10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark one)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

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)	(I.R.S. Employer Identification No.)
One Manhattanville Road, Purchase N.Y	10577
(Address of principal executive offices)	(Zip Code)

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

Title of Class	Shares Outstanding at November 1, 2002
Common Stock, par value $1 per share	29,714,335

Commission file number 333-59287

R.H. DONNELLEY INC. *

(Exact name of registrant as specified in its charter)

Delaware	36-2467635
(State of Incorporation)	(I.R.S. Employer Identification No.)
One Manhattanville Road, Purchase N.Y	10577
(Address of principal executive offices)	(Zip Code)

Registrants’ 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 H 1(a) and (b) of Form 10-Q 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 9 1/8% Senior Subordinated Notes. As of November 1, 2002, 100 shares of R.H. Donnelley Inc. common stock, no par value, were outstanding.

TABLE OF CONTENTS

		Consolidated Statements of Operations
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosure About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
EX-10.30: EMPLOYMENT AGREEMENT
EX-99.1: CERTIFICATION OF CHIEF EXECUTIVE OFFICER
EX-99.2: CERTIFICATION / VICE PRESIDENT AND C.F.O.

R.H. DONNELLEY CORPORATION

INDEX TO FORM 10-Q

		PAGE
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2001	3
	Consolidated Balance Sheets at September 30, 2002 and December 31, 2001	4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	23
Item 4.	Controls and Procedures	23
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 6.	Exhibits and Reports on Form 8-K	26
SIGNATURES		32
CERTIFICATIONS		33

2

R.H. Donnelley Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)

			Three months ended						Nine months ended
			September 30,						September 30,
(amounts in thousands, except per share data)			2002			2001			2002			2001
Gross revenue			$	21,069		$	20,418		$	59,116		$	59,951
Sales allowances				(131	)		1,747			(333	)		1,088
		Net revenue		20,938			22,165			58,783			61,039
Expenses
	Operating expenses			11,090			12,502			36,351			38,346
	General and administrative expenses			3,109			4,054			12,273			12,807
	Depreciation and amortization			1,553			2,597			4,718			8,237
	Restructuring and special charge			—			—			218			—
		Total expenses		15,752			19,153			53,560			59,390
Partnership and joint venture income				40,806			44,304			108,818			112,539
		Operating income		45,992			47,316			114,041			114,188
Interest expense, net				5,106			6,216			16,960			18,970
		Income before income taxes and extraordinary loss		40,886			41,100			97,081			95,218
Provision for income taxes				15,740			15,412			37,375			35,706
		Income before extraordinary loss		25,146			25,688			59,706			59,512
Extraordinary loss, net of tax				87			—			297			348
		Net income	$	25,059		$	25,688		$	59,409		$	59,164
Earnings per share before extraordinary loss
		Basic	$	0.85		$	0.86		$	2.02		$	1.95
		Diluted	$	0.83		$	0.83		$	1.97		$	1.91
Earnings per share after extraordinary loss
		Basic	$	0.84		$	0.86		$	2.01		$	1.94
		Diluted	$	0.83		$	0.83		$	1.96		$	1.89
Shares used in computing earnings per share
		Basic		29,707			29,979			29,618			30,454
		Diluted		30,269			30,817			30,262			31,230
Comprehensive Income:
Net income			$	25,059		$	25,688		$	59,409		$	59,164
Unrealized gain (loss) on interest rate swaps, net of tax				192			(2,237	)		(1,369	)		(4,528	)
Comprehensive income			$	25,251		$	23,451		$	58,040		$	54,636

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

3

R.H. Donnelley Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)

					September 30,			December 31,
					2002			2001
(in thousands, except share and per share data)
				Assets
Current Assets
	Cash and cash equivalents				$	9,845		$	14,721
	Accounts receivable
		Trade				31,804			29,240
		Other				3,574			4,121
		Allowance for doubtful accounts and sales allowances				(4,487	)		(4,189	)
			Net accounts receivable			30,891			29,172
	Other current assets					349			2,275
			Total current assets			41,085			46,168
	Fixed assets and computer software – net					12,292			14,514
	Partnership and joint venture investments					207,643			208,989
	Prepaid pension					22,156			20,956
	Other non-current assets					7,291			7,504
			Total Assets		$	290,467		$	298,131
				Liabilities and Shareholders’ Deficit
Current Liabilities
	Accounts payable and accrued liabilities				$	19,421		$	22,368
	Restructuring and other related liabilities					7,215			16,357
	Accrued interest payable					5,673			5,163
	Current portion of long-term debt					2,259			2,846
			Total current liabilities			34,568			46,734
	Long-term debt					221,991			283,904
	Long-term restructuring liability					1,116			4,934
	Deferred income taxes – net					57,377			52,632
	Postretirement and postemployment benefits					7,322			7,431
	Other non-current liabilities					12,804			13,809
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 2002 and 2001, respectively					51,622			51,622
	Additional paid-in capital					39,639			32,043
	Unamortized restricted stock					(387	)		(336	)
	Retained earnings (deficit)					30,539			(28,870	)
	Treasury stock, at cost, 21,909,070 shares for 2002 and 22,231,910 shares for 2001					(164,755	)		(163,442	)
	Accumulated other comprehensive loss					(1,369	)		(2,330	)
			Total shareholders’ deficit			(44,711	)		(111,313	)
			Total Liabilities and Shareholders’ Deficit		$	290,467		$	298,131

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

4

R.H. Donnelley Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)

				Nine months ended
				September 30,
(amounts in thousands)				2002			2001
Cash Flows from Operating Activities
Net income				$	59,409		$	59,164
Reconciliation of net income to net cash provided by operating activities:
		Extraordinary loss, net of tax			297			348
		Depreciation and amortization			4,718			8,237
		Deferred income tax			4,745			(2,132	)
		Provision for doubtful accounts			2,528			2,492
		Other noncash charges			1,047			869
		Cash in excess of partnership and joint venture income			1,346			2,206
		Increase in accounts receivable			(4,247	)		(2,724	)
		(Increase) decrease in other assets			(187	)		1,361
		Decrease in accounts payable and accrued liabilities			(13,050	)		(3,197	)
		(Decrease) increase in other non-current liabilities			(153	)		1,813
			Net cash provided by operating activities		56,453			68,437
Cash Flows from Investing Activities
Additions to fixed assets and computer software					(2,496	)		(3,262	)
Investment in ChinaBig.com Limited					—			(1,550	)
			Cash used in investing activities		(2,496	)		(4,812	)
Cash Flows from Financing Activities
Repayment of debt					(62,500	)		(50,000	)
Purchase of treasury stock					—			(58,174	)
Proceeds from employee stock option exercises					3,667			7,082
			Net cash used in financing activities		(58,833	)		(101,092	)
Decrease in cash and cash equivalents					(4,876	)		(37,467	)
Cash and cash equivalents, beginning of year					14,721			55,437
Cash and cash equivalents, end of period				$	9,845		$	17,970
Supplemental Information:
Cash used to pay:
	Interest			$	15,565		$	18,031
	Income taxes			$	26,845		$	26,800

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

5

R.H. Donnelley Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(amounts in thousands, except per share data)

1.     Basis of Presentation
The interim financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2001. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. Certain prior year amounts have been reclassified to conform to the current year’s presentation.

2.     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 financial statements of the DonTech Partnership (“DonTech”), a 50/50 perpetual partnership with an operating unit of SBC Communications Inc. (“SBC”), are not consolidated with our financial statements. See “Partnership and Joint Venture Accounting” below.

Revenue Recognition. We earn revenue in the form of commissions from the sale of advertising on behalf of Sprint Corporation (“Sprint”) and fees from our pre-press publishing services. As a sales agent for Sprint, we recognize sales commission revenue at the time an advertising contract is executed with a customer. Sales commission revenue is recorded net of potential sales allowances, which are estimated based on historical experience. Revenue from pre-press publishing operations is recognized as services are performed. We recognize no allowances for pre-press publishing services.

Partnership and Joint Venture Accounting. DonTech is accounted for under the equity method whereby we recognize our 50% share of the net income of DonTech as partnership and joint venture income (“partnership income”). Partnership income also includes revenue participation income from SBC and a priority distribution on our membership interest in CenDon LLC (“CenDon”), a joint venture with Centel Directory Company (“Centel”), a subsidiary of Sprint. Revenue participation income and the priority distribution are tied to advertising sales and recognized when a sales contract is executed with a customer. Partnership and joint venture investments on the consolidated balance sheets include our 50% share of the net assets of DonTech, the revenue participation receivable and the priority distribution receivable.

Trade Receivables. Trade receivables represent sales commissions earned from the sale of advertising on behalf of Sprint and fees earned for pre-press publishing services. An allowance for doubtful accounts for sales commissions is recognized based upon historical experience and subject to contractual limitations. 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, but no later than nine months after publication. Receivables for pre-press publishing services are billed and collected in accordance with the terms of the applicable agreement, generally a monthly pro rata amount based on the annual contract value. If actual volumes exceed contracted volumes, an additional amount is billed to the publisher at year-end.

Pension and Other Postretirement Benefits. Pension and other postretirement benefits represent estimated amounts to be paid to employees in the future. The accounting for benefit costs reflects the recognition of these future costs over the employee’s approximate service period based on the terms of the plans and the investment and funding decisions made. The determination of the future obligation and the periodic pension and other postretirement benefit costs requires management to make assumptions regarding the discount rate, return on retirement plan assets, increase in future compensation and health care cost trends. Changes in these assumptions can have a significant impact on the projected benefit obligation, funding requirement and periodic benefit cost. Our discount rate, which discounts our future obligation to its present value, is based on rates of return on Aa corporate bonds. The expected rate of return on plan assets is based on the mix of assets held by the plan and their historical long-term rates of return. The anticipated

6

trend of future health care costs is based on historical experience and external factors.

Concentration of Credit Risk. We maintain significant receivable balances with SBC and Sprint for revenue participation, priority distribution, sales commissions and pre-press publishing services fees. We do not 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.

Income Taxes. We recognize deferred tax assets for items that will give rise to future tax deductions. A valuation allowance is established where expected future taxable income does not support the full realization of deferred tax assets.

3.     Partnership and Joint Venture Income
Partnership income for the three and nine months ended September 30, 2002 and 2001 consisted of the following:

		Three months ended				Nine months ended
		September 30,				September 30,
		2002		2001		2002		2001
Revenue participation income		$	27,784	$	31,252	$	77,084	$	81,417
50% share of DonTech net income			6,646		7,762		15,878		16,681
	Total DonTech income		34,430		39,014		92,962		98,098
Priority distribution income			6,376		5,290		15,856		14,441
Partnership and joint venture income		$	40,806	$	44,304	$	108,818	$	112,539

Summarized combined financial information of DonTech is shown in the table below.

	Three months ended				Nine months ended
	September 30,				September 30,
	2002		2001		2002		2001
Net revenue	$	29,098	$	32,644	$	81,383	$	85,422
Operating income		13,249		15,441		31,846		33,096
Net income		13,291		15,524		31,755		33,362

Total assets of DonTech were $131,558 and $138,667 at September 30, 2002 and 2001, respectively.

4.     Debt
Debt at September 30, 2002 consisted of $74,250 outstanding under the Senior Secured Term Facilities (“Term Facilities”) and $150,000 Senior Subordinated 9-1/8% Notes. We also have a Senior Revolving Credit Facility (the “Revolver”), which allows us to borrow up to $100,000. There were no outstanding borrowings under the Revolver at September 30, 2002. During the quarter and nine-month period ended September 30, 2002, we prepaid $20,000 and $62,500 of Term Facilities, respectively. An after-tax extraordinary loss associated with the write-off of related deferred financing costs of $87 and $297 was recognized in the three and nine-month period ended September 30, 2002, respectively.

5.     Restructuring and Special Charge
In December 2001, a restructuring and special charge of $18,556 was recorded in connection with executive management transition arrangements and restructuring actions, including the relocation and consolidation of real estate facilities and the elimination of approximately 100 positions associated with the expiration in December 2002 of a pre-press publishing contract. As a result of the pending business acquisition of Sprint Publishing & Advertising (“SPA”), certain restructuring costs that management intended to incur have been delayed. However, management’s current intention is to still incur such costs, subject to further consideration as the closing of the SPA acquisition draws closer. At such time, management may determine that certain costs may not be incurred and, if so, will reverse the accrual for those costs at that time (see Note 10). Activity in the restructuring and other related liability account through September 30, 2002 is

7

presented in the table below. There were no layoffs related to the restructuring plan through September 30, 2002.

	Executive								Asset
	Management			Other			Facilities		Write-offs
	Transition			Severance			Related		and Other			Total
Restructuring and special charge	$	9,937		$	3,252		$	4,380	$	987		$	18,556
Reclass of related liabilities		2,735			—			—		—			2,735
Balance at January 1, 2002		12,672			3,252			4,380		987			21,291
2002 activity
Payments		(12,961	)		(128	)		—		(89	)		(13,178	)
Current period expense (income) (1)		289			—			—		(71	)		218
Balance at September 30, 2002	$	—		$	3,124		$	4,380	$	827		$	8,331
Short-term	$	—		$	2,891		$	3,527	$	797		$	7,215
Long-term		—			233			853		30			1,116
Total	$	—		$	3,124		$	4,380	$	827		$	8,331

(1) Represents amounts paid in excess of (lower than) the amounts originally provided for in the 2001 restructuring and special charge.

6.     Earnings Per Share
The computation of basic and diluted earnings per share for income before extraordinary loss and net income for the three and nine months ended September 30, 2002 and 2001 was as follows:

			Three months ended						Nine months ended
			September 30,						September 30,
			2002			2001			2002			2001
Income before extraordinary loss			$	25,146		$	25,688		$	59,706		$	59,512
Extraordinary loss, net of taxes				87			—			297			348
Net income			$	25,059		$	25,688		$	59,409		$	59,164
Weighted average shares of common stock outstanding
		Basic shares		29,707			29,979			29,618			30,454
		Dilutive effect of stock options		562			838			644			776
		Diluted shares (1)		30,269			30,817			30,262			31,230
Earnings per share
	Basic
		Income before extraordinary loss	$	0.85		$	0.86		$	2.02		$	1.95
		Extraordinary loss, net of taxes		(0.01	)		(0.00	)		(0.01	)		(0.01	)
		Net income	$	0.84		$	0.86		$	2.01		$	1.94
	Diluted
		Income before extraordinary loss	$	0.83		$	0.83		$	1.97		$	1.91
		Extraordinary loss, net of taxes		(0.00	)		(0.00	)		(0.01	)		(0.02	)
		Net income	$	0.83		$	0.83		$	1.96		$	1.89

(1) The computation of weighted average diluted shares for the three and nine months ended September 30, 2002 excludes options to purchase 546 and 181 shares, respectively, because the effect would have been antidilutive.

7.     Business Segments
Our reportable operating segments are DonTech and Directory Advertising Services (“DAS”). We evaluate the

8

performance of DonTech and DAS primarily based on operating income contribution. The DonTech segment includes revenue participation income and our 50% interest in the net profits of DonTech (see Note 3), but does not include an allocation of certain expenses incurred to support this business. Our DAS segment includes revenue and income from our sales agency and joint venture relationships with affiliates of Sprint, our pre-press publishing services operation, all information technology cost and an allocation of certain shared expenses based on estimated business usage. General & Corporate represents overhead and administrative costs not allocated to the DAS business units. Interest expense, interest income, income tax expense and other non-operating items are not allocated to the operating segments. Segment information for the three and nine months ended September 30, 2002 and 2001 is as follows:

			Directory
			Advertising		General &
	DonTech Partnership		Services		Corporate			Other (1)			Consolidated Totals
Three Months Ended September 30, 2002
Net revenue		—	$	20,938		—			—		$	20,938
Operating income (loss)	$	34,430		14,005	$	(2,443	)		—			45,992
Depreciation and amortization		—		1,488		65			—			1,553
EBITDA (2)		34,430		15,493		(2,378	)		—			47,545
Total assets		190,798		39,588		60,081			—			290,467
Three Months Ended September 30, 2001
Net revenue		—	$	22,165		—			—		$	22,165
Operating income (loss)	$	39,014		11,790	$	(3,488	)		—			47,316
Depreciation and amortization		—		2,465		132			—			2,597
EBITDA (2)		39,014		14,255		(3,356	)		—			49,913
Total assets		201,918		42,852		79,745			—			324,515
Nine Months Ended September 30, 2002
Net revenue		—	$	58,783		—			—		$	58,783
Operating income (loss)	$	92,962		31,589	$	(10,292	)	$	(218	)		114,041
Depreciation and amortization		—		4,505		213			—			4,718
EBITDA (2)		92,962		36,094		(10,079	)		(218	)		118,759
Nine Months Ended September 30, 2001
Net revenue		—	$	61,039		—			—		$	61,039
Operating income (loss)	$	98,099		27,326	$	(11,237	)		—			114,188
Depreciation and amortization		—		7,712		525			—			8,237
EBITDA (2)		98,099		35,038		(10,712	)		—			122,425

(1)

Represents expenses incurred in connection with the 2001 restructuring and special charge. These expenses exceeded the amounts provided for and are therefore treated as a period expense (see also Note 5).

(2)

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.

We also evaluate DonTech and DAS based on advertising sales because, while these sales do not appear on our financial statements or the financial statements of DonTech, they are a critical measure of performance reviewed by management and play an important role in management’s decision in allocating financial resources. For a discussion of advertising sales, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.”

8.     Litigation
Rockland Yellow Pages. In 1999, Sandy Goldberg, Dellwood Publishing, Inc. and Rockland Yellow Pages (as “plaintiffs”) initiated a lawsuit against the Company and Bell Atlantic Corporation (as “defendants”) 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 we 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 District Court dismissed substantially all of plaintiffs’ claims, and in August 2001, the remaining claims were either withdrawn by the plaintiffs or dismissed by the District Court. The plaintiffs then filed a complaint against the same defendants in New

9

York State Supreme Court, in Rockland County, alleging virtually the same state law tort claim previously dismissed by the District Court and seeking unspecified damages. In October 2001, defendants filed a motion to dismiss this complaint. On May 5, 2002, the Court granted defendants’ motion to dismiss the complaint. Plaintiffs have filed an appeal of this dismissal. Nonetheless, we presently do not believe that the final outcome of this matter will have a material adverse effect on our 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 The Dun & Bradstreet Corporation (“D&B”), ACNielsen Company and IMS International Inc., at the time of the filing, all wholly owned subsidiaries of D&B, as defendants (the “IRI Action”). IRI alleges, among other things, various violations of the antitrust laws, including alleged violations of Sections 1 and 2 of the Sherman Act. The complaint also alleges a claim of tortious interference with a contract and a claim of tortious interference with a prospective business relationship. These claims relate to the acquisition by defendants of Survey Research Group Limited (“SRG”). IRI alleges SRG violated an alleged agreement with IRI when it agreed to be acquired by the defendants and that the defendants induced SRG to breach that agreement. IRI is seeking damages in excess of $350,000, which amount IRI seeks to treble under antitrust laws. IRI is also seeking punitive damages of an unspecified amount. No trial date has been set and discovery is ongoing. Under the definitive agreement entered into in connection with our separation from D&B in 1998 (the “Distribution Agreement”), D&B assumed the defense and agreed to indemnify us against any payments that we may be required to make, including related legal fees. As required by the Distribution Agreement, Moody’s Corporation, which subsequently separated from D&B, agreed to be jointly and severally liable with D&B for the indemnity obligation to us. At this stage in the proceedings, we are unable to predict the outcome of this matter. While no assurances can be provided, we currently believe that D&B and Moody’s have sufficient financial resources and borrowing capacity to reimburse us for any payments we make and related costs we incur.

Tax Matters. Certain tax planning strategies entered into by D&B are currently subject to review by tax authorities. As a result of the form of our separation from D&B, we are the corporate successor of, and technically the taxpayer referred to below as D&B. However, under the terms of the Distribution Agreement and the Tax Allocation Agreement with D&B, D&B agreed to assume the defense and to indemnify us for any tax liability that may be assessed and any related costs and expenses we incur. Also, as required by the Distribution Agreement, Moody’s Corporation is jointly and severally liable with D&B for the indemnity obligation to us. Under the terms of a series of agreements between D&B, IMS Health Incorporated (“IMS”) and Nielsen Media Research, Inc. (“NMR”) (both former subsidiaries of D&B), D&B is required to pay the first $137,000 of any tax liability and accrued interest assessed by the tax authorities with respect to certain tax matters (including those discussed in detail below), as well as other tax liabilities. Any amount in excess of $137,000 will be paid 50% by IMS and NMR jointly and severally and 50% by D&B.

In 2000, D&B filed an amended tax return with respect to the utilization of capital losses in 1989 and 1990 in response to a formal IRS assessment. The amended tax return reflected an additional $561,600 of tax and interest due. In 2000, D&B paid the IRS $349,300 while IMS (on behalf of itself and NMR) paid the IRS approximately $212,300. We understand that this payment was made under dispute in order to stop additional interest from accruing, that D&B is contesting the IRS’s formal assessment and would also contest the assessment of amounts, if any, in excess of the amounts paid, and that D&B has filed a petition for a refund in the United States District Court. This case is expected to go to trial in 2004.

In connection with that IRS assessment and amended tax return, IMS has filed an arbitration proceeding against NMR claiming that NMR subsequently underpaid to IMS its proper allocation of the above-referenced tax liability under the agreements between NMR and IMS, to which neither D&B nor we are party. IMS has included us as a respondent in the arbitration proceeding so that if NMR prevails in its interpretation of the allocation computation, then IMS could apply that same interpretation of the allocation computation against us under its agreement with us (as successor to D&B). The arbitration panel has ruled that we are a proper party to the arbitration. Hearings before the arbitration panel on the merits are scheduled for December 2002. As required by the Distribution Agreement and Tax Allocation Agreement, D&B and Moody’s are defending us in this arbitration proceeding at their cost and expense. If NMR prevails in the arbitration against IMS and in turn IMS prevails against us, we believe that our additional liability under this alternative interpretation of the allocation

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computation would be approximately $15,000 (a $60,000 gross claim offset by approximately $45,000 of tax benefit). While we believe that the original interpretation of the allocation computation is correct and the claims of IMS are without merit, if NMR prevails against IMS and in turn IMS prevails against us in this arbitration proceeding, D&B and Moody’s would be jointly and severally obligated to indemnify us against any such liability.

We believe that 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 our risk. While no assurances can be given, we currently believe that D&B and Moody’s have sufficient financial resources and borrowing capacity to reimburse us for any payments we make and related costs we incur.

During the second quarter of 2002, D&B received a Notice of Proposed Adjustment from the IRS with respect to a transaction entered into in 1993. In this Notice, the IRS proposed to disallow certain royalty expense deductions claimed by D&B on its 1994, 1995 and 1996 tax returns. The IRS previously concluded an audit of this transaction for taxable years 1993 and 1994 and did not disallow any similarly claimed deductions. We understand that D&B disagrees with the position taken by the IRS in its Notice and has filed a responsive brief to this effect with the IRS. If the IRS were to issue a formal assessment consistent with the Notice, then a payment of the disputed amounts would be required if D&B opted to challenge the assessment in U.S. District Court rather than in U.S. Tax Court. In the event of such a challenge by D&B, the required payment by D&B to the IRS would be up to $42,000 (net of $6,000 of associated tax benefit). In recent communications between D&B and the IRS, we understand that the IRS has expressed some willingness to withdraw its proposed disallowance of certain royalty expense deductions of $7,500 for 1994. However, we also understand that the IRS has expressed its intent to seek penalties of $7,500 for 1995 and 1996 based on its interpretation of applicable law. We are advised that D&B would challenge the IRS’ interpretation. Again, as required by the Distribution Agreement and Tax Allocation Agreement, D&B and Moody’s are required to joint and severally indemnify us against any such liability.

We understand that the IRS has sought certain documentation from D&B with respect to a transaction entered into in 1997 that produces amortization expense deductions for D&B. While D&B believes the deductions are appropriate, it is possible that the IRS may challenge them and issue an assessment. If the IRS were to prevail in its challenge, D&B estimates that its liability to the IRS (including possible penalties) could be up to $41,000 (net of $3,000 of associated tax benefit). This transaction is scheduled to expire in 2012 and unless earlier terminated by D&B, the exposure would increase approximately $1,700 per quarter as additional amortization expenses are deducted. Again, as required by the Distribution Agreement and Tax Allocation Agreement, D&B and Moody’s are required to joint and severally indemnify us against any such liability.

As a result of our assessment of our exposure in these matters, especially in light of the indemnity arrangements with D&B and Moody’s, no material amounts have been accrued in the consolidated financial statements for any of these matters.

Other matters. We are also involved in other legal proceedings, claims and litigation arising in the ordinary conduct of our business. Although there can be no assurances, we currently believe that the outcome of such legal proceedings will not have a material adverse effect on our results of operations or financial condition.

9.     New Accounting Pronouncements

In April 2002, the Financial Accounting Standards Board (“FASB”) issued FAS 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This Statement, among other things, changes the way gains and losses from the extinguishment of debt are reported. Previously, all gains and losses from the extinguishment of debt were required to be reported as an extraordinary item, net of related tax effect. Under FAS 145, gains and losses from the extinguishment of debt should be reported as part of on-going operations, unless the extinguishment of debt is both an unusual and infrequent event for the entity. Previously reported extraordinary gains and losses from the extinguishment of debt that are not unusual or infrequent should be reclassified. This Statement is effective January 1, 2003. Upon adoption of this Statement, previously reported extraordinary loss will be reclassified to non-operating expense and tax expense. The adoption of this Statement will not impact our previously reported net income. Had we adopted this Statement during the third quarter of 2002, non-operating expense for the nine months ended September 30, 2002 and 2001 would have been $482 and $557 higher, and provision for income taxes would have been lower by $185 and $209, respectively.

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In June 2002, the FASB issued FAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.” FAS 146 addresses the accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” This Statement is effective for transactions initiated after December 31, 2002 and is to be applied prospectively.

10.     Pending Business Combination

On September 21, 2002, we entered into a stock purchase agreement with Sprint and Centel Directories LLC to acquire SPA for $2,230,000 in cash, subject to a working capital adjustment. SPA is the yellow pages directory operation of Sprint, which publishes 260 yellow pages directories in 18 states. The acquisition of SPA is expected to close in the first quarter of 2003, subject to certain regulatory approvals and customary closing conditions. As part of the transaction, we have received commitments from Deutsche Bank, Salomon Smith Barney and Bear Stearns to finance the purchase price and refinance existing debt. In addition, GS Capital Partners 2000, L.P. and affiliated entities (“Goldman Sachs”), the primary private equity investment funds of Goldman, Sachs & Co., have entered into a definitive agreement with us to invest $200,000 through the purchase of newly issued cumulative convertible preferred stock and warrants. The transaction, which would close simultaneously with the SPA acquisition, is subject to customary regulatory approvals and closing conditions.

As part of the transaction, we and/or certain affiliates will enter into commercial agreements with Sprint and/or its affiliates under which we will be the exclusive directory publisher for Sprint in the markets in which Sprint currently provides local telephone service for an initial term of 50 years (subject to customary early termination provisions).

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

Certain statements contained in this Form 10-Q 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, words such as “believe,” “expect,” “anticipate,” “should,” “will,” “would,” “planned,” “estimated,” “potential,” “goal,” “outlook,” “could,” and similar expressions, are used to identify such forward-looking statements. All forward-looking statements reflect only our current beliefs and assumptions with respect to our future results, business plans, and prospects, and are based solely on information currently available to us. Accordingly, these statements are subject to significant risks and uncertainties and our actual results, business plans and prospects could differ significantly from those expressed in, or implied by, these statements. We caution readers not to place undue reliance on, and we undertake no obligation to update, any forward-looking statements. Such risks and uncertainties 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”), which expire in 2004 and 2010. Due to the limited number of relationships, a material decline in the results of one relationship, especially our SBC relationship, would likely have a material adverse effect on our overall operating results. In the event the acquisition of Sprint Publishing & Advertising (“SPA”) is not consummated, we cannot assure you 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 these contracts as they expire. Any such failure to renew or replace these contracts would likely have a material adverse effect on our financial condition and results of operations.

(2)  Dependence on our Business Partners
DonTech is the exclusive sales agent for SBC’s yellow pages directories in certain markets and we are the exclusive sales agent for Sprint’s yellow pages directories in certain markets. SBC and Sprint are the publishers of these directories. As the exclusive sales agent, DonTech and we are responsible for the management of our respective sales forces, including compensation, recruiting, training and other sales related matters. As the publisher, SBC and Sprint have responsibility for and control over all other matters, including, without limitation, product development, pricing, scheduling, marketing, distribution, billing, collections, credit and customer service. While we believe that DonTech’s and our economic interests are generally aligned with those of SBC and Sprint with respect to their yellow pages directory operations, SBC or Sprint could implement policies or decisions (in which DonTech or we would likely have little or no participation or influence), and/or perform their obligations in a manner that could have a material adverse effect on our results of operations or financial condition and, potentially, on our relationship with our business partners. DonTech and we are afforded certain protections under the respective agreements, which we believe could mitigate to a significant degree the adverse effects of such policy changes or decisions on us. However, we cannot give any assurances that such policy changes or decisions would not have a material adverse effect on our results of operations, financial condition or our relationship with our business partners. Lastly, we maintain large receivable balances from SBC and Sprint, and any liquidity difficulties that they may experience could materially impact our results of operations, financial condition and liquidity. We cannot assure you that the DonTech relationship will remain in full force and effect into perpetuity, without material modification or at all, or that DonTech and SBC will perform all of their respective material obligations (particularly payment obligations) under these agreements or that SBC will not seek to terminate early these arrangements. Any such termination, material modification of the agreements or failure by SBC or DonTech to perform their respective material obligations would have a material adverse effect on our financial condition and results of operations.

(3)  Uncertainty Regarding Changes in the Industry
Our ability to diversify our business portfolio by providing sales agency, pre-press publishing or other services to SBC or Sprint in other markets or to other publishers in the industry may be impacted by uncertainties caused by consolidation within the telecommunications and independent yellow pages publishing industries or other changes. Also, most yellow pages directory publishers provide all sales and publishing functions internally, which could impact

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our ability to renew or obtain additional outsourcing business from our current publishers or offer our services to other yellow pages directory publishers. Our inability to diversify our business portfolio or expand the services we provide could negatively impact our ability to grow revenues and income and/or have a material adverse effect on our financial condition and results of operations. In addition, the effects of the Telecommunications Act of 1996 are still developing and the ultimate impact of those changes is still uncertain. The introduction of new products or technologies (including electronic delivery of directory information) by other companies and/or pricing pressures from competitors or customers could also adversely affect our results of operations and financial condition.

(4)  General Economic Factors
Our business results could be adversely affected by the reversal or slow down of the modest economic recovery 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 heavily upon travel and tourism, could also adversely affect our business.

(5)  Risks Related to Pending Acquisition
On September 21, 2002, we entered into a stock purchase agreement with Sprint and Centel Directories LLC to acquire SPA for $2.23 billion in cash, subject to a working capital adjustment (the “Acquisition”). SPA is the yellow pages directory operation of Sprint, which publishes 260 yellow pages directories in 18 states. The Acquisition is expected to close in the first quarter of 2003, subject to certain regulatory approvals and customary closing conditions. Additional risks that could cause forward-looking statements to differ materially from such statements include, without limitation, the failure to consummate the Acquisition and related financing, the inability to achieve synergies in connection with the Acquisition, the incurrence of unexpected costs in connection with the Acquisition, our high levels of debt following the Acquisition, our exposure to greater credit risk as publisher of the directories and risks relating to the integration of Sprint’s directory publishing operations and business.

The Acquisition may, if consummated, mitigate certain of the foregoing risks with respect to our Sprint operations. See “The Company – Significant Business Developments.”

The Company

R.H. Donnelley Corporation is a leading independent marketer of yellow pages advertising services tailored for small and medium-sized businesses. Our business is currently organized into two reportable operating segments, the DonTech Partnership (“DonTech”) and Directory Advertising Services (“DAS”). Unless otherwise indicated, the terms “Company,” “we,” “us” and “our” refer to R.H. Donnelley Corporation and its direct and indirect wholly owned subsidiaries. All tabular amounts are presented in millions of dollars.

DonTech
DonTech is a 50/50 perpetual partnership in which the Company and an operating unit of SBC are the partners. DonTech acts as the exclusive sales agent for yellow pages directories published by SBC in Illinois and northwest Indiana. DonTech sells advertising in SBC directories on behalf of SBC and receives a commission from SBC. Our income associated with DonTech is comprised of two components, our 50% interest in the net income of DonTech and revenue participation income received directly from SBC, which is based on a percentage of DonTech advertising sales. Income from DonTech accounts for a significant portion of our operating income and 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 and billing services for those SBC directories, as well as provide sales related computer applications to DonTech. The fees received for these services are included in our DAS segment.

Directory Advertising Services
Within our DAS segment, we sell yellow pages advertising in Sprint directories on behalf of affiliated entities of Sprint, perform pre-press publishing and related services for yellow pages directories and include all information technology costs. We are the exclusive sales agent in the greater Orlando, Florida market (“Central Florida”) for a subsidiary of Sprint and the exclusive sales agent in certain Nevada, Florida, Virginia and North Carolina markets for CenDon LLC (“CenDon”), a joint venture with Centel Directory Company (“Centel”), another subsidiary of Sprint. Other Sprint

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affiliates sell yellow pages advertising in other markets in these states. We receive a commission on all advertising we sell for Sprint and CenDon and a priority distribution on our membership interest in CenDon (“priority distribution”), which is based on a percentage of CenDon advertising sales. A material decline in the advertising sales of our Sprint operation could have a material adverse effect on our results of operations and financial condition. Our Central Florida sales agency relationship extends through 2004 and our CenDon sales agency relationship extends through 2010.

The priority distribution was designed to allow us to maintain the same level of profitability that we would have earned under the predecessor CenDon Partnership through its scheduled expiration date in 2004. Under the new agreements, total payments from CenDon (sales commission plus priority distribution) are expected to average approximately 37% of CenDon advertising sales through 2004. Starting with sales into 2005 directories, we will not receive a priority distribution but will receive a supplemental sales commission for sales into 2005 through 2007 directories. Total payments from CenDon (sales commission plus supplemental sales commission) in 2005 are expected to be approximately 35% of CenDon advertising sales and are expected to decline 4 percentage points per year through 2007. For sales into 2008 – 2010 publications, we will receive our base 23% commission on CenDon advertising sales. Upon consummation of the Acquisition, our sales agency and CenDon joint venture relationships with affiliates of Sprint would become intercompany agreements as we would thereafter be the owner of that business and publisher of the respective directories. See also “– Significant Business Developments” below.

We also provide pre-press publishing services under separately negotiated contracts for the yellow pages directories of Sprint (through 2003) and SBC (through 2008) for which we and DonTech sell advertising, as well as for an unaffiliated third party publisher. At the end of this year, the pre-press publishing agreement with this unaffiliated publisher will expire. As a result of the restructuring actions announced in 2001, the expiration of this contract will not have a material adverse effect on our results of operations or financial condition in the future. Upon consummation of the Acquisition, our pre-press agreement with an affiliate of Sprint would become an intercompany agreement as we would thereafter be the owner of that business and publisher of the respective directories. See also “– Significant Business Developments” below.

Significant Business Developments

On September 21, 2002, we entered into a definitive agreement to purchase all the outstanding capital stock of the entities comprising Sprint’s directory publishing business, SPA, for $2.23 billion in cash, subject to a working capital adjustment. SPA publishes 260 directories in 18 states. The transaction is expected to close in the first quarter of 2003, subject to certain regulatory approvals and customary closing conditions.

As part of the transaction, we have received commitments from Deutsche Bank, Salomon Smith Barney and Bear Stearns to finance the purchase price and refinance existing debt. In addition, GS Capital Partners 2000, L.P. and affiliated entities (“Goldman Sachs”), the primary private equity investment funds of Goldman, Sachs & Co., have entered into a definitive agreement with us to invest $200 million through the purchase of newly issued cumulative convertible preferred stock and warrants. The transaction, which would close simultaneously with the SPA acquisition, is subject to customary regulatory approvals and closing conditions.

We and/or certain affiliates will enter into commercial agreements, which are effective upon closing, with Sprint and/or its affiliates under which we will be the exclusive directory publisher for Sprint in the markets in which Sprint currently provides local telephone service for an initial term of 50 years (subject to customary early termination provisions).

Critical Accounting Policies

Certain amounts in our financial statements require that management make assumptions and estimates based on the best available information at that time. Actual results could vary from these estimates and assumptions. Those accounting policies that involve assumptions or estimates on our part that could have a material effect on our results of operations or financial condition if the actual results differ from our assumptions or estimates are presented below. Also see Note 2 in Item 1 “Financial Statements” for additional information on our accounting policies.

Revenue Recognition. We earn sales commission revenue from the sale of advertising on behalf of Sprint and fees from our pre-press publishing services. As a sales agent for Sprint, we recognize sales commission revenue at the time an

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advertising contract is executed with a customer. Sales commission revenue is recorded net of potential sales allowances, which are estimated, based on historical experience. If an advertiser is not satisfied with its yellow page advertisement (i.e. misspelled business name, incorrect business address or number, etc.), the publisher may, at its discretion, adjust the contract value. Since we earn commissions based on the aggregate value of advertising contracts, our commissions would also be adjusted under those circumstances. Concurrent with the recognition of sales commission revenue, we recognize a sales allowance of approximately 1% of sales commission revenue, based on historical experience. The amount of sales allowance recognized is subsequently adjusted based on actual results. Historically, the actual amount of sales allowances has been consistent with our estimates and significant adjustments have not been made. Revenue from pre-press publishing operations is recognized as services are performed. We recognize no allowances for pre-press publishing services.

Trade Receivables. Trade receivables represent sales commissions earned from the sale of advertising on behalf of Sprint and fees earned for pre-press publishing services. We establish an allowance for doubtful accounts for sales commissions based upon historical experience and subject to contractual limitations. Our exposure to bad debt is capped under the sales agency agreement with CenDon. We record our bad debt allowance for CenDon sales based on the cap rate since the actual rate of bad debts has exceeded the capped rate for the last three years. An increase in the actual bad debt rate will not have any direct impact on our financial condition or results of operations. Under the Central Florida sales agency agreement, our exposure to bad debts is not capped and we estimate our bad debt allowance based on historical experience. This amount is subject to adjustment based on actual results. On an annualized basis, a 1% increase in actual bad debts with respect to Central Florida over the amount originally provided for would increase our consolidated expenses approximately $0.1 million. Historically, actual bad debts on these receivables have been consistent with our estimates and significant adjustments have not been made.

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, but no later than nine months after publication. Receivables for pre-press publishing services are billed and collected in accordance with the terms of the applicable agreement, generally a monthly pro rata amount based on the annual contract value. If actual volumes exceed contracted volumes, an additional amount is billed to the publisher at year-end.

Pension and Other Postretirement Benefits. Pension and other postretirement benefits represent estimated amounts to be paid to employees in the future. The accounting for benefit costs reflects the recognition of these future costs over the employee’s approximate service period based on the terms of the plans and the investment and funding decisions made. The determination of the future obligation and the periodic pension and other postretirement benefit costs requires management to make assumptions regarding the discount rate, return on retirement plan assets, increase in future compensation and health care cost trends. Changes in these assumptions can have a significant impact on the projected benefit obligation, funding requirement and periodic benefit cost. Our discount rate, which discounts our future obligation to its present value, is based on rates of return on Aa corporate bonds. The expected rate of return on plan assets is based on the mix of assets held by the plan and their historical long-term rates of return. The anticipated trend of future health care costs is based on historical experience and external factors.

Concentration of Credit Risk. We maintain significant receivable balances with SBC and Sprint for revenue participation, priority distribution, sales commissions and pre-press publishing services fees. We do not currently foresee a material credit risk associated with these receivables based on SBC and Sprint’s past payment history and strong cash flows from their respective directory operations. However, there can be no assurance that full payment will continue to be received on a timely basis.

RESULTS OF OPERATIONS
Three and nine months ended September 30, 2002 and 2001

Net Revenue

Revenue is derived entirely from our DAS segment. As a sales agent for Sprint, we earn commission revenue based on the annual billing value of advertisements sold for Sprint directories in the period (“Sprint calendar sales”). We record our sales commission revenue net of an estimate of our share of allowances Sprint may give customers for errors. We also earn revenue from our pre-press publishing services.

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The amount of commission revenue we earn is directly correlated to Sprint calendar sales recorded during the period. We manage the selling of advertising on a directory by directory basis and organize each directory into a sales campaign. A typical sales campaign begins six to eight months and ends approximately two months before a directory is scheduled to be published. Therefore, changes in the beginning and ending dates of a sales campaign and the actual sales recorded at any point during the campaign can vary from one period to the next. These variations can cause sales commission revenue earned in the period to be materially different from the prior comparative period.

Net revenue detail for the three and nine months ended September 30, 2002 and 2001 was as follows:

		2002			2001		$ Change			% Change
Quarter ended September 30,
Sales commissions		$	13.1		$	12.7	$	0.4			3.1	%
Sales allowances			(0.1	)		1.7		(1.8	)		n/m
Net sales commissions			13.0			14.4		(1.4	)		(9.7	)
Pre-press publishing			7.9			7.8		0.1			1.3
	Net revenue	$	20.9		$	22.2	$	(1.3	)		(5.9	)%
Nine months ended September 30,
Sales commissions		$	35.2		$	35.4	$	(0.2	)		(0.6	)%
Sales allowances			(0.3	)		1.1		(1.4	)		n/m
Net sales commissions			34.9			36.5		(1.6	)		(4.4	)
Pre-press publishing			23.9			24.5		(0.6	)		(2.4	)
	Net revenue	$	58.8		$	61.0	$	(2.2	)		(3.6	)%

Net revenue was $20.9 million and $58.8 million for the quarter and nine months ended September 30, 2002, respectively, compared to $22.2 million and $61.0 million for the quarter and nine months ended September 30, 2001. Commission revenue from Sprint through September 2002 was slightly below last year as the economic conditions during the first half of 2002 resulted in many advertisers reducing the level of advertising spending, deciding not to advertise or not being allowed to continue to advertise under Sprint’s credit policy due to payment delinquency. However, during the third quarter of 2002, we saw improving economic conditions in certain Sprint markets as evidenced by increasing advertising renewal rates.

Sales allowances of $1.4 million originally provided for in 2000 and $0.4 million provided for during the first six months of 2001 were reversed in the third quarter 2001 as these amounts were determined to be no longer required. Excluding this reversal, sales allowances for the quarter and nine-month period in 2001 were $0.1 million and $0.3 million, respectively, which were in-line with the quarter and nine-month period in 2002.

Pre-press publishing revenue for the nine-month period ended September 30, 2002 declined $0.6 million compared to the prior year period as a result of the newly extended SBC contract.

The table below sets forth the value of advertising that we sold on behalf of Sprint and the value of advertising that DonTech sold on behalf of SBC during the periods noted. DonTech manages its selling process in a manner similar to the manner in which we manage our selling process. Accordingly, the annual billing value of advertisements sold for SBC directories in the period (“DonTech calendar sales”) can vary from one period to the next due to changes in the beginning and ending dates of a sales campaign and the actual sales recorded at any point during the campaign. Our commission revenue and priority distribution income from Sprint is directly correlated to the amount of Sprint calendar sales and our revenue participation income from SBC is directly correlated to the amount of DonTech calendar sales. Therefore, a material change in Sprint calendar sales or DonTech calendar sales would have a material effect on our results of operations and financial condition.

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		2002		2001		$ Change			% Change
Quarter ended September 30,
DonTech		$	115.1	$	129.0	$	(13.9	)		(10.8	)%
DAS			56.7		54.9		1.8			3.3
	Total	$	171.8	$	183.9	$	(12.1	)		(6.6	)%
Nine months ended September 30,
DonTech		$	322.1	$	337.7	$	(15.6	)		(4.6	)%
DAS			152.3		153.1		(0.8	)		(0.5	)
	Total	$	474.4	$	490.8	$	(16.4	)		(3.3	)%

DonTech calendar sales for the three and nine months ended September 30, 2002 were lower than the corresponding 2001 periods. There were planned changes in the sales campaign schedules this quarter that resulted in DonTech sales representatives servicing existing advertisers representing approximately 10% less revenue in the quarter than last year. Additionally, the current economic environment, which began affecting DonTech sales in the latter part of 2001, continues to affect sales in 2002. Advertisers continue to be cautious and are not increasing their advertising spending and new business sales continue to be below historical norms, primarily reflecting lack of confidence by consumers in those markets. Finally, increased competition in the DonTech markets, especially Chicago, is having an adverse affect on sales results.

Sprint calendar sales (reflected in the DAS segment in the above table) for the third quarter of 2002 increased over the prior year period as we saw improving economic conditions in certain Sprint markets as evidenced by increasing advertising renewal rates. The improvement in the third quarter helped offset most of the shortfall during the first half of 2002 that resulted from many advertisers reducing the level of advertising spending, deciding not to advertise or not being allowed to continue to advertise under Sprint’s credit policy due to payment delinquency. The quarter ended September 30, 2002 was the first quarter in which there has been an increase in Sprint calendar sales since the second quarter of 2001 due to the difficult economic conditions.

Management also reviews and analyzes the value of advertising sales sold on behalf of SBC and Sprint in directories that published during the period (“publication sales”). We compare publication sales for the period against publication sales for the same directories published in the prior year period (a “same store sales” type metric). A comparison of publication sales from one period to another gives an indication of underlying sales growth in directories as this metric removes all the timing issues associated with a sales campaign. However, publication sales 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 reported in prior periods.

If directories that published in the current period are not consistent with directories published in the comparable prior year period, the prior year period is adjusted to include only those directories that published during the current year period. A DonTech directory originally scheduled to publish in February 2002 was published in December 2001. To conform to the 2002 publication schedule, publication sales for the nine months ended September 30, 2001 were adjusted to remove the value of the February 2001 directory ($28.3 million). Publication sales for the three and nine months ended September 30, 2002 and 2001 were as follows:

		2002		2001		$ Change			% Change
Quarter ended September 30,
DonTech		$	66.7	$	67.4	$	(0.7	)		(1.0	)%
DAS			50.4		56.1		(5.7	)		(10.2	)
	Total	$	117.1	$	123.5	$	(6.4	)		(5.2	)%
Nine months ended September 30,
DonTech		$	251.4	$	262.2	$	(10.8	)		(4.1	)%
DAS			125.5		136.5		(11.0	)		(8.1	)
	Total	$	376.9	$	398.7	$	(21.8	)		(5.5	)%

Publication sales were down for the three and nine months ended September 30, 2002 compared to last year’s comparable periods reflecting difficult economic conditions, especially in the Mid-West, reduced spending by

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advertisers, uncertainty and caution in the small business market and increased competition in the Chicago markets. The decline in publication sales in the quarter was primarily due to Sprint’s July Las Vegas directory which declined over 10% from the prior year. The decline in the nine-month period was primarily due to SBC’s Chicago Consumer directory, which declined about 15% and Sprint’s January and July Las Vegas directories, which declined about 10% in the aggregate.

Partnership and Joint Venture Income

Partnership and joint venture income (“partnership income”) includes our share of the net income of DonTech (accounted for under the equity method), revenue participation income from SBC and the priority distribution on our membership interest in CenDon LLC. As a sales agent for SBC, DonTech earns commission revenue based on the annual billing value of advertisements sold for SBC directories in the period (“DonTech calendar sales”). DonTech’s net income (of which we recognize 50%) is dependent on DonTech calendar sales. Additionally, our revenue participation income is directly correlated to the amount of DonTech calendar sales in the period. Partnership income from our CenDon relationship consists of the priority distribution on our membership interest in CenDon LLC. Partnership income for the quarter and nine months ended September 30, 2002 and 2001 was as follows:

		2002		2001		$ Change			% Change
Quarter ended September 30,
DonTech Revenue participation		$	27.8	$	31.2	$	(3.4	)		(10.9	)%
Equity income share			6.6		7.8		(1.2	)		(15.4	)
Total DonTech			34.4		39.0		(4.6	)		(11.8	)
CenDon priority distribution			6.4		5.3		1.1			20.8
	Total	$	40.8	$	44.3	$	(3.5	)		(7.9	)%
Nine months ended September 30,
DonTech Revenue participation		$	77.1	$	81.4	$	(4.3	)		(5.3	)%
Equity income share			15.9		16.7		(0.8	)		(4.8	)
Total DonTech			93.0		98.1		(5.1	)		(5.2	)
CenDon priority distribution			15.8		14.4		1.4			9.7
	Total	$	108.8	$	112.5	$	(3.7	)		(3.3	)%

Partnership income was $40.8 million and $108.8 million for the quarter and nine months ended September 30, 2002, respectively, compared to $44.3 million and $112.5 million for the quarter and nine months ended September 30, 2001, respectively. Partnership income from DonTech for the quarter and year-to-date 2002 periods was lower than the corresponding 2001 periods due to lower DonTech calendar sales. This decline in calendar sales was due to a planned change in the sales campaign schedule this quarter, a difficult economic environment and increased competition in the DonTech markets.

During the quarter, we settled CenDon Partnership advertiser receivable issues for approximately $2.1 million less than the amount provided for to cover potential losses (the “CenDon settlement”). The $2.1 million excess accrual was reversed and applied against the same accounts that the original reserve was recorded to. Accordingly, $1.0 million of the benefit was included in CenDon priority distribution income and the remaining $1.1 million benefit was recognized as a reduction to operating expenses (see “– Expenses”). We recorded the original reserve over time as we became aware of relevant facts and circumstances. The reserve was recorded to two separate accounts based on the timing of when the reserve was recognized. Excluding the $1.0 million benefit, priority distribution income for the quarter and year-to-date 2002 periods was slightly higher than the corresponding 2001 periods primarily due a contractual increase in the priority distribution rate for 2002.

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Expenses

		2002		2001		$ Change			% Change
Quarter ended September 30,
Operating expenses		$	11.1	$	12.5	$	(1.4	)		(11.2	)%
G&A expense			3.1		4.1		(1.0	)		(24.4	)
D&A expense			1.6		2.6		(1.0	)		(38.5	)
	Total	$	15.8	$	19.2	$	(3.4	)		(17.7	)%
Nine months ended September 30,
Operating expenses		$	36.4	$	38.4	$	(2.0	)		(5.2	)%
G&A expense			12.3		12.8		(0.5	)		(3.9	)
D&A expense			4.7		8.2		(3.5	)		(42.7	)
Restructuring and special charge			0.2		—		0.2			n/m
	Total	$	53.6	$	59.4	$	(5.8	)		(9.8	)%

Operating expenses were $11.1 million and $36.4 million for the quarter and nine months ended September 30, 2002, respectively, compared to $12.5 million and $38.4 million for the quarter and nine months ended September 30, 2001, respectively. The decrease in the quarter and nine-month period was primarily due to the $1.1 million benefit from the CenDon settlement (see “– Partnership and Joint Venture Income”). Additionally, the quarter and nine-month 2002 periods benefited from lower salary expense of approximately $0.4 million and $0.8 million, respectively from lower headcount and less utilization of outside information technology (“IT”) contract services at our Raleigh facility.

General and administrative expense was $3.1 million and $12.3 million for the quarter and nine months ended September 30, 2002, respectively, compared to $4.1 million and $12.8 million for the quarter and nine months ended September 30, 2001, respectively. The decrease in the quarter was primarily due to lower salary and benefits expense, mainly associated with the change in executive management earlier in the year. General and administrative expense for the year-to-date period was also lower due to the change in executive management earlier in the year, but partially offset by non-capitalized expenses of approximately $0.4 million incurred in connection with the pending acquisition of SPA. Certain expenses to be incurred related to the transaction, such as financial advisory, legal and accounting fees and other transaction related fees and expenses will be capitalized as part of the purchase price in accordance with GAAP.

Depreciation and amortization expense was $1.6 million and $4.7 million for the quarter and nine months ended September 30, 2002, respectively, compared to $2.6 million and $8.2 million for the quarter and nine months ended September 30, 2001, respectively. The decrease in the quarter and year-to-date periods was primarily due to the original investment in the Raleigh Information Center being fully depreciated by the end of 2001.

During 2002, additional expenses of $0.2 million were incurred in connection with our executive management transition and restructuring plan announced at the end of 2001 as actual amounts paid exceeded the amounts provided for and were therefore treated as a period expense.

Operating Income

Operating income for DonTech includes our 50% interest in the net income of DonTech and revenue participation income, but does not include an allocation of certain general and administrative expenses incurred to support this business. Operating income for DAS includes the operating results of each of the included business units, less an allocation of certain shared expenses based on estimated business usage. General & Corporate represents overhead and administrative costs not allocated to the DAS business units. Operating income by segment was as follows:

		2002			2001			$ Change			% Change
Quarter ended September 30,
DonTech		$	34.4		$	39.0		$	(4.6	)		(11.8	)%
DAS			14.0			11.8			2.2			18.6
General & Corporate			(2.4	)		(3.5	)		1.1			31.4
	Total	$	46.0		$	47.3		$	(1.3	)		(2.7	)%

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		2002			2001			$ Change			% Change
Nine months ended September 30,
DonTech		$	92.9		$	98.1		$	(5.2	)		(5.3	)%
DAS			31.6			27.3			4.3			15.8
General & Corporate			(10.3	)		(11.2	)		0.9			8.0
	Segment Operating Income		114.2			114.2			—			—
Restructuring and special charge			(0.2	)		—			(0.2	)		n/m
	Total	$	114.0		$	114.2		$	(0.2	)		(0.2	)%

Operating income was $46.0 million and $114.0 million for the three and nine months ended September 30, 2002, respectively, compared to $47.3 million and $114.2 million for the three and nine months ended September 30, 2001, respectively. Poor sales results contributed to a decline in operating income from DonTech for the three and nine-month periods. See “Partnership and Joint Venture Income” above for further details of the decrease in DonTech operating income. DAS income for the three months was higher than the prior year period due to the CenDon settlement for $2.1 million less than the amount provided to cover potential losses. DAS income for the nine months increased over the prior year due to the CenDon settlement and lower depreciation and amortization expense of $3.2 million as the investment in the Raleigh Information Center was fully depreciated by the end of 2001. These increases were partially offset by lower commission revenue of $1.6 million, primarily due to the reversal of sales allowances in 2001, and lower publishing revenue of $0.6 million. General & Corporate costs for the quarter and nine-month period decreased from the prior year periods primarily due to lower salary and benefits expense resulting from the change in executive management earlier in the year. General & Corporate for the year-to-date 2002 period includes acquisition-related costs of approximately $0.4 million.

Interest and Taxes

Net interest expense was $5.1 million and $17.0 million for the quarter and nine months ended September 30, 2002, respectively, compared to $6.2 million and $19.0 million for the quarter and nine months ended September 30, 2001, respectively. The quarter and year-to-date decrease in 2002 was primarily due to lower average outstanding debt levels as we continue to use excess cash to prepay our debt.

The effective tax rate for the quarter and nine months ended September 30, 2002 was 38.5% compared to 37.5% for the three and nine months ended September 30, 2001. The increase in the effective tax rate was due to changes in state apportionment factors.

Extraordinary Loss

In connection with the pre-payment of debt, we recognized an extraordinary loss in the three and nine month period ended September 30, 2002 and the nine month period ended September 31, 2001 related to the write-off of deferred financing costs.

Net Income and Earnings Per Share

Net income for the third quarter 2002 was $25.1 million, or $0.83 per diluted share compared to net income of $25.7 million, or $0.83 per diluted share for the second quarter 2001. For the nine month period ended September 30, 2002, net income was $59.4 million, or $1.96 per diluted share compared to net income of $59.2 million, or $1.89 per diluted share for the nine month period ended September 30, 2001.

LIQUIDITY AND CAPITAL RESOURCES

On September 21, 2002, we entered into a definitive agreement to purchase all of the outstanding capital stock of SPA for $2.23 billion in cash, subject to a working capital adjustment. We intend to finance the Acquisition and repay certain existing indebtedness from the proceeds of financing commitments by Deutsche Bank, Salomon Smith Barney and Bear Stearns. In addition, in connection with the Acquisition, we will raise $200 million from the issuance to Goldman Sachs of 8% convertible preferred stock. The convertible preferred stock will initially be convertible at a price of $24.05, subject to adjustment, and will earn a cumulative dividend of 8%,

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compounded quarterly, which we can pay in cash or allow to accrue, at our option. Additionally, warrants to acquire 1.65 million shares of R.H. Donnelley common stock with an exercise price equal to the 30-day average of the stock price at closing will be issued to Goldman Sachs. We will use treasury shares to satisfy the conversion of Preferred Stock and exercise of the warrants.

Our primary source of liquidity is cash flows from revenue participation, priority distribution and sales commission payments received from SBC and Sprint. Additionally, at September 30, 2002, we had available $100 million under our existing $100 million Senior Revolving Credit Facility (the “Revolver”). In the event the Acquisition is not consummated, 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 the foreseeable future. Our primary sources of cash flow are directly dependent on the value of advertising sold and can be impacted by, among other factors, competition in our markets, general economic conditions and the level of demand for yellow pages advertising. In the event the Acquisition is not consummated, management believes that if aggregate 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 the foreseeable future. See “Forward-Looking Information – Risks Related to Pending Acquisition.”

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 little or no participation or influence, could have a material adverse effect on our results of operations or financial condition. See “Forward-Looking Information – Dependence on our Business Partners.”

Through September 2002, we generated $56.5 million of cash flow from operations, $11.9 million less than the $68.4 million generated through September 2001. During 2002, we made payments of $13.2 million related to the restructuring and special charge recorded in 2001 (see Note 5 in Item 1 “Financial Statements”) compared to payments of $8.4 million in 2001 for severance and other costs related to the disposition of the Bell Atlantic, Cincinnati and Get Digital Smart businesses in 2000. Also, in 2001 we received cash of $6.9 million from the CenDon Partnership as the partnership continued to collect its receivables and distribute cash to the partners, compared to only $0.2 million in 2002. As a result of the pending business acquisition of SPA, certain restructuring costs that we intended to incur have been delayed. Accordingly, cash payments related to the 2001 restructuring and special charge are expected to be minimal for the remainder of the year. However, our current intention is to still incur such costs, subject to further consideration as the closing of the SPA acquisition draws closer. At such time, we may determine that certain costs may not be incurred and, if so, will reverse the accrual for those costs at that time.

Cash used in investing activities during the first nine months of 2002 was $2.5 million, which consisted of fixed assets and computer software purchases. Cash used in investing activities for the prior year period was $4.8 million, which included a $1.6 million investment in ChinaBig in accordance with our contractual obligations. This payment represented our final required investment in ChinaBig. We currently have no material commitments for investment spending or capital expenditures.

Net cash used in financing activities was $58.8 million through September 2002 compared to $101.1 million through September 2001. The decrease in cash used for financing activities is primarily due to the repurchase of $58.2 million of our common stock during the first nine months of 2001 compared to no repurchases of our common stock during the first nine months of 2002. We suspended share repurchases under our share repurchase programs earlier in the year and do not intend to repurchase any of our common stock for the remainder of the year. Pending the closing of the Acquisition, free cash flow will either be retained in the business or used to repay debt.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Risk Management

We borrow funds under our Senior Secured Term Facilities (“Term Facilities”) and Revolver at prevailing short-term rates. To mitigate our exposure to fluctuating short-term interest rates, we have an outstanding interest rate swap with

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a notional value of $75 million whereby we pay a fixed rate and receive a variable rate based on 3-month LIBOR.

The outstanding interest rate swap exposes us to credit risk in the event that we are in a net gain position and the counterparty to the agreement does not, or cannot meet its obligation. The notional amount 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 swap agreement. At September 30, 2002, we were in a net loss position (see “Market Risk Sensitive Instruments” below), and therefore, were not exposed to credit risk. The counterparty to the swap is a major financial institution and, had we been in a net gain position, we would expect this counterparty to be able to perform its obligations under the swap. We use derivative financial instruments for hedging purposes only and not for trading or speculative purposes.

Market Risk Sensitive Instruments

The interest rate swap has been designated as a cash flow hedge. In accordance with FAS 133, the fair value of the swap is recognized in other comprehensive income, a component of shareholders’ equity. The fair value of the swap was based on quoted market prices. At September 30, 2002, the unrealized fair value, which is the difference between what we would have to pay to terminate the swap, and the book value of the swap, was a loss of $2.2 million ($1.4 million, after tax). This loss was recognized in the consolidated balance sheet as other non-current liabilities and accumulated other comprehensive loss, a component of shareholders’ deficit.

Item 4. Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures. Based on their evaluation, as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended), the principal executive officer and principal financial officer of the Company have each concluded that such disclosure controls and procedures are effective and sufficient to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms.

(b)

Changes in internal controls. Subsequent to their evaluation, there have not been any significant changes in the Company’s internal controls or in other factors that could significantly affect these controls, including any corrective action with regard to significant deficiencies and material weaknesses.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Rockland Yellow Pages. In 1999, Sandy Goldberg, Dellwood Publishing, Inc. and Rockland Yellow Pages (as “plaintiffs”) initiated a lawsuit against the Company and Bell Atlantic Corporation (as “defendants”) 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 we 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 District Court dismissed substantially all of plaintiffs’ claims, and in August 2001, the remaining claims were either withdrawn by the plaintiffs or dismissed by the District Court. The plaintiffs then filed a complaint against the same defendants in New York State Supreme Court, in Rockland County, alleging virtually the same state law tort claim previously dismissed by the District Court and seeking unspecified damages. In October 2001, defendants filed a motion to dismiss this complaint. On May 5, 2002, the Court granted defendants’ motion to dismiss the complaint. Plaintiffs have filed an appeal of this dismissal. Nonetheless, we presently do not believe that the final outcome of this matter will have a material adverse effect on our 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 The Dun & Bradstreet Corporation (“D&B”), ACNielsen Company and IMS International Inc., at the time of the filing, all wholly owned subsidiaries of D&B, as defendants

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(the “IRI Action”). IRI alleges, among other things, various violations of the antitrust laws, including alleged violations of Sections 1 and 2 of the Sherman Act. The complaint also alleges a claim of tortious interference with a contract and a claim of tortious interference with a prospective business relationship. These claims relate to the acquisition by defendants of Survey Research Group Limited (“SRG”). IRI alleges SRG violated an alleged agreement with IRI when it agreed to be acquired by the defendants and that the defendants induced SRG to breach that agreement. IRI is seeking damages in excess of $350,000, which amount IRI seeks to treble under antitrust laws. IRI is also seeking punitive damages of an unspecified amount. No trial date has been set and discovery is ongoing. Under the definitive agreement entered into in connection with our separation from D&B in 1998 (the “Distribution Agreement”), D&B assumed the defense and agreed to indemnify us against any payments that we may be required to make, including related legal fees. As required by the Distribution Agreement, Moody’s Corporation, which subsequently separated from D&B, agreed to be jointly and severally liable with D&B for the indemnity obligation to us. At this stage in the proceedings, we are unable to predict the outcome of this matter. While no assurances can be provided, we currently believe that D&B and Moody’s have sufficient financial resources and borrowing capacity to reimburse us for any payments we make and related costs we incur.

Tax Matters. Certain tax planning strategies entered into by D&B are currently subject to review by tax authorities. As a result of the form of our separation from D&B, we are the corporate successor of, and technically the taxpayer referred to below as D&B. However, under the terms of the Distribution Agreement and the Tax Allocation Agreement with D&B, D&B agreed to assume the defense and to indemnify us for any tax liability that may be assessed and any related costs and expenses we incur. Also, as required by the Distribution Agreement, Moody’s Corporation is jointly and severally liable with D&B for the indemnity obligation to us. Under the terms of a series of agreements between D&B, IMS Health Incorporated (“IMS”) and Nielsen Media Research, Inc. (“NMR”) (both former subsidiaries of D&B), D&B is required to pay the first $137,000 of any tax liability and accrued interest assessed by the tax authorities with respect to certain tax matters (including those discussed in detail below), as well as other tax liabilities. Any amount in excess of $137,000 will be paid 50% by IMS and NMR jointly and severally and 50% by D&B.

In 2000, D&B filed an amended tax return with respect to the utilization of capital losses in 1989 and 1990 in response to a formal IRS assessment. The amended tax return reflected an additional $561,600 of tax and interest due. In 2000, D&B paid the IRS $349,300 while IMS (on behalf of itself and NMR) paid the IRS approximately $212,300. We understand that this payment was made under dispute in order to stop additional interest from accruing, that D&B is contesting the IRS’s formal assessment and would also contest the assessment of amounts, if any, in excess of the amounts paid, and that D&B has filed a petition for a refund in the United States District Court. This case is expected to go to trial in 2004.

In connection with that IRS assessment and amended tax return, IMS has filed an arbitration proceeding against NMR claiming that NMR subsequently underpaid to IMS its proper allocation of the above-referenced tax liability under the agreements between NMR and IMS, to which neither D&B nor we are party. IMS has included us as a respondent in the arbitration proceeding so that if NMR prevails in its interpretation of the allocation computation, then IMS could apply that same interpretation of the allocation computation against us under its agreement with us (as successor to D&B). The arbitration panel has ruled that we are a proper party to the arbitration. Hearings before the arbitration panel on the merits are scheduled for December 2002. As required by the Distribution Agreement and Tax Allocation Agreement, D&B and Moody’s are defending us in this arbitration proceeding at their cost and expense. If NMR prevails in the arbitration against IMS and in turn IMS prevails against us, we believe that our additional liability under this alternative interpretation of the allocation computation would be approximately $15,000 (a $60,000 gross claim offset by approximately $45,000 of tax benefit). While we believe that the original interpretation of the allocation computation is correct and the claims of IMS are without merit, if NMR prevails against IMS and in turn IMS prevails against us in this arbitration proceeding, D&B and Moody’s would be jointly and severally obligated to indemnify us against any such liability.

We believe that 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 our risk. While no assurances can be given, we currently believe that D&B and Moody’s have sufficient financial resources and borrowing capacity to reimburse us for any payments we make and related costs we incur.

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During the second quarter of 2002, D&B received a Notice of Proposed Adjustment from the IRS with respect to a transaction entered into in 1993. In this Notice, the IRS proposed to disallow certain royalty expense deductions claimed by D&B on its 1994, 1995 and 1996 tax returns. The IRS previously concluded an audit of this transaction for taxable years 1993 and 1994 and did not disallow any similarly claimed deductions. We understand that D&B disagrees with the position taken by the IRS in its Notice and has filed a responsive brief to this effect with the IRS. If the IRS were to issue a formal assessment consistent with the Notice, then a payment of the disputed amounts would be required if D&B opted to challenge the assessment in U.S. District Court rather than in U.S. Tax Court. In the event of such a challenge by D&B, the required payment by D&B to the IRS would be up to $42,000 (net of $6,000 of associated tax benefit). In recent communications between D&B and the IRS, we understand that the IRS has expressed some willingness to withdraw its proposed disallowance of certain royalty expense deductions of $7,500 for 1994. However, we also understand that the IRS has expressed its intent to seek penalties of $7,500 for 1995 and 1996 based on its interpretation of applicable law. We are advised that D&B would challenge the IRS’ interpretation. Again, as required by the Distribution Agreement and Tax Allocation Agreement, D&B and Moody’s are required to joint and severally indemnify us against any such liability.

We understand that the IRS has sought certain documentation from D&B with respect to a transaction entered into in 1997 that produces amortization expense deductions for D&B. While D&B believes the deductions are appropriate, it is possible that the IRS may challenge them and issue an assessment. If the IRS were to prevail in its challenge, D&B estimates that its liability to the IRS (including possible penalties) could be up to $41,000 (net of $3,000 of associated tax benefit). This transaction is scheduled to expire in 2012 and unless earlier terminated by D&B, the exposure would increase approximately $1,700 per quarter as additional amortization expenses are deducted. Again, as required by the Distribution Agreement and Tax Allocation Agreement, D&B and Moody’s are required to joint and severally indemnify us against any such liability.

As a result of our assessment of our exposure in these matters, especially in light of the indemnity arrangements with D&B and Moody’s, no material amounts have been accrued in the consolidated financial statements for any of these matters.

Other matters. We are also involved in other legal proceedings, claims and litigation arising in the ordinary conduct of our business. Although there can be no assurances, we currently believe that the outcome of such legal proceedings will not have a material adverse effect on our results of operations or financial condition.

Item 6. Exhibits and Reports on Form 8-K

         (a)  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

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Exhibit No.	Document
	Guarantor, and the Bank of New York, as Trustee, with respect to the 91/8% 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 91/8% 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)
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)

26

Exhibit No.	Document
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)
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	Agreement for Publishing Services, dated as of January 1, 2002 between Ameritech Publishing Inc. and R.H. Donnelley Inc. (certain portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to an Application for an Order Granting Confidential Treatment) (incorporated by reference to Exhibit 10.13 to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2002, Commission File No. 001-07155)
10.14	Limited Liability Company Agreement of CenDon, L.L.C. dated April 27, 2000 between R.H. Donnelley Inc. and Centel Directory Company (certain portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to an Application for an Order Granting Confidential Treatment) (incorporated by reference to Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2002, Commission File No. 001-07155)
10.15	Sales Agency Agreement dated April 27, 2000 among R.H. Donnelley Inc., Centel Directory Company and CenDon, L.L.C. (incorporated by reference to Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2002, Commission File No. 001-07155)

27

Exhibit No.	Document
10.16	Agreement for Publishing Services dated April 27, 2000 between R.H. Donnelley and CenDon, L.L.C. (certain portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to an Application for an Order Granting Confidential Treatment) (incorporated by reference to Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2002, Commission File No. 001-07155)
10.17^	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)
10.18^	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)
10.19^	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)
10.20^	Pension Benefit Equalization Plan (incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, Commission File No. 001-07155)
10.21^	2001 Stock Award and Incentive Plan (incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, Commission File No. 001-07155)
10.22^	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)
10.23^	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)
10.24^	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)
10.25^	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)
10.26^	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)
10.27^	Amended and Restated Employment Agreement dated as of December 27, 2001 between the Company and Frank R. Noonan (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, Commission File No. 001-07155)

28

Exhibit No.	Document
10.28^	Amended and Restated Employment Agreement dated as of December 27, 2001 between the Company and Philip C. Danford (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, Commission File No. 001-07155)
10.29^	Employment Agreement effective as of May 1, 2002 between the Company and David C. Swanson (incorporated by reference to Exhibit 10.29 to the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2002, Commission File No. 001-07155)
10.30^*	Employment Agreement effective September 21, 2002 between the Company and Peter J. McDonald.
10.31^	Employment Agreement effective March 1, 2002 between the Company and Steven M. Blondy (incorporated by reference to Exhibit 10.30 to the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2002, Commission File No. 001-07155)
10.32^	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)
10.33^	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)
10.34^	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)
10.35^	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)
10.36^	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)
10.37^	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)
10.38^	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)
10.39^	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)

29

Exhibit No.	Document
10.40	Stock Purchase Agreement, dated as of September 21, 2002, by and among R.H. Donnelley Corporation, Sprint Corporation and Centel Directories LLC (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K dated October 1, 2002, Commission File No. 001-07155)
10.41	Preferred Stock and Warrant Purchase Agreement, dated as of September 21, 2002, among R.H. Donnelley Corporation and Goldman Sachs Capital Partners 2000, L.P. and entities affiliated therewith (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K dated October 1, 2002, 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)
99.1*	Certification of Quarterly Report on Form 10-Q for the period ended September 30, 2002 by David C. Swanson, Chief Executive Officer
99.2*	Certification of Quarterly Report on Form 10-Q for the period ended September 30, 2002 by Steven M. Blondy, Senior Vice President and Chief Financial Officer

* Filed herewith

^ Management contract or compensatory plan

30

(b)	Reports on Form 8-K:
	On November 8, 2002, the Company filed a Current Report on Form 8-K, disclosing under Item 9 that at a conference held on November 7, 2002, a representative of R.H. Donnelley Corporation stated that the Company does not intend to repay the outstanding 9 1/8% senior subordinated notes due 2008 of R.H. Donnelley Inc. in connection with the financing of the Company’s acquisition of the publishing business of Sprint Corporation.
	On November 7, 2002, the Company filed a Current Report on Form 8-K, disclosing under Item 5 that R.H. Donnelley Inc. intends to offer, through a subsidiary, $300 million of senior notes and $450 million of senior subordinated notes to certain institutional investors in an offering exempt from the registration requirements of the Securities Act of 1933. Pursuant to Rule 135c of the Securities Act, the Company filed the press release issued on November 6, 2002 as Exhibit 99.1.
	On October 1, 2002, the Company filed a Current Report on Form 8-K, disclosing under Item 5 that pursuant to a Stock Purchase Agreement, dated as of September 21, 2002, by and among R.H. Donnelley Corporation, Sprint Corporation and Centel Directories LLC, the Company will purchase Sprint’s directory publishing business (“SPA”) for $2.23 billion in cash. The Company also disclosed that Goldman Sachs Capital Partners 2000, L.P. and affiliated entities have entered into a definitive agreement to invest $200 million in the Company through the purchase of the Company’s newly issued convertible preferred stock. Goldman Sachs Capital Partners will also receive warrants to acquire 1.65 million shares of the Company’s common stock with an exercise price equal to the 30-day average of the common stock at the closing.
	On September 23, 2002, the Company filed a Current Report on Form 8-K, disclosing under Item 9 that the Company had posted a slide presentation on its website titled “Creating the Leading Public Stand-Alone U.S. Directory Company” in connection with the Company’s public announcement and related conference call that it had entered into a definitive agreement to purchase Sprint Corporation’s directory publishing business.

31

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		R.H. DONNELLEY CORPORATION
Date: November 8, 2002	By:	/s/ Steven M. Blondy
		Steven M. Blondy Senior Vice President and Chief Financial Officer
Date: November 8, 2002	By:	/s/ William C. Drexler
		William C. Drexler Vice President and Controller

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		R.H. DONNELLEY INC.
Date: November 8, 2002	By:	/s/ Steven M. Blondy
		Steven M. Blondy Senior Vice President and Chief Financial Officer
Date: November 8, 2002	By:	/s/ William C. Drexler
		William C. Drexler Vice President and Controller

32

CERTIFICATIONS

I, David C. Swanson, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of R.H. Donnelley Corporation;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors or persons performing the equivalent function:

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 8, 2002	By:	/s/ David C. Swanson
		David C. Swanson President and Chief Executive Officer

33

CERTIFICATIONS

I, Steven M. Blondy, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of R.H. Donnelley Corporation;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors or persons performing the equivalent function:

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 8, 2002	By:	/s/ Steven M. Blondy
		Steven M. Blondy Senior Vice President and Chief Financial Officer

34 EX-10.30 3 y65286exv10w30.htm EX-10.30: EMPLOYMENT AGREEMENT

Exhibit 10.30

         EMPLOYMENT AGREEMENT effective as of September 21, 2002 by and between R.H. Donnelley Corporation, a Delaware corporation (the “Company”), and Peter J. McDonald (the “Executive”).

         WHEREAS, the Compensation and Benefits Committee of the Board of Directors has determined it to be in the Company’s best interest to offer Executive an employment agreement on substantially the same terms as other senior executives of the Company; and

         WHEREAS, Executive desires to commence employment with the Company upon the terms and conditions hereinafter set forth in this agreement (this “Agreement”);

         NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the validity and sufficiency of which is hereby acknowledged, the parties agree as follows:

         1.     Term of Employment. Subject to the provisions of Section 8 of this Agreement, Executive shall be employed by the Company for a period (the “Employment Term”) commencing on the date hereof (the “Commencement Date”) and ending on the first anniversary of the Commencement Date. On the first anniversary of the Commencement Date and each succeeding anniversary thereof, the Employment Term shall automatically be extended for one additional year unless, not later than ninety days prior to such anniversary, the Company or the Executive shall have given notice of its or his intention not to extend the Employment Term. Any such non-renewal of this Agreement by the Company shall be treated as a termination of Executive’s employment without Cause, as hereinafter defined.

         2.     Position. (a) Executive shall serve as a Senior Vice President of the Company and as President of Donnelley Media. In such position, Executive shall have such duties and authority commensurate with such position and, to the extent not inconsistent with the foregoing, as shall be determined from time to time by the Chief Executive Officer of the Company and/or the Board of Directors of the Company (the “Board”). Executive shall be employed as the senior most operational officer of the Company (other than the CEO) and shall report directly to the Chief Executive Officer.

         (b) During the Employment Term, except as otherwise agreed in writing between the parties, Executive will devote substantially all of his business time and best efforts to the performance of his duties hereunder and will not engage in any other business, profession or occupation for compensation or otherwise which would conflict with the rendition of such services either directly or indirectly, without the prior written consent of the Board; provided that nothing herein shall be deemed to preclude Executive from serving on business, civic or charitable boards or committees, as long as such activities do not materially interfere with the performance of Executive’s duties hereunder.

         3.     Base Salary. Company shall pay Executive an annual base salary (the “Base Salary”) at the initial annual rate of $375,000, payable in equal bi-monthly installments or otherwise in accordance with the payroll and personnel practices of the Company in effect from time to time. Base Salary shall be reviewed annually by the Board or a committee thereof to which the Board may from time to time have delegated such authority (the “Committee”) for possible increase (but not decrease) in the sole discretion of the Board or the Committee, as the case may be.

         4.     Bonus. With respect to each fiscal year all or part of which is contained in the Employment Term, Executive shall be eligible to participate in the Company’s Annual Incentive Program under the 2001 Stock Award and Incentive Plan or any successor program or plan thereto or thereunder, with a target bonus opportunity of 65% of Base Salary (the “Bonus”). The Bonus may be paid in cash, shares of Common Stock (or derivatives thereof) or a combination of both, and will be governed by the applicable AIP award agreements.

         5.     Additional Compensation. As further compensation, Executive will be eligible for participation in all other bonuses, long-term incentive compensation and stock options and other equity participation arrangements made available generally to senior executives of the Company, on terms and conditions substantially similar to those offered to other senior executives of the Company, and with respect to those programs addressed therein, at no less attractive a level in the aggregate as set forth in the letter to you from Dave Swanson dated August 20, 2002 (the “Offer Letter”) attached hereto as Exhibit A. In the event of any conflict or inconsistency between the provisions of the Offer Letter and of this Agreement, the terms and conditions of this Agreement shall control.

         6.     Employee Benefits. During the Employment Term, Executive shall be eligible for employee benefits (including perquisites, fringe benefits, vacation, pension and profit sharing plan participation and life, health, accident and disability insurance) made available generally to senior executives of the Company, on terms and conditions substantially similar to those offered to other senior executives of the Company, and with respect to those programs addressed in the Offer Letter, at no less attractive a level in the aggregate as set forth in the Offer Letter.

         7.     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 in effect from time to time.

         8.     Termination of Employment. Each of Executive and the Company may terminate the employment of Executive hereunder at any time in accordance with this Section 8. Executive’s entitlements hereunder in the event of any such termination shall be as set forth in this Section 8. The provisions of this Section 8 (and any related provision of Section 10) shall survive any non-renewal of this Agreement by the Company pursuant to Section 1. With respect to any termination of employment (voluntary or otherwise), any and all (i) accrued but unused vacation and (ii) earned but unpaid bonus (with respect to any full performance period) will be paid at the same time as other payments provided for herein.

2

         (a)  For Cause by the Company. If Executive’s employment is terminated by the Company for Cause, he shall be entitled to receive his Base Salary through the Date of Termination, as hereinafter defined. All other benefits due Executive following Executive’s termination of employment pursuant to this Section 8(a) shall be determined in accordance with the then-existing plans, policies and practices of the Company.

         (b)  Death or Disability. Executive’s employment hereunder shall terminate upon his death and may be terminated by the Company upon his Disability during the Employment Term. Upon termination of Executive’s employment hereunder upon the Executive’s Disability or death, Executive or his estate (as the case may be) shall be entitled to receive Base Salary through the Date of Termination, plus a pro-rata portion of target Bonus, based on the number of whole or partial months from the beginning of the bonus period to the Date of Termination. In addition, if Executive’s employment is terminated as a result of Disability, Executive shall continue to be eligible to participate in all health, medical and dental benefit plans of the Company, until age 65 in accordance with the terms, conditions and elections, if any, applicable to or in effect with respect to Executive at the Date of Termination.

         (c)  Termination Not Following a Change in Control. If, during the Employment Term and prior to a Change in Control or more than two years after a Change in Control, Executive’s employment is terminated by the Company without Cause, or by Executive under subclauses (i), (ii) or (iii) of the definition of Good Reason, Executive shall be entitled to the following:

         (i) Base Salary through the Date of Termination at the rate in effect at the time of Notice of Termination, as defined in Section 8(g) herein, is given, or if higher, at the rate in effect immediately prior to the event or circumstance leading to the termination of employment, plus a pro rata (number of days employed during calendar year divided by 360) portion of the target Bonus, plus all other amounts to which Executive is entitled under any then-existing compensation or benefit plan of the Company.

         (ii) In lieu of any further salary payments to Executive for periods subsequent to the Date of Termination, the Company shall pay as severance pay, not later than the fifth business day following the Date of Termination, a severance payment (the “Severance Payment”) equal to two times the sum of (A) Base Salary at the rate in effect on the date Notice of Termination is given, or if higher, at the rate in effect immediately prior to the event or circumstance leading to the termination of employment, plus (B) target Bonus at the rate in effect on the date of the Notice of Termination is given, or if higher, at the rate in effect immediately prior to the event or circumstance leading to the termination of employment without Cause, paid in lump sum without reduction for time value of money.

         (iii) Continued eligibility to participate in all health, medical and dental benefit plans of the Company for which Executive was eligible immediately prior to the time of the Notice of Termination, or comparable coverage, for two years, or, if sooner, until comparable health insurance coverage is available to Executive in connection with subsequent employment or self-employment. The coverage for which Executive shall

3

continue to be eligible under this Section shall be made available at no greater cost or tax cost to Executive than that applicable to Executive at the time of termination of employment.

         (iv) Term life insurance equivalent in coverage, and at no greater cost or tax cost to Executive, to that elected by Executive at the time of the Notice of Termination, until the last day of the second calendar year beginning after termination of employment, or, if sooner, until comparable life insurance coverage is available to Executive in connection with subsequent employment or self-employment.

         (d)  Termination Within Two Years Following a Change in Control. If, during the Employment Term and within two years following a Change in Control, Executive’s employment is terminated by the Company without Cause, or by the Executive for Good Reason, as hereinafter defined, Executive shall be entitled to the payments and benefits set forth in Section 8(c), except that for purposes of this Section 8(d), references in such Section to “two times” or “ two years” shall be changed to “three times” and “three years.” In addition, Executive shall be entitled to receive, for the three years following termination of employment or, if sooner, until subsequently employed or self-employed, (i) all perquisites and similar benefits he was receiving immediately prior to the time of Notice of Termination, (ii) reimbursement of expenses relating to financial planning services, up to a maximum amount per year equal to the average of such amounts paid to Executive for the two calendar years preceding the Date of Termination and (iii) reimbursement of expenses relating to outplacement services, subject to a maximum reimbursement under this clause (iii) of $25,000. For purposes of this Agreement, termination of employment after the commencement of negotiations with a potential acquiror or business combination partner but prior to an actual Change of Control shall be deemed to be a termination of employment within two years following a Change in Control if such negotiations subsequently result in a transaction with such acquiror or business combination partner which constitutes a Change in Control.

         (e)  Retirement. If during the Employment Term, Executive retires at normal retirement age under the Company’s qualified pension plan or any successor plan, Executive shall be entitled to the payments and benefits specified in Section 8(b) as if his employment had terminated as a result of Disability.

         (f)  Voluntary Termination of Employment. If during the Employment Term, Executive terminates his employment under circumstances other than those specified elsewhere in this Section 8, Executive shall be entitled to the payments and benefits specified in Section 8(a).

         (g)  Notice and Date of Termination. (i) Any purported termination of employment by the Company or by Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 17(i) hereof. For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall indicate (by reference to specific Section and sub-section numbers and letters, for example, Section 8(d)) the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so

4

indicated. If the event or circumstance on which the proposed termination of employment is based is susceptible of cure, the Notice of Termination shall not be deemed effective until Executive or the Company, as the case may be, has had at least 30 days to effect such cure, and unless such event or circumstance persists at the end of such cure period.

         (ii) “Date of Termination” shall mean (A) if employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that Executive shall not have returned to the full-time performance of his duties during such thirty (30) day period), (B) if employment is terminated by reason of death, the date of death, and (C) if employment is terminated for any other reason, subject to the effectiveness of notice and “cure” provisions of clause (i) above, the date specified in the Notice of Termination (which, in the case of a termination of employment by the Company for Cause shall not be less than ten (10) days after the date such Notice of Termination is given); provided that if within thirty (30) days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence; and provided, further that in the event Executive gives Notice of Termination for Good Reason based upon any matter referred to in clause (ii) of the definition of Good Reason, and it is thereafter determined that said grounds do not constitute Good Reason, then so long as Executive reasonably believed in good faith that he had grounds for termination of employment for Good Reason, the Company may not terminate Executive’s employment for Cause based upon such matters.

         (h)  Any provision of this Agreement to the contrary notwithstanding, Executive shall be obligated to execute a general release of claims in favor of the Company, substantially in the form attached hereto as Exhibit B, as a condition to receiving benefits and payments under Sections 8(c) or 8(d) of this Agreement.

         (i)  Notwithstanding anything to the contrary set forth herein, the following provisions of this Agreement shall survive any termination of Executive’s employment hereunder and/or termination of this Agreement: Sections 8, 10, 11, 12, 13, 14, 15, 16 and 17(f) and (g).

         9.     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 for Good Reason, as hereinafter defined), (ii) any willful act or omission by the Executive constituting dishonesty, fraud or other malfeasance, which in any such case is demonstrably (and, in the case of other malfeasance, materially) injurious to the financial condition or business reputation of the Company or any of its affiliates, or (iii) the Executive’s conviction of a felony under the laws of

5

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:

         (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, 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, 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.

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         (c)  “Disability” shall mean the 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 the Agreement.

         (d)  “Good Reason” means:

         (i) Removal from, or failure to be reappointed or reelected to, Executive’s position as specified in Section 2 (other than as a result of a promotion); or

         (ii) Material diminution in Executive’s title, position, duties or responsibilities, re-assignment of Executive’s reporting relationship to anyone other than the Chief Executive Officer, or the assignment to Executive of duties that are inconsistent, in a material respect, with the scope of duties and responsibilities associated with Executive’s position as specified in Section 2; or

         (iii) Reduction in Base Salary or target or maximum Bonus opportunity, reduction in level of participation in long term incentive, stock option and other equity award, benefit and other plans for executive officers; or

         (iv) Relocation of the executive’s principal workplace without his consent to a location outside the Detroit metropolitan area; or

         (v) Other material breach of this Agreement by the Company.

         10.     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 no later than the due date for Executive’s tax return with respect to such Excise Tax (the “Gross-Up Payment”) such that the net amount retained by the 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 the Executive’s Base Amount, as defined in section 280G(b)(3) of the Code, the Executive shall not be entitled to the Gross-Up Payment, and the Total Payments shall be reduced as provided for in Section 10(d) below.

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         (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, the 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 10), 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 the 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). 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 the Executive with respect to such excess) at the time that the amount of such excess is finally determined. The 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 the 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. Unless Executive shall have given prior written notice to the Company specifying a different order, the

8

Company shall reduce or eliminate the payments or benefits by first reducing or eliminating the portion of the payments or benefits that are not payable in cash and then by reducing or eliminating cash payments, in each case, in reverse chronological order, starting with payments or benefits that are to be paid farthest in time from the applicable determination of the Auditor (as defined below). Any written notice given by Executive pursuant to the preceding sentence shall take precedence over the provisions of any plan, agreement or arrangement governing Executive’s entitlement and rights to such payments or benefits.

         (e)  All determinations under this Section 10 shall be made by a nationally recognized accounting firm selected by the Executive (the “Auditor”), and the Company shall pay all costs and expenses of the Auditor. The Company shall cooperate in good faith in making such determinations and in providing the necessary information for this purpose.

         11.     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 the Commencement Date, 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 11 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.

         12.     Non-Competition. Executive acknowledges and recognizes the highly competitive nature of the businesses of the Company and its affiliates and accordingly agrees that

         (a)  during the Employment Term:

         (i) Executive will not directly or indirectly engage in any business which is in competition with any line of business then 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

9

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 then conducts any such competing line of business; and

         (ii) 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; and

         (ii) Executive will not directly or indirectly solicit customers or suppliers of the Company or its affiliates or induce any such person to materially reduce or terminate its relationship with the Company.

         (f)  for one year following the Employment Term:

         (i) Executive will not directly or indirectly engage in any local directional advertising or marketing (whether in print, electronic, wireless or other format) business or provide pre-press publishing or utilize digital and intranet technologies to repurpose print directory information for electronic, wireless or related distribution, in each case which is in competition with the business then conducted by the Company or its affiliates, whether such engagement is as an officer, director, proprietor, employee, partner, investor (other than as a holder of less than 5% 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 then conducts any such competing line of business; and

         (ii) 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; and

         (iii) Executive will not directly or indirectly solicit customers or suppliers of the Company or its affiliates or induce any such person to materially reduce or terminate its relationship with the Company.

         For purposes of this Agreement, “directional advertising or marketing” shall mean advertising or marketing primarily (1) designed for purposes of directing consumers who are seeking a product or service to providers of that product or service in order to satisfy such consumer’s previously

10

recognized need or desire for such product or service and (2) generally delivered by non-intrusive means; and shall be distinguished from “creative advertising or marketing,” which is primarily (1) designed to stimulate (as opposed to direct) demand for products or services in consumers who did not previously recognize such need or desire for such products or services and (2) generally delivered by intrusive means.

         It is expressly understood and agreed that although Executive and the Company consider the restrictions contained in this Section 12 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.

         13.     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 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 knowingly disparage the reputation of the Company in a manner that causes or is reasonably likely to cause material harm to its business; provided, however, that Executive may (i) express his own opinions about the Company to other senior executives of the Company or to the Board and (ii) comply with applicable legal process, in each case without being deemed to have violated this provision.

         14.     Material Inducement; Specific Performance. Executive acknowledges and agrees that the covenants entered into by Executive in Sections 12 and 13(a) are essential elements of the parties’ agreement as expressed herein, are a material inducement for the Company to enter

11

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 12 or Section 13(a) 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.

         15.     Litigation Support. Executive agrees that he will assist and cooperate with the Company, at the Company’s sole cost and expense and, in the case of post-termination, in a manner so as to not unreasonably interfere with any other employment obligations of Executive, 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, at the Company’s sole cost and expense and, in the case of post-termination, in a manner so as to not unreasonably interfere with any other employment obligations of Executive. If Executive determines in good faith that separate counsel is necessary in connection with its compliance with this Section 15, then the Company shall pay all reasonable fees and expenses of such counsel retained by Executive in connection herewith. Following Executive’s termination of employment, this covenant shall expire and be of no further force or effect upon the later to occur of (a) one year following such termination of employment and (b) in the event of termination of employment under Sections 8(c) or (d), the maximum number of years following such termination specified in the applicable sub-section during which Executive is eligible to continue to participate in the Company’s benefit plans.

         16.     Legal Fees. The Company will pay or reimburse Executive, as incurred, all legal fees and costs incurred by Executive in enforcing his rights under the 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.

         17.     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. 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

12

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 17(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 except as provided for in Sections 8(c) and (d).

         (g)  Arbitration. Any dispute between the parties to this Agreement arising from or relating to the terms of this Agreement (other than as specified under Section 14 with respect to Sections 12 and 13(a) hereof) 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

13

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, distributees, 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 the 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.

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         IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the latest date indicated below.

	Peter J. McDonald
Date:
	/s/ Peter J. McDonald
	R.H. DONNELLEY CORPORATION
Date:
	By:	/s/ Debra M. Ryan
		Name: Debra M. Ryan Title: Vice President – Human Resources

15 EX-99.1 4 y65286exv99w1.htm EX-99.1: CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Exhibit 99.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the Quarterly Report on Form 10-Q of R.H. Donnelley Corporation (the “Company”) for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officer’s knowledge:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

/s/ David C. Swanson

David C. Swanson
Chief Executive Officer
November 8, 2002

35 EX-99.2 5 y65286exv99w2.htm EX-99.2: CERTIFICATION / VICE PRESIDENT AND C.F.O.

Exhibit 99.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the Quarterly Report on Form 10-Q of R.H. Donnelley Corporation (the “Company”) for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officer’s knowledge:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

/s/ Steven M. Blondy

Steven M. Blondy
Senior Vice President and Chief Financial Officer
November 8, 2002

36 -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.30

EX-10.30: EMPLOYMENT AGREEMENT

EX-99.1

EX-99.1: CERTIFICATION OF CHIEF EXECUTIVE OFFICER

EX-99.2

EX-99.2: CERTIFICATION / VICE PRESIDENT AND C.F.O.