EX-99.1 15 y40976ex99-1.txt INFORMATION STATEMENT 1 EXHIBIT 99.1 INFORMATION STATEMENT ------------------------ 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. ------------------------ 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. ------------------------ 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. 2 TABLE OF CONTENTS
PAGE ---- 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
i 3 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. ii 4 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. iii 5 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". 1 6 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. 2 7 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 3 8 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 4 9 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". 5 10 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. 6 11 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. 7 12 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. 8 13
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". 9 14 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. 10 15 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 11 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. 12 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. 13 18 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 14 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. 15 20 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. 16 21 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 17 22 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. 18 23 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 19 24 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 20 25 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 21 26 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 22 27 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. 23 28 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-- 24 29 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 25 30 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. 26 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 27 32 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. 28 33 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. 29 34 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. 30 35 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 31 36 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. 32 37 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. 43 48 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. 44 49 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. 45 50 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. 46 51 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 47 52 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 48 53 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. 49 54 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 50 55 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. 51 56 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 52 57 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. 53 58 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. 54 59 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. 55 60 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. 56 61 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 57 62 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 58 63 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. 59 64 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. 60 65 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. 61 66 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. 62 67 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. 63 68 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
64 69
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. 65 70 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.
66 71
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. 67 72 (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. 68 73 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. 69 74 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). 70 75 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. 71 76 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. 72 77 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
73 78
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. 74 79 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. 75 80 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. 76 81 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. 77 82 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. 78 83 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. 79 84 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. 80 85 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 81 86 (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. 82 87 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. 83 88 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
84 89
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". 85 90 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. 86 91 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 87 92 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 88 93 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 89 94 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. 90 95 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 91 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 92 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. 93 98 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. 94 99 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. 95 100 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%. 96 101 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. 97 102 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 98 103 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". 99 104 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. 100 105 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. 101 106 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. 102 107 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 103 108 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. 104 109 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. 105 110 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. 106 111 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)
107 112
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. 108 113 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.
109 114 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". 110 115 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. 111 116 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. 112 117 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". 113 118 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 - 114 119 485,651. 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. 115 120 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. 116 121 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. 117 122 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). 118 123 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 119 124 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. 120 125 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 121 126 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. 122 127 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. 123 128 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. 124 129 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-54 183 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. F-63 192 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. F-64 193 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 F-65 194 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 F-66 195 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-67 196 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 F-68 197 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 F-69 198 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 F-70 199 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. F-75 204 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