agreement"), between D&B (then known as "The New
Dun & Bradstreet Corporation") and R.H. Donnelley Corporation (then known as
"The Dun & Bradstreet Corporation" and herein referred to as
F-52
181
MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
"Donnelley"), as a condition to the Distribution, New D&B is required to
undertake to be jointly and severally liable with D&B to Donnelley for any
liabilities arising thereunder. The Distribution Agreement generally allocates
the financial responsibility for liabilities of D&B under the 1998 Distribution
Agreement equally between New D&B and Moody's, except that any such liabilities
that relate primarily to the New D&B Business will be New D&B liabilities and
any such liabilities that relate primarily to the Moody's Business will be
Moody's liabilities. Among other things, New D&B and Moody's will agree that, as
between themselves, they will each be responsible for 50% of any payments to be
made in respect of the IRI action (as described below in Note 4) under the 1998
Distribution Agreement, including any legal fees and expenses related thereto.
Due to the relative significance of the New D&B as compared to Moody's, the
transaction has been accounted for as a reverse spin-off.
The combined financial statements reflect the financial position, results
of operations, and cash flows of Moody's as if it were a separate entity for all
periods presented. The combined financial statements include allocations of
certain D&B corporate headquarters assets (including prepaid pension assets) and
liabilities (including postretirement benefits and corporate and tax
obligations) and expenses (including cash management, legal, accounting, tax,
employee benefits, insurance services, data services, and other D&B corporate
overhead) relating to Moody's businesses. Expenses related to these services
have been allocated to Moody's based on utilization of specific services or,
where an estimate could not be determined, based on Moody's revenue in
proportion to D&B's total revenues. Management believes that these allocations
are reasonable. However, the costs of these services and benefits charged to
Moody's are not necessarily indicative of the costs that would have been
incurred if Moody's had performed or provided these functions as a separate
entity. These allocations included in expenses in the combined statements of
operations totaled $8.9 and $8.6 for the six months ended June 30, 2000 and
1999, respectively. Amounts due to D&B for these expenses are included in net
distributions to D&B within shareholder's net investment.
These interim financial statements have been prepared in accordance with
the instructions to Form 10-Q and should be read in conjunction with the
financial statements and related notes of Moody's for the year ended December
31, 1999 included in this Information Statement. The results of interim periods
are not necessarily indicative of results for the full year or any subsequent
period. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of financial
position, results of operations and cash flows at the dates and for the periods
presented have been included.
2. RECONCILIATION OF SHARES USED IN COMPUTING PRO FORMA EARNINGS PER SHARE
Below is a reconciliation of basic weighted average shares to diluted
weighted average shares:
SIX
MONTHS ENDED
JUNE 30,
--------------
2000 1999
----- -----
(SHARE DATA IN
MILLIONS)
Weighted average number of pro forma shares -- Basic........ 161.5 163.6
Effect of potentially dilutive stock options................ 1.3 2.6
----- -----
Weighted average number of pro forma shares -- Diluted...... 162.8 166.2
===== =====
As required by SFAS No. 128, "Earnings per Share," Moody's has provided a
reconciliation of basic weighted average shares to diluted weighted average
shares within the table outlined above. The conversion of diluted shares had no
impact on Moody's operating results. Options to purchase 6.3 million and 0.1
million
F-53
182
MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
shares of D&B common stock were outstanding at June 30, 2000 and 1999,
respectively, but were not included in the computation of diluted earnings per
share because the options' exercise prices were greater than the average market
price of D&B common stock. The options generally expire 10 years after the
initial grant date.
3. FUTURE INDEBTEDNESS
In connection with the Distribution, D&B borrowed funds to repay in full
its commercial paper obligations. Also in connection with the Distribution, the
Distribution Agreement provides that, immediately prior to the Distribution, a
portion of the indebtedness of D&B (plus certain minority interest obligations)
and a portion of D&B's cash will be allocated to New D&B in amounts such that,
at the time of the Distribution, and after giving effect to the agreement
discussed below and certain other factors, the net indebtedness of New D&B (plus
the minority interest obligations) will approximate the net indebtedness of
Moody's. As indicated under "Relationship Between The New D&B Corporation and
Moody's Corporation After the Distribution--Employee Benefits Agreement",
substantially all unexercised D&B stock options will be adjusted as of the
Distribution Date to comprise options to purchase Moody's Common Stock and
separately exercisable options to purchase New D&B Common Stock. In light of,
among other things, the numbers of optionees to be employed by New D&B and
Moody's, respectively, this adjustment will result in a substantially greater
number of outstanding options to purchase Moody's Common Stock than would be the
case if options were adjusted so as to become solely options to purchase common
stock of the optionee's employer. Due to this fact and the fact that, consistent
with past practice, each of New D&B and Moody's is expected to maintain a stock
purchase program designed to offset the increased number of shares otherwise
attributable to option exercises, New D&B has agreed to adjust the net
indebtedness of the two companies to compensate Moody's for the disproportionate
amount of its estimated future cash costs in this regard. The exact amount of
the adjustment discussed in the immediately preceding sentence will be
determined on a formula basis and will be dependent upon a variety of factors,
including the respective trading prices of Moody's Common Stock and New D&B
Common Stock at the time of the Distribution.
4. CONTINGENCIES
Moody's is involved in legal proceedings, claims and litigation arising in
the ordinary course of business. Although the outcome of such matters cannot be
predicted with certainty, in the opinion of management, the ultimate liability
of the Company in connection with such matters will not have a material effect
on the Company's financial position, results of operations or cash flows.
In addition, Moody's has certain other contingencies discussed below.
Information Resources, Inc.
On July 29, 1996, Information Resources, Inc. ("IRI") filed a complaint in
the United States District Court for the Southern District of New York, naming
as defendants the corporation then known as "The Dun & Bradstreet Corporation"
(i.e., Donnelley), A.C. Nielsen Company (a subsidiary of ACNielsen Corporation)
and I.M.S. International, Inc. (a subsidiary of Cognizant Corporation). At the
time of the filing of the complaint, each of the other defendants was a wholly
owned subsidiary of Donnelley.
The complaint alleges various violations of United States antitrust laws,
including purported violations of Sections 1 and 2 of the Sherman Act arising
from tying arrangements, agreements with retailers and other customers,
predatory pricing practices and other matters alleged by IRI. In addition to the
foregoing claims, the complaint also alleges a claim of tortious interference
with a contract and a claim of tortious interference with a prospective business
relationship. These claims relate to the acquisition by defendants of Survey
Research Group Limited ("SRG"). IRI alleges SRG violated an alleged agreement
with IRI when it agreed to be acquired by the defendants and that the defendants
induced SRG to breach that agreement.
F-54
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MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
IRI's complaint alleges damages in excess of $350 million, which amount IRI
asked to be trebled under antitrust laws. IRI also seeks punitive damages in an
unspecified amount. No amount in respect of these alleged damages has been
accrued in the combined financial statements of the Company.
In November 1996, Donnelley completed a distribution to its shareholders
(the "1996 Distribution") of the capital stock of ACNielsen Corporation
("ACNielsen") and Cognizant Corporation ("Cognizant"). On October 28, 1996, in
connection with the 1996 Distribution, Cognizant, ACNielsen and Donnelley
entered into an Indemnity and Joint Defense Agreement (the "Indemnity and Joint
Defense Agreement") pursuant to which they have agreed (i) to certain
arrangements allocating potential liabilities ("IRI Liabilities") that may arise
out of or in connection with the IRI action and (ii) to conduct a joint defense
of such action. In particular, the Indemnity and Joint Defense Agreement
provides that ACNielsen will assume exclusive liability for IRI Liabilities up
to a maximum amount to be calculated at such time such liabilities, if any,
become payable (the "ACN Maximum Amount"), and that Donnelley and Cognizant will
share liability equally for any amounts in excess of the ACN Maximum Amount. The
ACN Maximum Amount will be determined by an investment banking firm as the
maximum amount that ACNielsen is able to pay after giving effect to (i) any plan
submitted by such investment bank that is designed to maximize the claims-paying
ability of ACNielsen without impairing the investment banking firm's ability to
deliver a viability opinion (but which will not require any action requiring
stockholder approval), and (ii) payment of related fees and expenses. For these
purposes, financial viability means the ability of ACNielsen, after giving
effect to such plan, the payment of related fees and expenses and the payment of
the ACN Maximum Amount, to pay its debts as they become due and to finance the
current and anticipated operating and capital requirements of its business, as
reconstituted by such plan, for two years from the date any such plan is
expected to be implemented.
In June 1998, Donnelley completed a distribution to its shareholders (the
"1998 Distribution") of the capital stock of D&B and changed its name to R.H.
Donnelley Corporation. In connection with the 1998 Distribution, D&B and
Donnelley entered into an agreement whereby the Company has assumed all
potential liabilities of Donnelley arising from the IRI action and agreed to
indemnify Donnelley in connection with such potential liabilities.
During 1998, Cognizant separated into two companies, IMS Health
Incorporated ("IMS Health") and Nielsen Media Research, Inc. ("NMR"). IMS Health
and NMR are each jointly and severally liable for all Cognizant liabilities
under the Indemnity and Joint Defense Agreement.
Under the terms of the Distribution Agreement, as a condition to the
Distribution, New D&B will undertake to be jointly and severally liable with
Moody's for D&B's obligations to Donnelley under the 1998 Distribution
Agreement, including any liabilities arising under the Indemnity and Joint
Defense Agreement. However, as between themselves, each of New D&B and Moody's
will be responsible for 50% of any payments to be made with respect to the IRI
action pursuant to the 1998 Distribution Agreement, including legal fees or
expenses related thereto.
Management is unable to predict at this time the final outcome of the IRI
action or whether the resolution of this matter could materially affect Moody's
results of operations, cash flows or financial position.
TAX MATTERS
Tax matters
D&B enters into global tax planning initiatives in the normal course of
business, principally through tax free restructurings of both its foreign and
domestic operations. These initiatives are subject to normal review by tax
authorities. It is possible that additional liabilities may be proposed by tax
authorities as a result of these reviews and that some of the reviews could be
resolved unfavorably. At this time, management is unable to
F-55
184
MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
predict the extent of such reviews, the outcome thereof or whether such outcome
could materially affect Moody's results of operations, cash flows or financial
position.
Pursuant to the Distribution Agreement, New D&B and Moody's will agree to
be financially responsible for 50% of any potential liabilities that may arise
with respect to the reviews described above, to the extent such potential
liabilities are not directly attributable to their respective business
operations. See "Relationship Between The New D&B Corporation and Moody's
Corporation After the Distribution--Distribution Agreement".
The IRS has completed its review of D&B's utilization of certain capital
losses generated during 1989 and 1990. On June 26, 2000, the IRS, as part of its
audit process, issued a final adjustment disallowing the utilization of these
capital losses.
Pursuant to a series of agreements, IMS Health and NMR are jointly and
severally liable to pay one-half, and Donnelley the other half, of any payments
for taxes and accrued interest arising from this matter and certain other
potential tax liabilities that may arise from future audit adjustments after
review by tax authorities relating to various transactions to which IMS Health,
NMR and Donnelley are parties, after Donnelley pays the first $137 million.
In connection with the 1998 Distribution, D&B and Donnelley entered into an
agreement whereby D&B has assumed all potential liabilities of Donnelley arising
from these tax matters and has agreed to indemnify Donnelley in connection with
such potential liabilities.
On May 12, 2000, an amended tax return was filed for the 1989 and 1990 tax
periods which reflected the final subsequent adjustment in the amount of $561.6
million of tax and interest due. D&B paid the IRS approximately $349.3 million
of this amount on May 12, 2000, which D&B funded with short-term borrowings. IMS
Health has informed D&B that it paid to the IRS approximately $212.3 million on
May 17, 2000. Notwithstanding the filing and payment, D&B intends to contest the
assessment of amounts , if any, in excess of the amounts paid. Moody's had
accrued its anticipated share of the probable liability arising from the
utilization of these capital losses.
5. COMPREHENSIVE INCOME
Total comprehensive income was as follows:
SIX MONTHS
ENDED JUNE 30,
--------------
2000 1999
----- -----
Net income............................................. $77.6 $75.2
Other comprehensive loss-foreign currency translation
adjustment............................................ (.8) (.4)
----- -----
Total comprehensive income........................ $76.8 $74.8
===== =====
6. SEGMENT INFORMATION
The Company reports segment information in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". In
accordance with SFAS No. 131, operating segments are defined as components of an
enterprise for which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Company operates primarily
in one reportable business segment -- ratings, which accounts for approximately
90% of the Company's total revenues. Revenues of the opinion research products
and risk management services businesses have been aggregated as "Other" for
reporting purposes. Given the
F-56
185
MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
dominance of the ratings segment to Moody's overall results, the Company does
not separately measure and report operating income for the ratings business.
Rather, revenue is the predominant measure utilized by senior management for
assessing performance and for the allocation of resources, and operating income
is evaluated for the Company as a whole. In addition, assets are not allocated
on a segment basis and are considered on a total company basis only.
The ratings segment is comprised of four major rating groups, each of which
have similar economic and financial characteristics. They are corporate finance
ratings, structured finance ratings, financial institutions and sovereign
ratings and public finance ratings.
Revenues included in "Other" consist of opinion products revenues,
generated from the sale of investor oriented credit research, and risk
management services revenues, generated from the sale of credit risk assessment
software and related products and services.
There are no intersegment sales and no single customer accounted for 10% or
more of total revenue.
SIX MONTHS ENDED
JUNE 30,
----------------
2000 1999
------ ------
Revenues:
Ratings:
Corporate finance ratings.............................. $ 82.8 $ 85.7
Structured finance ratings............................. 91.5 83.3
Financial institutions and sovereign ratings........... 55.6 54.5
Public finance ratings................................. 21.6 31.8
------ ------
Total ratings revenue.................................. 251.5 255.3
Other..................................................... 37.2 29.2
------ ------
Total revenues......................................... $288.7 $284.5
Total expenses.............................................. 150.1 149.6
Non-operating income (expense), net......................... .5 (.2)
------ ------
Income before provision for income taxes.................... $139.1 $134.7
====== ======
7. ACQUISITION
On January 27, 2000, the Company acquired the net assets of a financial
software products company for $17.4 million in cash. The acquisition was
accounted for using the purchase method of accounting for business combinations
from the date of acquisition. The purchase price has been preliminarily
allocated based on estimated fair values at the date of acquisition, pending
final determination of certain acquired balances. This preliminary allocation
has resulted in acquired goodwill and other intangibles of approximately $17.2
million, which will be amortized on a straight-line basis over 3-10 years. The
impact of the acquisition on the results of operations had the acquisition
occurred on January 1, 2000 or January 1, 1999 would not have been material.
F-57
186
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors
of The Dun & Bradstreet Corporation
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of shareholder's net investment and of cash
flows present fairly, in all material respects, the financial position of
Moody's Corporation (the "Company") at December 31, 1999 and 1998 and the
results of its operations and its cash flows for the years ended December 31,
1999, 1998 and 1997 in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the combined financial statements, the Company
changed certain revenue recognition accounting policies in 1997.
/s/ PricewaterhouseCoopers LLP
New York, New York
May 24, 2000
except as to the effect of
the Distribution described
in Note 1 which is as of June 15, 2000.
F-58
187
MOODY'S CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
REVENUES............................................ $ 564.2 $ 513.9 $ 457.4
EXPENSES:
Operating expenses................................ 184.9 178.1 158.0
General and administrative expenses............... 95.9 94.9 93.2
Depreciation and amortization..................... 13.0 15.4 16.2
----------- ----------- -----------
OPERATING INCOME.................................... 270.4 225.5 190.0
----------- ----------- -----------
Gain on sale of business............................ 9.2 12.6 --
Other non-operating income (expense)................ (.7) (.2) .2
----------- ----------- -----------
Non-operating income, net......................... 8.5 12.4 .2
----------- ----------- -----------
Income before provision for income taxes............ 278.9 237.9 190.2
Provision for income taxes.......................... 123.3 95.9 64.0
----------- ----------- -----------
Income before cumulative effect of accounting
change............................................ 155.6 142.0 126.2
Cumulative effect of accounting change, net of
income tax benefit................................ -- -- (20.3)
----------- ----------- -----------
NET INCOME.......................................... $ 155.6 $ 142.0 $ 105.9
=========== =========== ===========
UNAUDITED PRO FORMA BASIC EARNINGS PER SHARE:
Income before Cumulative Effect of Accounting
Change......................................... $ .96 $ .84 $ .74
Cumulative Effect of Accounting Change, Net of
Income Tax Benefit............................. -- -- (.12)
----------- ----------- -----------
Unaudited Pro Forma Basic Earnings Per Share of
Common Stock................................... $ .96 $ .84 $ .62
=========== =========== ===========
UNAUDITED PRO FORMA DILUTED EARNINGS PER SHARE:
Income before Cumulative Effect of Accounting
Change......................................... $ .95 $ .83 $ .73
Cumulative Effect of Accounting Change, Net of
Income Tax Benefit............................. -- -- (.12)
----------- ----------- -----------
Unaudited Pro Forma Diluted Earnings Per Share of
Common Stock................................... $ .95 $ .83 $ .61
=========== =========== ===========
SHARES USED IN COMPUTING PRO FORMA EARNINGS PER
SHARE:
Weighted Average Shares Outstanding -- Basic........ 162,253,000 169,492,000 170,765,000
=========== =========== ===========
Weighted Average Shares Outstanding -- Diluted...... 164,284,000 171,703,000 172,552,000
=========== =========== ===========
The accompanying notes are an integral part of the combined financial
statements.
F-59
188
MOODY'S CORPORATION
COMBINED BALANCE SHEETS
(DOLLAR AMOUNTS IN MILLIONS)
DECEMBER 31,
-----------------
1999 1998
------- ------
ASSETS
Current assets:
Cash...................................................... $ 3.4 $ 4.0
Accounts receivable, net of allowances of $24.5 and $20.7
in 1999 and 1998, respectively......................... 84.4 98.1
Other current assets...................................... 84.9 80.4
------- ------
Total Current Assets.............................. 172.7 182.5
Property and equipment, net................................. 43.3 43.4
Prepaid pension costs....................................... 49.7 47.8
Intangibles, net............................................ 2.2 2.7
Other assets................................................ 15.2 19.8
------- ------
Total Assets...................................... $ 283.1 $296.2
======= ======
LIABILITIES AND SHAREHOLDER'S NET INVESTMENT
Current liabilities:
Accounts payable and accrued liabilities.................. $ 275.1 $264.0
Deferred revenue.......................................... 100.4 85.8
------- ------
Total Current Liabilities......................... 375.5 349.8
Other liabilities........................................... 130.7 139.0
------- ------
Total Liabilities................................. 506.2 488.8
------- ------
Commitments and contingencies (Notes 10 and 11)
Shareholder's Net Investment................................ (223.1) (192.6)
------- ------
TOTAL LIABILITIES AND SHAREHOLDER'S NET
INVESTMENT....................................... $ 283.1 $296.2
======= ======
The accompanying notes are an integral part of the combined financial
statements.
F-60
189
MOODY'S CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN MILLIONS)
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
Cash flows from operating activities:
Net Income................................................ $ 155.6 $ 142.0 $ 105.9
Reconciliation of net income to net cash provided by
operating activities:
Cumulative effect of accounting change, net of income
tax benefit.......................................... -- -- 20.3
Depreciation and amortization.......................... 13.0 15.4 16.2
Deferred income taxes.................................. 7.3 (6.8) (3.4)
Loss on sale of property and equipment................. -- .3 --
Gain on sale of business............................... (9.2) (12.6) --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable............. 13.7 (4.0) (4.4)
(Increase) decrease in other current assets............ (4.6) (28.5) 10.6
Increase in prepaid pension costs...................... (1.9) (1.5) (.6)
(Increase) decrease in other assets.................... (2.0) (.4) --
Increase in accounts payable and accrued liabilities... 20.7 56.8 39.1
Increase in deferred revenue........................... 14.3 20.9 20.7
Decrease in other liabilities.......................... (9.2) (14.0) (16.0)
------- ------- -------
Net cash provided by operating activities............ 197.7 167.6 188.4
------- ------- -------
Cash flows from investing activities:
Net additions to property and equipment................... (11.4) (11.3) (13.6)
Net addition to computer software......................... (1.5) (1.1) (1.1)
Acquisition of business................................... -- (1.5) --
Proceeds from sale of business............................ -- 26.5 --
Other..................................................... .9 .5 (.2)
------- ------- -------
Net cash provided by (used in) investing
activities........................................ (12.0) 13.1 (14.9)
Cash flows from financing activities:
Net distributions to D&B.................................. (186.4) (182.0) (174.3)
------- ------- -------
Net cash used in financing activities................ (186.4) (182.0) (174.3)
------- ------- -------
Effect of exchange rate changes on cash................... .1 .1 (.4)
------- ------- -------
Decrease in cash............................................ (.6) (1.2) (1.2)
Cash, beginning of year..................................... 4.0 5.2 6.4
------- ------- -------
Cash, end of year........................................... $ 3.4 $ 4.0 $ 5.2
======= ======= =======
The accompanying notes are an integral part of the combined financial
statements.
F-61
190
MOODY'S CORPORATION
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDER'S NET INVESTMENT
(DOLLAR AMOUNTS IN MILLIONS)
YEAR ENDED DECEMBER 31,
---------------------------------
SHAREHOLDER'S COMPREHENSIVE
NET INVESTMENT INCOME
-------------- -------------
BALANCE AT JANUARY 1, 1997.................................. $ (83.9)
Net income.................................................. 105.9 $105.9
Translation adjustment...................................... (.6) (.6)
Net distributions to D&B.................................... (174.3) --
------- ------
Total comprehensive income.................................. $105.3
======
BALANCE AT DECEMBER 31, 1997................................ (152.9)
Net income.................................................. 142.0 $142.0
Translation adjustment...................................... .3 .3
Net distributions to D&B.................................... (182.0) --
------- ------
Total comprehensive income.................................. $142.3
======
BALANCE AT DECEMBER 31, 1998................................ (192.6)
Net income.................................................. 155.6 $155.6
Translation adjustment...................................... .3 .3
Net distributions to D&B.................................... (186.4) --
------- ------
Total comprehensive income.................................. $155.9
======
BALANCE AT DECEMBER 31, 1999................................ $(223.1)
=======
The accompanying notes are an integral part of the combined financial
statements.
F-62
191
MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
1. BACKGROUND AND BASIS OF PRESENTATION
DISTRIBUTION
On December 15, 1999, The Dun & Bradstreet Corporation ("D&B") announced a
plan to separate into two independent, publicly traded companies -- The New D&B
Corporation ("New D&B") and Moody's Corporation ("Moody's" or the "Company").
The separation will be accomplished through a tax-free distribution to the
shareholders of D&B (the "Distribution") of all of the shares of common stock of
a newly formed, wholly owned subsidiary corporation (New D&B) comprising the
business of the D&B operating company. In connection with the Distribution, D&B
will complete an internal reorganization so that, at the time of the
Distribution, the business of New D&B will consist solely of the business of
supplying business, purchasing, credit and marketing information products and
services as well as receivable management services (the "New D&B Business") and
the business of D&B will consist solely of the business of providing ratings and
related research and risk management services (the "Moody's Business"). In
addition, at the time of the Distribution, D&B will be renamed "Moody's
Corporation" and New D&B will succeed to the name "The Dun & Bradstreet
Corporation." Shares of common stock of D&B will represent a continuing interest
in the Moody's Business. D&B expects to complete the Distribution by the end of
the third quarter of 2000.
D&B received a tax ruling from the Internal Revenue Service (the "IRS") on
June 15, 2000 that the receipt by D&B stockholders of the New D&B Common Stock
in the Distribution will be tax-free to such stockholders and D&B for Federal
income tax purposes, except to the extent that cash is received in lieu of
fractional shares of New D&B Common Stock.
For purposes of, among other things, governing certain of the ongoing
relations between New D&B and Moody's as a result of the Distribution as well as
to allocate certain tax, employee benefit and other liabilities arising prior to
the Distribution, the companies will enter into various agreements, including a
Distribution Agreement, Tax Allocation Agreement, Employee Benefits Agreement,
Intellectual Property Assignment, Shared Transaction Services Agreement,
Insurance and Risk Management Services Agreement, Data Services Agreement and
Transition Services Agreement. Summaries of these agreements are set forth
elsewhere in the Information Statement.
In general, pursuant to the terms of the Distribution Agreement, all of the
assets of the New D&B Business will be allocated to New D&B and all of the
assets of the Moody's Business will be allocated to Moody's. The Distribution
Agreement also provides for assumptions of liabilities and cross-indemnities
designed to allocate generally, effective as of the Distribution Date, financial
responsibility for (i) all liabilities arising out of or in connection with the
New D&B Business to New D&B, (ii) all liabilities arising out of or in
connection with the Moody's Business to Moody's and (iii) substantially all
other liabilities equally between New D&B and Moody's. The liabilities so
allocated include liabilities arising out of or in connection with former
businesses of D&B and its predecessor as well as certain other transactions
involving D&B and its predecessor.
Pursuant to the terms of a distribution agreement, dated as of June 30,
1998 (the "1998 Distribution Agreement"), between D&B (then known as "The New
Dun & Bradstreet Corporation") and R.H. Donnelley Corporation (then known as
"The Dun & Bradstreet Corporation" and herein referred to as "Donnelley"), as a
condition to the Distribution, New D&B is required to undertake to be jointly
and severally liable with D&B to Donnelley for any liabilities arising
thereunder. The Distribution Agreement generally allocates the financial
responsibility for liabilities of D&B under the 1998 Distribution Agreement
equally between New D&B and Moody's, except that any such liabilities that
relate primarily to the New D&B Business will be New D&B liabilities and any
such liabilities that relate primarily to the Moody's Business will be Moody's
liabilities. Among other things, New D&B and Moody's will agree that, as between
themselves, they will each be responsible for 50% of any payments to be made in
respect of the IRI action (as described below in Note 11) under the 1998
Distribution Agreement, including any legal fees and expenses related thereto.
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MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
In connection with the Distribution, D&B will borrow funds in order to
repay in full D&B's commercial paper obligations. Also in connection with the
Distribution, the Distribution Agreement provides that, immediately prior to the
Distribution, a portion of the indebtedness of D&B (plus certain minority
interest obligations) and a portion of D&B's cash will be allocated to New D&B
in amounts such that, at the time of the Distribution, and after giving effect
to the agreement discussed below and certain other factors, the net indebtedness
of New D&B (plus the minority interest obligations) will approximate the net
indebtedness of Moody's. As indicated under "Relationship Between The New D&B
Corporation and Moody's Corporation After the Distribution--Employee Benefits
Agreement", substantially all unexercised D&B stock options will be adjusted as
of the Distribution Date to comprise options to purchase Moody's Common Stock
and separately exercisable options to purchase New D&B Common Stock. In light
of, among other things, the numbers of optionees to be employed by New D&B and
Moody's, respectively, this adjustment will result in a substantially greater
number of outstanding options to purchase Moody's Common Stock than would be the
case if options were adjusted so as to become solely options to purchase common
stock of the optionee's employer. Due to this fact and the fact that, consistent
with past practice, each of New D&B and Moody's is expected to maintain a stock
purchase program designed to offset the increased number of shares otherwise
attributable to option exercises, New D&B has agreed to adjust the net
indebtedness of the two companies to compensate Moody's for the disproportionate
amount of its estimated future cash costs in this regard. The exact amount of
the adjustment discussed in the immediately preceding sentence will be
determined on a formula basis and will be dependent upon a variety of factors,
including the respective trading prices of Moody's Common Stock and New D&B
Common Stock at the time of the Distribution.
Due to the relative significance of the New D&B as compared to Moody's, the
transaction has been accounted for as a reverse spin-off.
Moody's is a leading global credit rating, research and risk analysis firm.
Moody's publishes credit opinions, research and ratings on fixed-income
securities, issuers of securities and other credit obligations. Moody's
publishes rating opinions on a broad range of credit obligations. These include
various corporate and governmental obligations, issued in domestic and
international markets, structured finance securities and commercial paper
programs. In recent years, Moody's has moved beyond its traditional bond ratings
activities and has been assigning ratings to issuers of securities, insurance
company obligations, bank loans, derivative products, bank deposits and other
bank debt, managed funds and derivatives.
Closely integrated with its rating services, Moody's publishes
investor-oriented credit research including in-depth research on major issuers,
industry studies, special comments and credit opinion handbooks. These research
products include insurance, utilities, speculative-grade instruments, structured
finance, bank, finance, real estate and global credit research.
Moody's risk management services business ("MRMS") develops and distributes
credit risk assessment software used by banks and other financial institutions
in their commercial lending and other activities. MRMS also provides modeling
tools, analytics, credit education materials, seminars and computer-based
lending simulations.
The combined financial statements reflect the financial position, results
of operations and cash flows of Moody's as if it were a separate entity for all
periods presented. The combined financial statements include allocations of
certain D&B corporate headquarters assets (including prepaid pension assets) and
liabilities (including postretirement benefits and corporate and tax
obligations), and expenses (including cash management, legal, accounting, tax,
employee benefits, insurance services, data services and other D&B corporate
overhead) relating to Moody's businesses (See Note 6 to Moody's Combined
Financial Statements and Notes thereto). Management believes that these
allocations are reasonable. However, the costs of these services and benefits
charged to Moody's are not necessarily indicative of the costs that would have
been incurred if Moody's had performed or provided these functions as a separate
entity.
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MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
The financial information included herein may not necessarily reflect the
results of operations, financial position, changes in shareholder's net
investment, and cash flows of Moody's in the future or what they would have been
had it been a separate, stand-alone entity during the periods presented.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The combined financial statements include those of Moody's Corporation,
Moody's Investors Service, Inc. and its wholly owned subsidiaries, certain other
subsidiaries of D&B that conduct the Moody's business that are wholly owned by
D&B, and certain assets and liabilities of D&B which are to be allocated to
Moody's in connection with the Distribution. The effects of all significant
intercompany transactions have been eliminated. Investments for which the
Company does not have the ability to exercise significant influence over
operating and financial policies are carried at cost.
Property and Equipment
Property and equipment are stated at cost and are depreciated over their
estimated useful lives using the straight-line method. Expenditures for
maintenance and repairs that do not extend the economic useful life of the
related assets are charged to expense as incurred. Gains and losses on disposals
of property and equipment are reflected in the combined statements of
operations.
Computer Software
The Company capitalizes costs related to software developed or obtained for
internal use, and the development of software that will be licensed or otherwise
marketed to third parties.
Costs for internal-use software, which are included in property and
equipment in the combined balance sheets, principally relate to the Company's
accounting and customer support systems. Such costs generally consist of the
direct costs of third party license fees, professional services provided by
third parties and employee compensation, in each case incurred either during the
application stage or in connection with upgrades and enhancements that increase
functionality. Costs incurred during the preliminary project stage of
development as well as maintenance costs are expensed as incurred.
Costs for the development of computer software that will be sold, leased or
otherwise marketed are capitalized when technological feasibility has been
established. Such costs, which are included in other assets on the combined
balance sheets, primarily relate to the development of credit risk assessment
software to be licensed to customers. These costs generally consist of
professional services provided by third parties and compensation costs of
employees that develop the software, are amortized on a straight-line basis over
a period of three years and are reported at the lower of unamortized cost or net
realizable value.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
undiscounted expected future cash flows is lower than the carrying amount of the
asset, a loss is recognized for the difference between the carrying amount and
the fair value of the asset.
Intangibles
Goodwill of $0.9 and $1.3 million at December 31, 1999 and 1998,
respectively, net of accumulated amortization of $1.5 and $1.1 million,
respectively, represents the excess of the purchase price over the fair
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MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
value of identifiable net assets of an acquired business and is being amortized
on a straight-line basis over seven years. Other intangible assets of $1.3 and
$1.4 million at December 31, 1999 and 1998, respectively, net of accumulated
amortization of $0.2 and $0.1 million, respectively, consist primarily of
acquired tradenames and are being amortized over their estimated useful lives,
generally over ten years.
At each balance sheet date, the Company reviews the recoverability of
goodwill and intangible assets based on estimated undiscounted future cash flows
from operating activities compared with the carrying value, and recognizes any
impairment on the basis of such comparison.
Revenue Recognition
The Company recognizes ratings revenue as services are provided and opinion
research products revenue over the subscription period, which is generally over
one to three years. Revenue from risk management software product sales is
generally recognized at the time the product is shipped to customers, as the
Company's obligations are complete. Amounts billed in advance of providing the
related products or services are credited to deferred revenue and reflected in
revenues when earned.
Foreign Currency Translation
For all operations outside the United States where the Company has
designated the local currency as the functional currency, assets and liabilities
are translated using the end of year exchange rates, and revenues and expenses
are translated using average exchange rates for the year. For these operations,
currency translation adjustments are accumulated in a separate component of
shareholder's net investment, whereas realized transaction gains and losses are
recognized in other non-operating income/(expense)-net. Transaction gains/
(losses) were $(0.7), $(0.2) and $0.3 million in 1999, 1998 and 1997,
respectively.
Comprehensive Income
Accumulated losses on foreign currency translation of $2.4, $2.6 and $2.9
million at December 31, 1999, 1998 and 1997, respectively are included in
Shareholder's Net Investment.
Income Taxes
Moody's has been included in the federal and certain state income tax
returns of D&B. The provision for income taxes in the combined financial
statements has been calculated on a separate-company basis, which includes
allocations pursuant to the Tax Allocation Agreement in connection with the
Distribution. Income taxes paid on behalf of Moody's by D&B are included in
Shareholder's Net Investment. After the Distribution, Moody's will file separate
income tax returns.
Financial Instruments and Concentration of Risk
The Company's financial instruments include trade receivables and payables,
which are short-term in nature and, accordingly, approximate fair value.
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of trade receivables. Credit is extended to
customers based on an evaluation of their financial condition. No customer
accounted for 10% or more of trade receivables at December 31, 1999 or 1998.
Pro Forma Earnings Per Share of Common Stock (Unaudited)
The computation of pro forma basic earnings per share for the periods
presented is based upon D&B's historical weighted average number of shares of
D&B common stock outstanding, reflecting the Distribution. The computation of
pro forma diluted earnings per share is calculated by dividing net income by the
sum of
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MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
D&B's historical weighted average common shares outstanding and potentially
dilutive D&B common shares. Potentially dilutive common shares are calculated in
accordance with the treasury stock method, which assumes that proceeds from the
exercise of all D&B stock options are used to repurchase D&B's common stock at
market value due to the fact that at the Distribution Date, each outstanding D&B
stock option (other than stock options held by Mr. Loren) will convert into
separately exercisable Moody's Stock Options and New D&B stock options,
regardless of whether Moody's or D&B employs the option holder after the
Distribution. At the Distribution Date, the number of shares of Moody's common
stock covered by the Moody's Stock Options will equal the same number of shares
covered by the unexercised historical D&B options.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates. Estimates are used in, but not
limited to, accounts receivable allowances, employee benefit plans, taxes and
contingencies, and depreciation and amortization rates for property and
equipment, goodwill, other intangible assets and computer software.
Accounting Change
Effective January 1, 1997, the Company changed its revenue recognition
method to recognizing revenue over the service period from previously
recognizing revenue at the time of billing. In the opinion of management, this
accounting change brings its revenue recognition method more in line with the
economics of the business and provides a better measure of operating results.
In accordance with Accounting Principles Board Opinion ("APB") No. 20
"Accounting Changes", the cumulative effect of this accounting change resulted
in a pre-tax non-cash charge of $30.7 million ($20.3 million after-tax or $.12
pro forma basic and diluted earnings per share).
Recently Adopted Accounting Policies
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which requires
capitalization of certain costs incurred in the development of internal-use
software. SOP 98-1 is effective for fiscal years beginning after December 15,
1998. The Company believes that its policy for capitalizing internal-use
computer software costs is consistent with the requirements of SOP 98-1.
Recently Issued Accounting Policies
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN No. 44"). The
interpretation provides guidance for certain issues relating to stock
compensation involving employees that arose in applying Opinion 25. Among other
things, FIN 44 clarifies (a) the definition of an employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The provision of FIN No. 44 are effective July 1, 2000, except for
the provisions regarding modifications to fixed stock option awards that reduce
the exercise price of an award, which apply to modifications made after December
15, 1998. Provisions regarding modifications to fixed stock option awards
F-67
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MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
to add reload features apply to modifications made after January 12, 2000. The
effect of adopting FIN No. 44 is not expected to have a material impact on
Moody's.
In December 1999, the staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 summarizes some of the staff's
interpretations of the application of generally accepted accounting principles
to revenue recognition. The staff provided this guidance due, in part, to the
large number of revenue recognition issues that it has encountered in registrant
filings. In June 2000, SAB 101B, "Second Amendment: Revenue Recognition in
Financial Statements" was issued, which defers the effective date of SAB 101
until the fourth fiscal quarter of 2000. Moody's believes that its revenue
recognition policies are in compliance with SAB 101.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities on the balance sheet and measurement
of those instruments at fair value. If certain conditions are met, a derivative
may be designated specifically as: (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm commitment
(a fair value hedge); (b) a hedge of the exposure to variable cash flows of a
forecasted transaction (a cash flow hedge); or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. In June 1999, the Financial
Accounting Standards Board issued SFAS No. 137 delaying the effective date of
SFAS No. 133. The provisions of SFAS No. 133 are effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. Moody's currently
does not engage in any transactions that would be impacted by the adoption of
SFAS No. 133.
2. RECONCILIATION OF SHARES USED IN COMPUTING PRO FORMA EARNINGS PER SHARE
Below is a reconciliation of pro forma basic weighted average shares to pro
forma diluted weighted average shares:
1999 1998 1997
------ ------ ------
(SHARE DATA IN MILLIONS)
Weighted average number of pro forma shares -- Basic........ 162.3 169.5 170.8
Dilutive effect of shares issuable under stock options,
restricted stock and performance share plans.............. 2.0 2.2 1.8
----- ----- -----
Weighted average number of pro forma shares -- Diluted...... 164.3 171.7 172.6
===== ===== =====
As required by SFAS No. 128, "Earnings per Share," Moody's has provided a
reconciliation of basic weighted average shares to diluted weighted average
shares within the table outlined above. The conversion of diluted shares had no
impact on Moody's operating results. Options to purchase 3.0 million, 3.4
million and 3.1 million shares of D&B common stock were outstanding at December
31, 1999, 1998 and 1997, respectively, but were not included in the computation
of diluted earnings per share because the options' exercise prices were greater
than the average market price of D&B's common stock. The options generally
expire 10 years after the initial grant date.
3. NON-RECURRING ITEM
In July 1998, Moody's sold its Financial Information Services business
("FIS"), which was engaged in the publishing of historical financial
information. Moody's received $26.5 million from the sale and recorded a
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MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
pre-tax gain of $12.6 million. During the third quarter of 1999, certain
agreements related to the sale of FIS expired or were completed. As a result,
estimated liabilities established at the time of the divestiture in connection
with these agreements, determined to be no longer required, were adjusted. These
adjustments resulted in a gain of $9.2 million.
Below is summarized financial information for the FIS business through the
sale date, as reflected in the combined statements of operations:
YEAR ENDED
DECEMBER 31,
--------------
1998 1997
----- -----
Revenues.................................................... $18.4 $34.3
Operating income............................................ 4.2 5.8
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of:
DECEMBER 31,
USEFUL ----------------
LIVES 1999 1998
--------- ------ ------
Land, building and building improvements............... 7-40 $ 22.1 $ 21.4
yrs......
Office and computer equipment.......................... 3-5 yrs.. 35.0 33.6
Office furniture and fixtures.......................... 10 yrs... 13.1 12.0
Internal-use computer software......................... 3-5 yrs.. 7.5 5.9
Leasehold improvements................................. * 27.9 24.5
------ ------
105.6 97.4
Less: accumulated depreciation......................... (62.3) (54.0)
------ ------
$ 43.3 $ 43.4
====== ======
- ---------------
* shorter of the term of the lease or estimated useful life of the improvement
Included in expenses is depreciation and amortization expense of $11.4,
$13.4, and $13.8 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities included the following significant
components:
DECEMBER 31,
----------------
1999 1998
------ ------
Accounts payable............................................ $ 3.2 $ 1.6
Accrued income taxes (see Note 11).......................... 174.0 163.4
Compensation and related expenses........................... 71.9 59.6
Other....................................................... 26.0 39.4
------ ------
$275.1 $264.0
====== ======
6. RELATED PARTY TRANSACTIONS
D&B uses a centralized cash management system to finance its operations.
Cash deposits from the majority of Moody's businesses are transferred to D&B on
a daily basis. In addition, the majority of Moody's cash disbursements are
funded by D&B from its centralized cash management system. Net distributions to
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MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
D&B reflect these intercompany cash activities. No interest has been credited or
charged for these transactions.
D&B provides certain centralized services to Moody's (see Note 1 to the
financial statements). Expenses related to these services have been allocated to
Moody's based on utilization of specific services or, where an estimate could
not be determined, based on Moody's revenues in proportion to D&B's total
revenues. Management believes these allocation methods are reasonable. However,
the costs of these services and benefits charged to Moody's are not necessarily
indicative of the costs that would have been incurred if Moody's had performed
these services as a separate entity. These allocations included in expenses in
the combined statements of operations totaled $17.2, $16.4 and $15.8 million in
1999, 1998 and 1997 respectively. Amounts due to D&B for these expenses are
included in net distributions to D&B within shareholder's net investment.
7. PENSION AND POSTRETIREMENT BENEFITS
As specified in the Employee Benefits Agreement, Moody's will assume
responsibility for pension benefits related to its active and disabled employees
with benefits under the D&B Benefit Plan after the Distribution Date. Moody's
will be allocated a portion of the assets of the D&B retirement plans as agreed
with D&B. Accordingly, an allocation of prepaid pension expenses attributable to
Moody's active and disabled employees, of approximately $50 million and $48
million in 1999 and 1998, respectively, has been reflected in the combined
balance sheets.
Moody's will also assume responsibility for postretirement benefits for its
active employees. An allocation of liabilities related to postretirement
benefits for Moody's active employees has been included in the combined balance
sheets.
The responsibility for Moody's employees who retired or terminated with
vested rights prior to the Distribution will remain with New D&B.
PENSION
Through the date of the Distribution, Moody's will participate in D&B's
defined benefit pension plans covering substantially all employees. Moody's
accounts for the plans as multi-employer plans. Accordingly, Moody's has
recorded net pension costs as allocated by D&B totaling $0.1, $0.0, and $1.1
million for the years 1999, 1998 and 1997, respectively. After the Distribution,
Moody's expects to establish a defined benefit plan that will cover
substantially all Moody's employees. The assumptions of the multi-employer plans
are described below.
Effective January 1, 1997, the D&B Retirement Plan was amended to provide
retirement income based on a percentage of annual compensation, rather than
final pay. The weighted average expected long-term rate of return on pension
plan assets was 9.75% for 1999 and 1998. At December 31, 1999 and 1998 the
projected benefit obligations were determined using weighted average discount
rates of 7.75% and 6.75%, respectively, and weighted average rates of increase
in future compensation levels of 4.91% and 3.91%, respectively. Plan assets are
invested in diversified portfolios that consist primarily of equity and debt
securities.
SAVINGS PLAN
D&B also has a profit participation plan covering substantially all U.S.
employees, including substantially all U.S. employees of Moody's, that provides
for an employee salary deferral contribution and Moody's contributions. Moody's
employees will continue to participate in the D&B profit participation plan
through the
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MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
date of the Distribution. Employees may contribute up to 16% of their pay.
Moody's contributes an amount equal to 50% of employee contributions, with
Moody's contribution limited to 3% of the employee's pay. Moody's also makes
contributions to the plan if certain objectives are met, based on performance
over a two-year period. Moody's recognized expense associated with the plan of
$2.8, $2.6 and $2.4 million in 1999, 1998 and 1997, respectively. After the
Distribution, Moody's expects to establish a profit participation plan covering
substantially all Moody's employees.
POSTRETIREMENT BENEFITS
In addition to providing pension benefits, Moody's, through D&B provides
various health-care and life-insurance benefits for retired employees. Employees
are eligible for these benefits if they reach normal retirement age while
working for Moody's or 10 years of service after age 45.
Moody's accounts for the plan as a multi-employer plan. Accordingly,
Moody's has recorded postretirement benefits costs as allocated by D&B totaling
$0.3 million for each of the years 1999, 1998 and 1997. The assumptions used for
the multi-employer plan follow.
The accumulated postretirement benefits obligation at December 31, 1999 and
1998 was determined using discount rates of 7.75% and 6.75%, respectively. The
assumed rate of future increases in per capita cost of covered health-care
benefits is 6.5% in 2000, decreasing gradually to 5.0% for the year 2021 and
remaining constant thereafter.
8. EMPLOYEE STOCK OPTION PLANS
Under D&B's 1998 Key Employees' Stock Option Plan, certain employees of
Moody's are eligible for the grant of stock options, stock appreciation rights
and limited stock appreciation rights in tandem with stock options. These awards
are granted at the market price on the date of the grant.
In connection with the Distribution, unexercised D&B stock options held by
Moody's employees as of the Distribution Date will be adjusted to comprise
options to purchase Moody's Common Stock ("Moody's Stock Options") and separate
options to purchase New D&B Common Stock ("New D&B Stock Options"). In general,
unexercised D&B stock options held by New D&B employees as of the Distribution
Date will become options to acquire Moody's Common Stock, and such individual
will also receive replacement stock options exercisable into shares of New D&B
Common Stock. The value of replacement awards will preserve, as closely as
possible, the value of awards that existed prior to the Distribution.
The number of shares of Moody's Common Stock covered by the adjusted
Moody's Stock Options will equal the same number of shares covered by the
unexercised D&B stock options. The number of shares of New D&B Common Stock
covered by the New D&B Stock Options will equal 50% percent of the number of
shares covered by the unexercised D&B stock options.
Unexercised D&B stock options held by former employees and disabled
employees of D&B who terminated employment on or prior to the Distribution Date
will be adjusted in substantially the same manner as options held by Moody's
active employees. All stock appreciation rights will be adjusted or converted in
substantially the same manner as the unexercised D&B stock options.
On July 1, 1998, in connection with the 1998 Distribution, employees of
Donnelley were granted substitute options and other equity-based awards,
preserving the economic value, as closely as possible, of the awards that
existed immediately prior to the 1998 Distribution, and any awards held by them
in respect of Donnelley were surrendered. For employees of Donnelley, awards
were adjusted immediately following the 1998 Distribution to preserve, as
closely as possible, the economic value of the awards that existed immediately
prior to the 1998 Distribution. The remaining holders of unexercised options,
including retirees
F-71
200
MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
and certain other former employees of D&B, were offered the choice of converting
their options to D&B options or continuing to hold Donnelley options.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") requires that companies with
stock-based compensation plans either recognize compensation expense based on
the fair value of options granted or continue to apply Accounting Principles
Board Opinion No. 25 ("APB No. 25") and related interpretations and disclose pro
forma net income and earnings per share assuming the fair value method had been
applied. Moody's has chosen to continue applying APB No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for the fixed stock option plans. Had compensation cost for
Moody's stock-based compensation plans been determined based on the fair value
at the grant dates for awards to Moody's employees only under those plans,
consistent with the method of SFAS No. 123, Moody's net income and pro forma
earnings per share would have been reduced to the pro forma amounts indicated
below:
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
Net Income:
As reported............................................ $155.6 $142.0 $105.9
Pro forma.............................................. $153.2 $139.8 $104.9
Pro Forma Basic earnings per share of common stock:
As reported............................................ $ .96 $ .84 $ .62
Pro forma.............................................. $ .94 $ .82 $ .61
Pro Forma Diluted earnings per share of common stock:
As reported............................................ $ .95 $ .83 $ .61
Pro forma.............................................. $ .93 $ .81 $ .61
The pro-forma disclosures shown are not representative of the effects on
income and earnings per share in future years.
F-72
201
MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
The fair value of D&B's stock options used to compute the Moody's pro forma
income disclosures is the estimated present value at grant date using the
Black-Scholes option-pricing model, with the following weighted average
assumptions:
AFTER CONVERSION PRIOR TO
1998 AT 1998 1998
1999 DISTRIBUTION DISTRIBUTION DISTRIBUTION 1997
--------- ------------ ------------ ------------ ---------
Expected dividend yield......... 2.40% 2.75% 2.75% 3.3% 3.3%
Expected stock volatility....... 30% 20% 20% 20% 20%
Risk-free interest rate......... 6.41% 5.38% 5.42% 5.53% 5.73%
Expected holding period......... 5.0 years 6.0 years 2.3 years 4.5 years 4.5 years
Options outstanding at December 31, 1999 were granted during the years 1988
through 1999 and are exercisable over periods ending not later than 2009. At
December 31, 1999, 1998 and 1997, Moody's employees held options that were
exercisable for 2,067,459 shares, 2,006,380 shares and 1,409,094 shares of D&B
common stock, respectively. 9,087,997 shares, 12,427,373 shares and 1,450,195
shares were available for future grants under the D&B plans at December 31,
1999, 1998 and 1997, respectively.
Changes in stock options for the three years ended December 31, 1999 are
summarized as follows:
WEIGHTED
NUMBER AVERAGE
OUTSTANDING EXERCISE PRICE
----------- --------------
Options outstanding, January 1, 1997........................ 3,330,313 $22.15
Granted................................................... 867,041 30.06
Exercised................................................. (385,496) 20.71
Surrendered or retired.................................... (266,167) 23.42
---------
Options outstanding, December 31, 1997...................... 3,545,691 24.14
Granted................................................... 6,300 31.91
Exercised................................................. (179,952) 21.56
Surrendered or retired.................................... (117,988) 24.39
---------
Options outstanding, June 30, 1998.......................... 3,254,051 24.29
=========
Options converted, July 1, 1998............................. 3,449,022 22.92
Granted................................................... 1,358,989 32.72
Exercised................................................. (182,129) 20.45
Surrendered or retired.................................... (184,622) 26.55
---------
Options outstanding, December 31, 1998...................... 4,441,260 25.87
Granted................................................... 1,225,590 29.22
Exercised................................................. (419,964) 20.56
Surrendered or retired.................................... (134,812) 30.63
---------
Options outstanding, December 31, 1999...................... 5,112,074 $26.98
---------
The weighted average fair value of options granted during 1999, 1998 and
1997 was $8.78, $7.13 and $5.52, respectively.
F-73
202
MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
The following table summarizes information about stock options outstanding
at December 31, 1999:
OPTIONS OUTSTANDING
----------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE -----------------------------
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE IN YEARS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------ ----------- ------------- -------------- ----------- --------------
$14.84 -- $23.35 1,899,505 4.7 Years $21.31 1,695,831 $21.28
$24.00 -- $35.63 3,212,569 8.5 Years $30.34 371,628 $28.47
--------- ---------
Total 5,112,074 2,067,459
--------- ---------
Under the D&B 1998 Key Employees' Stock Incentive Plan, key employees of
Moody's may be granted shares of D&B's stock based on the achievement of
two-year revenue growth goals or other key operating objectives. At the end of
the performance period, Company performance at target will yield the targeted
amount of shares, whereas Company performance above or below target will yield
larger or smaller share awards, respectively. Compensation expense of $11.5,
$5.0 and $5.0 million was recorded by the Company in 1999, 1998 and 1997,
respectively, for the plans.
In addition, certain New D&B employees have been granted stock appreciation
rights and limited stock appreciation rights in tandem with their D&B stock
options. All stock appreciation rights granted to New D&B employees will be
adjusted or converted in substantially the same manner as unexercised D&B stock
options.
9. INCOME TAXES
Components of the income tax expense (benefit) are as follows:
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998 1997
------ ------ -----
Current:
Federal................................................. $ 77.8 $ 66.1 $40.7
State and local......................................... 36.6 36.2 26.2
Non U.S. ............................................... 1.6 0.4 0.6
------ ------ -----
Total Current............................................. 116.0 102.7 67.5
------ ------ -----
Deferred:
Federal................................................. 4.8 (4.2) (2.6)
State and local......................................... 2.6 (2.6) (.9)
Non U.S. ............................................... (0.1) -- --
------ ------ -----
Total Deferred............................................ 7.3 (6.8) (3.5)
------ ------ -----
Provision for Income Taxes...................... $123.3 $ 95.9 $64.0
====== ====== =====
F-74
203
MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
A reconciliation of the U.S. federal statutory tax rate to the Company's
effective tax rate on profits before income taxes is as follows:
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998 1997
----- ----- -----
U.S. statutory tax rate..................................... 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit........... 9.2 9.3 8.7
Recognition of ordinary losses.............................. -- (4.4) (9.0)
Foreign operations.......................................... (0.1) (0.3) (0.3)
Other....................................................... 0.1 0.7 (0.7)
---- ---- ----
Effective Tax Rate................................ 44.2% 40.3% 33.7%
==== ==== ====
Income taxes paid through distributions to D&B in the combined financial
statements were $116.0, $113.3 and $84.7 million in 1999, 1998 and 1997,
respectively.
Below is a summary of the deferred tax accounts at December 31:
1999 1998
------ ------
Deferred tax assets:
Current:
Allowances............................................. $ 13.1 $ 11.3
Accrued liabilities.................................... 0.9 2.6
Accrued compensation................................... 4.2 4.0
Other.................................................. 0.3 0.7
------ ------
Total current............................................. 18.5 18.6
Non-current:
Depreciation........................................... 2.3 1.7
Accrued liabilities.................................... 2.6 9.4
Accrued compensation................................... 3.3 3.7
------ ------
Total Non-current......................................... 8.2 14.8
------ ------
Gross deferred tax assets................................... 26.7 33.4
------ ------
Deferred tax liabilities:
Non-current:
Retirement and pension plans........................... (22.5) (21.6)
Amortization........................................... (0.8) (1.1)
------ ------
Total Non-current......................................... (23.3) (22.7)
------ ------
Gross deferred tax liabilities.............................. (23.3) (22.7)
------ ------
Total net deferred tax asset.............................. $ 3.4 $ 10.7
====== ======
Included in other current assets are prepaid taxes of $62.0 and $58.2
million and current deferred tax assets of $18.5 and $18.6 million at December
31, 1999 and 1998, respectively. Non-current deferred tax assets of $8.2 and
$14.8 million are included in other assets at December 31, 1999 and 1998,
respectively. Non-current deferred tax liabilities of $23.3 and $22.7 million
are included in other liabilities at December 31, 1999 and 1998, respectively.
Management has determined based on the Company's history of prior and current
levels of operating earnings, that no valuation allowance for deferred tax
assets should be provided as of December 31, 1999 and 1998.
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204
MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
At December 31, 1999, undistributed earnings of non-U.S. subsidiaries
aggregated $18.7 million. Deferred tax liabilities have not been recognized for
these undistributed earnings because it is management's intention to reinvest
such undistributed earnings outside the U.S. If all undistributed earnings were
remitted to the U.S., the amount of incremental U.S. Federal and foreign income
taxes payable, net of foreign tax credits, would be $1.1 million.
10. LEASE COMMITMENTS
Moody's has leased facilities, which are under operating leases that expire
over the next ten years. Moody's also leases certain computer and other
equipment under operating leases that expire over the next four years. Rent
expense under operating leases for the years ended December 31, 1999, 1998 and
1997 was $5.6, $5.5 and $5.4 million, respectively. Rent expense for 1999 and
1998 is net of sublease rental income of $1.0 and $0.4 million related to a
facility utilized by FIS, which was sold in July 1998.
The approximate minimum rent for operating leases that have remaining
noncancelable lease terms in excess of one year at December 31, 1999 net of
sublease rental commitments of $1.0, $1.0 and $0.6 million in 2000, 2001, and
2002, respectively, are as follows:
YEAR ENDED DECEMBER 31,
- -----------------------
2000........................................................ $ 6.9
2001........................................................ 6.1
2002........................................................ 4.7
2003........................................................ 3.8
2004........................................................ 3.1
Thereafter.................................................. 6.0
-----
Total minimum lease payments...................... $30.6
=====
11. CONTINGENCIES
Moody's is involved in legal proceedings, claims and litigation arising in
the ordinary course of business. Although the outcome of such matters cannot be
predicted with certainty, in the opinion of management, the ultimate liability
of Moody's in connection with such matters will not have a material effect on
Moody's results of operations, cash flows or financial position.
In addition, Moody's also has certain other contingencies discussed below.
Information Resources, Inc.
On July 29, 1996, Information Resources, Inc. ("IRI") filed a complaint in
the United States District Court for the Southern District of New York, naming
as defendants the corporation then known as "The Dun & Bradstreet Corporation"
(i.e., Donnelley), A.C. Nielsen Company (a subsidiary of ACNielsen Corporation)
and I.M.S. International, Inc. (a subsidiary of Cognizant Corporation). At the
time of the filing of the complaint, each of the other defendants was a wholly
owned subsidiary of Donnelley.
The complaint alleges various violations of United States antitrust laws,
including purported violations of Sections 1 and 2 of the Sherman Act arising
from tying arrangements, agreements with retailers and other customers,
predatory pricing practices and other matters alleged by IRI. In addition to the
foregoing claims, the complaint alleges a claim of tortious interference with a
contract and a claim of tortious interference with a prospective business
relationship. These claims relate to the acquisition by defendants of Survey
Research Group Limited ("SRG"). IRI alleges SRG violated an alleged agreement
with IRI when it agreed to be acquired by the defendants and that the defendants
induced SRG to breach that agreement.
F-76
205
MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
IRI's complaint alleges damages in excess of $350 million, which amount IRI
asked to be trebled under antitrust laws. IRI also seeks punitive damages in an
unspecified amount. No amount in respect of these alleged damages has been
accrued in the combined financial statements of the Company.
In November 1996, Donnelley completed a Distribution to its shareholders
(the "1996 Distribution") of the capital stock of ACNielsen Corporation
("ACNielsen") and Cognizant Corporation ("Cognizant"). On October 28, 1996, in
connection with the 1996 Distribution, Cognizant, ACNielsen and Donnelley
entered into a Indemnity and Joint Defense Agreement (the "Indemnity and Joint
Defense Agreement") pursuant to which they have agreed (i) to certain
arrangements allocating potential liabilities ("IRI Liabilities") that may arise
out of or in connection with the IRI action and (ii) to conduct a joint defense
of such action. In particular, the Indemnity and Joint Defense Agreement
provides that ACNielsen will assume exclusive liability for IRI Liabilities up
to a maximum amount to be calculated at such time such liabilities, if any,
become payable (the "ACN Maximum Amount"), and that Donnelley and Cognizant will
share liability equally for any amounts in excess of the ACN Maximum Amount. The
ACN Maximum Amount will be determined by an investment banking firm as the
maximum amount that ACNielsen is able to pay after giving effect to (i) any plan
submitted by such investment bank that is designed to maximize the claims-paying
ability of ACNielsen without impairing the investment banking firm's ability to
deliver a viability opinion (but which will not require any action requiring
stockholder approval), and (ii) payment of related fees and expenses. For these
purposes, financial viability means the ability of ACNielsen, after giving
effect to such plan, the payment of related fees and expenses and the payment of
the ACN Maximum Amount, to pay its debts as they become due and to finance the
current and anticipated operating and capital requirements of its business, as
reconstituted by such plan, for two years from the date any such plan is
expected to be implemented.
In June 1998, Donnelley completed a distribution to its shareholders (the
"1998 Distribution") of the capital stock of D&B and changed its name to R.H.
Donnelley Corporation. In connection with the 1998 Distribution, D&B and
Donnelley entered into an agreement whereby the Company has assumed all
potential liabilities of Donnelley arising from the IRI action and agreed to
indemnify Donnelley in connection with such potential liabilities.
During 1998, Cognizant separated into two companies, IMS Health
Incorporated ("IMS Health") and Nielsen Media Research, Inc. ("NMR"). IMS Health
and NMR are each jointly and severally liable for all Cognizant liabilities
under the indemnity and Joint Defense Agreement.
Under the terms of the Distribution Agreement, as a condition to the
Distribution, New D&B will undertake to be jointly and severally liable with
Moody's for D&B's Obligations to Donnelley under the 1998 Distribution
Agreement, including any liabilities arising under the Indemnity and Joint
Defense Agreement. However, as between themselves, each of New D&B and Moody's
will be responsible for 50% of any payments to be made with respect to the IRI
action pursuant to the 1998 Distribution Agreement, including legal fees or
expenses related thereto.
Management is unable to predict at this time the final outcome of the IRI
action or whether the resolution of this matter could materially affect Moody's
results of operations, cash flows or financial position.
Tax matters
D&B enters into global tax planning initiatives in the normal course of
business, principally through tax free restructurings of both its foreign and
domestic operations. These initiatives are subject to normal review by tax
authorities. It is possible that additional liabilities may be proposed by tax
authorities as a result of these reviews and that some of the reviews could be
resolved unfavorably. At this time, management is unable to predict the extent
of such reviews, the outcome thereof or whether such outcome could materially
affect Moody's results of operations, cash flows or financial position.
F-77
206
MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Pursuant to the Distribution Agreement, New D&B and Moody's will agree to
be financially responsible for 50% of any potential liabilities that may arise
with respect to the reviews described above, to the extent such potential
liabilities are not directly attributable to their respective business
operations. See "Relationships Between The Dun & Bradstreet Corporation and
Moody's Corporation After the Distribution Agreement -- Distribution Agreement."
The IRS, as part of its audit process, is continuing its review of D&B's
utilization of certain capital losses generated during 1989 and 1990. On May 9,
2000, the IRS issued a summary report disallowing the utilization of these
capital losses. D&B expects to receive a final adjustment disallowing the
utilization of these capital losses from the IRS during the second quarter of
2000.
Pursuant to a series of agreements, IMS Health and NMR are jointly and
severally liable to pay one-half, and Donnelley the other half, of any payments
for taxes and accrued interest that may arise from future audit, adjustments
after review by tax authorities relating to various transactions to which IMS
Health, NMR and Donnelly are parties after Donnelley pays the first $137
million.
In connection with the 1998 Distribution, D&B and Donnelley entered into an
agreement whereby D&B has assumed all potential liabilities of Donnelley arising
from these tax matters and has agreed to indemnify Donnelley in connection with
such potential liabilities.
On May 12, 2000, an amended tax return was filed for the 1989 and 1990 tax
periods which reflected the May 9, 2000 report in the amount of $561.6 million
of tax and interest due. D&B paid the IRS approximately $349.3 million of this
amount on May 12, 2000, which D&B funded with short-term borrowings. IMS Health
has informed D&B that it paid to the IRS approximately $212.3 million on May 17,
2000. Notwithstanding the filing and payment, D&B intends to contest the
assessment of amounts, if any, in excess of the amounts paid. D&B has accrued
its anticipated share of the probable liability arising from the utilization of
these capital losses. Half of such liability has been allocated to Moody's and
is reflected herein.
12. SEGMENT INFORMATION
The Company reports segment information in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." In
accordance with SFAS No. 131, operating segments are defined as components of an
enterprise for which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Company operates primarily
in one reportable business segment -- ratings, which accounts for approximately
90% of the Company's total revenues. Revenues of the opinion research products
and risk management services businesses have been aggregated as "Other" for
reporting purposes. Given the dominance of the ratings segment to Moody's
overall results, the Company does not separately measure and report operating
income for the ratings business. Rather, revenue is the predominant measure
utilized by senior management for assessing performance and for the allocation
of resources, and operating income is evaluated for the Company as a whole. In
addition, assets are not allocated on a segment basis and are considered on a
total company basis only.
The ratings segment comprises four major rating groups, each of which have
similar economic and financial characteristics. They are corporate finance
ratings, structured finance ratings, financial institutions and sovereign
ratings and public finance ratings.
Revenues included in "Other" consists of opinion products revenue,
generated from the sale of investor-oriented credit research, and the risk
management services revenues, generated from the sale of credit risk assessment
software and related products and services. Also included in "Other" for 1998
and 1997 are the revenues of the FIS business, which was divested in July of
1998.
F-78
207
MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
The accounting principles underlying the revenue information reported for
each segment are consistent with those described in the summary of significant
accounting policies in Note 1. There are no intersegment sales and no single
customer accounted for 10% or more of total revenue.
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
Revenues:
Ratings
Corporate Finance Ratings.............................. $165.5 $143.6 $127.7
Structured Finance Ratings............................. 172.4 143.0 104.1
Financial Institutions and Sovereign Ratings........... 104.8 90.1 90.1
Public Finance Ratings................................. 59.5 64.8 58.0
------ ------ ------
Total ratings revenue.................................. 502.2 441.5 379.9
Other(1).................................................. 62.0 72.4 77.5
------ ------ ------
Total revenues......................................... $564.2 $513.9 $457.4
====== ====== ======
Total expenses.............................................. 293.8 288.4 267.4
Gain on sale of business(2)................................. 9.2 12.6 --
Other non-operating income (expense), net................... (.7) (.2) .2
------ ------ ------
Income from operations, before provision for income taxes... $278.9 $237.9 $190.2
====== ====== ======
- ---------------
(1) Includes revenue for FIS, which was sold in July 1998, of $18.4 million for
1998 and $34.3 million for 1997. (see Note 3).
(2) Represents the gain on the sale of FIS (see Note 3).
Revenue and long-lived asset information by geographic area as of and for
the year ended December 31,
1999 1998 1997
------ ------ ------
Revenues:
United States.......................................... $423.4 $413.0 $378.3
International(A)....................................... 140.8 100.9 79.1
------ ------ ------
Combined Total......................................... $564.2 $513.9 $457.4
====== ====== ======
Long-lived Assets:
United States.......................................... $ 38.5 $ 42.5 $ 49.5
International.......................................... 9.8 6.5 5.4
------ ------ ------
Combined Total......................................... $ 48.3 $ 49.0 $ 54.9
====== ====== ======
- ---------------
(A) International revenues are determined as follows:
International revenues are determined based on the country of domicile
of the customer or the issuer.
F-79
208
MOODY'S CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
13. QUARTERLY INFORMATION (UNAUDITED)
THREE MONTHS ENDED(1)
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
-------- ------- ------------ ----------- ------
1999
Revenues.............................. $137.1 $ 147.4 $139.3 $140.4 $564.2
Operating Income...................... 63.0 71.9 66.6 68.9 270.4
Net Income............................ 35.2 40.0 42.2 38.2 155.6
Pro Forma Basic Earnings Per Share.... $ .22 $ .25 $ .26 $ .24 $.96(2)
Pro Forma Diluted Earnings Per
Share............................... $ .21 $ .24 $ .26 $ .24 $.95(2)
1998
Revenues.............................. $132.5 $ 140.7 $118.5 $122.2 $513.9
Operating Income...................... 58.3 63.1 50.3 53.8 225.5
Net Income............................ 34.8 37.7 37.4 32.1 142.0
Pro Forma Basic Earnings Per Share.... $ .20 $ .22 $ .22 $ .19 $.84
Pro Forma Diluted Earnings Per
Share............................... $ .20 $ .22 $ .22 $ .19 $.83
- ---------------
(1) Basic and diluted EPS are computed independently for each of the periods
presented. Accordingly, the sum of the quarterly earnings per share data may
not agree to the total for the year.
(2) The number of weighted average shares outstanding changes as common shares
are issued for employee plans and other purposes or as shares are
repurchased. For this reason, the sum of quarterly earnings per share may
not be the same as earnings per share for the year.
14. VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO END
OF THE YEAR REVENUE WRITE-OFFS OF THE YEAR
----------- ---------- ---------- -----------
Allowances:
Year ended December 31, 1997 $(11.2) $(36.7) $25.1 $(22.8)
Year ended December 31, 1998 (22.8) (35.7) 37.8 (20.7)
Year ended December 31, 1999 (20.7) (40.3) 36.5 (24.5)
Allowances primarily represent adjustments to customer billings that are
estimated when the related revenue is recognized.
15. SUBSEQUENT EVENT
On January 27, 2000, Moody's acquired the net assets of a financial
software products company for $17.4 million in cash. The acquisition was
accounted for using the purchase method of accounting for business combinations
from the date of acquisition. The purchase price has been preliminarily
allocated based on estimated fair values at the date of acquisition, pending
final determination of certain acquired balances. This preliminary allocation
has resulted in acquired goodwill and other intangibles of approximately $17.2
million, which will be amortized on a straight-line basis over 3-10 years.
F-80