R.H. Donnelley 1998 Annual Report

Notes to Consolidated Financial Statements

9. Pension and Postretirement Benefits

Prior to the Distribution, substantially all employees of the Company and Donnelley were eligible to participate in Old D&B's defined benefit and defined contribution pension plans. These plans were accounted for as multi-employer plans. Accordingly, the Company has recorded pension costs as allocated by Old D&B relating to the defined benefit plan totaling $1,121 for the six months ended June 30, 1998, $996 in 1997 and $1,082 in 1996. Allocated costs relating to the defined contribution plan were $818 for the six months ended June 30, 1998, $2,243 in 1997 and $2,268 in 1996.

In addition to providing pension benefits, Old D&B provided certain health care and life insurance benefits for retired employees of the Company and Donnelley. The Company accounted for this plan as a multi-employer plan. Accordingly, the Company has recorded postretirement benefits costs as allocated by Old D&B totaling $893 for the six months ended June 30, 1998, $1,724 in 1997 and $1,873 in 1996.

Subsequent to the Distribution, the Company assumed responsibility for pension benefits for active employees of the Company and Donnelley with vested benefits under the Old D&B Retirement Plan. The responsibility for Donnelley retirees and vested terminated employees prior to the Distribution will remain with New D&B. The Company assumed responsibility for postretirement benefits for active employees of Donnelley. An allocation of assets and liabilities related to active employee benefits has been included in the financial statements. A description of the Company's benefit plans follows.

Pension The Company has a defined benefit plan covering substantially all employees. The benefits to be paid to employees are based on years of service and a percentage of total annual compensation. The percentage of compensation allocated to a retirement account ranges from 3.0% to 12.5% depending on age and years of service. Pension costs are determined actuarially. Due to the overfunded status of the plan, the Company has not formally adopted a funding policy as of December 31, 1998. The underlying pension plan assets are invested in diversified portfolios consisting primarily of equity and debt securities.

The Company also has two unfunded non-qualified defined benefit plans, the Pension Benefit Equalization Plan (PBEP) and the Supplemental Executive Benefit Plan (SEBP). Senior executives and certain key employees are entitled to participate in these plans which provide retirement benefits based on years of service and compensation (including compensation not permitted to be taken into account under the previously mentioned defined benefit plan).

The Company also maintains a defined contribution plan for substantially all its employees. Contributions to the plan are generally determined based on a percentage of each eligible employee's salary. The Company makes a matching contribution of 50 cents for each dollar contributed up to 6% of each participating employee's salary. The cost of this plan to the Company for the six months ended December 31, 1998, was $808.

Postretirement Benefits In addition to the Company's defined benefit and defined contribution plans, the Company sponsors an unfunded defined benefit postretirement plan that provides certain health care and life insurance benefits to those full-time employees who reach normal retirement age while working for the Company or Donnelley.

A summary of the funded status of the benefit plans at December 31, 1998, is as follows:

For measurement purposes, a 6.5% annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 1999. The rate was assumed to decrease gradually to 5.0% through 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:

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