UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

Commission file number 1-15967

 

The Dun & Bradstreet Corporation

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

(973) 921-5500

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one:)

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

 

THE DUN & BRADSTREET CORPORATION

 

INDEX TO FORM 10-Q

 

 

The Dun & Bradstreet Corporation

 

Consolidated Statements of Operations (Unaudited)

 

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

The Dun & Bradstreet Corporation

 

Consolidated Balance Sheets (Unaudited)

 

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

The Dun & Bradstreet Corporation

 

Consolidated Statements of Cash Flows (Unaudited)

 

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

THE DUN & BRADSTREET CORPORATION

(Tabular dollar amounts in millions, except per share data)

 

Note 1 — Basis of Presentation

 

These interim consolidated financial statements have been prepared in accordance with the instructions to the Quarterly Report on Form 10-Q. They should be read in conjunction with the consolidated financial statements and related notes, which appear in The Dun & Bradstreet Corporation’s (“D&B”, “we” or “our”) Annual Report on Form 10-K for the year ended December 31, 2005. The consolidated results for interim periods do not include all disclosures required by accounting principles generally accepted in the United States of America for annual financial statements and are not necessarily indicative of results for the full year or any subsequent period. In the opinion of our management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows at the dates and for the periods presented have been included.

 

All significant inter-company transactions have been eliminated in consolidation.

 

The financial statements of the subsidiaries outside the United States (“U.S.”) and Canada reflect three month and six month periods ended May 31, 2006, in order to facilitate timely reporting of our unaudited consolidated financial results and financial position.

 

Where appropriate, we have reclassified certain prior period amounts to conform to our current presentation.

 

Significant Accounting Policies

 

In preparing our unaudited consolidated financial statements and accounting for the underlying transactions and balances reflected therein, we have applied the significant accounting policies described in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2005. During the six months ended June 30, 2006, we updated the significant accounting policy titled “Stock-Based Compensation” as follows:

 

Stock-Based Awards

 

On January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004) or “SFAS No. 123R,” “Share-Based Payments,” requiring the recognition of compensation expense in the income statement related to the fair value of our employee stock options and our 15% discount from market value, subject to limitations, under our Employee Stock Purchase Plan (“ESPP”). Determining the fair value of stock options at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility and the expected dividends. Judgment is also required in estimating the amount of stock-based awards expected to be forfeited prior to vesting. For further detail on Stock-Based Awards, see Note 9 to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.

 

 

In July 2006, the Financial Accounting Standard Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes,” or “FIN 48,” which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We plan to adopt the provisions of FIN 48 as required on January 1, 2007. The cumulative effect of applying FIN 48 should be reported as an adjustment to retained earnings at the beginning of the period in which it is adopted. We are currently assessing the impact the adoption of FIN 48 will have on our consolidated financial statements.

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

 

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which changes the accounting and reporting requirements for a change in accounting principle. Accounting Principle Board (“APB”) Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” are superseded by SFAS No. 154, which requires retrospective application to prior periods’ financial statements for changes in an accounting principle. SFAS No. 154 applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS No. 154 also defines a restatement as the revising of previously issued financial statements to reflect the correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 in the first quarter of 2006 did not have an impact on our consolidated financial statements.

 

In December 2004, the FASB issued SFAS No. 123R which revises SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This standard requires companies to recognize in the statement of operations the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of the award (with limited exceptions). The cost will be recognized over the period that an employee provides service in exchange for the award, which normally would be the vesting period. We adopted SFAS No. 123R on January 1, 2006, as required by the U.S. Securities and Exchange Commission (“SEC”), under the Modified Prospective application method. During the three and six month periods ended June 30, 2006, we incurred additional expenses of approximately $3.4 million and $7.4 million, respectively, related to stock options and our ESPP. In addition, SFAS No. 123R also requires the benefits of tax deductions in excess of the tax impact of recognized compensation expense to be reported as cash flows from financing activities, rather than cash flows from operating activities. As a result, we reclassified $25.1 million from net cash flows from operating activities to net cash used in financing activities during the six months ended June 30, 2006.

 

On October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into law. The Act provides a deduction from income for qualified domestic production activities, which will be phased in from 2005 through 2010. In return, the Act also provides for a two-year phase-out of the existing extra-territorial income exclusion (“ETI”) for foreign sales. In December 2004, the FASB issued Financial Statement Position (“FSP”) No. FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004.” FSP No. FAS 109-1 provides guidance on the accounting implications of the Act related to the deduction for qualified domestic production activities. The deduction will be treated as a “special deduction” as described in SFAS No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. In May 2006, the Treasury and the Internal Revenue Service issued final regulations relating to the domestic production activities. Based on these regulations, during the six months ended June 30, 2006, we recorded tax benefits relating to this deduction in our effective tax rate of approximately $0.5 million, of which $0.3 million related to the six months ended June 30, 2006 and $0.2 million related to the year ended December 31, 2005. We anticipate recording a tax benefit of approximately $0.7 million (inclusive of the $0.2 million related to the year ended December 31, 2005) for the year ended December 31, 2006.

 

 

 

Since the launch of our Blueprint for Growth strategy, we have implemented Financial Flexibility Programs. In each of these Programs, we identified ways to reduce our expense base and reallocated most of the identified spending to other areas of our operations to improve revenue growth. With each Program, we have incurred restructuring charges (which generally consist of employee severance and termination costs, contract terminations,

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

asset write-offs, and/or costs to terminate lease obligations less assumed sublease income). These charges are incurred as a result of eliminating, consolidating, standardizing, automating and/or outsourcing operations of our business. We have also incurred transition costs such as consulting fees, costs of temporary workers, relocation costs and stay bonuses to implement our Financial Flexibility Programs.

 

For the three month and six month periods ended June 30, 2006 and 2005, the restructuring charges were recorded in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Under SFAS No. 146, the current period charge represents the liabilities incurred during the quarter for each of these obligations. The curtailment gains were recorded in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” and the curtailment charges were recorded in accordance with SFAS No. 87, “Employers’ Accounting for Pensions” and SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.”

 

Three Months Ended June 30, 2006 vs. Three Months Ended June 30, 2005

 

During the three months ended June 30, 2006, we recorded a $3.5 million restructuring charge in connection with the Financial Flexibility Program announced in February 2006 (“2006 Financial Flexibility Program”), a $0.2 million net restructuring charge in connection with the Financial Flexibility Program announced in February 2005 (“2005 Financial Flexibility Program”) and a $0.1 million restructuring gain in connection with the Financial Flexibility Program announced in February 2004 (“2004 Financial Flexibility Program”). The components of these charges and gains included:

 

 

During the three months ended June 30, 2005, we recorded a $9.3 million restructuring charge in connection with the 2005 Financial Flexibility Program and a $2.8 million net restructuring gain for the International Business Machines Corporation (“IBM”) outsourcing agreement in connection with the 2004 Financial Flexibility Program. The components of these charges and gains included:

 

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

 

 

Six Months Ended June 30, 2006 vs. Six Months Ended June 30, 2005

 

During the six months ended June 30, 2006, we recorded an $8.1 million restructuring charge in connection with the 2006 Financial Flexibility Program, a $2.2 million net restructuring charge in connection with the 2005 Financial Flexibility Program and a $0.3 million net restructuring curtailment gain in connection with the 2004 Financial Flexibility Program. The components of these charges and gains included:

 

 

During the six months ended June 30, 2005, we recorded a $17.5 million restructuring charge in connection with the 2005 Financial Flexibility Program and a $0.6 million net restructuring gain in connection with the 2004 Financial Flexibility Program. The components of these charges and gains included:

 

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

 

 

Since the launch of our Blueprint for Growth Strategy, we have eliminated approximately 5,000 positions through June 30, 2006, which included 300 open positions, and approximately 4,700 employees were terminated (via attrition and termination) under our Financial Flexibility Programs since inception in October 2000. These figures include the 220 employees who were transitioned to IBM as part of the 2004 Financial Flexibility Program and approximately 400 employees who were transitioned to Computer Sciences Corporation (“CSC”) as part of the 2002 Financial Flexibility Program. Under the terms of the CSC agreement, we outsourced certain technology functions in which approximately 400 of our employees who performed data center operations, technology help desk and network management functions in the U.S. and in the UK were transitioned to CSC.

 

The following table sets forth, in accordance with SFAS No. 146, the restructuring reserves and utilization related to our 2006 Financial Flexibility Program.

 

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

 

The following table sets forth, in accordance with SFAS No. 146, the restructuring reserves and utilization related to our 2005 Financial Flexibility Program.

 

 

 

Actions under the 2004 Financial Flexibility Program have been substantially completed.

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

 

 

Our borrowings are summarized in the following table:

 

 

Fixed-Rate Notes

 

In March 2006, we issued senior notes with a face value of $300 million that mature on March 15, 2011 (the “2011 notes”), bearing interest at a fixed annual rate of 5.50%, payable semi-annually. The proceeds were used to repay our existing $300 million notes which matured on March 15, 2006. The 2011 notes of $299.3 million, net of $0.7 million of discount, are recorded as “Long-Term Debt” in our consolidated balance sheet at June 30, 2006. The $300 million notes that matured on March 15, 2006 were recorded as “Short-Term Debt” at December 31, 2005.

 

The 2011 notes were issued at a discount of $0.8 million and we incurred underwriting and other fees in the amount of approximately $2.2 million. These costs are being amortized over the life of the 2011 notes. The 2011 notes contain certain covenants that limit our ability to create liens, enter into sale and leasebacks transactions and consolidate, merge or sell assets to another entity. The 2011 notes do not contain any financial covenants.

 

On September 30, 2005 and February 10, 2006, we entered into interest rate derivative transactions with aggregate notional amounts of $200 million and $100 million, respectively. The objective of these hedges was to mitigate the variability of future cash flows from market changes in Treasury rates in the anticipation of the above referenced debt issuance. These transactions were accounted for as cash flow hedges, and as such, changes in fair value of the hedges that took place through the date of debt issuance were recorded in accumulated other comprehensive income. In connection with the issuance of the 2011 notes, these interest rate derivative transactions were terminated, resulting in proceeds of approximately $5.0 million at the dates of termination. The proceeds are recorded in other comprehensive income and will be amortized over the life of the 2011 notes.

 

Other Credit Facilities

 

At June 30, 2006 and December 31, 2005, we had a $300 million bank credit facility available at prevailing short-term interest rates, which expires in September 2009. At June 30, 2006, we had $55.0 million of borrowings outstanding under this facility with a weighted average interest rate of 5.44%. We borrowed under our facility during the six months ended June 30, 2006 primarily to fund our share repurchase program. We had not drawn on the facility and we did not have any borrowings outstanding under this facility at December 31, 2005. This facility also supports our commercial paper borrowings up to $300 million. We also have not borrowed under our commercial paper program as of June 30, 2006 and December 31, 2005. The facility requires the maintenance of

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

interest coverage and total debt to EBITDA ratios (each as defined in the agreement). We were in compliance with these requirements at June 30, 2006 and December 31, 2005.

 

Other

 

At June 30, 2006 and December 31, 2005, we had $0.4 million and $0.8 million, respectively, of capital lease obligations maturing within one year. At December 31, 2005, we had $0.1 million of capital lease obligations maturing after one year.

 

At June 30, 2006 and December 31, 2005, certain of our international operations had non-committed lines of credit of $15.6 million and $17.2 million, respectively. There were no borrowings outstanding under these lines of credit at June 30, 2006 and December 31, 2005. These arrangements have no material commitment fees and no compensating balance requirements.

 

At June 30, 2006 and December 31, 2005, we were contingently liable under open standby letters of credit issued by our bank in favor of third parties totaling $4.8 million and $7.9 million, respectively.

 

During the three months ended June 30, 2006, no interest payments were made and during the six months ended June 30, 2006 interest paid totaled $10.1 million. Interest paid totaled $0.4 million and $8.9 million for the three month and six month periods ended June 30, 2005, respectively.

 

 

 

Stock-based awards to acquire 0.5 million and 0.1 million shares of common stock were outstanding at June 30, 2006 and 2005, respectively, but were not included in the quarter-to-date computation of diluted earnings per share because the assumed proceeds, as calculated under the treasury stock method, resulted in these equity awards being anti-dilutive. Stock-based awards to acquire 0.8 million and 0.1 million shares of common stock were outstanding at June 30, 2006 and 2005, respectively, but were not included in the year-to-date computation of diluted earnings per share because the assumed proceeds, as calculated under the treasury stock method, resulted in these equity awards being anti-dilutive. Our stock options generally expire 10 years after the grant date.

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

 

Our share repurchases were as follows:

 

 

 

 

Additionally, on August 1, 2006, our Board of Directors approved a new $200 million one-year share repurchase program and a four-year five million share repurchase program. See note 14 to our unaudited consolidated financial statement included in this Quarterly Report Form 10-Q.

 

 

Total comprehensive income for the three month and six month periods ended June 30, 2006 and 2005, which includes net income and other gains and losses that affect shareholders’ equity, was as follows:

 

 

 

We are involved in tax and legal proceedings, claims and litigation arising in the ordinary course of business. We periodically assess our liabilities and contingencies in connection with these matters based upon the latest information available. For those matters where it is probable that we have incurred a loss and the loss or range of loss can be reasonably estimated, we have recorded reserves in our consolidated financial statements. In other instances, we are unable to make a reasonable estimate of any liability because of the uncertainties related to the probability of the outcome and/or amount or range of loss. As additional information becomes available, we adjust our assessment and estimates of such liabilities accordingly. It is possible that the ultimate resolution of our liabilities and contingencies could be at amounts that are different from our currently recorded reserves and that such differences could be material.

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

 

Based on our review of the latest information available, we believe our ultimate liability in connection with pending tax and legal proceedings, claims and litigation will not have a material effect on our results of operations, cash flows or financial position, with the possible exception of the matters described below.

 

In order to understand our exposure to the potential liabilities described below, it is important to understand the relationship between us and Moody’s Corporation, our predecessors and other parties that, through various corporate reorganizations and contractual commitments, have assumed varying degrees of responsibility with respect to such matters.

 

In November 1996, the Company then known as The Dun & Bradstreet Corporation (“D&B1”) separated through a spin-off into three separate public companies: D&B1, ACNielsen Corporation (“ACNielsen”) and Cognizant Corporation (“Cognizant”) (the “1996 Distribution”). This was accomplished through a spin-off by D&B1 of its stock in ACNielsen and Cognizant. In June 1998, D&B1 separated through a spin-off into two separate public companies: D&B1, which changed its name to R.H. Donnelley Corporation (“Donnelley/D&B1”), and which spun off its stock in a new company named The Dun & Bradstreet Corporation (“D&B2”) (the “1998 Distribution”). During 1998, Cognizant separated into two separate public companies: IMS Health Incorporated (“IMS”) and Nielsen Media Research, Inc. (“NMR”) (the “1998 Cognizant Distribution”). In September 2000, D&B2 separated through a spin-off into two separate public companies: D&B2, which changed its name to Moody’s Corporation (“Moody’s” and also referred to elsewhere in this Quarterly Report on Form 10-Q as “Moody’s/D&B2”) and which spun off its stock in a new company named The Dun & Bradstreet Corporation (“we” or “D&B3” and also referred to elsewhere in this Quarterly Report on Form 10-Q as “D&B”) (the “2000 Distribution”).

 

Tax Matters

 

Moody’s/D&B2 and its predecessors entered into global tax-planning initiatives in the normal course of business, principally through tax-free restructurings of both their foreign and domestic operations. As further described below, we undertook contractual obligations to be financially responsible for a portion of certain liabilities arising from certain historical tax-planning initiatives (“Legacy Tax Matters”).

 

As of the end of 2005, settlement agreements have been executed with the IRS with respect to the Legacy Tax Matters previously referred to in our SEC filings as “Utilization of Capital Losses” and “Royalty Expense Deductions.” With respect to the Utilization of Capital Losses matter, the settlement agreement resolved the matter in its entirety. For the Royalty Expense Deductions matter, the settlement covered tax years 1995 and 1996, which represented approximately 90% of the total potential liability to the IRS, including penalties. We believe we are adequately reserved for the remaining exposure. In addition, with respect to these two settlement agreements, we believe that IMS and NMR did not pay their allocable share to the IRS under applicable agreements. Under our agreement with Donnelley/D&B1, we and Moody’s were each required to cover the shortfall, and each of us paid to the IRS approximately $12.8 million in excess of our respective allocable shares. If we are unable to resolve our dispute with IMS and NMR through the negotiation process contemplated by our agreements, we will commence arbitration to enforce our rights and collect these amounts from IMS and NMR. We believe that the resolution of the remaining exposure to the IRS under the Royalty Expense Deduction matter and the foregoing disputes with IMS and NMR will not have a material adverse impact on D&B’s financial position, results of operations or cash flows.

 

Our remaining Legacy Tax Matter is referred to as “Amortization and Royalty Expense Deductions/Royalty Income — 1997-2006.”

 

Beginning in the fourth quarter of 2003, we received a series of notices with respect to a partnership agreement entered into in 1997. In these notices the IRS asserted, among other things, that certain amortization expense deductions claimed by Donnelley/D&B1, Moody’s/D&B2 and D&B3 on applicable tax returns for years 1997-2002 should be disallowed. In addition to the foregoing, the IRS has asserted that royalty expense deductions

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

claimed for 1997-2002 for royalties paid to the partnership should be disallowed. We have filed protests with the IRS with respect to these notices. The IRS has also asserted that the receipt of these same royalties by the partnership should be reallocated to and reported as royalty income by the taxpayers, including the portions of the royalties that were allocated to third-party partners in the partnership, and thus included in their taxable income. We believe that the IRS’ positions with respect to the treatment of the royalty expense and royalty income are mutually inconsistent. If the IRS prevails on one of the positions, we believe that it is unlikely that it will prevail on the other. In addition to the foregoing, the IRS has asserted that certain business expenses incurred by Moody’s/D&B2 and D&B3 during 1999-2002 should be capitalized and amortized over a 15-year period, if (but only if) the proposed adjustments described above are not sustained.

 

We estimate that the net impact to cash flow as a result of the disallowance of the 1997-2002 amortization expense deductions and the disallowance of such deductions claimed from 2003 to date could be up to $73.6 million (tax, interest and penalties, net of tax benefits but not taking into account the Moody’s/D&B2 repayment to us of $30.7 million described below). This transaction is scheduled to expire in 2012 and, unless terminated by us, the net impact to cash flow, based on current interest rates and tax rates would increase at a rate of approximately $2.0 million per quarter (including potential penalties) as future amortization expenses are deducted. On March 3, 2006, we made a deposit to the IRS of approximately $39.8 million in order to stop the accrual of statutory interest on potential tax deficiencies up to or equal to that amount with respect to tax years 1997-2002.

 

We also estimate that, with regard to the possible disallowance of deductions for royalty expenses paid to the partnership and the reallocation of royalty income from the partnership, after taking into account certain other tax benefits resulting from the IRS’ position on the partnership, it is unlikely that there will be any net impact to cash flow in addition to the amounts noted above related to the amortization expense deduction disallowance. In the unlikely event the IRS were to prevail on both positions with respect to the royalty expense and royalty income, we estimate that the net impact to cash flow as a result of the disallowance of the 1997-2002 royalty expense deductions, and the inclusion of the reallocated royalty income for all relevant years, could be up to $150 million (tax, interest and penalties, net of tax benefits). This $150 million would be in addition to the $73.6 million noted above related to the amortization expense deduction.

 

At the time of the 2000 Distribution, we paid Moody’s/D&B2 approximately $55.0 million in cash representing the discounted value of future tax benefits associated with this transaction. Pursuant to the terms of the 2000 Distribution, should the transaction be terminated, Moody’s/D&B2 would be required to repay us an amount equal to the discounted value of its 50% share of the related future tax benefits. If the transaction was terminated at June 30, 2006, the amount of such repayment from Moody’s/D&B2 to us would be approximately $30.7 million and would decrease by approximately $4.0 million to $5.0 million per year.

 

We are attempting to resolve this matter with the IRS before proceeding to litigation, if necessary. If we, on behalf of Donnelley/D&B1, Moody’s/D&B2, and D&B3 were to challenge, at any time, any of these IRS positions for years 1997-2002 in U.S. District Court or the U.S. Court of Federal Claims, rather than in U.S. Tax Court, the disputed amounts for each applicable year would need to be paid in advance for the court to have jurisdiction over the case.

 

We have considered the foregoing Legacy Tax Matters and the merits of the legal defenses and the various contractual obligations in our overall assessment of potential tax liabilities. As of June 30, 2006, we have net $68.2 million of reserves recorded in the consolidated financial statements, made up of the following components: $0.9 million in Accrued Income Tax and $67.3 million in Other Non-Current Liabilities. We believe that these reserves are adequate for our share of the liabilities in these Legacy Tax Matters. Any payments that would be made for these exposures could be significant to our cash from operations in the period a cash payment took place, including any payments for the purpose of obtaining jurisdiction in U.S. District Court or the U.S. Court of Federal Claims to challenge any of the IRS’ positions.

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

 

* * * * *

 

Legal Proceedings

 

Hoover’s — Initial Public Offering Litigation

 

On November 15, 2001, a putative shareholder class action lawsuit was filed against Hoover’s, certain of its then current and former officers and directors (the “Individual Defendants”), and one of the investment banks that was an underwriter of Hoover’s July 1999 initial public offering (“IPO”). The lawsuit was filed in the U.S. District Court for the Southern District of New York and purports to be a class action filed on behalf of purchasers of the stock of Hoover’s during the period from July 20, 1999 through December 6, 2000.

 

A Consolidated Amended Complaint, which is now the operative complaint, was filed on April 19, 2002. The purported class action alleges violations of Sections 11 and 15 of the Securities Act of 1933, as amended, and Sections 10(b), Rule 10b-5 and 20(a) of the Securities Exchange Act of 1934, as amended, against Hoover’s and the Individual Defendants. Plaintiffs allege that the underwriter defendant agreed to allocate stock in Hoover’s IPO to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at predetermined prices above the IPO price. Plaintiffs allege that the Prospectus for Hoover’s IPO was false and misleading in violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecified amount. The defense of the action is being coordinated with more than 300 other nearly identical actions filed against other companies. On July 15, 2002, Hoover’s moved to dismiss all claims against it and the Individual Defendants. On October 9, 2002, the Court dismissed the Individual Defendants from the case based upon Stipulations of Dismissal filed by the plaintiffs and the Individual Defendants. On February 19, 2003, the Court denied the motion to dismiss the complaint against Hoover’s. On October 13, 2004, the Court certified a class in six of the approximately 300 other nearly identical actions and noted that the decision is intended to provide strong guidance to all parties regarding class certification in the remaining cases. The underwriter defendants sought leave to appeal this decision and the Second Circuit has accepted the appeal. Plaintiffs have not yet moved to certify a class in the case involving Hoover’s.

 

Hoover’s has approved a settlement agreement and related agreements that set forth the terms of a settlement between Hoover’s, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. Among other provisions, the settlement provides for a release of Hoover’s and the Individual Defendants for the conduct alleged in the action to be wrongful. Hoover’s would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential claims Hoover’s may have against its underwriters. The settlement agreement also provides a guaranteed recovery of $1 billion to plaintiffs for the cases relating to all of the approximately 300 issuers. To the extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment will be required under the issuers’ settlement agreement. To the extent that the underwriter defendants settle for less than $1 billion, the issuers are required to make up the difference. On April 20, 2006, JPMorgan Chase, one of the underwriter defendants, and the plaintiffs reached a preliminary agreement for a settlement for $425 million. The JPMorgan Chase settlement has not yet been approved by the Court. However, if it is finally approved, then the maximum amount that the issuers’ insurers would be potentially liable for is $575 million. It is anticipated that any potential financial obligation of Hoover’s to plaintiffs pursuant to the terms of the settlement agreement and related agreements will be covered by existing insurance. Hoover’s currently is not aware of any material limitations on the expected recovery of any potential financial obligation to plaintiffs from its insurance carriers. Its carriers are solvent, and Hoover’s is not aware of any uncertainties as to the legal sufficiency of an insurance claim with respect to any recovery by plaintiffs. Therefore, we do not expect that the settlement will involve any payment by Hoover’s. If material limitations on the expected recovery of any potential financial obligation to the plaintiffs from Hoover’s insurance carriers should arise, Hoover’s maximum financial obligation to plaintiffs pursuant to the settlement agreement is less than $3.4 million. However, if the JPMorgan Chase settlement is finally approved, Hoover’s maximum financial obligation to the plaintiffs pursuant to the settlement agreement

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

would be less than $2 million. On February 15, 2005, the court granted preliminary approval of the settlement agreement, subject to certain modifications consistent with its opinion. Those modifications have been made. On March 20, 2006, the underwriter defendants submitted objections to the settlement to the Court. The Court held a hearing regarding these and other objections to the settlement at a fairness hearing on April 24, 2006, but has not yet issued a ruling. There is no assurance that the court will grant final approval to the settlement.

 

As previously noted, if the settlement is ultimately approved and implemented in its current form, Hoover’s reasonably foreseeable exposure in this matter, if any, would be limited to amounts that would be covered by existing insurance. If the settlement is not approved in its current form, we cannot predict the final outcome of this matter or whether such outcome or ultimate resolution of this matter could materially affect our results of operations, cash flows or financial position. No amount in respect of any potential judgment in this matter has been accrued in our consolidated financial statements.

 

Pension Plan Litigation

 

March 2003 Action

 

In March 2003, a lawsuit seeking class action status was filed against us in federal court in Connecticut on behalf of 46 specified former employees relating to our retirement plans. The complaint, as amended in July 2003 (the “Amended Complaint”), sets forth the following putative class:

 

 

The Amended Complaint estimates that the proposed class covers over 5,000 individuals.

 

There are four counts in the Amended Complaint. Count 1 claims that we violated ERISA by not paying severance benefits to plaintiffs under our Career Transition Plan. Count 2 claims a violation of ERISA in that our sale of the RMS business to RMSC and the resulting termination of our employees constituted a prohibited discharge of the plaintiffs and/or discrimination against the plaintiffs for the “intentional purpose of interfering with their employment and/or attainment of employee benefit rights which they might otherwise have attained.” Count 3 claims that the plaintiffs were materially harmed by our alleged violation of ERISA’s requirements that a summary plan description reasonably apprise participants and beneficiaries of their rights and obligations under the plans and that, therefore, undisclosed plan provisions (in this case, the actuarial deduction beneficiaries incur when they leave D&B before age 55 and elect to retire early) cannot be enforced against them. Count 4 claims that the 6.60% interest rate (the actual rate is 6.75%) used to actuarially reduce early retirement benefits is unreasonable and, therefore, results in a prohibited forfeiture of benefits under ERISA.

 

In the Amended Complaint, the plaintiffs sought payment of severance benefits; equitable relief in the form of either reinstatement of employment with D&B or restoration of employee benefits (including stock options); invalidation of the actuarial reductions applied to deferred vested early retirement benefits, including invalidation of

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

the plan rate of 6.60% (the actual rate is 6.75%) used to actuarially reduce former employees’ early retirement benefits; attorneys’ fees and such other relief as the court may deem just.

 

We have denied all allegations of wrongdoing and are aggressively defending the case. In September 2003, we filed a motion to dismiss Counts 1, 3 and 4 of the Amended Complaint on the ground that plaintiffs cannot prevail on those claims under any set of facts, and in February 2004, the Court heard oral argument on our motion. With respect to Count 4, the court requested that the parties conduct limited expert discovery and submit further briefing. In November 2004, after completion of expert discovery on Count 4, we moved for summary judgment on Count 4 on the ground that an interest rate of 6.75% is reasonable as a matter of law. On November 30, 2004, the Court issued a ruling granting our motion to dismiss Counts 1 and 3. Shortly after that ruling, plaintiffs’ counsel stipulated to dismiss with prejudice Count 2 (which challenged the sale of the RMS business as an intentional interference with employee benefit rights, but which the motion to dismiss did not address). Plaintiffs’ counsel also stipulated to a dismissal with prejudice of Count 1, the severance pay claim, agreeing to forego any appeal of the Court’s dismissal of that claim. Plaintiffs’ counsel did file a motion to join party plaintiffs and to amend the Amended Complaint to add a new count challenging the adequacy of the retirement plan’s mortality tables. We objected to the attempt to add a new claim. On June 6, 2005, the Court granted D&B’s motion for summary judgment as to Count 4 (the interest rate issue) and also denied the plaintiffs’ motion to further amend the Amended Complaint to add a new claim challenging the mortality tables. On July 8, 2005, the plaintiffs filed their notice of appeal; they are appealing the ruling granting the motion to dismiss, the ruling granting summary judgment, and the denial of leave to amend their Amended Complaint. Oral argument before the Second Circuit took place on February 15, 2006, and we are awaiting a decision.

 

While we believe we have strong defenses in this matter, we are unable to predict at this time the final outcome of this matter or whether the resolution of this matter could materially affect our results of operations, cash flows or financial position. No amount in respect of this matter has been accrued in our consolidated financial statements.

 

September 2005 Action

 

In addition to the foregoing proceeding, a lawsuit seeking class action status was filed in September of 2005 against us in federal court in the Northern District of Illinois on behalf of a current employee relating to our retirement plans. The complaint (the “Complaint”) seeks certification of the following putative class:

 

 

The Complaint estimates that the proposed class covers over 1,000 individuals.

 

There are five counts in the Complaint. Count 1 claims that we violated ERISA by reducing the rate of an employee’s benefit accrual on the basis of age. Count 2 claims a violation of ERISA’s non-forfeitability requirement, because the plan allegedly conditions receipt of cash balance benefits on foregoing the early retirement benefits plaintiff earned prior to the adoption of the cash balance amendment. Count 3 claims that the cash balance plan violates ERISA’s “anti-backloading” rule. Count 4 claims that D&B failed to supply advance notice of a significant benefit decrease. Count 5 claims that D&B failed to provide an adequate Summary Plan Description.

 

In the Complaint, the plaintiff seeks (1) a declaration that (a) D&B’s cash balance plan is ineffective and that the D&B Master Retirement Plan is still in force and effect, and (b) plaintiff’s benefit accrual under the cash balance plan must be unconditional and not reduced because of age, (2) an injunction (a) prohibiting the application of the cash balance plan’s reduction in the rate of benefit accruals because of age and its conditions of benefits due under the plan, and (b) ordering appropriate equitable relief to determine plan participant losses caused by D&B’s

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

payment of benefits under the cash balance plan’s terms and requiring the payment of additional benefits as appropriate, (3) attorneys’ fees and costs, (4) interest, and (5) such other relief as the court may deem just.

 

A Motion to Transfer Venue to the District of New Jersey was filed on January 27, 2006 and was granted on March 31, 2006. The action was transferred to the District of New Jersey, and, on June 5, 2006, plaintiff filed an Amended Complaint, which omitted the claim for violation of ERISA’s non-forfeitability requirement and added a claim for breach of fiduciary duty based on allegedly misleading plan communications. On July 5, 2006, we filed a Motion to Dismiss, pursuant to Fed.R.Civ.P. 12(b)(6), on the grounds that (i) the complaint is barred by the statute of limitations and the doctrine of laches, (ii) the cash balance plan does not discriminate on the basis of age, (iii) the cash balance plan does not violate ERISA’s anti-backloading rule, (iv) D&B complied with ERISA § 204(h) by providing sufficient advance notice of the plan amendment, (v) D&B’s Summary Plan Description fully complies with the requirements of ERISA, and (vi) plaintiff failed to state a claim for breach of fiduciary duty.

 

We believe we have strong defenses in this matter and we will deny all allegations of wrongdoing and aggressively defend the case. We are unable to predict at this time the final outcome of this matter or whether the resolution of this matter could materially affect our results of operations, cash flows or financial position. No amount in respect of this matter has been accrued in our consolidated financial statements.

 

Other Matters

 

In addition, in the normal course of business, D&B indemnifies other parties, including customers, lessors and parties to other transactions with D&B, with respect to certain matters. D&B has agreed to hold the other parties harmless against losses arising from a breach of representations or covenants, or arising out of other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. D&B has also entered into indemnity obligations with its officers and directors of the Company. Additionally, in certain circumstances, D&B issues guarantee letters on behalf of our wholly-owned subsidiaries for specific situations. It is not possible to determine the maximum potential amount of future payments under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by D&B under these agreements have not had a material impact on our consolidated financial statements.

 

 

As part of our Blueprint for Growth Strategy, we implemented our international market leadership strategy which has led to various dispositions over the years. During the second quarter of 2005, we sold our equity investment in a South African company. We received proceeds of $5.3 million and recognized a pre-tax gain of approximately $3.5 million in the second quarter of 2005 in “Other Income (Expense) - Net.”

 

 

On January 1, 2006, we adopted SFAS No. 123R using the Modified Prospective transition method. Prior to the adoption of SFAS No. 123R, we applied APB No. 25 and related interpretations in accounting for our plans. Accordingly, no compensation cost was recognized for grants under the stock option programs.

 

Under the Modified Prospective method, compensation cost associated with the stock option programs recognized for the three month and six month periods ended June 30, 2006 includes (a) compensation cost for stock options granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provision of SFAS No. 123, and (b) compensation cost for stock options granted subsequent to January 1, 2006, based on the grant-date fair value under SFAS No. 123R. SFAS No. 123R also requires us to estimate future forfeitures in calculating the expense relating to stock-based compensation as opposed to only recognizing these forfeitures and the corresponding reduction in expense as they occur. As a result, we have

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

adjusted for this cumulative effect and recognized a reduction in stock-based compensation of $0.5 million pre-tax, related to our restricted stock and restricted stock unit programs during the three months ended March 31, 2006. As required under the Modified Prospective method, results for prior periods have not been restated.

 

For periods prior to the adoption of SFAS No. 123R, the following table summarizes the pro forma effect of stock-based compensation on net income and net income per share as if the fair value expense recognition provisions of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” had been adopted, as follows:

 

 

Stock Option Programs

 

Under The Dun & Bradstreet Corporation 2000 Stock Incentive Plan (“2000 SIP”) and Non-Employee Directors’ Stock Incentive Plan (“2000 DSIP”), we have granted stock options to certain employees and non-employee directors to purchase shares of our common stock at the market price on the date of the grant. Stock options granted under the 2000 SIP prior to February 9, 2004 generally vest in three equal installments, beginning on the third anniversary of the grant. Stock options granted under the 2000 SIP on or after February 9, 2004 generally vest in four equal installments beginning on the first anniversary of the grant. Stock options granted under the 2000 DSIP generally vest 100% on the first anniversary of the grant. All stock options generally expire 10 years from the date of the grant. The 2000 SIP and 2000 DSIP provide for the granting of up to 9.7 million and 0.3 million shares of our common stock, respectively.

 

Accordingly, compensation cost is recognized on a straight-line basis over the vesting period. For stock options granted after the adoption of SFAS No. 123R, the compensation cost is recognized over the shorter of the vesting period or the period from the grant date to the date when retirement eligibility is achieved. The total expense associated with stock option awards recognized during the three month and six month periods ended June 30, 2006 was $3.2 million and $6.9 million, respectively. Total income tax benefit associated with the stock option program for the three month and six month periods ended June 30, 2006 was $1.1 million and $2.5 million, respectively.

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

 

The fair value of each stock option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table.

 

 

Expected volatilities are derived from the historical volatility of our common stock. Expected terms are determined using the simplified method for estimating expected option life, as prescribed under Staff Accounting Bulletin (“SAB”) No. 107. The risk-free interest rate for corresponding expected terms of the stock option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

A summary of stock option activity under the stock option programs as of June 30, 2006 is presented below:

 

 

The total intrinsic value of stock options exercised during the three month and six month periods ended June 30, 2006 was $11.1 million and $45.3 million, respectively, and includes D&B and Moody’s employees that exercised D&B options. See Note 7 to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q for further discussion on the separation of D&B and Moody’s Corporation in September 2000.

 

A summary of the status of our nonvested stock options as of June 30, 2006 is presented below:

 

 

Total unrecognized compensation cost related to nonvested stock options at June 30, 2006 was $23.6 million. This cost is expected to be recognized over a weighted average period of 2.5 years. The total fair value of stock options vested during the three month and six month periods ended June 30, 2006 was $1.5 million and $11.5 million, respectively.

 

Cash received from stock option exercises for the three months ended June 30, 2006 and 2005 was $3.9 million and $4.1 million, respectively. Cash received from stock option exercises for the six months ended June 30, 2006

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

and 2005 was $22.4 million and $11.3 million, respectively. The expected tax benefit associated with the tax deductions from stock option exercises totaled $7.3 million and $2.2 million for the three months ended June 30, 2006 and 2005, respectively. The expected tax benefit associated with the tax deductions from stock option exercises totaled $27.7 million and $4.7 million for the six months ended June 30, 2006 and 2005, respectively. The expected tax benefit includes D&B employees exercising both D&B and Moody’s stock options.

 

Restricted Stock and Restricted Stock Unit Programs

 

The adoption of SFAS No. 123R did not change our accounting for restricted stock and restricted stock units. The cost associated with our restricted stock and restricted stock units has been included in net income. The fair value of restricted stock and restricted stock units is determined based on the average of high and low trading prices of our common stock on the grant date.

 

Prior to 2004, restricted stock and restricted stock unit grants were generally vested on a cliff basis over three years of service. Compensation cost associated with these awards is generally recognized on a straight-line basis over three years. Beginning in 2004, certain employees were provided an opportunity to receive an award of restricted stock or restricted stock units in the future. That award is contingent on performance against the same goals that drive payout of the annual bonus plan. The restricted stock or restricted stock units will be granted, if at all, after the one year performance goal has been met and will then vest over a three-year period on a graded basis. Compensation cost associated with these grants is recognized on a graded-vesting basis over four years, including the performance period. Total expense associated with restricted stock, restricted stock units and restricted stock opportunity was $1.9 million and $3.3 million for the three months ended June 30, 2006 and 2005, respectively. Total expense associated with restricted stock, restricted stock units and restricted stock opportunity was $3.7 million (including a reduction of expense of $0.5 million related to accumulated effect of forfeiture assumption) and $6.7 million for the six months ended June 30, 2006 and 2005, respectively. Total income tax benefit associated with restricted stock, restricted stock units and restricted stock opportunity was $0.7 million and $1.3 million for the three months ended June 30, 2006 and 2005, respectively. Total income tax benefit associated with restricted stock, restricted stock units and restricted stock opportunity was $1.2 million and $2.6 million for the six months ended June 30, 2006 and 2005, respectively.

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

 

A summary of the status of our nonvested restricted stock and restricted stock units as of June 30, 2006 is presented below:

 

 

Total unrecognized compensation cost related to nonvested awards was $20.3 million at June 30, 2006. This cost is expected to be recognized over a weighted average period of 3.0 years. The total fair value of shares vested during the three month and six month periods ended June 30, 2006 was $0.3 million and $9.3 million, respectively. The tax benefit associated with the tax deductions from vested shares for the three month and six month periods ended June 30, 2006 was $0.2 million and $3.6 million, respectively. The tax benefit associated with the tax deductions from vested shares for each of the three month and six month periods ended June 30, 2005 was $2.1 million.

 

Employee Stock Purchase Plan

 

Under the ESPP, our employees can purchase our common stock at a 15% discount from market value, subject to certain limitations as set forth in the ESPP. The total expense recognized for the three month and six month periods ended June 30, 2006 was $0.2 million and $0.5 million, respectively.

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

 

 

The following table sets forth the components of the net periodic cost associated with our pension plans and our postretirement benefit obligations.

 

 

We previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005 that we expected to contribute $32.4 million and $12.4 million to our Non-Qualified U.S. and non-U.S. pension plans and the U.S. postretirement benefit plan, respectively in 2006. As of June 30, 2006, we have made contributions to our Non-Qualified U.S. and non-U.S. pension plans and postretirement benefit plan of $15.9 million and $6.3 million, respectively. For the three month and six month periods ended June 30, 2006, we received government subsidies of $0.5 million related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.

 

We also recognized a curtailment gain of $0.2 million and $0.4 million for our postretirement benefit plan for the three month and six month periods ended June 30, 2006, respectively. For the three months ended June 30, 2006, $0.1 million was related to each of the 2005 Financial Flexibility Program and 2004 Financial Flexibility Program. For the six months ended June 30, 2006, $0.1 million and $0.3 million was related to the 2005 Financial Flexibility Program and the 2004 Financial Flexibility Program, respectively (see detail in Note 3 to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q).

 

For the three month and six month periods ended June 30, 2005, we incurred a curtailment charge of $0.3 million for our UK pension plan related to the 2005 Financial Flexibility Program. In addition, we recognized a curtailment gain of $2.9 million and $5.7 million for our postretirement benefit plan for the three month and six month periods ended June 30, 2005, respectively, related to the 2004 Financial Flexibility Program.

 

 

The operating segments reported below are our segments for which separate financial information is available and upon which operating results are evaluated by management on a timely basis to assess performance and to allocate resources. Our results are reported and managed under the following two segments: U.S. and International (which consists of operations in Canada, Europe, Asia Pacific and Latin America). Our customer solution sets are Risk Management Solutions^tm, Sales & Marketing Solutions^tm, E-Business Solutions^tm and Supply Management Solutions^tm. Inter-segment sales are immaterial and no single customer accounted for 10% or more of our total revenues during the three month and six month periods ended June 30, 2006 and 2005. For management reporting purposes, we evaluate business segment performance before restructuring charges because restructuring charges are not a component of our ongoing income or expenses and may have a disproportionate positive or negative impact on the results of our ongoing underlying business (see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “How We Manage Our Business” in this Quarterly Report on Form 10-Q for further details). Additionally, transition costs, which are period costs such as consulting fees, costs of temporary employees,

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

relocation costs and stay bonuses incurred to implement our Financial Flexibility Programs, are not allocated to our business segments.

 

 

 

 

 

THE DUN & BRADSTREET CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

(Tabular dollar amounts in millions, except per share data)

 

Supplemental Geographic and Customer Solution Set Information: