-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RG7eOHY7fLgRE3k8OaDVVj681FLxCr6J4yQs8+H8tOvxwAPOi+dGIhqPG8BRnzb9 fSGuWXdrnn/IMlw7lVfGIA== 0000950123-02-002993.txt : 20020415 0000950123-02-002993.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950123-02-002993 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: R H DONNELLEY CORP CENTRAL INDEX KEY: 0000030419 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING [7310] IRS NUMBER: 132740040 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07155 FILM NUMBER: 02587752 BUSINESS ADDRESS: STREET 1: ONE MANHATTANVILLE ROAD CITY: PURCHASE STATE: NY ZIP: 10577 BUSINESS PHONE: 9149336800 MAIL ADDRESS: STREET 1: ONE MANHATTANVILLE ROAD CITY: PURCHASE STATE: NY ZIP: 10577 FORMER COMPANY: FORMER CONFORMED NAME: DUN & BRADSTREET CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: DUN & BRADSTREET COMPANIES INC DATE OF NAME CHANGE: 19790429 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DONNELLEY R H INC CENTRAL INDEX KEY: 0001065310 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PUBLISHING [2741] IRS NUMBER: 362467635 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 333-59287 FILM NUMBER: 02587753 BUSINESS ADDRESS: STREET 1: 1 MANHATTANVILLE ROAD CITY: PURCHASE STATE: NY ZIP: 10577 BUSINESS PHONE: 9149336400 MAIL ADDRESS: STREET 1: 1 MANHATTANVILLE ROAD CITY: PURCHASE STATE: NY ZIP: 10577 10-K405 1 y57684e10-k405.txt R.H. DONNELLEY CORPORATION/R.H. DONNELLEY INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (Mark one) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------- ------------------------ Commission file number 001-07155 R.H. DONNELLEY CORPORATION -------------------------- (Exact name of registrant as specified in its charter) Delaware 13-2740040 - --------------------------------------------------------- ---------------------------------------------------- (State of Incorporation) (IRS Employer Identification No.) One Manhattanville Road, Purchase, N.Y. 10577 - --------------------------------------------------------- ---------------------------------------------------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 933-6400 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of Class Name of Exchange on Which Registered -------------- ------------------------------------ Common Stock, par value $1 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 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 X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] The aggregate market value at March 4, 2002 of shares of the Registrant's common stock (based upon the closing price per share of $30.46 of such stock on The New York Stock Exchange) held by non-affiliates of the Registrant was approximately $889,400,000. For purposes of this calculation, only those shares held by directors and executive officers of the Registrant have been excluded as held by affiliates. Such exclusion should not be deemed a determination or an admission by the Registrant that such individuals are, in fact, affiliates of the Registrant. At March 4, 2002, there were 29,424,806 outstanding shares of the Registrant's common stock. (continued) Commission file number 333-59287 R.H. DONNELLEY INC. * --------------------- (Exact name of registrant as specified in its charter) Delaware 36-2467635 - --------------------------------------------------- ------------------------------------------------- (State of Incorporation) (IRS Employer Identification No.) One Manhattanville Road, Purchase, N.Y. 10577 - --------------------------------------------------- ------------------------------------------------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 933-6400 -------------- * R.H. Donnelley Inc. is a wholly owned subsidiary of R.H. Donnelley Corporation. R.H. Donnelley Inc. meets the conditions set forth in General Instructions I 1(a) and (b) of Form 10-K and is therefore filing this report with respect to R.H. Donnelley Inc. with the reduced disclosure format. R.H. Donnelley Inc. became subject to the filing requirements of Section 15(d) on October 1, 1998 in connection with the public offer and sale of its 91/8% Senior Subordinated Notes. As of March 4, 2002, 100 shares of R.H. Donnelley Inc. common stock, no par value, were outstanding. *- DOCUMENTS INCORPORATED BY REFERENCE - ----------------------------------------------------------------------------------------------------------------- Part III - ----------------------------------------------------------------------------------------------------------------- Item 10 Directors and Executive Officers of the Information responsive to this Item can Registrant be found on pages 7-8 of the Company's Proxy Statement dated March 25, 2002. - ----------------------------------------------------------------------------------------------------------------- Item 11 Executive Compensation Information responsive to this Item can be found on pages 11-21 of the Company's Proxy Statement dated March 25, 2002. - ----------------------------------------------------------------------------------------------------------------- Item 12 Security Ownership of Certain Beneficial Owners and Information responsive to this Item can Management be found on pages 22-23 of the Company's Proxy Statement dated March 25, 2002. - ----------------------------------------------------------------------------------------------------------------- Item 13 Certain Relationships and Related Information responsive to this Item can Transactions be found on page 21 of the Company's Proxy Statement dated March 25, 2002. - -----------------------------------------------------------------------------------------------------------------
PART I ITEM 1. BUSINESS Except where otherwise indicated, the terms "Company," "we," "us" and "our" refer to R.H. Donnelley Corporation and its direct and indirect wholly owned subsidiaries. The Company's only direct subsidiary is R.H. Donnelley, Inc. ("Donnelley"). Our executive offices are located at One Manhattanville Road, Purchase, NY 10577 and our telephone number is (914) 933-6400. Prior to July 1, 1998, the Company operated as part of The Dun & Bradstreet Corporation ("D&B"). THE COMPANY Together with our business partners, we are one of the largest independent marketers of yellow pages advertising in the United States, selling advertising for more than 175 yellow pages directories with a total circulation of over 15 million. We sell over $600 million of yellow pages advertising annually and provide pre-press publishing services for approximately 240 yellow pages directories, including all of the directories for which we currently sell advertising. We have a diversified customer base of approximately 200,000 small to medium-sized businesses, many of which rely on yellow pages directories as their principal or sole form of advertising. We sell yellow pages advertising in Illinois and northwest Indiana under a 50/50 perpetual partnership (called "DonTech") with an affiliate of SBC Communications Inc. ("SBC"), and in Nevada, Florida, Virginia and North Carolina under contractual agreements with affiliates of Sprint Corporation ("Sprint"). These agreements allow SBC and Sprint to gain the benefits of our long-term presence in these markets, our yellow pages advertising sales and pre-press publishing expertise, an established infrastructure and performance-focused, non-union sales force. We benefit from these agreements as SBC is the major incumbent telephone company in the Illinois and northwest Indiana markets and Sprint is the major incumbent telephone company in the Nevada, Virginia and North Carolina markets and one of two major incumbent telephone companies in the Florida markets. Incumbent telephone companies have strong brand name recognition and typically publish the leading directories in terms of numbers of advertisers, billing value of advertising, utilization rates and distribution. Through June 30, 2000, we were the exclusive sales agent for directories published by affiliates of Bell Atlantic Corporation (now known as Verizon Communications, "Bell Atlantic") that covered substantially all of New York State. Effective June 30, 2000, the Company and Bell Atlantic mutually agreed to terminate early that relationship in exchange for a termination payment to us of $114 million plus accrued commissions earned. We also operated our own independent directory operation in the Cincinnati area through April 30, 2000, when we sold this operation to Yellow Book USA for $8 million. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting Comparability" for a more detailed description of these transactions. In 2001, we recorded a restructuring and special charge of $18.6 million in connection with the employment transition arrangements of the Company's Chief Executive Officer and Chief Financial Officer, as well as the elimination of approximately 100 other positions in connection with the expiration of a pre-press publishing contract during 2002. We also recorded an investment impairment charge of $11.4 million to write-down our investment in ChinaBig.com Limited ("ChinaBig"). See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting Comparability" for a more detailed description of these matters. OPERATING SEGMENTS Our business is organized into two operating segments at December 31, 2001: the DonTech Partnership ("DonTech") and Directory Advertising Services ("DAS"), each of which is described below. Get Digital Smart, our Internet operation, was a reportable segment in 2000 and 1999 before we ceased its operations in December 2000. See Note 13 to the Consolidated Financial Statements in Item 8 for further information regarding our business segments. DONTECH PARTNERSHIP DonTech is our 50/50 perpetual partnership with SBC. Our relationship with telephone companies presently owned by SBC began in 1908 with the Chicago Telephone Company. Since then, we have maintained a variety of contractual relationships with these telephone companies, including a series of partnerships. Under the current partnership agreement, DonTech is the exclusive sales 1 agent in perpetuity for all yellow pages directories published by SBC in Illinois and northwest Indiana. Under the sales agency agreement, DonTech provides advertising sales services for these directories and earns a commission from SBC. Under our agreements with SBC, we have a 50% interest in the net profits of DonTech and also receive revenue participation income directly from SBC. The amount of revenue participation income earned is based on a percentage of DonTech advertising sales and is recognized when a sales contract is executed with a customer. Revenue participation income comprises over 80% of the total income from DonTech. Total income from DonTech accounted for 79%, 72% and 83% of operating income before General & Corporate costs and other unallocated expenses for the years ended December 31, 2001, 2000 and 1999, respectively. Certain general and administrative expenses incurred to support this business are not allocated to the DonTech segment. As income from DonTech accounts for a significant portion of the Company's total operating income, a material decline in the advertising sales of DonTech would likely have a material adverse effect on the Company's results of operations and financial condition. We also provide certain pre-press publishing services for DonTech directories, the results of which are included in our DAS segment as described below. We account for our investment in DonTech under the equity method and record our income from DonTech as partnership and joint venture income in the consolidated statements of operations. Although DonTech provides advertising sales of yellow pages and other directory products similar to DAS, it is considered a separate operating segment since, among other things, it has its own Board of Directors and the employees of DonTech, including its officers and managers, are not our employees. In general, most major decisions are required to be made at the DonTech Board of Directors level and require the affirmative vote of both partners. DIRECTORY ADVERTISING SERVICES Within our DAS segment, we sell yellow pages advertising for Sprint and perform pre-press publishing services for yellow pages directories. We are the exclusive sales agent in the greater Orlando, Florida market ("Central Florida") for an operating unit of Sprint and the exclusive sales agent in certain markets in Nevada (particularly Las Vegas), Florida, Virginia and North Carolina for CenDon LLC ("CenDon"), a joint venture with Centel Directory Company ("Centel"), a subsidiary of Sprint. Other Sprint affiliates sell yellow pages advertising in other markets in these states. We also provide pre-press publishing services for the yellow pages directories of DonTech and Sprint for which we sell advertising, as well as for an unaffiliated third party under separately negotiated contracts. All information technology costs are also included in DAS. The results of our DAS segment for 2000 also include the operating results of the Bell Atlantic and Cincinnati businesses and our share of the losses of ChinaBig through the dates of transactions that caused changes to the reporting of each respective business. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting Comparability" for a more detailed description of these transactions. The DAS segment accounted for approximately 21%, 28% and 17% of operating income before General & Corporate costs and other unallocated corporate expenses for the years ended December 31, 2001, 2000 and 1999, respectively. Operating income for DAS includes the revenues and direct costs incurred by each constituent business plus an allocation of certain shared expenses based on estimated business usage. Sprint Our relationship with Sprint began in 1980 when we began publishing directories for predecessors or affiliates of Central Telephone Company and United Telephone Company of Florida, both of which have since been acquired by Sprint. Today, we are the exclusive sales agent in Nevada, Florida, Virginia and North Carolina for CenDon and the exclusive sales agent in Central Florida for an operating unit of Sprint. The sales agency agreement with CenDon extends through 2010 and the sales agency agreement for Central Florida extends through 2004. Total revenue and operating income from our Central Florida sales agency agreement is approximately $9 million and $1 million, respectively. Effective for directories that published after June 30, 2000, we entered into a series of agreements with Centel that effectively restructured the CenDon Partnership as a limited liability company and extended the sales agency arrangement through 2010. The CenDon Partnership was a 50/50 partnership with Centel, formed to publish directories in Florida, Nevada, Virginia and North Carolina. Both the prior partnership agreement and sales agency agreement were set to expire in 2004. The new arrangement focuses our responsibilities on sales and certain pre-press publishing services and establishes us as the exclusive sales agent for Centel's print and electronic directory products in the markets previously covered by the partnership agreement. Centel assumed responsibility for the printing and delivery of directories, which were previously performed by the CenDon Partnership, and related support services such as marketing, customer service and collections, which were previously performed by the Company. Under the new arrangement, Centel manages CenDon. We receive sales commissions on all advertising sold, and in consideration for transferring control over the publishing functions to Centel, we also receive a priority distribution on our membership interest in CenDon ("priority distribution"). The amount of priority distribution earned is based on a percentage of 2 CenDon advertising sales and is recognized when a sales contract is executed with a customer. The priority distribution allows us to maintain the same level of profitability that we would have earned under the CenDon Partnership through the original expiration date in 2004. Income from Sprint is highly dependent on the level of advertising sales and a material decline in the level of advertising sales could have a material adverse effect on our results of operations or financial condition. On the consolidated statements of operations, sales commissions are recorded as revenue and the priority distribution is recorded as partnership and joint venture income. Revenue from Sprint represented 57%, 46% and 23% of consolidated revenue for the years ended December 31, 2001, 2000 and 1999, respectively. Pre-press Publishing Services We provide certain pre-press publishing services for SBC's Illinois and northwestern Indiana yellow pages directories and Sprint's Central Florida and CenDon yellow pages directories under separate agreements that individually extend through 2003, and to an unaffiliated third party under an agreement that extends through 2002. We have been notified by this unaffiliated third party that the contract will not be renewed at the end of 2002. This contract provided annual revenue of approximately $8 million; however, due to certain restructuring actions, the loss of this contract is not expected to have a material adverse effect on our results of operations or financial condition. See Item 7, "Management's Discussion and Analysis of Financial Condition - Factors Affecting Comparability" for a more detailed description of these restructuring actions. Our current pre-press publishing service agreements with SBC and Sprint are scheduled to expire in 2003. We recently re-negotiated our pre-press publishing service agreement with SBC to extend its term through 2008 on substantially the same terms. While we have not yet sought to negotiate an extension of the Sprint pre-press publishing agreement as we were awaiting the outcome of the SBC extension negotiations, we intend to pursue such negotiations with Sprint promptly. However, no assurances can be given that we will be successful in extending that agreement or as to the terms and conditions of any such extension. Revenue from our pre-press publishing service operation accounted for approximately 43%, 23% and 17% of total consolidated revenue for the years ended December 31, 2001, 2000 and 1999, respectively. ChinaBig Investment We currently have an 18% interest in ChinaBig, which publishes yellow pages directories and offers Internet directory services in the People's Republic of China. In connection with an equity investment by an unaffiliated third party and in order to facilitate the raising of additional capital and provide greater flexibility, on June 15, 2000, ChinaBig and each existing investor (including the Company), restructured the existing joint venture agreement of ChinaBig to, among other things, significantly reduce our ability to influence the operations of ChinaBig. As a result of the restructured agreement, we became a passive investor in ChinaBig and started accounting for this investment under the cost method. Prior to June 15, 2000, we accounted for this investment under the equity method. Therefore, subsequent to June 15, 2000, we no longer recognize our share of the losses of ChinaBig. In November 2001, management received an independent third party valuation of ChinaBig's current business plan, capital needs and outlook for profitability and cash flow. The valuation was conducted in connection with a proposed equity financing and was determined based on the present value of expected cash flows. The results of the valuation provided a range of possible estimated fair values for ChinaBig, all of which implied that the value of our 18% interest was substantially lower than the carrying value of $13.4 million. Management determined that the carrying value of this investment had been permanently impaired, and recorded an impairment charge of $11.4 million in the fourth quarter of 2001 to write this investment down to $2.0 million, which management believes is its best estimate of the current fair value of the ChinaBig investment. Prior valuations of the ChinaBig business had assumed a more rapid development of Internet advertising than is currently forecast. GET DIGITAL SMART In February 2000, we formally launched an initiative, known as "Get Digital Smart(SM)" ("GDS"), in the Miami/Ft. Lauderdale market to test the economic viability of providing a variety of products and services designed to deliver a comprehensive package of Internet marketing and e-commerce capabilities to small and medium-sized local businesses. While the test demonstrated that there was a demand for the products and services we offered, the business was not broadly capable of providing an adequate return on investment within our originally planned time horizon. During 2000, GDS incurred an operating loss of $8.9 million and in December 2000, we ceased operations and recorded one-time costs of $2.9 million related to the shutdown of the business. 3 COMPETITION Yellow Pages Advertising Sales We experience varying degrees of competition for yellow pages advertising sales in our current markets from other local telephone companies, independent yellow pages publishers (publishers that are not affiliated with any telephone company) and national yellow pages sales agents. We believe we have a competitive advantage in that SBC is the major incumbent telephone company in the Illinois and northwest Indiana market and Sprint is the major incumbent telephone company in the Nevada, Virginia and North Carolina markets and one of two major incumbent telephone companies in the Florida markets. The incumbent telephone companies have strong brand name recognition and typically publish the leading directories in terms of numbers of advertisers, billing value of advertising, utilization rates and distribution. The market position of local telephone companies, including those with which we have relationships, may be adversely impacted by the Telecommunications Act of 1996, which effectively opened local telephone markets to increased competition. There is also competition for advertising sales from other media, including newspapers, magazines, radio, direct mail, online information services, television and cable television. Additionally, advances in technology have brought to the industry new participants, new products and new channels, including increasing use of electronic delivery of directory information as an advertising medium. Pre-press Publishing Services Yellow pages publishers typically derive these necessary services from internal divisions or through independent providers of such services, or some combination of both. Many telephone companies and many of the significant independent yellow pages publishers, including those who are currently our customers, have made, or are making investments to acquire publishing services technology similar to the technology used at our Raleigh publishing center. We compete based upon breadth of services offered, price, turn-around time and experience. EMPLOYEES As of December 31, 2001, we had approximately 600 full-time employees. This number does not include the employees of DonTech, whom are not our employees. None of our employees are covered by collective bargaining agreements, and we consider relations with our employees to be good. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information concerning the individuals who serve as executive officers of the Company as of March 4, 2002.
NAME AGE POSITION(S) - ---- --- ----------- Frank R. Noonan 59 Chairman of the Board and Chief Executive Officer David C. Swanson 47 President and Chief Operating Officer; CEO-elect Steven M. Blondy 42 Senior Vice President and Chief Financial Officer George F. Bednarz 47 Vice President, Publishing and Information Technology Robert J. Bush 36 Vice President, General Counsel and Corporate Secretary Frank M. Colarusso 44 Vice President and Treasurer William C. Drexler 48 Vice President and Controller
FRANK R. NOONAN has served as Chairman and Chief Executive Officer of the Company since June 30, 1998. Mr. Noonan will resign as Chief Executive Officer at the 2002 Annual Meeting of Shareholders, but remain Chairman through December 2002. Mr. Noonan served as President from August 1991 to December 2000 and has been a director since February 1995. Mr. Noonan was a director of D&B from April 1998 to June 1998. Mr. Noonan was Senior Vice President Finance of Dun & Bradstreet Information Services from 1989 to August 1991. Prior to joining D&B, Mr. Noonan served as Senior Vice President and Chief Financial Officer of UNUM Corporation and in various financial positions for the General Electric Company. DAVID C. SWANSON has served as President and Chief Operating Officer since December 2000 and as Senior Vice President of the Company since June 1998. Mr. Swanson will assume the position of Chief Executive Officer following the Annual Meeting of Shareholders in May 2002. Prior to his appointment as President and Chief Operating Officer, Mr. Swanson served as President of Donnelley Directory Services since March 1999. Upon the spin-off of the Company from D&B in June 1998, Mr. Swanson was appointed Executive Vice President-Corporate Strategy. Prior thereto, Mr. Swanson served as Executive Vice President and General 4 Manager for Proprietary Operations from July 1997, Executive Vice President Sales from October 1995 and Vice President and General Manager of Cincinnati Operations from September 1993. STEVEN M. BLONDY joined the Company and was appointed Senior Vice President and Chief Financial Officer on March 1, 2002. Prior to joining the Company, Mr. Blondy served as Senior Vice President - Corporate Development for Young & Rubicam, Inc., a global marketing and communications company, from February 1998 to October 2000. Mr. Blondy also served as Executive Vice President and Chief Financial Officer for Poppe Tyson, a leading Internet and integrated marketing communications agency from April 1996 to December 1997. Mr. Blondy also served as Chief Financial Officer for Grundy Worldwide, an independent producer of television programs in Europe and Australia from December 1994 to July 1995 and prior to that, he spent 12 years in the investment banking industry with Chase Manhattan Bank and Merrill Lynch. GEORGE F. BEDNARZ has served as Vice President, Publishing and Information Technology since April 2001. Previously, he served as Vice President & General Manager - Publishing since 1999. Mr. Bednarz joined the Company in November 1995 to lead the start-up implementation of the Company's Raleigh Information Center. Prior to joining the Company, Mr. Bednarz spent 19 years at D&B, where he held executive positions of increasing responsibility in various functions. ROBERT J. BUSH was appointed General Counsel in January 2001, Vice President in October 2000 and Corporate Secretary in July 2000. Mr. Bush joined the Company in October 1999 as Assistant Vice President and Assistant General Counsel. Prior to joining the Company, Mr. Bush was Assistant General Counsel and Assistant Secretary at MIM Corporation, a pharmacy benefit management company, from May 1998 to October 1999 and an Associate at the New York offices of Jones, Day, Reavis & Pogue from August 1993 to May 1998. FRANK M. COLARUSSO has served as Vice President and Treasurer since June 1998. Prior to that, he was Assistant Treasurer of D&B since 1996. Mr. Colarusso joined D&B in 1986 and was named Manager, International Treasury Services in 1989 and Director of Corporate Finance in 1992. Prior to joining D&B, Mr. Colarusso held management positions at Texaco Inc. and Sperry Corporation. WILLIAM C. DREXLER has served as Vice President and Controller since June 1999. Prior to that, Mr. Drexler served as Assistant Vice President of Finance for the Company since 1996. Mr. Drexler joined the Company in 1992 as Director of Accounting Operations. In 1995, he was named Director of Financial Planning for publishing and information services. Prior to joining the Company, Mr. Drexler held financial management positions with a number of manufacturing firms. ITEM 2. PROPERTIES Within our DAS segment, we lease six sales offices and conduct our publishing operations from two leased facilities with non-cancelable lease terms expiring at various dates though 2006. Our sales offices are between 2,000 and 15,000 square feet and are located in Florida, Nevada and Virginia. Our main publishing facility is located in a 55,000 square foot building in Raleigh, North Carolina and our graphics center is located in a 20,000 square foot building in Dunmore, Pennsylvania. We also lease 35,000 square feet for our corporate headquarters in Purchase, New York. The lease of our corporate headquarters extends through 2011, but we have the option to cancel the lease in 2006 for a minimal fee. DonTech directly leases its own sales offices and corporate headquarters. ITEM 3. LEGAL PROCEEDINGS Rockland Yellow Pages In 1999, Sandy Goldberg, Dellwood Publishing, Inc. and Rockland Yellow Pages initiated a lawsuit against the Company and Bell Atlantic in the United States District Court for the Southern District of New York. The Rockland Yellow Pages is a proprietary directory that competes against a Bell Atlantic directory in the same region, for which the Company served as Bell Atlantic's advertising sales agent through June 30, 2000. The complaint alleged that the defendants disseminated false information concerning the Rockland Yellow Pages, which resulted in damages to the Rockland Yellow Pages. In May 2001, the Court dismissed substantially all of plaintiff's claims, including the antitrust claims; only a false advertising claim under the Lanham Act and a state law tort claim with respect to only one advertiser survived. In August 2001, the plaintiff withdrew its Lanham Act claim with prejudice and then the Court dismissed the state law tort claim without prejudice as to re-filing in state court. In August 2001, the same plaintiffs filed a complaint naming the same defendants in New York State Supreme Court, in Rockland County, alleging virtually the same state law tort claim, seeking unspecified damages. In October 2001, defendants filed a motion to dismiss this complaint. While at this stage in the proceedings management is unable to predict the outcome of 5 this matter, it presently believes that the resolution of the action will not have a material adverse effect on the Company's financial condition or results of operations. Information Resources In 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 Company (as successor of D&B), ACNielsen Company and IMS International Inc., each former subsidiaries of D&B (the "IRI Action"). The complaint alleges, among other things, various violations of the antitrust laws and seeks damages in excess of $350 million, which IRI is seeking to have trebled under the antitrust laws. IRI also seeks punitive damages of an unspecified amount. Under the definitive agreement entered into in connection with the Company's separation from D&B in 1998 (the "Distribution Agreement"), D&B has assumed the defense and will indemnify the Company against any payments to be made by the Company in respect of the IRI Action, including any related legal fees and expenses. As required by the Distribution Agreement, Moody's Corporation, which subsequently separated from D&B, has agreed to be jointly and severally liable with D&B for the indemnity obligation to the Company. Management presently believes that D&B and Moody's have sufficient financial resources and/or borrowing capacity to satisfy all such liabilities and to reimburse the Company for all related costs and expenses. However, no assurances can be provided that all such liabilities, costs and expenses will be covered. Tax Matters Certain tax planning strategies entered into by D&B are currently subject to review by tax authorities. Pursuant to a series of agreements, IMS Health Incorporated ("IMS") and Nielsen Media Research, Inc. ("NMR") (both of which are former subsidiaries of D&B) are each jointly and severally liable to pay 50%, and D&B is liable for the remaining 50% of any payments for taxes and accrued interest arising from this matter and certain other potential tax liabilities after D&B pays the first $137 million of tax liability. As a result of the form of the separation of the Company from D&B, the Company is the corporate successor of, and technically the taxpayer referred to herein as D&B. However, pursuant to the terms of the Distribution Agreement and the Tax Allocation Agreement entered into in connection with the Company's separation from D&B, D&B assumed the defense and agreed to indemnify the Company against any payments to be made by the Company in respect of any tax liability that may be assessed and any related costs and expenses. In 2000, D&B filed an amended tax return for 1989 and 1990, which reflected $561.6 million of tax and interest due and paid the IRS approximately $349.3 million, while IMS paid approximately $212.3 million. The Company understands that these payments were paid under dispute in order to stop additional interest from accruing. As required by the Distribution Agreement, Moody's Corporation has agreed to be jointly and severally liable with D&B for the indemnity obligation to the Company. IMS has filed an arbitration proceeding against NMR claiming that NMR underpaid its proper allocation of the tax liability under the agreements between NMR and IMS. In response to NMR's position that it paid its appropriate allocation of the tax liability, IMS has joined the Company (again, as successor to D&B) as a respondent in the arbitration proceeding so that if NMR should prevail in its interpretation of the allocation computation, then IMS could apply that same interpretation of the allocation computation against the Company under its agreement with the Company. If NMR should prevail in the arbitration against IMS and in turn IMS should prevail against the Company, the Company believes that the additional liability to the Company represented by this alternative interpretation of the allocation computation would be approximately $15 million (an approximate $60 million gross claim offset by approximately $45 million of tax benefit). While the Company believes that its interpretation of the allocation computation is correct, even should NMR prevail against IMS and in turn IMS prevail against the Company in this arbitration proceeding, D&B and Moody's would be obligated to indemnify the Company against any such liability. The fact that D&B and IMS have already paid the IRS a substantial amount of additional taxes with respect to the contested tax planning strategies significantly mitigates the risk to the Company. In addition, management presently believes that D&B, Moody's, IMS and NMR have sufficient financial resources and/or borrowing capacity to satisfy all such liabilities and to reimburse the Company for all related costs and expenses. However, no assurances can be provided that all such liabilities, costs and expenses will be covered. Image One In May 2001, Image One filed a complaint against certain Sprint Corporation affiliates and the Company in the United States District Court for the Middle District of Florida. In the complaint, Image One alleged that it created and licensed original text, graphics, images and other artwork specifically for yellow pages advertising and that the defendants engaged in copyright infringement and false designation of origin. Image One sought actual damages of approximately $95 million and statutory damages in excess of $330 million. This matter was settled and the complaint dismissed in February 2002, and such resolution of the action will not have a material adverse effect on the Company's financial condition or results of operations. Other than the matters described above, the Company is involved in legal proceedings, claims and litigation arising in the ordinary conduct of its business. Although there can be no assurances, management presently believes that the outcome of such legal proceedings will not have a material adverse effect on the Company's results of operations, financial condition or cash flows. 6 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 2001. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on the New York Stock Exchange under the symbol "RHD." The table below indicates the high and low sales price of the Company's common stock for each quarter of the last two years.
Price Per Share --------------- High Low ---- --- 2001 - ---- 1st Quarter $29.00 $22.88 2nd Quarter $32.00 $25.41 3rd Quarter $32.30 $25.50 4th Quarter $30.60 $25.02 2000 - ---- 1st Quarter $18.94 $15.25 2nd Quarter $21.00 $14.88 3rd Quarter $21.94 $18.38 4th Quarter $24.94 $19.38
At March 4, 2002, there were approximately 7,100 holders of record of the Company's common stock. The Company did not pay any cash dividends during the last two years and does not expect to pay dividends for the foreseeable future. The Company's Credit Agreement and the Indenture governing the Notes contain various financial restrictions that may place limitations on the ability of the Company to pay dividends in the future (see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for additional information regarding the Company's debt instruments). 7 ITEM 6. SELECTED FINANCIAL DATA The selected financial data of the Company (except advertising sales data) at December 31, 2001 and for each of the five years then ended are derived from the audited consolidated financial statements of the Company. The Company's audited consolidated financial statements are presented as if the Company were a stand-alone entity for all periods and include allocations through June 30, 1998 of certain D&B assets, liabilities and general and administrative expenses related to the business. The information below also includes operating results of businesses that were disposed during 2000 and 1997 and certain one-time items in 2000. Amounts related to these businesses and one-time items are presented below in footnote 1. The information set forth below should be read in conjunction with the audited consolidated financial statements and related notes in Item 8 and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7.
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------- (in thousands, except per share data) 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS (1) Net revenue ................................ $ 76,739 $ 141,287 $ 181,905 $ 166,249 $ 233,735 Partnership and joint venture income ....... 139,964 147,693 139,181 135,854 130,171 Operating income ........................... 111,472 147,375 129,906 125,235 134,470 Income before extraordinary item (2) ....... 50,256 125,462 55,151 61,268 84,743 Net income ................................. 49,815 124,758 55,151 61,268 84,743 EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEM Basic ...................................... $ 1.66 $ 3.93 $ 1.64 $ 1.79 $ 2.48 Diluted .................................... $ 1.62 $ 3.85 $ 1.61 $ 1.77 $ 2.48 EARNINGS PER SHARE AFTER EXTRAORDINARY ITEM Basic ...................................... $ 1.65 $ 3.91 $ 1.64 $ 1.79 $ 2.48 Diluted .................................... $ 1.61 $ 3.83 $ 1.61 $ 1.77 $ 2.48 SHARES USED IN COMPUTING EARNINGS PER SHARE Basic ...................................... 30,207 31,947 33,676 34,237 34,153 Diluted .................................... 30,976 32,594 34,159 34,522 34,213 DIVIDENDS PER SHARE ........................ -- -- -- $ 0.35 -- BALANCE SHEET (1) Total assets ............................... $ 295,981 $ 365,284 $ 395,406 $ 385,841 $ 377,507 Long-term debt ............................. 283,904 347,526 435,000 464,500 -- Shareholders' (deficit) equity ............. (111,313) (108,510) (192,811) (224,770) 255,807 ADVERTISING SALES (UNAUDITED) (1,3) Publication sales .......................... $ 627,509 $ 861,904 $1,044,150 $ 989,336 $1,082,592 Calendar sales ............................. 607,866 897,670 1,066,728 991,575 1,064,745
(1) Amounts above include the results of the Bell Atlantic, Cincinnati and Get Digital Smart businesses disposed of in 2000 and one-time items from the restructuring of the CenDon relationship. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting Comparability" for a discussion of these items. In addition, the amounts shown for 1997 also include the results of the P-East business. To facilitate comparison of the financial data, the amounts related to these disposed businesses and one-time items are as follows:
2000 1999 1998 1997 ----------------------------------------------------------------- Net revenue.................................. $ 63,994 $106,986 $ 92,319 $175,210 Partnership and joint venture income......... 5,422 -- -- 1,724 Operating income............................. 13,191 7,538 6,531 22,873 Total assets................................. -- 64,193 61,678 65,437 Publication sales (3)........................ 238,131 436,870 405,929 527,549 Calendar sales (3)........................... 277,768 453,971 388,299 492,816
(2) In 2001 and 2000, the Company recognized an extraordinary after-tax loss of $441 and $704, respectively, related to the write-off of deferred financing costs in connection with the prepayment of debt. (3) Advertising sales represent the billing value of advertisements sold for an annual directory by the Company and DonTech. Calendar sales represent the billing value of advertisements sold for an annual directory stated on the same basis as revenue is recognized. Publication sales represent sales for directories that published in the current period regardless of when the advertising for that directory was sold. These sales are compared against sales for the same directories published in the prior year period. If events occur during the current year that affects the comparability of publication sales to the prior year, such as changes in directory publication dates or other contractual changes, then prior year publication sales are adjusted to conform to the current year presentation and maintain comparability. 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Item should be read in conjunction with the audited, consolidated financial statements and notes thereto that are included in Item 8. FORWARD-LOOKING INFORMATION Certain statements contained in this Form 10-K regarding R.H. Donnelley's future operating results, performance, business plans or prospects and any other statements not constituting historical fact are "forward-looking statements" subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Where possible, the words "believe," "expect," "anticipate," "should," "will," "would," "planned," "estimated," "potential," "goal," "outlook," and similar expressions, as they relate to R.H. Donnelley or its management, have been used to identify such forward-looking statements. Regardless of any identifying phrases, these statements and all other forward-looking statements reflect only R.H. Donnelley's current beliefs and assumptions with respect to future business plans, prospects, decisions and results, and are based on information currently available to R.H. Donnelley. Accordingly, the statements are subject to significant risks, uncertainties and contingencies which could cause R.H. Donnelley's actual operating results, performance, business plans, prospects or decisions to differ from those expressed in, or implied by, these statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update any forward-looking statements. Such risks, uncertainties and contingencies include, without limitation, the following: (1) DEPENDENCE ON A LIMITED NUMBER OF RELATIONSHIPS Our business consists primarily of two relationships; a perpetual partnership with SBC Communications Inc. ("SBC") called DonTech; and two sales agency arrangements with Sprint Corporation ("Sprint"). No assurance can be given that we will be able to renew our existing Sprint sales agency or various pre-press publishing agreements as they expire or that we will be able to secure additional business to replace any such expired contracts. (2) DEPENDENCE ON OUR BUSINESS PARTNERS The Company is the exclusive sales agent for Sprint and DonTech is the exclusive sales agent for SBC in the respective markets. As the exclusive sales agent, the Company and DonTech are responsible for all sales management, sales force compensation, recruiting and training and other sales related matters. As the publisher of the respective directories, Sprint and SBC are responsible for, and consequently control, all other matters, including without limitation, product development, pricing, scheduling, marketing, distribution, billing, collections, credit and customer service. While we believe that the economic interests of the Company and DonTech are generally aligned with those of Sprint and SBC with respect to their yellow pages directory operations, Sprint or SBC could implement policies and decisions that could have an adverse impact on their overall yellow pages directory operations or more particularly on our business relationships with them. Such policies and decisions, in which the Company or DonTech would likely have no participation or influence, could have a material adverse effect on our results of operations or financial condition. While we and DonTech are afforded certain protections under the respective agreements which we believe could mitigate to a significant degree the adverse effects of such policy changes and/or decisions on the Company, no assurances can be given that such policy changes and/or decisions would not have a material adverse effect on our results of operations or financial condition. Lastly, we maintain large receivable balances from Sprint and SBC, and any liquidity difficulties that they may experience could materially impact the Company's results of operations, financial condition and liquidity. (3) UNCERTAINTY REGARDING CHANGES IN THE INDUSTRY Our ability to offer our sales agency, pre-press publishing and other services to SBC and Sprint in other markets and to other publishers in the industry and/or our ability to diversify our business portfolio may be impacted by uncertainties caused by the consolidation (both past and future) of the telecommunications industry, as well as by recent consolidation activity in the independent yellow pages publishing industry. Most publishers provide all sales and publishing functions internally; consequently there can be no assurance that the Company will be able to obtain additional outsourcing business from any of these publishers. In addition, the effects of the Telecommunications Act of 1996 are still developing and the ultimate impact of those changes is still uncertain. Other changes in the yellow pages industry and markets could also affect our results, plans and prospects. Also, the introduction of competing products or technologies (including electronic delivery of directory information) 9 by other companies and/or pricing pressures from competitors and/or customers could adversely affect our results of operations and financial condition. (4) GENERAL ECONOMIC FACTORS Our business results could be adversely affected by any continuation or further deterioration of the economic slowdown presently being experienced in the United States, especially with respect to the markets in which we operate. In addition, any residual economic effects of, and uncertainties regarding (i) the terrorist attacks that occurred on September 11, 2001, (ii) the general possibility or express threat of similar terrorist or other related disruptive events, or (iii) the future occurrence of similar terrorist or other related disruptive events, especially with respect to the major markets in which we operate that depend so heavily upon travel and tourism, could also adversely affect our business. (5) USE OF CASH FLOW The Company intends to use its cash flow for some or all of the following: repay its debt, repurchase its outstanding Common Stock and/or pursue growth initiatives within its line of business and core competencies, whether through acquisition, joint ventures, outsourcing opportunities or otherwise. Any share repurchases would be subject to market conditions and compliance with legal restrictions as well as restrictions under the Company's debt covenants. Growth initiatives, if pursued, would be subject to implementation, integration and other related risks and no assurance can be given that any proposed transaction would be accretive to earnings. THE COMPANY R.H. Donnelley Corporation is a leading independent marketer of yellow pages advertising services tailored for small and medium-sized businesses. Unless otherwise indicated, the terms "Company," "we," "us" and "our" refer to R.H. Donnelley Corporation and its direct and indirect wholly owned subsidiaries. Prior to July 1, 1998, the Company operated as part of The Dun & Bradstreet Corporation ("D&B"). Unless otherwise specified, all tabular amounts are presented in millions of dollars. Our business is organized into two reportable operating segments as of January 1, 2001: the DonTech Partnership ("DonTech") and Directory Advertising Services ("DAS"). DONTECH DonTech is a 50/50 perpetual partnership with an operating unit of SBC, which acts as the exclusive sales agent for yellow pages directories published by SBC in Illinois and northwest Indiana. DonTech provides advertising sales services and receives a commission from SBC. Our income from DonTech is comprised of two components: our 50% interest in the net profits of DonTech and revenue participation income received directly from SBC. Revenue participation income is based on a percentage of DonTech advertising sales and comprises over 80% of the total income from DonTech. Total income from DonTech accounted for 79%, 72% and 83% of operating income before General & Corporate costs and other unallocated expenses for the years ended December 31, 2001, 2000 and 1999, respectively. Certain general and administrative expenses incurred to support this business are not allocated to the DonTech segment. As income from DonTech accounts for a significant portion of our operating income, a material decline in the advertising sales of DonTech would likely have a material adverse effect on our results of operations and financial condition. We also provide certain pre-press publishing services for DonTech directories, which is included in our DAS segment as described below. Although DonTech provides advertising sales of yellow pages and other directory products similar to DAS, the partnership is considered a separate operating segment since, among other things, the partnership has its own Board of Directors and the employees of DonTech, including its officers and managers, are not our employees. DIRECTORY ADVERTISING SERVICES Within our DAS segment, we sell yellow pages advertising for affiliated entities of Sprint and perform pre-press publishing services for yellow pages directories. We are the exclusive sales agent in the greater Orlando, Florida market ("Central Florida") for an operating unit of Sprint and the exclusive sales agent in Nevada, Florida, Virginia and North Carolina for CenDon LLC ("CenDon"), a joint venture with Centel Directory Company ("Centel"), a subsidiary of Sprint. Other Sprint affiliates sell yellow pages advertising in other markets in these states. We provide pre-press publishing services for the yellow pages directories of DonTech and Sprint for which we sell advertising, as well as for an unaffiliated third party publisher under separately negotiated contracts. All information technology costs are also included in DAS. In addition, the DAS segment for periods prior to 2001 includes the operating results of the Cincinnati and Bell Atlantic businesses and our share of the losses in ChinaBig.com Limited ("ChinaBig") through the dates of transactions that caused changes to the reporting of each respective business (see "Factors Affecting Comparability" below). 10 We receive sales commissions on all advertising we sell for Sprint and CenDon and a priority distribution on our membership interest in CenDon ("priority distribution"). The amount of priority distribution earned is based on a percentage of CenDon advertising sales. Income from Sprint is also highly dependent on the level of advertising sales and a material decline in the level of advertising sales could have a material adverse effect on our results of operations or financial condition. At the end of 2002, our pre-press publishing contract with an unaffiliated third party publisher will expire and we have been notified that this contract will not be renewed. Revenue from this contract was approximately $8 million per year; however, due to certain restructuring actions described below under "Factors Affecting Comparability," we do not anticipate that the expiration of this contract will have a material adverse effect on our results of operations or financial condition. Our current pre-press publishing service agreements with SBC and Sprint extend through 2003. We recently re-negotiated our pre-press publishing service agreement with SBC to extend its term through 2008 on substantially the same terms. While we have not yet sought to negotiate an extension of the Sprint pre-press publishing agreement as we were awaiting the outcome of the SBC extension negotiations, we intend to pursue such negotiations with Sprint promptly. However, no assurances can be given that we will be successful in extending that agreement or as to the terms and conditions of any such extension. Revenue from our pre-press publishing services operation accounted for approximately 43%, 23% and 17% of total consolidated revenue in 2001, 2000 and 1999, respectively. CRITICAL ACCOUNTING POLICIES An understanding of our accounting policies is necessary for a complete analysis of our results of operations and financial condition. Those accounting policies that have or could have a material effect on our results of operations or financial condition are as follows: Revenue Recognition. We earn revenue in the form of commissions from the sale of advertising and fees from our pre-press publishing services. As a sales agent, sales commission revenue is recognized at the time an advertising contract is executed with a customer. This includes sales commission revenue realized from Sprint, including CenDon for directories that published after June 30, 2000, and Bell Atlantic through June 30, 2000. When we were the publisher, or part of a publishing partnership, revenue was recognized when a directory was published. This included revenue from the CenDon Partnership before June 30, 2000 and from the publication of our Cincinnati proprietary directory prior to its sale. Sales commission revenue is recorded net of potential claims and allowances, which are estimated based on historical experience. Revenue from pre-press publishing operations is recognized as services are performed. Partnership and Joint Venture Income. Partnership and joint venture income includes our 50% share of the net profits of DonTech, revenue participation income and the priority distribution. Revenue participation income and the priority distribution are earned and recognized when a sales contract is executed with a customer. Prior to the restructuring of the CenDon relationship, which was effective July 1, 2000, we were a general partner in the CenDon Partnership, a 50/50 partnership with Centel, formed to publish directories in Florida, Nevada, Virginia and North Carolina. We recognized our 50% share of the net profits of the partnership as partnership and joint venture income. Partnership and joint venture income also included our share of the losses of ChinaBig, through June 15, 2000, at which time, we became a passive investor and were no longer required to recognize our share of the losses. Partnership and Joint Venture Investments. The carrying value of the DonTech investment, the revenue participation receivable and the priority distribution receivable are reflected as partnership and joint venture investments and the investment in ChinaBig is reflected as other non-current assets on the consolidated balance sheets. The carrying value of partnership and joint venture investments is evaluated for impairment when events or changes in circumstances indicate that the carrying value of the investment may be impaired. If an impairment is deemed to have occurred, and such impairment is determined to be permanent, the carrying value of the investment is written-down to its estimated fair value. Such estimate of fair value would be determined based on independent third party valuations or by discounting estimated future cash flows. Based on an independent third party valuation, we recorded an impairment charge of $11.4 million in the fourth quarter of 2001 related to our investment in ChinaBig (see "Factors Affecting Comparability" below). Concentration of Credit Risk. We maintain significant receivable balances with SBC and Sprint for revenue participation, priority distribution and sales commissions. The ultimate remittance of these receivables is subject to adjustment, up to specified maximums under contractual provisions, based on collections by these companies from the individual advertisers. The Company does not 11 currently foresee a material credit risk associated with these receivables, although there can be no assurance that full payment will be received on a timely basis. See Note 1 to the Consolidated Financial Statements in Item 8 for additional information on our accounting policies. FACTORS AFFECTING COMPARABILITY During 2000, we entered into the following transactions that resulted in a pre-tax net gain of $86.5 million ($53.5 million after-tax) and a one-time operating income benefit of $15.8 million: - - We executed an agreement with affiliates of Bell Atlantic Corporation (now known as Verizon Communications, "Bell Atlantic") for the early termination of our sales agency agreements, and we sold our Cincinnati proprietary operations. - - We restructured and extended our CenDon sales agency relationship through 2010. The original relationship was set to expire in 2004. - - In connection with the investment by an unaffiliated third party in ChinaBig, we became a passive investor, and as such, no longer recognize our share of the losses of ChinaBig. - - We ceased operations of our Get Digital Smart ("GDS") business. DISPOSITION OF BUSINESSES AND RELATED COST CUTTING ACTIONS On April 27, 2000, we sold our Cincinnati proprietary directory business to Yellow Book USA, Inc. for $8 million. On June 30, 2000, we entered into an agreement ("Agreement") with Bell Atlantic for the early termination of the directory services agreements, as amended (the "Agency Agreements"), between the Company and Bell Atlantic. Pursuant to the Agency Agreements, the Company had served as exclusive sales agent for Bell Atlantic directories covering substantially all of New York State. The Agency Agreements had been scheduled to expire in 2003 and 2005. The transactions contemplated by the Agreement were also consummated on June 30, 2000. Under the terms of the Agreement, we received a termination payment of $114 million. We also received a payment of approximately $57 million for commissions on sales which occurred prior to the closing, but which were not yet payable under the terms of the Agency Agreements, and for sales in directories that published in the pre-closing period. In December 2000, we ceased operations of our Get Digital Smart business. GDS was formally launched in February 2000 in the Miami/Ft. Lauderdale market to test the economic viability of providing a variety of products and services designed to deliver a comprehensive package of Internet marketing and e-commerce capabilities to small and medium-sized local businesses. While the test demonstrated that there was a demand for the products and services we offered, the business was not broadly capable of providing an adequate return on investment within our originally planned time horizon. We recognized one-time costs of $2.9 million related to the shutdown of the business. We also implemented cost-cutting measures in 2000, including headcount reductions, at our pre-press publishing facility in Raleigh and corporate headquarters consistent with our new operating structure. CENDON PARTNERSHIP RESTRUCTURING AND EXTENSION Effective for directories that published after June 30, 2000, we entered into a series of agreements with Centel that effectively restructured the CenDon Partnership as a limited liability company and extended the sales agency arrangement through 2010. Both the partnership agreement and sales agency agreement were set to expire in 2004. The new arrangement focuses our responsibilities on sales and certain pre-press publishing services and establishes us as the exclusive sales agent for Centel's directory products in the markets previously covered by the partnership agreement. Centel assumed responsibility for the printing and delivery of directories, which were previously performed by the CenDon Partnership, and related support services such as marketing, customer service and collections, which were previously performed by the Company. Under the new arrangement, Centel manages CenDon. We receive sales commissions on all advertising sold, and in consideration for transferring control over the publishing functions to Centel, we also receive a priority distribution. The priority distribution allows us to maintain the same level of profitability that we would have earned under the CenDon Partnership through the original expiration date in 2004. 12 Under the new arrangement, revenue and related costs are recognized at the time of sale. Under the previous CenDon Partnership, where we shared responsibility for the publishing and delivery functions, revenue and related costs were recognized at the time of directory publication. Accordingly, upon the restructuring of the CenDon arrangement in 2000, a one-time operating income benefit of $15.8 million was recorded. This benefit related to advertising sales made and costs incurred prior to the effective date of the agreement for directories that published subsequent to the effective date of the agreement. CHINABIG INVESTMENT AND IMPAIRMENT CHARGE We currently have an 18% interest in ChinaBig, which publishes yellow pages directories and offers Internet directory services in the People's Republic of China. In connection with an equity investment by an unaffiliated third party and in order to facilitate the raising of additional capital and provide greater flexibility, on June 15, 2000, ChinaBig and each existing investor (including the Company) restructured the existing joint venture agreement of ChinaBig to, among other things, significantly reduce our ability to influence the operations of ChinaBig. As a result of the restructured agreement, we are a passive investor in ChinaBig and account for this investment under the cost method. Prior to June 15, 2000, we accounted for this investment under the equity method. Therefore, subsequent to June 15, 2000, our share of the losses of ChinaBig is no longer recognized in the consolidated statement of operations. In November 2001, management received an independent third party valuation of ChinaBig's current business plan, capital needs and outlook for profitability and cash flow. The valuation was conducted in connection with a proposed equity financing. The results of the valuation provided a range of possible estimated fair values for ChinaBig, all of which implied that the value of our 18% interest was substantially lower than our carrying value of $13.4 million. Management determined that the carrying value of this investment had been permanently impaired, and recorded an impairment charge of $11.4 million in the fourth quarter of 2001 to write this investment down to $2.0 million, which management believes is its best estimate of the current fair value of the investment. Prior valuations of the ChinaBig business had assumed a more rapid development of Internet advertising in China than is currently forecast. RESTRUCTURING AND SPECIAL CHARGE The operating results for 2001 include a charge of $18.6 million in connection with executive management employment transition arrangements and the expiration of a pre-press publishing contract, which will result in the elimination of approximately 100 positions during 2002. The charge includes $9.9 million associated with the executive management transition arrangements, including severance, accrued benefits under executive pension plans and other related costs, $3.3 million for other employee severance and related costs, $4.4 million for idle leased space in the Raleigh publishing facility and planned relocation of the corporate headquarters due to excess capacity and $1.0 million for professional fees and the write-off of assets no longer considered useable. 2000 AND 1999 AS ADJUSTED RESULTS Due to the above mentioned transactions during 2000, we do not believe that comparisons of 2001 results to 2000 reported results and 2000 reported results to 1999 reported results would be meaningful. Accordingly, the information below for 2000 and 1999 is presented on both a reported, audited basis and an as adjusted, unaudited basis. Because it is no longer relevant or material, other than disclosing the reported amounts, the "Results of Operations" does not discuss the results of our disposed operations (Bell Atlantic, Cincinnati and GDS) or the one-time operating income benefit from the restructuring of the CenDon relationship. For period over period comparisons of the Bell Atlantic and Cincinnati operations during the periods prior to disposition, see Management's Discussion and Analysis of Financial Condition and Results of Operations in our Quarterly Reports on Form 10-Q for the first and second quarters of 2000. GDS did not begin full operations until 2000, therefore period over period comparisons are not possible. The as adjusted amounts assume the 2000 transactions described above had occurred on January 1, 1999 and are derived by excluding from the reported amounts the advertising sales, revenue and expenses of the Bell Atlantic, Cincinnati and GDS operations, as well as the one-time items from the restructuring of the CenDon relationship. We believe that the as adjusted, unaudited information is more indicative of our underlying financial and operational performance during 2000 and may better reflect the results of our continuing businesses. However, the as adjusted, unaudited information does not purport to represent what our actual results would have been had the transactions occurred as of the assumed dates or to project the results of operations or financial condition for any future period. 13 RESULTS OF OPERATIONS THREE YEARS ENDED DECEMBER 31, 2001 ADVERTISING SALES As a sales agent, we earn a commission on the value of advertising sold, and therefore do not report on the consolidated statements of operations the gross value of advertising sold. We nevertheless disclose and discuss both publication and calendar advertising sales as we believe they are a good indicator of our operational performance. Our sales commission revenue, revenue participation income and priority distribution income are computed based upon calendar advertising sales. Further discussion of publication and calendar sales is provided below. Publication Sales Publication sales represent the value of advertising sales in directories that published during the current period regardless of when the advertising for that directory was sold. These sales give an indication of underlying sales growth in the directories for which we and DonTech sell advertising, but do not have a direct correlation to our reported revenue or profitability in the indicated period as most, if not all of these sales were consummated and recognized in prior periods (see "Calendar Sales" below). These sales are compared against sales for the same directories published in the prior year period. If events occur during the current year that effect the comparability of publication sales to the prior year, such as changes in directory publication dates or other contractual changes, then prior year publication sales are adjusted to conform to the current year presentation and maintain comparability. Accordingly, to facilitate comparability, 2000 and 1999 publication sales for DonTech have been decreased $0.3 million and $1.0 million, respectively and DAS sales for 2000 have been increased $1.7 million to account for changes in directory publication dates and contractual provisions. Changes in directory publication dates do not impact our reported revenue or profitability, since as a sales agent, we and DonTech recognize revenue in the period the sale is completed and not at the time of directory publication. Reported and as adjusted publication advertising sales by segment are as follows:
2001 vs. 2000 2000 vs. 1999 -------------------------------------------------- 2001 2000 1999 $ Change % Change $ Change % Change --------------------------------------------------------------------------------------------- REPORTED DonTech $434.0 $ 430.5 $ 426.6 $ 3.5 0.8% $ 3.9 0.9% DAS 193.5 431.4 617.5 (237.9) (55.1) (186.1) (30.1) --------------------------------------------------------------------------------------------- Total $627.5 $ 861.9 $1,044.1 $(234.4) (27.2)% $(182.2) (17.5)% ============================================================================================= AS ADJUSTED DonTech $434.0 $ 430.5 $ 426.6 $ 3.5 0.8% $ 3.9 0.9% DAS (a) 193.5 193.3 180.7 0.2 0.1 12.6 7.0 --------------------------------------------------------------------------------------------- Total $627.5 $ 623.8 $ 607.3 $ 3.7 0.6% $ 16.5 2.7% =============================================================================================
(a) Excludes Bell Atlantic sales of $238.1 million in 2000 and Bell Atlantic and Cincinnati sales of $426.8 million and $10.0 million, respectively, in 1999. Reported publication sales were $627.5 million, $861.9 million and $1,044.1 million for 2001, 2000 and 1999, respectively. As adjusted publication sales were $627.5 million, $623.8 million and $607.3 million for 2001, 2000 and 1999, respectively. Publication sales growth at DonTech has been relatively flat for the last two years. Sales for 2001 at DonTech were adversely affected by the weakening economy, uncertainty among advertisers following the events of September 11, 2001 and increased competition. Sales for 2000 at DonTech were adversely affected by certain systems related issues in the billing and collections function at Ameritech Corporation (now a wholly owned subsidiary of SBC, "Ameritech"), prior to their conversion to SBC's systems. As adjusted publication sales for DAS in 2001 were flat compared to 2000 due to the weakening economy, tighter credit standards in light of the weakening economy and increased uncertainty among advertisers, especially in the tourist based market of Orlando. DAS sales showed strong growth in 2000 compared to 1999 driven primarily by growth in the Las Vegas and Central Florida markets. Two of our largest sales campaigns, the January Las Vegas and Chicago Consumer, were completed by year-end and will publish during the first quarter of 2002. The results of these sales campaigns were significantly below prior year campaigns, and as a result, publication sales for the first quarter of 2002 are expected to be approximately 10% lower than publication sales in the first quarter of 2001. As defined, publication sales are recorded in the period that the directory is published, whereas calendar sales are recorded in the period that a sales contract is signed. Since a calendar sale precedes a publication sale in terms of reporting, 14 lower calendar sales in one quarter will generally lead to lower publication sales in subsequent periods. However, since our revenue and profitability are driven by calendar sales, the shortfall in the January Las Vegas and Chicago Consumer directories adversely affected 2001 revenue and profitability (as described below) and will not have an impact on revenue and profitability in 2002. Calendar Sales We and DonTech earn commission revenue based on a contractual percentage of the billing value of advertisements sold for an annual directory. Calendar sales are recorded when a sales contract is executed with a customer. As the Company and DonTech operate solely as sales agents, calendar sales are stated on the same basis as revenue is recognized. Accordingly, our reported revenue and profitability are directly correlated to calendar sales. The selling of advertising for a specific directory is managed as a sales campaign, and the typical sales campaign begins approximately six to eight months prior to the scheduled publication date. As a result, the amount of calendar sales can fluctuate from the prior year due to various factors, including changes in the actual commencement date of the sales campaign and the timing of sales during the sales campaign. Such fluctuations, if material, would likely have a material effect on our results of operations or financial condition for that period. Reported and as adjusted calendar sales by segment are as follows:
2001 vs. 2000 2000 vs. 1999 -------------------------------------------------- 2001 2000 1999 $ Change % Change $ Change % Change ---------------------------------------------------------------------------------------- REPORTED DonTech $ 422.6 $ 428.2 $ 432.3 $ (5.6) (1.3)% $ (4.1) (0.9)% DAS 185.3 469.5 634.4 (284.2) (60.5) (164.9) (26.0) ---------------------------------------------------------------------------------------- Total $ 607.9 $ 897.7 $1,066.7 $(289.8) (32.3)% $(169.0) (15.8)% ======================================================================================== AS ADJUSTED DonTech $ 422.6 $ 428.2 $ 432.3 $ (5.6) (1.3)% $ (4.1) (0.9)% DAS (a) 185.3 191.7 180.4 (6.4) (3.3) 11.3 6.3 ---------------------------------------------------------------------------------------- Total $ 607.9 $ 619.9 $ 612.7 $ (12.0) (1.9)% $ 7.2 1.2% ========================================================================================
(a) Excludes Bell Atlantic sales of $182.0 million and one-time sales benefit from the CenDon restructuring of $95.8 million in 2000 and Bell Atlantic sales of $444.0 million and Cincinnati sales of $10.0 million in 1999. Reported calendar sales were $607.9 million, $897.7 million and $1,066.7 million for 2001, 2000 and 1999, respectively. As adjusted calendar sales were $607.9 million, $619.9 million and $612.7 million for 2001, 2000 and 1999, respectively. Sales at DonTech for 2001 declined 1.3% from 2000 due to weakening economic conditions, increased uncertainty among many small and medium sized businesses following the events of September 11, 2001 and increased competition in the Chicago market. The sales campaign for the 2002 Chicago Consumer directory, DonTech's largest directory in terms of advertising sales, was in its peak selling period immediately after September 11th and was severely impacted by the uncertainty caused by the terrorist attacks. The 2002 Chicago Consumer campaign was completed in December 2001, and results were significantly below the prior year's results. This directory published in February 2002. The decline in 2000 sales compared to 1999 was due to certain systems related issues in the billing and collection functions at Ameritech that resulted in a loss of customers who were significantly delinquent and withdrawn from directories, as well as the timing of certain sales campaigns in 2000 compared to 1999. The systems related issues were essentially corrected by the third quarter of 2001, partially through conversion to SBC's systems. As adjusted sales for DAS in 2001 declined 3.3% from 2000 due to the weakening economy, tighter credit standards in light of the weakening economy and increased uncertainty among advertisers following September 11, 2001. The effects of the weakening economy and increased uncertainty were exacerbated in the tourist based markets of Las Vegas and Orlando. The sales campaign for the January 2002 Las Vegas directory, one of Sprint's largest directories in terms of advertising sales, was also in its peak selling period immediately after September 11th and was severely impacted by the uncertainty caused by the terrorist attacks. The January 2002 Las Vegas campaign was completed in December 2001 and the results were significantly below the prior year's results. In 2000, as adjusted DAS sales increased 6.3% over 1999 as we saw good growth in sales in the Las Vegas and Central Florida markets. 15 NET REVENUE Revenue is derived principally from two sources - sales commissions earned on the value of advertising sold for Sprint and fees for pre-press publishing services. Revenue from Sprint accounted for 57%, 46% and 23% of consolidated revenue for the years ended December 31, 2001, 2000 and 1999, respectively. Reported and as adjusted net revenue by segment is as follows:
2001 vs. 2000 2000 vs. 1999 ------------------------------------------------------ 2001 2000 1999 $ Change % Change $ Change % Change ----------------------------------------------------------------------------------------------- REPORTED DAS $ 76.7 $141.1 $181.9 $ (64.4) (45.6)% $(40.8) (22.4)% GDS -- 0.2 -- (0.2) n/m 0.2 n/m ----------------------------------------------------------------------------------------------- Total $ 76.7 $141.3 $181.9 $ (64.6) (45.7)% $(40.6) (22.3)% =============================================================================================== AS ADJUSTED DAS (a) $ 76.7 $ 77.3 $ 74.9 $ (0.6) (0.8)% $ 2.4 3.2% GDS (b) -- -- -- -- -- -- -- ----------------------------------------------------------------------------------------------- Total $ 76.7 $ 77.3 $ 74.9 $ (0.6) (0.8)% $ 2.4 3.2% ===============================================================================================
(a) Excludes Bell Atlantic revenue of $42.8 million and one-time revenue benefit of $21.0 million from the CenDon restructuring in 2000 and revenue from Bell Atlantic and Cincinnati of $97.4 million and $9.6 million, respectively, in 1999. There was no revenue recorded for Cincinnati in 2000 as this directory was sold prior to its scheduled publication date. (b) Excludes revenue for GDS in 2000. Reported revenue was $76.7 million, $141.3 million and $181.9 million for 2001, 2000 and 1999, respectively. As adjusted revenue was $76.7 million, $77.3 million and $74.9 million for 2001, 2000 and 1999, respectively. Revenue for 2001 was slightly lower than as adjusted revenue for 2000. Lower DAS calendar sales resulted in a decrease of $3.4 million and revenue from our cable television yellow pages product was $1.0 million lower as we discontinued offering this product at the beginning of 2001. These decreases were partially offset by lower claims and allowances of $3.1 million, primarily due to the reversal in 2001 of $1.4 million of sales claims and allowances that were recognized in 2000, but based on actual results, were no longer needed, and higher revenue from our pre-press publishing operations of $0.7 million, primarily due to a full year of services performed for the new owner and publisher of the Cincinnati directory, which we sold in April 2000. As adjusted revenue for 2000 was $2.4 million higher than as adjusted revenue for 1999 primarily due to the increase in Sprint calendar sales. Pre-press publishing revenue increased $0.9 million in 2000 compared to 1999, but was offset by a decrease in revenue from our cable television yellow pages product of $0.7 million. EXPENSES Reported and as adjusted expenses were as follows:
2001 vs. 2000 2000 vs. 1999 ------------------------------------------------ 2001 2000 1999 $ Change % Change $ Change % Change --------------------------------------------------------------------------------- REPORTED Operating expenses $ 44.8 $ 96.7 $138.4 $(51.9) (53.7)% $(41.7) (30.1)% G&A expenses 16.6 25.2 29.2 (8.6) (34.1) (4.0) (13.7) Restructuring and special charge 18.6 -- -- 18.6 n/m -- -- Investment impairment charge 11.4 -- -- 11.4 n/m -- -- D&A expense 10.8 15.4 18.3 (4.6) (29.9) (2.9) (15.8) Provision for bad debts 3.0 4.3 5.3 (1.3) (30.2) (1.0) (18.9) --------------------------------------------------------------------------------- Total $105.2 $141.6 $191.2 $(36.4) (25.7)% $(49.6) (25.9)% =================================================================================
16
2001 vs. 2000 2000 vs. 1999 ------------------------------------------------ 2001 2000 1999 $ Change % Change $ Change % Change --------------------------------------------------------------------------------- AS ADJUSTED Operating expenses (a) $ 44.8 $ 47.2 $ 53.0 $ (2.4) (5.1)% $ (5.8) (10.9)% G&A expenses (b) 16.6 22.5 22.5 (5.9) (26.2) -- -- Restructuring and special charge 18.6 -- -- 18.6 n/m -- -- Investment impairment charge 11.4 -- -- 11.4 n/m -- -- D&A expense (c) 10.8 12.7 12.8 (1.9) (15.0) (0.1) (0.8) Provision for bad debts (d) 3.0 3.1 3.3 (0.1) (3.2) (0.2) (6.1) --------------------------------------------------------------------------------- Total $105.2 $ 85.5 $ 91.6 $ 19.7 23.0% $ (6.1) (6.7)% =================================================================================
(a) Excludes operating expenses for Bell Atlantic of $30.4 million, Cincinnati of $0.7 million, GDS of $9.0 million and one-time expenses in connection with the CenDon restructuring of $9.4 million in 2000 and operating expenses for Bell Atlantic of $75.4 million and Cincinnati of $10.0 million in 1999. (b) Excludes general and administrative expenses for Bell Atlantic of $2.4 million and Cincinnati of $0.3 million in 2000 and general and administrative expenses for Bell Atlantic of $4.0 million, Cincinnati of $1.4 million and GDS start-up expenses of $1.3 million in 1999. (c) Excludes depreciation and amortization expense of $2.6 million for Bell Atlantic and $0.1 million for Cincinnati in 2000 and depreciation and amortization expense of $5.3 million for Bell Atlantic and $0.2 million for Cincinnati in 1999. (d) Excludes one-time provision in connection with the CenDon restructuring of $1.2 million in 2000 and provision for Cincinnati of $1.9 million and Bell Atlantic of $0.1 million in 1999. Reported operating expenses were $44.8 million, $96.7 million and $138.4 million for 2001, 2000 and 1999, respectively. As adjusted operating expenses were $44.8 million, $47.2 million and $53.0 million for 2001, 2000 and 1999, respectively. The decrease in 2001 operating expenses compared to 2000 is due to lower sales compensation related costs proportionate to the decrease in sales, the full year effect of cost savings initiatives implemented during 2000 and the absence of sales and production costs associated with our cable television yellow pages product. The decrease in 2000 operating expenses compared to 1999 was primarily due to reduced costs in our pre-press publishing operations and information technology function due to improvements in operational efficiency and lower salaries and benefit costs as a result of headcount reductions. Reported general and administrative expenses were $16.6 million, $25.2 million and $29.2 million for 2001, 2000 and 1999, respectively. As adjusted general and administrative expenses were $16.6 million, $22.5 million and $22.5 million for 2001, 2000 and 1999, respectively. The decrease in costs in 2001 compared to 2000 was primarily due to a full year effect of the cost savings initiatives implemented during 2000. Due to the reduction in headcount, we realized savings from lower salary and benefit costs, lower rental costs due to the consolidation of staff and the elimination of corporate planning and international development efforts. General and administrative costs in 2000 were consistent with 1999 as cost cutting actions and the strategic initiatives implemented in 2000 were offset by investment banking costs and legal fees incurred in connection with the process to explore the possible sale of the Company. See "Factors Affecting Comparability - Restructuring and Special Charge and ChinaBig Investment and Impairment Charge" for a discussion of the charges reflected in the above table. Reported depreciation and amortization expense was $10.8 million, $15.4 million and $18.3 million in 2001, 2000 and 1999, respectively. As adjusted depreciation and amortization expense was $10.8 million, $12.7 million and $12.8 million in 2001, 2000 and 1999, respectively. The decrease in 2001 depreciation expense compared to 2000 was due to software development costs in our Raleigh pre-press publishing operation being fully amortized during 2000, the write-off of assets in 2000 and lower capital spending during 2001. Reported provision for bad debts was $3.0 million, $4.3 million and $5.3 million in 2001, 2000 and 1999, respectively. On an as adjusted basis, provision for bad debts was relatively consistent at $3.0 million, $3.1 million and $3.3 million in 2001, 2000 and 1999, respectively. PARTNERSHIP AND JOINT VENTURE INCOME Partnership and joint venture income ("partnership income") was $140.0 million, $147.7 million and $139.2 million for 2001, 2000 and 1999, respectively. Partnership income from DonTech was $122.4 million in 2001, $124.0 million in 2000 and $123.5 million in 1999. DonTech partnership income has been relatively flat over the last three years. The weakening economy, 17 uncertainty among advertisers and increased competition that adversely impacted calendar sales also negatively affected partnership income for 2001. Also, partnership income for 2000 was adversely affected by certain systems related issues in the billing and collections function at Ameritech. Partnership income from CenDon was $17.6 million in 2001, $24.8 million in 2000 and $16.9 million in 1999. Partnership income from CenDon for 2000 includes a one-time benefit of $5.4 million from the restructuring of the CenDon relationship. The decrease in 2001 CenDon income compared to 2000 is primarily due to the one-time benefit in 2000 and the lower sales in the CenDon markets in 2001. The increase in CenDon income for 2000 compared to 1999 was due to the one-time benefit and growth in sales in the CenDon markets, especially Las Vegas. As previously mentioned, effective June 15, 2000, we became a passive investor in ChinaBig and no longer recognize our share of its losses. Partnership income includes our share of ChinaBig losses of $1.1 million in 2000 (through June 15) and $1.2 million in 1999. OPERATING INCOME Operating income from DonTech includes our 50% share of the net profits of DonTech and revenue participation income from SBC. Operating income from DAS includes the results of, and those costs directly incurred by, each constituent business unit, less an allocation of certain shared expenses based on estimated business usage. General & Corporate represents overhead and administrative costs that are not allocated to the DAS business units. Reported and as adjusted operating income was as follows:
2001 vs. 2000 2000 vs. 1999 ----------------------------------------------- 2001 2000 1999 $ Change % Change $ Change % Change ---------------------------------------------------------------------------------- REPORTED DonTech $122.4 $124.0 $123.5 $ (1.6) (1.3)% $ 0.5 0.4% DAS 32.9 48.1 24.8 (15.2) (31.6) 23.3 94.0 General & Corporate (13.8) (15.8) (17.1) 2.0 12.7 1.3 7.6 GDS -- (8.9) (1.3) 8.9 n/m (7.6) n/m ---------------------------------------------------------------------------------- Segment Operating Income 141.5 147.4 129.9 (5.9) (4.0) 17.5 13.5 Restructuring and special charge (18.6) -- -- (18.6) n/m -- -- Investment impairment charge (11.4) -- -- (11.4) n/m -- -- ---------------------------------------------------------------------------------- Total $111.5 $147.4 $129.9 $(35.9) (24.4)% $ 17.5 13.5% ================================================================================== AS ADJUSTED DonTech $122.4 $124.0 $123.5 $ (1.6) (1.3)% $ 0.5 0.4% DAS (a) 32.9 26.0 16.0 6.9 26.5 10.0 62.5 General & Corporate (13.8) (15.8) (17.1) 2.0 12.7 1.3 7.6 GDS (b) -- -- -- -- -- -- -- ---------------------------------------------------------------------------------- Segment Operating Income 141.5 134.2 122.4 7.3 5.4 11.8 9.6 Restructuring and special charge (18.6) -- -- (18.6) n/m -- -- Investment impairment charge (11.4) -- -- (11.4) n/m -- -- ---------------------------------------------------------------------------------- Total $111.5 $134.2 $122.4 $(22.7) (16.9)% $ 11.8 9.6% ==================================================================================
(a) Excludes one-time operating income benefit of $15.8 million from the CenDon restructuring, operating income for Bell Atlantic of $7.3 million and operating loss for Cincinnati of $1.0 million in 2000 and operating income for Bell Atlantic of $12.7 million and operating loss for Cincinnati of $3.9 million in 1999. (b) Excludes the operating loss for GDS in 2000 and 1999. Reported operating income was $111.5 million, $147.4 million and $129.9 million in 2001, 2000 and 1999, respectively. As adjusted operating income was $111.5 million, $134.2 million and $122.4 million in 2001, 2000 and 1999, respectively. See "Partnership and Joint Venture Income" above for an explanation of the changes in DonTech operating income. The increase in as adjusted DAS operating income in 2001 compared to 2000 was due to lower information technology and publishing costs and higher income from Sprint. The lower information technology and publishing costs were due to the full-year benefit of cost cutting initiatives and strategic actions taken in 2000. Despite lower sales in Sprint, operating income benefited from cost management and controls and the reversal of prior period sales claims and allowances. As adjusted DAS operating income increased in 2000 compared to 1999 primarily due to strong growth in Sprint and lower costs in our pre-press publishing operations. General and Corporate costs have decreased over the last two years due to cost cutting initiatives and headcount reductions that resulted in lower salary and benefit costs, lower rental costs, the elimination of corporate planning and international development efforts and lower depreciation expense. 18 INTEREST AND TAXES Interest expense was $26.7 million, $34.8 million and $37.2 million for 2001, 2000 and 1999, respectively. The decrease in interest expense over the last two years was driven by lower debt as we prepaid $65 million of debt in 2001 and $90 million of debt in 2000. We also made scheduled principal repayments of $3 million in 2000. Interest income was $1.8 million, $3.9 million and $0.4 million in 2001, 2000 and 1999, respectively. Interest income for 2001 decreased compared to 2000 as cash was used to prepay debt and repurchase shares, while interest income in 2000 was higher compared to 1999 due to interest earned on the proceeds from the Bell Atlantic and Cincinnati transactions. Our effective tax rate for 2001 increased to 41.9% compared to 38.2% in 2000 due to the effect of the ChinaBig investment impairment charge. For tax purposes, the $11.4 million impairment charge is not deductible against current year income. The charge gave rise to a deferred tax asset of $4.3 million that can only be realized by offsetting future capital gains. Given our current business portfolio and a projection of future results, management believes that the Company will not generate future capital gains to realize this asset. Accordingly, a valuation allowance for the full value of the asset was established. Management believes that the ChinaBig impairment charge will not have any effect on the Company's 2002 effective tax rate and that the effective tax rate for 2002 should approximate the 2000 effective tax rate. Our effective tax rate was 40.8% in 1999, as our share of the losses in ChinaBig could not be offset against our domestic source income when recognized. EXTRAORDINARY LOSS In connection with the prepayment of debt in 2001 and 2000, we recognized an extraordinary loss of $0.4 million (after taxes of $0.3 million) and $0.7 million (after taxes of $0.4 million), respectively, from the write-off of related deferred financing costs. The extraordinary loss had the effect of reducing diluted earnings per share by $0.01 in 2001 and $0.02 in 2000. NET INCOME AND EARNINGS PER SHARE Net income was $49.8 million, $124.8 million and $55.2 million in 2001, 2000 and 1999, respectively, and diluted earnings per share was $1.61, $3.83 and $1.61 in 2001, 2000 and 1999, respectively. Net income and earnings per share for 2001 includes the restructuring and special charge and the investment impairment charge and net income and earnings per share for 2000 includes the one-time operating income benefit from the CenDon restructuring and the net gain on the disposition of the Bell Atlantic, Cincinnati and GDS businesses. LIQUIDITY AND CAPITAL RESOURCES Our primary source of liquidity is our cash flows from operations. Additionally, we have available $100 million under our $100 million Senior Revolving Credit Facility (the "Revolver"). We believe that cash flows generated from operations and the available borrowing capacity under the Revolver will be sufficient to fund our operations and meet our obligations to our employees, vendors and creditors for at least the next 12 - 24 months. Our sources of cash flow are primarily from revenue participation, priority distribution and sales commission payments received from SBC and Sprint. These payments are all directly dependent on the value of advertising sold. The amount of cash flow from these sources can be impacted by, among other factors, competition in our markets, general economic conditions and the level of demand for yellow pages advertising. Management believes that if advertising sales were to decline by 10%, cash flow from operations, together with the available borrowing capacity under the Revolver, would still be sufficient to fund our operations and meet our obligations to our employees, vendors and creditors for at least the next 12 - 24 months. In addition, as the publisher of the respective directories, Sprint and SBC are responsible for and consequently control many of the critical functions and decisions that can impact our results and the results of DonTech. While it has not historically been the case, their respective policies, decisions and performance of their respective obligations in these areas, in which we have no participation or influence, could have a material adverse effect on our results of operations or financial condition. See "Forward-Looking Information." 19 Our material future commitments under contractual obligations include the following:
2006 - 2002 2003 2004 2005 2008 Total --------------------------------------------------------------- Debt repayment $ 2.8 $ 10.5 $ 16.6 $ 55.1 $201.8 $286.8 Lease commitments 2.8 2.8 2.7 1.4 0.6 10.3 Executive management employment transition 13.8 0.2 -- -- -- 14.0 Payment under CenDon agreement -- -- -- 7.0 -- 7.0 --------------------------------------------------------------- Total $ 19.4 $ 13.5 $ 19.3 $ 63.5 $202.4 $318.1 ===============================================================
The $7.0 million payment represents an amount due to CenDon for our share of an obligation that CenDon owes to applicable telephone companies under the prior CenDon Partnership. This payment is due in 2005 and has been fully provided for in the financial statements. At December 31, 2001, outstanding debt was $286.8 million, which consisted of $150 million of Senior Subordinated Notes (the "Notes") and $136.8 million of Senior Secured Term Facilities ("Term Facilities" and together with the Revolver, the "Credit Agreement"). The Notes pay interest semi-annually at an annual rate of 9.125%, and are due in June 2008. The Credit Agreement provides for a floating interest rate based on a spread over the London interbank offered rate (LIBOR) or the greater of either the Prime rate or the Fed Funds rate plus 50 basis points, at the election of the Company. Our obligations under the Credit Agreement are secured by security interests granted to the lenders in substantially all of our assets, including capital stock in our existing and newly formed subsidiaries. The Credit Agreement and the Indenture governing the Notes each contain various financial and other restrictive covenants, including restrictions on asset dispositions and similar transactions, indebtedness, capital expenditures, dividends and commitments. Cash flow from operations in 2001 was $86.9 million, higher than the $82.8 million in 2000. Payments of accounts payable and accrued liabilities decreased $53.7 million as 2000 included significant payments for severance and taxes related to the Bell Atlantic and Cincinnati transactions and cash receipts from the DonTech Partnership and CenDon joint venture in excess of income increased $9.6 million, primarily due to the timing of cash receipts relative to the recognition of income. Income from DonTech and CenDon is recognized when a sales contract is executed; however, cash is not received until the publisher bills the advertiser. Therefore, timing differences exist as to when income is recognized and cash is collected. Partially offsetting these increases were lower collections of accounts receivable of $41.0 million in 2001 as accounts receivable collections in 2000 included the collection of all outstanding Bell Atlantic receivables at the time of the buyout of the Agency Agreements. Cash flows from operations in 2000 increased $20.2 million from the 1999 amount of $62.6 million. The increase was driven by higher net income (excluding the after-tax net gain from disposition of businesses) and collections of accounts receivable, mainly due to the buyout of the Agency Agreements and collection of all outstanding Bell Atlantic receivables. Partially offsetting this increase was higher payments of accrued liabilities, mainly due to severance and taxes related to the Bell Atlantic and Cincinnati transactions. Cash used in investing activities was $6.1 million in 2001 compared to cash provided by investing activities in 2000 of $109.4 million, which included $122.0 million from the buyout of the Bell Atlantic Agency Agreements and sale of our Cincinnati operations. Capital expenditures decreased in 2001 compared to 2000 and 1999 due to lower capital requirements as a result of the reduction in headcount and disposition of businesses. Investments made in ChinaBig during 2001, 2000 and 1999 were made in accordance with the joint venture agreement and our final required investment of $1.6 million was made during 2001. We currently have no material commitments for investment spending. Cash used in financing activities of $121.5 million, $139.1 million and $47.1 million in 2001, 2000 and 1999, respectively, consists of debt repayment, repurchases of our common stock and proceeds received from the exercise of employee stock options. The significant increase in 2000 compared to 1999 was due to the use of the proceeds from the Bell Atlantic and Cincinnati transactions, as well as cash flow from operations, to repay $93.0 million of debt and repurchase $53.6 million of our common stock under both our systematic share repurchase plan and our open market share repurchase plan (collectively, "Share Repurchase Plans"). Any repurchase of shares of our common stock under the Share Repurchase Plans in 2002 would be funded primarily from operating cash flows. At February 28, 2002, we had available authorization to repurchase up to $23.1 million of stock under our 20 $100 million open market share repurchase plan, and to repurchase up to 1.9 million shares under the systematic share repurchase plan to offset the dilutive impact on earnings from the exercise of employee stock options. The amount that we can repurchase under the Share Repurchase Plans is further limited by restrictions imposed under the Credit Agreement and Indenture. These restrictions are based on 50% of cumulative net income less cumulative repurchases and other restricted payments. The maximum amount that we could repurchase under the Credit Agreement and Indenture is recalculated each quarter upon the filing of our quarterly Form 10-Qs and annual Form 10-K. As of the filing of this Form 10-K, we have the ability to repurchase up to $8.0 million of shares. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK RISK MANAGEMENT We are exposed to interest rate risk through our Credit Agreement, under which we borrow at prevailing short-term rates. We have outstanding interest rate swap agreements with a notional principal amount of $125 million, whereby the Company makes fixed rate payments of 5.9% and receives floating rate payments based on 3-month LIBOR rates. For 2001, the weighted average rate received was 3.0%. These swap agreements effectively change the interest rate on $125 million of floating rate borrowings to fixed rates. As a result of the significant prepayment of debt in 2001 and 2000, 96% of our total debt at December 31, 2001 was effectively fixed rate debt. Therefore, our interest rate risk is minimal. We are exposed to credit risk in the event of nonperformance by the counterparty to these agreements. The notional amount of the swap agreements is used to measure interest to be paid or received and does not represent the amount of exposure to credit loss. The loss would be limited to the amount that would have been received, if any, over the remaining life of the agreements. The counterparty to these agreements is a major financial institution and we do not currently anticipate nonperformance by this counterparty. These interest rate swaps are entered into for hedging purposes only and we do not use interest rate swaps or other derivative financial instruments for trading or speculative purposes. In June 2002, an interest rate swap agreement with a notional value of $50 million will expire. Due to the reduced level of indebtedness, we do not anticipate replacing the expiring interest rate swap at this time. The final interest rate swap agreement, with a notional amount of $75 million, will expire in June 2003. Management has not determined at this time whether this swap will be replaced. A discussion of our accounting policies and further disclosure relating to these financial instruments is included in Note 1 to the Consolidated Financial Statements included in Item 8. MARKET RISK SENSITIVE INSTRUMENTS The provisions of FAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by FAS 137 and FAS 138 ("FAS 133"), became effective on January 1, 2001. FAS 133 requires that the fair value of derivative instruments be recognized on the balance sheet. The interest rate swaps have been designated as cash flow hedges, and in accordance with FAS 133, the fair value of the swaps is recognized in other comprehensive income, a component of shareholders' equity. The fair value of the swaps was based on quoted market prices. At December 31, 2001, the unrealized fair value, which is the difference between what we would have to pay to terminate the swaps, and the book value of the swaps, was a loss of $4.0 million ($2.3 million, after tax). This loss was recognized in the consolidated balance sheet for 2001 as other non-current liabilities and accumulated other comprehensive loss, a component of shareholders' deficit. This loss is not expected to be recognized into earnings as the Company intends to hold the swaps until their respective maturities. Assuming an instantaneous parallel upward shift in the yield curve of 10% from the year-end level of 2.6%, the unrealized fair value loss would be $3.0 million ($1.7 million, after tax). Assuming an instantaneous parallel downward shift in the yield curve of 10% from the December 31, 2001 level, the unrealized fair value loss would be $5.1 million ($3.0 million, after tax). 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
Page ---- R.H. DONNELLEY CORPORATION Report of Independent Accountants.............................................................................. 23 Consolidated Statements of Operations for the three years ended December 31, 2001.............................. 24 Consolidated Balance Sheets at December 31, 2001 and 2000...................................................... 25 Consolidated Statements of Cash Flows for the three years ended December 31, 2001.............................. 26 Consolidated Statement of Changes in Shareholders' Deficit for the three years ended December 31, 2001......... 27 Notes to Consolidated Financial Statements..................................................................... 28 DONTECH Report of Independent Accountants.............................................................................. 43 Combined Statements of Operations for the three years ended December 31, 2001.................................. 44 Combined Balance Sheets at December 31, 2001 and 2000.......................................................... 45 Combined Statements of Cash Flows for the three years ended December 31, 2001.................................. 46 Combined Statements of Partners' Capital for the three years ended December 31, 2001........................... 47 Notes to Combined Financial Statements......................................................................... 48
22 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of R.H. Donnelley Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' deficit and cash flows present fairly, in all material respects, the financial position of R.H. Donnelley Corporation (the "Company") and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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. /s/ PRICEWATERHOUSECOOPERS LLP New York, New York February 8, 2002 23 R.H. DONNELLEY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------------------- 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) Net revenue .................................................................. $ 76,739 $ 141,287 $ 181,905 Expenses Operating expenses ........................................................ 44,855 96,723 138,354 General and administrative expenses ....................................... 16,643 25,143 29,185 Restructuring and special charge .......................................... 18,556 -- -- Investment impairment charge .............................................. 11,432 -- -- Depreciation and amortization ............................................. 10,767 15,433 18,319 Provision for bad debts ................................................... 2,978 4,306 5,322 ------------------------------------------- Total expenses ......................................................... 105,231 141,605 191,180 Partnership and joint venture income ......................................... 139,964 147,693 139,181 ------------------------------------------- Operating income ....................................................... 111,472 147,375 129,906 Interest income .............................................................. 1,763 3,912 443 Interest expense ............................................................. (26,707) (34,764) (37,187) Gain on disposition of businesses ............................................ -- 86,495 -- ------------------------------------------- Income before income taxes and extraordinary loss ...................... 86,528 203,018 93,162 Provision for income taxes ................................................... 36,272 77,556 38,011 ------------------------------------------- Income before extraordinary loss ....................................... 50,256 125,462 55,151 Extraordinary loss (net of taxes of $263 in 2001 and $440 in 2000) ........... 441 704 -- ------------------------------------------- Net income ............................................................. $ 49,815 $ 124,758 $ 55,151 =========================================== Earnings per share before extraordinary loss Basic .................................................................. $ 1.66 $ 3.93 $ 1.64 =========================================== Diluted ................................................................ $ 1.62 $ 3.85 $ 1.61 =========================================== Earnings per share after extraordinary loss Basic .................................................................. $ 1.65 $ 3.91 $ 1.64 =========================================== Diluted ................................................................ $ 1.61 $ 3.83 $ 1.61 =========================================== Shares used in computing earnings per share Basic .................................................................. 30,207 31,947 33,676 =========================================== Diluted ................................................................ 30,976 32,594 34,159 =========================================== COMPREHENSIVE INCOME: Net income ............................................................. $ 49,815 $ 124,758 $ 55,151 Unrealized loss on interest rate swaps, net of tax benefit of $1,708 ... (2,330) -- -- ------------------------------------------- Comprehensive income ................................................... $ 47,485 $ 124,758 $ 55,151 ===========================================
The accompanying notes are an integral part of the consolidated financial statements. 24 R.H. DONNELLEY CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------------- 2001 2000 - ----------------------------------------------------------------------------------------------------------------------- (in thousands, except share and per share data) ASSETS CURRENT ASSETS Cash and cash equivalents ............................................................ $ 14,721 $ 55,437 Accounts receivable Trade .............................................................................. 29,240 31,783 Other .............................................................................. 4,121 5,863 Allowance for doubtful accounts .................................................... (6,339) (7,355) ---------------------------- Total accounts receivable ...................................................... 27,022 30,291 Other current assets ................................................................. 2,275 4,821 ---------------------------- Total current assets ........................................................... 44,018 90,549 Fixed assets and computer software - net ............................................. 14,514 21,633 Partnership and joint venture investments ............................................ 208,989 213,834 Prepaid pension ...................................................................... 20,956 19,457 Other non-current assets ............................................................. 7,504 19,811 ---------------------------- Total Assets ................................................................... $ 295,981 $ 365,284 ============================ LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable and accrued liabilities ............................................. $ 20,218 $ 36,148 Restructuring and other related liabilities .......................................... 16,357 -- Accrued interest payable ............................................................. 5,163 6,490 Current portion of long-term debt .................................................... 2,846 4,224 ---------------------------- Total current liabilities ...................................................... 44,584 46,862 Long-term debt ....................................................................... 283,904 347,526 Long-term restructuring liability .................................................... 4,934 -- Deferred income taxes - net .......................................................... 52,632 60,913 Postretirement and postemployment benefits ........................................... 7,431 8,598 Other non-current liabilities ........................................................ 13,809 9,895 Commitments and contingencies SHAREHOLDERS' DEFICIT Preferred stock, par value $1 per share, authorized - 10,000,000 shares; outstanding - none .............................................. -- -- Common stock, par value $1 per share, authorized - 400,000,000 shares; issued - 51,621,894 shares for 2001 and 2000, respectively ..... 51,622 51,622 Additional paid-in capital ........................................................... 32,043 18,615 Unamortized restricted stock ......................................................... (336) (232) Retained deficit ..................................................................... (28,870) (78,685) Treasury stock, at cost, 22,231,910 shares for 2001 and 20,682,293 shares for 2000 ... (163,442) (99,830) Accumulated other comprehensive loss ................................................. (2,330) -- ---------------------------- Total shareholders' deficit .................................................... (111,313) (108,510) ---------------------------- Total Liabilities and Shareholders' Deficit .................................... $ 295,981 $ 365,284 ============================
The accompanying notes are an integral part of the consolidated financial statements. 25 R.H. DONNELLEY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------------- 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income ................................................................... $ 49,815 $ 124,758 $ 55,151 Reconciliation of net income to net cash provided by operating activities: Restructuring and special charge, net of tax ............................. 10,781 -- -- Investment impairment charge ............................................. 11,432 Gain on disposition of businesses, net of tax ............................ -- (53,454) -- Extraordinary loss, net of tax ........................................... 441 704 -- Depreciation and amortization ............................................ 10,767 15,433 18,319 Deferred income tax ...................................................... (8,281) (2,111) 12,115 Provision for bad debts .................................................. 2,978 4,306 5,322 Other noncash charges .................................................... 1,777 2,158 1,961 Cash in excess of partnership and joint venture income ................... 11,893 2,252 1,402 Decrease (increase) in accounts receivable ............................... 292 41,304 (9,490) Decrease (increase) in income tax refund receivable ...................... -- 6,000 (6,000) Decrease (increase) in other assets ...................................... 263 226 (507) Decrease in accounts payable and accrued liabilities ..................... (6,944) (60,657) (15,406) Increase (decrease) in other non-current liabilities ..................... 1,640 1,847 (268) ------------------------------------------- Net cash provided by operating activities ............................ 86,854 82,766 62,599 CASH FLOWS FROM INVESTING ACTIVITIES Additions to fixed assets and computer software .............................. (4,550) (7,717) (7,435) Investment in ChinaBig.com Limited ........................................... (1,550) (4,938) (8,000) Proceeds from disposition of businesses ...................................... -- 122,009 -- ------------------------------------------- Net cash (used in) provided by investing activities .................. (6,100) 109,354 (15,435) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of debt ............................................................ (65,000) (93,000) (23,875) Purchase of treasury stock ................................................... (63,981) (53,627) (27,957) Proceeds from employee stock option exercises ................................ 7,511 7,554 4,756 ------------------------------------------- Net cash used in financing activities ................................ (121,470) (139,073) (47,076) ------------------------------------------- (Decrease) increase in cash and cash equivalents ............................. (40,716) 53,047 88 Cash and cash equivalents, beginning of year ................................. 55,437 2,390 2,302 ------------------------------------------- Cash and cash equivalents, end of year ....................................... $ 14,721 $ 55,437 $ 2,390 =========================================== SUPPLEMENTAL INFORMATION Cash interest paid ........................................................... $ 24,552 $ 36,750 $ 38,218 =========================================== Income taxes paid ............................................................ $ 39,608 $ 82,698 $ 37,450 ===========================================
The accompanying notes are an integral part of the consolidated financial statements. 26 R.H. DONNELLEY CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
Common Stock and Accumulated Additional Unamortized Other Total Paid-in Restricted Retained Treasury Comprehensive Shareholders' Capital Stock Deficit Stock Loss Deficit - --------------------------------------------------------------------------------------------------------------------------------- (in thousand) Balance, December 31, 1998 ................. $ 51,896 $(258,594) $ (18,072) $(224,770) Net income ................................. 55,151 55,151 Employee stock option exercises, including tax benefit .................. 4,662 471 5,133 Stock issued: Restricted stock ........................ 236 $ (236) -- Non-employee stock options .............. 66 66 Restricted stock amortization .............. 84 84 Stock acquired for treasury ................ (28,475) (28,475) ----------------------------------------------------------------------------------- Balance, December 31, 1999 ................. 56,860 (152) (203,443) (46,076) (192,811) Net income ................................. 124,758 124,758 Employee stock option exercises, including tax benefit .................. 11,096 636 11,732 Stock issued: Restricted stock ........................ 204 (204) -- Employee bonus plans .................... 1,901 120 2,021 Non-employee stock options .............. 176 176 Restricted stock amortization .............. 124 124 Stock acquired for treasury ................ (54,510) (54,510) ----------------------------------------------------------------------------------- Balance, December 31, 2000 ................. 70,237 (232) (78,685) (99,830) (108,510) Net income ................................. 49,815 49,815 Employee stock option exercises, including tax benefit .................. 11,101 585 11,686 Stock issued: Restricted stock ........................ 292 (297) 5 -- Employee bonus plans .................... 1,408 90 1,498 Non-employee stock options .............. 627 627 Restricted stock amortization .............. 193 193 Stock acquired for treasury ................ (64,292) (64,292) Unrealized loss on interest rate swaps, including tax benefit .................. $ (2,330) (2,330) ----------------------------------------------------------------------------------- Balance, December 31, 2001 ................. $ 83,665 $ (336) $ (28,870) $(163,442) $ (2,330) $(111,313) ===================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 27 R.H. DONNELLEY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, UNLESS OTHERWISE NOTED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries. All intercompany transactions and balances have been eliminated. The DonTech Partnership ("DonTech") is not consolidated with the Company's financial statements. DonTech is accounted for under the equity method whereby the Company recognizes its 50% share of the net profits of DonTech in the consolidated statements of operations as partnership and joint venture income. Revenue Recognition. We earn revenue in the form of commissions from the sale of advertising and fees for our pre-press publishing services. As a sales agent, sales commission revenue is recognized at the time an advertising contract is executed with a customer. This includes sales commission revenue realized from affiliates of Sprint Corporation ("Sprint"), including CenDon LLC ("CenDon," for directories that published after June 30, 2000), and affiliates of Bell Atlantic Corporation (now known as Verizon Communications, "Bell Atlantic," through June 30, 2000). When the Company was the publisher, or part of a publishing partnership, revenue was recognized when a directory was published. This included revenue realized from publication of directories by the CenDon Partnership before June 30, 2000 and from the publication of the Company's Cincinnati proprietary directory in 1999. There was no revenue recognized in 2000 from the Cincinnati proprietary operation as the business was sold prior to the scheduled directory publication date. Sales commission revenue is recorded net of potential claims and allowances, estimated based on historical experience. Revenue from the Company's pre-press publishing operations is recognized as services are performed. Partnership and Joint Venture Income. Partnership and joint venture income includes the Company's 50% share of the net profits of DonTech, revenue participation income from SBC Communications Inc. ("SBC") and the priority distribution on the Company's membership interest in CenDon ("priority distribution"). Revenue participation income and the priority distribution are earned and recognized when a sales contract is executed with a customer. Prior to the restructuring of the CenDon relationship, which was effective July 1, 2000, the Company accounted for the CenDon Partnership under the equity method, recognizing its 50% share of the net profits of CenDon in partnership and joint venture income. The Company also accounted for its investment in ChinaBig.com Limited ("ChinaBig") under the equity method through June 15, 2000, at which time, the Company became a passive investor and began accounting for this investment under the cost method. See also Note 5 - Partnership and Joint Venture Investments. Cash and Cash Equivalents. Cash equivalents include highly liquid investments with a maturity of less than three months at their time of acquisition. Trade Receivables. Trade receivables represent sales commissions earned from the sale of advertising and fees for pre-press publishing services. The Company establishes an allowance for doubtful accounts based on the expected collectibility of receivables from advertisers based upon historical experience and contractual provisions. Receivables for sales commissions are billed to the publisher upon directory publication and collected in accordance with contractual provisions, typically in the same month of publication. Receivables for pre-press publishing services are billed and collected in accordance with the terms of the applicable agreement. Fixed Assets and Computer Software. Fixed assets are recorded at cost. Depreciation is provided over the estimated useful lives of depreciable assets using the straight-line method. Estimated useful lives are five years for machinery and equipment, ten years for furniture and fixtures and three to five years for computer equipment. 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. Certain direct costs incurred for computer software to meet the needs of the Company and its customers are capitalized in accordance with SOP 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," and amortized on a straight-line basis over five years. Fixed assets and computer software at December 31, 2001 and 2000, consisted of the following: 28
2001 2000 ------------------------------ Computer software ................................ $ 62,428 $ 59,478 Computer equipment ............................... 39,150 41,442 Machinery and equipment .......................... 3,863 3,879 Furniture and fixtures ........................... 4,953 4,945 Leasehold improvements ........................... 3,824 3,746 ------------------------------ Total cost ................................ 114,218 113,490 Less accumulated depreciation and amortization ... (99,704) (91,857) ------------------------------ Net fixed assets and computer software .... $ 14,514 $ 21,633 ==============================
Depreciation and amortization expense for the years ended December 31, 2001, 2000 and 1999 was as follows:
2001 2000 1999 --------------------------------------- Depreciation of fixed assets ........... $ 3,803 $ 5,532 $ 7,104 Amortization of computer software ...... 6,964 9,901 11,215 --------------------------------------- Total depreciation and amortization .... $10,767 $15,433 $18,319 =======================================
Partnership and Joint Venture Investments. The Company includes the carrying value of the DonTech investment, the revenue participation receivable from SBC and the priority distribution receivable from Sprint as partnership and joint venture investments and the investment in ChinaBig as other non-current assets. The carrying value of partnership and joint venture investments is evaluated for impairment when events or changes in circumstances indicate that the carrying value of an investment may be impaired. If an impairment is deemed to have occurred, and such impairment is determined to be permanent, the carrying value of the investment is written-down to its estimated fair value. Such estimate of fair value would be determined based on independent third party valuations or by discounting estimated future cash flows. Based on an independent third party valuation, an impairment charge of $11,432 was recorded in 2001 related to the ChinaBig investment. See also Note 3 - Investment Impairment Charge. Concentration of Credit Risk. The Company maintains significant receivable balances with SBC and Sprint for revenue participation, priority distribution and sales commissions. The ultimate remittance of these receivables is subject to adjustment, up to specified maximums under contractual provisions, based on collections by these companies from the individual advertisers. The Company does not currently foresee a material credit risk associated with these receivables, although there can be no assurance that full payment will be received in a timely manner. Derivative Financial Instruments. The Company's derivative financial instruments are limited to interest rate swap agreements used to manage exposure to fluctuations in interest rates on variable rate debt. At December 31, 2001 and 2000, the Company had outstanding interest rate swaps with a notional value of $125,000 and $175,000, respectively. The Company makes fixed-rate payments of 5.9% and receives variable-rate payments based on 3-month LIBOR rates. The weighted average rate received for 2001 and 2000 was 3.0% and 6.4%, respectively. These periodic payments and receipts are recorded as part of interest expense. The related amount payable to, and receivable from, the counterparty at the end of a period is included in accrued interest payable and other current assets. If the Company terminates a swap agreement, the gain or loss is amortized over the shorter of the remaining original life of the debt or the swap. The Company is subject to credit risk in the event of nonperformance by the counterparty to these agreements; however, the loss is limited to the amount that would have been received, if any, over the remaining life of the agreements. The counterparty to these agreements is a major financial institution and the Company does not currently anticipate nonperformance by this counterparty. The Company does not use derivative financial instruments for trading or speculative purposes. A swap with a notional principal value of $50,000 is set to expire in June 2002 and a swap with a notional principal value of $75,000 is set to expire in June 2003. The provisions of FAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by FAS 137 and FAS 138 ("FAS 133"), became effective for the Company on January 1, 2001. FAS 133 requires that the fair value of derivative instruments be recognized on the balance sheet. The interest rate swaps have been designated as cash flow hedges, and in accordance with FAS 133, the difference between the fair value, or what the Company would have to pay to terminate the swaps, and the book value of the swaps ("unrealized fair value"), is recorded in other comprehensive income. At December 31, 2001, the unrealized fair 29 value loss, net of related taxes, was $2,330 and is recognized as other non-current liabilities on the balance sheet with a corresponding charge to accumulated other comprehensive loss, a component of shareholders' deficit. This loss is not expected to be reclassified into earnings as the Company intends to hold the swaps until their respective maturities. Earnings Per Share. Basic earnings per share is calculated by dividing net income by the weighted average common shares outstanding during the year. Diluted earnings per share is calculated by dividing net income by the weighted average common shares outstanding plus potentially dilutive common shares, primarily stock options, calculated using the treasury stock method. The table below provides a reconciliation of basic weighted average shares outstanding to diluted weighted average shares outstanding.
2001 2000 1999 ------------------------------------ (in thousands) Weighted average shares outstanding - basic ...... 30,207 31,947 33,676 Potentially dilutive shares ...................... 769 647 483 ------------------------------------ Weighted average shares outstanding - diluted .... 30,976 32,594 34,159 ====================================
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, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. Actual results could differ materially from those estimates and assumptions. Estimates and assumptions are used in the determination of sales allowances, allowances for bad debts, depreciation and amortization, employee benefit plans, restructuring reserve and investment impairment, among others. Reclassifications. Certain prior year amounts have been reclassified to conform to the current year's presentation. These reclassifications had no impact on previously reported results of operations or shareholders' deficit. New Accounting Pronouncements. In July 2001, the Financial Accounting Standards Board ("FASB") issued FAS 141, "Business Combinations," which eliminates the pooling-of-interests method of accounting for business combinations and modifies the application of the purchase accounting method. In July 2001, the FASB also issued FAS 142, "Goodwill and Intangible Assets," which eliminates the current requirement to amortize goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with definite life and addresses the impairment testing and recognition for goodwill and intangible assets. FAS 142 is effective for 2002 and will apply to existing goodwill and intangible assets as well as to transactions completed after the Statement's effective date. The Company has no recorded goodwill or intangible assets at December 31, 2001; therefore this Statement will not have an impact on the Company's operating results or financial condition. In June 2001, the FASB issued FAS 143, "Accounting for Asset Retirement Obligations." FAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period incurred if a reasonable estimate of fair value can be made. The Statement is effective for 2003. The Company has not incurred or identified an asset retirement obligation liability at this time; therefore this Statement currently would not have an impact on the Company's results of operations or financial condition. In August 2001, the FASB issued FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." FAS 144 establishes a single model for the impairment of long-lived assets and broadens the presentation of discontinued operations to include more disposal transactions. FAS 144 is effective for 2002 and is not expected to have a material impact on the Company's results of operations or financial condition at the time of adoption. 2. RESTRUCTURING AND SPECIAL CHARGE The operating results for 2001 include a restructuring and special charge of $18,556 in connection with the executive management employment transition arrangements and the expiration of a pre-press publishing contract, which will result in the elimination of approximately 100 positions during 2002. This charge includes $9,937 for the executive management employment transition arrangements, including severance, accrued benefits under executive pension plans and other related costs, $3,252 for other employee severance and related costs, $4,380 for idle leased space in the Raleigh publishing facility and planned relocation of the Company's corporate headquarters due to excess capacity and $987 for professional fees and the write-off of assets no longer 30 considered useable. In addition, short-term restructuring and other related liabilities on the consolidated balance sheet includes $2,735 of previously accrued liabilities that will be paid in connection with the executive management transition arrangements. 3. INVESTMENT IMPAIRMENT CHARGE The Company currently has an 18% interest in ChinaBig, which publishes yellow pages directories and offers Internet directory services in the People's Republic of China. In November 2001, management received an independent third party valuation of ChinaBig's current business plan, capital needs and outlook for profitability and cash flow. The valuation was conducted in connection with a proposed equity financing. The results of the valuation provided a range of possible estimated fair values for ChinaBig, all of which implied that the value of the Company's 18% interest was substantially lower than the carrying value of $13,432. Accordingly, management determined that the carrying value of this investment had been permanently impaired and recorded an impairment charge of $11,432 to write this investment down to $2,000, which management believes is its best estimate of the current fair value of the investment. The valuation was determined based on the present value of expected cash flows. Prior valuations of the ChinaBig business had assumed a more rapid development of Internet advertising in China than is currently forecast. See also Note 5 - Partnership and Joint Venture Investments. 4. DISPOSITION OF BUSINESSES During 2000, the Company sold its Cincinnati proprietary directory business to Yellow Book USA, Inc., terminated early its directory services agreements with Bell Atlantic, ceased operations of its Get Digital Smart ("GDS") business and implemented related cost-cutting measures, including headcount reductions, at its Raleigh facility and corporate headquarters. In connection with the above actions, the Company received cash proceeds of $122,009 and recognized a pretax gain of $86,495 ($53,454 after taxes). 5. PARTNERSHIP AND JOINT VENTURE INVESTMENTS DonTech. DonTech is a 50/50 perpetual partnership with an operating unit of SBC, which acts as the exclusive sales agent for yellow pages directories published by SBC in Illinois and northwest Indiana. The Company receives 50% of the net profits of DonTech and receives revenue participation income directly from SBC, which is directly correlated with advertising sales. Income from DonTech consisted of the following:
Years Ended December 31, ------------------------------------------ 2001 2000 1999 ------------------------------------------ 50% share of DonTech net profits ..... $ 19,313 $ 20,671 $ 19,769 Revenue participation income ......... 103,106 103,354 103,755 ------------------------------------------ Total DonTech income ................. $122,419 $124,025 $123,524 ==========================================
The Company's investment in DonTech, including the revenue participation receivable from SBC, was $193,810 and $197,822 at December 31, 2001 and 2000, respectively. CenDon. The Company is the exclusive sales agent in Nevada, Florida, Virginia and North Carolina for CenDon LLC, a joint venture with Centel Directory Company ("Centel"), a subsidiary of Sprint. Prior to June 30, 2000, the Company was a general partner in the CenDon Partnership, a 50/50 partnership between the Company and Centel, and also served as their exclusive sales agent. Effective for directories that published after June 30, 2000, the Company and Centel entered into a series of agreements that effectively restructured the CenDon Partnership as a limited liability company, CenDon. Under the restructured arrangement, the Company continues to receive sales commissions on all advertising sold, and in consideration for transferring control over the publishing functions to Centel, the Company now also receives a priority distribution, which is determined as a percentage of CenDon advertising sales. The priority distribution allows us to maintain the same level of profitability that we would have earned under the CenDon Partnership through the original expiration date in 2004. The Company also provided pre-press publishing services to the CenDon Partnership and continues to provide similar services to CenDon. The CenDon sales agency relationship extends through December 2010. Under the restructured CenDon arrangement, revenue and related costs are recognized at the time of sale rather than at the time of directory publication, as had historically been the case for the CenDon Partnership. Accordingly, upon the restructuring of the CenDon arrangement in 2000, a one-time partnership and joint venture income benefit of $5,422 was recognized. Income from 31 CenDon and the CenDon Partnership was $17,545, $24,747 and $16,935 in 2001, 2000 and 1999, respectively. The priority distribution receivable was $15,179 and $16,012 at December 31, 2001 and 2000, respectively. ChinaBig. The Company currently has an 18% interest in ChinaBig; however, as a result of the Company's prior active involvement in the daily operations of ChinaBig's yellow pages business, this investment had been accounted for under the equity method. During 2000, in connection with an equity investment by an unaffiliated third party and in order to facilitate the raising of additional capital and provide greater flexibility, ChinaBig and each existing investor (including the Company), restructured the existing joint venture agreement of ChinaBig to, among other things, significantly reduce the Company's involvement in the daily operations of ChinaBig. As a result of the restructured agreement, effective June 15, 2000, the Company became a passive investor. Accordingly, the Company now accounts for this investment under the cost method and no longer recognizes its share of the losses of ChinaBig. Partnership and joint venture income includes a loss from ChinaBig of $1,078 in 2000 (through June 15, 2000) and $1,278 in 1999. During 2001, an impairment charge was recorded related to this investment. See Note 3 - Investment Impairment Charge. 6. LONG-TERM DEBT AND CREDIT FACILITIES Long-term debt at December 31, 2001 and 2000, consisted of the following:
2001 2000 --------------------------- Senior Subordinated 9.125% Notes ....... $150,000 $150,000 Senior Secured Term Facilities ......... 136,750 201,750 --------------------------- Total ........................... 286,750 351,750 Less current portion ................... 2,846 4,224 --------------------------- Long-term debt .................. $283,904 $347,526 ===========================
The Senior Subordinated Notes (the "Notes") pay interest semi-annually and mature in June 2008. The Indenture governing the Notes contains covenants that, among other things, restrict the ability of the Company and its subsidiaries to incur certain additional debt and liens and engage in mergers, consolidations and asset sales. The Notes are callable at the option of the Company at any time on or after June 1, 2003 at 104.6% of par. This percentage declines 1.5% after each 12-month period until June 1, 2006, when the Notes are callable at 100% of par. The Company's committed bank facilities consist of $136,750 outstanding under the Senior Secured Term Facilities ("Term Facilities") and a $100,000 Senior Revolving Credit Facility (the "Revolver," and together with the Term Facilities, the "Credit Agreement"). These facilities bear interest at floating rates based on a spread over the London interbank offered rate (LIBOR) or the greater of either the Prime rate or the Fed Funds rate plus 50 basis points, at the election of the Company. At December 31, 2001, the Company had available borrowing capacity of $100,000 under the Revolver. The weighted average interest rate for outstanding debt under the Term Facilities at December 31, 2001 and 2000 was 7.4% and 7.2%, respectively. The Company's obligations under the Credit Agreement are secured by security interests granted to the lenders in substantially all of the Company's assets, including capital stock of its existing and newly formed subsidiaries. The Credit Agreement contains covenants that, among other things, restrict the ability of the Company and its subsidiaries to engage in mergers, consolidations and asset sales, incur additional indebtedness, pay dividends or create liens and require the Company to maintain certain financial ratios. During 2001 and 2000, the Company prepaid $65,000 and $90,000, respectively, of outstanding Term Facilities. In connection with the prepayment, an extraordinary loss of $441 (net of taxes of $263) and $704 (net of taxes of $440) was recognized in 2001 and 2000, respectively, for the write-off of related deferred financing costs. Aggregate maturities of long-term debt at December 31, 2001 were: 2002............................................... $ 2,846 2003............................................... 10,472 2004............................................... 16,632 2005............................................... 55,060 2006............................................... 51,740 Thereafter......................................... 150,000 ------------- Total........................................ $ 286,750 =============
32 7. COMMITMENTS The Company leases office facilities and equipment under operating leases with non-cancelable lease terms expiring at various dates through 2006. Rent and lease expense for 2001, 2000 and 1999 was $3,534, $7,065 and $9,841, respectively. The non-cancelable minimum rental payments applicable to operating leases at December 31, 2001, were: 2002............................................. $ 2,847 2003............................................. 2,761 2004............................................. 2,737 2005............................................. 1,424 2006 582 ----------- Total...................................... $10,351 ===========
The Company's lease of its corporate headquarters extends through 2011; however, it is cancelable at the option of the Company in 2006 for a minimal fee. The Company will make payments of approximately $13,800 in 2002 related to the executive management transition arrangements, which include $10,500 for settlement of all accrued benefits due under executive retirement plans and in consideration for an agreement to cease participation in these retirement plans, a special recognition payment of $1,500, executive bonus plan payments of $1,100 and other payments of $700. The Company will also pay CenDon $7,049 in 2005, representing its share of an obligation that CenDon owes to the applicable telephone companies under the prior CenDon Partnership. This payment has been fully provided for in the financial statements. 8. LITIGATION Rockland Yellow Pages. In 1999, Sandy Goldberg, Dellwood Publishing, Inc. and Rockland Yellow Pages initiated a lawsuit against the Company and Bell Atlantic in the United States District Court for the Southern District of New York. The Rockland Yellow Pages is a proprietary directory that competes against a Bell Atlantic directory in the same region, for which the Company served as Bell Atlantic's advertising sales agent through June 30, 2000. The complaint alleged that the defendants disseminated false information concerning the Rockland Yellow Pages, which resulted in damages to the Rockland Yellow Pages. In May 2001, the Court dismissed substantially all of plaintiff's claims, including the antitrust claims; only a false advertising claim under the Lanham Act and a state law tort claim with respect to only one advertiser survived. In August 2001, the plaintiff withdrew its Lanham Act claim with prejudice and then the Court dismissed the state law tort claim without prejudice as to re-filing in state court. In August 2001, the same plaintiffs filed a complaint naming the same defendants in New York State Supreme Court, in Rockland County, alleging virtually the same state law tort claim and seeking unspecified damages. In October 2001, defendants' filed a motion to dismiss this complaint. While at this stage in the proceedings management is unable to predict the outcome of this matter, it presently believes that the resolution of the action will not have a material adverse effect on the Company's results of operations or financial condition. Information Resources. In 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 Company (as successor of The Dun & Bradstreet Corporation ("D&B")), ACNielsen Company and IMS International Inc., each former subsidiaries of D&B (the "IRI Action"). The complaint alleges, among other things, various violations of the antitrust laws and seeks damages in excess of $350,000, which IRI is seeking to have trebled under the antitrust laws. IRI also seeks punitive damages of an unspecified amount. Under the definitive agreement entered into in connection with the Company's separation from D&B in 1998 (the "Distribution Agreement"), D&B has assumed the defense and will indemnify the Company against any payments to be made by the Company in respect of the IRI Action, including any related legal fees and expenses. As required by the Distribution Agreement, Moody's Corporation, which subsequently separated from D&B, has agreed to be jointly and severally liable with D&B for the indemnity obligation to the Company. Management presently believes that D&B and Moody's have sufficient financial resources and/or borrowing capacity to satisfy all such liabilities and to reimburse the Company for all related costs and expenses. However, no assurances can be provided that all such liabilities, costs and expenses will be covered. Tax Matters. Certain tax planning strategies entered into by D&B are currently subject to review by tax authorities. Pursuant to a series of agreements, IMS Health Incorporated ("IMS") and Nielsen Media Research, Inc. ("NMR") (both of which are former subsidiaries of D&B) are each jointly and severally liable to pay 50%, and D&B is liable for the remaining 50% of any payments for taxes and accrued interest arising from this matter and certain other potential tax liabilities after D&B pays the first $137,000 of tax liability. As a result of the form of the separation of the Company from D&B, the Company is the corporate successor of, and 33 technically the taxpayer referred to herein as D&B. However, pursuant to the terms of the Distribution Agreement and the Tax Allocation Agreement entered into in connection with the Company's separation from D&B, D&B assumed the defense and agreed to indemnify the Company against any payments to be made by the Company in respect of any tax liability that may be assessed and any related costs and expenses. In 2000, D&B filed an amended tax return for 1989 and 1990, which reflected $561,600 of tax and interest due and paid the IRS approximately $349,300, while IMS paid approximately $212,300. The Company understands that these payments were paid under dispute in order to stop additional interest from accruing. As required by the Distribution Agreement, Moody's Corporation has agreed to be jointly and severally liable with D&B for the indemnity obligation to the Company. IMS has filed an arbitration proceeding against NMR claiming that NMR underpaid its proper allocation of the tax liability under the agreements between NMR and IMS. In response to NMR's position that it paid its appropriate allocation of the tax liability, IMS has joined the Company (again, as successor to D&B) as a respondent in the arbitration proceeding so that if NMR should prevail in its interpretation of the allocation computation, then IMS could apply that same interpretation of the allocation computation against the Company under its agreement with the Company. If NMR should prevail in the arbitration against IMS and in turn IMS should prevail against the Company, the Company believes that the additional liability to the Company represented by this alternative interpretation of the allocation computation would be approximately $15,000 (an approximate $60,000 gross claim offset by approximately $45,000 of tax benefit). While the Company believes that its interpretation of the allocation computation is correct, even should NMR prevail against IMS and in turn IMS prevail against the Company in this arbitration proceeding, D&B and Moody's would be obligated to indemnify the Company against any such liability. The fact that D&B and IMS have already paid the IRS a substantial amount of additional taxes with respect to the contested tax planning strategies significantly mitigates the risk to the Company. In addition, management presently believes that D&B, Moody's, IMS and NMR have sufficient financial resources and/or borrowing capacity to satisfy all such liabilities and to reimburse the Company for all related costs and expenses. However, no assurances can be provided that all such liabilities, costs and expenses will be covered. Image One. In May 2001, Image One filed a complaint against certain Sprint Corporation affiliates and the Company in the United States District Court for the Middle District of Florida. In the complaint, Image One alleged that it created and licensed original text, graphics, images and other artwork specifically for yellow pages advertising and that the defendants engaged in copyright infringement and false designation of origin. Image One sought actual damages of approximately $95,000 and statutory damages in excess of $330,000. This matter was settled and the complaint dismissed in February 2002, and such resolution of the action will not have a material adverse effect on the Company's results of operations or financial condition. Other than the matters described above, the Company is involved in legal proceedings, claims and litigation arising in the ordinary conduct of its business. Although there can be no assurances, management presently believes that the outcome of such legal proceedings will not have a material adverse effect on the Company's results of operations or financial condition. 9. BENEFIT PLANS Retirement Plans. The Company has a defined benefit pension 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 ("cash balance benefit"). Benefits for certain employees who were participants in the predecessor D&B defined benefit pension plan are also determined based on the participant's average compensation and years of service ("final average pay benefit") and benefits to be paid will equal the greater of the final average pay benefit or the cash balance benefit. Pension costs are determined using the projected unit credit actuarial cost method. The Company's funding policy is to contribute an amount at least equal to the minimum legal funding requirement. Due to the overfunded status of the plan, no contributions were made in 2001 or 2000. 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 pension 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 pension plan). In connection with the executive management employment transition arrangements, the Company's CEO and CFO will cease to participate in these plans and will not earn additional retirement benefits after December 31, 2001. In settlement of all accrued benefits thereunder, an aggregate lump sum payment of $7,559, which includes special benefits of $3,452, will be made to these individuals in 2002. The Company maintains a defined contribution savings plan for substantially all its employees and makes a contribution of 50 cents for each dollar contributed by a participating employee, up to a maximum of 6% of each participating employee's salary. Company contributions under this plan were $776, $1,287 and $1,662 for the year ended December 31, 2001, 2000 and 1999, respectively. 34 Other Postretirement Benefits. The Company has an unfunded postretirement benefit plan that provides certain health care and life insurance benefits to those full-time employees who reach retirement age while working for the Company. A summary of the funded status of the benefit plans at December 31, 2001 and 2000, was as follows:
Retirement Plans Postretirement Plan ------------------------- -------------------------- 2001 2000 2001 2000 ------------------------- -------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation, beginning of period .......... $ 48,668 $ 48,029 $ 4,960 $ 6,660 Service cost ..................................... 1,876 2,336 120 330 Interest cost .................................... 3,777 3,790 360 430 Plan participant contributions ................... -- -- 60 40 Amendments ....................................... 1,227 -- (440) -- Actuarial loss ................................... 1,689 2,415 250 100 Benefits paid .................................... (3,037) (2,921) (40) (150) Special benefits ................................. 3,452 -- -- -- Curtailment loss (gain) .......................... 567 (4,981) -- (2,450) Settlement ....................................... (7,559) -- -- -- ------------------------- -------------------------- Benefit obligation, end of period ................ $ 50,660 $ 48,668 $ 5,270 $ 4,960 ========================= ========================== CHANGE IN PLAN ASSETS Fair value of plan assets, beginning of period ... $ 68,463 $ 75,015 $ -- $ -- Return on plan assets ............................ (1,751) (2,325) -- -- Employer contributions ........................... 87 134 (20) 110 Plan participant contributions ................... -- -- 60 40 Actuarial gain ................................... -- (1,440) -- -- Benefits paid .................................... (3,037) (2,921) (40) (150) ------------------------- -------------------------- Fair value of plan assets, end of period ......... $ 63,762 $ 68,463 $ -- $ -- ========================= ========================== Funded status of plans ........................... $ 13,102 $ 19,795 $ (5,270) $ (4,960) Unrecognized net loss (gain) ..................... 6,084 (3,192) 40 (210) Unrecognized prior service costs ................. 1,300 235 (370) -- ------------------------- -------------------------- Net amount recognized ............................ $ 20,486 $ 16,838 $ (5,600) $ (5,170) ========================= ==========================
Net amounts recognized in the consolidated balance sheets at December 31, 2001 and 2000 were as follows:
Retirement Plans Postretirement Plan -------------------------- -------------------------- 2001 2000 2001 2000 -------------------------- -------------------------- Prepaid pension .................... $ 20,956 $ 19,457 $ -- $ -- Other non-current liabilities ...... (470) (2,619) (5,600) (5,170) -------------------------- -------------------------- Net amount recognized .............. $ 20,486 $ 16,838 $ (5,600) $ (5,170) ========================== ==========================
The accumulated benefit obligation (ABO) and projected benefit obligation (PBO) for the unfunded PBEP and SEBP at December 31, 2001 and 2000 is shown in the table below. There is no ABO or PBO for the SEBP as the obligation under this plan was effectively settled and the plan curtailed as of December 31, 2001.
PBEB SEBP --------------------- -------------------- 2001 2000 2001 2000 --------------------- -------------------- Accumulated benefit obligation ..... $ 39 $ 391 $ -- $1,359 Projected benefit obligation ....... 319 840 -- 3,628
35 The net periodic benefit (income) expense of the benefit plans was as follows:
Retirement Plans Postretirement Plan ------------------------------ ------------------------------- Year Ended Year Ended Year Ended Year Ended Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 2001 Dec. 31, 2000 ------------------------------ ------------------------------- Service cost ................................ $ 1,876 $ 2,336 $ 120 $ 330 Interest cost ............................... 3,777 3,790 360 430 Return on plan assets ....................... (6,690) (6,397) -- -- Net amortization and deferral ............... 210 (259) (70) -- ------------------------------ ------------------------------- Net periodic benefit (income) expense ....... $ (827) $ (530) $ 410 $ 760 ============================== ===============================
In addition to the net periodic benefit (income) expense above, a charge of $4,823 was recognized in 2001 for special benefits, the settlement of a portion of the liability under the PBEP and the curtailment of the SEBP in connection with the executive management transition arrangements. These costs were included as part of the restructuring and special charge. During 2000, as a result of the disposition of businesses and the resulting reduction in headcount, the Company recognized a curtailment gain of $4,756 and $2,450 for the retirement plans and postretirement plan, respectively. These amounts were reported as a component of gain on disposition of businesses. The following assumptions were used in determining the benefit obligation and net periodic benefit (income) expense:
Retirement Plans Postretirement Plan --------------------- ---------------------- 2001 2000 2001 2000 --------------------- ---------------------- Weighted average discount rate .............. 7.25% 7.50% 7.25% 7.50% Rate of increase in future compensation ..... 4.41% 4.66% -- -- Expected return on plan assets .............. 9.75% 9.75% -- --
For measurement purposes, a 9.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2002. The rate was assumed to decrease gradually to 5.0% through 2011 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 rate would have the following effects:
1% point 1% point increase decrease ---------------------------- Benefit obligation at end of period $460 $(390) Service and interest costs 40 (30)
10. STOCK OPTION PLANS During 2001, the Company adopted the 2001 Stock Award and Incentive Plan to replace the 1991 Key Employees' Stock Option Plan and the 1998 Directors' Stock Option Plan (collectively, the "Stock Option Plan"). Under the Stock Option Plan, certain employees and non-employee directors are eligible to receive stock options, stock appreciation rights, limited stock appreciation rights in tandem with stock options and deferred stock. Non-employee directors receive an option to purchase 1,500 shares and an award of 1,500 deferred shares upon election to the Board, and on an annual basis, they receive an option to purchase 1,500 shares of the Company's common stock and an award of 1,500 deferred shares. Non-employee directors may also elect to receive additional options to purchase shares of the Company's common stock in lieu of their annual cash retainer fee. Options may not be granted at less than fair market value of the Company's common stock at the date of the grant and expire not more than ten years from the grant date. The vesting period for awards under the Stock Option Plan is determined by the Board at the date of the grant, but historically have typically become exercisable in equal annual installments over four years for employees and three years for non-employee directors. Deferred shares granted to non-employee directors' vest equally over a three-year period. The Company has never granted stock appreciation rights or limited stock appreciation rights. 36 Changes in stock options under the Stock Option Plan for the last three years were as follows:
Weighted Average Exercise Price Shares Per Share ------------------------------- Options outstanding, December 31, 1998 ................ 4,394,945 $13.55 Granted .......................................... 97,525 16.49 Exercised ........................................ (456,137) 11.15 Canceled or expired .............................. (465,904) 14.49 ------------------------------- Options outstanding, December 31, 1999 ................ 3,570,429 13.82 Granted .......................................... 685,858 16.65 Exercised ........................................ (631,727) 12.58 Canceled or expired .............................. (725,975) 15.40 ------------------------------- Options outstanding, December 31, 2000 ................ 2,898,585 14.35 Granted .......................................... 539,084 25.23 Exercised ........................................ (585,913) 12.82 Canceled or expired .............................. (222,402) 17.22 ------------------------------- Options outstanding, December 31, 2001 ................ 2,629,354 $16.70 =============================== Available for future grants at December 31, 2001 ...... 4,048,035 ==============
The Company also grants stock options to certain key employees of DonTech under the Stock Option Plan. Options granted to DonTech employees were 16,195 shares in 2001, 16,278 shares in 2000 and 12,725 shares in 1999. These options are considered compensatory under current accounting rules and compensation expense of $627, $176 and $66 was recognized in 2001, 2000 and 1999, respectively. The weighted average fair value of all options granted during 2001, 2000 and 1999 was $8.81, $6.15 and $6.62, respectively, based on the Black-Scholes option pricing model under certain assumptions set forth below. The following table summarizes information about stock options outstanding and exercisable under the Stock Option Plan at December 31, 2001:
Stock Options Outstanding Stock Options Exercisable ----------------------------------------------- ------------------------------ Weighted Weighted Weighted Average Average Average Remaining Exercise Exercise Contractual Price Per Price Per Range of Exercise Prices Shares Life Share Shares Share - ------------------------------------------------------------------------------------ ------------------------------ $ 9.99 - $ 15.78 1,741,858 5.9 years $14.21 1,249,762 $13.78 $ 16.09 - $ 29.12 887,496 8.2 years $21.57 100,391 $16.93 ----------------------------------------------- ------------------------------ 2,629,354 6.7 years $16.70 1,350,153 $14.02 =============================================== ==============================
At December 31, 2000, there were 2,861,333 shares outstanding at a weighted average exercise price per share of $14.32 and 1,357,603 shares exercisable at a weighted average exercise price per share of $12.84. At December 31, 1999, there were 3,545,977 shares outstanding at a weighted average exercise price per share of $13.80 and 1,367,777 shares exercisable at a weighted average exercise price per share of $11.82. The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its Stock Option Plan, and, accordingly, no compensation expense related to the issuance of stock option grants to employees or non-employee directors has been recognized. The following table reflects the pro forma net income and diluted earnings per share assuming the Company applied the fair value method of SFAS No. 123 "Accounting for Stock-Based Compensation." The pro forma disclosures shown are not necessarily representative of the effects on income and diluted earnings per share in future years. 37
2001 2000 1999 ------------------------------------------------ Net income As reported ............... $49,815 $124,758 $55,151 Pro forma ................. $47,621 $123,045 $53,532 Diluted earnings per share As reported ............... $1.61 $3.83 $1.61 Pro forma ................. $1.54 $3.78 $1.57
The fair value of stock options used to compute the pro forma disclosures is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:
2001 2000 1999 ----------------------------------------------- Dividend yield................................ 0% 0% 0% Expected volatility........................... 35% 35% 35% Risk-free interest rate....................... 4.8% 6.6% 5.5% Expected holding period....................... 4.0 years 3.9 years 4.8 years
11. INCOME TAXES The Company accounts for income taxes under the liability method in accordance with SFAS 109, "Accounting for Income Taxes." Provision for income taxes consisted of:
2001 2000 1999 ---------------------------------------------- Current provision U.S. Federal ..................... $ 39,977 $ 67,475 $ 20,665 State and local .................. 4,313 11,752 5,231 ---------------------------------------------- Total current provision ................ 44,290 79,227 25,896 Deferred (benefit) provision U.S. Federal ..................... (7,233) (1,795) 10,298 State and local .................. (1,048) (316) 1,817 ---------------------------------------------- Total deferred (benefit) provision ..... (8,281) (2,111) 12,115 ---------------------------------------------- Provision for income taxes ............. $ 36,009 $ 77,116 $ 38,011 ==============================================
The following table summarizes the significant differences between the U.S. Federal statutory tax rate and the Company's effective tax rate.
2001 2000 1999 ---------------------------------- Statutory Federal tax rate ................................. 35.0% 35.0% 35.0% State and local taxes, net of U.S. Federal tax benefit ..... 2.5 2.5 5.0 Non-deductible expense ..................................... 4.4 0.7 0.8 ---------------------------------- Effective tax rate ......................................... 41.9% 38.2% 40.8% ==================================
Deferred tax assets and liabilities consisted of the following at December 31, 2001 and 2000:
2001 2000 ----------------------------- Deferred tax assets Reorganization and restructuring costs ...... $ 7,821 $ 1,551 Bad debts ................................... 2,302 2,812 Postretirement benefits ..................... 2,109 1,977 Capital loss carryforward ................... 4,287 -- Other ....................................... 780 3,025 ----------------------------- 17,299 9,365 Valuation allowance ......................... (4,287) -- ----------------------------- Total deferred tax assets ................... $ 13,012 $ 9,365 -----------------------------
38
2001 2000 -------------------------- Deferred tax liabilities Revenue recognition ........................... $53,262 $57,667 Pension ....................................... 6,655 6,437 Capitalized project costs and fixed assets .... 5,727 4,227 Other ......................................... -- 1,947 -------------------------- Total deferred tax liabilities ................ 65,644 70,278 -------------------------- Net deferred tax liability ............................ $52,632 $60,913 ==========================
The investment impairment charge of $11,432 to write-down the Company's investment in ChinaBig gave rise to a deferred tax asset of $4,287. The loss on this investment represents a capital loss for income tax purposes and can only be utilized to offset future capital gains. Based on the Company's current business portfolio and projection of future results, management does not believe that the Company will generate future capital gains to offset against this capital loss. Accordingly, a valuation allowance was established for the full amount of this asset. Management believes that it will be able to obtain the full benefit of other deferred tax assets based on an assessment of the Company's anticipated profitability during the years the deferred tax assets are expected to become tax deductions. 12. FINANCIAL INSTRUMENTS The Company's financial instruments at December 31, 2001 and 2000 consist of cash and cash equivalents, Term Facilities and the Notes. The carrying amount of cash and cash equivalents and Term Facilities approximates fair value, as these are short-term instruments that bear interest at floating rates. The carrying value of the Notes was $150,000 at December 31, 2001 and 2000. The fair value of the Notes, determined based on the quoted market price, was $154,425 and $145,500 at December 31, 2001 and 2000, respectively. 13. BUSINESS SEGMENTS The Company's two operating segments at December 31, 2001 are DonTech and Directory Advertising Services ("DAS"). Get Digital Smart, the Company's Internet business, was an operating segment during 2000 and 1999 until the Company ceased operations of this business in December 2000. The DonTech segment includes the Company's 50% interest in the net profits of DonTech and the revenue participation income received from SBC. Income from DonTech accounted for 79%, 72% and 83% of operating income before General & Corporate costs and other unallocated expenses for the years ended December 31, 2001, 2000 and 1999, respectively. Although DonTech provides advertising sales of yellow pages and other directory products similar to DAS, the partnership is considered a separate operating segment since, among other things, it has its own Board of Directors and the employees of DonTech, including officers and managers, are not employees of the Company. Within the DAS segment, the Company provides yellow pages advertising sales for affiliated entities of Sprint and performs pre-press publishing services for yellow pages directories. The DAS segment also includes all information technology costs. Operating income for DAS includes the results of, and those costs directly incurred by, each constituent business unit, less an allocation of certain shared expenses based on estimated business usage. DAS results for 2000 and 1999 also include the operating results of the Bell Atlantic and Cincinnati businesses and the Company's share of the losses of ChinaBig through the dates of transactions that caused changes to the reporting of each respective business unit and certain one-time items from the restructuring of the CenDon relationship in 2000 (see Note 4 - Disposition of Businesses and Note 5 - Partnership and Joint Venture Investments). Operating income from DAS accounted for 21%, 28% and 17% of operating income before General & Corporate costs and other unallocated expenses for the years ended December 31, 2001, 2000 and 1999, respectively. General & Corporate includes those expenses not allocated to the DAS segment. Interest expense, interest income, income tax expense and other non-operating income and expenses are not allocated to the operating segments. 39 Segment information for the years ended December 31, 2001, 2000 and 1999 is presented below:
Directory DonTech Advertising General Consolidated 2001 Partnership Services & Corporate Other (1) Totals ---------------------------------------------------------------------------------- Advertising sales (unaudited) (2) Publication sales........................ $433,974 $193,535 $627,509 Calendar sales........................... 422,586 185,280 607,866 Net revenue................................ 76,739 76,739 Operating income (loss).................... 122,419 32,885 $ (13,844) $ (29,988) 111,472 Depreciation and amortization.............. 10,149 618 10,767 EBITDA (3)................................. 122,419 43,034 (13,226) (29,988) 122,239 Total assets............................... 193,810 38,644 63,527 295,981
Directory Get DonTech Advertising Digital General Consolidated 2000 Partnership Services (4) Smart & Corporate Totals ---------------------------------------------------------------------------------- Advertising sales (unaudited) (2) Publication sales........................ $430,529 $ 431,375 $ 861,904 Calendar sales........................... 428,201 469,469 897,670 Net revenue................................ 141,124 $ 163 141,287 Operating income (loss).................... 124,025 48,092 (8,914) $ (15,828) 147,375 Depreciation and amortization.............. 13,841 57 1,535 15,433 EBITDA (3)................................. 124,025 61,933 (8,857) (14,293) 162,808 Total assets............................... 197,822 47,270 120,192 365,284
Directory Get DonTech Advertising Digital General Consolidated 1999 Partnership Services (4) Smart & Corporate Totals ---------------------------------------------------------------------------------- Advertising sales (unaudited) (2) Publication sales........................ $426,580 $617,570 $1,044,150 Calendar sales........................... 432,348 634,380 1,066,728 Net revenue................................ 181,905 181,905 Operating income (loss).................... 123,524 24,780 $ (1,329) $ (17,069) 129,906 Depreciation and amortization.............. 16,126 2,193 18,319 EBITDA (3)................................. 123,524 40,906 (1,329) (14,876) 148,225 Total assets............................... 197,307 139,394 58,705 395,406
(1) Other in 2001 represents the restructuring and special charge of $18,556 and investment impairment charge of $11,432, which were not allocated to an operating segment. (2) Advertising sales represent the billing value of advertisements sold for an annual directory by the Company and DonTech. Calendar sales represent the billing value of advertisements sold for an annual directory stated on the same basis as revenue is recognized. Publication sales represent sales for directories that published in the current period regardless of when the advertising for that directory was sold. These sales are compared against sales for the same directories published in the prior year period. If events occur during the current year that affects the comparability of publication sales to the prior year, such as changes in directory publication dates or other contractual changes, then prior year publication sales are adjusted to conform to the current year presentation and maintain comparability. Accordingly, for comparative purposes, DAS publication sales for 2000 have been increased by $1,667 and DonTech sales for 2000 and 1999 have been decreased by $286 and $982, respectively, as a result of changes in directory publication dates and contractual changes. (3) EBITDA represents earnings before interest, taxes and depreciation and amortization. EBITDA is not a measurement of operating performance computed in accordance with generally accepted accounting principles and should not be considered as a substitute for operating income or net income prepared in conformity with generally accepted accounting principles. In addition, EBITDA may not be comparable to similarly titled measures of other companies. 40 (4) The Directory Advertising Services segment includes the following data relating to the Bell Atlantic and Cincinnati businesses that were disposed of in 2000 and certain one-time items related to the CenDon restructuring.
2000 1999 ------------------------ Advertising sales (unaudited) (2) Publication sales............................. $238,131 $436,870 Calendar sales................................ 277,768 453,971 Net revenue...................................... 63,831 106,986 Operating income................................. 22,105 8,867 Depreciation and amortization.................... 2,703 5,536 EBITDA (3)....................................... 24,808 14,403 Total assets..................................... -- 64,193
14. VALUATION AND QUALIFYING ACCOUNTS
Additions Balance at Charged To Write-offs and Beginning Revenue and Other Balance at End of Period Expense Deductions of Period -------------------------------------------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS For the year ended December 31, 2001................ $ 7,355 3,372 4,388 $ 6,339 For the year ended December 31, 2000................ $ 7,992 11,128 11,765 $ 7,355 For the year ended December 31, 1999................ $ 8,765 8,571 9,344 $ 7,992 DEFERRED TAX ASSET VALUATION ALLOWANCE For the year ended December 31, 2001................ $ -- 4,287 -- $ 4,287
15. QUARTERLY INFORMATION (UNAUDITED)
Three Months Ended --------------------------------------------------------------- March 31 June 30 September 30 December 31 (1) Full Year ----------------------------------------------------------------------------- 2001 Net revenue ........................ $18,839 $20,034 $22,165 $15,701 $76,739 Operating income ................... 27,661 39,208 47,316 (2,713) 111,472 Income before extraordinary loss (2) 13,209 20,612 25,688 (9,253) 50,256 Net income ......................... 12,861 20,612 25,688 (9,346) 49,815 Basic earnings per share, before extraordinary loss ............. $0.43 $0.68 $0.86 $(0.31) $1.66 Diluted earnings per share, before extraordinary loss ............. $0.42 $0.66 $0.83 $(0.31) $1.62 Basic earnings per share, after extraordinary loss ............. $0.42 $0.68 $0.86 $(0.32) $1.65 Diluted earnings per share, after extraordinary loss ............. $0.41 $0.66 $0.83 $(0.32) $1.61
41
Three Months Ended -------------------------------------------------------------- March 31 June 30 (3) September 30 December 31 (4) Full Year --------------------------------------------------------------------------- 2000 Net revenue ............................ $41,389 $60,160 $22,778 $16,960 $141,287 Operating income ....................... 25,574 52,210 45,641 23,950 147,375 Income before extraordinary loss (2) ... 9,685 81,851 24,117 9,809 125,462 Net income ............................. 9,685 81,851 23,413 9,809 124,758 Basic earnings per share, before extraordinary loss ................. $0.30 $2.56 $0.76 $0.31 $3.93 Diluted earnings per share, before extraordinary loss ................. $0.29 $2.50 $0.74 $0.30 $3.85 Basic earnings per share, after extraordinary loss ................. $0.30 $2.56 $0.74 $0.31 $3.91 Diluted earnings per share, after extraordinary loss ................. $0.29 $2.50 $0.72 $0.30 $3.83
The full year earnings per share (EPS) amount may not equal the sum of the quarters. EPS for each quarter is computed using the weighted average number of shares outstanding during the quarter while EPS for the year is computed using the weighted average number of shares outstanding during the year. Also, for diluted EPS, the effect of potentially dilutive shares is not included in those periods where the effect would have been anti-dilutive. (1) The fourth quarter of 2001 includes a pretax restructuring and special charge of $18,556 and an investment impairment charge of $11,432. (2) The Company recognized an extraordinary loss in 2001 and 2000 relating to the prepayment of debt and write-off of related deferred financing costs. (3) The second quarter of 2000 includes a one-time operating income benefit of $15,771 from the restructuring of the CenDon relationship and pretax gain of $89,435 from the disposition of Bell Atlantic and Cincinnati businesses and related strategic cost cutting initiatives. (4) The fourth quarter of 2000 includes a pretax loss of $2,940 from the disposition of the Get Digital Smart operations. 42 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Partners of DonTech I and DonTech II In our opinion, the accompanying combined balance sheets and the related combined statements of partners' capital, operations and cash flows present fairly, in all material respects, the combined financial position of AM-DON (doing business as "DonTech" and hereafter referred to as "DonTech I") and the DonTech II Partnership ("DonTech II") at December 31, 2001 and 2000, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the management of DonTech I and DonTech II; our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 our opinion. /s/ PRICEWATERHOUSECOOPERS LLP January 18, 2002 43 DONTECH COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------------------ 2001 2000 1999 - ----------------------------------------------------------------------------------- (in thousands) Sales .............................. $106,849 $108,316 $109,260 Less allowances .................... -- -- 6,364 ------------------------------------------ Net sales .................... 106,849 108,316 102,896 Expenses Selling .......................... 48,810 49,327 44,994 Printing and manufacturing ....... -- -- 19 Delivery ......................... -- -- 2 Administrative ................... 10,356 8,493 9,440 Occupancy and depreciation ....... 9,058 8,174 6,883 Other ............................ 1,190 1,640 1,670 ------------------------------------------ Total operating expenses ..... 69,414 67,634 63,008 ------------------------------------------ Income from operations ....... 37,435 40,682 39,888 Other income ....................... 1,191 736 1,422 ------------------------------------------ Net income ................... $ 38,626 $ 41,418 $ 41,310 ==========================================
The accompanying notes are an integral part of the financial statements. 44 DONTECH COMBINED BALANCE SHEETS
DECEMBER 31, --------------------------- 2001 2000 - ----------------------------------------------------------------------------------------------------------- (in thousands, except share and per share data) ASSETS CURRENT ASSETS Cash and cash equivalents ............................................... $ 3,946 $ 5,371 Commission receivable - from related party .............................. 108,475 110,925 Prepaid expenses ........................................................ 212 103 --------------------------- Total current assets ................................................ 112,633 116,399 Fixed assets, net of accumulated depreciation and amortization ............ 7,086 8,115 Pension asset ............................................................. 9,759 9,677 Other ..................................................................... 1,662 1,738 --------------------------- Total Assets ........................................................ $131,140 $135,929 =========================== LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES Accounts payable ........................................................ $ 1,573 $ 2,121 Accrued liabilities ..................................................... 9,154 8,621 --------------------------- Total current liabilities ........................................... 10,727 10,742 Partners' capital ......................................................... 120,413 125,187 --------------------------- Total Liabilities and Partners' Capital ............................. $131,140 $135,929 ===========================
The accompanying notes are an integral part of the financial statements. 45 DONTECH COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, --------------------------------------------- 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income ..................................................................... $ 38,626 $ 41,418 $ 41,310 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization ............................................ 2,360 2,135 2,615 Provision for uncollectible accounts ..................................... -- -- 6,364 Loss on disposal of fixed assets ......................................... -- 44 -- Changes in assets and liabilities: Decrease (increase) in commission receivable ........................ 2,450 2,815 (94) Increase in other current assets .................................... (115) (486) (4,157) Decrease in accounts payable ........................................ (548) (325) (4,090) Increase in accrued liabilities ..................................... 533 1,090 201 --------------------------------------------- Net cash provided by operating activities ...................... 43,306 46,691 42,149 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of equipment ......................................................... (1,331) (3,153) (1,288) CASH FLOWS FROM FINANCING ACTIVITIES Distributions to partners ...................................................... (43,400) (57,575) (42,396) --------------------------------------------- Decrease in cash and cash equivalents ............................... (1,425) (14,037) (1,535) Cash and cash equivalents, beginning of year ................................... 5,371 19,408 20,943 --------------------------------------------- Cash and cash equivalents, end of year ......................................... $ 3,946 $ 5,371 $ 19,408 ============================================= NONCASH FINANCING ACTIVITIES Forgiveness of receivable due from API/IL $ -- $ 16,567 $ -- =============================================
The accompanying notes are an integral part of the financial statements. 46 DONTECH COMBINED STATEMENTS OF PARTNERS' CAPITAL
R.H. AMERITECH DONNELLEY PUBLISHING OF (in thousands) CORPORATION ILLINOIS, INC. TOTAL - ------------------------------------------------------------------------------------ Balance, December 31, 1998 ..... $ 94,786 $ 64,211 $ 158,997 Net income ..................... 20,312 20,998 41,310 Distributions to partners ...... (21,896) (20,500) (42,396) ----------------------------------------------- Balance, December 31, 1999 ..... 93,202 64,709 157,911 Net income ..................... 20,671 20,747 41,418 Distributions to partners ...... (21,381) (52,761) (74,142) ----------------------------------------------- Balance, December 31, 2000 ..... 92,492 32,695 125,187 Net income ..................... 19,313 19,313 38,626 Distributions to partners ...... (21,700) (21,700) (43,400) ----------------------------------------------- Balance, December 31, 2001 ..... $ 90,105 $ 30,308 $ 120,413 ===============================================
The accompanying notes are an integral part of the financial statements. 47 DONTECH NOTES TO COMBINED FINANCIAL STATEMENTS (IN THOUSANDS,) 1. FORM OF ORGANIZATION AND NATURE OF BUSINESS AM-DON d.b.a. DonTech ("DonTech I") is a general partnership between R.H. Donnelley Inc. (formerly known as The Reuben H. Donnelley Corporation) ("R. H. Donnelley"), a Delaware corporation, and Ameritech Publishing of Illinois, Inc. ("API/IL"), an Illinois corporation, doing business as Ameritech Advertising Services ("Aas"). Under a new structure as defined in the "Master Agreement" dated August 19, 1997, the existing partnership is defined as "DonTech I". Concurrently, API/IL and R. H. Donnelley formed a new partnership defined as "DonTech II". DonTech I participated in a Directory Agreement with R. H. Donnelley, Illinois Bell Telephone Company ("IBT"), doing business as Ameritech Illinois, API/IL and Aas. DonTech I also participated in a Subcontracting Agreement with Ameritech Publishing, Inc. ("API") to perform certain of API's obligations under the Publishing Services Contract between API and Indiana Bell Telephone Company, Incorporated ("Indiana Bell"), doing business as Ameritech Indiana. DonTech I published various directories, as identified in the Directory Agreements, solicited advertising, its primary source of revenues, and manufactured and delivered such directories. DonTech I's net income is allocated to each partner based on a predefined percentage as set forth in the amended partnership agreement. In accordance with the Second Amended and Restated AM-Don Partnership Agreement, effective August 19, 1997, the DonTech I partnership ceased publishing directories as of January 1, 1998. The partnership recognized the deferred revenue and expenses recorded as of December 31, 1997 over the remaining life of those directories published prior to January 1, 1998. As of December 31, 2000, DonTech I ceased business operations and it's remaining assets were distributed to its partners. In August 1997, R.H. Donnelley and API/IL reached an agreement regarding a revised partnership structure through which a new DonTech partnership became the exclusive sales agent in perpetuity for the yellow page, white page and street address directories to be published by API for Illinois, Northwest Indiana and Michigan. The new partnership, known as "DonTech II", receives a 27% commission on sales net of provisions (capped at 6.1% subject to certain exclusions). DonTech II's cost structure includes principally sales, sales operations, office services, finance, facilities and related overhead. DonTech II profits are shared equally between the partners. During the term of the partnership agreement, neither partner may compete directly against the business of DonTech II without the consent of the Board of Directors. A Board of Directors (the "Board") was appointed to administer the activities of each partnership. From time to time during the term of the partnership, the Board may call for additional capital contributions in equal amounts from each of the partners if, in the opinion of the Board, additional capital is required for the operation of the partnership. The accompanying financial statements of DonTech I and DonTech II are shown on a combined basis. All significant affiliated accounts and transactions have been eliminated in preparation of the combined financial statements. On January 28, 2000, the respective partners of the DonTech I partnership agreed to amend the DonTech I partnership agreement to provide for the payment of $29,898 from the DonTech I partnership to API/IL as a preferential distribution. The preferential distribution was comprised of cash funds totaling $13,331 and the forgiveness and cancellation of a receivable due from API/IL to the partnership in the amount of $16,567. Additionally, the partners of Don Tech II also agreed to amend the DonTech II partnership agreement to provide for the payment of $29,898 by API/IL to the DonTech II Partnership upon the dissolution of the Don Tech II partnership and for the subsequent payment of a $29,898 preferential distribution to R. H. Donnelley. 2. SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents. Cash and cash equivalents include all highly liquid investments with an initial maturity date of three months or less. The carrying value of cash equivalents approximates fair value due to their short-term nature. 48 Revenue Recognition. Substantially all DonTech I sales made to customers in the cities covered by the directories are recorded as deferred sales revenue and accounts receivable in the month of publication. Revenue related to these sales is recognized over the lives of the directories, generally twelve months. Sales made to customers outside the cities covered by the directories are recognized each quarter. Sales for national accounts are recognized in full in the month of publication. For DonTech II, revenue is comprised of sales commissions reflected net of provisions (capped at 6.1% per annum subject to certain exclusions) and is recognized upon execution of contracts for the sale of advertising. Fixed Assets. Fixed assets are recorded at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. Upon asset retirement or other disposition, the cost and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in the statement of operations. Amounts incurred for repairs and maintenance are charged to operations. Post-Retirement Benefits Other Than Pensions. DonTech II is obligated to provide post-retirement benefits consisting mainly of life and health insurance to substantially all employees and their dependents. The accrual method of accounting is utilized for post-retirement health care and life insurance benefits. Income Taxes. No provision for income taxes is made, as the proportional share of each partnership's income is the responsibility of the individual partners. Concentration of Credit Risk. Financial instruments that potentially subject DonTech II to a concentration of credit risk consist principally of commission receivable. DonTech II's commission receivable is due from one of its partners, Aas. Collateral is not required. During 1999, DonTech I recorded a $6.2 million charge related to bad debts that has been allocated to each partner based on their respective share of partnership and loss as stipulated in the Don Tech I partnership agreement. 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the reporting period. Actual results could differ from those estimates. Recent Pronouncements. In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.141, "Business Combinations" ("SFAS 141") and SFAS No.142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. It also defines the criteria for identifying intangible assets for recognition apart from goodwill. SFAS 142 addresses the recognition and measurement of goodwill and other intangible assets subsequent to their acquisition. This statement requires that intangible assets with finite useful lives be amortized and intangible assets with indefinite lives and goodwill no longer be amortized, but instead tested for impairment at least annually. The adoption of SFAS 141 and 142 will not have a material impact on DonTech II's financial position or results of operations. In August 2001, the FASB issued SFAS No.143, "Accounting for Asset Retirement Obligations" ("SFAS 143") which is effective for fiscal years beginning after June 15, 2002. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of SFAS 143 will not have a material impact on DonTech II's financial position or results of operations. In October 2001, the FASB issued SFAS No.144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") which is effective for fiscal years beginning after December 15, 2001. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of' while retaining many of the provisions of that statement. SFAS 144 also supercedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting for the Impairment or Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("APB No. 30"). The adoption of SFAS 144 will not have a material impact on DonTech II's financial position or results of operations. 49 3. FIXED ASSETS Fixed assets consist of the following at December 31:
2001 2000 ------------------------- Equipment ........................................ $15,990 $15,243 Furniture and fixtures ........................... 7,261 7,110 Leasehold improvements ........................... 1,970 1,903 Other ............................................ 366 -- ------------------------- 25,587 24,256 Less accumulated depreciation and amortization ... 18,501 16,141 ------------------------- $ 7,086 $ 8,115 =========================
Depreciation expense for the three years ended December 31, 2001, 2000 and 1999 was $2,360, $2,135 and $2,615, respectively. During the year ended December 31, 2000, DonTech II disposed of $9,565 of fixed assets that were no longer being utilized. Most of the assets were fully depreciated. This disposal activity resulted in a net loss of $44, which is reflected in the statement of operations for the year ended December 31, 2000. 4. ACCRUED LIABILITIES Accrued liabilities consist of the following at December 31:
2001 2000 ----------------------- Accrued bonuses, commissions and other employee expenses ..... $4,184 $3,875 Accrued post-retirement benefits other than pensions ......... 3,230 2,942 Deferred compensation ........................................ 1,662 1,738 Other accrued liabilities .................................... 78 66 ----------------------- $9,154 $8,621 =======================
5. RELATED PARTY TRANSACTIONS Amended Partnership Allocation. The partners negotiated settlement agreements regarding excessive bad debt write-offs incurred by DonTech I during the year ended December 31, 1999. The agreements provided for special allocations of the excessive bad debts between the partners based upon a negotiated ratio. The effect of these settlement agreements has been included in the allocation of net income as presented in the statement of partners' capital at December 31, 1999. DonTech II. Under the provisions of a "Revenue Participation Agreement" between APIL Partners Partnership and R.H. Donnelley dated August 19, 1997, in exchange for exclusive publishing rights, APIL Partners Partnership agrees to pay R.H. Donnelley revenue participation interests. The revenue participation interests are based upon gross revenues of the DonTech II partnership net of provisions (capped at 6.1% per annum subject to certain exclusions) and sales commissions paid to DonTech II. The revenue participation interest was 35.9% in 1999 and thereafter. Payment of the revenue participation interest is outside of the DonTech II partnership structure and is not reflected in the combined financial statements. DonTech II purchases insurance services and through August 2000 purchased automobile plan administration from R.H. Donnelley, and general ledger and purchasing services from Aas. DonTech II also provides facility space for certain employees of Aas under an agreement entered into in 1998. 6. CONTINGENCIES AND COMMITMENTS DonTech II leases certain office facilities under noncancelable lease arrangements. Rent expense under these operating leases was approximately $2,223, $2,119 and $1,807 for 2001, 2000 and 1999, respectively. During 2000, DonTech II entered into a sublease agreement with Aas whereby DonTech II received $54 and $30 of sublease rental income from SBC during 2001 and 2000, respectively. 50 The future minimum lease payments required under noncancelable operating leases that have initial or remaining lease terms in excess of one year as of December 31, 2001 are as follows: 2002............................................. $ 4,121 2003............................................. 4,026 2004............................................. 3,806 2005............................................. 3,756 2006 and thereafter.............................. 14,811 ----------- $30,520 ===========
In September 1998, DonTech II entered into a maintenance service agreement with Ameritech to provide maintenance services, including parts, to DonTech II. The length of the agreement is five years. According to the terms of the agreement, DonTech II's obligations as of December 31, 2001 are $116 in 2002 and $79 in 2003. 7. EMPLOYEE RETIREMENT AND PROFIT PARTICIPATION PLANS DonTech II sponsors a defined benefit pension plan covering substantially all of its employees (the "Principal Plan"). The Principal Plan's assets are invested in equity funds, fixed income funds and real estate. Total expense (benefit) for the Principal Plan was $29, $(342) and $564 for 2001, 2000, and 1999 respectively. The following provides a reconciliation of benefit obligations, plan assets, and the funded status of the Principal Plan.
2001 2000 ---------------------------- CHANGE IN BENEFIT OBLIGATION Projected benefit obligation, beginning of year ...................... $ 24,477 $ 20,434 Service cost ......................................................... 1,116 1,093 Interest cost ........................................................ 1,765 1,683 Benefits paid ........................................................ (934) (728) Actuarial (gain) loss ................................................ (575) 1,641 Effect of plan amendments, assumption changes and other charges ...... 431 354 ---------------------------- Projected benefit obligation, end of year ............................ $ 26,280 $ 24,477 ============================ CHANGE IN PLAN ASSETS Market value of assets, at January 1 ................................. $ 31,618 $ 30,842 Benefits paid ........................................................ (934) (728) Contributions ........................................................ 60 767 Actual return on assets .............................................. (718) 737 ---------------------------- Market value of assets, at December 31 ............................... $ 30,026 $ 31,618 ============================ Funded status of the plan ............................................ $ 3,746 $ 7,141 Unrecognized net loss ................................................ 4,250 404 Unrecognized prior service costs ..................................... 1,127 1,547 ---------------------------- Prepaid cost ......................................................... $ 9,123 $ 9,092 ============================
Net periodic pension (benefit) cost for the Plan in 2001, 2000 and 1999 include the following components:
2001 2000 1999 ----------------------------------------- Service cost .......................................... $ 1,116 $ 1,093 $ 1,027 Interest cost ......................................... 1,765 1,683 1,364 Expected return on assets ............................. (3,282) (3,430) (2,255) Amortization of net loss (gain) ....................... 4 (114) 2 Amortization of unrecognized prior service cost ....... 426 426 426 ----------------------------------------- Total pension cost (benefit) .......................... $ 29 $ (342) $ 564 =========================================
51 Assumptions used are as follows:
2001 2000 1999 --------------------------------- Discount rate......................................... 7.25% 7.50% 7.75% Expected long-term rate of return..................... 10.50% 10.50% 9.75% Weighted average compensation increase................ 3.91% 4.16% 4.16%
In the fourth quarter of 2000, the Partnership changed the method of accounting used to determine the value of plan assets for purposes of calculating annual pension expense. The method was changed from a market-related value whereby gains and losses are recognized on a straight-line basis over five years to market value whereby gains and losses are reflected immediately. The effect of this change on the 2000 results of operations, including the cumulative effect of prior years, was not material. Additionally, DonTech II has a Profit Participation Plan (the "Profit Plan") that covers substantially all employees. Employees may voluntarily contribute up to 6% of their salaries to the Profit Plan and are guaranteed a matching contribution of fifty cents per dollar contributed. DonTech II also makes contributions to the Profit Plan based on a formula and contingent upon the attainment of financial goals set in advance as defined in the Profit Plan agreement. The contributions made to the plan were $944, $854 and $782 in 2001, 2000 and 1999, respectively. 8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS DonTech II provides postretirement health care and life insurance benefits to certain retired employees and their dependents. The following provides a reconciliation of benefit obligations, plan assets and the funded status of the health and life insurance plans.
2001 2000 -------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation, beginning of year ....... $ 3,326 $ 2,951 Service cost ................................ 126 154 Interest cost ............................... 261 231 Plan participants' contributions ............ 36 27 Amendments .................................. -- 50 Actuarial loss .............................. 536 99 Benefits paid ............................... (233) (186) -------------------------- Benefit obligation, end of year ............. $ 4,052 $ 3,326 ========================== CHANGE IN PLAN ASSETS Market value of assets, at January 1 ........ $ -- $ -- Employer contributions ...................... 197 159 Plan participants' contributions ............ 36 27 Benefits paid ............................... (233) (186) -------------------------- Market value of assets, at December 31, ..... $ -- $ -- ========================== Funded status of plan ....................... $ 4,052 $ 3,326 Unrecognized actuarial gain ................. (656) (121) Unrecognized prior service benefit .......... (166) (263) -------------------------- Accrued cost ................................ $ 3,230 $ 2,942 ==========================
Net periodic postretirement benefit cost for 2001, 2000 and 1999 include the following components:
2001 2000 1999 ------------------------------ Service cost ................. $224 $251 $253 Interest cost ................ 261 231 196 ------------------------------ Net periodic benefit cost .... $485 $482 $449 ==============================
The discount rate used in determining the benefit obligation as of December 31, 2001 and 2000 was 7.25% and 7.50%, respectively. The assumed health care cost trend rate used in measuring the benefit obligation as of December 31, 2001 and 2000 52 was 9.5% and 6.5%, respectively. The rates are assumed to decrease gradually to 5.0% for 2015 and remain at that level thereafter. Increasing the health care cost trend rates by one percentage point would not have had a material effect on the net periodic post-retirement expense for the year ended December 31, 2001 but would have increased the benefit obligation at December 31, 2001 by $354. 9. VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions Beginning of Charged to Cost Balance at End Period and Expenses Deductions (1) of Period ------------------------------------------------------------------------ ALLOWANCE FOR DOUBTFUL ACCOUNTS For the year ended December 31, 2001 ..... $ -- -- -- $ -- For the year ended December 31, 2000 ..... $ 61 -- 61 $ -- For the year ended December 31, 1999 ..... $2,187 6,364 8,490 $ 61
(1) Includes accounts written off and other allowances made. 53 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES There have been no changes in, or disagreements with the Company's independent auditors, or the independent auditors of DonTech for the three-year period ended December 31, 2001. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information in response to this Item is incorporated herein by reference to the section entitled "Board of Directors" on pages 7-8 in the Company's Proxy Statement dated March 25, 2002 filed with the Securities and Exchange Commission, except that "Executive Officers of the Registrant" on pages 4-5 of this Report responds to Item 401(b) and (e) of Regulation S-K with respect to executive officers. ITEM 11. EXECUTIVE COMPENSATION Information in response to this Item is incorporated herein by reference to the section entitled "Director and Executive Compensation" on pages 11-12 in the Company's Proxy Statement dated March 25, 2002 filed with the Securities and Exchange Commission. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information in response to this Item is incorporated herein by reference to the section entitled "Security Ownership of Certain Beneficial Owners and Management" on pages 22-23 in the Company's Proxy Statement dated March 25, 2002 filed with the Securities and Exchange Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information in response to this Item is incorporated herein by reference to the section entitled "Compensation Committee Interlocks and Insider Participation; Certain Relationships and Related Party Transactions" on page 21 in the Company's Proxy Statement dated March 25, 2002 filed with the Securities and Exchange Commission. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A)(1) AND (2) - LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following consolidated financial statements of the Company are included under Item 8: Consolidated Statements of Operations for the three years ended December 31, 2001 Consolidated Balance Sheets at December 31, 2001 and 2000 Consolidated Statements of Cash Flows for the three years ended December 31, 2001 Consolidated Statements of Changes in Shareholders' Deficit for the three years ended December 31, 2001 Notes to Consolidated Financial Statements The following combined financial statements for DonTech are included under Item 8: Combined Statements of Operations for the three years ended December 31, 2001 Combined Balance Sheets at December 31, 2001 and 2000 Combined Statements of Cash Flows for the three years ended December 31, 2001 Combined Statements of Partners' Capital for the three years ended December 31, 2001 Notes to Combined Financial Statements 54 The following financial statement schedule for the Company is included under Item 8: Schedule II - Valuation and Qualifying Accounts (included as Footnote 14 - Valuation and Qualifying Accounts, in the Notes to Consolidated Financial Statements) (C) EXHIBITS:
EXHIBIT NO. DOCUMENT 3.1 Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for the three months ended March 31, 1999, Commission File No. 001-07155) 3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to the Quarterly Report on Form 10-Q for the three months ended March 31, 1999, Commission File No. 001-07155) 3.3 Certificate of Incorporation of R.H. Donnelley Inc. (incorporated by reference to Exhibit 3.3 to Amendment No. 1 to the Registration Statement on Form S-4, filed with the Securities and Exchange Commission on August 7, 1998, Registration No. 333-59287) 3.4 By-laws of R.H. Donnelley Inc. (incorporated by reference to Exhibit 3.4 to the Registration Statement on Form S-4, filed with the Securities and Exchange Commission on July 17, 1998, Registration No. 333-59287) 4.1 Indenture dated as of June 5, 1998 between R.H. Donnelley Inc., as Issuer, the Company, as Guarantor, and the Bank of New York, as Trustee, with respect to the 9 1/8% Senior Subordinated Notes due 2008 (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4, filed with the Securities and Exchange Commission on July 17, 1998, Registration No. 333-59287) 4.2 Form of the 9 1/8% Senior Subordinated Notes due 2008 (included in Exhibit 4.1) 4.3 Company Guarantee (included in Exhibit 4.1) 4.4 Rights Agreement, dated as of October 27, 1998 between R.H. Donnelley Corporation and First Chicago Trust Company (incorporated by reference to Exhibit 4 to the Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on November 5, 1998, Registration No. 001-07155) 4.5 Amendment No. 1 to Rights Agreement dated as of February 26, 2001 by and among R.H. Donnelley Corporation, First Chicago Trust Company of New York (as initial Rights Agent) and The Bank of New York (as successor Rights Agent) (incorporated by reference to Exhibit 4.5 to the Annual Report on Form 10-K for the year ended December 31, 2000, Commission File No. 001-07155) 10.1 Form of Distribution Agreement between the Company (f/k/a The Dun & Bradstreet Corporation) and The New Dun & Bradstreet Corporation (incorporated by reference to Exhibit 99.2 to the Form 8-K of the Company (f/k/a The Dun & Bradstreet Corporation), filed on June 30, 1998, Commission File No. 001-07155) 10.2 Form of Tax Allocation Agreement between the Company (f/k/a The Dun & Bradstreet Corporation) and The New Dun & Bradstreet Corporation (incorporated by reference to Exhibit 99.3 to the Form 8-K of the Company (f/k/a The Dun & Bradstreet Corporation), filed on June 30, 1998, Commission File No. 001-07155)
55
EXHIBIT NO. DOCUMENT 10.3 Form of Employee Benefits Agreement between the Company (f/k/a The Dun & Bradstreet Corporation) and The New Dun & Bradstreet Corporation (incorporated by reference to Exhibit 99.4 to the Form 8-K of the Company (f/k/a The Dun & Bradstreet Corporation), filed on June 30, 1998, Commission File No. 001-07155) 10.4 Form of Intellectual Property Agreement between the Company (f/k/a The Dun & Bradstreet Corporation) and The New Dun & Bradstreet Corporation (incorporated by reference to Exhibit 99.5 to the Form 8-K of the Company (f/k/a The Dun & Bradstreet Corporation), filed on June 30, 1998, Commission File No. 001-07155) 10.5 Form of Amended and Restated Transition Services Agreement between the Company (f/k/a The Dun & Bradstreet Corporation), The New Dun & Bradstreet Corporation, Cognizant Corporation, IMS Health Incorporated, ACNielsen Corporation and Gartner Group, Inc. (incorporated by reference to Exhibit 99.9 to the Form 8-K of the Company (f/k/a The Dun & Bradstreet Corporation), filed on June 30, 1998, Commission File No. 001-07155) 10.6 Credit Agreement among the Company, R.H. Donnelley Inc., The Chase Manhattan Bank, as Administrative Agent and the Lenders party thereto (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-4, filed with the Securities and Exchange Commission on July 17, 1998, Registration No. 333-59287) 10.7 First Amendment to Credit Agreement, dated as of March 4, 1999, among the Company, R.H. Donnelley Inc., The Chase Manhattan Bank, as Administrative Agent, and the Lenders party thereto (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the three months ended March 31, 1999, Commission File No. 001-07155) 10.8 DonTech II Partnership Agreement, effective August 19, 1997, by and between R.H. Donnelley Inc. (f/k/a The Reuben H. Donnelley Corporation) and Ameritech Publishing of Illinois, Inc. (incorporated by reference to Exhibit 10.10 to Amendment No. 1 to the Registration Statement on Form S-4, filed with the Securities and Exchange Commission on August 7, 1998, Registration No. 333-59287) 10.9 Revenue Participation Agreement, dated as of August 19, 1997, by and between APIL Partners Partnership and R.H. Donnelley Inc. (f/k/a The Reuben H. Donnelley Corporation) (incorporated by reference to Exhibit 10.11 to Amendment No. 1 to the Registration Statement on Form S-4, filed with the Securities and Exchange Commission on August 7, 1998, Registration No. 333-59287) 10.10 Master Agreement, executed August 19, 1997, by and among R.H. Donnelley Inc. (f/k/a The Reuben H. Donnelley Corporation), the Company (f/k/a The Dun & Bradstreet Corporation), The Am-Don Partnership a/k/a DonTech, DonTech II, Ameritech Publishing, Inc., Ameritech Publishing of Illinois, Inc., Ameritech Corporation, DonTech I Publishing Company LLC and the APIL Partners Partnership (incorporated by reference to Exhibit 10.12 to Amendment No. 1 to the Registration Statement on Form S-4, filed with the Securities and Exchange Commission on August 7, 1998, Registration No. 333-59287) 10.11 Exclusive Sales Agency Agreement, effective August 19, 1997, between APIL Partners Partnership and DonTech II (incorporated by reference to Exhibit 10.13 to Amendment No. 1 to the Registration Statement on Form S-4, filed with the Securities and Exchange Commission on August 7, 1998, Registration No. 333-59287)
56
EXHIBIT NO. DOCUMENT 10.12 Second Amended and Restated Partnership Agreement, effective as of August 19, 1997, by and between R.H. Donnelley Inc. (f/k/a The Reuben H. Donnelley Corporation) and Ameritech Publishing of Illinois (incorporated by reference to Exhibit 10.14 to Amendment No. 1 to the Registration Statement on Form S-4, filed with the Securities and Exchange Commission on August 7, 1998, Registration No. 333-59287) 10.13/\ Key Employees' Performance Unit Plan, as amended and restated (incorporated by reference to Exhibit 10.15 to Amendment No. 3 to the Registration Statement on Form S-4, filed with the Securities and Exchange Commission on September 28, 1998, Registration No. 333-59287) 10.14/\ 1991 Key Employees' Stock Option Plan, as amended and restated through April 25, 2000 (incorporated by reference to Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q for the three months ended September 30, 2000, Commission File No. 001-07155) 10.15/\ Amended and Restated 1998 Directors' Stock Plan (incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 001-07155) 10.16*/\ Pension Benefit Equalization Plan 10.17*/\ 2001 Stock Award and Incentive Plan 10.18/\ 2001 Partner Share Plan (incorporated by reference to Exhibit 99.1 to Registration Statement on Form S-8, filed with the Securities and Exchange Commission on April 30, 2001, Registration No. 333-59790) 10.19/\ Form of Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 99.02 to Registration Statement on Form S-8, filed with the Securities and Exchange Commission on July, 25, 2001, Registration No. 333-65822) 10.20/\ Form of Annual Incentive Program Award (incorporated by reference to Exhibit 99.03 to Registration Statement on Form S-8, filed with the Securities and Exchange Commission on July, 25, 2001, Registration No. 333-65822) 10.21/\ Form of Performance Unit Program Award (incorporated by reference to Exhibit 99.04 to Registration Statement on Form S-8, filed with the Securities and Exchange Commission on July, 25, 2001, Registration No. 333-65822) 10.22/\ Deferred Compensation Plan (incorporated by reference to Exhibit 4.01 to the Company's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on November 24, 1999, Registration No. 333-91613) 10.23*/\ Amended and Restated Employment Agreement dated as of December 27, 2001 between the Company and Frank R. Noonan 10.24*/\ Amended and Restated Employment Agreement dated as of December 27, 2001 between the Company and Philip C. Danford 10.25/\ Employment Agreement dated as of September 28, 1998 between the Company and David C. Swanson (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, Commission File No. 001-07155)
57
EXHIBIT NO. DOCUMENT 10.26/\ Amendment No. 1 to Employment Agreement dated as of July 27, 2000 between the Company and David C. Swanson (incorporated by reference to Exhibit 10.24 to the Annual Report on Form 10-K for the year ended December 31, 2000, Commission File No. 001-07155) 10.27/\ Amendment No. 2 to Employment Agreement dated as of February 27, 2001 between the Company and David C. Swanson (incorporated by reference to Exhibit 10.25 to the Annual Report on Form 10-K for the year ended December 31, 2000, Commission File No. 001-07155) 10.28/\ Employment Agreement dated as of September 28, 1998 between the Company and Frank M. Colarusso (incorporated by reference to Exhibit 10.32 to the Annual Report on Form 10-K for the year ended December 31, 2000, Commission File No. 001-07155) 10.29/\ Amendment No. 1 to Employment Agreement dated as of July 27, 2000 between the Company and Frank M. Colarusso (incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-K for the year ended December 31, 2000, Commission File No. 001-07155) 10.30/\ Amendment No. 2 to Employment Agreement dated as of February 27, 2001 between the Company and Frank M. Colarusso (incorporated by reference to Exhibit 10.34 to the Annual Report on Form 10-K for the year ended December 31, 2000, Commission File No. 001-07155) 10.31/\ Employment Agreement dated as of September 26, 2000 between the Company and William C. Drexler (incorporated by reference to Exhibit 10.35 to the Annual Report on Form 10-K for the year ended December 31, 2000, Commission File No. 001-07155) 10.32/\ Amendment No. 1 to Employment Agreement dated as of February 27, 2001 between the Company and William C. Drexler (incorporated by reference to Exhibit 10.36 to the Annual Report on Form 10-K for the year ended December 31, 2000, Commission File No. 001-07155) 10.33/\ Employment Agreement dated as of January 1, 2001 between the Company and Robert J. Bush (incorporated by reference to Exhibit 10.37 to the Annual Report on Form 10-K for the year ended December 31, 2000, Commission File No. 001-07155) 10.34/\ Amendment No. 1 to Employment Agreement dated as of February 27, 2001 between the Company and Robert J. Bush (incorporated by reference to Exhibit 10.38 to the Annual Report on Form 10-K for the year ended December 31, 2000, Commission File No. 001-07155) 10.35/\ Separation Agreement and Release dated as of March 15, 2001 between the Company and Judith A. Norton (incorporated by reference to Exhibit 10.29 to the Annual Report on Form 10-K for the year ended December 31, 2000, Commission File No. 001-07155) 21 Subsidiaries of the Company (incorporated by reference to Exhibit 21 to the Annual Report on Form 10-K for the year ended December 31, 2000, Commission File No. 001-07155) 23* Consent of Independent Accountants
- --------------------------- *Filed herewith /\ Management contract or compensatory plan 58 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on the 27th day of March, 2002. R.H. Donnelley Corporation By: /s/ Frank R. Noonan ------------------------------------------ Frank R. Noonan, Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been duly signed by the following persons in the capacities and on the date indicated. /s/ Frank R. Noonan Chairman of the Board and March 27, 2002 - ------------------------------------ Chief Executive Officer (Frank R. Noonan) (Principal Executive Officer) /s/ David C. Swanson President and Chief Operating March 27, 2002 - ------------------------------------ Officer and Director (David C. Swanson) /s/ William C. Drexler Vice President and Controller March 27, 2002 - ------------------------------------ (Principal Financial and Accounting (William C. Drexler) Officer) /s/ Kenneth G. Campbell Director March 27, 2002 - ------------------------------------ (Kenneth G. Campbell) /s/ William G. Jacobi Director March 27, 2002 - ------------------------------------ (William G. Jacobi) /s/ Robert Kamerschen Director March 27, 2002 - ------------------------------------ (Robert Kamerschen) /s/ Peter J. McDonald Director March 27, 2002 - ------------------------------------ (Peter J. McDonald) /s/ Carol J. Parry Director March 27, 2002 - ------------------------------------ (Carol J. Parry) /s/ Barry Lawson Williams Director March 27, 2002 - ------------------------------------ (Barry Lawson Williams)
59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on the 27th day of March, 2002. R.H. Donnelley Inc. By: /s/ Frank R. Noonan ----------------------------------------- Frank R. Noonan, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been duly signed by the following persons in the capacities and on the date indicated. /s/ Frank R. Noonan Director and Chief March 27, 2002 - ------------------------------------ Executive Officer (Frank R. Noonan) (Principal Executive Officer) /s/ David C. Swanson Director, President and March 27, 2002 - ------------------------------------ Chief Operating Officer (David C. Swanson) /s/ William C. Drexler Vice President and Controller March 27, 2002 - ------------------------------------ (Principal Financial and Accounting (William C. Drexler) Officer)
60 EX-10.16 3 y57684ex10-16.txt PENSION BENEFIT EQUALIZATION PLAN Exhibit 10.16 PENSION BENEFIT EQUALIZATION PLAN OF R.H. DONNELLEY Effective as of July 1, 1998 I. Purpose of the Plan The purpose of the Pension Benefit Equalization Plan of R.H. Donnelley (the "Plan") is to provide a means of equalizing the benefits of those employees participating in the Retirement Account of R.H. Donnelley (the "Retirement Plan") whose funded benefits under the Retirement Plan are or will be limited by the application of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Internal Revenue Code of 1986, as amended (the "Code") or any applicable law or regulation. The Plan is intended to be an "excess benefit plan" as that term is defined in Section 3(36) of ERISA with respect to those participants whose benefits under the Retirement Plan have been limited by Section 415 of the Code, and a "top hat" plan meeting the requirements of Sections 201(2), 301(a)(3), 401(a)(1) and 4021(b)(6) of ERISA with respect to those participants whose benefits under the Retirement Plan have been limited by Section 401(a)(17) of the Code. II. Administration of the Plan The Board and the Executive Compensation and Stock Option Committee appointed by the Board (the "Committee"), severally (and not jointly) shall be responsible for the administration of the Plan. The Committee shall consist of not less than three (3) nor more than seven (7) members, as may be appointed by the Board from time to time. Any member of the Committee may resign at will by notice to the Board or be removed at any time (with or without cause) by the Board. The members of the Committee may from time to time allocate responsibilities among themselves and may delegate to any management committee, employee, director or agent its responsibility to perform any act hereunder, including without limitation those matters involving the exercise of discretion, provided that such delegation shall be subject to revocation at any time at its discretion. The Committee (and their delegees) shall have the exclusive authority to interpret the provisions of the Plan and construe all of its terms (including, without limitation, all disputed and uncertain terms), to adopt, amend, and rescind rules and regulations for the administration of the Plan, and generally to conduct and administer the Plan and to make all determinations in connection with the Plan as may be necessary or advisable. All such actions of the Committee shall be conclusive and binding upon all Participants, Former Participants, Vested Former Participants and Surviving Spouses. All deference permitted by law shall be given to such interpretations, determinations and actions. 2 Any action to be taken by the Committee shall be taken by a majority of its members, either at a meeting or by written instrument approved by such majority in the absence of a meeting. A written resolution or memorandum signed by one Committee member and the secretary of the Committee shall be sufficient evidence to any person of any action taken pursuant to the Plan. Any person, corporation or other entity may serve in more than one fiduciary capacity under the Plan. III. Participation in the Plan All members of the Retirement Plan shall be eligible to participate in this Plan whenever their benefits under the Retirement Plan as from time to time in effect would exceed the limitations on benefits and contributions imposed by Sections 401, 415 or any other applicable Section of the Code, calculated from and after September 2, 1974. For purposes of this Plan, benefits of a participant in this Plan shall be determined as though no provision were contained in the Retirement Plan incorporating limitations imposed by Sections 401, 415 or any other Section of the Code. IV. Benefit Limitations For purposes of this Plan and the Retirement Plan, the limitations imposed by Section 415 of the Code shall be deemed to be met when the sum of the participant's defined benefit plan fraction and his defined contribution plan fraction equals 1.0, as such fractions are computed for purposes of Section 415 of the Code and Section 19.4 of the Retirement Plan. V. Equalized Benefits The Corporation shall pay to each eligible member of the Retirement Plan and his beneficiaries a supplemental pension benefit equal to the benefit which would have been payable to them under the Retirement Plan, as if no provision were set forth therein incorporating limitations imposed by Sections 401, 415 or any other applicable Section of the Code, to the extent that such benefit otherwise payable under the Retirement Plan exceeds the benefit limitations related to the Retirement Plan as described in Section III of this Plan. Subject to Section XII of this Plan, such supplemental pension benefits shall be payable in accordance with all of the terms and conditions applicable to the participant's benefits under the Retirement Plan including whatever optional benefits he may have elected; provided, however, if an Election (as defined in Section IX of this Plan) or a Special Election (as defined in Section X of this Plan) has been made and becomes effective prior to the date when benefits under this Plan would otherwise be payable, the form of payment of benefits under this Plan shall be in the form so elected pursuant to such Election or Special Election; provided further that notwithstanding any Election or Special Election, if the lump sum value, determined in the same manner as provided under Section IX below, of the benefits payable 3 under this Plan is $10,000 or less at the time such benefits are payable under this Plan, such benefits shall be payable as a lump sum. Any portion of the benefits payable under this Plan as a lump sum, including any amounts payable as a lump sum under Section VI, shall be paid 60 days after the date when payments of the same benefits under this Plan, if payable in the form of an annuity, would otherwise commence, or as soon as practicable thereafter, provided the Committee has approved such payment. Any such lump sum distribution of a participant's or beneficiary's benefits under this Plan shall fully satisfy all present and future Plan liability with respect to such participant or beneficiary for such portion or all of such benefits so distributed. Any portion of the benefits payable under this Plan as an annuity shall commence on the date when annuity benefits under this Plan would otherwise commence, without regard to any Election or Special Election. VI. Payments of Benefits in the Event of Death In case of the death of the participant, the amount in his account shall, where applicable and subject to Section XII of this Plan, be distributed to the surviving beneficiary who has been designated to receive benefits under the Retirement Plan and in the manner which has been elected under the Retirement Plan; provided, however, if an Election (as defined in Section IX of this Plan) or a Special Election (as defined in Section X of this Plan) has been made and becomes effective prior to the date when benefits under this Plan would otherwise be payable, the form of payment of benefits payable to such surviving beneficiary under this Plan shall be in the form so elected pursuant to such Election or Special Election; provided further that notwithstanding any Election or Special Election, if the lump sum value, determined in the same manner as provided under Section IX below, of the benefits payable under this Plan is $10,000 or less at the time such benefits are payable to such surviving beneficiary under this Plan, such benefits shall be payable as a lump sum. If the participant has not designated a beneficiary under the Retirement Plan, or if no such beneficiary is living at the time of the participant's death, the amount, if any, in the participant's account that is distributable upon his death shall be distributed to the person or persons who would otherwise be entitled to receive a distribution of the participant's Retirement Plan benefits. Payment to such person or persons shall completely discharge the Plan with respect to the amount so paid. VII. Change in Control Upon the occurrence of a "Change in Control" of the Corporation, as such term is defined below, (i) each participant and beneficiary already receiving benefits and/or survivor's benefits under the Plan shall receive a lump sum distribution of their unpaid benefits and/or survivor's benefits under the Plan in an amount equal to the present value of such benefits and/or survivor's benefits in full satisfaction of all present and future Plan liability with respect to such participant or beneficiary, and (ii) each vested participant who is not already receiving benefits under the Plan shall receive (A) a lump sum distribution of the present value of his accrued benefit under the Plan as of the date of such Change in Control, 4 within 30 days of the date of such Change in Control and (B) a lump sum distribution of the present value of his additional benefit, if any, accrued under the Plan from the date of the Change in Control until the date he retires or terminates employment with the Corporation, within 30 days from the date of the participant's retirement or termination of employment with the Corporation. In determining the amount of the lump sum distributions to be paid under this Section VII, the following actuarial assumptions shall be used: (i) the interest rate used shall be the interest rate used by the Pension Benefit Guaranty Corporation for determining the value of immediate annuities as of January 1st of either the year of the occurrence of the Change in Control or the participant's retirement or termination of employment, whichever is applicable, (ii) the 1983 Group Annuity Mortality Table shall be used; and (iii) it shall be assumed that all participants retired or terminated employment with the Corporation on the date of the occurrence of the Change in Control for purposes of determining the amount of the lump sum distribution to be paid upon the occurrence of the Change in Control. For purposes of this Plan, a "Change in Control" shall be deemed to have occurred if (a) any "Person," as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Corporation, any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation, or any corporation owned, directly or indirectly, by the shareholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation), is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 20% or more of the combined voting power of the Corporation's then outstanding securities; (b) during any period of twenty-four months (not including any period prior to the effective date of this provision), individuals who at the beginning of such period constitute the Board, and any new director (other than (1) a director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in clause (a), (c) or (d) of this Section) (2) a director designated by any Person (including the Corporation) who publicly announces an intention to take or to consider taking actions (including, but not limited to, an actual or threatened proxy contest) which if consummated would constitute a Change in Control or (3) a director designated by any Person who is the Beneficial Owner, directly or indirectly, of securities of the Corporation representing 10% or more of the combined voting power of the Corporation's securities) whose election by the Board or nomination for election by the Corporation's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved cease for any reason to constitute at least a majority thereof; (c) the shareholders of the Corporation approve a merger or consolidation of the Corporation with any other company, other than (1) a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately 5 prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Corporation or such surviving entity outstanding immediately after such merger or consolidation and (2) after which no Person holds 20% or more of the combined voting power of the then outstanding securities of the Corporation or such surviving entity; or (d) the shareholders of the Corporation approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets. 6 VIII. Funding Benefits payable under this Plan shall not be funded and shall be made out of the general funds of the Corporation; provided, however, that the Corporation reserves the right to establish one or more trusts to provide alternate sources of benefit payments under this Plan, provided, further, however, that upon the occurrence of a "Potential Change in Control" of the Corporation, as defined below, the appropriate officers of the Corporation are authorized to make contributions to such a trust fund, established as an alternate source of benefits payable under the Plan, as are necessary to fund the lump sum payments to Plan participants required pursuant to Section VII of this Plan in the event of a Change in Control of the Corporation; provided, further, however, that if payments are made from such trust fund, such payments will satisfy the Corporation's obligations under this Plan to the extent made from such trust fund. In determining the amount of the necessary contribution to the trust fund in the event of a Potential Change in Control, the following actuarial assumptions shall be used: (i) the interest rate used shall be the interest rate used by the Pension Benefit Guaranty Corporation for determining the value of immediate annuities as of January 1st of the year of the occurrence of the Potential Change in Control, (ii) the 1983 Group Annuity Mortality Table shall be used; and (iii) it shall be assumed that all participants will retire or terminate employment with the Corporation as soon as practicable after the occurrence of the Potential Change in Control. For the purposes of this Plan, "Potential Change in Control" means: (a) the Corporation entered into an agreement, the consummation of which would result in the occurrence of a Change in Control of the Corporation; (b) any person (including the Corporation) publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change in Control of the Corporation; (c) any person, other than a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation (or a Corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation), who is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing 9.5% or more of the combined voting power of the Corporation's then outstanding securities, increases his beneficial ownership of such securities by 5% or more over the percentage so owned by such person; or (d) The Board of Directors of the Corporation adopts a resolution to the effect that, for purposes of this Plan, a Potential Change in Control of the Corporation has occurred. 7 IX. Election of Form of Payment A participant under this Plan may make an election, on a form supplied by the Committee, to receive all, none, or a specified portion of his benefits under this Plan in a lump sum and to receive any balance of such benefits in the form of an annuity (an "Election"); provided that any such Election shall be effective for purposes of this Plan only if (i) such participant remains in the employment of the Corporation or an Affiliate (as defined under Section XII below), as the case may be, for the full twelve calendar months immediately following the Election Date of such Election, except in the case of such participant's death or disability as provided below and (ii) such participant complies with the administrative procedures set forth by the Committee with respect to the making of the Election. A participant making such Election shall be subject to the provisions of Section XII of this Plan. A participant may elect a payment form different than the payment form previously elected by him under this Section IX by filing a revised election form; provided that any such new Election shall be effective only if the conditions in clauses (i) and (ii) of the immediately preceding paragraph are satisfied with respect to such new Election. Any prior Election made by a participant that has satisfied such conditions remains effective for purposes of this Plan until such participant has made a new Election that satisfies such conditions. A participant making an election under this Section IX may specify the portion of his benefits under this Plan to be received in a lump sum as follows: 0 percent, 25 percent, 50 percent, 75 percent or 100 percent. In the event a participant who has made an Election dies or becomes "totally disabled" as defined in the R.H. Donnelly Long Term Disability Plan while employed by the Corporation or an Affiliate and such death or total disability occurs during the twelve-calendar-month period immediately following the Election Date of such Election, the condition that such participant remain employed with the Corporation or an Affiliate (as defined in Section XII) for such twelve-month-period shall be deemed to be satisfied and such Election shall be effective with respect to benefits payable to such participant or participant's beneficiaries under this Plan. The amount of any portion of the benefits payable as a lump sum under this Section IX will equal the present value of such portion of such benefits, and the present value shall be determined (i) based on a discount rate equal to the average of 85% of the 15-year non-callable U.S. Treasury bond yields as of the close of business on the last business day of each of the three months immediately preceding the date the annuity value is determined and (ii) using the 1983 Group Annuity Mortality Table. "Election Date" for purposes of this Plan means the date that a properly completed election form with respect to an Election or Special Election (as defined in Section X below) is received by the Corporate Assistant Treasurer of the Corporation. 8 X. Special Election of Form of Payment Any participant under this Plan (except for the Chairman of the Board of Directors of the Corporation on December 21, 1994) who as of December 31, 1994 (i) is age 54 or older and (ii) has at least 4 years of Credited Service (as defined in the Corporation's Supplemental Executive Benefit Plan) may make an election, on a form supplied by the Committee, to receive all, none, or a specified portion, in the same percentages as described in Section IX above, of his benefits under this Plan in a lump sum and to receive any balance of such benefits in the form of an annuity (a "Special Election"); provided that any such Special Election shall be effective for purposes of this Plan only if such participant remains in employment with the Corporation or an Affiliate (as defined in Section XII below), as the case may be, for the one calendar month immediately following the Election Date, except in the case of death or disability as provided below and complies with the administrative procedures set forth by the Committee with respect to the making of the Special Election; and provided further that the Election Date with respect to any such Special Election may not be later than January 31, 1995. A participant making such Special Election shall be subject to the provisions of Section XII of this Plan. In the event a participant who has made a Special Election dies or becomes "totally disabled" as defined in the R.H. Donnelly Long Term Disability Plan while employed by the Corporation or an Affiliate (as defined in Section XII below) and such death or total disability occurs during the one-calendar-month-period immediately following the Election Date of such Special Election, the participant shall for purposes of this Section X be deemed to have been employed with the Corporation or an Affiliate (as defined in Section XII below), as the case may be, for such one calendar-month period, and such Special Election shall be effective with respect to benefits payable to such participant or participant's beneficiaries under this Plan. The amount of any portion of the benefits payable as a lump sum under this Section X will equal the present value of such portion of such benefits, and the present value shall be determined (i) based on a discount rate equal to the average of 85% of the 15-year non-callable U.S. Treasury bond yields as of the close of business on the last business day of each of the three months immediately preceding the date the annuity value is determined and (ii) using the 1983 Group Annuity Mortality Table. XI. Indemnification Subject to certain conditions as provided below, the Corporation shall indemnify each participant or beneficiary who receives any benefits under this Plan in the form of an annuity for any interest and penalties that may be assessed by the U.S. Internal Revenue Service (the "Service") with respect to U.S. Federal income tax on such benefits (payable under the Plan in the form of an annuity) upon final settlement or judgment with respect to any such assessment in favor of the Service, provided the basis for the assessment is that the amendment of this Plan to provide for the Election or the Special Election causes the participant or the beneficiary, as the case may be, to be treated as being in constructive 9 receipt of such benefits prior to the time when such benefits are actually payable under the Plan. In case any such assessment shall be made against a participant or beneficiary, such participant or beneficiary, as the case may be (the "indemnified party"), shall promptly notify the Corporation's Treasurer in writing and the Corporation, upon request of such indemnified party, shall select and retain an accountant or legal counsel reasonably satisfactory to the indemnified party to represent the indemnified party in connection with such assessment and shall pay the fees and expenses of such accountant or legal counsel related to such representation, and the Corporation shall have the right to determine how and when such assessment by the Service should be settled, litigated or appealed. In connection with any such assessment, any indemnified party shall have the right to retain his own accountant or legal counsel, but the fees and expenses of such accountant or legal counsel shall be at the expense of such indemnified party unless the Corporation and the indemnified party shall have mutually agreed to the retention of such accountant or legal counsel. The Corporation shall not be liable to a participant or beneficiary for any payments under this Section XI with respect to any assessment described in the second preceding paragraph if such participant or beneficiary against whom such assessment is made has not notified or allowed the Corporation to participate with respect to such assessment in the manner described above or, following demand by the Corporation, has not made the deposit to avoid additional interest or penalties as described below, or has agreed to, or otherwise settled with the Service with respect to, such assessment without the Corporation's written consent, provided, however, (i) if such assessment is settled with such consent or if there is a final judgment for the Service, (ii) the Corporation has been notified and allowed to participate in the manner as provided above and (iii) such participant or beneficiary has made any required deposit to avoid additional interest or penalties as described below, the Corporation agrees to indemnify the indemnified party to the extent set forth in this Section XI. In the event a final settlement or judgment with respect to an assessment as described under this Section XI has been made against a participant or beneficiary, such participant or beneficiary may elect to receive a portion or all of his benefits that is otherwise payable as an annuity under the Plan in the form of a lump sum in accordance with procedures as the Committee may set forth, and such lump sum distribution will be made as soon as practicable after any such election. At the time such assessment is made against such participant or beneficiary (the "assessed party") and prior to any final settlement or judgement with respect to such assessment, if so directed by the Corporation, such assessed party shall, as a condition to receiving an indemnity under this Section XI, as soon as practicable after notification of such assessment make a deposit with the Service to avoid any additional interest or penalties with respect to such assessment and, upon the request of such assessed party, the Corporation shall lend, or arrange for the lending to, such assessed party a portion of his remaining benefit under the Plan, not to exceed the lump sum value of such benefit under the Plan, determined using the actuarial assumptions set forth in Section IX, solely for purposes of providing the assessed party with funds to make a deposit with the Service to avoid any additional interest or penalties with respect to such assessment. 10 XII. Limitations on Payment of Benefits If a participant under this Plan has at any time made an Election or a Special Election to have all or a portion of the benefits under this Plan distributed in a lump sum, such participant shall be subject to this Section XII. Notwithstanding any other provision of this Plan to the contrary, no benefits or no further benefits, as the case may be, shall be paid to a participant who is subject to this Section XII if the Committee reasonably determines that such participant has: (i) To the detriment of the Corporation or any Affiliate, directly or indirectly acquired, without the prior written consent of the Committee, an interest in any other company, firm, association, or organization (other than an investment interest of less than 1% in a publicly-owned company or organization), the business of which is in direct competition with the business (present of future) of the Corporation or any of its Affiliates; (ii) To the detriment of the Corporation or any Affiliate, directly or indirectly competed with the Corporation or any Affiliate as an owner, employee, partner, director or contractor of a business, in a field of business activity in which the participant has been primarily engaged on behalf of the Corporation or any Affiliate or in which he has considerable knowledge as a result of his employment by the Corporation or any Affiliate, either for his own benefit or with any person other than the Corporation or any Affiliate, without the prior written consent of the Committee; or (iii) Been discharged from employment with the Corporation or any Affiliate for "Cause." An "Affiliate" for purposes of this Plan means any corporation, partnership, division or other organization controlling, controlled by or under common control with the Corporation or any joint venture entered into by the Corporation. "Cause" for purposes of this Section XII shall include the occurrence of any of the following events or such other dishonest or disloyal act or omission as the Committee determines to be "cause": (a) The participant has misappropriated any funds or property of the Corporation or any Affiliate; (b) The participant has, without the prior knowledge or written consent of the Committee, obtained personal profit as a result of any transaction by a third party with the Corporation or any Affiliate; or 11 (c) The participant has sold or otherwise imparted to any person, firm, or corporation the names of the customers of the Corporation or any Affiliate or any confidential records, data, formulae, specifications and other trade secrets or other information of value to the Corporation or any Affiliate derived by his or her association with the Corporation or any Affiliate. In any case described in this Section XII, the participant shall be given prior written notice that no benefits or no further benefits, as the case may be, will be paid to such participant. Such written notice shall specify the particular act(s), or failures to act, on the basis of which the decision to terminate his benefits has been made. Notwithstanding any other provision of this Plan to the contrary, a participant who receives in a lump sum any portion of his benefits under this Plan pursuant to an Election or Special Election shall receive such lump sum portion of his benefits subject to the condition that if such participant engages in any of the acts described in clause (i) or (ii) of this Section XII, then such participant shall within 60 days after written notice by the Corporation repay to the Corporation the amount described in the immediately following sentence. The amount to be repaid shall equal the amount, as determined by the Committee, of the participant's lump sum benefit paid under this Plan to which such participant would not have been entitled, if such lump sum benefit had instead been payable in the form of an annuity under this Plan and such annuity payments were subject to the provisions of this Section XII. XIII. Miscellaneous This Plan may be terminated at any time by the Board of Directors of the Corporation, in which event the rights of participants to their accrued benefits shall become nonforfeitable. This Plan may also be amended at any time by the Board of Directors of the Corporation, except that no such amendment shall deprive any participant of his benefits accrued at the time of such amendment. No right to payment or any other interest under this Plan may be alienated, sold, transferred, pledged, assigned, or made subject to attachment, execution, or levy of any kind. Nothing in this Plan shall be construed as giving any employee the right to be retained in the employ of the Corporation. The Corporation expressly reserves the right to dismiss any employee at any time without regard to the effect which such dismissal might have upon him under the Plan. This Plan shall be construed, administered and enforced according to the laws of the State of New York. 12 XIV. Effective Date This Plan shall be effective as of July 1, 1998, upon its adoption by the Board of Directors of R.H. Donnelley. EX-10.17 4 y57684ex10-17.txt 2001 STOCK AWARD AND INCENTIVE PLAN Exhibit 10.17 R.H. DONNELLEY CORPORATION 2001 STOCK AWARD AND INCENTIVE PLAN Approved and adopted by the Board of Directors on February 27, 2001, Approved and adopted by shareholders on May 1, 2001 and Amended and Restated by the Board of Directors effective May 1, 2001 R.H. DONNELLEY CORPORATION 2001 STOCK AWARD AND INCENTIVE PLAN
Page ---- 1. Purpose................................................................................. 1 2. Definitions............................................................................. 1 3. Administration.......................................................................... 4 4. Stock Subject to Plan................................................................... 5 5. Eligibility; Per-Person Award Limitations .............................................. 5 6. Specific Terms of Awards................................................................ 6 7. Performance Awards, Including Annual Incentive Awards.................................. 9 8. Non-Employee Director Awards............................................................ 12 9. Certain Provisions Applicable to Awards................................................. 19 10. Change in Control....................................................................... 20 11. Additional Award Forfeiture Provisions.................................................. 22 12. General Provisions...................................................................... 24
R.H. DONNELLEY CORPORATION 2001 STOCK AWARD AND INCENTIVE PLAN 1. PURPOSE. The purpose of this 2001 Stock Award and Incentive Plan (the "Plan") is to aid R.H. Donnelley Corporation, a Delaware corporation (together with its successors and assigns, the "Company"), in attracting, retaining, motivating and rewarding employees and non-employee directors of the Company or its subsidiaries or affiliates, to provide for equitable and competitive compensation opportunities, to recognize individual contributions and reward achievement of Company goals, and promote the creation of long-term value for stockholders by closely aligning the interests of Participants with those of stockholders. The Plan authorizes stock-based and cash-based incentives for Participants. 2. DEFINITIONS. In addition to the terms defined in Section 1 above and elsewhere in the Plan, the following capitalized terms used in the Plan have the respective meanings set forth in this Section: (a) "Annual Incentive Award" means a type of Performance Award granted to a Participant under Section 7(c) representing a conditional right to receive cash, Stock or other Awards or payments, as determined by the Committee, based on performance in a performance period of one fiscal year or a portion thereof. (b) "Annual Limit" shall have the meaning specified in Section 5(b). (c) "Award" means any Option, SAR, Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of another award, Dividend Equivalent, Other Stock-Based Award, Performance Award or Annual Incentive Award, together with any related right or interest, granted to a Participant under the Plan. (d) "Beneficiary" means the legal representatives of the Participant's estate entitled by will or the laws of descent and distribution to receive the benefits under a Participant's Award upon a Participant's death, provided that, if and to the extent authorized by the Committee, a Participant may be permitted to designate a Beneficiary, in which case the "Beneficiary" instead will be the person, persons, trust or trusts (if any are then surviving) which have been designated by the Participant in his or her most recent written and duly filed beneficiary designation to receive the benefits specified under the Participant's Award upon such Participant's death. Unless otherwise determined by the Committee, any designation of a Beneficiary other than a Participant's spouse shall be subject to the written consent of such spouse. (e) "Board" means the Company's Board of Directors. (f) "Cause" shall have the meaning defined in any employment agreement or severance agreement between the Participant and the Company or a subsidiary or affiliate then in effect or, if no such agreement is then in effect, "Cause" shall mean (i) the Participant's willful and continued failure substantially to perform the duties of his or her position after notice and opportunity to cure; (ii) any willful act or omission by the Participant constituting dishonesty, fraud or other malfeasance, which in any such case is demonstrably injurious to the financial condition or business reputation of the Company or any of its subsidiaries or affiliates; or (iii) a felony conviction in a court of law under the laws of the United States or any state thereof or any other jurisdiction in which the Company or a subsidiary or affiliate conducts business which materially impairs the value of the Participant's service to the Company or any of its subsidiaries or affiliates; provided, however, that for purposes of this definition, no act or failure to act shall be deemed "willful" unless effected by the Participant not in good faith and without a reasonable belief that such action or failure to act was in or not opposed to the Company's best interests, and no act or failure to act shall be deemed "willful" if it results from any incapacity of the Participant due to physical or mental illness. (g) "Change in Control" and related terms have the meanings specified in Section 10. (h) "Code" means the Internal Revenue Code of 1986, as amended. References to any provision of the Code or regulation (including a proposed regulation) thereunder shall include any successor provisions and regulations. (i) "Committee" means a committee of two or more directors designated by the Board to administer the Plan; provided, however, that, directors appointed or serving as members of a Board committee designated as the Committee shall not be employees of the Company or any subsidiary or affiliate. In appointing members of the Committee, the Board will consider whether a member is or will be a Qualified Member, but such members are not required to be Qualified Members at the time of appointment or during their term of service on the Committee. The full Board may perform any function of the Committee hereunder, in which case the term "Committee" shall refer to the Board. (j) "Covered Employee" means an Eligible Person who is a Covered Employee as specified in Section 12(j). (k) "Deferral Account" means the account established and maintained by the Company for Deferred Stock and/or deferred cash credited under Section 8. A Deferral Account shall include one or more subaccounts, including a Deferred Stock Account for forfeitable Deferred Stock under Section 8(c), a Deferred Stock Account for shares of Deferred Stock that have become nonforfeitable under Section 8(c) or that are at all times nonforfeitable under Section 8(e)(iii), a Deferred Stock Account for Deferred Stock resulting from Option exercises under Section 8(f)(i), and a Deferred Cash Account described in Section 8(e)(iv). The Deferral Account and subaccounts, and Deferred Stock and deferred cash credited thereto, will be maintained solely as bookkeeping entries by the Company to evidence unfunded obligations of the Company. (l) "Deferred Stock" means a right, granted under this Plan, to receive Stock or other Awards or a combination thereof at the end of a specified deferral period. (m) "Disability" means, with respect to a non-employee director, termination of service as a director of the Company due to a physical or mental incapacity of long duration which renders the Participant unable to perform the duties of a director of the Company. (n) "Dividend Equivalent" means a right, granted under this Plan, to receive cash, Stock, other Awards or other property equal in value to all or a specified portion of the dividends paid with respect to a specified number of shares of Stock. (o) "Effective Date" means the effective date specified in Section 12(p). (p) "Eligible Person" has the meaning specified in Section 5. (q) "Exchange Act" means the Securities Exchange Act of 1934, as amended. References to any provision of the Exchange Act or rule (including a proposed rule) thereunder shall include any successor provisions and rules. (r) "Fair Market Value" means the fair market value of Stock, Awards or other property as determined by the Committee or under procedures established by the Committee. Unless otherwise determined by the Committee, the Fair Market Value of Stock shall be the average of the high and low sales prices per share of Stock reported on a consolidated basis for securities listed on the - 2 - principal stock exchange or market on which Stock is traded on the day immediately preceding the day as of which such value is being determined or, if there is no sale on that day, then on the last previous day on which a sale was reported. (s) "Incentive Stock Option" or "ISO" means any Option designated as an incentive stock option within the meaning of Code Section 422 and qualifying thereunder. (t) "Option" means a right, granted under this Plan, to purchase Stock. (u) "Option Valuation Methodology" means the method for determining the number of shares to be subject to Options, and the exercise price thereof, granted in payment of Retainer Fees under Section 8(e)(ii). (v) "Other Director Compensation" means fees payable to a director in his or her capacity as such, other than Retainer Fees, for attending meetings and other service on the Board and Board committees or otherwise. (w) "Other Stock-Based Awards" means Awards granted to a Participant under Section 6(h). (x) "Participant" means a person who has been granted an Award under the Plan which remains outstanding, including a person who is no longer an Eligible Person. (y) "Performance Award" means a conditional right, granted to a Participant under Sections 6(i) and 7, to receive cash, Stock or other Awards or payments. (z) "Plan Year" means, with respect to a non-employee director, the period commencing at the time of election of the director at an annual meeting of shareholders (or the election of a class of directors if the Company then has a classified Board of Directors), or the director's initial appointment to the Board if not at an annual meeting of shareholders, and continuing until the close of business of the day preceding the next annual meeting of shareholders; provided, however, that the initial Plan Year shall begin on the day of the Company's 2001 Annual Meeting of Stockholders. (aa) "Preexisting Plans" means each of the following Company plans: the 1991 Key Employees' Stock Option Plan, as amended and restated; the Key Employees' Performance Unit Plan, as amended and restated; the 1998 Directors' Stock Plan, as amended and restated; and the Annual Incentive Plan, as amended and restated. (bb) "Qualified Member" means a member of the Committee who is a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) and an "outside director" within the meaning of Regulation 1.162-27 under Code Section 162(m). (cc) "Restricted Stock" means Stock granted under this Plan which is subject to certain restrictions and to a risk of forfeiture. (dd) "Retainer Fees" means annual Board and chair retainer fees payable to a director in his or her capacity as such for service on the Board and Board committees. (ee) "Retirement" means, with respect to a non-employee director, termination of service as a director of the Company at or after age 65. (ff) "Rule 16b-3" means Rule 16b-3, as from time to time in effect and applicable to Participants, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act. - 3 - (gg) "Stock" means the Company's Common Stock, par value $1.00 per share, and any other equity securities of the Company that may be substituted or resubstituted for Stock pursuant to Section 12(c). (hh) "Stock Appreciation Rights" or "SAR" means a right granted to a Participant under Section 6(c). (ii) "Valuation Date" shall mean the close of business on the last business day of each calendar quarter and, in the case of any final distribution from a Participant's Deferred Cash Account (described in Section 8(f)(iv)), the day preceding such distribution. 3. ADMINISTRATION. (a) Authority of the Committee. The Plan shall be administered by the Committee, which shall have full and final authority, in each case subject to and consistent with the provisions of the Plan, to select Eligible Persons to become Participants; to grant Awards; to determine the type and number of Awards, the dates on which Awards may be exercised and on which the risk of forfeiture or deferral period relating to Awards shall lapse or terminate, the acceleration of any such dates, the expiration date of any Award, whether, to what extent, and under what circumstances an Award may be settled, or the exercise price of an Award may be paid, in cash, Stock, other Awards, or other property, and other terms and conditions of, and all other matters relating to, Awards; to prescribe documents evidencing or setting terms of Awards (such Award documents need not be identical for each Participant), amendments thereto, and rules and regulations for the administration of the Plan and amendments thereto; to construe and interpret the Plan and Award documents and correct defects, supply omissions or reconcile inconsistencies therein; and to make all other decisions and determinations as the Committee may deem necessary or advisable for the administration of the Plan. Decisions of the Committee with respect to the administration and interpretation of the Plan shall be final, conclusive, and binding upon all persons interested in the Plan, including Participants, Beneficiaries, transferees under Section 12(b) and other persons claiming rights from or through a Participant, and stockholders. The foregoing notwithstanding, the Board shall perform the functions of the Committee for purposes of granting Awards under the Plan to non-employee directors (the functions of the Committee with respect to other aspects of non-employee director awards is not exclusive to the Board, however). (b) Manner of Exercise of Committee Authority. The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. The Committee may delegate to officers or managers of the Company or any subsidiary or affiliate, or committees thereof, the authority, subject to such terms as the Committee shall determine, to perform such functions, including administrative functions, as the Committee may determine, to the extent (x) that such delegation will not result in the loss of an exemption under Rule 16b-3(d) for Awards granted to Participants subject to Section 16 of the Exchange Act in respect of the Company and will not cause Awards intended to qualify as "performance-based compensation" under Code Section 162(m) to fail to so qualify, and (y) permitted by the Delaware General Corporation Law. (c) Limitation of Liability. The Committee and each member thereof, and any person acting pursuant to authority delegated by the Committee, shall be entitled, in good faith, to rely or act upon any report or other information furnished by any executive officer, other officer or employee of the Company or a subsidiary or affiliate, the Company's independent auditors, consultants or any other agents assisting in the administration of the Plan. Members of the Committee, any person acting pursuant to authority delegated by the Committee, and any officer or employee of the Company or a subsidiary or affiliate acting at the direction or on behalf of the Committee or a delegee shall not be - 4 - personally liable for any action or determination taken or made in good faith with respect to the Plan, and shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action or determination. 4. STOCK SUBJECT TO PLAN. (a) Overall Number of Shares Available for Delivery. Subject to adjustment as provided in Section 12(c), the total number of shares of Stock reserved and available for delivery in connection with Awards under the Plan shall be (i) four million shares, plus (ii) the number of shares subject to awards under the Preexisting Plans which become available in accordance with Section 4(b) after the Effective Date, plus (iii) 10% of the number of shares issued or delivered by the Company during the term of the Plan other than issuances or deliveries under the Plan or other incentive compensation plans of the Company; provided, however, that the total number of shares with respect to which ISOs may be granted shall not exceed the number specified under clause (i) above; and provided further, that the total number of shares which may be issued and delivered in connection with Awards other than Options and SARs shall not exceed one million shares. Any shares of Stock delivered under the Plan shall consist of authorized and unissued shares or treasury shares. (b) Share Counting Rules. The Committee may adopt reasonable counting procedures to ensure appropriate counting, avoid double counting (as, for example, in the case of tandem or substitute awards) and make adjustments if the number of shares of Stock actually delivered differs from the number of shares previously counted in connection with an Award. Shares subject to an Award or an award under the Preexisting Plans that is canceled, expired, forfeited, settled in cash or otherwise terminated without a delivery of shares to the Participant will again be available for Awards, and shares withheld in payment of the exercise price or taxes relating to an Award or Preexisting Plan award and shares equal to the number surrendered in payment of any exercise price or taxes relating to an Award or Preexisting Plan award shall be deemed to constitute shares not delivered to the Participant and shall be deemed to again be available for Awards under the Plan. In addition, in the case of any Award granted in assumption of or in substitution for an award of a company or business acquired by the Company or a subsidiary or affiliate or with which the Company or a subsidiary or affiliate combines, shares issued or issuable in connection with such substitute Award shall not be counted against the number of shares reserved under the Plan. This Section 4(b) shall apply to the number of shares reserved and available for ISOs only to the extent consistent with applicable regulations relating to ISOs under the Code. 5. ELIGIBILITY; PER-PERSON AWARD LIMITATIONS. (a) Eligibility. Awards may be granted under the Plan only to Eligible Persons. For purposes of the Plan, an "Eligible Person" means an employee of the Company or any subsidiary or affiliate, including any executive officer or non-employee director of the Company or a subsidiary or affiliate, and any person who has been offered employment by the Company or a subsidiary or affiliate, provided that such prospective employee may not receive any payment or exercise any right relating to an Award until such person has commenced employment with the Company or a subsidiary or affiliate. An employee on leave of absence may be considered as still in the employ of the Company or a subsidiary or affiliate for purposes of eligibility for participation in the Plan. For purposes of the Plan, a joint venture in which the Company or a subsidiary has a substantial direct or indirect equity investment shall be deemed an affiliate, if so determined by the Committee. Holders of awards granted by a company or business acquired by the Company or a subsidiary or affiliate, or with which the Company or a subsidiary or affiliate combines, are eligible for grants of substitute awards granted in assumption of or in substitution for such outstanding awards previously granted under the Plan in connection with such acquisition or combination transaction. - 5 - (b) Per-Person Award Limitations. In each calendar year during any part of which the Plan is in effect, an Eligible Person may be granted Awards intended to qualify as "performance-based compensation" under Code Section 162(m) under each of Section 6(b), 6(c), 6(d), 6(e), 6(f), 6(g) or 6(h) relating to up to his or her Annual Limit (such Annual Limit to apply separately to the type of Award authorized under each specified subsection, except that the limitation applies to Dividend Equivalents under Section 6(g) only if such Dividend Equivalents are granted separately from and not as a feature of another Award). A Participant's Annual Limit, in any year during any part of which the Participant is then eligible under the Plan, shall equal two million shares plus the amount of the Participant's unused Annual Limit relating to the same type of Award as of the close of the previous year, subject to adjustment as provided in Section 12(c). In the case of an Award which is not valued in a way in which the limitation set forth in the preceding sentence would operate as an effective limitation satisfying applicable law (including Treasury Regulation 1.162-27(e)(4)), an Eligible Person may not be granted Awards authorizing the earning during any calendar year of an amount that exceeds the Eligible Person's Annual Limit, which for this purpose shall equal $4 million plus the amount of the Eligible Person's unused cash Annual Limit as of the close of the previous year (this limitation is separate and not affected by the number of Awards granted during such calendar year subject to the limitation in the preceding sentence). For this purpose, (i) "earning" means satisfying performance conditions so that an amount becomes payable, without regard to whether it is to be paid currently or on a deferred basis or continues to be subject to any service requirement or other non-performance condition, and (ii) a Participant's Annual Limit is used to the extent an amount or number of shares may be potentially earned or paid under an Award, regardless of whether such amount or shares are in fact earned or paid. 6. SPECIFIC TERMS OF AWARDS. (a) General. Awards may be granted on the terms and conditions set forth in this Section 6. In addition, the Committee may impose on any Award or the exercise thereof, at the date of grant or thereafter (subject to Section 12(e)), such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine, including terms requiring forfeiture of Awards in the event of termination of employment or service by the Participant and terms permitting a Participant to make elections relating to his or her Award. The Committee shall retain full power and discretion with respect to any term or condition of an Award that is not mandatory under the Plan. The Committee shall require the payment of lawful consideration for an Award to the extent necessary to satisfy the requirements of the Delaware General Corporation Law, and may otherwise require payment of consideration for an Award except as limited by the Plan. (b) Options. The Committee is authorized to grant Options to Participants on the following terms and conditions: (i) Exercise Price. The exercise price per share of Stock purchasable under an Option (including both ISOs and non-qualified Options) shall be determined by the Committee, provided that such exercise price shall be not less than the Fair Market Value of a share of Stock on the date of grant of such Option, subject to Section 9(a). Notwithstanding the foregoing, any substitute award granted in assumption of or in substitution for an outstanding award granted by a company or business acquired by the Company or a subsidiary or affiliate, or with which the Company or a subsidiary or affiliate combines may be granted with an exercise price per share of Stock other than as required above. (ii) Option Term; Time and Method of Exercise. The Committee shall determine the term of each Option, provided that in no event shall the term of any ISO or SAR in tandem therewith exceed a period of ten years from the date of grant. The Committee shall determine the time or times at which or the circumstances under which an Option may be exercised in whole or in part (including based on achievement of performance goals and/or future service - 6 - requirements), the methods by which such exercise price may be paid or deemed to be paid and the form of such payment (subject to Section 12(k)), including, without limitation, cash, Stock, other Awards or awards granted under other plans of the Company or any subsidiary or affiliate, or other property (including notes and other contractual obligations of Participants to make payment on a deferred basis, such as through "cashless exercise" arrangements, to the extent permitted by applicable law), and the methods by or forms in which Stock will be delivered or deemed to be delivered in satisfaction of Options to Participants (including deferred delivery of shares representing the Option "profit," at the election of the Participant or as mandated by the Committee, with such deferred shares subject to any vesting, forfeiture or other terms as the Committee may specify). (iii) ISOs. The terms of any ISO granted under the Plan shall comply in all respects with the provisions of Code Section 422, including but not limited to the requirement that no ISO shall be granted more than ten years after the Effective Date. (c) Stock Appreciation Rights. The Committee is authorized to grant SAR's to Participants on the following terms and conditions: (i) Right to Payment. An SAR shall confer on the Participant to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one share of Stock on the date of exercise (or, in the case of a "Limited SAR," the Fair Market Value determined by reference to the Change in Control Price, as defined under Section 10(d) hereof) over (B) the grant price of the SAR as determined by the Committee. (ii) Other Terms. The Committee shall determine at the date of grant or thereafter, the time or times at which and the circumstances under which a SAR may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the method of exercise, method of settlement, form of consideration payable in settlement, method by or forms in which Stock will be delivered or deemed to be delivered to Participants, and whether or not a SAR shall be free-standing or in tandem or combination with any other Award. Limited SARs that may only be exercised in connection with a Change in Control or other event as specified by the Committee may be granted on such terms, not inconsistent with this Section 6(c), as the Committee may determine. (d) Restricted Stock. Subject to Section 9(d), the Committee is authorized to grant Restricted Stock to Participants on the following terms and conditions: (i) Grant and Restrictions. Restricted Stock shall be subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee may impose, which restrictions may lapse separately or in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service requirements), in such installments or otherwise and under such other circumstances as the Committee may determine at the date of grant or thereafter. Except to the extent restricted under the terms of the Plan and any Award document relating to the Restricted Stock, a Participant granted Restricted Stock shall have all of the rights of a stockholder, including the right to vote the Restricted Stock and the right to receive dividends thereon (subject to any mandatory reinvestment or other requirement imposed by the Committee). (ii) Forfeiture. Except as otherwise determined by the Committee, upon termination of employment or service during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited and reacquired by the Company; provided that the Committee may provide, by rule or regulation or in any Award document, or may determine in - 7 - any individual case, that restrictions or forfeiture conditions relating to Restricted Stock will lapse in whole or in part, including in the event of terminations resulting from specified causes. (iii) Certificates for Stock. Restricted Stock granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Stock are registered in the name of the Participant, the Committee may require that such certificates bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock, that the Company retain physical possession of the certificates, and that the Participant deliver a stock power to the Company, endorsed in blank, relating to the Restricted Stock. (iv) Dividends and Splits. As a condition to the grant of an Award of Restricted Stock, the Committee may require that any dividends paid on a share of Restricted Stock shall be either (A) paid with respect to such Restricted Stock at the dividend payment date in cash, in kind, or in a number of shares of unrestricted Stock having a Fair Market Value equal to the amount of such dividends, or (B) automatically reinvested in additional Restricted Stock or held in kind, which shall be subject to the same terms as applied to the original Restricted Stock to which it relates, or (C) deferred as to payment, either as a cash deferral or with the amount or value thereof automatically deemed reinvested in shares of Deferred Stock, other Awards or other investment vehicles, subject to such terms as the Committee shall determine or permit a Participant to elect. Unless otherwise determined by the Committee, Stock distributed in connection with a Stock split or Stock dividend, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which such Stock or other property has been distributed. (e) Deferred Stock. The Committee is authorized to grant Deferred Stock to Participants, subject to the following terms and conditions: (i) Award and Restrictions. Issuance of Stock will occur upon expiration of the deferral period specified for an Award of Deferred Stock by the Committee (or, if permitted by the Committee, as elected by the Participant). In addition, Deferred Stock shall be subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee may impose, which restrictions may lapse at the expiration of the deferral period or at earlier specified times (including based on achievement of performance goals and/or future service requirements), separately or in combination, in installments or otherwise, and under such other circumstances as the Committee may determine at the date of grant or thereafter. Deferred Stock may be satisfied by delivery of Stock, other Awards, or a combination thereof (subject to Section 12(k)), as determined by the Committee at the date of grant or thereafter. (ii) Forfeiture. Except as otherwise determined by the Committee, upon termination of employment or service during the applicable deferral period or portion thereof to which forfeiture conditions apply (as provided in the Award document evidencing the Deferred Stock), all Deferred Stock that is at that time subject to such forfeiture conditions shall be forfeited; provided that the Committee may provide, by rule or regulation or in any Award document, or may determine in any individual case, that restrictions or forfeiture conditions relating to Deferred Stock will lapse in whole or in part, including in the event of terminations resulting from specified causes. (iii) Dividend Equivalents. Unless otherwise determined by the Committee, Dividend Equivalents on the specified number of shares of Stock covered by an Award of Deferred Stock shall be either (A) paid with respect to such Deferred Stock at the dividend payment date in cash or in shares of unrestricted Stock having a Fair Market Value equal to the amount of such dividends, or (B) deferred with respect to such Deferred Stock, either as a cash deferral - 8 - or with the amount or value thereof automatically deemed reinvested in additional Deferred Stock, other Awards or other investment vehicles having a Fair Market Value equal to the amount of such dividends, as the Committee shall determine or permit a Participant to elect. (f) Bonus Stock and Awards in Lieu of Obligations. The Committee is authorized to grant Stock as a bonus, or to grant Stock or other Awards in lieu of obligations of the Company or a subsidiary or affiliate to pay cash or deliver other property under the Plan or under other plans or compensatory arrangements, subject to such terms as shall be determined by the Committee. (g) Dividend Equivalents. The Committee is authorized to grant Dividend Equivalents to a Participant, which may be awarded on a free-standing basis or in connection with another Award. The Committee may provide that Dividend Equivalents shall be paid or distributed when accrued or shall be deemed to have been reinvested in additional Stock, Awards, or other investment vehicles, and subject to restrictions on transferability, risks of forfeiture and such other terms as the Committee may specify. (h) Other Stock-Based Awards. The Committee is authorized, subject to limitations under applicable law, to grant to Participants such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Stock or factors that may influence the value of Stock, including, without limitation, convertible or exchangeable debt securities, other rights convertible or exchangeable into Stock, purchase rights for Stock, Awards with value and payment contingent upon performance of the Company or business units thereof or any other factors designated by the Committee, and Awards valued by reference to the book value of Stock or the value of securities of or the performance of specified subsidiaries or affiliates or other business units. The Committee shall determine the terms and conditions of such Awards. Stock delivered pursuant to an Award in the nature of a purchase right granted under this Section 6(h) shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including, without limitation, cash, Stock, other Awards, notes, or other property, as the Committee shall determine. Cash awards, as an element of or supplement to any other Award under the Plan, may also be granted pursuant to this Section 6(h). (i) Performance Awards. Performance Awards, denominated in cash or in Stock or other Awards, may be granted by the Committee in accordance with Section 7. 7. PERFORMANCE AWARDS, INCLUDING ANNUAL INCENTIVE AWARDS. (a) Performance Awards Generally. Performance Awards may be denominated as a cash amount, number of shares of Stock, or specified number of other Awards (or a combination) which may be earned upon achievement or satisfaction of performance conditions specified by the Committee. In addition, the Committee may specify that any other Award shall constitute a Performance Award by conditioning the right of a Participant to exercise the Award or have it settled, and the timing thereof, upon achievement or satisfaction of such performance conditions as may be specified by the Committee. The Committee may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions, and may exercise its discretion to reduce or increase the amounts payable under any Award subject to performance conditions, except as limited under Sections 7(b) and 7(c) in the case of a Performance Award intended to qualify as "performance-based compensation" under Code Section 162(m). (b) Performance Awards Granted to Covered Employees. If the Committee determines that a Performance Award to be granted to an Eligible Person who is designated by the Committee as likely to be a Covered Employee should qualify as "performance-based compensation" for purposes of Code Section 162(m), the grant, exercise and/or settlement of such Performance Award shall be - 9 - contingent upon achievement of a preestablished performance goal and other terms set forth in this Section 7(b). (i) Performance Goal Generally. The performance goal for such Performance Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to each of such criteria, as specified by the Committee consistent with this Section 7(b). The performance goal shall be objective and shall otherwise meet the requirements of Code Section 162(m) and regulations thereunder, including the requirement that the level or levels of performance targeted by the Committee result in the achievement of performance goals being "substantially uncertain." The Committee may determine that such Performance Awards shall be granted, exercised and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to grant, exercise and/or settlement of such Performance Awards. Performance goals may differ for Performance Awards granted to any one Participant or to different Participants. (ii) Business Criteria. One or more of the following business criteria for the Company, on a consolidated basis, and/or for specified subsidiaries or affiliates or other business units of the Company shall be used by the Committee in establishing performance goals for such Performance Awards: (1) advertising sales (either calendar cycle or publication cycle basis) or other sales or revenue measures; (2) operating income, earnings from operations, earnings before or after taxes, earnings before or after interest, depreciation, amortization, or extraordinary or special items, (3) net income or net income per common share (basic or diluted); (4) return on assets, return on investment, return on capital, or return on equity; (5) cash flow, free cash flow, cash flow return on investment, or net cash provided by operations; (6) interest expense after taxes; (7) economic profit or value created; (8) operating margin; (9) stock price or total stockholder return; and (10) strategic business criteria, consisting of one or more objectives based on meeting specified market penetration, geographic business expansion goals, cost targets, customer satisfaction, employee satisfaction, management of employment practices and employee benefits, supervision of litigation and information technology, and goals relating to acquisitions or divestitures of subsidiaries, affiliates or joint ventures. The targeted level or levels of performance with respect to such business criteria may be established at such levels and in such terms as the Committee may determine, in its discretion, including in absolute terms, as a goal relative to performance in prior periods, or as a goal compared to the performance of one or more comparable companies or an index covering multiple companies. (iii) Performance Period; Timing for Establishing Performance Goals. Achievement of performance goals in respect of such Performance Awards shall be measured over a performance period of up to one year or more than one year, as specified by the Committee. A performance goal shall be established not later than the earlier of (A) 90 days after the beginning of any performance period applicable to such Performance Award or (B) the time 25% of such performance period has elapsed. (iv) Performance Award Pool. The Committee may establish a Performance Award pool, which shall be an unfunded pool, for purposes of measuring performance of the Company in connection with Performance Awards. The amount of such Performance Award pool shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 7(b)(ii) during the given performance period, as specified by the Committee in accordance with Section 7(b)(iv). The Committee may specify the amount of the Performance Award pool as a percentage of any of such business criteria, a percentage thereof in excess of a threshold amount, or as another amount which need not bear a strictly mathematical relationship to such business criteria. - 10 - (v) Settlement of Performance Awards; Other Terms. Settlement of Performance Awards shall be in cash, Stock, other Awards or other property, in the discretion of the Committee. The Committee may, in its discretion, increase or reduce the amount of a settlement otherwise to be made in connection with such Performance Awards, but may not exercise discretion to increase any such amount payable to a Covered Employee in respect of a Performance Award subject to this Section 7(b). Any settlement which changes the form of payment from that originally specified shall be implemented in a manner such that the Performance Award and other related Awards do not, solely for that reason, fail to qualify as "performance-based compensation" for purposes of Code Section 162(m). The Committee shall specify the circumstances in which such Performance Awards shall be paid or forfeited in the event of termination of employment by the Participant or other event (including a Change in Control) prior to the end of a performance period or settlement of such Performance Awards. (c) Annual Incentive Awards Granted to Designated Covered Employees. The Committee may grant an Annual Incentive Award to an Eligible Person who is designated by the Committee as likely to be a Covered Employee. Such Annual Incentive Award will be intended to qualify as "performance-based compensation" for purposes of Code Section 162(m), and its grant, exercise and/or settlement shall be contingent upon achievement of preestablished performance goals and other terms set forth in this Section 7(c). (i) Grant of Annual Incentive Awards. Not later than the earlier of 90 days after the beginning of any performance period applicable to such Annual Incentive Award or the time 25% of such performance period has elapsed, the Committee shall determine the Covered Employees who will potentially receive Annual Incentive Awards, and the amount(s) potentially payable thereunder, for that performance period. The amount(s) potentially payable shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 7(b)(ii) in the given performance period, as specified by the Committee. The Committee may designate an annual incentive award pool as the means by which Annual Incentive Awards will be measured, which pool shall conform to the provisions of Section 7(b)(iv). In such case, the portion of the Annual Incentive Award pool potentially payable to each Covered Employee shall be preestablished by the Committee. In all cases, the maximum Annual Incentive Award of any Participant shall be subject to the limitation set forth in Section 5. (ii) Payout of Annual Incentive Awards. After the end of each performance period, the Committee shall determine the amount, if any, of the Annual Incentive Award for that performance period payable to each Participant. The Committee may, in its discretion, determine that the amount payable to any Participant as a final Annual Incentive Award shall be reduced from the amount of his or her potential Annual Incentive Award, including a determination to make no final Award whatsoever, but may not exercise discretion to increase any such amount. The Committee shall specify the circumstances in which an Annual Incentive Award shall be paid or forfeited in the event of termination of employment by the Participant or other event prior to the end of a performance period or settlement of such Annual Incentive Award. (d) Written Determinations. Determinations by the Committee as to the establishment of performance goals, the amount potentially payable in respect of Performance Awards and Annual Incentive Awards, the level of actual achievement of the specified performance goals relating to Performance Awards and Annual Incentive Awards, and the amount of any final Performance Award and Annual Incentive Award shall be recorded in writing in the case of Performance Awards intended to qualify under Section 162(m). Specifically, the Committee shall certify in writing, in a manner conforming to applicable regulations under Section 162(m), prior to settlement of each such Award - 11 - granted to a Covered Employee, that the performance objective relating to the Performance Award and other material terms of the Award upon which settlement of the Award was conditioned have been satisfied. 8. NON-EMPLOYEE DIRECTOR AWARDS. Options, Deferred Stock, Restricted Stock and other Awards (which other Awards, if granted, will be governed by Sections 6 and 7 of this Plan) shall be granted to non-employee directors of the Company or a subsidiary or an affiliate in accordance with policies established from time to time by the Board specifying the classes of non-employee directors to be granted such Awards, the number of shares to be subject to each Award, and the time or times at which such Awards shall be granted. All Options granted to non-employee directors shall be non-qualified stock options. (a) Initial Policy -- Option Grants. The initial policy with respect to Options granted under this Section 8(a), effective as of the Effective Date and continuing until modified or revoked by the Board from time to time, shall be as follows: (i) Initial Grants. At the date of a person's initial election or appointment as a member of the Board after the Effective Date, such person, if he or she is a non-employee director of the Company eligible to participate upon such election or appointment, shall be granted an Option to purchase 1,500 shares of Stock, subject to adjustment as provided in Section 12(c). At the Effective Date, each person who is a non-employee director of the Company eligible to participate at that date shall be granted an Option to purchase 1,500 shares of Stock, subject to adjustment as provided in Section 12(c). (ii) Annual Grants. At the date of each annual meeting of shareholders following the Effective Date at which a director is elected or reelected as a member of the Board (or at which members of another class of directors are elected or reelected, if the Company then has a classified Board), such director, if he or she is a non-employee director of the Company eligible to participate at that date and if he or she has not been granted an Option under this Section 8(a) previously during the same calendar year, shall be granted an Option to purchase 1,500 shares of Stock, subject to adjustment as provided in Section 12(c). (b) Terms of Options Granted Under Section 8(a). Each Option granted under Section 8(a) shall be subject to the following terms and conditions: (i) Exercise Price. The exercise price per share of Stock purchasable under an Option shall be equal to 100% of the Fair Market Value of Stock on the date of grant of the Option, subject to Section 9(a). (ii) Option Term. Each Option shall expire ten years after the date of grant, or such earlier date as the Option may no longer be exercised and cannot, by its terms, thereafter become exercisable. (iii) Vesting and Exercisability. The Board may establish terms regarding the times at which Options shall become vested and exercisable. Unless otherwise determined by the Board, an Option granted under this Section 8(a) and not previously forfeited shall vest and become exercisable by a Participant as to one-third of the number of shares subject to the Option at the close of business on the day preceding each of the three annual meetings of shareholders following the date of grant of the Option, rounded to the nearest number of whole shares. The foregoing notwithstanding, an Option not previously forfeited shall vest and become exercisable on an accelerated - 12 - basis upon a Change in Control or upon the termination of the Participant's service as a director due to death, Disability or Retirement. Unless otherwise determined by the Board, an Option will cease to vest and become exercisable upon the termination of the Participant's service prior to a Change in Control for any reason other than death, Disability or Retirement, and such portion that has not vested and become exercisable at the time of such termination shall be forfeited. (iv) Payment. The exercise price of an Option shall be paid to the Company either in cash or by the surrender of Stock, or any combination thereof, or in such other form or manner as may be consistent with Section 6(b)(ii). (c) Initial Policy -- Grant of Deferred Stock and Restricted Stock. The initial policy with respect to Awards granted under this Section 8(c), effective as of the Effective Date and continuing until modified or revoked by the Board from time to time, shall be as follows: (i) Initial Grant. At the date of a person's initial election or appointment as a member of the Board after the Effective Date, such person, if he or she is a non-employee director of the Company eligible to participate upon such election or appointment, shall be granted 1,500 shares of Deferred Stock, subject to adjustment as provided in Section 12(c). At the Effective Date, each person who is a non-employee director of the Company eligible to participate at that date shall be granted 1,500 shares of Deferred Stock, subject to adjustment as provided in Section 12(c). (ii) Annual Grants. At the date of each annual meeting of shareholders following the Effective Date at which a director is elected or reelected as a member of the Board (or at which members of another class of directors are elected or reelected, if the Company then has a classified Board), such director, if he or she is a non-employee director of the Company eligible to participate at that date and if he or she has not been granted Deferred Stock or Restricted Stock under Section 8(c) previously during the same calendar year, shall be granted 1,500 shares of Deferred Stock, unless the director has elected, prior to such annual meeting of shareholders, to receive such grant in the form of an equal number of shares of Restricted Stock. The number of shares subject to such annual grants shall be subject to adjustment as provided in Section 12(c). (d) Terms of Deferred Stock and Restricted Stock Granted Under Section 8(c). Deferred Stock granted under Section 8(c) shall be subject to the terms and conditions of Deferred Stock specified in Sections 8(f)(ii), (iii), and (iv), unless otherwise determined by the Board. Deferred Stock and Restricted Stock granted under this Section 8(c) shall also be subject to the following additional terms and conditions: (i) Vesting and Forfeiture. The Board may establish terms regarding the times at which Deferred Stock and Restricted Stock shall become vested and non-forfeitable. Unless otherwise determined by the Board, an Award granted under Section 8(c) and not previously forfeited shall become vested and non-forfeitable as to one-third of the number of shares of Deferred Stock or Restricted Stock at the close of business on the day preceding each of the three annual meetings of shareholders following the date of grant of such Award, rounded to the nearest number of whole shares. The foregoing notwithstanding, an Award of Deferred Stock or Restricted Stock not previously vested or forfeited shall vest and become non-forfeitable on an accelerated basis upon a Change in Control or upon the termination of the Participant's service as a director due to death, Disability or Retirement. Unless otherwise determined by the Board, an Award of Deferred Stock or Restricted Stock not previously vested or forfeited will cease to vest - 13 - and will be forfeited upon the termination of the Participant's service prior to a Change in Control for any reason other than death, Disability or Retirement. (ii) Deferred Stock Credited as a Result of Dividend Equivalents. Unless otherwise determined by the Board, Deferred Stock credited as a result of Dividend Equivalents under Section 8(f)(ii) shall be subject to the same terms, including risk of forfeiture, as the Deferred Stock with respect to which the dividend equivalents were credited. (iii) Dividends on Restricted Stock. Unless otherwise determined by the Board, dividends on Restricted Stock declared and paid prior to the lapse of the risk of forfeiture on such Restricted Stock shall be automatically reinvested in additional shares of Restricted Stock, which shall be subject to the same terms, including risk of forfeiture, as the Restricted Stock on which the dividend was paid. (iv) Awards Nontransferable. Deferred Stock and Restricted Stock shall be nontransferable by the Participant at any time that the Award remains subject to a risk of forfeiture. (e) Options Granted in Payment of Fees and Deferral of Fees in Deferred Stock and Deferred Cash. Each non-employee director of the Company may elect, in accordance with Section 8(e)(i), to be paid Retainer Fees in the form of Options under Section 8(e)(ii) or to defer receipt of Retainer Fees and Other Director Compensation in the form of Deferred Stock under Section 8(e)(iii) or deferred cash under Section 8(e)(iv). (i) Elections. A director shall elect to participate and the terms of such participation by filing an election with the Company prior to the beginning of a Plan Year (the initial Plan Year will begin August 14, 1998 and Plan Years thereafter generally will begin at each annual meeting of shareholders or, in the case of a new director, upon initial appointment) or at such other date as may be specified by the Board, provided that any date so specified shall ensure effective deferral of taxation and otherwise comply with applicable laws. (A) Effect and Irrevocability of Elections. Elections shall be deemed continuing, and therefore applicable to Plan Years after the initial Plan Year covered by the election, until the election is modified or superseded by the Participant. Elections other than those subject to Section 8(f)(iv) shall become irrevocable at the commencement of the Plan Year to which an election relates, unless the Board specifies a different time. Elections relating to the time of settlement of a Deferral Account shall become irrevocable at the time specified in Section 8(f)(iv). Elections may be modified or revoked by filing a new election prior to the time the election to be modified or revoked has become irrevocable. The latest election filed with the Board shall be deemed to revoke all prior inconsistent elections that remain revocable at the time of filing of the latest election. (B) Matters To Be Elected. The Company will provide a form of election which will permit a director to make appropriate elections with respect to all relevant matters under this Section 8. (C) Time of Filing Elections. An election must be received by the Company prior to the date specified by the Board. Under no circumstances may a - 14 - Participant defer compensation to which the Participant has attained, at the time of deferral, a legally enforceable right to current receipt of such compensation. (ii) Options Granted in Payment of Retainer Fees. A Participant who has elected to be paid a specified amount of Retainer Fees in the form of Options shall be granted, at the close of business on the day the Participant's Plan Year commences an Option to purchase the number of whole shares of Stock determined in accordance with the Option Valuation Methodology specified by the Board. Each Option granted under this Section 8(e)(ii) shall be subject to the following terms and conditions: (A) Option Valuation Methodology. The Board shall determine the Option Valuation Methodology which will be used to determine the number of Options granted and the Option exercise price. The Option Valuation Methodology may be based upon a valuation of the Option, a discounting of the aggregate exercise price of the Options by the amount of Retainer Fees to be paid in the form of Options, or such other methodology as may be deemed reasonable for purposes of this Section 8(e)(ii). (B) Option Term. Each Option will expire ten years after the date of grant; provided, however, that, unless otherwise determined by the Board, any portion of an Option that is not yet exercisable as of the date a Participant ceases to serve as a director for any reason will expire at the date such service ceases. (C) Vesting and Exercisability. Unless otherwise determined by the Board, each Option will vest and become exercisable as to 25% of the underlying shares on the June 30, September 30, December 31, and March 31 following the date of grant; provided, however, that, in the case of a Plan Year which begins on or after June 30 and before September 30, the vesting percentage shall be 33%, and in the case of a Plan Year which begins on or after September 30 and before December 31, the vesting percentage shall be 50%; and provided further, that an Option will become fully vested and exercisable at the close of business on the last day of the Plan Year in which it was granted. The number of shares as to which the Option becomes vested and exercisable will be rounded to the nearest whole number. The foregoing notwithstanding, (i) upon a Change in Control a Participant's Option not previously forfeited shall vest and become exercisable in full, and (ii) upon termination of the Participant's service as a director due to death, Disability, or Retirement, that portion of the Option which would become vested and exercisable on the last day of the calendar quarter in which such death, Disability, or Retirement occurred will become immediately vested and exercisable. (D) Exercise Price. The exercise price per share of Stock purchasable under an Option will be determined in accordance with the Option Valuation Methodology. The exercise price of an Option shall be paid to the Company either in cash or by the surrender of Stock, or any combination thereof, or in such other form or manner as may be established by the Board; provided, however, that, unless otherwise determined by the Board, shares shall not be surrendered in payment of the exercise price if such surrender would result in additional accounting expense to the Company. (E) Changes in Fees; Changes in Service as a Committee Chair. If the amount of Retainer Fees is increased during a Plan Year, or if a Director is appointed chair of a Board committee such that an additional Retainer Fee is - 15 - payable during a Plan Year, such increased or additional fees will not be paid in the form of Options. If a Director has been granted an Option in respect of a Plan Year in payment of Retainer Fees which included committee-related fees for service as chair or a member of any Board committee, and during such Plan Year he or she ceases such service but remains on the Board, the Option will expire in part at the time such service ceases, to the extent of that portion of the Option which is not yet exercisable multiplied by a fraction the numerator of which is the amount of committee-related fees included in such Retainer Fees and the denominator of which is the total amount of such Retainer Fees. (F) Service During Part of a Quarter. If a Participant ceases to serve as a director or on committee at a date other than a vesting date for the Option and if the Board does not exercise its discretion to permit vesting of the Participant's Option in consideration for the Participant's service in that final quarterly period, the Participant shall be entitled to payment in cash for his or her service in that final quarterly period if and to the extent then provided in the Company's regular non-employee director compensation policies. (iii) Deferral of Retainer Fees and Other Director Compensation in the Form of Deferred Stock. If a Participant has elected to defer receipt of a specified amount of Retainer Fees or Other Director Compensation in the form of Deferred Stock, a number of shares of Deferred Stock shall be credited to the Participant's Deferred Stock Account, as of the date such Retainer Fees or Other Director Compensation otherwise would have been payable to the Participant but for such election to defer, equal to (i) such amount otherwise payable divided by (ii) the Fair Market Value of a share of Stock at that date. Deferred Shares credited under this Section 8(e)(iii) shall be subject to the terms and conditions of Deferred Stock specified in Sections 8(f)(ii), (iii) and (iv). The right and interest of each Participant in Deferred Stock credited to the Participant's Deferred Stock Account under this Section 8(e)(iii) at all times will be nonforfeitable. (iv) Deferral of Retainer Fees and Other Director Compensation in the Form of Deferred Cash. If a Participant has elected to defer receipt of a specified amount of Retainer Fees or Other Director Compensation in the form of deferred cash, an amount equal to such specified amount shall be credited to the Participant's Deferred Cash Account as of the date such Retainer Fees or Other Director Compensation otherwise would have been payable to the Participant but for such election to defer. Each Participant shall be entitled to direct the manner in which his or her Deferred Cash Account will be deemed to be invested, selecting among the same investment alternatives (other than Company common stock) as are offered from time to time to participants in the Company's Deferred Compensation Plan. The right and interest of each Participant relating to his or her Deferred Cash Account at all times will be nonforfeitable. (v) Cessation of Service as a Director. If any Retainer Fee or Other Director Compensation otherwise subject to an election would be paid to a Participant after he or she has ceased to serve as a director, such payment shall not be subject to deferral under this Section 8(e), but shall instead be paid in accordance with the Company's regular non-employee director compensation policies. (f) Other Deferrals and Terms of Deferral Accounts. (i) Deferral of Certain Option Shares. Upon any exercise of an Option or an option granted under any other plan or program of the Company by a non-employee - 16 - director, if the exercise price of such option is paid by surrender of shares of Stock to the Company, the director may elect to defer receipt of all or a portion of the shares deliverable upon exercise of the option in excess of the number surrendered in payment of the exercise price. In such case, the number of shares deferred shall be credited to the Participant's Deferred Stock Account. (ii) Dividend Equivalents on Deferred Stock. Dividend Equivalents will be credited on Deferred Stock credited to a Participant's Deferred Stock Account(s) as follows: (A) Cash and Non-Share Dividends. If the Company declares and pays a dividend on Stock in the form of cash or property other than shares of Stock, then a number of additional shares of Deferred Stock shall be credited to a Participant's Deferred Stock Account(s) as of the payment date for such dividend equal to (i) the number of shares of Deferred Stock credited to the respective Account as of the record date for such dividend, multiplied by (ii) the amount of cash plus the Fair Market Value of any property other than shares actually paid as a dividend on each share at such payment date, divided by (iii) the Fair Market Value of a share of Stock at such payment date. (B) Share Dividends and Splits. If the Company declares and pays a dividend on Stock in the form of additional shares of Stock, or there occurs a forward split of Stock, then a number of additional shares of Deferred Stock shall be credited to the Participant's Deferred Stock Account(s) as of the payment date for such dividend or forward Stock split equal to (i) the number of shares of Deferred Stock credited to the respective Account as of the record date for such dividend or split multiplied by (ii) the number of additional shares actually paid as a dividend or issued in such split in respect of each share of Stock. (iii) Reallocation of Accounts. A Participant may allocate amounts credited to his or her Deferred Cash Account to one or more of the investment vehicles authorized under the Company's Deferred Compensation Plan. Subject to the rules established by the Board and subject to the provisions of this Section 8(f), a Participant may reallocate amounts credited to his or her Deferred Cash Account as of the Valuation Date following the Participant's election, to one or more of such investment vehicles, by filing with the Company a notice, in such form, and in accordance with such procedures, as the Board shall determine from time to time. The Board may, in its discretion, restrict allocation into or reallocation by specified Participants into or out of special investment vehicles or specify minimum or maximum amounts that may be allocated or reallocated by Participants. Notwithstanding the foregoing, a Participant shall have no right to have amounts credited as cash to the Participant's Deferred Cash Account reallocated or switched to his or her Deferred Stock Account or amounts credited to the Participant's Deferred Stock Account reallocated or switched to his or her Deferred Cash Account, except as may be permitted by the Board. (iv) Elections as to Settlement. Each Participant, while still a director of the Company, shall file an election with the Company specifying the time or times at which the Participant's Deferral Account will be settled, following the Participant's termination of service as a director of the Company, and whether distribution will be in a single lump sum or in a number of annual installments not exceeding ten (or such other number as may be determined by the Board); provided, however, that, if no valid election has been filed as to the time of settlement of a Participant's Deferral Account or any portion thereof, such Deferral Account or portion thereof shall be distributed in a single lump sum - 17 - on the first business day of the year following the year in which the Participant ceases to serve as a director. If installments are elected, such installments must be annual installments, unless otherwise determined by the Board, commencing not later than the first year following the year in which the Participant ceases to serve as a director (on such annual installment date as may be specified by the Board) and extending over a period not to exceed ten years, unless otherwise determined by the Board. (A) Matters Covered by Election. Subject to the terms of the Plan, the Board shall determine whether all deferrals under the Plan must be subject to a single election as to the time or times of settlement, or whether settlement elections may relate to a specified sub-account (i.e., the Deferred Stock Account or the Deferred Cash Account) and/or a specified Plan Year. If the Board permits elections to relate to a specified Plan Year, such election shall apply to the amounts originally credited to the specified subaccount in respect of such Plan Year and to any additional amounts credited as Dividend Equivalents or interest in respect of such originally credited amounts and previously credited additional amounts. (B) Modifying Elections. A Participant may modify a prior election as to the time at which a Participant's Deferral Account (including a specified subaccount) will be settled at any time prior to the time the Participant ceases to serve as a director, subject to such requirements as may be specified by the Company. Such modification shall be made by filing a new election with the Company. The foregoing notwithstanding, the Board may disapprove or limit elections under this Section 8(f)(iv) in order to ensure that the Participant will not be deemed to have constructively received compensation in respect of the Participant's Deferral Account prior to settlement. (v) Election Forms. Elections under the Plan shall be made in writing on such form or forms as may be specified from time to time by the Board. (vi) Statements. The Company will furnish statements to each Participant reflecting the amount credited to a Participant's Deferral Account, transactions therein, and other related information no less frequently than once each calendar year. (vii) Fractional Shares. The amount of Deferred Stock credited to a Deferred Stock Account shall include fractional shares calculated to at least three decimal places. (g) Settlement of Deferral Accounts. The Company will settle a Participant's Deferral Account by making one or more distributions to the Participant (or his or her Beneficiary, following Participant's death) at the time or times, in a lump sum or installments, as specified in the Participant's election filed in accordance with Section 8(f)(iv); provided, however, that a Deferral Account will be settled at times earlier than those specified in such election in accordance with Sections 8(g)(ii), (iii), and (iv). (i) Form of Distribution. Distributions in respect of a Participant's Deferred Stock Account shall be made only in shares of Stock, together with cash in lieu of any fractional share remaining at a time that less than one whole share of Deferred Stock is credited to such Deferred Stock Account. Shares may be delivered in certificate form to a Participant (or his or her Beneficiary) or to a nominee for the account of the Participant (or his or her Beneficiary), or in such other manner as the Board may determine. Distributions in respect of a Participant's Deferred Cash Account shall be made only in cash. - 18 - (ii) Death. If a Participant ceases to serve as a director due to death or dies prior to distribution of all amounts from his or her Deferral Account, the Company shall make a single lump-sum distribution to the Participant's Beneficiary. Any such distribution shall be made as soon as practicable following notification to the Company of the Participant's death. (iii) Financial Emergency and Other Payments. Other provisions of the Plan notwithstanding, if, upon the written application of a Participant, the Board determines that the Participant has a financial emergency of such a substantial nature and beyond the Participant's control that payment of amounts previously deferred under the Plan is warranted, the Board may direct the payment to the Participant of all or a portion of the balance of a Deferral Account and the time and manner of such payment. (iv) Change in Control. In the event of a Change in Control, payments in settlement of any Deferral Account (including a Deferral Account with respect to which one or more installment payments have previously been made) shall be made within fifteen (15) business days following such Change in Control. 9. CERTAIN PROVISIONS APPLICABLE TO AWARDS. (a) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any award granted under another plan of the Company, any subsidiary or affiliate, or any business entity to be acquired by the Company or a subsidiary or affiliate, or any other right of a Participant to receive payment from the Company or any subsidiary or affiliate. Awards granted in addition to or in tandem with other Awards or awards may be granted either as of the same time as or a different time from the grant of such other Awards or awards. Subject to Section 12(k), the Committee may determine that, in granting a new Award, the in-the-money value of any surrendered Award or award or the value of any other right to payment surrendered by the Participant may be applied to reduce the exercise price of any Option, grant price of any SAR, or purchase price of any other Award. (b) Term of Awards. The term of each Award shall be for such period as may be determined by the Committee, subject to the express limitations set forth in Sections 6(b)(ii) and 8 or elsewhere in the Plan. (c) Form and Timing of Payment under Awards; Deferrals. Subject to the terms of the Plan (including Section 12(k)) and any applicable Award document, payments to be made by the Company or a subsidiary or affiliate upon the exercise of an Option or other Award or settlement of an Award may be made in such forms as the Committee shall determine, including, without limitation, cash, Stock, other Awards or other property, and may be made in a single payment or transfer, in installments, or on a deferred basis. The settlement of any Award may be accelerated, and cash paid in lieu of Stock in connection with such settlement, in the discretion of the Committee or upon occurrence of one or more specified events (subject to Section 12(k)). Installment or deferred payments may be required by the Committee (subject to Section 12(e)) or permitted at the election of the Participant on terms and conditions established by the Committee. Payments may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of Dividend Equivalents or other amounts in respect of installment or deferred payments denominated in Stock. (d) Limitation on Vesting of Certain Awards. Subject to Section 8, Restricted Stock will vest over a minimum period of three years except in the event of a Participant's death, disability, or - 19 - retirement, or in the event of a Change in Control or other special circumstances. The foregoing notwithstanding, (i) Restricted Stock as to which either the grant or vesting is based on, among other things, the achievement of one or more performance conditions generally will vest over a minimum period of one year except in the event of a Participant's death, disability, or retirement, or in the event of a Change in Control or other special circumstances, and (ii) up to 5% of the shares of Stock authorized under the Plan may be granted as Restricted Stock without any minimum vesting requirements. For purposes of this Section 9(d), vesting over a three-year period or one-year period will include periodic vesting over such period if the rate of such vesting is proportional throughout such period. 10. CHANGE IN CONTROL. (a) Effect of "Change in Control" on Non-Performance Based Awards. In the event of a "Change in Control," the following provisions shall apply to non-performance based Awards, including Awards as to which performance conditions previously have been satisfied or are deemed satisfied under Section 10(b), unless otherwise provided by the Committee in the Award document: (i) All deferral of settlement, forfeiture conditions and other restrictions applicable to Awards granted under the Plan shall lapse and such Awards shall be fully payable as of the time of the Change in Control without regard to deferral and vesting conditions, except to the extent of any waiver by the Participant or other express election to defer beyond a Change in Control and subject to applicable restrictions set forth in Section 12(a); (ii) Any Award carrying a right to exercise that was not previously exercisable and vested shall become fully exercisable and vested as of the time of the Change in Control and shall remain exercisable and vested for the balance of the stated term of such Award without regard to any termination of employment or service by the Participant other than a termination for Cause, subject only to applicable restrictions set forth in Section 12(a); and (iii) The Committee may, in its discretion, determine to extend to any Participant who holds an Option the right to elect, during the 60-day period immediately following the Change in Control, in lieu of acquiring the shares of Stock covered by such Option, to receive in cash the excess of the Change in Control Price over the exercise price of such Option, multiplied by the number of shares of Stock covered by such Option, and to extend to any Participant who holds other types of Awards denominated in shares the right to elect, during the 60-day period immediately following the Change in Control, in lieu of receiving the shares of Stock covered by such Award, to receive in cash the Change in Control Price multiplied by the number of shares of Stock covered by such Award. (b) Effect of "Change in Control" on Performance-Based Awards. In the event of a "Change in Control," with respect to an outstanding Award subject to achievement of performance goals and conditions, such performance goals and conditions shall be deemed to be met or exceeded if and to the extent so provided by the Committee in the Award document governing such Award or other agreement with the Participant. (c) Definition of "Change in Control." A "Change in Control" shall be deemed to have occurred if, after the Effective Date, there shall have occurred any of the following: (i) Any "person," as such term is used in Section 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company), acquires voting securities of the Company and immediately thereafter is a "20% - 20 - Beneficial Owner." For purposes of this provision, a "20% Beneficial Owner" shall mean a person who is the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then-outstanding voting securities; provided that the term "20% Beneficial Owner" shall not include any person who, at all times following such an acquisition of securities, remains eligible to file a Schedule 13G pursuant to Rule 13d-1(b) under the Exchange Act, or remains exempt from filing a Schedule 13D under Section 13(d)(6)(b) of the Exchange Act, with respect to all classes of Company voting securities; (ii) During any period of two consecutive years commencing on or after the Effective Date, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person (as defined above) who has entered into an agreement with the Company to effect a transaction described in subsections (i), (iii) or (iv) of this definition) whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (the "Continuing Directors") cease for any reason to constitute at least a majority thereof; (iii) The shareholders of the Company have approved a merger, consolidation, recapitalization, or reorganization of the Company, or a reverse stock split of any class of voting securities of the Company, or the consummation of any such transaction if shareholder approval is not obtained, other than any such transaction which would result in at least 60% of the combined voting power of the voting securities of the Company or the surviving entity outstanding immediately after such transaction being beneficially owned by persons who together beneficially owned at least 80% of the combined voting power of the voting securities of the Company outstanding immediately prior to such transaction, with the relative voting power of each such continuing holder compared to the voting power of each other continuing holder not substantially altered as a result of the transaction; provided that, for purposes of this paragraph (iii), such continuity of ownership (and preservation of relative voting power) shall be deemed to be satisfied if the failure to meet such 60% threshold (or to substantially preserve such relative voting power) is due solely to the acquisition of voting securities by an employee benefit plan of the Company, such surviving entity or a subsidiary thereof; and provided further, that, if consummation of the corporate transaction referred to in this Section 10(c)(iii) is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency or approval of the shareholders of another entity or other material contingency, no Change in Control shall occur until such time as such consent and approval has been obtained and any other material contingency has been satisfied; (iv) The shareholders of the Company have approved a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect); provided that, if consummation of the transaction referred to in this Section 10(c)(iv) is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency or approval of the shareholders of another entity or other material contingency, no Change in Control shall occur until such time as such consent and approval has been obtained and any other material contingency has been satisfied; and (v) any other event which the Board of Directors of the Company determines shall constitute a Change in Control for purposes of this Plan. (d) Definition of "Change in Control Price." The "Change in Control Price" means an amount in cash equal to the higher of (i) the amount of cash and fair market value of property that is the - 21 - highest price per share paid (including extraordinary dividends) in any transaction triggering the Change in Control or any liquidation of shares following a sale of substantially all assets of the Company, or (ii) the highest Fair Market Value per share at any time during the 60-day period preceding and 60-day period following the Change in Control. (e) Termination of Employment After Change in Control Negotiations Have Commenced. For purposes of this Section 10, a termination of a Participant's employment by the Company without Cause after the commencement of negotiations with a potential acquirer or business combination partner will be deemed to be a termination of employment immediately after a Change in Control if such negotiations result in a transaction constituting a Change in Control within 24 months of the commencement date of such negotiations. 11. ADDITIONAL AWARD FORFEITURE PROVISIONS. (a) Forfeiture of Options and Other Awards and Gains Realized Upon Prior Option Exercises or Award Settlements. Unless otherwise determined by the Committee, each Award granted hereunder, other than Awards granted to non-employee directors, shall be subject to the following additional forfeiture conditions, to which the Participant, by accepting an Award hereunder, agrees. If any of the events specified in Section 11(b)(i), (ii), or (iii) occurs (a "Forfeiture Event"), all of the following forfeitures will result: (i) The unexercised portion of the Option, whether or not vested, and any other Award not then settled (except for an Award that has not been settled solely due to an elective deferral by the Participant and otherwise is not forfeitable in the event of any termination of service of the Participant) will be immediately forfeited and canceled upon the occurrence of the Forfeiture Event; and (ii) The Participant will be obligated to repay to the Company, in cash, within five business days after demand is made therefor by the Company, the total amount of Award Gain (as defined herein) realized by the Participant upon each exercise of an Option or settlement of an Award (regardless of any elective deferral) that occurred on or after (A) the date that is six months prior to the occurrence of the Forfeiture Event, if the Forfeiture Event occurred while the Participant was employed by the Company or a subsidiary or affiliate, or (B) the date that is six months prior to the date the Participant's employment by the Company or a subsidiary or affiliate terminated, if the Forfeiture Event occurred after the Participant ceased to be so employed. For purposes of this Section, the term "Award Gain" shall mean (i), in respect of a given Option exercise, the product of (X) the Fair Market Value per share of Stock at the date of such exercise (without regard to any subsequent change in the market price of shares) minus the exercise price times (Y) the number of shares as to which the Option was exercised at that date, and (ii), in respect of any other settlement of an Award granted to the Participant, the Fair Market Value of the cash or Stock paid or payable to Participant (regardless of any elective deferral) less any cash or the Fair Market Value of any Stock or property (other than an Award or award which would have itself then been forfeitable hereunder and excluding any payment of tax withholding) paid by the Participant to the Company as a condition of or in connection such settlement. (b) Events Triggering Forfeiture. The forfeitures specified in Section 11(a) will be triggered upon the occurrence of any one of the following Forfeiture Events at any time during the Participant's employment by the Company or a subsidiary or affiliate and resulting in his or her termination of employment, or during the one-year period following termination of such employment: (i) The Participant, acting alone or with others, directly or indirectly, prior to a Change in Control, (A) engages, either as employee, employer, consultant, advisor, or director, or as an - 22 - owner, investor, partner, or stockholder unless the Participant's interest is insubstantial, in any business in an area or region in which the Company conducts business at the date the event occurs, which is directly in competition with a business then conducted by the Company or a subsidiary or affiliate; (B) induces any customer or supplier of the Company or a subsidiary or affiliate, or telephone company with which the Company or a subsidiary or affiliate has a business relationship, to curtail, cancel, not renew, or not continue his or her or its business with the Company or any subsidiary or affiliate; or (C) induces, or attempts to influence, any employee of or service provider to the Company or a subsidiary or affiliate to terminate such employment or service. The Committee shall, in its discretion, determine which lines of business the Company conducts on any particular date and which third parties may reasonably be deemed to be in competition with the Company. For purposes of this Section 11(b)(i), a Participant's interest as a stockholder is insubstantial if it represents beneficial ownership of less than five percent of the outstanding class of stock, and a Participant's interest as an owner, investor, or partner is insubstantial if it represents ownership, as determined by the Committee in its discretion, of less than five percent of the outstanding equity of the entity; (ii) The Participant discloses, uses, sells, or otherwise transfers, except in the course of employment with or other service to the Company or any subsidiary or affiliate, any confidential or proprietary information of the Company or any subsidiary or affiliate, including but not limited to information regarding the Company's current and potential customers, organization, employees, finances, and methods of operations and investments, so long as such information has not otherwise been disclosed to the public or is not otherwise in the public domain, except as required by law or pursuant to legal process, or the Participant makes statements or representations, or otherwise communicates, directly or indirectly, in writing, orally, or otherwise, or takes any other action which may, directly or indirectly, disparage or be damaging to the Company or any of its subsidiaries or affiliates or their respective officers, directors, employees, advisors, businesses or reputations, except as required by law or pursuant to legal process; or (iii) The Participant fails to cooperate with the Company or any subsidiary or affiliate in any way, including, without limitation, by making himself or herself available to testify on behalf of the Company or such subsidiary or affiliate in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, or otherwise fails to assist the Company or any subsidiary or affiliate in any way, including, without limitation, in connection with any such action, suit, or proceeding by providing information and meeting and consulting with members of management of, other representatives of, or counsel to, the Company or such subsidiary or affiliate, as reasonably requested. (c) Agreement Does Not Prohibit Competition or Other Participant Activities. Although the conditions set forth in this Section 11 shall be deemed to be incorporated into an Award, a Participant is not thereby prohibited from engaging in any activity, including but not limited to competition with the Company and its subsidiaries and affiliates. Rather, the non-occurrence of the Forfeiture Events set forth in Section 11(b) is a condition to the Participant's right to realize and retain value from his or her compensatory Options and Awards, and the consequence under the Plan if the Participant engages in an activity giving rise to any such Forfeiture Event are the forfeitures specified herein. The Company and the Participant shall not be precluded by this provision or otherwise from entering into other agreements concerning the subject matter of Sections 11(a) and 11(b). (d) Committee Discretion. The Committee may, in its discretion, waive in whole or in part the Company's right to forfeiture under this Section, but no such waiver shall be effective unless evidenced by a writing signed by a duly authorized officer of the Company. In addition, the Committee may impose additional conditions on Awards, by inclusion of appropriate provisions in the document evidencing or governing any such Award. - 23 - 12. GENERAL PROVISIONS. (a) Compliance with Legal and Other Requirements. The Company may, to the extent deemed necessary or advisable by the Committee, postpone the issuance or delivery of Stock or payment of other benefits under any Award until completion of such registration or qualification of such Stock or other required action under any federal or state law, rule or regulation, listing or other required action with respect to any stock exchange or automated quotation system upon which the Stock or other securities of the Company are listed or quoted, or compliance with any other obligation of the Company, as the Committee may consider appropriate, and may require any Participant to make such representations, furnish such information and comply with or be subject to such other conditions as it may consider appropriate in connection with the issuance or delivery of Stock or payment of other benefits in compliance with applicable laws, rules, and regulations, listing requirements, or other obligations. The foregoing notwithstanding, in connection with a Change in Control, the Company shall take or cause to be taken no action, and shall undertake or permit to arise no legal or contractual obligation, that results or would result in any postponement of the issuance or delivery of Stock or payment of benefits under any Award or the imposition of any other conditions on such issuance, delivery or payment, to the extent that such postponement or other condition would represent a greater burden on a Participant than existed on the 90th day preceding the Change in Control. (b) Limits on Transferability; Beneficiaries. No Award or other right or interest of a Participant under the Plan shall be pledged, hypothecated or otherwise encumbered or subject to any lien, obligation or liability of such Participant to any party (other than the Company or a subsidiary or affiliate thereof), or assigned or transferred by such Participant otherwise than by will or the laws of descent and distribution or to a Beneficiary upon the death of a Participant, and such Awards or rights that may be exercisable shall be exercised during the lifetime of the Participant only by the Participant or his or her guardian or legal representative, except that Awards and other rights (other than ISOs and SARs in tandem therewith) may be transferred to one or more transferees during the lifetime of the Participant, and may be exercised by such transferees in accordance with the terms of such Award, but only if and to the extent such transfers are permitted by the Committee, subject to any terms and conditions which the Committee may impose thereon (including limitations the Committee may deem appropriate in order that offers and sales under the Plan will meet applicable requirements of registration forms under the Securities Act of 1933 specified by the Securities and Exchange Commission). A Beneficiary, transferee, or other person claiming any rights under the Plan from or through any Participant shall be subject to all terms and conditions of the Plan and any Award document applicable to such Participant, except as otherwise determined by the Committee, and to any additional terms and conditions deemed necessary or appropriate by the Committee. (c) Adjustments. In the event that any large, special and non-recurring dividend or other distribution (whether in the form of cash or property other than Stock), recapitalization, forward or reverse split, Stock dividend, reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, liquidation, dissolution or other similar corporate transaction or event affects the Stock such that an adjustment is determined by the Committee to be appropriate under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and kind of shares of Stock which may be delivered in connection with Awards granted thereafter, (ii) the number and kind of shares of Stock by which annual per-person Award limitations are measured under Section 5, (iii) the number and kind of shares of Stock subject to or deliverable in respect of outstanding Awards and (iv) the exercise price, grant price or purchase price relating to any Award or, if deemed appropriate, the Committee may make provision for a payment of cash or property to the holder of an outstanding Option (subject to Section 12(k)). In addition, the Committee is authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards (including Performance Awards and performance goals and any hypothetical funding pool relating - 24 - thereto) in recognition of unusual or nonrecurring events (including, without limitation, events described in the preceding sentence, as well as acquisitions and dispositions of businesses and assets) affecting the Company, any subsidiary or affiliate or other business unit, or the financial statements of the Company or any subsidiary or affiliate, or in response to changes in applicable laws, regulations, accounting principles, tax rates and regulations or business conditions or in view of the Committee's assessment of the business strategy of the Company, any subsidiary or affiliate or business unit thereof, performance of comparable organizations, economic and business conditions, personal performance of a Participant, and any other circumstances deemed relevant; provided that no such adjustment shall be authorized or made if and to the extent that the existence of such authority (i) would cause Options, SARs, or Performance Awards granted under the Plan to Participants designated by the Committee as Covered Employees and intended to qualify as "performance-based compensation" under Code Section 162(m) and regulations thereunder to otherwise fail to qualify as "performance-based compensation" under Code Section 162(m) and regulations thereunder, or (ii) would cause the Committee to be deemed to have authority to change the targets, within the meaning of Treasury Regulation 1.162-27(e)(4)(vi), under the performance goals relating to Options or SARs granted to Covered Employees and intended to qualify as "performance-based compensation" under Code Section 162(m) and regulations thereunder. (d) Tax Provisions. (i) Withholding. The Company and any subsidiary or affiliate is authorized to withhold from any Award granted, any payment relating to an Award under the Plan, including from a distribution of Stock, or any payroll or other payment to a Participant, amounts of withholding and other taxes due or potentially payable in connection with any transaction involving an Award, and to take such other action as the Committee may deem advisable to enable the Company and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of a Participant's withholding obligations, either on a mandatory or elective basis in the discretion of the Committee. Other provisions of the Plan notwithstanding, only the minimum amount of Stock deliverable in connection with an Award necessary to satisfy statutory withholding requirements will be withheld. (ii) Required Consent to and Notification of Code Section 83(b) Election. No election under Section 83(b) of the Code (to include in gross income in the year of transfer the amounts specified in Code Section 83(b)) or under a similar provision of the laws of a jurisdiction outside the United States may be made unless expressly permitted by the terms of the Award document or by action of the Committee in writing prior to the making of such election. In any case in which a Participant is permitted to make such an election in connection with an Award, the Participant shall notify the Company of such election within ten days of filing notice of the election with the Internal Revenue Service or other governmental authority, in addition to any filing and notification required pursuant to regulations issued under Code Section 83(b) or other applicable provision. (iii) Requirement of Notification Upon Disqualifying Disposition Under Code Section 421(b). If any Participant shall make any disposition of shares of Stock delivered pursuant to the exercise of an Incentive Stock Option under the circumstances described in Code Section 421(b), such Participant shall notify the Company of such disposition within ten days thereof. (e) Changes to the Plan. The Board may amend, suspend or terminate the Plan or the Committee's authority to grant Awards under the Plan without the consent of stockholders or Participants; provided, however, that any amendment to the Plan shall be submitted to the Company's stockholders for approval not later than the earliest annual meeting for which the record - 25 - date is after the date of such Board action if such stockholder approval is required by any federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the Stock may then be listed or quoted, or if such amendment would: (i) materially increase the number of shares reserved for issuance and delivery under Section 4 of the Plan; (ii) expand the class of Eligible Persons under Section 5(a) of the Plan; (iii) increase the per-person Annual Limits under Section 5(b) of the Plan; (iv) increase the number of shares that may be issued and delivered under the Plan in connection with awards other than Options and SARs under Section 4(a) of the Plan; (v) permit unrestricted Stock to be granted other than in lieu of such payments under the Plan or other incentive plans and programs of the Company and its subsidiaries and affiliates; (vi) allow for the creation of additional types of awards; (vii) with respect to Restricted Stock, permit shortening or lapsing of restrictions or waiving of performance goals, except to the extent specified in Section 9(d) of the Plan; (viii) amend or replace previously granted Options in a transaction that constitutes a "repricing," as such term is used in Instruction 3 to Item 402(b)(2)(iv) of Regulation S-K, as promulgated by the Securities and Exchange Commission; or (ix) amend any of the terms and conditions of this Section 12(e); and the Board may otherwise, in its discretion, determine to submit other amendments to the Plan to stockholders for approval. In addition, without the consent of an affected Participant, no such Board action may materially and adversely affect the rights of such Participant under any outstanding Award, except any such amendment made to cause the Plan to comply with applicable law, stock exchange rules and regulations or accounting or tax rules and regulations. With regard to other terms of Awards, the Committee shall have no authority to waive or modify any such Award term after the Award has been granted to the extent the waived or modified term would be mandatory under the Plan for any Award newly granted at the date of the waiver or modification (f) Right of Setoff. The Company or any subsidiary or affiliate may, to the extent permitted by applicable law, deduct from and set off against any amounts the Company or a subsidiary or affiliate may owe to the Participant from time to time, including amounts payable in connection with any Award, owed as wages, fringe benefits, or other compensation owed to the Participant, such amounts as may be owed by the Participant to the Company, including but not limited to amounts owed under Section 11(a), although the Participant shall remain liable for any part of the Participant's payment obligation not satisfied through such deduction and setoff. By accepting any Award granted hereunder, the Participant agrees to any deduction or setoff under this Section 12(f). (g) Unfunded Status of Awards; Creation of Trusts. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant or obligation to deliver Stock pursuant to an Award, nothing contained in the Plan or any Award shall give any such Participant any rights that are greater than those of a general creditor of the Company; provided that the Committee may authorize the creation of trusts and deposit therein cash, Stock, other Awards or other property, or make other arrangements to meet the - 26 - Company's obligations under the Plan. Such trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Committee otherwise determines with the consent of each affected Participant. (h) Nonexclusivity of the Plan. Neither the adoption of the Plan by the Board nor its submission to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board or a committee thereof to adopt such other incentive arrangements, apart from the Plan, as it may deem desirable, including incentive arrangements and awards which do not qualify under Code Section 162(m), and such other arrangements may be either applicable generally or only in specific cases. (i) Payments in the Event of Forfeitures; Fractional Shares. Unless otherwise determined by the Committee, in the event of a forfeiture of an Award with respect to which a Participant paid cash consideration, the Participant shall be repaid the amount of such cash consideration. No fractional shares of Stock shall be issued or delivered pursuant to the Plan or any Award. The Committee shall determine whether cash, other Awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated. (j) Compliance with Code Section 162(m). It is the intent of the Company that Options and SARs granted to Covered Employees and other Awards designated as Awards to Covered Employees subject to Section 7 shall constitute qualified "performance-based compensation" within the meaning of Code Section 162(m) and regulations thereunder, unless otherwise determined by the Committee at the time of allocation of an Award. Accordingly, the terms of Sections 7(b), (c), and (d), including the definitions of Covered Employee and other terms used therein, shall be interpreted in a manner consistent with Code Section 162(m) and regulations thereunder. The foregoing notwithstanding, because the Committee cannot determine with certainty whether a given Participant will be a Covered Employee with respect to a fiscal year that has not yet been completed, the term Covered Employee as used herein shall mean only a person designated by the Committee as likely to be a Covered Employee with respect to a specified fiscal year. If any provision of the Plan or any Award document relating to a Performance Award that is designated as intended to comply with Code Section 162(m) does not comply or is inconsistent with the requirements of Code Section 162(m) or regulations thereunder, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements, and no provision shall be deemed to confer upon the Committee or any other person discretion to increase the amount of compensation otherwise payable in connection with any such Award upon attainment of the applicable performance objectives. (k) Certain Limitations Relating to Accounting Treatment of Awards. Other provisions of the Plan notwithstanding, the Committee's authority under the Plan (including under Sections 9(c), 12(c) and 12(d)) is limited to the extent necessary to ensure that any Option or other Award of a type that the Committee has intended to be subject to fixed accounting with a measurement date at the date of grant or the date performance conditions are satisfied under APB 25 shall not become subject to "variable" accounting solely due to the existence of such authority, unless the Committee specifically determines that the Award shall remain outstanding despite such "variable" accounting. In addition, other provisions of the Plan notwithstanding, (i) if any right under this Plan would cause a transaction to be ineligible for pooling-of-interests accounting that would, but for the right hereunder, be eligible for such accounting treatment, such right shall be automatically adjusted so that pooling-of-interests accounting shall be available, including by substituting Stock or cash having a Fair Market Value equal to any cash or Stock otherwise payable in respect of any right to cash which would cause the transaction to be ineligible for pooling-of-interests accounting, and (ii) if any authority under Section 10 would cause a transaction to be ineligible for pooling-of-interests accounting that would, but for - 27 - such authority, be eligible for such accounting treatment, such authority shall be limited to the extent necessary so that such transaction would be eligible for pooling-of-interests accounting. (l) Governing Law. The validity, construction, and effect of the Plan, any rules and regulations relating to the Plan and any Award document shall be determined in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of laws, and applicable provisions of federal law. (m) Awards to Participants Outside the United States. The Committee may modify the terms of any Award under the Plan made to or held by a Participant who is then resident or primarily employed outside of the United States in any manner deemed by the Committee to be necessary or appropriate in order that such Award shall conform to laws, regulations, and customs of the country in which the Participant is then resident or primarily employed, or so that the value and other benefits of the Award to the Participant, as affected by foreign tax laws and other restrictions applicable as a result of the Participant's residence or employment abroad shall be comparable to the value of such an Award to a Participant who is resident or primarily employed in the United States. An Award may be modified under this Section 12(m) in a manner that is inconsistent with the express terms of the Plan, so long as such modifications will not contravene any applicable law or regulation or result in actual liability under Section 16(b) for the Participant whose Award is modified. (n) Limitation on Rights Conferred under Plan. Neither the Plan nor any action taken hereunder shall be construed as (i) giving any Eligible Person or Participant the right to continue as an Eligible Person or Participant or in the employ or service of the Company or a subsidiary or affiliate, (ii) interfering in any way with the right of the Company or a subsidiary or affiliate to terminate any Eligible Person's or Participant's employment or service at any time (subject to the terms and provisions of any separate written agreements), (iii) giving an Eligible Person or Participant any claim to be granted any Award under the Plan or to be treated uniformly with other Participants and employees, or (iv) conferring on a Participant any of the rights of a stockholder of the Company unless and until the Participant is duly issued or transferred shares of Stock in accordance with the terms of an Award or an Option is duly exercised. Except as expressly provided in the Plan and an Award document, neither the Plan nor any Award document shall confer on any person other than the Company and the Participant any rights or remedies thereunder. (o) Severability; Entire Agreement. If any of the provisions of this Plan or any Award document is finally held to be invalid, illegal or unenforceable (whether in whole or in part), such provision shall be deemed modified to the extent, but only to the extent, of such invalidity, illegality or unenforceability, and the remaining provisions shall not be affected thereby; provided, that, if any of such provisions is finally held to be invalid, illegal, or unenforceable because it exceeds the maximum scope determined to be acceptable to permit such provision to be enforceable, such provision shall be deemed to be modified to the minimum extent necessary to modify such scope in order to make such provision enforceable hereunder. The Plan and any Award documents contain the entire agreement of the parties with respect to the subject matter thereof and supersede all prior agreements, promises, covenants, arrangements, communications, representations and warranties between them, whether written or oral with respect to the subject matter thereof. - 28 - (p) Plan Effective Date and Termination. The Plan shall become effective if, and at such time as, the stockholders of the Company have approved it by the affirmative votes of the holders of a majority of the voting securities of the Company present, or represented, and entitled to vote on the subject matter at a duly held meeting of stockholders. Upon such approval of the Plan by the stockholders of the Company, no further awards shall be granted under the Preexisting Plans, but any outstanding awards under the Preexisting Plans shall continue in accordance with their terms. Any elections made by non-employee directors and their respective Deferral Accounts established pursuant to the 1998 Directors' Stock Plan shall continue as if made or established pursuant to the Plan until any such election is changed by such Participant in accordance with the provisions of this Plan. Unless earlier terminated by action of the Board of Directors, the Plan will remain in effect until such time as no Stock remains available for delivery under the Plan and the Company has no further rights or obligations under the Plan with respect to outstanding Awards under the Plan. - 29 - EX-10.23 5 y57684ex10-23.txt AMENDED AND RESTATED EMPLOYMENT AGREEMENT: NOONAN Exhibit 10.23 AMENDED AND RESTATED EMPLOYMENT AGREEMENT dated as of December 27, 2001 by and between R.H. Donnelley Corporation, a Delaware corporation, (the "COMPANY") and Frank R. Noonan (the "EXECUTIVE"). WHEREAS, the Company and Executive previously entered into an Employment Agreement dated as of September 28, 1998 (the "FORMER AGREEMENT") and further desire to amend and restate the Former Agreement in its entirety; and WHEREAS, Executive is currently serving as Chief Executive Officer of the Company; and WHEREAS, Executive is willing so to continue his employment on the terms hereinafter set forth in this agreement, which shall supersede in its entirety the Former Agreement (this "AGREEMENT"); NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Term of Employment. Executive shall be employed by the Company until the Employment Termination Date, as hereinafter defined (the "EMPLOYMENT TERM"). 2. Position; Change of Status. (a) Unless otherwise mutually agreed between the parties, (i) Executive will continue to serve as Chief Executive Officer of the Company until May 1, 2002, the date of the Company's Annual Meeting of Shareholders (the "CHANGE OF STATUS DATE"); (ii) on the Change of Status Date, Executive will relinquish his title and office, and continue to be employed as Chairman of the Company; (iii) immediately following the December 2002 meeting of the Board of Directors of the Company (the "BOARD") (the date of which being hereinafter referred to as the "EMPLOYMENT CONTINUATION DATE"), Executive will resign from the Board and will relinquish his title as Chairman; and (iv) effective as of the Employment Continuation Date, Executive will continue to be employed by the Company as Special Industry and Strategy Liaison. The Company agrees to employ Executive in these roles and to provide the payments and other benefits referred to herein, and Executive agrees to be employed as provided hereunder, through July 31, 2003 (the "EMPLOYMENT TERMINATION DATE"). (b) In his roles as Chairman and as Special Industry and Strategy Liaison, Executive will report to the Board and to the Chief Executive Officer and his duties will include: (i) consulting and advising the Board and senior management with respect to industry and strategic planning matters, including, but not limited to, acting as RHD liaison with respect to the China Big investment (including serving on the China Big Board if so requested by RHD), (ii) if so requested by RHD, acting as liaison to industry trade groups, (iii) assisting the Board in searching for and selecting a new Chairperson and in facilitating the transition to the new Chairperson, (iv) assisting and facilitating the transition to the new Chief Executive Officer and (v) such other duties, commensurate with his position, as may be reasonably assigned by the Board and the Chief Executive Officer from time to time. Executive shall devote such time to the performance of his duties hereunder as is necessary to carry out his responsibilities. 3. Salary. Executive will continue to receive his current salary ($21,875 per semi-monthly pay period) until (but not including) the Change of Status Date. From the Change of Status Date through December 31, 2002, in consideration of his services as Chairman or Special Industry and Strategy Liaison, as the case may be, Executive will receive a total salary of $500,000, in equal semi-monthly increments, and from January 1, 2003 through the Employment Termination Date, in consideration of his services as Special Industry and Strategy Liaison, he will receive a total salary of $100,000, in equal semi-monthly increments. 4. Variable Compensation. For 2002 and 2003, Executive shall not be eligible to participate in any annual or long-term cash and stock incentive plans of the Company. In lieu of participating in any such plans, Executive shall be entitled to receive, as soon as practicable after the last business day of each of the first four months of 2002, a lump sum payment of $156,250. 5. Recognition Bonus. In consideration of (i) Executive's considerable contributions during his long service to the Company, (ii) Executive's services in identifying and training his successor as Chief Executive Officer, (iii) Executive agreeing to resign as Chief Executive Officer on the Change of Status Date and (iv) Executive's execution of this Agreement, the Company shall pay Executive a Recognition Bonus of $1,500,000 promptly after the Change of Status Date. 6. Options. Until the Employment Termination Date, options currently held by Executive will continue to vest in accordance with their terms. 7. PERS, Deferred Compensation. Executive will be entitled to receive the third and final installment of the 1998 PERS award and the first installment of the 1999 PERS award, both payable in February or March 2002. Such amounts will be deferred, in accordance with his previous deferral election, and paid into the Company's Deferred Compensation Plan. Such portion of the 1998 PERS award will be deferred in shares, and such portion of the 1999 PERS 2 award will be deferred in cash. All of Executive's deferred accounts will be distributed to Executive in a lump sum as soon as practicable after the first Valuation Date, as defined in the Deferred Compensation Plan, occurring after the Change of Status Date, and Executive will not be eligible to participate in the Deferred Compensation Plan after such date. Such distribution will be in cash, except to the extent that deferred account balances are invested in Company stock, which will be distributed in kind. The earned value of the 1999 PERS award shall be determined in February 2002 by the Compensation and Benefits Committee of the Board in accordance with the terms of the PERS plan and consistent with the Committee's past practice. Executive will be entitled to receive (i) the portion of his 1999 PERS award that is not deferred as set forth above, and (ii) $280,000, representing one-third of the target amount of his 2001 PERS award. These amounts shall be paid, in cash, in a lump sum as soon as practicable after the Change of Status Date. 8. Lock up. Executive agrees not to sell, pledge or otherwise transfer or dispose of any Company stock, in any manner, whether physically, synthetically, by contract directly or indirectly or otherwise prior to the Change of Status Date, except that (i) Executive may engage in any transaction, other than a pledge or hypothecation of the stock, that does not require the filing of a Form 144 or a Form 4 or 5; (ii) Executive may donate Company stock to family members and to charity, as long as such disposition is eligible to be reported on Form 5 and is in fact so reported at the normal time such Form 5 is due and (iii) Executive may file any required Forms 4 or 5 that arise out of the transactions and payments described in Section 7 hereof. The Compensation Committee may release Executive from the lockup restriction as part of any broad-based executive sales program. 9. Employee Benefits; Perquisite. During the Employment Term, Executive shall be eligible, on the same basis as he is currently eligible, for employee benefits (including fringe benefits, vacation, pension and profit sharing plan participation and life, health, accident and disability insurance) no less favorable than those benefits for which he is eligible immediately prior to December 27, 2001. Executive will continue to be eligible for reimbursement of expenses relating to financial and tax planning services through the completion of his income tax return for calendar year 2003, up to a maximum of $11,000 per year. 10. Business Expenses. Reasonable travel, entertainment and other business expenses incurred by Executive in the performance of his duties 3 hereunder shall be reimbursed by the Company in accordance with Company policies from time to time. 11. Unforeseen Termination of Employment. The Company shall not terminate Executive's employment under this Agreement prior to July 31, 2003, except for Cause. In the event that (i) Executive's employment is terminated prior to the Employment Termination Date by reason of his death, or (ii) following a Change in Control, the successor to the business of the Company does not assume, by operation of law or by contract, the obligations of the Company hereunder, then all amounts to which Executive is entitled hereunder which have not theretofore been paid shall be paid in lump sum to Executive or his legal representative as soon as practicable following such termination of employment or Change in Control. In the event that, prior to the Employment Termination Date, Executive should incur a Disability, Executive or his legal representative shall continue to receive the benefits of this Agreement; provided, however, that any cash payments due hereunder shall be reduced, but not below zero, by any disability insurance benefit received by Executive under the Company's disability insurance plans. 12. Definitions. (a) "CAUSE" shall mean (i) Executive's willful and continued failure substantially to perform the duties of his position (other than as a result of total or partial incapacity due to physical or mental illness or as a result of a termination by Executive after a material breach by the Company of its obligations hereunder), (ii) any willful act or omission by Executive constituting dishonesty, fraud or other malfeasance, which in any such case is demonstrably injurious to the financial condition or business reputation of the Company or any of its affiliates, or (iii) Executive's conviction of a felony under the laws of the United States or any state thereof or any other jurisdiction in which the Company or any of its subsidiaries conducts business which materially impairs the value of Executive's services to the Company or any of its subsidiaries. For purposes of this definition, no act or failure to act shall be deemed "willful" unless effected by Executive not in good faith and without a reasonable belief that such action or failure to act was in or not opposed to the best interests of the Company. (b) "CHANGE IN CONTROL" shall mean the occurrence of any of the following events after December 27, 2001: (i) Any "person," as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned directly or indirectly by the shareholders of the Company 4 in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (ii) During any period of two consecutive years commencing on December 27, 2001, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person (as defined above) who has entered into an agreement with the Company to effect a transaction described in subsections (i), (iii) or (iv) of this definition) whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (_) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) The shareholders of the Company have approved a merger or consolidation of the Company with any other company and all other required governmental approvals of such merger or consolidation have been obtained, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 60% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (as defined above) becomes the beneficial owner (as defined above) of more than 20% of the combined voting power of the Company's then outstanding securities; or (iv) The shareholders of the Company have approved a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, and all other required governmental approvals of such transaction have been obtained. (c) "DISABILITY" shall mean Executive's inability, as a result of physical or mental incapacity, to perform the duties of his position for a period of six (6) consecutive months or for an aggregate of six (6) months in any twelve (12) consecutive month period. Any question as to the existence of the Disability 5 of Executive as to which Executive and the Company cannot agree shall be determined in writing by a qualified independent physician mutually acceptable to Executive and the Company. If Executive and the Company cannot agree as to a qualified independent physician, each shall appoint such a physician and those two physicians shall select a third who shall make such determination in writing. The determination of Disability made in writing to the Company and Executive shall be final and conclusive for all purposes of this Agreement. 13. Pension and Other Retirement Benefits. In connection with Executive's resignation as Chief Executive Officer on the Change of Status Date, Executive will cease to participate in the RHD nonqualified excess and supplemental pension plans (collectively, the "SERP"). In consideration of such cessation, and in settlement of any and all accrued benefits under the RHD SERP, the Company shall pay Executive $7,088,943 in a cash lump sum as soon as practicable after the Change of Status Date. Executive will continue to participate in the Company's qualified defined benefit pension plan in accordance with its terms. Effective upon the Employment Termination Date, Executive shall be fully vested in and eligible to participate in the Company's post-retirement life, health, medical, dental and vision insurance plans. 14. Certain Payments. (a) If any of the payments or benefits received or to be received by Executive in connection with a Change in Control or Executive's termination of employment, whether or not pursuant to this Agreement (such payments or benefits, excluding the Gross-Up Payment, as hereinafter defined, shall hereinafter be referred to as the "TOTAL PAYMENTS") will be subject to an excise tax as provided for in Section 4999 of the Internal Revenue Code (the "CODE") (the "EXCISE TAX"), the Company shall pay to Executive an additional amount (the "GROSS-UP PAYMENT") such that the net amount retained by Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments; provided, however, that if the Total Payments are less than 360% of Executive's Base Amount, as defined in Section 280G(b)(3) of the Code, Executive shall not be entitled to the Gross-Up Payment, and the Total Payments shall be reduced as provided for in Section 14(d) below. (b) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("TAX COUNSEL") reasonably acceptable to Executive and selected by the accounting firm acting as the "Auditor", as defined below, such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, (ii) all "Excess parachute payments" within 6 the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive's residence or, if higher, in the state and locality of Executive's principal place of employment, on the date of termination (or if there is no date of termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 14), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (c) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (including that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by Executive to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income or employment tax deduction) plus interest on the amount of such repayment at 120% of the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by Executive with respect to such excess) at the time that the amount of such excess is finally determined. Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. (d) If the Total Payments would constitute an Excess parachute payment, but are less than 360% of the Base Amount, such payments shall be reduced to the largest amount that may be paid to Executive without the imposition of the 7 Excise Tax or the disallowance as deductions to the Company under Section 280G of the Code of any such payments. (e) All determinations under this Section 14 shall be made by a nationally recognized accounting firm selected by Executive (the "AUDITOR"). The Company shall cooperate in good faith in making such determinations and in providing the necessary information for this purpose. 15. Indemnification. The Company will indemnify Executive (and his legal representative or other successors) to the fullest extent permitted (including a payment of expenses in advance of final disposition of a proceeding) by applicable law, as in effect at the time of the subject act or omission, or by the Certificate of Incorporation and By-Laws of the Company, as in effect at such time or on December 27, 2001, or by the terms of any indemnification agreement between the Company and Executive, whichever affords or afforded greatest protection to Executive, and Executive shall be entitled to the protection of any insurance policies the Company may elect to maintain generally for the benefit of its directors and officers (and to the extent the Company maintains such an insurance policy or policies, Executive shall be covered by such policy or policies, in accordance with its or their terms to the maximum extent of the coverage available for any Company officer or director), against all costs, charges and expenses whatsoever incurred or sustained by him or his legal representatives (including but not limited to any judgment entered by a court of law) at the time such costs, charges and expenses are incurred or sustained, in connection with any action, suit or proceeding to which Executive (or his legal representatives or other successors) may be made a party by reason of his having accepted employment with the Company or by reason of his being or having been a director, officer or employee of the Company, or any subsidiary of the Company, or his serving or having served any other enterprise as a director, officer or employee at the request of the Company. Executive's rights under this Section 15 shall continue without time limit for so long as he may be subject to any such liability, whether or not the Employment Term may have ended. 16. Non-Competition. (a) Executive acknowledges and recognizes the highly competitive nature of the businesses of the Company and its affiliates and accordingly agrees that during the Employment Term and for a period of one year after the termination thereof; (i) Executive will not directly or indirectly engage in any business which is in competition with any line of business conducted by the Company or its affiliates (including without limitation by performing or soliciting the performance of services for any person who is a customer or client of the Company or any of its affiliates) whether such engagement is as an officer, director, proprietor, employee, partner, investor (other 8 than as a holder of less than 1% of the outstanding capital stock of a publicly traded corporation), consultant, advisor, agent, sales representative or other participant, in any location in which the Company or any of its affiliates conducted any such competing line of business. (ii) Executive will not directly or indirectly assist others in engaging in any of the activities in which Executive is prohibited from engaging in by clause (i) above. (iii) Executive will not directly or indirectly induce any employee of the Company or any of its affiliates to engage in any activity in which Executive is prohibited to engage by this Section, or to terminate his or her employment with the Company or any of its affiliates, and will not directly or indirectly employ or offer employment to any person who was employed by the Company or any of its affiliates unless such person shall have ceased to be employed by the Company or any of its affiliates for a period of at least 12 months. (iv) Executive will not directly or indirectly solicit subscribers or suppliers of the Company or telephone companies for which the Company serves as sales agent or induce any such person to terminate its relationships with the Company. (b) It is expressly understood and agreed that although Executive and the Company consider the restrictions contained in this Section 16 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against Executive, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 17. Confidentiality; Nondisparagement. (a) Executive will not at any time (whether during or after his employment with the Company) disclose or use for his own benefit or purposes or the benefit or purposes of any other person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise other than the Company and any of its subsidiaries or affiliates, any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, 9 marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans, employees, organizational structure or the business and affairs of the Company generally, or of any subsidiary or affiliate of the Company, provided that the foregoing shall not apply to information which is not unique to the Company or which is generally known to the industry or the public other than as a result of Executive's breach of this covenant. Executive agrees that upon termination of his employment with the Company for any reason, he will return to the Company immediately all memoranda, books, papers, plans, information, letters and other data, and all copies thereof or therefrom, in any way relating to the business of the Company and its affiliates, except that he may retain personal notes, notebooks and diaries. Executive further agrees that he will not retain or use for his account at any time any trade names, trademark or other proprietary business designation used or owned in connection with the business of the Company or its affiliates. (b) Executive will not at any time (whether during or after his employment with the Company) knowingly make any statement, written or oral, or take any other action relating to the Company or its officers or directors that would disparage or otherwise harm the Company, its business or its reputation or those of any of its officers and directors. 18. Material Inducement; Specific Performance. Executive acknowledges and agrees that the covenants entered into by Executive in Section 16 and 17 are essential elements of the parties' agreement as expressed herein, are a material inducement for the Company to enter into this Agreement and the breach thereof would be a material breach of this Agreement. Executive further acknowledges and agrees that the Company's remedies at law for a breach or threatened breach of any of the provisions of Section 16 or Section 17 would be inadequate and, in recognition of this fact, Executive agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. 19. Litigation Support. Executive agrees that he will assist and cooperate with the Company in connection with the defense or prosecution of any claim that may be made against or by the Company or its affiliates, or in connection with any ongoing or future investigation or dispute or claim of any kind involving the Company or its affiliates, including any proceeding before any arbitral, administrative, judicial, legislative, or other body or agency, including testifying in any proceeding, to the extent such claims, investigations or proceedings relate to services performed or required to be performed by Executive, pertinent knowledge possessed by Executive, or any act or omission 10 by Executive. Executive further agrees to perform all acts and to execute and deliver any documents that may be reasonably necessary to carry out the provisions of this Section. 20. Legal Fees. The Company will reimburse Executive for reasonable legal fees and expenses incurred by Executive in negotiating and entering into this Agreement, not to exceed $25,000. In addition, the Company will reimburse Executive for reasonable legal fees and expenses incurred by Executive in enforcing his rights in connection with this Agreement, if Executive's position substantially prevails. Following a Change in Control, the Company will pay or reimburse Executive, as incurred, for all such fees and costs unless Executive's claim was frivolous or was brought or pursued by Executive in bad faith. 21. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. (b) Entire Agreement/Amendments. This Agreement contains the entire understanding of the parties with respect to the employment of Executive by the Company and supersedes and preempts any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way, including, without limitation, the Former Agreement. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein and in the incentive compensation and other employee benefit plans and arrangements of the Company referenced herein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. (c) No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. (d) Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this Agreement shall not be affected thereby. (e) Assignment. This Agreement shall not be assignable by Executive and shall be assignable by the Company only with the consent of Executive except as set forth in Section 21(h); provided that no such assignment by the Company shall relieve the Company of any liability hereunder, whether accrued before or after such assignment. 11 (f) No Mitigation. Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and no such employment, if obtained, or compensation or benefits payable in connection therewith, shall reduce any amounts or benefits to which Executive is entitled hereunder. (g) Arbitration. Any dispute between the parties to this Agreement arising from or relating to the terms of this Agreement or the employment of Executive by the Company shall be submitted to arbitration in New York, New York under the auspices of the American Arbitration Association. (h) Successors; Binding Agreement (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Such assumption and agreement shall be obtained prior to the effectiveness of any such succession. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. Prior to a Change in Control, the term "Company" shall also mean any affiliate of the Company to which Executive may be transferred and the Company shall cause such successor employer to be considered the "Company" bound by the terms of this Agreement and this Agreement shall be amended to so provide. Following a Change in Control the term "Company" shall not mean any affiliate of the Company to which Executive may be transferred unless Executive shall have previously approved of such transfer in writing, in which case the Company shall cause such successor employer to be considered the "Company" bound by the terms of this Agreement and this Agreement shall be amended to so provide. 12 (ii) This Agreement shall inure to the benefit of and be binding upon personal or legal representatives, executors, administrators, successors, heirs, distributers, devisees and legatees. If Executive should die while any amount would still be payable to Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the devisee, legatee or other designee of Executive or, if there is no such designee, to the estate of Executive. (i) Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the Executive at the address appearing from time to time in the personnel records of the Company and to the Company at the address of its corporate headquarters, directed to the attention of the Board with a copy to the Secretary of the Company, or in either case to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. (j) Withholding Taxes. The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (k) Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 13 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. R. H. DONNELLEY CORPORATION By: /s/ Robert J. Bush ------------------------------------------ Title: Vice President EXECUTIVE /s/ Frank R. Noonan ------------------------------------------ 14 EX-10.24 6 y57684ex10-24.txt AMENDED AND RESTATED EMPLOYMENT AGREEMENT: DANFORD Exhibit 10.24 AMENDED AND RESTATED EMPLOYMENT AGREEMENT dated as of December 27, 2001 by and between R.H. Donnelley Corporation, a Delaware corporation, (the "COMPANY") and Philip C. Danford (the "EXECUTIVE"). WHEREAS, the Company and Executive previously entered into an Employment Agreement dated as of September 28, 1998 (the "FORMER AGREEMENT") and further desire to amend and restate the Former Agreement in its entirety; and WHEREAS, Executive is currently serving as Senior Vice President and Chief Financial Officer of the Company; and WHEREAS, Executive is willing so to continue his employment on the terms hereinafter set forth in this agreement, which shall supersede in its entirety the Former Agreement (this "AGREEMENT"); NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Term of Employment. Executive shall be employed by the Company until the Employment Termination Date, as hereinafter defined (the "EMPLOYMENT TERM"). 2. Position; Change of Status. (a) Unless otherwise mutually agreed between the parties, (i) Executive will continue to serve as Senior Vice President and Chief Financial Officer of the Company until February 28, 2002 (the "CHANGE OF STATUS DATE"); and (ii) on the Change of Status Date, Executive will relinquish his title and office, and continue to be employed by the Company as Assistant to the Chief Financial Officer, or if there is no Chief Financial Officer at that time, then he will serve as Assistant to the Chief Executive Officer until such time as a Chief Financial Officer is appointed by the Company. The Company agrees to employ Executive in that role and to provide the payments and other benefits referred to herein, and Executive agrees to be employed as provided hereunder, through July 31, 2003 (the "EMPLOYMENT TERMINATION DATE"). (b) In his role as Assistant to the Chief Financial Officer (or Assistant to the Chief Executive Officer, as the case may be), Executive will report to the Chief Executive Officer and his duties will include: (i) assisting senior management in the transition to the new Chief Financial Officer, including, but not limited to, consultation and advice with respect to financial planning, financial strategy, financing arrangements, financial reporting, financial statements, audit matters, internal controls, Audit and Finance Committee issues, and investor relations and (ii) such other duties, commensurate with his position, as the Chief Executive Officer may assign from time to time. Executive shall devote such time to the performance of his duties hereunder as is necessary to carry out his responsibilities. 3. Salary. Executive will continue to receive his current salary ($13,875 per semi-monthly pay period) until the Change of Status Date. From the Change of Status Date through the Employment Termination Date, in consideration of his services as Assistant to the Chief Financial Officer (or Assistant to the Chief Executive Officer, as the case may be), he will receive a salary at an annual rate of $75,000, payable in equal semi-monthly increments. 4. Variable Compensation. For 2002 and 2003, Executive shall not be eligible to participate in any annual or long-term cash and stock incentive plans of the Company. In lieu of participating in any such plans, Executive shall be entitled to receive, as soon as practicable after the last business day of each of the first two months of 2002, a lump sum payment of $61,050. 5. Options. Until the Employment Termination Date, options currently held by Executive will continue to vest in accordance with their terms. 6. PERS, Deferred Compensation. Executive will be entitled to receive the third and final installment of the 1998 PERS award and the first installment of the 1999 PERS award, both payable in February or March 2002. Such amounts will be deferred, in accordance with his previous deferral election, and paid into the Company's Deferred Compensation Plan. Such portion of the 1998 PERS award will be deferred in shares, and such portion of the 1999 PERS award will be deferred in cash. All of Executive's deferred accounts will be distributed to Executive in a lump sum as soon as practicable after the first Valuation Date, as defined in the Deferred Compensation Plan, occurring after the Change of Status Date, and Executive will not be eligible to participate in the Deferred Compensation Plan after such date. Such distribution will be in cash, except to the extent that deferred account balances are invested in Company stock, which will be distributed in kind. The earned value of the 1999 PERS award shall be determined in February 2002 by the Compensation and Benefits Committee (the "COMMITTEE") of the Board of Directors of the Company (the "BOARD") in accordance with the terms of the PERS plan and consistent with the Committee's past practice. Executive will be entitled to receive (i) the portion of his 1999 PERS award that is not deferred as set forth above, and (ii) $111,000, representing one-third of the 2 target amount of his 2001 PERS award. These amounts shall be paid, in cash, in a lump sum as soon as practicable after the Change of Status Date. 7. Lock up. Executive agrees not to sell, pledge or otherwise transfer or dispose of any Company stock, in any manner, whether physically, synthetically, by contract directly or indirectly or otherwise prior to the Change of Status Date, except that (i) Executive may engage in any transaction, other than a pledge or hypothecation of the stock, that does not require the filing of a Form 144 or a Form 4 or 5; (ii) Executive may donate Company stock to family members and to charity, as long as such disposition is eligible to be reported on Form 5 and is in fact so reported at the normal time such Form 5 is due and (iii) Executive may file any required Forms 4 or 5 that arise out of the transactions and payments described in Section 6 hereof. The Committee may release Executive from the lockup restriction as part of any broad-based executive sales program. 8. Employee Benefits; Perquisite. During the Employment Term, Executive shall be eligible, on the same basis as he is currently eligible, for employee benefits (including fringe benefits, vacation, pension and profit sharing plan participation and life, health, accident and disability insurance) no less favorable than those benefits for which he is eligible immediately prior to December 27, 2001. Executive will continue to be eligible for reimbursement of expenses relating to financial and tax planning services through the completion of his income tax return for calendar year 2003, up to a maximum of $11,000 per year. 9. Business Expenses. Reasonable travel, entertainment and other business expenses incurred by Executive in the performance of his duties hereunder shall be reimbursed by the Company in accordance with Company policies from time to time. 10. Unforeseen Termination of Employment. The Company shall not terminate Executive's employment under this Agreement prior to July 31, 2003, except for Cause. In the event that (i) Executive's employment is terminated prior to the Employment Termination Date by reason of his death, or (ii) following a Change in Control, the successor to the business of the Company does not assume, by operation of law or by contract, the obligations of the Company hereunder, then all amounts to which Executive is entitled hereunder which have not theretofore been paid shall be paid in lump sum to Executive or his legal representative as soon as practicable following such termination of employment or Change in Control. 3 In the event that, prior to the Employment Termination Date, Executive should incur a Disability, Executive or his legal representative shall continue to receive the benefits of this Agreement; provided, however, that any cash payments due hereunder shall be reduced, but not below zero, by any disability insurance benefit received by Executive under the Company's disability insurance plans. 11. Definitions. (a) "CAUSE" shall mean (i) Executive's willful and continued failure substantially to perform the duties of his position (other than as a result of total or partial incapacity due to physical or mental illness or as a result of a termination by Executive after a material breach by the Company of its obligations hereunder), (ii) any willful act or omission by Executive constituting dishonesty, fraud or other malfeasance, which in any such case is demonstrably injurious to the financial condition or business reputation of the Company or any of its affiliates, or (iii) Executive's conviction of a felony under the laws of the United States or any state thereof or any other jurisdiction in which the Company or any of its subsidiaries conducts business which materially impairs the value of Executive's services to the Company or any of its subsidiaries. For purposes of this definition, no act or failure to act shall be deemed "willful" unless effected by Executive not in good faith and without a reasonable belief that such action or failure to act was in or not opposed to the best interests of the Company. (b) "CHANGE IN CONTROL" shall mean the occurrence of any of the following events after December 27, 2001: (i) Any "person," as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (ii) During any period of two consecutive years commencing on December 27, 2001, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person (as defined above) who has entered into an agreement with the Company to effect a transaction described in subsections (i), (iii) or (iv) of this definition) whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (_) of the directors then still in office who 4 either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) The shareholders of the Company have approved a merger or consolidation of the Company with any other company and all other required governmental approvals of such merger or consolidation have been obtained, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 60% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (as defined above) becomes the beneficial owner (as defined above) of more than 20% of the combined voting power of the Company's then outstanding securities; or (iv) The shareholders of the Company have approved a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, and all other required governmental approvals of such transaction have been obtained. (c) "DISABILITY" shall mean Executive's inability, as a result of physical or mental incapacity, to perform the duties of his position for a period of six (6) consecutive months or for an aggregate of six (6) months in any twelve (12) consecutive month period. Any question as to the existence of the Disability of Executive as to which Executive and the Company cannot agree shall be determined in writing by a qualified independent physician mutually acceptable to Executive and the Company. If Executive and the Company cannot agree as to a qualified independent physician, each shall appoint such a physician and those two physicians shall select a third who shall make such determination in writing. The determination of Disability made in writing to the Company and Executive shall be final and conclusive for all purposes of this Agreement. 12. Pension and Other Retirement Benefits. In connection with Executive's resignation as Senior Vice President and Chief Financial Officer on the Change of Status Date, Executive will cease to participate in the RHD nonqualified excess and supplemental pension plans (collectively, the "SERP"). In consideration of such cessation, and in settlement of any and all accrued benefits under the RHD SERP, the Company shall pay Executive $3,656,028 in 5 a cash lump sum as soon as practicable after the Change of Status Date. Executive will continue to participate in the Company's qualified defined benefit pension plan in accordance with its terms. Effective upon the Employment Termination Date, Executive shall be fully vested in and eligible to participate in the Company's post-retirement life, health, medical, dental and vision insurance plans. 13. Certain Payments. (a) If any of the payments or benefits received or to be received by Executive in connection with a Change in Control or Executive's termination of employment, whether or not pursuant to this Agreement (such payments or benefits, excluding the Gross-Up Payment, as hereinafter defined, shall hereinafter be referred to as the "TOTAL PAYMENTS") will be subject to an excise tax as provided for in Section 4999 of the Internal Revenue Code (the "CODE") (the "EXCISE TAX"), the Company shall pay to Executive an additional amount (the "GROSS-UP PAYMENT") such that the net amount retained by Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments; provided, however, that if the Total Payments are less than 360% of Executive's Base Amount, as defined in Section 280G(b)(3) of the Code, Executive shall not be entitled to the Gross-Up Payment, and the Total Payments shall be reduced as provided for in Section 13(d) below. (b) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("TAX COUNSEL") reasonably acceptable to Executive and selected by the accounting firm acting as the "Auditor", as defined below, such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, (ii) all "Excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state 6 and locality of Executive's residence or, if higher, in the state and locality of Executive's principal place of employment, on the date of termination (or if there is no date of termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 13), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (c) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (including that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by Executive to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income or employment tax deduction) plus interest on the amount of such repayment at 120% of the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by Executive with respect to such excess) at the time that the amount of such excess is finally determined. Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. (d) If the Total Payments would constitute an Excess parachute payment, but are less than 360% of the Base Amount, such payments shall be reduced to the largest amount that may be paid to Executive without the imposition of the Excise Tax or the disallowance as deductions to the Company under Section 280G of the Code of any such payments. (e) All determinations under this Section 13 shall be made by a nationally recognized accounting firm selected by Executive (the "AUDITOR"). The Company shall cooperate in good faith in making such determinations and in providing the necessary information for this purpose. 14. Indemnification. The Company will indemnify Executive (and his legal representative or other successors) to the fullest extent permitted (including a payment of expenses in advance of final disposition of a proceeding) by applicable law, as in effect at the time of the subject act or omission, or by the Certificate of Incorporation and By-Laws of the Company, as in effect at such 7 time or on December 27, 2001, or by the terms of any indemnification agreement between the Company and Executive, whichever affords or afforded greatest protection to Executive, and Executive shall be entitled to the protection of any insurance policies the Company may elect to maintain generally for the benefit of its directors and officers (and to the extent the Company maintains such an insurance policy or policies, Executive shall be covered by such policy or policies, in accordance with its or their terms to the maximum extent of the coverage available for any Company officer or director), against all costs, charges and expenses whatsoever incurred or sustained by him or his legal representatives (including but not limited to any judgment entered by a court of law) at the time such costs, charges and expenses are incurred or sustained, in connection with any action, suit or proceeding to which Executive (or his legal representatives or other successors) may be made a party by reason of his having accepted employment with the Company or by reason of his being or having been a director, officer or employee of the Company, or any subsidiary of the Company, or his serving or having served any other enterprise as a director, officer or employee at the request of the Company. Executive's rights under this Section 14 shall continue without time limit for so long as he may be subject to any such liability, whether or not the Employment Term may have ended. 15. Non-Competition. (a) Executive acknowledges and recognizes the highly competitive nature of the businesses of the Company and its affiliates and accordingly agrees that during the Employment Term and for a period of one year after the termination thereof; (i) Executive will not directly or indirectly engage in any business which is in competition with any line of business conducted by the Company or its affiliates (including without limitation by performing or soliciting the performance of services for any person who is a customer or client of the Company or any of its affiliates) whether such engagement is as an officer, director, proprietor, employee, partner, investor (other than as a holder of less than 1% of the outstanding capital stock of a publicly traded corporation), consultant, advisor, agent, sales representative or other participant, in any location in which the Company or any of its affiliates conducted any such competing line of business. (ii) Executive will not directly or indirectly assist others in engaging in any of the activities in which Executive is prohibited from engaging in by clause (i) above. (iii) Executive will not directly or indirectly induce any employee of the Company or any of its affiliates to engage in any activity in which Executive is prohibited to engage by this Section, or to terminate his or 8 her employment with the Company or any of its affiliates, and will not directly or indirectly employ or offer employment to any person who was employed by the Company or any of its affiliates unless such person shall have ceased to be employed by the Company or any of its affiliates for a period of at least 12 months. (iv) Executive will not directly or indirectly solicit subscribers or suppliers of the Company or telephone companies for which the Company serves as sales agent or induce any such person to terminate its relationships with the Company. (b) It is expressly understood and agreed that although Executive and the Company consider the restrictions contained in this Section 15 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against Executive, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 16. Confidentiality; Nondisparagement. (a) Executive will not at any time (whether during or after his employment with the Company) disclose or use for his own benefit or purposes or the benefit or purposes of any other person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise other than the Company and any of its subsidiaries or affiliates, any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans, employees, organizational structure or the business and affairs of the Company generally, or of any subsidiary or affiliate of the Company, provided that the foregoing shall not apply to information which is not unique to the Company or which is generally known to the industry or the public other than as a result of Executive's breach of this covenant. Executive agrees that upon termination of his employment with the Company for any reason, he will return to the Company immediately all memoranda, books, papers, plans, information, letters and other data, and all copies thereof or therefrom, in any way relating to the business of the Company and its affiliates, except that he may retain personal notes, notebooks and diaries. Executive further agrees that he will not retain or use for 9 his account at any time any trade names, trademark or other proprietary business designation used or owned in connection with the business of the Company or its affiliates. (b) Executive will not at any time (whether during or after his employment with the Company) knowingly make any statement, written or oral, or take any other action relating to the Company or its officers or directors that would disparage or otherwise harm the Company, its business or its reputation or those of any of its officers and directors. 17. Material Inducement; Specific Performance. Executive acknowledges and agrees that the covenants entered into by Executive in Section 15 and 16 are essential elements of the parties' agreement as expressed herein, are a material inducement for the Company to enter into this Agreement and the breach thereof would be a material breach of this Agreement. Executive further acknowledges and agrees that the Company's remedies at law for a breach or threatened breach of any of the provisions of Section 15 or Section 16 would be inadequate and, in recognition of this fact, Executive agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. 18. Litigation Support. Executive agrees that he will assist and cooperate with the Company in connection with the defense or prosecution of any claim that may be made against or by the Company or its affiliates, or in connection with any ongoing or future investigation or dispute or claim of any kind involving the Company or its affiliates, including any proceeding before any arbitral, administrative, judicial, legislative, or other body or agency, including testifying in any proceeding, to the extent such claims, investigations or proceedings relate to services performed or required to be performed by Executive, pertinent knowledge possessed by Executive, or any act or omission by Executive. Executive further agrees to perform all acts and to execute and deliver any documents that may be reasonably necessary to carry out the provisions of this Section. 19. Legal Fees. The Company will pay or reimburse Executive, as incurred, all legal fees and costs incurred by Executive in enforcing his rights under this Agreement, if Executive's position substantially prevails. Following a Change in Control, the Company will pay or reimburse Executive, as incurred, for all such fees and costs unless Executive's claim was frivolous or was brought or pursued by Executive in bad faith. 10 20. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. (b) Entire Agreement/Amendments. This Agreement contains the entire understanding of the parties with respect to the employment of Executive by the Company and supersedes and preempts any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way, including, without limitation, the Former Agreement. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein and in the incentive compensation and other employee benefit plans and arrangements of the Company referenced herein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. (c) No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. (d) Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this Agreement shall not be affected thereby. (e) Assignment. This Agreement shall not be assignable by Executive and shall be assignable by the Company only with the consent of Executive except as set forth in Section 20(h); provided that no such assignment by the Company shall relieve the Company of any liability hereunder, whether accrued before or after such assignment. (f) No Mitigation. Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and no such employment, if obtained, or compensation or benefits payable in connection therewith, shall reduce any amounts or benefits to which Executive is entitled hereunder. (g) Arbitration. Any dispute between the parties to this Agreement arising from or relating to the terms of this Agreement or the employment of Executive by the Company shall be submitted to arbitration in New York, New York under the auspices of the American Arbitration Association. (h) Successors; Binding Agreement. 11 (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Such assumption and agreement shall be obtained prior to the effectiveness of any such succession. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. Prior to a Change in Control, the term "Company" shall also mean any affiliate of the Company to which Executive may be transferred and the Company shall cause such successor employer to be considered the "Company" bound by the terms of this Agreement and this Agreement shall be amended to so provide. Following a Change in Control the term "Company" shall not mean any affiliate of the Company to which Executive may be transferred unless Executive shall have previously approved of such transfer in writing, in which case the Company shall cause such successor employer to be considered the "Company" bound by the terms of this Agreement and this Agreement shall be amended to so provide. (ii) This Agreement shall inure to the benefit of and be binding upon personal or legal representatives, executors, administrators, successors, heirs, distributers, devisees and legatees. If Executive should die while any amount would still be payable to Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the devisee, legatee or other designee of Executive or, if there is no such designee, to the estate of Executive. (i) Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the Executive at the address appearing from time to time in the personnel records of the Company and to the Company at the address of its corporate headquarters, directed to the attention of the Board with a copy to the Secretary of the Company, or in either case to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 12 (j) Withholding Taxes. The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (k) Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. R. H. DONNELLEY CORPORATION By: /s/ Robert J. Bush ---------------------------------------- Title: Vice President EXECUTIVE /s/ Philip C. Danford ---------------------------------------- 13 EX-23 7 y57684ex23.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File Nos. 33-44551, 33-56289, 33-64317, 333-46615, 333-59790, 333-65822, 333-75539, 333-75541, 333-75543, 333-91613) of R.H. Donnelley Corporation of our report dated February 8, 2002 relating to the R.H. Donnelley Corporation consolidated financial statements and our report dated January 18, 2002 relating to the DonTech Partnership combined financial statements, which appear in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP New York, New York March 27, 2002 61 -----END PRIVACY-ENHANCED MESSAGE-----