-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vx5Y5MgZcgFNSAxBikXdhWj+T1xV+GShZ7vUWTUrjWqMyklGG5UA6CYyCo8IyvJ+ JkrHdiPuZFmHv7EOBB4X1w== 0001157523-03-004237.txt : 20030814 0001157523-03-004237.hdr.sgml : 20030814 20030813191849 ACCESSION NUMBER: 0001157523-03-004237 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: R H DONNELLEY CORP CENTRAL INDEX KEY: 0000030419 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING [7310] IRS NUMBER: 132740040 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07155 FILM NUMBER: 03842986 BUSINESS ADDRESS: STREET 1: ONE MANHATTANVILLE ROAD CITY: PURCHASE STATE: NY ZIP: 10577 BUSINESS PHONE: 9149336800 MAIL ADDRESS: STREET 1: ONE MANHATTANVILLE ROAD CITY: PURCHASE STATE: NY ZIP: 10577 FORMER COMPANY: FORMER CONFORMED NAME: DUN & BRADSTREET CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: DUN & BRADSTREET COMPANIES INC DATE OF NAME CHANGE: 19790429 10-Q 1 a4453591.txt RH DONNELLEY 10Q 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 June 30, 2003 ------------- 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 by check mark whether registrant is an accelerated filer 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 August 1, 2003 -------------- ------------------------------------ Common Stock, par value $1 per share 30,775,088 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. In addition, R.H. Donnelley Inc. is the obligor of 8 7/8% senior notes due 2010 and 10 7/8% senior subordinated notes due 2012. As of August 1, 2003, 100 shares of R.H. Donnelley Inc. common stock, no par value, were outstanding. 1
R.H. DONNELLEY CORPORATION INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION PAGE - ----------------------------------- ---- Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets at June 30, 2003 and December 31, 2002.......... 3 Consolidated Statements of Operations for the three and six months ended 4 June 30, 2003 and 2002...................................................... Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002...................................................... 5 Notes to Consolidated Financial Statements.................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................... 21 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................... 32 Item 4. Controls and Procedures............................................................. 33 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................................... 33 Item 4 Submission of Matters to a Vote of Security Holders................................. 37 Item 6. Exhibits and Reports on Form 8-K.................................................... 38 SIGNATURES..................................................................................... 47
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R.H. Donnelley Corporation and Subsidiaries Consolidated Balance Sheets (Unaudited) June 30, December 31, (in thousands, except share and per share data) 2003 2002 - ------------------------------------------------------------------------------------------- ----------------- ---------------- Assets Current Assets Cash and cash equivalents........................................................... $ -- $ 7,787 Restricted cash..................................................................... -- 1,928,700 ----------------- ---------------- Total cash, cash equivalents and restricted cash............................... -- 1,936,487 Accounts receivable Billed............................................................................ 52,990 -- Unbilled.......................................................................... 249,319 31,978 Allowance for doubtful accounts and sales allowances.............................. (31,300) (4,772) ----------------- ---------------- Net accounts receivable........................................................ 271,009 27,206 Deferred directory costs............................................................ 40,098 -- Other current assets................................................................ 7,353 4,981 ----------------- ---------------- Total current assets........................................................... 318,460 1,968,674 Fixed assets and computer software - net............................................ 21,907 12,008 Partnership investment.............................................................. 179,912 202,236 Other non-current assets............................................................ 92,547 40,457 Intangible assets, net.............................................................. 1,890,084 -- Goodwill............................................................................ 94,858 -- ----------------- ---------------- Total Assets................................................................... $ 2,597,768 $ 2,223,375 ----------------- ---------------- Liabilities, Redeemable Convertible Preferred Stock and Shareholders' Deficit Current Liabilities Accounts payable and accrued liabilities............................................ $ 21,827 $ 9,043 Deferred directory revenue.......................................................... 208,975 -- Accrued interest payable............................................................ 6,016 11,218 Current portion of long-term debt................................................... 59,729 13,780 ----------------- ---------------- Total current liabilities...................................................... 296,547 34,041 Long-term debt...................................................................... 2,146,584 2,075,470 Deferred income taxes - net......................................................... 19,020 60,783 Other non-current liabilities....................................................... 15,892 20,222 ----------------- ---------------- Total liabilities.............................................................. 2,478,043 2,190,516 Commitments and contingencies Redeemable convertible preferred stock (redemption value at June 30, 2003, $208,572).. 189,797 63,459 Shareholders' Deficit Common stock, par value $1 per share, authorized - 400,000,000 shares; issued - 51,621,894 shares for 2003 and 2002.................. 51,622 51,622 Additional paid-in capital.......................................................... 126,477 63,586 Warrants outstanding................................................................ 13,758 5,330 Accumulated (deficit) earnings...................................................... (94,625) 13,605 Other comprehensive loss............................................................ (3,257) -- Treasury stock, at cost, 20,895,914 shares for 2003 and 21,900,818 shares for 2002.. (164,047) (164,743) ----------------- ---------------- Total shareholders' deficit.................................................... (70,072) (30,600) ----------------- ---------------- Total Liabilities, Redeemable Convertible Preferred Stock and Shareholders' Deficit....................................... $ 2,597,768 $ 2,223,375 ----------------- ---------------- The accompanying notes are an integral part of the consolidated financial statements.
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R.H. Donnelley Corporation and Subsidiaries Consolidated Statements of Operations (Unaudited) Three months ended Six months ended June 30, June 30, ----------------------------- ---------------------------- (amounts in thousands, except per share data) 2003 2002 2003 2002 - --------------------------------------------------- ---------------- ------------ ------------- -------------- Net revenue.................................. $ 38,634 $ 19,894 $ 51,053 $ 38,721 Expenses Operating expenses........................ 34,862 14,088 66,795 25,755 General and administrative expenses....... 12,206 4,720 22,216 9,765 Depreciation and amortization............. 16,443 1,557 32,471 3,164 ---------------- ------------ ------------- -------------- Total expenses.......................... 63,511 20,365 121,482 38,684 Partnership income........................... 35,341 40,864 58,974 68,012 ---------------- ------------ ------------- -------------- Operating income (loss)................. 10,464 40,393 (11,455) 68,049 Interest expense, net........................ (43,253) (5,973) (91,928) (12,194) Other income................................. 723 -- 1,523 -- ---------------- ------------ ------------- -------------- (Loss) income before income taxes....... (32,066) 34,420 (101,860) 55,855 (Benefit) provision for income taxes......... (13,155) 13,251 (41,762) 21,504 ---------------- ------------ ------------- -------------- Net (loss) income....................... (18,911) 21,169 (60,098) 34,351 Preferred dividend........................... 5,978 -- 48,132 -- ---------------- ------------ ------------- -------------- Net (loss) income available to common shareholders.......................... $ (24,889) $ 21,169 $ (108,230) $ 34,351 ---------------- ------------ ------------- -------------- Earnings (loss) per share Basic................................... $ (0.81) $ 0.71 $ (3.56) $ 1.16 ---------------- ------------ ------------- -------------- Diluted................................. $ (0.81) $ 0.70 $ (3.56) $ 1.14 ---------------- ------------ ------------- -------------- Weighted average shares outstanding Basic................................... 30,605 29,692 30,424 29,573 ---------------- ------------ ------------- -------------- Diluted................................. 30,605 30,415 30,424 30,265 ---------------- ------------ ------------- -------------- Comprehensive (Loss) Income: Net (loss) income............................ $ (18,911) $ 21,169 $(60,098) $ 34,351 Unrealized (loss) gain on interest rate swaps, net of tax ............................. (3,257) 101 (3,257) (1,561) ---------------- ------------ ------------- -------------- Comprehensive (loss) income.................. $ (22,168) $ 21,270 $(63,355) $ 32,790 ---------------- ------------ ------------- -------------- The accompanying notes are an integral part of the consolidated financial statements.
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R.H. Donnelley Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30, --------------------------------- (amounts in thousands) 2003 2002 - ------------------------------------------------------------------------------- ------------------- ------------- Cash Flows from Operating Activities Net (loss) income........................................................ $ (60,098) $ 34,351 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization....................................... 32,471 3,164 Deferred income tax................................................. (41,762) 312 Provision for doubtful accounts..................................... 288 1,467 Other noncash charges............................................... 6,856 1,103 Cash in excess of partnership income................................ 6,058 5,164 Changes in assets and liabilities, net of effects from acquisition: Decrease (increase) in accounts receivable.......................... 15,548 (3,964) Increase in other current assets.................................... (24,617) -- Decrease (increase) in other assets................................. 181 (413) Decrease in accounts payable and accrued liabilities................ (13,362) (12,769) Increase in deferred revenue........................................ 208,975 -- Increase (decrease) in other non-current liabilities................ 984 (207) ------------------- ------------- Net cash provided by operating activities.................... 131,522 28,208 Cash Flows from Investing Activities Additions to fixed assets and computer software.......................... (5,473) (1,300) Acquisition of SPA....................................................... (2,259,633) -- Decrease in restricted cash - funds held in escrow at year-end........... 1,825,000 -- Decrease in restricted cash - other ..................................... 69,300 -- ------------------- ------------- Net cash used in investing activities........................ (370,806) (1,300) Cash Flows from Financing Activities Proceeds from the issuance of debt, net of costs......................... 461,307 -- Proceeds from the issuance of Redeemable Convertible Preferred Stock and warrants, net of costs.................................... 125,683 -- Pre-acquisition debt refinanced with proceeds from new debt.............. (243,005) -- Repayment of new debt.................................................... (152,787) (42,500) Borrowings under the Revolver............................................ 24,100 -- Proceeds from employee stock option exercises............................ 16,199 3,298 ------------------- ------------- Net cash provided by (used in) financing activities.......... 231,497 (39,202) Decrease in cash and cash equivalents.................................... (7,787) (12,294) Cash and cash equivalents, beginning of year............................. 7,787 14,721 ------------------- ------------- Cash and cash equivalents, end of period................................. $ -- $ 2,427 ------------------- ------------- Supplemental Information: Cash used to pay: Interest.............................................................. $ 89,036 $ 12,647 ------------------- ------------- Income taxes.......................................................... $ -- $ 16,566 ------------------- ------------- 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 of R.H. Donnelley Corporation and its direct and indirect wholly owned subsidiaries (the "Company," "we," "us" and "our") have been prepared in accordance with the instructions to Quarterly Report on 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, 2002. 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. Business Combination On January 3, 2003, we acquired Sprint Corporation's directory publishing business, Sprint Publishing & Advertising ("SPA"), for $2,229,763 and are now the publisher of 260 revenue-generating yellow pages directories in 18 states. Prior to the acquisition, we served as the exclusive sales agent and pre-press publishing vendor for SPA directories in certain markets. This acquisition transformed us from a sales agent and pre-press vendor into a leading publisher of yellow pages directories. The results of the SPA business are included in our consolidated results from and after January 3, 2003, the acquisition closing date. SPA is now being operated as R.H. Donnelley Publishing & Advertising, Inc. ("RHDPA"), an indirect, wholly owned subsidiary of the Company. The acquisition was accounted for as a purchase business combination in accordance with SFAS 141 "Business Combinations." The purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date. The fair value of certain long-term intangible assets and their respective useful lives were determined by an independent third party with expert knowledge in the area of valuing acquired businesses and our industry. Management believes that the allocation of the purchase price to the assets acquired and liabilities assumed is final; however, additional information could come to our attention that would require us to revise the purchase price allocation. Identifiable intangible assets acquired included directory services agreements entered into between Sprint and us, customer relationships and acquired trade names (see Note 4). A summarized unaudited condensed balance sheet of the consolidated Company at January 3, 2003 is presented below.
Liabilities, Redeemable Convertible Preferred Assets Stock and Shareholders' Equity ----------------------------------- --------------- ----------------------------------------------- --------------- Cash and cash equivalents...... $ 23,986 Current liabilities......................... $ 46,101 Other current assets........... 308,852 Current portion long-term debt.............. 58,668 --------------- --------------- Total current assets...... 332,838 Total current liabilities............ 104,769 Partnership investment......... 185,969 Long-term debt.............................. 2,297,577 Other non-current assets....... 124,140 Other non-current liabilities............... 73,956 Intangible assets.............. 1,915,000 Goodwill....................... 77,953 Redeemable convertible preferred stock...... 143,553 Shareholders' equity........................ 16,045 --------------- --------------- Total Liabilities, Redeemable Convertible Total assets................... $2,635,900 Preferred Stock and Shareholders' Equity.... $2,635,900 --------------- ---------------
6 Summarized unaudited condensed pro forma information for the three and six months ended June 30, 2002 assuming the SPA acquisition occurred on January 1, 2002 is presented below.
Three months Six months ended ended June 30, 2002 June 30, 2002 ------------------- ---------------- Net revenue.............................................. $142,460 $ 287,047 Operating income......................................... 87,260 162,996 Net income............................................... 25,689 44,330 Preferred dividend....................................... 4,080 70,454 Net income (loss) available to common shareholders....... 21,730 (25,909)
3. Significant Accounting Policies Principles of Consolidation. The consolidated financial statements include the accounts of R.H. Donnelley Corporation and its direct and indirect wholly owned subsidiaries. All intercompany transactions and balances have been eliminated. The DonTech Partnership ("DonTech") is accounted for under the equity method as we do not have control, but do have the ability to exercise significant influence over DonTech's operating and financial policies. Accordingly, DonTech's results are not consolidated in our financial statements, but our share of its net profits is reported as partnership income in the Consolidated Statements of Operations. Revenue Recognition. We earn revenue from the sale of advertising into our yellow pages directories. Revenue from the sale of advertising is deferred when a directory is published and recognized ratably over the life of a directory, which is typically twelve months (the "deferral and amortization method"). Revenue is recorded net of an estimate for claims and allowances based on historical experience. We adjust our estimate when information or circumstances indicate that the current estimate may not adequately represent the amount of claims and allowances we may incur in the future. We also earn revenue from pre-press publishing services provided to SBC Communications Inc. ("SBC") for those directories in the DonTech markets. Revenue from pre-press publishing services is recognized as services are performed. Deferred Directory Costs. Deferred directory costs include costs directly attributable to the advertising sales process. These costs include sales commissions, printing, paper and initial distribution expenses. Deferred directory costs are initially deferred when incurred and recognized ratably over the life of a directory. These costs also include an allowance for sales claims and bad debts, which are initially deferred and recognized ratably over the life of a directory. Equity Method Accounting. We account for DonTech under the equity method whereby we recognize our 50% share of the net income of DonTech as partnership income in our consolidated statements of operations. Partnership income also includes revenue participation income from SBC. Revenue participation income is based on DonTech advertising sales and is recognized when a sales contract is executed with a customer. Our investment in DonTech includes our 50% share of the net assets of DonTech and the revenue participation receivable from SBC and is reported as partnership investment on the consolidated balance sheet. Derivative Financial Instruments. Our derivative financial instruments are currently limited to interest rate swap agreements used to mitigate our exposure to changes in interest rates on variable rate debt. We have interest rate swap agreements with a total notional value of $255,000 that effectively converts $255,000 of variable rate debt to fixed rate debt. Under the terms of the swap agreements, we receive variable interest based on three-month LIBOR and pay a fixed rate of 2.85%. The swaps mature on March 31, 2007. The interest rate swaps and the hedged item (3 month LIBOR-based interest payments on $255,000 of bank debt) have been designed so that the critical terms (interest reset dates, duration and index) coincide. The interest rate swaps have been designated as cash flow hedges. In accordance with SFAS 133, to the extent the swaps are effective, changes in the fair value of the swaps are recorded in other comprehensive income or loss, a component of shareholders' equity. Any ineffectiveness is recorded through earnings. 7 Earnings per Share. Basic earnings per common share (EPS) are generally calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding. However, because our redeemable convertible cumulative preferred stock ("Preferred Stock") contains certain participation rights, EITF Topic D-95, "Effect of Participating Securities on the Computation of Basic Earnings Per Share," ("Topic D-95") requires that the dilutive effect of those securities be included in the weighted average number of shares outstanding. Furthermore, Topic D-95 requires that the dilutive effect to be included in basic EPS may be calculated using either the if-converted method or the two-class method. However, the dilutive effect of the Preferred Stock cannot be less than that which would result from the application of the two-class method. We have elected to use the if-converted method in calculating basic EPS. Diluted EPS equals net income divided by the weighted average common shares outstanding plus common share equivalents. Common share equivalents include stock options and warrants, the dilutive effect of which is calculated using the treasury stock method, and Preferred Stock, the potential dilutive effect of which is calculated using the if-converted method. The calculation of basic and diluted EPS for the quarter and six months ended June 30, 2003 is presented below.
Three months Six months ended ended June 30, 2003 June 30, 2003 - ----------------------------------------------------------------------- ---------------- ----------------- Basic EPS - If-Converted Method Loss available to common shareholders........................ $(24,889) $(108,230) Preferred Stock dividend..................................... 5,978 48,132 ---------------- ----------------- Net loss..................................................... $(18,911) $ (60,098) ---------------- ----------------- Weighted average common shares outstanding................... 30,605 30,424 Weighted average common shares assuming conversion of Preferred Stock......................................... 8,672 8,588 ---------------- ----------------- Weighted average common equivalent shares assuming conversion of Preferred Stock.............................. 39,277 39,012 ---------------- ----------------- Basic loss per share - if-converted method...................... $ (0.48) $(1.54) ---------------- ----------------- Basic EPS - Two-Class Method Loss available to common shareholders........................ $(24,889) $(108,230) Amount allocable to common shares (1)........................ 78% 78% ---------------- ----------------- Rights to undistributed losses............................... (19,413) (84,419) Weighted average common shares outstanding................... 30,605 30,424 ---------------- ----------------- Basic earnings per share - two-class method (2).............. $ (0.81) $ (3.56) ---------------- -----------------
8 (1) 30,605 / (30,605 + 8,672) for the quarter ended June 30, 2003 and 30,424 / (30,424 + 8,588) for the six months ended June 30, 2003. (2) Basic EPS calculated under the two-class method was a loss of $0.63 for the quarter ended June 30, 2003 and a loss of $2.77 the six months ended June 30, 2003. However, where there is a net loss in a period, the application of the two-class method is anti-dilutive. Accordingly, reported basic EPS are calculated as the loss available to common shareholders divided by the weighted average basic shares outstanding.
Diluted EPS Loss available to common shareholders........................... $(24,889) $(108,230) ---------------- ----------------- Weighted average common shares outstanding...................... 30,605 30,424 Dilutive effect of stock options (3)............................ -- -- Dilutive effect of Preferred Stock assuming conversion (3)...... -- -- ---------------- ----------------- Weighted average diluted shares outstanding..................... 30,605 30,424 ---------------- ----------------- Diluted EPS (4)................................................. $(0.81) $(3.56) ---------------- -----------------
(3) The effect of stock options and the assumed conversion of the Preferred Stock were anti-dilutive and are not included in the calculation of diluted EPS. (4) Because there was a reported net loss in the quarter, the calculation of diluted earnings per share was anti-dilutive compared to basic earnings per share for the three months and six months ended June 30, 2003. Diluted earnings per share cannot be greater than basic earnings per share (or less of a loss). Therefore, reported diluted earnings per share and basic earnings per share for the three and six-month periods ended June 30, 2003 were the same. For the quarter and six months ended June 30, 2002, basic EPS equals net income divided by the weighted average common shares outstanding and diluted EPS equals net income divided by the weighted average common shares outstanding plus potentially dilutive common shares, primarily stock options. Concentration of Credit Risk. Approximately 85% of our advertising revenue is derived from the sale of advertising to local small- and medium-sized businesses. These advertisers enter into twelve-month advertising sales contracts and typically make monthly payments over the term of the contract. Some advertisers pre-pay the full amount or a portion of the contract value. Most new advertisers are subject to a credit review. If the advertisers qualify, we may extend credit to them for their advertising purchase. Small- and medium-sized businesses tend to have fewer financial resources and higher financial failure rates than large businesses. In addition, full collection of delinquent accounts can take an extended period of time and involve significant costs. While we do not believe that extending credit to our local advertisers will have a material adverse affect on our results of operations or financial condition, no assurances can be given. We do not require collateral from our advertisers, although we do charge interest to advertisers who do not pay within specified due dates. The remaining 15% of our advertising revenue is derived from the sale of advertising to national or large regional chains, such as rental car companies, automobile repair shops and pizza delivery businesses. Substantially all of the revenue derived through national accounts is serviced through Certified Marketing Representatives ("CMRs"), with which we contract. CMRs are independent third parties that act as agents for national companies. The CMRs are responsible for billing the national customers for their advertising. We receive payment for the value of advertising placed in our directory, net of the CMR's commission, directly from the CMR. While we are still exposed to credit risk, the amount of losses from these accounts are less than the local accounts as the advertisers, and in some cases, the CMRs, tend to be larger companies with greater financial resources than the local advertisers. We maintain a significant receivable balance with SBC for revenue participation and pre-press publishing services fees. The revenue participation receivable is subject to adjustment, based on collections by SBC from individual advertisers; however, the adjustment is limited based on contractual provisions. The receivable is recorded at net realizable value. We do not currently foresee a material credit risk associated with this receivable, although there can be no assurance that full payment will be received on a timely basis. We have interest rate swap agreements with major financial institutions with a notional value of $255,000. We are exposed to credit risk in the event that one or more of the counterparties to the agreements does not, or cannot meet their 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. The counterparties to the swap agreements are major financial institutions with credit ratings of A or higher. We do not currently foresee a material credit risk associated with these swap agreements. Employee Stock Options. We follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for our stock option plan. Compensation expense related to the issuance of stock options to employees or non-employee directors is not recognized if the exercise price of the stock option is equal to the fair market value of the underlying stock at the grant date. We recognized compensation expense related to stock options of $426 in the quarter ended June 30, 2003 and $1,048 for the six months ended June 30, 2003. Compensation expense in 2002 related to stock options was minimal. The following table reflects the pro forma net income and earnings per share assuming we applied the fair value method of SFAS No. 123 "Accounting for Stock-Based Compensation." The pro forma disclosures shown are not necessarily representative of the effects on income and earnings per share in future years. 9
Three Months Ended Six Months Ended June 30, June 30, ------------- ------------ -------------- ------------ 2003 2002 2003 2002 ------------- ------------ -------------- ------------ Net (loss) income As reported................................... $ (18,911) $21,169 $(60,098) $34,351 Pro forma..................................... (19,762) 20,472 (64,293) 32,955 Net (loss) income available to common shareholders As reported................................... $(24,889) $21,169 $(108,230) $34,351 Pro forma..................................... (25,740) 20,472 (112,425) 32,955 Basic earnings per share As reported................................... $ (0.81) $ 0.71 $ (3.56) $ 1.16 Pro forma..................................... (0.84) 0.69 (3.70) 1.11 Diluted earnings per share As reported................................... $ (0.81) $ 0.70 $ (3.56) $ 1.14 Pro forma..................................... (0.84) 0.67 (3.70) 1.09 The pro forma information was determined based on the fair value of stock options calculated using the Black-Scholes option-pricing model with the following assumptions: 2003 2002 -------------- -------------- Dividend yield................................................. 0% 0% Expected volatility............................................ 35% 35% Risk-free interest rate........................................ 2.6% 3.1% Expected holding period........................................ 4 years 4 years
4. Intangible Assets and Goodwill As a result of the SPA acquisition, certain long-term intangible assets and their respective useful lives were identified and valued by an independent third party. The net book value of intangible assets at June 30, 2003 is presented below. Amortization expense was $24,916 for the first half of 2003. Amortization expense for intangible assets for 2003 through 2008 will be approximately $50,000 per year.
Directory Services Local customer National CMR Agreements relationships relationships Trade names TOTAL ----------------- ------------------ ------------------ -------------- ---------------- Estimated useful life........ 50 years 15 years 30 years 15 years ----------------- ------------------ ------------------ -------------- Initial fair value........... $1,625,000 $200,000 $60,000 $30,000 $1,915,000 Accumulated amortization.... (16,250) (6,666) (1,000) (1,000) (24,916) ----------------- ------------------ ------------------ -------------- ---------------- Net intangible assets........ $1,608,750 $193,334 $59,000 $29,000 $1,890,084 ----------------- ------------------ ------------------ -------------- ----------------
Directory services agreements between Sprint and the Company includes a directory services license agreement, a trademark license agreement and a non-competition agreement (collectively "Directory Services Agreements"). The directory services license agreement gives us the exclusive right to produce, publish and distribute directories for Sprint in the markets where Sprint provided local telephone service at the time of the agreement. The trademark license agreement gives us the exclusive right to use certain specified Sprint trademarks, including the Sprint diamond logo, in those markets and the non-competition agreement prohibits Sprint from producing, publishing and distributing print directories or selling local advertising in those markets, with certain limited exceptions. The fair value of these agreements was determined based on the present value of estimated future cash flows and is being amortized under the straight-line method over 50 years. 10 The fair value of local and national customer relationships was determined based on the present value of estimated future cash flows and historical attrition rates and is being amortized under an accelerated method that recognizes the value derived from customer relationships is greater in the earlier years and steadily declines over time. The weighted average useful life of these relationships is 18 years. The fair value of acquired trade names was determined based on the "relief from royalty" method, which values the trade names based on the estimated amount that a company would have to pay in an arms length transaction to use these trade names. These assets are being amortized under the straight-line method over 15 years. Goodwill represents the excess of the purchase price for SPA over the net tangible and intangible assets acquired. In accordance with SFAS 142 "Goodwill and Other Intangible Assets," goodwill is not amortized, but is subject to impairment testing. No impairment losses were recorded during the period. All goodwill is included in the Donnelley segment (see Note 9 for segment information). 5. Partnership Income Partnership income in 2003 includes our 50% share of the net income of DonTech (accounted for under the equity method) and revenue participation income from SBC. Partnership income in 2002 also included a priority distribution on our membership interest in CenDon, LLC. As a result of the SPA acquisition, we no longer report priority distribution income. Partnership income for the three and six months ended June 30, 2003 and 2002 consisted of the following:
Three Months ended Six months ended June 30, June 30, ---------------------------- --------------------------- 2003 2002 2003 2002 ------------- -------------- ------------- ------------- Revenue participation income.............................. $ 28,553 $ 29,882 $ 49,001 $ 49,300 50% share of DonTech net income........................... 6,788 6,745 9,973 9,232 Priority distribution income.............................. -- 4,237 -- 9,480 ------------- -------------- ------------- ------------- Partnership income........................................ $ 35,341 $ 40,864 $ 58,974 $ 68,012 ------------- -------------- ------------- ------------- Summarized combined financial information for DonTech is shown in the table below. Three months ended Six months ended June 30, June 30, ---------------------------- --------------------------- 2003 2002 2003 2002 ------------- -------------- ------------- ------------- Net revenue............................................... $ 30,315 $ 31,645 $ 51,870 $ 52,284 Operating income.......................................... 13,750 13,468 20,138 18,597 Net income................................................ 13,575 13,489 19,947 18,464
Total assets of DonTech were $120,955 at June 30, 2003 and $128,914 at December 31, 2002. 6. Long-term Debt and Credit Facilities Long-term debt at June 30, 2003 and December 31, 2002 consisted of the following:
June 30, 2003 December 31, 2002 -------------------- ----------------------- 8 7/8% Senior Notes due 2010................................ $ 325,000 $ 325,000 10 7/8% Senior Subordinated Notes due 2012.................. 600,000 600,000 Senior Secured Credit Facilities............................ 1,260,068 900,000 9 1/8% Senior Subordinated Notes due 2008................... 21,245 150,000 Pre-acquisition Senior Secured Term Facilities.............. -- 114,250 -------------------- ----------------------- Total................................................... 2,206,313 2,089,250 Less current portion........................................ 59,729 13,780 -------------------- ----------------------- Long-term debt.......................................... $2,146,584 $2,075,470 -------------------- -----------------------
11 In connection with the SPA acquisition, we entered into a $1,525,000 Credit Facility ("Credit Facility"), consisting of a $500,000 Term Loan A, a $900,000 Term Loan B and a $125,000 Revolving Credit Facility (the "Revolver") and issued $325,000 8 7/8% Senior Notes due 2010 ("Senior Notes") and $600,000 10 7/8% Subordinated Notes due 2012 ("Subordinated Notes," and collectively with the Senior Notes, the "Notes"). By December 31, 2002, we had issued the Notes and borrowed $900,000 under the Term Loan B. The gross proceeds of $1,825,000 were held in escrow pending the SPA acquisition closing. On January 3, 2003, we borrowed $500,000 under the Term Loan A and the $1,825,000 of gross proceeds from the Notes and Term Loan B was released from escrow. These funds were used to acquire SPA, refinance existing debt and pay transactions costs. Amounts outstanding prior to the acquisition under our former senior secured term facilities of $114,250 were refinanced and in connection with a tender offer and exit consent solicitation, we repurchased $128,755 of the 9 1/8% Senior Subordinated Notes due 2008 ("Pre-acquisition Notes"). The Term Loan A and Term Loan B require quarterly principal payments and mature in December 2008 and June 2010, respectively. There was $24,100 outstanding under the Revolver at June 30, 2003. 7. Redeemable Convertible Preferred Stock and Warrants We have authorization to issue up to 10 million shares of preferred stock. At June 30, 2003, 200,604 shares of Preferred Stock were outstanding. On January 3, 2003, we issued 130,000 shares of Preferred Stock and warrants to purchase 1,072,500 shares of our common stock to investment partnerships affiliated with The Goldman Sachs Group, Inc. (collectively, the "GS Funds") for gross proceeds of $130,000. This investment by the GS Funds represented the remaining investment amount of their $200,000 commitment. On January 3, 2003, the 70,000 shares of Series B-1 Preferred Stock purchased by the GS Funds in November 2002 automatically converted into 70,604 shares of Preferred Stock. The Preferred Stock (and any accrued but unpaid dividends) is convertible by the GS Funds at any time into common stock at a price of $24.05 and earns a cumulative dividend of 8% compounded quarterly. Due to clarification of an ambiguity in the Preferred Stock documentation, we cannot pay Preferred Stock dividends in cash until October 2005; therefore, the dividend will accrete through September 2005. Beginning in October 2005, we can pay the Preferred Stock dividend in cash or allow it to accrete, at our option. We may redeem the Preferred Stock in cash at any time on or after January 3, 2006 if the market price (as defined) of our common stock exceeds 200% of the conversion price for 30 trading days. The Preferred Stock is redeemable in cash by us at any time on or after January 3, 2013. The Preferred Stock is redeemable in cash at the option of the GS Funds in the event of a change in control (as defined). At June 30, 2003, the redemption value of the Preferred Stock was $208,572 and at December 31, 2002, the redemption value of the Preferred Stock was $70,544. The net proceeds received were allocated to the Preferred Stock and warrants based on their relative fair values. The fair value of the Preferred Stock was based on an independent valuation of the security. The fair value of the warrants issued January 3, 2003 was $10.43 based on the Black-Scholes model and the following assumptions: Dividend yield................................................. 0% Expected volatility............................................ 35% Risk-free interest rate........................................ 2.9% Expected holding period........................................ 5 years Because the fair market value of the underlying common stock on the date of issuance ($28.96) was greater than the conversion price, a beneficial conversion feature ("BCF") of $38,216 was recognized. In addition, due to the clarification of the Preferred Stock documentation mentioned above, a BCF of approximately $1,000 will be recognized each quarter through September 2005. The preferred dividend for the quarter and six months ended June 30, 2003 includes a deemed dividend for a BCF of $1,888 and $40,104, respectively. At June 30, 2003, the Preferred Stock was convertible into 8,672,429 shares of common stock. 8. Restructuring Charge As a result of the acquisition, we acquired a liability for severance for certain SPA positions that were eliminated immediately after the acquisition. The severance liability for those positions was $696 and through June 30, 2003, payments of $564 have been made. During the quarter, we announced plans to shutdown one of our publishing facilities in Tennessee (the "2003 Restructuring Actions"). Approximately 120 positions will be affected by the shutdown of this facility, which is expected to be completed by the end of the year. A charge of $3,121 was recorded in the period for severance and other related costs. 12 In July 2003, we also announced plans to relocate the corporate headquarters functions in Overland Park, Kansas and Purchase, New York to Raleigh, North Carolina. Approximately 145 positions will be affected by this consolidation, which we anticipate will be completed by the end of the first quarter 2004. Management is still in the process of estimating the costs related to this consolidation, but expects to record a charge in the third quarter related to severance, retention bonuses, employee relocations, lease termination and other related costs of approximately $4,000 to $6,000. The 2001 restructuring actions related to the elimination of certain pre-press publishing positions as a result of the expiration of a third-party pre-press publishing contract. These restructuring actions are substantially completed and the remaining reserve relates to severance, which is being paid over time in accordance with our policies and applied against the reserve. The table below shows the activity in our restructuring reserves during 2003.
2001 2003 Restructuring Restructuring Actions Actions ------------------ ------------------ Balance at January 1, 2003....................... $ 1,675 $ -- Additions to reserve charged to goodwill......... -- 696 Additions to reserve charged to earnings......... -- 3,121 Payments......................................... (508) (564) ------------------ ------------------ Balance at June 30, 2003......................... $ 1,167 $ 3,253 ------------------ ------------------
9. Business Segments We have revised our historical segment reporting to reflect the change in the business that resulted from the SPA acquisition and to reflect the way management now reviews and analyzes the business. Our reportable operating segments are Donnelley and DonTech. Donnelley includes the revenue from our Sprint-branded yellow pages directories and pre-press publishing services and all operating and administrative expenses. The DonTech segment includes revenue participation income and our 50% interest in the net profits of DonTech. Although DonTech provides advertising sales of yellow pages and other directory products similar to Donnelley, the partnership is considered a separate operating segment since, among other things, it has its own Board of Directors and the employees of DonTech, including officers and managers, are not employees of the Company. We evaluate the performance of our segments based primarily on operating income and earnings before interest, taxes, depreciation and amortization ("EBITDA"). We evaluate and report the performance of our segments based on EBITDA because we believe that EBITDA is a useful measure of our underlying operating performance and ability to satisfy our significant debt service requirements. Segment information for the quarter and six months ended June 30, 2002 has been adjusted to be comparable to the 2003 presentation. Segment information for the three and six-months ended June 30, 2003 and 2002 is as follows:
2003 Three Months Ended June 30 Six Months Ended June 30 ------------------------------------------ ----------------------------------------- Donnelley DonTech Total Donnelley DonTech Total Net revenue...................... $ 38,634 $ -- $ 38,634 $ 51,053 $ -- $ 51,053 Operating income (loss).......... (24,877) 35,341 10,464 (70,429) 58,974 (11,455) EBITDA (1)....................... (7,711) 35,341 27,630 (36,435) 58,974 22,539 Total assets..................... 2,417,856 179,912 2,597,768
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2002 Three Months Ended June 30 Six Months Ended June 30 -------------- -------------- ------------ -------------- ------------- ------------ Donnelley DonTech Total Donnelley DonTech Total Net revenue...................... $ 19,894 $ -- $ 19,894 $ 38,721 $ -- $ 38,721 Operating income (loss).......... 3,766 36,627 40,393 9,517 58,532 68,049 EBITDA (1)....................... 5,323 36,627 41,950 12,681 58,532 71,213 Total assets..................... 93,109 187,783 280,892
(1) 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. The most comparable GAAP measure for EBITDA is net income. The reconciliation of net income to EBITDA is as follows:
Three Months Ended June 30, Six Months Ended June 30, --------------------------------- ------------------------------------ 2003 2002 2003 2002 ---------------- ---------------- ----------------- ------------------ Net (loss) income.................. $ (18,911) $ 21,169 $ (60,098) $ 34,351 + tax expense (benefit)........... (13,155) 13,251 (41,762) 21,504 + interest expense, net........... 43,253 5,973 91,928 12,194 + depreciation and amortization...... 16,443 1,557 32,471 3,164 ---------------- ---------------- ----------------- ------------------ EBITDA............................. $ 27,630 $ 41,950 $ 22,539 $ 71,213 ---------------- ---------------- ----------------- ------------------
We also evaluate the performance of Donnelley and DonTech based on advertising sales. Advertising sales are a critical measure of performance that we review and play an important role in our decision to allocate financial resources between our segments. For a discussion of advertising sales, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations." 10. Litigation We are involved in various legal proceedings arising in the ordinary course of our business, as well as certain extraordinary litigation and tax matters described below. We periodically assess our liabilities and contingencies in connection with these matters based upon the latest information available to us. For those matters where it is probable that we have incurred a loss and the loss or range of loss can be reasonably estimated, we record reserves in our consolidated financial statements. In other instances, we are unable to make a reasonable estimate of any liability because of the uncertainties related to both the probable outcome and amount or range of loss. As additional information becomes available, we adjust our assessment and estimates of such liabilities accordingly. Based on our review of the latest information available, we believe our ultimate liability in connection with pending legal proceedings, including the extraordinary litigation and tax matters described below, will not have a material adverse effect on our results of operations, cash flows or financial position, as described further below. In order to understand our potential exposure under the extraordinary litigation and tax matters described below under the captions "Information Resources, Inc." and "Tax Matters," one needs to understand the relationship between us and The Dun & Bradstreet Corporation, and certain of its predecessors and affiliates that, through various corporate reorganizations and contractual commitments, have assumed varying degrees of responsibility with respect to such matters. In November 1996, the company then known as The Dun & Bradstreet Corporation ("D&B1") separated (the "1996 Distribution") through a spin-off into three separate public companies: D&B1, ACNielsen Corporation ("ACNielsen") and Cognizant Corporation ("Cognizant"). In June 1998, D&B1 separated (the "1998 Distribution") through a spin-off into two separate public companies: D&B1, which changed its name to R.H. Donnelley Corporation ("Donnelley"), and a new company named The Dun & Bradstreet Corporation ("D&B2"). Later in 1998, Cognizant separated (the "Cognizant Distribution") through a spin-off into two separate public companies: IMS Health Incorporated ("IMS") and Nielsen Media Research, Inc. ("NMR"). In September 2000, D&B2 separated (the "2000 Distribution") through a spin-off into two separate public companies: D&B2, which changed its name to Moody's Corporation ("Moody's"), and a new company named The Dun & Bradstreet Corporation ("D&B3," and together with D&B1 and D&B2, also referred to elsewhere in this Quarterly Report on Form 10-Q as "D&B"). As a result of the form of our separation from D&B, we are the corporate successor of, and technically the defendant and taxpayer referred to below as D&B. 14 Rockland Yellow Pages In 1999, Sandy Goldberg, Dellwood Publishing, Inc. and Rockland Yellow Pages initiated a lawsuit against the Company and Bell Atlantic Corporation 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. In May 2002, the Court granted defendants' motion to dismiss the complaint. Plaintiffs filed an appeal of this dismissal. In April 2003, the Appellate Division dismissed all but one count of the complaint, which count alleges immaterial compensatory damages with respect to only one advertiser. Accordingly, 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, Inc. In 1996, Information Resources, Inc. ("IRI"), filed a complaint in the United States District Court for the Southern District of New York, naming as defendants the Company, as successor of D&B, ACNielsen Company and IMS International Inc., at the time of the filing, all wholly owned subsidiaries of D&B. 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 agreements relating to the 1996 Distribution, Cognizant, AC Nielsen and D&B agreed to conduct a joint defense and allocated liabilities amongst themselves. Under the agreements relating to the 1998 Distribution, 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 those agreements, Moody's Corporation, which subsequently separated from D&B in the 2000 Distribution, has 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 we cannot assure you as to any outcome, management presently believes that D&B and Moody's have sufficient financial resources, borrowing capacity and indemnity rights against IMS and NMR (who succeeded to Cognizant's indemnity obligations under the Cognizant Distribution) to reimburse us for any payments we may be required to make and related costs we may incur in connection with this matter. Tax Matters D&B entered into global tax planning initiatives in the normal course of its business, principally through tax-free restructurings of both their foreign and domestic operations. The status of Internal Revenue Service ("IRS") reviews of these initiatives is summarized below. Pursuant to a series of agreements relating to the 1996, 1998, Cognizant and 2000 Distributions, IMS and NMR are jointly and severally liable for, and must pay one-half, and D&B and Moody's are jointly and severally liable for, and must pay the other half, of any payments over $137,000 for taxes, accrued interest and other amounts resulting from unfavorable IRS rulings on the tax matters summarized below (other than the matter summarized below as "Amortization Expense Deductions - 1997 - 2002," for which D&B and Moody's, jointly and severally, are solely responsible). D&B, on our behalf, was contractually obligated to pay, and did pay, the first $137,000 of tax liability in connection with the matter summarized below as "Utilization of Capital Losses - 1989 - 1990." Under the agreements relating to the 1998 Distribution, D&B agreed to assume the defense and to indemnify us for any tax liability that may be assessed against us and any related costs and expenses that we may incur in connection with any of these tax matters. Also, as required by those agreements, Moody's has agreed to be jointly and severally liable with D&B for the indemnity obligation to us. Under the agreements relating to the 2000 Distribution, D&B and Moody's have, between each other, agreed to each be financially responsible for 50% of any potential liabilities that may arise to the extent such potential liabilities are not directly attributable to each party's respective business operations. 15 While we cannot assure you as to any outcome in these matters, management presently believes that D&B and Moody's have sufficient financial resources, borrowing capacity and indemnity rights against IMS and NMR (who succeeded to Cognizant's indemnity obligations under the Cognizant Distribution) to reimburse us for any payments we may be required to make and related costs we may incur in connection with these tax matters. Utilization of Capital Losses - 1989 - 1990 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 $212,300 to the IRS. 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. Subsequent to making its payment to the IRS in 2000, IMS sought to obtain partial reimbursement from NMR under the terms of the agreements relating to the Cognizant Distribution. NMR paid IMS less than IMS sought. Accordingly, in 2001, IMS filed an arbitration proceeding against NMR claiming that NMR underpaid to IMS its proper allocation of the above tax payments as provided by the agreements relating to the Cognizant Distribution. Neither D&B nor we were party to the Cognizant Distribution. IMS nonetheless sought to include us in this arbitration, arguing that if NMR should prevail in its interpretation against IMS, then IMS could seek to enforce the same interpretation against us (as successor to D&B) under the agreements relating to the 1996 Distribution. The arbitration panel ruled that we were a proper party to this arbitration proceeding. In April 2003, the arbitration panel dismissed all claims against us and found for IMS. If, on appeal of that ruling, NMR should prevail against IMS and, in turn, IMS should prevail against us, then we believe that our additional liability would be approximately $15,000, net of tax benefits. As noted above, D&B and Moody's would be jointly and severally obligated to indemnify us against any such additional liability and related costs. We believe 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, borrowing capacity and indemnity rights against IMS and NMR to reimburse us for any payments we may be required to make and related costs we may incur with respect to this matter. Royalty Expense Deductions - 1994 - 1996 During the second quarter of 2002, D&B (on our behalf) 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 challenge by D&B, the required payment by D&B to the IRS would be up to $42,000 ($48,000 offset by a $6,000 tax benefit). In verbal communications between D&B and the IRS during 2002, 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 have been advised that D&B would challenge the IRS's interpretation. Again, under the agreements relating to the 1998 and 2000 Distributions, D&B and Moody's have agreed to jointly and severally defend and indemnify us against any such liability and related costs. 16 Notwithstanding the verbal communications with the IRS in 2002 noted above regarding royalty expense deductions of $7,500 for 1994, in a February 2003 letter to D&B (on our behalf) the IRS asserted that it intends to take a position regarding prior tax years that would have the effect of disallowing a portion of the 1994 royalty expense deduction, our share of which would be $5,000 if the IRS prevailed. We understand that D&B disagrees with the IRS's position. Also, in February 2003, D&B (on our behalf) received a Preliminary Partnership Summary Report from the IRS that challenges the tax treatment of certain royalty payments received by a partnership in which D&B was a partner. As stated in its Report, the IRS would reallocate certain partnership income to D&B, which if the IRS prevailed would require an additional payment from us of $20,000 (which includes tax, interest and penalty, net of associated tax benefits). Again, under the agreements relating to the 1998 and 2000 Distributions, D&B and Moody's have agreed to jointly and severally defend and indemnify us against any such liability and related costs. Amortization Expense Deductions - 1997 - 2002 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 we understand that D&B believes the deductions are appropriate, the IRS could ultimately challenge them and issue an assessment. If the IRS were to prevail or the assessment were to be challenged by us in U.S. District Court, we understand that D&B estimates that its cash payment to the IRS with respect to deductions claimed to date and including any potential assessment of penalties of $6,500, could be up to $46,400, or $43,000 net of associated tax benefits. This transaction is scheduled to expire in 2012 and, unless earlier terminated by D&B, the cash exposure, based on current interest rates and tax rates, would increase at a rate of approximately $2,300 per quarter (including potential penalties) as future amortization expenses are deducted. Again, under the agreements relating to the 1998 and 2000 Distributions, D&B and Moody's are required to jointly and severally indemnify us against any such liability and related costs. Conclusion As a result of our assessment of our exposure in these matters, especially in light of our indemnity arrangements with D&B and Moody's, and their financial resources, borrowing capacity and indemnity rights against IMS and NMR, no material amounts have been accrued for in our consolidated financial statements for any of these D&B-related litigation and tax matters. Coastal Termite and Pest Control In 2001, Marnan Group, Inc., doing business as Coastal Termite and Pest Control ("Coastal"), filed a complaint in the United States District Court for the Middle District of Florida against SPA. The complaint, as amended, alleged that SPA breached certain directory advertising contracts between 1996 and 1999, fraudulently induced Coastal to enter into another directory advertising contract and tortiously interfered with Coastal's business relationships with its customers. Coastal is seeking damages for lost contract benefits, lost profits and diminution of business value in an unspecified amount, including pre-judgment interest. In January 2002, SPA filed a motion to dismiss certain of Coastal's claims. In September 2002, the court denied SPA's motion to dismiss. Nonetheless, we do not believe that the final outcome of this matter will have a material adverse effect on our results of operations or financial condition. Other matters We are also involved in other legal proceedings, claims and litigation arising in the ordinary conduct of our business. Although we cannot assure you of any outcome, management presently believes that the outcome of such legal proceedings will not have a material adverse effect on our results of operations or financial condition. 17 11. Guarantees R.H. Donnelley Inc. is a direct wholly owned subsidiary of the Company and the issuer of the Notes and Pre-acquisition Notes. The Company and the direct and indirect wholly owned subsidiaries of R.H. Donnelley Inc. jointly and severally, fully and unconditionally, guarantee the Notes and Pre-acquisition Notes. At June 30, R.H. Donnelley Inc.'s direct wholly owned subsidiaries are R.H. Donnelley Publishing & Advertising, Inc., R.H. Donnelley APIL, Inc., R.H. Donnelley CD, Inc. and Get Digital Smart.com Inc. R.H. Donnelley Acquisitions, Inc. is a wholly owned subsidiary of R.H. Donnelley APIL, Inc. The following consolidating condensed financial statements should be read in conjunction with the consolidated financial statements of the Company.
R.H. Donnelley Corporation Consolidating Condensed Balance Sheet June 30, 2003 R.H. R.H. Consolidated Donnelley R.H. Donnelley Donnelley Other R.H. Corp. Inc. Publishing & Guarantor Donnelley (Parent) (Issuer) Advertising subsidiaries Eliminations Corporation ------------- ---------------- ------------- ------------- --------------- -------------- Assets Cash and cash equivalents.. $ -- $ -- $ -- $ -- $ -- $ -- Accounts receivable, net... -- -- 271,009 -- -- 271,009 Other current assets....... 4,142 41,723 1,586 -- 47,451 Fixed assets, net.......... -- 14,069 7,838 -- -- 21,907 Investment in subsidiaries. 119,725 2,527,464 -- 2,184,232 (4,651,509) 179,912 Intercompany advance....... -- -- -- 2,280,865 (2,280,865) -- Intangible assets.......... -- -- 1,890,084 -- -- 1,890,084 Other assets............... -- 92,540 7 -- -- 92,547 Goodwill................... -- -- 94,858 -- -- 94,858 ------------- ---------------- ------------- ------------- --------------- -------------- Total assets............... $119,725 $2,638,215 $2,305,519 $4,466,683 $(6,932,374) $2,597,768 ------------- ---------------- ------------- ------------- --------------- -------------- Liabilities, Redeemable Convertible Preferred Stock and Shareholders' Deficit Accounts payable and accrued liabilities............. $ -- $ 77,439 $ (39,112) $ 53,306 $ (63,790) $ 27,843 Deferred directory revenue. -- -- 208,975 -- -- 208,975 Current portion long-term debt -- 59,729 -- -- -- 59,729 Long-term debt............. -- 2,146,584 -- -- -- 2,146,584 Other long-term liabilities... -- 76,658 17 -- (41,763) 34,912 Intercompany loan.......... -- -- 2,180,875 -- (2,180,875) -- Redeemable convertible preferred stock......... 189,797 -- -- -- -- 189,797 Shareholders' (deficit) equity (70,072) 277,805 (45,236) 4,413,377 (4,645,946) (70,072) ------------- ---------------- ------------- ------------- --------------- -------------- Total liabilities, redeemable convertible preferred stock and shareholders' $ 119,725 $2,638,215 $ 2,305,519 $4,466,683 $(6,932,374) $2,597,768 deficit................. ------------- ---------------- ------------- ------------- --------------- --------------
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R.H. Donnelley Corporation Consolidating Condensed Statement of Operations R.H. R.H. R.H. Donnelley Other For the Three Months Ended Donnelley Donnelley Publishing Guarantor Consolidated June 30, 2003 Corp. Inc. & subsidiaries R.H. (Parent) (Issuer) Advertising Corporation Eliminations Donnelley ------------- -------------- ------------- -------------- ------------- --------------- Net revenue.............. $ -- $ 6,448 $ 32,186 $ -- $ -- $ 38,634 Expenses................. -- 18,564 44,572 375 -- 63,511 Partnership and equity (loss) income......... (18,525) 21,690 -- 60,224 (28,048) 35,341 ------------- -------------- ------------- -------------- ------------- --------------- Operating (loss) income.. (18,525) 9,574 (12,386) 59,849 (28,048) 10,464 Interest (expense) income.... -- (46,818) (46,474) 50,039 -- (43,253) Other income............. -- 723 -- -- -- 723 ------------- -------------- ------------- -------------- ------------- --------------- Pre-tax (loss) income.... (18,525) (36,521) (58,860) 109,888 (28,048) (32,066) Income tax expense (benefit). 386 (17,996) (23,893) 28,348 -- (13,155) ------------- -------------- ------------- -------------- ------------- --------------- Net (loss) income........ (18.911) (18,525) (34,967) 81,540 (28,048) (18,911) Preferred Stock dividend. 5,978 -- -- -- -- 5,978 ------------- -------------- ------------- -------------- ------------- --------------- Net (loss) income available to common shareholders.... $ (24,889) $ (18,525) $ (34,967) $ 81,540 $ (28,048) $(24,889) ------------- -------------- ------------- -------------- ------------- --------------- For the Three Months Ended June 30, 2002 Net revenue.............. $ -- $ 19,894 $ -- $ -- $ -- $19,894 Expenses................. -- 20,343 -- 22 -- 20,365 Partnership and equity income 21,169 28,783 -- 35,221 (44,309) 40,864 ------------ --------------- ------------- -------------- -------------- -------------- Operating income......... 21,169 28,334 -- 35,199 (44,309) 40,393 Interest (expense) income.... -- (7,755) -- 1,782 -- (5,973) ------------ --------------- ------------- -------------- -------------- -------------- Pre-tax income........... 21,169 20,579 -- 36,981 (44,309) 34,420 Income tax expense (benefit). -- (590) -- 13,841 -- 13,251 ------------ --------------- ------------- -------------- -------------- -------------- Net income............... $ 21,169 $ 21,169 $ -- $ 23,140 $ (44,309) $21,169 ------------ --------------- ------------- -------------- -------------- -------------- For the Six Months Ended June 30, 2003 Net revenue.............. $ -- $ 13,003 $ 38,050 $ -- $ -- $ 51,053 Expenses................. -- 35,380 85,691 411 -- 121,482 Partnership and equity (loss) income......... (60,447) 17,339 -- 111,538 (9,456) 58,974 ------------- -------------- ------------- -------------- ------------- --------------- Operating (loss) income.. (60,447) (5,038) (47,641) 111,127 (9,456) (11,455) Interest (expense) income.... -- (95,493 (94,909) 98,474 -- (91,928) Other income............. -- 1,523 -- -- -- 1,523 ------------- -------------- ------------- -------------- ------------- --------------- Pre-tax (loss) income.... (60,447) (99,008) (142,550) 209,601 (9,456) (101,860) Income tax expense (benefit). (349) (38,561) (56,165) 53,313 -- (41,762) ------------- -------------- ------------- -------------- ------------- --------------- Net (loss) income........ (60,098) (60,447) (86,385) 156,288 (9,456) (60,098) Preferred Stock dividend. 48,132 -- -- -- -- 48,132 ------------- -------------- ------------- -------------- ------------- --------------- Net (loss) income available to common shareholders $(108,230) $ (60,447) $ (86,385) $ 156,288 $ (9,456) $ (108,230) ------------- -------------- ------------- -------------- ------------- --------------- For the Six Months Ended June 30, 2002 Net revenue.............. $ -- $ 38,721 $ -- $ -- $ -- $ 38,721 Expenses................. -- 38,617 -- 67 -- 38,684 Partnership and equity income 34,351 47,540 -- 60,991 (74,870) 68,012 ------------- -------------- ------------- -------------- ------------- --------------- Operating income......... 34,351 47,644 -- 60,924 (74,870) 68,049 Interest (expense) income.... -- (15,759) -- 3,565 -- (12,194) ------------- -------------- ------------- -------------- ------------- --------------- Pre-tax income........... 34,351 31,885 -- 64,489 (74,870) 55,855 Income tax expense (benefit). -- (2,466) -- 23,970 -- 21,504 ------------- -------------- ------------- -------------- ------------- --------------- Net income............... $ 34,351 $ 34,351 $ -- $ 40,519 $ (74,870) $ 34,351 ------------- -------------- ------------- -------------- ------------- ---------------
19
R.H. Donnelley Corporation Consolidating Condensed Statement of Cash Flows R.H. Donnelley R.H. R.H. Donnelley Other Consolidated For the Six Months Ended Corp. Donnelley Publishing & Guarantor R.H. Donnelley June 30, 2003 (Parent) Inc. Advertising subsidiaries Corporation (Issuer) ---------------- -------------- ------------------ ------------------ ----------------- Cash flow from operations.... $ -- $ (100,959) $ 22,842 $ 209,639 $ 131,522 Cash flow from investing activities................... 69,300 (407,926) (32,180) -- (370,806) Cash flow from financing activities................... (69,300) 501,140 9,338 (209,681) 231,497 ---------------- -------------- ------------------ ------------------ ----------------- Change in cash............... -- (7,745) -- (42) (7,787) Cash at beginning of period.. -- 7,745 -- 42 7,787 ---------------- -------------- ------------------ ------------------ ----------------- Cash at end of period........ $ -- $ -- $ -- $ -- $ -- ---------------- -------------- ------------------ ------------------ ----------------- For the Six Months Ended June 30, 2002 Cash flow from operations.... $ -- $ (17,153) $ -- $ 45,361 $ 28,208 Cash flow from investing activities................... -- (1,300) -- -- (1,300) Cash flow from financing activities................... -- 6,144 -- (45,346) (39,202) ---------------- -------------- ------------------ ------------------ ----------------- Change in cash............... -- (12,309) -- 15 (12,294) Cash at beginning of period.. -- 14,667 -- 54 14,721 ---------------- -------------- ------------------ ------------------ ----------------- Cash at end of period........ $ -- $ 2,358 $ -- $ 69 $ 2,427 ---------------- -------------- ------------------ ------------------ -----------------
20 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, other than imposed by law, any forward-looking statements. Unless otherwise indicated, the terms "Company," "we," "us" and "our" refer to R.H. Donnelley Corporation and its direct and indirect wholly owned subsidiaries. Such risks and uncertainties are described in detail in our Annual Report on Form 10-K for the year ended December 31, 2002. The Company On January 3, 2003, we acquired Sprint Corporation's ("Sprint") directory operations, Sprint Publishing and Advertising ("SPA") for $2,229.8 million in cash and are now the publisher of 260 revenue-generating Sprint Yellow Pages(R) directories in 18 states. Prior to the acquisition, we served as the exclusive sales agent and pre-press publishing vendor for SPA directories in certain markets. The acquisition transformed us from a sales agent and pre-press vendor into a leading publisher of yellow pages directories. The acquisition was accounted for as a purchase business combination and the purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values on the acquisition date. The results of the SPA business are included in our consolidated results from and after January 3, 2003, the acquisition closing date. SPA is now operated as R.H. Donnelley Publishing & Advertising, Inc. ("RHDPA"), an indirect, wholly owned subsidiary of the Company. Through the DonTech Partnership ("DonTech"), we are also the exclusive sales agent to sell yellow pages advertising for 129 SBC Communications Inc. ("SBC") directories in Illinois and northwest Indiana. DonTech was not affected by the acquisition and continues to act as the exclusive sales agent to SBC. We have revised our historical segment reporting to reflect the change in the business that resulted from the SPA acquisition and to reflect the way management now reviews and analyzes the business. Our reportable operating segments are Donnelley and DonTech. Donnelley Donnelley includes the revenue from our Sprint-branded yellow pages directories and pre-press publishing services and all operating and administrative expenses. As the publisher of yellow pages directories, directory revenue is recognized under the deferral and amortization method based on the annual billing value of the advertisements sold in a directory ("publication sales"), subject to sales claims and allowances. Prior to the acquisition, we sold yellow pages advertising in certain Sprint directories on behalf of SPA and earned a commission based on the contract value of those sales, subject to an allowance for sales claims and bad debts. Revenue from pre-press publishing services is based on contractual terms. 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. The DonTech segment includes revenue participation income and our 50% interest in the net profits of DonTech. We also provide certain pre-press publishing and billing services under separately negotiated contracts for the yellow pages directories of SBC for which DonTech sells advertising and sales related computer application services to DonTech. The fees received for these services are included in our Donnelley segment, as they relate more to our pre-press publishing services than DonTech sales activities. 21 Although DonTech provides advertising sales of yellow pages and other directory products similar to Donnelley, the partnership is considered a separate operating segment since, among other things, it has its own Board of Directors and the employees of DonTech, including officers and managers, are not employees of the Company. 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 results of operations or financial condition if the actual results differ from the assumptions or estimates are presented below. See Note 3 in Item 1 "Financial Statements" for additional information on our accounting policies. Principles of Consolidation. The consolidated financial statements include the accounts of R.H. Donnelley Corporation and its direct and indirect wholly owned subsidiaries. All intercompany transactions and balances have been eliminated. The DonTech Partnership ("DonTech") is accounted for under the equity method as we do not have control, but do have the ability to exercise significant influence over DonTech's operating and financial policies. Accordingly, DonTech's revenue and expenses are not consolidated in our financial statements, but our share of its net profits is reported as partnership income in the consolidated statements of operations. Revenue Recognition. We earn revenue from the sale of advertising into our yellow pages directories. Revenue from the sale of advertising is deferred when a directory is published and recognized ratably over the life of a directory, which is typically twelve months (the "deferral and amortization method"). Revenue is recorded net of an estimate for claims and allowances based on historical experience. We adjust our estimate based on actual results or when information or circumstances indicate that the current estimate may not adequately represent the amount of claims and allowances we may incur in the future. A 1% change in our claims and allowances rate would impact revenue by $5 to $6 million annually. We also earn revenue from pre-press publishing services provided to SBC for those directories in the DonTech markets. Revenue from pre-press publishing services is recognized as services are performed. For the 2002 period, we earned sales commission revenue from the sale of advertising on behalf of SPA and fees for pre-press publishing services. As a sales agent for SPA, we recognized sales commission revenue, net of an allowance for sales claims and bad debts, at the time an advertising contract was executed with a customer. Deferred Directory Costs. Deferred directory costs include costs directly attributable to the advertising sales process. These costs include sales commissions, printing, paper and initial distribution expenses. Deferred directory costs are initially deferred when incurred and recognized ratably over the life of a directory. These costs also include an allowance for sales claims and bad debt, which are initially deferred and recognized ratably over the life of a directory. Receivables. Advertisers enter into a twelve-month contract for their advertising. Most advertisers are billed a pro rata amount of their contract value on a monthly basis. Billed receivables represent the amount that has been billed to advertisers. Unbilled receivables represent amounts for published directories that have yet to be billed to advertisers in accordance with the terms of their contract. We establish an estimate of our allowance for doubtful accounts for billed and unbilled receivables based upon historical experience. We adjust our estimate based on actual results or when information or circumstances indicate that our current estimate may not represent the amount of bad debts we may incur in the future. A 1% change in our bad debt rate would impact expenses by $5 to $6 million annually. We provide pre-press publishing services to SBC for those directories sold by DonTech under a separately negotiated contract that expires in 2008. Receivables for services are billed and collected in accordance with the terms of the agreement, generally a monthly pro rata amount based on the annual estimated contract value. An additional amount is billed or reimbursed to SBC early in the following year based on a reconciliation of actual volumes compared to contractual volumes. Concentration of Credit Risk. Approximately 85% of our advertising revenue is derived from the sale of advertising to local small- and medium-sized businesses. These advertisers enter into twelve-month advertising sales contracts and typically make monthly payments over the term of the contract. Some advertisers pre-pay the full amount or a portion of the contract value. Most new advertisers are subject to a credit review. If the advertisers qualify, we may extend credit to them for their advertising purchase. Small- and medium-sized businesses tend to have fewer financial resources and higher financial failure rates than large businesses. In addition, full collection of delinquent accounts can take an extended period of time and involve increased costs. While we do not believe that extending credit to our local advertisers will have a material adverse affect on our results of operations or financial condition, no assurances can be given. We do not require collateral from our advertisers, although we do charge interest to advertisers who do not pay within specified due dates. 22 The remaining 15% of our advertising revenue is derived from the sale of advertising to national or large regional chains, such as rental car companies, insurance companies, banks and automobile manufacturers. Substantially all of the revenue derived through national accounts is serviced through Certified Marketing Representatives ("CMRs"), with which we contract. CMRs are independent third parties that act as agents for national companies. The CMRs are responsible for billing the national customers for their advertisement. We receive payment for the value of advertising placed in our directory, net of the CMR's commission, directly from the CMR. While we are still exposed to credit risk, the amount of losses from these accounts are usually less than the local accounts as the advertisers, and in some cases, the CMRs, tend to be larger companies with greater financial resources than the local advertisers. We maintain a significant receivable balance with SBC for revenue participation and pre-press publishing services fees. The revenue participation receivable is subject to adjustment, based on collections by SBC from individual advertisers; however, the adjustment is limited based on contractual provisions. The receivable is recorded at net realizable value. We do not currently foresee a material credit risk associated with this receivable, although there can be no assurance that full payment will be received on a timely basis. We have interest rate swap agreements with major financial institutions with a notional value of $255 million. We are exposed to credit risk in the event that one or more of the counterparties to the agreements does not, or cannot meet their 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. The counterparties to the swap agreements are major financial institutions with credit ratings of A or higher. While we do not currently foresee a material credit risk associated with these swap agreements, no assurances can be given. Intangible Assets and Goodwill. Intangible assets consist of directory services agreements between Sprint and the Company entered into as part of the SPA acquisition, established customer relationships and trade names. The fair value of these intangible assets is being amortized over their estimated useful lives. The estimated fair value and useful lives of these intangible assets were determined based on an independent valuation and deemed by management to be reasonable. Annual amortization expense for the next five years is approximately $50 million. An increase or decrease of one year in the estimated useful lives of each of these assets would change the annual amortization expense by approximately $2 million. The directory services agreements consist of a directory services license agreement, a trademark license agreement and a non-competition agreement (collectively "Directory Services Agreements"). The fair value of these agreements was determined based on the present value of estimated future cash flows and is being amortized under the straight-line method over 50 years. The fair value of customer relationships was determined based on the present value of estimated future cash flows and historical attrition rates and is being amortized under an accelerated method that recognizes the value derived from customer relationships is greater in the earlier years and steadily declines over time. The weighted average useful life of these relationships is 18 years. The fair value of the acquired trade names was determined based on the "relief from royalty" method, which values the trade names based on the estimated amount that a company would have to pay in an arms length transaction to use these trade names. These assets are being amortized under the straight-line method over 15 years. Goodwill represents the excess of the purchase price for SPA over the net tangible and intangible assets acquired. In accordance with SFAS 142 "Goodwill and Other Intangible Assets," goodwill is not amortized, but is subject to impairment testing. No impairment losses were recorded during the period. 23 Derivative Financial Instruments. Our derivative financial instruments are currently limited to interest rate swap agreements used to mitigate our exposure to changes in interest rates on variable rate debt. We have interest rate swap agreements with a total notional value of $255 million that effectively converts $255 million of variable rate debt to fixed rate debt. Under the terms of the swap agreements, we receive variable interest based on three-month LIBOR and pay a fixed rate of 2.85%. The swaps mature on March 31, 2007. The interest rate swaps and the hedged item (3 month LIBOR-based interest payments on $255 million of bank debt) have been designed so that the critical terms (interest reset dates, duration and index) coincide. The interest rate swaps have been designated as cash flow hedges. In accordance with SFAS 133, to the extent the swaps are effective, changes in the fair value of the swaps are recorded in other comprehensive income or loss, a component of shareholders' equity. Any ineffectiveness is recorded through earnings. Through June 30, 2003, the swaps have provided a perfect hedge of the hedged item (e.g. the cash flows from the swaps exactly offset the interest payments made during the quarter on $255 million of bank debt) and no ineffectiveness has been charged to earnings. 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 investment and funding decisions. 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. Effective January 1, 2003, we reduced our rate of return on plan assets from 9.75% to 8.25%. Based on the current investment environment, our outlook for future returns and the pension plan's asset allocation, we determined that a long-term rate of return of 8.25% was a more appropriate assumption. Earnings per Share. Basic earnings per common share (EPS) are generally calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding. However, because the redeemable convertible cumulative preferred stock ("Preferred Stock") contains certain participation rights, EITF Topic D-95, "Effect of Participating Securities on the Computation of Basic Earnings Per Share," ("Topic D-95") requires that the dilutive effect of those securities be included in the weighted average number of shares outstanding. Furthermore, Topic D-95 requires that the dilutive effect to be included in basic EPS may be calculated using either the if-converted method or the two-class method. However, the dilutive effect of the Preferred Stock cannot be less than that which would result from the application of the two-class method. We have elected to use the if-converted method in calculating basic EPS. Diluted EPS equals net income divided by the weighted average common shares outstanding plus common share equivalents. Common share equivalents include stock options and warrants, the dilutive effect of which is calculated using the treasury stock method, and Preferred Stock, the potential dilutive effect of which is calculated using the if-converted method. 24 RESULTS OF OPERATIONS Three and six months ended June 30, 2003 and 2002 Because of the SPA acquisition, related financing and associated accounting, results for 2003 prepared in accordance with generally accepted accounting principles ("GAAP") are not comparable to our 2002 GAAP results previously reported. Also, because purchase accounting rules prevent us from recognizing deferred revenue and expenses for those directories that published prior to the acquisition, including all January 2003 published directories, reported 2003 revenue and expenses are not representative of revenue and expenses that would be reported in subsequent years. These purchase accounting adjustments will continue to effect reported results into 2004. Accordingly, in addition to a discussion of the reported 2003 results compared to the reported 2002 results, we are also providing a comparison of 2003 adjusted results, which eliminates the effect of purchase accounting on deferred revenue and expenses, to 2002 pro forma results, which assumes the acquisition occurred on January 1, 2002. See "- Adjusted and Pro Forma Results" below for the reconciliation of 2003 and 2002 reported results to 2003 adjusted and 2002 pro forma results. Net Revenue Revenue is derived entirely from our Donnelley segment. We earn revenue primarily from the sale of advertising in our yellow-pages directories. Net revenue was $38.6 million and $51.0 million for the quarter and six months ended June 30, 2003, respectively, compared to $19.9 million and $38.8 million for the quarter and six months ended June 30, 2002, respectively. The increase in 2003 is primarily due to the acquisition. Revenue for the 2002 periods included commission revenue on advertising sales made on behalf of SPA and revenue from pre-press publishing services, whereas revenue in 2003 includes the amortization of publication sales for directories published subsequent to the acquisition under the deferral and amortization method and revenue from pre-press publishing services. Revenue from pre-press publishing services for the quarter and six months ended June 30, 2003 declined $1.3 million and $4.3 million, compared to the quarter and six months ended June 30, 2002, respectively, primarily due to the loss of revenue from SPA. As a result of the acquisition, services previously provided to SPA are now performed internally with revenue and expenses eliminated in consolidation. Expenses Expenses are derived entirely from our Donnelley segment. Total expenses were $63.5 million and $121.5 million for the quarter and six months ended June 30, 2003, respectively, and $20.4 million and $38.7 million for the quarter and six months ended June 30, 2002, respectively. Operating expenses were $34.8 million and $66.8 million for the quarter and six months ended June 30, 2003, respectively, and $14.1 million and $25.7 million for the quarter and six months ended June 30, 2002, respectively. The increase in operating expenses in the 2003 periods is primarily due to the acquisition and an increase in expenses in our new role as publisher compared to our prior role as a sales agent. Direct sales costs, which includes sales person compensation and lease expense for sales offices, were $7.8 million and $14.1 million higher than last year's quarter and six months ended June 30, 2002, respectively, due to an increase in the number of directories, the number of sales personnel and the number of sales offices. As a publisher, we also incur costs for the printing (including the cost of paper) and distribution of directories, as well as marketing and advertising costs, which we did not incur as a sales agent. Total expenses for these items for the quarter and six months ended June 30, 2003 were $5.3 million and $9.8 million, respectively. Publishing and information technology expenses were $5.4 million and $12.1 million higher for the quarter and six months ended June 30, 2003, respectively. Operating expenses also include $2.9 million and $3.9 million for the three and six months ended June 30, 2003, respectively, for the amortization of a purchase accounting adjustment to increase the deferred directory costs acquired to their fair value. General and administrative expenses were $12.2 million and $22.2 million for the quarter and six months ended June 30, 2003, respectively, and $4.7 million and $9.8 million for the quarter and six months ended June 30, 2002, respectively. This increase is attributable to general and administrative expenses related to the acquired SPA business for the quarter and six months ended June 30, 2003 of $3.0 million and $6.3 million, respectively, a charge of $3.1 million for the quarter and six months ended June 30, 2003 related to the shutdown of one of our publishing facilities in Tennessee, higher insurance costs in the quarter and six months ended June 30, 2003 of $0.9 million and $1.9 million, respectively and compensation expense for employee stock options of $0.4 million and $1.0 million for the quarter and six months ended June 30, 2003, respectively. In October 2002, we granted stock options to certain key employees that were contingent upon the closing of the SPA acquisition. On the date of the SPA closing, the fair market value of our common stock was greater than the exercise price. Accordingly, we will recognize compensation expense of approximately $5.1 million over the next four years. 25 Depreciation and amortization was $16.4 million and $32.5 million for the quarter and six months ended June 30, 2003, respectively, and $1.6 million and $3.2 million for the quarter and six months ended June 30, 2002, respectively. The increase is primarily due to the amortization of intangible assets, which was not incurred in 2002. Amortization of intangible assets was $12.5 million and $24.9 million for the quarter and six months ended June 30, 2003, respectively. Depreciation of fixed assets and amortization of computer software was $2.3 million higher for the quarter and $4.4 million higher for the six-month period due to the acquisition of SPA depreciable assets. Partnership Income Partnership income in 2003 and 2002 includes our 50% share of the net income of DonTech and revenue participation income from SBC. As a sales agent for SBC, DonTech earns commission revenue based on the annual value of sales contracts executed during the period ("calendar sales"). We also earn revenue participation income based on the level of calendar sales during the period. DonTech's net income and our revenue participation income are directly correlated to DonTech's calendar sales and a material decline in their calendar sales could have an adverse effect on our consolidated results. DonTech manages the sale of advertising ("sales campaign") on a directory-by-directory basis or project basis (a project consists of two or more directories in a geographic area). A typical sales campaign lasts two to five months and ends approximately two months prior to publication. Accordingly, changes in the beginning and ending dates of a sales campaign and the actual sales recorded at any point during the sales campaign can vary from one period to the next. These variations, or timing factors, can cause partnership income to be materially different from the prior year comparative period. Partnership income in 2002 also included priority distribution income on our membership interest in CenDon, LLC. As a result of the SPA acquisition, we no longer report priority distribution income. Partnership income related to DonTech was $35.3 million in the second quarter of 2003 compared to $36.6 million in the second quarter of 2002, and $59.0 million for the six months ended June 30, 2003 compared to $58.5 million for the six months ended June 30, 2002. The decrease in the second quarter 2003 compared to the second quarter 2002 was due to lower calendar sales resulting from continued weak economic conditions in the Midwest, intense competition in the local media market and a shift of advertising sales previously serviced in the first quarter. Calendar sales for the six-month period ended June 30, 2003 were also lower than the comparable 2002 period as a result of weak economic conditions and competition; however, lower partnership expenses more than offset the impact on partnership income from lower calendar sales. See "- Advertising Sales" below for a reconciliation of DonTech calendar sales, a non-GAAP measure, to reported partnership income, the most comparable GAAP measure. Priority distribution income for the quarter and six months ended June 30, 2002 was $4.3 million and $9.5 million, respectively. Operating Income / Loss We had operating income of $10.5 million and operating loss of $11.5 million for the quarter and six months ended June 30, 2003, respectively, and operating income of $40.4 million and $68.1 million for the quarter and six months ended June 30, 2002, respectively. Operating income from DonTech was $35.3 million in the second quarter of 2003 compared to $36.6 million in the second quarter of 2002, and $59.0 million for the six months ended June 30, 2003 compared to $58.5 million for the six months ended June 30, 2002. See "- Partnership Income" above for a discussion of DonTech income. Operating loss from Donnelley was $24.8 million and $70.5 million for the quarter and six months ended June 30, 2003, respectively, compared to operating income of $3.8 million and $9.5 million for the quarter and six months ended June 30, 2002, respectively. The significant decline in Donnelley operating income was mainly due to purchase accounting rules that prevent us from recognizing deferred revenue and expenses associated with those directories published prior to the acquisition and the increase in expenses incurred as a publisher. Interest Expense Net interest expense was $43.3 million and $91.9 million for the quarter and six months ended June 30, 2003, respectively, and $6.0 million and $12.2 million for the quarter and six months ended June 30, 2002, respectively. Interest expense in 2003 is not comparable to 2002 due to the substantial amount of debt issued in connection with the SPA acquisition (see "- Liquidity and Capital Resources"). 26 Other Income Other income of $0.7 million in the second quarter of 2003 and $1.5 million in the six month period ended June 30, 2003 represents a gain on hedging activities. At December 31, 2002, a $75 million notional value interest rate swap did not qualify for hedge accounting treatment due to the then-pending repayment of existing variable rate debt in connection with the SPA acquisition. In December 2002, a charge of $1.5 million was recorded to reclassify the cumulative change in the fair value of the swap that was previously recognized in accumulated other comprehensive loss on the balance sheet to earnings. The change in the fair value of the swap was recorded through earnings in 2003 and, since the swap was held through its maturity in June 2003, a gain of $1.5 million was recognized. Net Income (Loss), Net Income (Loss) Available to Common Shareholders and Earnings Per Share Net loss was $18.9 million and $60.1 million for the quarter and six months ended June 30, 2003, respectively, compared to net income of $21.2 million and $34.4 million for the quarter and six months ended June 30, 2002, respectively. The net loss in 2003 was due to purchase accounting rules that prevented us from recognizing deferred revenue and expenses associated with those directories published prior to the acquisition, higher expenses as a publisher and significantly higher interest expense. The Preferred Stock dividend was $6.0 million for the second quarter 2003 and $48.1 million for the six months ended June 30, 2003. These amounts include a "deemed dividend" of $1.9 million and $40.1 million for the quarter and six-months ended June 30, 2003 for a beneficial conversion feature. Net loss available to common shareholders, or net loss after the Preferred Stock dividend, was $24.9 million and $108.2 million for the quarter and six months ended June 30, 2003. Basic and diluted earnings per share were a loss of $0.81 and $3.56 for the quarter and six months ended June 30, 2003, respectively. Because there was a net loss for the quarter and six months ended June 30, 2003, diluted earnings per share were anti-dilutive compared to basic earnings per share. Diluted earnings per share cannot be greater (or less of a loss) than basic earnings per share; therefore, basic and diluted earnings per share reported for the quarter and six months ended June 30, 2003 were the same. Basic and diluted earnings per share for the quarter ended June 30, 2002 were $0.71 and $0.70, respectively and basic and diluted earnings per share for the six months ended June 30, 2002 were $1.16 and $1.14, respectively. Adjusted and Pro Forma Results As a result of the SPA acquisition, our 2003 results are not comparable to our previously reported 2002 results. Additionally, due to purchase accounting rules that prevent us from recognizing deferred revenue and expenses associated with directories that published prior to the acquisition, our reported 2003 results are not indicative of our underlying operations and financial performance. Accordingly, management is presenting adjusted results for 2003 that eliminate the purchase accounting impacts on revenue and expenses and pro forma results for 2002 that assume the acquisition and related financing occurred January 1, 2002. Management believes that the presentation of these adjusted and pro forma results will help investors better and more easily compare 2003 underlying operating results against what the combined company performance would likely have been in the comparable 2002 periods. However, while management believes that the 2002 pro forma amounts reasonably represent results as if the two businesses had been combined as of January 1, 2002, because of differences in the application of accounting policies between SPA and RHD, management does not believe the pro forma 2002 amounts are strictly comparable to adjusted 2003 results on a quarterly basis. 27
amounts in millions Three months ended June 30, ----------------- ----------------- ---- ---------------- Reported Adjustments Adjusted ----------------- ----------------- ---- ---------------- 2003 Net revenue................................. $ 38.6 $ 105.0 (1) $ 143.6 Operating expenses.......................... 34.8 19.4 (2) 54.2 General and administrative expenses......... 12.2 -- 12.2 Depreciation and amortization............... 16.4 -- 16.4 Partnership income.......................... 35.3 -- 35.3 ----------------- ----------------- ---- ---------------- Operating income............................ $ 10.5 $ 85.6 $ 96.1 ----------------- ----------------- ---- ---------------- Reported Adjustments Pro forma ----------------- ----------------- ---- ---------------- 2002 Net revenue................................. $ 19.9 $ 122.6 (3) $ 142.5 Operating expenses.......................... 14.1 53.2 (4) 67.3 General and administrative expenses......... 4.7 3.6 (5) 8.3 Depreciation and amortization............... 1.6 14.6 (6) 16.2 Partnership income.......................... 40.9 (4.3) (7) 36.6 ----------------- ----------------- ---- ---------------- Operating income............................ $ 40.4 $ 46.9 $ 87.3 ----------------- ----------------- ---- ---------------- amounts in millions Six months ended June 30, ------------------ ---------------- ---- ---------------- Reported Adjustments Adjusted ------------------ ---------------- ---- ---------------- 2003 Net revenue................................. $ 51.0 $ 236.1 (1) $ 287.1 Operating expenses.......................... 66.8 46.0 (2) 112.8 General and administrative expenses......... 22.2 -- 22.2 Depreciation and amortization............... 32.5 -- 32.5 Partnership income.......................... 59.0 -- 59.0 ------------------ ---------------- ---- ---------------- Operating (loss) income..................... $ (11.5) $ 190.1 $ 178.6 ------------------ ---------------- ---- ---------------- Reported Adjustments Pro forma ------------------ ---------------- ---- ---------------- 2002 Net revenue................................. $ 38.8 $ 248.3 (3) $ 287.1 Operating expenses.......................... 25.7 105.4 (4) 131.1 General and administrative expenses......... 9.8 9.3 (5) 19.1 Depreciation and amortization............... 3.2 29.2 (6) 32.4 Partnership income.......................... 68.0 (9.5) (7) 58.5 ------------------ ---------------- ---- ---------------- Operating income............................ $ 68.1 $ 94.9 $ 163.0 ------------------ ---------------- ---- ----------------
(1) Represents the net revenue for directories that published prior to the acquisition that would have been recognized during the period had it not been for purchase accounting adjustments required under GAAP. (2) Represents the operating expenses for directories that published prior to the acquisition that would have been recognized during the period, in accordance with RHD's accounting policies, had it not been for purchase accounting adjustments required under GAAP. (3) Represents revenue recognized by SPA during the period less RHD commission revenue and pre-press publishing revenue from SPA included in the reported amounts. The RHD commission revenue and pre-press publishing revenue would have been eliminated as intercompany revenue had the acquisition occurred on January 1, 2002. Revenue recognized by SPA for the quarter and six months ended June 30, 2002 was $136.5 million and $273.7 million, respectively, and RHD commission revenue and pre-press publishing revenue from SPA for the quarter and six months ended June 30, 2002 was $13.9 million and $25.4 million, respectively. 28 (4) Represents operating expenses recognized by SPA during the period, net of commission and pre-press publishing expenses for services provided by RHD, plus expense related to the amortization of a required purchase accounting adjustment to increase deferred directory costs acquired to fair value. The SPA commission and pre-press publishing expenses for services provided by RHD would have been eliminated as intercompany expenses had the acquisition occurred on January 1, 2002. SPA expenses for the quarter and six months ended June 30, 2002, net of commission and pre-press publishing expenses for services provided by RHD were $50.2 million and $97.9 million, respectively, and the additional expense related to a required purchase accounting adjustment for the quarter and six months ended June 30, 2002 was $3.0 million and $7.5 million, respectively. (5) Represents general and administrative expenses recognized by SPA during the period. (6) Represents depreciation and amortization expense recognized by SPA for the quarter and six months ended June 30, 2002 of $2.2 million and $4.3 million, respectively plus amortization expense for intangible assets acquired in the acquisition assuming it occurred on January 1, 2002 of $12.4 million and $24.9 million for the quarter and six months ended June 30, 2002, respectively. (7) Represents income from CenDon, LLC recognized by RHD and included in reported amounts, which would have been eliminated as intercompany income had the acquisition occurred on January 1, 2002. Adjusted net revenue in the second quarter 2003 was $143.6 million, an increase of 0.8% from $142.5 million of pro forma revenue in the second quarter of 2002. The increase was primarily due to higher pre-press publishing revenue resulting from the reconciliation of prior year volumes to contractual volumes, which resulted in additional billings for services performed. Adjusted and pro forma net revenue for the six months ended June 30, 2003 and 2002 was $287.1 million. Adjusted operating expenses in the second quarter 2003 were $54.2 million compared to pro forma operating expenses of $67.3 million for the same period last year. Adjusted operating expenses for the six months ended June 30, 2003 were $112.7 million compared to pro forma operating expenses of $131.1 million for the six months ended June 30, 2002. These decreases were attributable to lower bad debt expense for the quarter and six months ended June 30, 2003 of approximately $7 million and $9 million, respectively, and lower print and paper costs for the quarter and six months ended June 30, 2003 of approximately $3 million and $6 million, respectively. The remaining variance is primarily due to the timing of expense recognition caused by a difference between SPA and RHD accounting policies. Adjusted general and administrative expenses in the second quarter 2003 were $12.2 million compared to pro forma general and administrative expenses of $8.4 million in the second quarter 2002. Adjusted general and administrative expenses for the six months ended June 30, 2003 were $22.3 million compared to pro forma general and administrative expenses of $19.1 million for the six months ended June 30, 2002. The increase in the 2003 periods was due to by a charge of $3.1 million related to the shutdown of one of our pre-press publishing facilities in Tennessee. Advertising Sales Management utilizes publication sales as its primary sales performance measure. Management believes that a comparison of publication sales for the same directories from one period to another gives a better indication of underlying sales trends, economic conditions and business confidence than a comparison of directory revenue due to the deferral and amortization method. Because directory revenue is recognized ratably over the life of a directory under the deferral and amortization method, the amount of revenue recognized during a period is not directly related to the sales trends, economic conditions and business confidence during that period. Publication sales are comparable to a "same-store" sales measure and are utilized and disclosed by many directory publishers, thus facilitating comparison of sales performance among publishers. For the second quarter 2003, publication sales for the Donnelley segment were $132.9 million, up 0.3% from publication sales for the Donnelley segment of $132.5 million last year. The increase in publication sales resulted from continued improvement in advertiser renewal rates offset by weaker performance in several military markets due to troop deployment in connection with the Iraqi conflict. Publication sales are a non-GAAP measure and the most comparable GAAP measure related to the Donnelley segment is net revenue. A reconciliation of publication sales to net revenue is presented below. 29
For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------------------- ------------------------------- amounts in millions 2003 2002 2003 2002 --------------- --------------- ---------------- -------------- Publication sales in the period.................. $ 132.9 $ 132.5 $ 278.0 $ 275.6 Less publication sales for January 2003 directories not recognized as revenue due to purchase accounting.................................... (102.4) Less publication sales not recognized as revenue in current period................................ (111.9) (149.3) Less publication sales for SPA directories not sold by RHD........................................ (104.7) (200.5) Plus revenue recognized from prior period publication sales............................. 10.5 10.5 --------------- --------------- ---------------- -------------- Publication sales reported by RHD in 2002........ 27.8 75.1 Less the value of executed sales contracts reported as calendar sales in prior periods............ (22.7) (45.9) Plus the value of sales contracts executed during the period to be reported as publication sales in future periods................................ 47.9 66.5 --------------- -------------- Calendar sales reported by RHD in 2002........... $ 53.0 $ 95.7 --------------- -------------- Net directory advertising revenue................ 31.5 36.8 Net commission revenue on 2002 calendar sales.... $ 12.2 $ 22.0 Pre-press publishing revenue..................... 6.0 7.3 12.1 16.2 Other revenue.................................... 1.1 0.4 2.1 0.6 --------------- --------------- ---------------- -------------- Net revenue...................................... $ 38.6 $ 19.9 $ 51.0 $ 38.8 --------------- --------------- ---------------- --------------
Management also utilizes publication sales to evaluate the sales performance of DonTech. Although partnership income from DonTech is not directly correlated to DonTech publication sales, management believes that this measure provides a better indication of underlying sales trends, economic conditions and business confidence in the DonTech markets than calendar sales or partnership income. Publication sales at DonTech represent the annual billing value of the SBC directories published during the period for which DonTech sells advertising. For the second quarter, publication sales were $90.8 million, which was consistent with $90.6 million of sales in the same period of 2002. For the six month period ended June 30, 2003, publication sales were $179.4 million compared to $184.7 million for the six-month period ended June 30, 2002. This decline of 2.9% reflects the weak economic conditions and business confidence in the Midwest, as well as the impact of local media competition in the Chicago market. Publication sales for DonTech are a non-GAAP measure and the most comparable GAAP measure is partnership income. A reconciliation of publication sales to calendar sales to partnership income is provided below. 30
Three months ended Six months ended June 30, June 30, ------------------------------ ------------------------------- amounts in million 2003 2002 2003 2002 -------------- --------------- --------------- --------------- DonTech publication sales in the period.......... $ 90.8 $ 90.6 $ 179.4 $ 184.7 Less the value of executed sales contracts reported as calendar sales in prior periods............ (86.8) (85.8) (173.1) (177.3) Plus the value of sales contracts executed during the period to be reported as publication sales in future periods................................ 116.1 120.4 199.1 199.6 -------------- --------------- --------------- --------------- DonTech calendar sales in the period............. $ 120.1 $ 125.2 $ 205.4 $ 207.0 -------------- --------------- --------------- --------------- Commission revenue from above calendar sales..... $ 30.3 $ 31.6 $ 51.9 $ 52.2 Partnership net expenses......................... (16.8) (18.1) (32.0) (33.7) -------------- --------------- --------------- --------------- Partnership profit............................... $ 13.5 $ 13.5 $ 19.9 $ 18.5 -------------- --------------- --------------- --------------- Company's 50% share of partnership profits....... $ 6.8 $ 6.8 $ 10.0 $ 9.3 Revenue participation income from SBC sales...... 28.5 29.8 49.0 49.2 -------------- --------------- --------------- --------------- Total income from DonTech........................ 35.3 36.6 59.0 58.5 Priority distribution income from CenDon, LLC.... -- 4.3 -- 9.5 -------------- --------------- --------------- --------------- Partnership income............................... $ 35.3 $ 40.9 $ 59.0 $ 68.0 -------------- --------------- --------------- ---------------
LIQUIDITY AND CAPITAL RESOURCES In connection with the SPA acquisition, we entered into a $1,525 million Credit Facility ("Credit Facility"), consisting of a $500 million Term Loan A, a $900 million Term Loan B and a $125 million Revolving Credit Facility (the "Revolver") and issued $325 million 8 7/8% Senior Notes due 2010 ("Senior Notes") and $600 million 10 7/8% Subordinated Notes due 2012 ("Subordinated Notes," and collectively with the Senior Notes, the "Notes"). These funds were used to acquire SPA, refinance existing debt and pay transactions costs. Amounts outstanding prior to the acquisition under our former senior secured term facilities of $114.2 million were refinanced and in connection with a tender offer and exit consent solicitation, we repurchased $128.8 million of the 9 1/8% Senior Subordinated Notes due 2008 ("Pre-acquisition Notes"). Our primary source of liquidity is cash flows from operations as well as available borrowing capacity under the Revolver. At June 30, 2003, we had $100.9 million of borrowing capacity under the Revolver. Our primary liquidity requirements are to fund operating expenses and service our debt. Our ability to meet these requirements will depend on our ability to generate cash flow in the future. Our primary sources of cash flow consist mainly of cash receipts from the sale of advertising in our yellow pages directories, revenue participation payments from SBC and cash distributions from DonTech. These sources are directly dependent on the value of yellow pages advertising sold and can be impacted by, among other factors, general economic conditions, competition from other yellow pages directory publishers and other alternative products, consumer confidence and the level of demand for yellow pages advertising. We believe that cash flow from operations, along with borrowing capacity under the Revolver, will be adequate to fund our operations and meet our debt service requirements for at least the next 12 to 24 months. However, we make no assurances that our business will generate sufficient cash flow from operations or that sufficient borrowing will be available under the Revolver to enable us to fund our operations and meet all debt service requirements. Cash flow from operations was $131.5 million for the six months ended June 30, 2003 and $28.2 million for the same period in 2002. When we purchased SPA, we acquired the rights associated with the collection of over $250 million of accounts receivables under advertising contracts executed prior to the SPA acquisition, but we did not acquire the associated deferred revenue liability. As a result, the increase in deferred revenue resulted in a source of cash of $209.0 million. Deferred revenue represents the value of published directories that will be recognized as revenue over the remaining life of the directories. Because we did not acquire the pre-acquisition deferred revenue liability of SPA, we are not amortizing the revenue associated with those directories that were published prior to the acquisition (including all January 2003 directories). However, we continue to bill and collect from advertisers the amounts due for directories published prior to the acquisition in accordance with terms of the advertising contract. The increase in other current assets resulted in a use of cash of $24.6 million primarily due to payments made to sales persons and vendors for directories that will publish at a later date. These payments are deferred until the directory is published. Through June 30, 2003, we also made interest payments of $89.0 million for borrowings under our Credit Facility, the Notes and Pre-acquisition Notes. 31 Cash used in investing activities was $370.8 million through June 30, 2003 and $1.3 million through June 30, 2002. During the first quarter of 2003, we paid $2,259.6 million to acquire SPA and fund transaction costs, of which, $1,825.0 million raised prior to year-end 2002 was released from escrow. Also prior to year-end 2002, we issued $70 million of Preferred Stock to investment partnerships affiliated with The Goldman Sachs Group, Inc. (collectively, the "GS Funds") in November 2002. The net proceeds received of $69.3 million were reported as restricted cash at year-end 2002. The remaining funds were obtained from additional borrowings under the Credit Facility and the issuance of Preferred Stock at the closing (see cash flow from financing activities below). Cash provided by financing activities was $231.5 million through June 30, 2003 compared to cash used in financing activities of $39.2 million through June 30, 2002. On January 3, 2003, we borrowed $500 million under the Credit Facility and received net proceeds after issuance costs of $461.3 million. We also issued $130 million of Preferred Stock and received net proceeds after issuance costs of $125.7 million. With the proceeds raised from the issuance of debt and Preferred Stock, we refinanced pre-acquisition debt of $243 million, which consisted of $114.2 million of variable rate bank debt and $128.8 million of the Pre-acquisition Notes. Through June 30, 2003, we also repaid $128.7 million of acquisition-related debt, net of $24.1 million of borrowings under the Revolver and received $16.2 million from stock option exercises. Cash used by financing activities through June 30, 2002 consisted of debt repayments of $42.5 million and $3.3 million received from stock option exercises. Item 3. Quantitative and Qualitative Disclosure About Market Risk Risk Management The Credit Facility bears interest at variable rates. Accordingly, our earnings and cash flow are affected by changes in interest rates. The terms of the Credit Facility required that we enter into hedge agreements to provide either a fixed interest rate or interest rate protection on at least 50% of our total outstanding debt. To satisfy the requirements under the Credit Facility and to mitigate our exposure to changes in interest rates, in March 2003, we entered into three interest rate swap agreements with a total notional value of $255 million. These interest rate swaps effectively convert $255 million of variable rate debt to fixed rate debt. After the effect of the swaps, total fixed rate debt comprises 54% of our total debt portfolio. Under the terms of these swap agreements, we receive variable interest based on three-month LIBOR and pay a fixed rate of 2.85%. The swaps mature on March 31, 2007. The outstanding interest rate swaps expose us to credit risk in the event that the counterparties to the agreements do not or cannot meet their obligations. 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 agreements. The counterparties to the swaps are major financial institutions and we expect the counterparties to be able to perform their obligations under the swaps. We use derivative financial instruments for hedging purposes only and not for trading or speculative purposes. Market Risk Sensitive Instruments The swaps and the hedged item (3 month LIBOR-based interest payments on $255 million of bank debt) have been designed so that the critical terms (interest reset dates, duration and index) coincide. The interest rate swap agreements have been designated as cash flow hedges. In accordance with SFAS 133, to the extent the swaps are effective, changes in the fair value of the swaps are recorded in other comprehensive income or loss, a component of shareholders' equity. Any ineffectiveness is recorded through earnings. The fair value of the swaps was determined based on quoted market prices. At June 30, 2003, the unrealized fair value of the swaps, which represents the difference between what the Company would pay to terminate the swaps, and the book value of the swaps, was a loss of $5.5 million (a loss of $3.2 million after tax). The unrealized after-tax fair value of the swaps was recognized in other comprehensive loss as the swaps provided a perfect hedge of the hedged item (e.g. the cash flows from the swaps exactly offset the interest payments made during the quarter on $255 million of bank debt). 32 Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures. Based on their evaluation, as of the end of the period covered by 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 over financial reporting. There have not been any significant changes in the Company's internal controls over financial reporting identified in connection with the evaluation described in (a) above that have materially affected, or is reasonable likely to materially affect the Company's internal controls over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings We are involved in various legal proceedings arising in the ordinary course of our business, as well as certain extraordinary litigation and tax matters described below. We periodically assess our liabilities and contingencies in connection with these matters based upon the latest information available to us. For those matters where it is probable that we have incurred a loss and the loss or range of loss can be reasonably estimated, we record reserves in our consolidated financial statements. In other instances, we are unable to make a reasonable estimate of any liability because of the uncertainties related to both the probable outcome and amount or range of loss. As additional information becomes available, we adjust our assessment and estimates of such liabilities accordingly. Based on our review of the latest information available, we believe our ultimate liability in connection with pending legal proceedings, including the extraordinary litigation and tax matters described below, will not have a material adverse effect on our results of operations, cash flows or financial position, as described further below. In order to understand our potential exposure under the extraordinary litigation and tax matters described below under the captions "Information Resources, Inc." and "Tax Matters," one needs to understand the relationship between us and The Dun & Bradstreet Corporation, and certain of its predecessors and affiliates that, through various corporate reorganizations and contractual commitments, have assumed varying degrees of responsibility with respect to such matters. In November 1996, the company then known as The Dun & Bradstreet Corporation ("D&B1") separated (the "1996 Distribution") through a spin-off into three separate public companies: D&B1, ACNielsen Corporation ("ACNielsen") and Cognizant Corporation ("Cognizant"). In June 1998, D&B1 separated (the "1998 Distribution") through a spin-off into two separate public companies: D&B1, which changed its name to R.H. Donnelley Corporation ("Donnelley"), and a new company named The Dun & Bradstreet Corporation ("D&B2"). Later in 1998, Cognizant separated (the "Cognizant Distribution") through a spin-off into two separate public companies: IMS Health Incorporated ("IMS") and Nielsen Media Research, Inc. ("NMR"). In September 2000, D&B2 separated (the "2000 Distribution") through a spin-off into two separate public companies: D&B2, which changed its name to Moody's Corporation ("Moody's"), and a new company named The Dun & Bradstreet Corporation ("D&B3," and together with D&B1 and D&B2, also referred to elsewhere in this Quarterly Report on Form 10-Q as "D&B"). As a result of the form of our separation from D&B, we are the corporate successor of, and technically the defendant and taxpayer referred to below as D&B. Rockland Yellow Pages In 1999, Sandy Goldberg, Dellwood Publishing, Inc. and Rockland Yellow Pages initiated a lawsuit against the Company and Bell Atlantic Corporation 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. In May 2002, the Court granted defendants' motion to dismiss the complaint. Plaintiffs filed an appeal of this dismissal. In April 2003, the Appellate Division dismissed all but one count of the complaint, which count alleges immaterial compensatory damages with respect to only one advertiser. Accordingly, 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. 33 Information Resources, Inc. In 1996, Information Resources, Inc. ("IRI"), filed a complaint in the United States District Court for the Southern District of New York, naming as defendants the Company, as successor of D&B, ACNielsen Company and IMS International Inc., at the time of the filing, all wholly owned subsidiaries of D&B. 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 million, 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 agreements relating to the 1996 Distribution, Cognizant, AC Nielsen and D&B agreed to conduct a joint defense and allocated liabilities amongst themselves. Under the agreements relating to the 1998 Distribution, 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 those agreements, Moody's Corporation, which subsequently separated from D&B in the 2000 Distribution, has 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 we cannot assure you as to any outcome, management presently believes that D&B and Moody's have sufficient financial resources, borrowing capacity and indemnity rights against IMS and NMR (who succeeded to Cognizant's indemnity obligations under the Cognizant Distribution) to reimburse us for any payments we may be required to make and related costs we may incur in connection with this matter. Tax Matters D&B entered into global tax planning initiatives in the normal course of its business, principally through tax-free restructurings of both their foreign and domestic operations. The status of Internal Revenue Service ("IRS") reviews of these initiatives is summarized below. Pursuant to a series of agreements relating to the 1996, 1998, Cognizant and 2000 Distributions, IMS and NMR are jointly and severally liable for, and must pay one-half, and D&B and Moody's are jointly and severally liable for, and must pay the other half, of any payments over $137 million for taxes, accrued interest and other amounts resulting from unfavorable IRS rulings on the tax matters summarized below (other than the matter summarized below as "Amortization Expense Deductions - 1997 - 2002," for which D&B and Moody's, jointly and severally, are solely responsible). D&B, on our behalf, was contractually obligated to pay, and did pay, the first $137 million of tax liability in connection with the matter summarized below as "Utilization of Capital Losses - 1989 - 1990." Under the agreements relating to the 1998 Distribution, D&B agreed to assume the defense and to indemnify us for any tax liability that may be assessed against us and any related costs and expenses that we may incur in connection with any of these tax matters. Also, as required by those agreements, Moody's has agreed to be jointly and severally liable with D&B for the indemnity obligation to us. Under the agreements relating to the 2000 Distribution, D&B and Moody's have, between each other, agreed to each be financially responsible for 50% of any potential liabilities that may arise to the extent such potential liabilities are not directly attributable to each party's respective business operations. While we cannot assure you as to any outcome in these matters, management presently believes that D&B and Moody's have sufficient financial resources, borrowing capacity and indemnity rights against IMS and NMR (who succeeded to Cognizant's indemnity obligations under the Cognizant Distribution) to reimburse us for any payments we may be required to make and related costs we may incur in connection with these tax matters. 34 Utilization of Capital Losses - 1989 - 1990 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 $561.6 million of tax and interest due. In 2000, D&B paid the IRS $349.3 million while IMS (on behalf of itself and NMR) paid $212.3 million to the IRS. 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. Subsequent to making its payment to the IRS in 2000, IMS sought to obtain partial reimbursement from NMR under the terms of the agreements relating to the Cognizant Distribution. NMR paid IMS less than IMS sought. Accordingly, in 2001, IMS filed an arbitration proceeding against NMR claiming that NMR underpaid to IMS its proper allocation of the above tax payments as provided by the agreements relating to the Cognizant Distribution. Neither D&B nor we were party to the Cognizant Distribution. IMS nonetheless sought to include us in this arbitration, arguing that if NMR should prevail in its interpretation against IMS, then IMS could seek to enforce the same interpretation against us (as successor to D&B) under the agreements relating to the 1996 Distribution. The arbitration panel ruled that we were a proper party to this arbitration proceeding. In April 2003, the arbitration panel dismissed all claims against us and found for IMS. If, on appeal of that ruling, NMR should prevail against IMS and, in turn, IMS should prevail against us, then we believe that our additional liability would be approximately $15 million, net of tax benefits. As noted above, D&B and Moody's would be jointly and severally obligated to indemnify us against any such additional liability and related costs. We believe 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, borrowing capacity and indemnity rights against IMS and NMR to reimburse us for any payments we may be required to make and related costs we may incur with respect to this matter. Royalty Expense Deductions - 1994 - 1996 During the second quarter of 2002, D&B (on our behalf) 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 challenge by D&B, the required payment by D&B to the IRS would be up to $42 million ($48 million offset by a $6 million tax benefit). In verbal communications between D&B and the IRS during 2002, we understand that the IRS has expressed some willingness to withdraw its proposed disallowance of certain royalty expense deductions of $7.5 million for 1994. However, we also understand that the IRS has expressed its intent to seek penalties of $7.5 million for 1995 and 1996 based on its interpretation of applicable law. We have been advised that D&B would challenge the IRS's interpretation. Again, under the agreements relating to the 1998 and 2000 Distributions, D&B and Moody's have agreed to jointly and severally defend and indemnify us against any such liability and related costs. Notwithstanding the verbal communications with the IRS in 2002 noted above regarding royalty expense deductions of $7.5 million for 1994, in a February 2003 letter to D&B (on our behalf) the IRS asserted that it intends to take a position regarding prior tax years that would have the effect of disallowing a portion of the 1994 royalty expense deduction, our share of which would be $5 million if the IRS prevailed. We understand that D&B disagrees with the IRS's position. Also, in February 2003, D&B (on our behalf) received a Preliminary Partnership Summary Report from the IRS that challenges the tax treatment of certain royalty payments received by a partnership in which D&B was a partner. As stated in its Report, the IRS would reallocate certain partnership income to D&B, which if the IRS prevailed would require an additional payment from us of $20 million (which includes tax, interest and penalty, net of associated tax benefits). Again, under the agreements relating to the 1998 and 2000 Distributions, D&B and Moody's have agreed to jointly and severally defend and indemnify us against any such liability and related costs. 35 Amortization Expense Deductions - 1997 - 2002 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 we understand that D&B believes the deductions are appropriate, the IRS could ultimately challenge them and issue an assessment. If the IRS were to prevail or the assessment were to be challenged by us in U.S. District Court, we understand that D&B estimates that its cash payment to the IRS with respect to deductions claimed to date and including any potential assessment of penalties of $6.5 million, could be up to $46.4 million, or $43 million net of associated tax benefits. This transaction is scheduled to expire in 2012 and, unless earlier terminated by D&B, the cash exposure, based on current interest rates and tax rates, would increase at a rate of approximately $2.3 million per quarter (including potential penalties) as future amortization expenses are deducted. Again, under the agreements relating to the 1998 and 2000 Distributions, D&B and Moody's are required to jointly and severally indemnify us against any such liability and related costs. Conclusion As a result of our assessment of our exposure in these matters, especially in light of our indemnity arrangements with D&B and Moody's, and their financial resources, borrowing capacity and indemnity rights against IMS and NMR, no material amounts have been accrued for in our consolidated financial statements for any of these D&B-related litigation and tax matters. Coastal Termite and Pest Control In 2001, Marnan Group, Inc., doing business as Coastal Termite and Pest Control ("Coastal"), filed a complaint in the United States District Court for the Middle District of Florida against SPA. The complaint, as amended, alleged that SPA breached certain directory advertising contracts between 1996 and 1999, fraudulently induced Coastal to enter into another directory advertising contract and tortiously interfered with Coastal's business relationships with its customers. Coastal is seeking damages for lost contract benefits, lost profits and diminution of business value in an unspecified amount, including pre-judgment interest. In January 2002, SPA filed a motion to dismiss certain of Coastal's claims. In September 2002, the court denied SPA's motion to dismiss. Nonetheless, we do not believe that the final outcome of this matter will have a material adverse effect on our results of operations or financial condition. Other matters We are also involved in other legal proceedings, claims and litigation arising in the ordinary conduct of our business. Although we cannot assure you of any outcome, management presently believes that the outcome of such legal proceedings will not have a material adverse effect on our results of operations or financial condition. 36 Item 4. Submission of Matters to a Vote of Security Holders Our Annual Meeting of Stockholders ("Meeting") was held in White Plains, N.Y. on May 1, 2003. At the Meeting, the Company's stockholders elected each of the three Class I directors nominated for election by the Board of Directors to serve a three-year term as follows: Votes Name Votes For Withheld ---- --------- -------- Nancy E. Cooper 31,503,108 4,490,248 Robert Kamerschen 35,435,230 558,126 David C. Swanson 35,602,607 390,749 The Board of Directors now comprises nine members consisting of three classes of three directors each. The other members of our Board of Directors (Kenneth G. Campbell, Robert R. Gheewalla, Terrence M. O'Toole, Carol J. Parry, David M. Veit and Barry Lawson Williams) were not subject to re-election by stockholders this year and continue in office. At the Meeting, the Company's stockholders also ratified the appointment of PricewaterhouseCoopers LLP ("PwC") to serve as the Company's independent accountants for 2003 as follows:
Votes For Votes Against Abstentions --------- ------------- ----------- Ratification of the appointment of PwC 30,133,922 5,831,302 28,132 Lastly, at the Meeting, the Company's stockholders also approved a stockholder proposal relating to the Company's stockholder rights plan, as follows: Votes For Votes Against Abstentions --------- ------------- ----------- Stockholder Proposal re: Rights Plan 16,350,870 13,303,609 6,338, 877
With respect to the proposal relating to the Company's stockholder rights plan, abstentions also included broker non-votes. The Company announced in February that the Board had adopted a Three-Year Independent Director Evaluation ("TIDE") policy with respect to its rights plan. Under this TIDE policy, a committee comprised of independent directors of the Company will review and evaluate the stockholder rights plan at least once every three years to determine, in light of all relevant factors, whether the plan continues to serve the best interests of the Company and all of its stockholders or whether it should be modified or terminated. The Board has completed the first review of its stockholder rights plan pursuant to its TIDE policy. The Corporate Governance Committee, which is an independent Board committee, conducted the review with the advice and assistance of its outside financial and legal advisors. The Committee concluded after a review of all relevant factors that the rights plan continues to serve the best interests of the Company and all of its stockholders. Accordingly, the Committee recommended and the Board resolved to maintain the rights plan in its current form. The next TIDE review of the Company's rights plan will occur not later than May 2006. 37 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) 3.5 Certificate of Designations of Convertible Cumulative Preferred Stock of R.H. Donnelley Corporation (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 17, 2003, Commission File No. 001-07155) 3.6 Certificate of Designations of Series B-1 Convertible Cumulative Preferred Stock of R.H. Donnelley Corporation (incorporated by reference to Exhibit 3.1 to the Current Report Form 8-K, filed with the Securities and Exchange Commission on December 3, 2002, Commission File No. 001-07155) 4.1 Indenture dated as of June 5, 1998 between R.H. Donnelley Inc., as Issuer, the Company, as Guarantor, and the Bank of New York, as Trustee, with respect to the 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 First Supplemental Indenture, dated as of November 25, 2002, among R.H. Donnelley Inc., as Issuer, and R.H. Donnelley Corporation, R.H. Donnelley Acquisitions, Inc., R.H. Donnelley APIL, Inc., R.H. Donnelley CD, Inc. and Get Digital Smart.com, Inc., as Guarantors, and the Bank of New York, as Trustee, with respect to the 9 1/8% Senior Subordinated Notes due 2008 (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 25, 2002, Commission File No. 001-07155) 38 Exhibit No. Document ------ -------- 4.5 Second Supplemental Indenture, dated as of December 20, 2002, among R.H. Donnelley Inc., as Issuer, and R.H. Donnelley Corporation, R.H. Donnelley Acquisitions, Inc., R.H. Donnelley Acquisitions II, Inc., R.H. Donnelley APIL, Inc., R.H. Donnelley CD, Inc. and Get Digital Smart.com, Inc., as Guarantors, and the Bank of New York, as Trustee, with respect to the 9 1/8% Senior Subordinated Notes due 2008 (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 20, 2002, Commission File No. 001-07155) 4.6 Third Supplemental Indenture, dated as of December 20, 2002 (operative as of January 3, 2003), among R.H. Donnelley Inc., as Issuer, and R.H. Donnelley Corporation, R.H. Donnelley Acquisitions, Inc., R.H. Donnelley Acquisitions II, Inc., R.H. Donnelley APIL, Inc., R.H. Donnelley CD, Inc. and Get Digital Smart.com, Inc., as Guarantors, and the Bank of New York, as Trustee, with respect to the 9 1/8% Senior Subordinated Notes due 2008 (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 6, 2003, Commission File No. 001-07155) 4.7 Indenture dated as of December 3, 2002 between R.H. Donnelley Inc. (as successor to R.H. Donnelley Finance Corporation I), as Issuer, and the Bank of New York, as Trustee, with respect to the 8 7/8% Senior Notes due 2010 (incorporated by reference to Exhibit 4.13 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2003, Commission File No. 001-07155) 4.8 Supplemental Indenture dated as of January 3, 2003 among R.H. Donnelley Inc., as Issuer, the Company and the other guarantors signatory thereto, as Guarantors, and the Bank of New York, as Trustee, with respect to the 8 7/8% Senior Notes due 2010 (incorporated by reference to Exhibit 4.14 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2003) 4.9 Form of 8 7/8% Senior Notes due 2010 (included in Exhibit 4.7) 4.10 Guarantees relating to the 8 7/8% Senior Notes due 2010 (incorporated by reference to Exhibit 4.16 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2003, Commission File No. 001-07155) 4.11 Indenture dated as of December 3, 2002 between R.H. Donnelley Inc. (as successor to R.H. Donnelley Finance Corporation I), as Issuer, and the Bank of New York, as Trustee, with respect to the 10 7/8% Senior Subordinated Notes due 2012 (incorporated by reference to Exhibit 4.17 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2003, Commission File No. 001-07155) 4.12 Supplemental Indenture dated as of January 3, 2003 among R.H. Donnelley Inc., as Issuer, the Company and the other guarantors signatory thereto, as Guarantors, and the Bank of New York, as Trustee, with respect to the 10 7/8% Senior Subordinated Notes due 2012 (incorporated by reference to Exhibit 4.18 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2003, Commission File No. 001-07155) 4.13 Form of 10 7/8% Senior Subordinated Notes due 2012 (included in Exhibit 4.11) 4.14 Guarantees relating to the 10 7/8% Senior Subordinated Notes due 2012 (incorporated by reference to Exhibit 4.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2003, Commission File No. 001-07155) 39 Exhibit No. Document ------ -------- 4.15 Registration Rights Agreement, dated as of December 3, 2002, by and among R.H. Donnelley Inc. and Salomon Smith Barney, Bear, Stearns & Co., Inc. and Deutsche Bank Securities Inc., as representatives of the initial purchasers (incorporated by reference to Exhibit 4.15 to the Registration Statement on Form S-3 filed with the SEC on July 31, 2003, Registration No. 333-104964) 4.16 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) 4.17 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) 4.18 Amendment No. 2 to Rights Agreement, dated as of September 21, 2002, between the Company and The Bank of New York, as successor Rights Agent (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 1, 2002, Commission File No. 001-07155) 4.19 Form of Warrant Agreement, dated as of November 25, 2002, between the Company and investment partnerships affiliated with The Goldman Sachs Group, Inc. (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 17, 2003, 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) 40 Exhibit No. Document ------ -------- 10.6 Credit Agreement among the Company, R.H. Donnelley Inc., The Chase Manhattan Bank, as Administrative Agent and the Lenders party thereto (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-4, filed with the Securities and Exchange Commission on July 17, 1998, Registration No. 333-59287) 10.7 First Amendment to Credit Agreement, dated as of March 4, 1999, among the Company, R.H. Donnelley Inc., The Chase Manhattan Bank, as Administrative Agent, and the Lenders party thereto (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the three months ended March 31, 1999, Commission File No. 001-07155) 10.8 DonTech II Partnership Agreement, effective August 19, 1997, by and between R.H. Donnelley Inc. (f/k/a The Reuben H. Donnelley Corporation) and Ameritech Publishing of Illinois, Inc. (incorporated by reference to Exhibit 10.10 to Amendment No. 1 to the Registration Statement on Form S-4, filed with the Securities and Exchange Commission on August 7, 1998, Registration No. 333-59287) 10.9 Revenue Participation Agreement, dated as of August 19, 1997, by and between APIL Partners Partnership and R.H. Donnelley Inc. (f/k/a The Reuben H. Donnelley Corporation) (incorporated by reference to Exhibit 10.11 to Amendment No. 1 to the Registration Statement on Form S-4, filed with the Securities and Exchange Commission on August 7, 1998, Registration No. 333-59287) 10.10 Master Agreement, executed August 19, 1997, by and among R.H. Donnelley Inc. (f/k/a The Reuben H. Donnelley Corporation), the Company (f/k/a The Dun & Bradstreet Corporation), The Am-Don Partnership a/k/a DonTech, DonTech II, Ameritech Publishing, Inc., Ameritech Publishing of Illinois, Inc., Ameritech Corporation, DonTech I Publishing Company LLC and the APIL Partners Partnership (incorporated by reference to Exhibit 10.12 to Amendment No. 1 to the Registration Statement on Form S-4, filed with the Securities and Exchange Commission on August 7, 1998, Registration No. 333-59287) 10.11 Exclusive Sales Agency Agreement, effective August 19, 1997, between APIL Partners Partnership and DonTech II (incorporated by reference to Exhibit 10.13 to Amendment No. 1 to the Registration Statement on Form S-4, filed with the Securities and Exchange Commission on August 7, 1998, Registration No. 333-59287) 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) 41 Exhibit No. Document ------ -------- 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) 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 March 31, 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) 42 Exhibit No. Document ------ -------- 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) 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 (incorporated by reference to Exhibit 10.30 to the Company's Quarterly Report on Form 10-Q for the three months ended September 30, 2002, Commission File No. 001-07155) 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) 43 Exhibit No. Document ------ -------- 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 July 25, 2003 between the Company and Frank M. Colarusso 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 investment partnerships affiliated with The Goldman Sachs Group, Inc. (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K dated October 1, 2002, Commission File No. 001-07155) 10.42 Letter Agreement, dated as of November 25, 2002, among the Company, R.H. Donnelley Inc. and investment partnerships affiliated with The Goldman Sachs Group, Inc. (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 3, 2002, Commission File No. 001-0715) 10.43 Registration Rights Agreement, dated as of November 25, 2002, among the Company and investment partnerships affiliated with The Goldman Sachs Group, Inc. (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 3, 2002, Commission File No. 001-07155) 10.44 Letter Agreement dated as of January 3, 2003 among the Company, R.H. Donnelley Inc. and investment partnerships affiliated with The Goldman Sachs Group, Inc. (incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 17, 2003, Commission File No. 001-07155) 10.45* Letter Agreement, dated as of July 22, 2003, among the Company and investment partnerships affiliated with The Goldman Sachs Group, Inc. 10.46 Directory Services License Agreement, dated as of January 3, 2003, by and among R.H. Donnelley Publishing & Advertising, Inc. (f/k/a Sprint Publishing & Advertising, Inc.), CenDon L.L.C., R.H. Donnelley Directory Company (f/k/a Centel Directory Company), Sprint Corporation, Sprint Directory Trademark Company, LLC and the Sprint Local Telecommunications Division (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 17, 2003, Commission File No. 001-07155) 44 Exhibit No. Document ------ -------- 10.47 Trademark License Agreement, dated as of January 3, 2003, by and among Sprint Directory Trademark Company, LLC, R.H. Donnelley Publishing & Advertising, Inc. (f/k/a Sprint Publishing & Advertising, Inc.), CenDon L.L.C. and R.H. Donnelley Directory Company (f/k/a Centel Directory Company) (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 17, 2003, Commission File No. 001-07155) 10.48 Publisher Trademark License Agreement, dated as of January 3, 2003, by and among R.H. Donnelley Publishing & Advertising, Inc. (f/k/a Sprint Publishing & Advertising, Inc.), R.H. Donnelley Directory Company (f/k/a Centel Directory Company) and Sprint Corporation (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 17, 2003, Commission File No. 001-07155) 10.49 Non-Competition Agreement, dated as of January 3, 2003, by and among the Company, R.H. Donnelley Publishing & Advertising, Inc. (f/k/a Sprint Publishing & Advertising, Inc.), CenDon L.L.C., R.H. Donnelley Directory Company (f/k/a Centel Directory Company), Sprint Corporation and the Sprint Local Telecommunications Division (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 17, 2003, Commission File No. 001-07155) 10.50 Subscriber Listings Agreement, dated as of January 3, 2003, by and among R.H. Donnelley Publishing & Advertising, Inc. (f/k/a Sprint Publishing & Advertising, Inc.), CenDon L.L.C., R.H. Donnelley Directory Company (f/k/a Centel Directory Company), Sprint Corporation and the Sprint Local Telecommunications Division (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 17, 2003, Commission File No. 001-07155) 10.51 Credit Agreement, dated as of December 6, 2002, among the Company, R.H. Donnelley Inc., R.H. Donnelley Finance Corporation II (subsequently merged with and into R.H. Donnelley Inc.), the several lenders from time to time party thereto, Bear Stearns Corporate Lending Inc. and Citicorp North America, Inc., as joint syndication agents, BNP Paribas and Fleet National Bank, as joint documentation agents, Deutsche Bank Trust Company Americas, as administrative agent, and Deutsche Bank Securities Inc., Salomon Smith Barney Inc. and Bear, Stearns & Co. Inc., as joint lead arrangers and joint bookrunners (incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 17, 2003, 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) 31.1* Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2003 under Section 302 of Sarbanes-Oxley Act by David C. Swanson, Chief Executive Officer for R.H. Donnelley Corporation 31.2* Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2003 under Section 302 of Sarbanes-Oxley Act by Steven M. Blondy, Senior Vice President and Chief Financial Officer for R.H. Donnelley Corporation 45 Exhibit No. Document ------ -------- 31.3* Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2003 under Section 302 of Sarbanes-Oxley Act David C. Swanson, Chief Executive Officer for R.H. Donnelley Inc. 31.4* Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2003 under Section 302 of Sarbanes-Oxley Act by Steven M. Blondy, Senior Vice President and Chief Financial Officer for R.H. Donnelley Inc. 32.1* Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2003 under Section 906 of the Sarbanes-Oxley Act by David C. Swanson, Chief Executive Officer and Steven M. Blondy, Senior Vice President and Chief Financial Officer for R.H. Donnelley Corporation 32.2* Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2003 under Section 906 of the Sarbanes-Oxley Act by David C. Swanson, Chief Executive Officer and Steven M. Blondy, Senior Vice President and Chief Financial Officer for R.H. Donnelley Inc. - --------------------- * Filed herewith ^ Management contract or compensatory plan (b) Reports on Form 8-K: On July 23, 2003, the Company furnished a Current Report on Form 8-K disclosing under Item 9 (nominally, but substantively under Item 12) certain quarterly publication cycle advertising sales and adjusted pro forma financial results for each of the quarters ended March 31, 2002, June 30, 2002, September 30, 2002 and December 31, 2002 that gave effect to the Company's acquisition of Sprint Publishing & Advertising, assuming the acquisition occurred on January 1, 2002. On July 23, 2003, the Company furnished a Current Report on Form 8-K disclosing under Items 7 and 9 ( nominally, but substantively under Item 12) certain financial results of the Company for the three and six months ended June 30, 2003, and attached a copy of its related press release as Exhibit 99.1. On June 2, 2003, the Company furnished a Current Report on Form 8-K disclosing under Item 9 that on June 3, 2003, certain members of senior management of the Company were scheduled to make a presentation at a media industry conference sponsored by Deutsche Bank Securities Inc. During its presentation at that conference, management intended to present a slide presentation. The Company attached a copy of the slide presentation as Exhibit 99.1. On May 2, 2003, the Company filed a Current Report on Form 8-K disclosing under Item 5 certain information required by Regulation G, Item 10(e) of Regulation S-K and Item 12 of Form 8-K regarding non-GAAP financial measures that the Company intends to routinely publicly disclose. On May 2, 2003, the Company furnished a Current Report on Form 8-K disclosing under Items 7 and 9 (nominally, but substantively under Item 12) certain financial results of the Company for the three months ended March 31, 2003, and attached a copy of its related press release as Exhibit 99.1. 46 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: August 13, 2003 By: /s/ Steven M. Blondy --------------------- Steven M. Blondy Senior Vice President and Chief Financial Officer Date: August 13, 2003 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: August 13, 2003 By: /s/ Steven M. Blondy -------------------- Steven M. Blondy Senior Vice President and Chief Financial Officer Date: August 13, 2003 By: /s/ William C. Drexler ---------------------- William C. Drexler Vice President and Controller 47 EXHIBIT INDEX Exhibit Number Document 10.39^* Separation Agreement and Release dated as of July 25, 2003 between the Company and Frank M. Colarusso 10.45* Letter Agreement, dated as of July 22, 2003, among the Company and investment partnerships affiliated with The Goldman Sachs Group, Inc. 31.1* Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2003 under Section 302 of Sarbanes-Oxley Act by David C. Swanson, Chief Executive Officer for R.H. Donnelley Corporation 31.2* Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2003 under Section 302 of Sarbanes-Oxley Act by Steven M. Blondy, Senior Vice President and Chief Financial Officer for R.H. Donnelley Corporation 31.3* Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2003 under Section 302 of Sarbanes-Oxley Act David C. Swanson, Chief Executive Officer for R.H. Donnelley Inc. 31.4* Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2003 under Section 302 of Sarbanes-Oxley Act by Steven M. Blondy, Senior Vice President and Chief Financial Officer for R.H. Donnelley Inc. 32.1* Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2003 by David C. Swanson, Chief Executive Officer and Steven M. Blondy, Senior Vice President and Chief Financial Officer for R.H. Donnelley Corporation 32.2* Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2003 by David C. Swanson, Chief Executive Officer and Steven M. Blondy, Senior Vice President and Chief Financial Officer for R.H. Donnelley Inc. EX-10 3 a4453591_ex1039.txt RH DONNELLEY EXHIBIT 10.39 SEPARATION AGREEMENT And RELEASE THIS SEPARATION AGREEMENT AND RELEASE AGREEMENT (the "Agreement") dated as of this 25th day of July 2003, made by and between Frank M. Colarusso (hereinafter referred to as "Executive"), and R.H. Donnelley Corporation (hereinafter, unless the context indicates to the contrary, deemed to include its subsidiaries, partnerships and affiliates and referred to as the "Company"). WITNESSETH THAT: WHEREAS, Executive has been employed by the Company pursuant to the terms of an Employment Agreement dated September 28, 1998 (as amended to date, the "Employment Agreement"); WHEREAS, Executive's employment with the Company will terminate as of July 31, 2003 (the "Termination Date"); WHEREAS, Section 8(h) of the Employment Agreement requires Executive to execute a general release of claims in favor of the Company as a condition to receiving certain benefits and payments under Sections 8(c) and (d) of the Employment Agreement; and WHEREAS, capitalized terms used herein without definition shall have the meanings given to such terms in the Employment Agreement; NOW, THEREFORE, in consideration of the mutual covenants and promises hereinafter provided and of the actions taken pursuant thereto, the parties agree as follows: 1. Termination Date. Executive's employment with the Company (as well as Executive's membership on any committees) will be terminated effective as of the Termination Date. Each party agrees that such termination shall be deemed to have occurred within two years of a Change in Control as defined in Section 9(b) of the Employment Agreement. As such, certain benefits to which Executive was entitled in connection with a Change in Control have previously been provided to Executive (e.g., vesting of all outstanding stock options). 2. Entitlements under Employment Agreement. Upon Executive's termination of employment, Executive shall be entitled to the payments and benefits set forth below in accordance with Sections 8(c) and 8(d) (as the case may be) of the Employment Agreement. Executive acknowledges and agrees that he is not entitled to (and waives to the extent so entitled) any other or different payments or benefits under the Employment Agreement or otherwise as a result of such termination. Each of the Company's and Executive's rights and obligations under the Employment Agreement shall terminate as of the Termination Date, except those that expressly survive termination of the Employment Agreement under the terms of the Employment Agreement or this Agreement, which shall expressly survive the termination of the Employment Agreement and the release set forth herein. 3. Severance Payment. Within five (5) business days following the Termination Date (subject to expiration of the revocation period set forth in paragraph 14 below), in lieu of further salary or bonus payments, Executive shall be entitled to receive the Severance Payment in lump-sum cash amount (without reduction for time value of money) equal to $630,400 comprised of the sum of $394,000 (representing 200% (since it was a termination within two years following a Change in Control pursuant to Section 8(d) of the Employment Agreement) of Executive's Base Salary) plus $236,4000 (representing 200% (since it was a termination within two years following a Change in Control pursuant to Section 8(d) of the Employment Agreement) of Executive's Target Bonus). 4. Benefits. For the earlier to occur of twenty four (24) months (since it was a termination within two years following a Change in Control pursuant to Section 8(d) of the Employment Agreement) from the Termination Date and the availability to Executive and his dependants of comparable health insurance coverage in connection with subsequent employment or self-employment, the Company shall continue to provide Executive an opportunity to participate in the Company's medical, dental, vision, life insurance and disability plans for which he was eligible immediately prior to the termination of employment, or comparable coverage. This coverage 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. The Company will invoice Executive monthly for the cost of continued participation in such plans. The foregoing shall not be construed to require the Company to maintain any plan presently in effect or to adopt any new or replacement plan, all such decisions with respect to plans being reserved by the Company its sole and absolute discretion. As of the Termination Date, Executive shall be 100% vested in all Company contributions under the Company's Profit Participation Plan and Retirement Account and all amounts credited to Executive under the Retirement Account shall be fully vested and portable. In addition, all cash amounts and deferred shares (if any) credited to Executive's account under the Company's Deferred Compensation Plan will be paid out to Executive in kind (cash for cash and shares for shares) as promptly as practicable after the Valuation Date next following the Termination Date, in accordance with the provisions of that Plan. Finally, Executive shall be entitled to the other payments and benefits set forth in Sections 8(c)(i), 8(c)(iv) and Section 8(d) (since it was a termination within two years following a Change in Control) of the Employment Agreement. 5. Bonus. Executive shall be entitled to receive a pro rata portion (7/12ths) of the cash portion (45% target) of his 2003 Annual Incentive Program bonus, based on actual financial and operating results of the Company, payable at the same time such AIP bonus is paid to other continuing executives of the Company. 6. Stock Options. Notwithstanding anything to the contrary set forth herein, all outstanding options will be treated in accordance with the award documents evidencing such options. 7. PERS. Notwithstanding anything to the contrary set forth herein, all outstanding long-term incentive awards will be treated in accordance with the award documents evidencing such grants. 8. Withholding Taxes. All amounts payable by Company to Executive under this Agreement shall be reduced for any applicable withholding taxes. 9. Non-Competition. Executive hereby acknowledges the restrictions set forth in Section 12 of the Employment Agreement (the "Non-Compete Provisions") and, as consideration for the payments and benefits set forth above, Executive hereby agrees that Executive shall be bound by such Non-Compete Provisions for the twelve-month period commencing as of the Termination Date. In the event of a breach, as judged by a court of competent jurisdiction, of the foregoing Non-Compete Provisions, Executive shall forfeit all rights to the payments and benefits set forth above and the Company shall be entitled to recoup any payments and the fair value of any benefits previously bestowed upon Executive hereunder. 10. Confidentiality; Non-Disparagement. Executive hereby acknowledges the restrictions set forth in Section 13 of the Employment Agreement (the "Confidentiality and Non-Disparagement Provisions") and, as consideration for the payments and benefits set forth above, Executive hereby agrees that Executive shall continue to be bound by such Confidentiality and Non-Disparagement Provisions into perpetuity. Without limiting the generality of the foregoing, the existence and the terms and conditions of this Separation Agreement and Release shall constitute confidential information covered by the Confidentiality and Non-Disparagement Provisions, except that Executive shall have the right to disclose the existence and terms of this Separation Agreement and Release to the extent reasonably necessary to enforce his rights hereunder or those rights that survive under the Employment Agreement or otherwise to financial and legal advisors, immediate family and to the extent required to disclose by operation of law. In the event of a breach, as judged by a court of competent jurisdiction, of the foregoing Confidentiality and Non-Disparagement Provisions, Executive shall forfeit all rights to the payments and benefits set forth above and the Company shall be entitled to recoup any payments and the fair value of any benefits previously bestowed upon Executive hereunder. 11. Material Inducement. Executive acknowledges and agrees that the Non-Compete Provisions and the Confidentiality and Non-Disparagement Provisions are an essential element of the parties' agreement, are a material inducement for the Company to make the payments and provide the benefits set forth above 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 the Non-Compete Provisions or the Confidentiality and Non-Disparagement Provisions 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 seek 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. 12. Release. a. Except with respect to Executive's rights hereunder and those rights of Executive that survive under the Employment Agreement, Executive, Executive's representatives, successors and assigns releases and forever discharges the Company and its successors, assigns, subsidiaries, affiliates, directors, officers, Executives, attorneys, agents and trustees or administrators of any Company plan from any and all claims, demands, debts, damages, injuries, actions or rights of action of any nature whatsoever (collectively "Claims"), whether known or unknown, which Executive had, now has or may have (provided, however, that Claims accruing after the date hereof shall not be released hereby) against the Company, its successors, assigns, subsidiaries, affiliates, directors, officers, Executives, attorneys, agents and trustees or administrators of any Company plan, including, without limitation, Claims relating to or arising out of Executive's employment with the Company or the termination of such employment. Executive represents that Executive has not filed any action, complaint, charge, grievance or arbitration against the Company or any of its successors, assigns, subsidiaries, affiliates, directors, officers, Executives, attorneys, agents and trustees or administrators of any Company plan. b. Executive covenants that neither Executive, nor any of Executive's respective heirs, representatives, successors or assigns, will commence, prosecute or cause to be commenced or prosecuted against the Company or any of its successors, assigns, subsidiaries, affiliates, directors, officers, Executives, attorneys, agents and trustees or administrators of any Company plan any action or other proceeding based upon any claims, demands, causes of action, obligations, damages or liabilities which are to be released by this Agreement, nor will Executive seek to challenge the validity of this Agreement, except that this covenant not to sue does not affect Executive's future right to enforce appropriately in a court of competent jurisdiction the terms of this Agreement or the terms that survive under the Employment Agreement. c. By releasing the claims described in this paragraph 13 of this Agreement, Executive does not waive any claims that cannot be waived as a matter of law, including without limitation any claims filed with the Equal Employment Opportunity Commission, the U.S. Department of Labor or claims under the Age Discrimination in Employment Act that arise after the date of this Agreement. 13. Executive Acknowledgments. Executive acknowledges that (a) Executive has been advised to consult with an attorney before executing this Agreement and that Executive has been advised by an attorney or has knowingly waived Executive's right to do so, (b) Executive has been offered a period of at least twenty-one (21) days to consider this Agreement, (c) Executive has a period of seven (7) days from the date hereof within which to revoke it and that this Agreement will not become effective or enforceable until the expiration of this seven (7) day revocation period, (d) Executive fully understands the terms and contents of this Agreement and freely, voluntarily, knowingly and without coercion enters into this Agreement, and (e) the waiver or release by Executive of rights or claims Executive may have under Title VII of the Civil Rights Act of 1964, The Executive Retirement Income Security Act of 1974, the Age Discrimination in Employment Act of 1967, the Older Workers Benefit Protection Act, the Fair Labor Standards Act, the Americans with Disabilities Act, the Rehabilitation Act, the Worker Adjustment and Retraining Act (all as amended) and/or any other local, state or federal law dealing with employment or the termination thereof is knowing and voluntary and, accordingly, that it shall be a breach of this Agreement to institute any action or to recover any damages that would be in conflict with or contrary to this acknowledgment or the releases Executive has granted hereunder. Executive understands and agrees that the Company's payment of money and other benefits to Executive and Executive's signing of this Agreement does not in any way indicate that Executive has any viable claims against the Company or that the Company admits any liability whatsoever. 14. Notice of Termination. Each of Executive and the Company hereby waives the Notice of Termination provided for in Section 8(g) of the Employment Agreement. 15. Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors, assigns, heirs and legal representatives. Neither this Agreement nor any rights hereunder shall be assignable by Executive without the Company's written consent, other than by operation of the laws of descent and distribution. 16. Severability. If for any reason any one or more of the provisions of this Agreement shall be held or deemed to be inoperative, unenforceable or invalid by a court of competent jurisdiction, such circumstances shall not have the effect of rendering such provision invalid in any other case or rendering any other provisions of this Agreement inoperative, unenforceable or invalid. In any such event, such provision shall be read by such court to be as broad and restrictive as possible without being found to be inoperative, unenforceable or invalid. 17. Governing Law. This Agreement shall be construed in accordance with the laws of the State of New York, without giving effect to the conflict of laws provisions thereof, except to the extent superseded by applicable federal law. 18. Counterparts. This Agreement may be signed in counterparts, each of which shall be deemed an original, with all counterparts taken together representing one and the same Agreement, with the same effect as if all of the signatures were upon the same instrument. IN WITNESS WHEREOF, Executive and R.H. Donnelley Corporation, by its duly authorized agent, have hereunder executed this Agreement. /s/ Frank M. Colarusso R.H. DONNELLEY CORPORATION /s/ Robert J. Bush ------------------------------------------ Name: Robert J. Bush Title: Vice President and General Counsel EX-10 4 a4453591_ex1045.txt RH DONNELLEY EXHIBIT 10.45 GS Capital Partners 2000, L.P. GS Capital Partners 2000 Offshore, L.P. GS Capital Partners 2000 GmbH & Co. Beteiligungs KG GS Capital Partners 2000 Employee Fund, L.P. Goldman Sachs Direct Investment Fund 2000, L.P. c/o Goldman, Sachs & Co. 85 Broad Street New York, New York 10004 July 22, 2003 R.H. Donnelley Corporation R.H. Donnelley Inc. One Manhattanville Road Purchase, NY 10577 Re: Investment in Preferred Stock of R.H. Donnelley Corporation Ladies and Gentlemen: Reference is made to the Preferred Stock and Warrant Purchase Agreement, dated as of September 21, 2002 (as amended, the "Purchase Agreement"), by and among R.H. Donnelley Corporation, a Delaware corporation (the "Company") and the investors listed in Schedule A thereto (the "Purchasers"), as amended by the Letter Agreement, dated as of November 25, 2002, by and among the Purchasers, the Company and R.H. Donnelley Inc. and the Second Letter Agreement, dated as of January 3, 2003, by and among the Purchasers, the Company and R.H. Donnelley Inc. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the Purchase Agreement. RECITALS: A. Dividends on the Preferred Stock have accrued through the date hereof and shall continue to accrue in accordance with Section 3 of the Certificate of Designations, and dividends so accrued through the quarter ending September 30, 2005 shall not be paid (in cash or otherwise) at any time without the prior written consent of at least a majority of the then-outstanding Preferred Shares or the affirmative vote in person or by proxy at a meeting called for that purpose of the holders of at least a majority of the Preferred Shares voting thereat; and B. Dividends that accrue from and after October 1, 2005 on the Preferred Stock may be paid in cash, or allowed to accrue, at the option of the Company, in accordance with Section 3 of the Certificate of Designations without such prior written consent or affirmative vote. Accordingly, this letter agreement (this "Third Letter Agreement") will confirm our agreement as follows: 1 1. Amendment to Section 4.04(i) of the Purchase Agreement. Section 4.04(i) of the Purchase Agreement is hereby amended by: (a) replacing the first parenthetical in its entirety with the following: "(other than (A) dividends on the Common Stock payable in additional shares of Common Stock, (B) dividends from a wholly owned Company Subsidiary to its parent company and (C) dividends that accrue on the Preferred Stock from and after October 1, 2005, payable in cash in accordance with the terms of the Certificate of Designations)" and (b) adding the following clause at the end of Section 4.04(i): "; provided, that, notwithstanding anything to the contrary in this Section 4.04(i) and without limiting the provisions of Sections 3 and 4 of the Certificate of Designations, the Company shall not, at any time, declare or pay (whether in cash or otherwise) any dividend on the Preferred Stock that accrues prior to October 1, 2005 without the prior written consent of at least a majority of the then-outstanding Preferred Shares or the affirmative vote in person or by proxy at a meeting called for that purpose of the holders of at least a majority of the Preferred Shares voting thereat" 2. Convertible Preferred Amount. In accordance with Sections 3 and 4 of the Certificate of Designations, all dividends that accrue on the Preferred Stock are included in the Convertible Preferred Amount (as defined in the Certificate of Designations). Accordingly, the Company and Purchasers hereby acknowledge that, as of July 22, 2003, (1) the Convertible Preferred Amount (as defined in the Certificate of Designations), which includes all dividends that have accrued on the Preferred Stock to date, is $209,591,676 and (2) the Preferred Stock is convertible by the Purchasers (excluding fractional shares) into 8,714,828 shares of Common Stock. 3. No Other Amendments. Except as set forth in this Third Letter Agreement, all provisions of the Purchase Agreement shall remain unchanged and in full force and effect. 4. Miscellaneous. 4.1. This Third Letter Agreement shall be governed by, and interpreted in accordance with, the laws of the State of New York applicable to contracts made and to be performed in that State without giving effect to any conflict of laws rules or principles that might require the application of the laws of another jurisdiction. 4.2. The courts of the State of New York in New York County and the United States District Court for the Southern District of New York shall have jurisdiction over the parties with respect to any dispute or controversy between them arising under or in connection with this Third Letter Agreement and, by execution and delivery of this Third Letter Agreement, each of the parties to this Third Letter Agreement submits to the jurisdiction of those courts, including but not limited to the in personam and subject matter jurisdiction of those courts, waives any objections to such jurisdiction on the grounds of venue or forum non conveniens, the absence of in personam or subject matter jurisdiction and any similar grounds, consents to service of process by mail (in accordance with Section 8.01 of the Purchase Agreement) or any other manner permitted by law, and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Third Letter Agreement. 2 4.3. No amendment, modification or alteration of the terms or provisions of this Third Letter Agreement shall be binding on the parties hereto unless the same shall be in writing and duly executed by such parties, except that any of the terms or provisions of this Third Letter Agreement may be waived in writing at any time by the parties entitled to the benefits of such waived terms or provisions. No waiver of any of the provisions of this Third Letter Agreement shall be deemed to or shall constitute a waiver of any other provision hereof (whether or not similar). No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof. 4.4. This Third Letter Agreement may be executed by facsimile signature and may be executed in one or more counterparts, each of which shall be deemed to constitute an original, but all of which together shall constitute but one agreement. 4.5. Nothing contained in this Third Letter Agreement or in any instrument or document executed by any party in connection with the transactions contemplated hereby shall create any rights in, or be deemed to have been executed for the benefit of, any person that is not a party hereto or thereto, or, a successor or permitted assign of such a party. [Signatures are on the following pages.] 3 Please confirm your agreement with the foregoing by signing and returning one copy of this Third Letter Agreement to the undersigned, whereupon this Third Letter Agreement shall become a binding agreement between you and the Purchasers. Very truly yours, GS CAPITAL PARTNERS 2000, L.P. By: GS Advisors 2000, L.L.C. Its General Partner By: /s/ John E. Bowman Name: John E. Bowman Its: Vice President GS CAPITAL PARTNERS 2000 OFFSHORE, L.P. By: GS Advisors 2000, L.L.C. Its General Partner By: /s/ John E. Bowman Name: John E. Bowman Its: Vice President GS CAPITAL PARTNERS 2000 GmbH & CO. BETEILIGUNGS KG By: Goldman Sachs Management GP GmbH Its General Partner By: /s/ John E. Bowman Name: John E. Bowman Its: Managing Director 4 GS CAPITAL PARTNERS 2000 EMPLOYEE FUND, L.P. By: GS Employee Funds 2000 GP, L.L.C. Its General Partner By: /s/ John E. Bowman Name: John E. Bowman Its: Vice President GOLDMAN SACHS DIRECT INVESTMENT FUND 2000, L.P. By: GS Employee Funds 2000 GP, L.L.C. Its General Partner By: /s/ John E. Bowman Name: John E. Bowman Its: Vice President Accepted and agreed as of the date first written above: R.H. DONNELLEY CORPORATION By:__/s/ Robert J. Bush______________________________ Name: Robert J. Bush Title: Vice President R.H. DONNELLEY INC. By:___/s/ Robert J. Bush_____________________________ Name: Robert J. Bush Title: Vice President 5 EX-31 5 a4453591ex311.txt EXHIBIT 31.1 Exhibit 31.1 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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) [paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 By: /s/ David C. Swanson -------------------- David C. Swanson President and Chief Executive Officer EX-31 6 a4453591ex312.txt EXHIBIT 31.2 Exhibit 31.2 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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) [paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 By: /s/ Steven M. Blondy -------------------- Steven M. Blondy Senior Vice President and Chief Financial Officer EX-31 7 a4453591ex313.txt EXHIBIT 31.3 Exhibit 31.3 CERTIFICATIONS I, David C. Swanson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of R.H. Donnelley Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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) [paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 By: /s/ David C. Swanson -------------------- David C. Swanson President and Chief Executive Officer EX-31 8 a4453591ex314.txt EXHIBIT 31.4 Exhibit 31.4 CERTIFICATIONS I, Steven M. Blondy, certify that: 1. I have reviewed this quarterly report on Form 10-Q of R.H. Donnelley Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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) [paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 By: /s/ Steven M. Blondy -------------------- Steven M. Blondy Senior Vice President and Chief Financial Officer EX-32 9 a4453591ex321.txt EXHIBIT 32.1 Exhibit 32.1 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 for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers 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 R.H. Donnelley Corporation as of the dates and for the periods expressed in the Report. /s/ David C. Swanson /s/ Steven M. Blondy - --------------------------------- -------------------- David C. Swanson Steven M. Blondy Chief Executive Officer SVP and Chief Financial Officer August 13, 2003 August 13, 2003 The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. EX-32 10 a4453591ex322.txt EXHIBIT 32.2 Exhibit 32.2 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 Inc. for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers 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: (3) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (4) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of R.H. Donnelley Inc. as of the dates and for the periods expressed in the Report. /s/ David C. Swanson /s/ Steven M. Blondy - --------------------------------- -------------------- David C. Swanson Steven M. Blondy Chief Executive Officer SVP and Chief Financial Officer August 13, 2003 August 13, 2003 The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. -----END PRIVACY-ENHANCED MESSAGE-----