In addition to these principal products, we offer a broad range of specialty products that advertisers use to differentiate and enhance their display of information. An overview of our main revenue-generating specialty products follows:

Specialty Products

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Internet-based Directory and Electronic Products

Although historically SPA has not offered advertisers any material Internet platform, we intend to market an Internet-based directory service to our advertisers. We view our Internet-based directory as a complement to our print directory product rather than as a stand-alone business. We intend to utilize our existing sales force and customer relationships to enable us to provide an electronic source of directory information. We intend to provide electronic products that offer local content to consumers, require little incremental effort by our sales force and utilize a low cost technical and production platform. The DonTech sales force currently offers the SBC Smart Pages Internet product.

We believe that increased usage of Internet-based directories will continue to support overall usage and advertising rates in the U.S. directory advertising industry. We will continue to explore new means to deliver our content to consumers.

Business Cycle Overview

All of our directories generally have a 12-month publication cycle except Las Vegas, which has a semi-annual cycle. Our business process generally spans 15 to 20 months from the beginning of the sales campaign to the end of a directory’s life and is comprised of several stages. The marketing stage is generally completed before the end of the first month. The sales stage begins once marketing is completed and depending on the size of the geographic area covered by a directory, generally runs through the following two to five months. The sales campaign closes approximately two months prior to publication. Production and printing are completed following sales and usually lasts two months. Finally, directories are distributed during the final publication month. Customer service as well as billing and collections stages are provided after distribution and throughout the 12-month (or 6-month in the case of Las Vegas) publication cycle.

Sales

As a result of the SPA acquisition, we have combined the separate SPA and Donnelley sales teams into a single sales organization. Sales are carried out internally through premise representatives, telephone representatives and letter renewals on the local level, and through national account managers who work with Certified Marketing Representatives (“CMRs”) serving national advertisers. We distinguish between national advertisers, which advertise in 20 or more directories and span three or more states with at least two different publishers from local advertisers, which are primarily small and medium-sized businesses located within our markets. In general, advertising from local advertisers account for approximately 85% of gross revenue while advertising from national advertisers account for approximately 15% of gross revenue.

Local Sales Organization

Our local sales efforts are managed through three sales channels: premise sales, telephone sales and letter renewal. Premise sales representatives conduct sales calls at customers’ business locations and typically handle higher dollar and more complex accounts. Telephone sales representatives handle lower dollar value accounts and conduct their sales over the phone. The final channel, letter renewal, is used to contact very low dollar value customers that have renewed their account for the same product for several years.

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National Sales Organization

Our national sales channel is managed through our national sales department located in Overland Park, Kansas. The national sales department seeks to increase national directory revenues by developing and maintaining favorable relationships with CMRs who are the yellow pages media buyers for national advertisers. National account managers are the primary point of contact for all communication and business dealings between SPA and CMRs. SPA’s national account managers and national sales representatives are accountable for overall national revenue objectives.

Pre-press and Information Technology Management Services

Pre-press services include canvass and assignment preparation, graphics and ad composition, contract processing, database management and pagination. We provide one of the most comprehensive capabilities in the directory information industry, including tools and information to effectively conduct sales and marketing planning, sales management, sales compensation and customer service activities. Our information management and publishing systems are located primarily in facilities in Raleigh, North Carolina and in Bristol and Blountville, Tennessee, with additional services provided in a facility in Dunmore, Pennsylvania.

Printing & Distribution

All directories are printed by and we source all paper through our long-standing relationship with printing vendor R.R. Donnelley. We currently have two contracts for the printing of our directories with R.R. Donnelley that expire in December 2005 and December 2007. Although we share a common family heritage, no other common ownership or business relationship exists between R.R. Donnelley and us.

The delivery of directories is facilitated through outsourcing relationships with Product Development Corporation (“PDC”) and Special Directory Delivery Service (“SDDS”). Delivery methods utilized in both initial and secondary delivery to distribute directories to customers are selected based on factors such as cost, quality, geography, and customer need. Primary delivery methods include U.S. Postal Service and hand delivery and occasionally, we may also use UPS or other types of expedited delivery methods. Frequently, a combination of these methods is required to meet the needs of the marketplace.

SDDS is our principal secondary delivery vendor maintaining warehouses in Ohio, Florida and Nevada to stock inventory for secondary delivery to new residents and businesses that move into our local market areas following the completion of initial distribution of the directory in that area.

Competition

Yellow Pages Advertising Sales

The U.S. directory advertising industry is highly competitive. More than 240 independent publishers operating in the United States compete with regional bell operating company, or RBOC, directory publishers and other telephone utility publishers. In most markets, we compete with one or more yellow pages directory publishers, which are predominantly independent publishers. In some markets, we compete on a limited basis with RBOC directory publishers in adjacent markets. One of these publishers, Verizon Information Services, the directory business affiliated with Verizon Communications, Inc., has announced plans to publish directories and offer local Internet directory services in markets beyond where Verizon Communications offers local phone service, including in several SPA markets. Effectively, Verizon Information Services will be competing as an independent publisher in those markets. While no other RBOC or utility publisher has announced similar plans, no assurance can be given that other RBOC or utility publishers will not do so in the future. Many of these telephone utility publishers are larger than us and have greater financial resources than we have. No assurances can be given that we will be able to compete effectively with these other publishers for advertising sales or acquisitions in the future.

We also compete for advertising sales with other media, including newspapers, magazines, radio, direct mail, the Internet and television. Many of these competitors are larger than us and have greater financial resources than we have. Additionally, advances in technology have brought new participants, new products and new channels to the industry, including increasing use of electronic delivery of directory information as an advertising medium.

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In addition, the Telecommunications Act of 1996, which effectively opened local telephone markets to increased competition, may adversely impact the market position of telephone utilities, including those with which we have relationships. Because the Telecommunications Act of 1996 has opened local telephone markets to increased competition, no assurances can be given that Sprint, or SBC will remain a dominant local telephone service provider in their local service areas. If Sprint were no longer a dominant local telephone service provider in any particular local service area, our license to be the exclusive publisher for Sprint in its markets and to use the Sprint brand name on our directories in those markets may not be as valuable as we presently anticipate, and we may not realize some of the anticipated benefits under our commercial arrangements with Sprint. If SBC were no longer the dominant local telephone service provider in any DonTech service areas, our income from the DonTech relationship would be adversely affected.

Internet

Since 1997, overall usage of printed yellow pages directories in the United States has declined, which we believe is in part a result of increased usage of Internet-based directory products. The yellow pages directory advertising business is subject to changes arising from developments in technology, including information distribution methods and users’ technological preferences. The use of the Internet by consumers as a means to transact commerce may result in new technologies being developed and services being provided that could compete with our products and services. Our growth and future financial performance may depend on our ability to develop and market new products and services and create new distribution channels, while enhancing existing products, services and distribution channels, in order to incorporate the latest technological advances and accommodate changing user preferences, including the use of the Internet.

Raw Materials

Our principal raw material is paper, which our printer currently purchases on our behalf at agreed upon prices. These prices are at or near the spot market price, as we do not currently have long-term purchase arrangements or commitments from paper mills or other outside suppliers. Accordingly, we are subject to price increases and delays in receiving this principal raw material. Further, changes in the supply of, or demand for, paper could affect delivery times and prices. Paper is one of our largest variable cost items and will account for approximately 10% to 15% of annual operating expenses. As conditions warrant, we may enter into longer term supply agreements in the future.

Intellectual Property

We own and control confidential information as well as a number of trade secrets, trademarks, service marks, trade names, copyrights and other intellectual property rights which, in the aggregate, are of material importance to our business. We believe that the “Donnelley” name and related names, marks and logos are, in the aggregate, material to our business. We are licensed to use certain technology and other intellectual property rights owned and controlled by others. As a result of the acquisition, we own an exclusive license to produce, publish, and distribute directories for Sprint in those markets where Sprint currently provides local telephone service. We also own the exclusive license to use Sprint’s brand, including Sprint’s diamond logo, on directories in those markets, and we acquired the “Best Red Yellow Pages” tagline and the “look and feel” trademarks previously used by SPA. Although we do not consider any individual trademark or other intellectual property to be material to our operations, we believe that the licenses we acquired are material, taken as a whole, to our business. We consider our trademarks, service marks, databases, software and other intellectual property to be proprietary and we rely on a combination of copyright, trademark, trade secret, non-disclosure and contract safeguards for protection. We also benefit from the use of both the phrase “yellow pages” and the walking fingers logo, which we believe to be in the public domain in the United States.

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Employees

As of December 31, 2002, we had approximately 575 full-time employees. As a result of the acquisition, we presently have approximately 1,550 full-time employees. These numbers do not include the employees of DonTech, whom are not our employees. None of our employees are covered by collective bargaining agreements, and we consider relations with employees to be good.

Executive Officers of the Registrant

The following table sets forth information concerning the individuals who serve as executive officers of the Company as of March 6, 2003.

The executive officers serve at the pleasure of the Board of Directors. We have been advised that there are no family relationships among any of the officers listed, and there is no arrangement or understanding among any of them and any other persons pursuant to which they were elected as an officer.

David C. Swanson has served as Chief Executive Officer since May 2002 and was appointed Chairman of the Board in December 2002. Prior to May 2002, Mr. Swanson served as President and Chief Operating Officer since December 2000. Prior to his appointment as President and Chief Operating Officer, Mr. Swanson served as President of Donnelley Directory Services since 1999 and was a Senior Vice President of the Company since 1998. Upon the spin-off of the Company from The Dun & Bradstreet Corporation (“D&B”) in June 1998, Mr. Swanson was appointed Executive Vice President-Corporate Strategy. Prior thereto, Mr. Swanson served as Executive Vice President and General Manager for Proprietary Operations from 1997, Executive Vice President Sales from 1995 and Vice President and General Manager of Cincinnati Operations from 1993.

Peter J. McDonald has served as Senior Vice President of the Company and President of Donnelley Media since September 2002. Mr. McDonald was a director of the Company between May 2001 and September 2002. Previously, Mr. McDonald served as President and Chief Executive Officer of SBC Directory Operations, a publisher of yellow pages directories from October 1999 to April 2000. He was President and Chief Executive Officer of Ameritech Publishing’s yellow pages business from 1994 to 1999, when Ameritech was acquired by SBC. Mr. McDonald was President and Chief Executive Officer of DonTech from 1993 to 1994. Prior to that time, he served in a variety of sales positions at our Company, after beginning his career at National Telephone Directory Corporation. Mr. McDonald is also a past vice chairman of the Yellow Pages Publishers Association.

Steven M. Blondy has served as Senior Vice President and Chief Financial Officer since March 2002. Prior to joining the Company, Mr. Blondy served as Senior Vice President – Corporate Development for Young & Rubicam, Inc., a global marketing and communications company, from 1998 to 2000. Mr. Blondy also served as Executive Vice President and Chief Financial Officer for Poppe Tyson, a leading Internet and integrated marketing communications agency from 1996 to 1997. Mr. Blondy also served as Chief Financial Officer for Grundy Worldwide, an independent producer of television programs in Europe and Australia from 1994 to 1995. Prior to that, he spent 12 years in the investment banking industry with Chase Manhattan and Merrill Lynch.

George F. Bednarz has served as Vice President, Publishing and Information Technology since April 2001. Previously, he served as Vice President & General Manager – Publishing since 1999. Mr. Bednarz joined the Company in November 1995 to lead the start-up implementation of the Raleigh Information Center. Prior to joining

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the Company, Mr. Bednarz spent 19 years at D&B, where he held executive positions of increasing responsibility in various functions.

Robert J. Bush has served as General Counsel since January 2001. During 2000, Mr. Bush served as Vice President and Corporate Secretary, having joined the Company in October 1999 as Assistant Vice President and Assistant General Counsel. Prior to joining the Company, Mr. Bush was Assistant General Counsel and Assistant Secretary at MIM Corporation, a pharmacy benefit management company, from 1998 to 1999 and an Associate at the New York offices of Jones, Day, Reavis & Pogue from 1993 to 1998.

Frank M. Colarusso has served as Vice President and Treasurer since June 1998. Prior to that, he was Assistant Treasurer of D&B since 1996. Mr. Colarusso joined D&B in 1986 and was named Manager, International Treasury Services in 1989 and Director of Corporate Finance in 1992. Prior to joining D&B, Mr. Colarusso held management positions at Texaco Inc. and Sperry Corporation.

William C. Drexler has served as Vice President and Controller since June 1999. Prior to that, Mr. Drexler served as Assistant Vice President of Finance since 1996. Mr. Drexler joined the Company in 1992 as Director of Accounting Operations. In 1995, he was named Director of Financial Planning for publishing and information services. Prior to joining the Company, Mr. Drexler held financial management positions of increasing responsibility with a number of manufacturing firms.

Debra M. Ryan has served as Vice President-Human Resources since January 2002. Prior to that, Ms. Ryan served as Assistant Vice President – Human Resources since 1992. Ms. Ryan joined the Company in 1973 as a sales representative and has held several management positions in the sales organization.

ITEM 2. PROPERTIES

After the acquisition and prior to giving effect to any potential facility consolidation, we conduct our publishing operations from one owned and three leased facilities with non-cancelable lease terms expiring at various dates through 2012. Our publishing facilities are located in a leased 55,000 square foot building in Raleigh, North Carolina, in an owned 25,000 square foot facility in Bristol, Tennessee and in a leased 42,000 square foot facility in Blountville, Tennessee. Our graphics center is located in a 20,000 square foot building in Dunmore, Pennsylvania. We lease 35,000 square feet for our corporate headquarters in Purchase, New York and 67,000 square feet of office space in Overland Park, Kansas. The lease of our corporate headquarters extends through 2011, but we have the option to cancel the lease in 2006 for a nominal fee. The lease on the Overland Park facility extends through April 2005 but both the landlord and we have the right to cancel the lease upon 180 days prior written notice. We also lease space for local sales offices, which are relatively small and have reasonably short terms. DonTech directly leases its own sales offices and corporate headquarters. We believe that our facilities are adequate for their current use.

ITEM 3. 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,” you need to understand the relationship between us and The Dun & Bradstreet Corporation, and certain of its predecessors and affiliates that, through

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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 Form 10-K 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 have filed an appeal of this dismissal. Nonetheless, we presently do not believe that the final outcome of this matter will have a material adverse effect on our results of operations or financial condition.

Information Resources, 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.

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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 Corporation 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.

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 approximately $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 are a proper party to this arbitration proceeding. A decision from the arbitration panel on the merits is expected during 2003. If NMR should prevail in the arbitration 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. While we believe that the original interpretation of the tax allocation computation is correct and that the claims of IMS are without merit, if NMR prevails against IMS and in turn IMS prevails against us in this arbitration proceeding, as noted above, D&B and Moody’s would be jointly and severally obligated to indemnify us against any such 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.

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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.

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.

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

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condition. SPA had approximately $0.5 million reserved in its consolidated financial statements for this matter, which amount was transferred to our consolidated financial statements as a result of the acquisition.

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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 2002.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company’s common stock trades on the New York Stock Exchange under the symbol “RHD.” The table below indicates the high and low sales price of the Company’s common stock for each quarter of the last two years.

At March 6, 2003, there were approximately 8,400 holders of record of the Company’s common stock. We have not paid any common dividends during the last two years and do not expect to pay common dividends in the foreseeable future. The Preferred Stock earns a cumulative dividend of 8%, compounded quarterly, which we may pay in cash or permit to accrue, at our option. The Credit Facility significantly limits our ability to pay the Preferred Stock dividends in cash through 2004. The Stock Purchase Agreement with respect to the Preferred Stock, Credit Facility and Indentures governing the Notes contain various financial restrictions that place limitations on our ability to pay dividends in the future (see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for additional information regarding these instruments and agreements).

On November 25, 2002, the GS Funds purchased 70,000 shares of our Series B-1 Preferred Stock and warrants to purchase 577,500 shares of our common stock, for aggregate gross consideration of $70 million. The Series B-1 Preferred Stock was immediately convertible into common stock at a conversion price of $24.05 per share, and the exercise price of the warrants is $26.28 per share. On January 3, 2003, the GS Funds purchased 130,000 shares of our Preferred Stock and warrants to purchase 1,072,500 shares of our common stock, for aggregate gross consideration of $130 million. On January 3, 2003, the 70,000 shares of Series B-1 Preferred Stock automatically converted into 70,604 shares of Preferred Stock. This Preferred Stock is immediately convertible into common stock at a conversion price of $24.05 per share, and the exercise price of the warrants is $28.62 per share. Both of these private placements of securities were made in reliance on Rule 506 of the Securities Act of 1933. We privately placed the Preferred Stock as part of the SPA acquisition financing. No underwriters were involved in these transactions and no underwriting discounts or commissions were paid. A closing payment of 1% of the aggregate $200 million investment was paid to the GS Funds and we reimbursed their transactions costs.

On December 3, 2002, we issued $325 million aggregate principal amount of 8 7/8% Senior Notes due 2010 and $600 million aggregate principal amount of 10 7/8% Senior Subordinated Notes due 2012. The Notes were privately placed in order to partially fund the SPA acquisition. The initial purchasers of the Notes were various institutional investors. We received net proceeds from the sale of the Notes to the initial purchasers of $900.9 million, net of initial purchasers’ discounts of $24.1 million. This private placement of debt securities was made in reliance on Section 4(2) of the Securities Act.

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Equity Compensation Plan Information

(1)		This includes our 2001 Stock Award and Incentive Plan.
(2)		This includes our Key Employees’ Performance Unit Plan. Upon completion of the respective performance period, a dollar amount of the award is determined for each recipient based on the Company’s actual financial performance against economic profit and earnings per share goals. The dollar amount is then converted into a number of performance shares by dividing the dollar amount of the award by the Company’s stock price (calculated as the average of the high and low prices of the Company’s common stock on the 10 trading days subsequent to delivery of the Company’s respective audited financial statements to the Compensation and Benefits Committee of the Company’s Board of Directors) at that time.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data are derived from our audited consolidated financial statements. The audited consolidated financial statements for 1998 assume we were a stand-alone entity for all periods and include allocations through June 30, 1998 of certain assets, liabilities and general and administrative expenses of D&B related to our business. The information below also includes operating results of businesses that were disposed of during 2000 and certain special items in 2000, 2001 and 2002. Amounts related to these businesses and special items are presented in footnotes 1 and 2. The information set forth below should be read in conjunction with the audited consolidated financial statements and related notes in Item 8 and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.

(1)

Amounts above include the results of the Bell Atlantic, Cincinnati and Get Digital Smart businesses disposed of in 2000 and one-time items from the CenDon restructuring in 2000. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting Comparability” for a discussion of these items. To facilitate comparison of the financial data, the amounts related to these disposed businesses and one-time items are as follows:

(2)

Operating income in 2001 includes a restructuring and special charge of $18,556 and an investment impairment charge of $11,432. Operating income in 2002 includes income of $6,405 from the reversal of the restructuring and special charge and an investment impairment charge of $2,000. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting Comparability” for a discussion of these items.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Item should be read in conjunction with the audited, consolidated financial statements and notes thereto that are included in Item 8. Unless otherwise indicated, the terms “Company,” “Donnelley,” “we,” “us” and “our” refer to R.H. Donnelley Corporation and its direct and indirect wholly owned subsidiaries.

On January 3, 2003, we acquired all the outstanding common stock of SPA, Sprint Corporation’s directory publishing business. See “Significant Business Development” below. As a result, commencing in 2003 our operating and financial results will no longer reflect sales commissions or pre-press fees from or other transactions with SPA since these intercompany transactions will be eliminated in consolidation. Rather, we will report the full value of advertising sales and certain direct costs under the deferral and amortization method. In order to facilitate discussion of our historical results as opposed to our future results, we use the past tense when referring to operating and financial results for the years 2000 through 2002.

DonTech remains unchanged following the SPA transaction and our financial presentation of DonTech will appear consistently in both historical and future periods.

Forward-Looking Information

Certain statements contained in this Annual Report on Form 10-K regarding R.H. Donnelley’s future operating results, performance, business plans or prospects and any other statements not constituting historical fact are “forward-looking statements” subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Where possible, words such as “believe,” “expect,” “anticipate,” “should,” “will,” “would,” “planned,” “estimated,” “potential,” “goal,” “outlook,” “could,” and similar expressions, are used to identify such forward-looking statements. All forward-looking statements reflect only our current beliefs and assumptions with respect to our future results, business plans, and prospects, and are based solely on information currently available to us. Accordingly, these statements are subject to significant risks and uncertainties and our actual results, business plans and prospects could differ significantly from those expressed in, or implied by, these statements. We caution readers not to place undue reliance on, and we undertake no obligation to update, any forward-looking statements. Such risks and uncertainties include, without limitation, the following:

(1)  Our ability to meet our substantial debt service obligations
We have a substantial amount of debt and significant debt service obligations in 2003 and thereafter. After closing the SPA acquisition, we had total outstanding debt of $2,356.2 million at January 3, 2003. This debt was comprised of borrowings of $1,410 million under our new $1,525 million Credit Facility, $325 million 8 7/8% Senior Notes, $600 million 10 7/8% Notes and, following a tender offer and exit consent solicitation, $21.2 million aggregate remaining principal amount of the 9 1/8% Senior Subordinated Notes issued in 1998 (the “Existing Notes”). As a result of our significant amount of debt and debt service obligations, we face increasing risks associated with, but not limited to, the following:

	•		our ability to obtain additional financing in excess of the additional borrowing capacity under our $125 million revolving credit facility on satisfactory terms to fund working capital requirements, capital expenditures, acquisitions, investments, debt service requirements and other general corporate requirements is limited;
	•		we are more vulnerable to general economic downturns, competition and industry conditions, which could place us at a competitive disadvantage compared to our competitors that are less leveraged;
	•		we face increased exposure to rising interest rates as a portion of our debt is at variable interest rates;
	•		we have reduced availability of cash flow to fund working capital requirements, capital expenditures, acquisitions, investments and other general corporate requirements because a substantial portion of our cash flow will be needed to service our debt obligations; and
	•		we have limited flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.

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Our ability to pay principal and interest on our debt obligations will depend upon our future operating performance and our ability to refinance debt. If we are unable to service our debt and fund our business, we may be forced to reduce or delay capital expenditures, seek additional debt financing or equity capital, restructure or refinance our debt or sell assets. We cannot assure you that we would be able to obtain additional financing, refinance existing debt or sell assets on satisfactory terms or at all.

(2)  Restrictive covenants under the terms of our debt and Preferred Stock agreements
The indentures governing the Notes and the Credit Facility include a number of significant restrictive covenants. These covenants could adversely affect us by limiting our ability to plan for or react to market conditions or to meet our capital needs. These covenants, among other things, restrict our ability and the ability of our subsidiaries to:

	•		incur additional debt;
	•		pay dividends on our equity interests or repurchase equity interests;
	•		make certain investments;
	•		enter into certain types of transactions with affiliates;
	•		place restrictions on our restricted subsidiaries to pay dividends or make other payments to us;
	•		use assets as security in other transactions; and
	•		sell certain assets or merge with or into other companies.

In addition, the Credit Facility includes other and more restrictive covenants and prohibits us from prepaying the Notes and Existing Notes while borrowings under the Credit Facility are outstanding. The Credit Facility also requires us to maintain certain financial ratios and meet other financial tests. The failure to comply with these covenants could result in an event of default, which, if not cured or waived, could require us to repay these borrowings before their scheduled due date. If we were unable to make this repayment or otherwise refinance these borrowings, the lenders under the Credit Facility could foreclose on our assets. In addition, these lenders could elect to declare all amounts borrowed under the Credit Facility, together with accrued interest, to be due and payable, which, in some instances, would be an event of default under the indentures governing the Notes. If we were unable to refinance these borrowings on favorable terms, our results of operations and financial condition could be adversely impacted by increased costs and less favorable terms, including rates and covenants. Any future refinancing of the Credit Facility is likely to contain similar restrictive covenants.

Furthermore, the terms of the purchase agreement with respect to our Preferred Stock, among other things, restricts our ability and the ability of our subsidiaries to:

	•		incur additional debt;
	•		pay dividends on shares of our common stock or repurchase shares of our common stock;
	•		enter into certain types of transactions with affiliates; and
	•		sell or acquire certain assets.

Our failure to comply with these terms would result in a breach of this agreement, which could have a material adverse effect on our business. In addition, without the consent of the GS Funds, we cannot issue shares of common stock for 18 months following the sale of the Preferred Stock, which could adversely affect our liquidity (see “– Liquidity and Capital Resources” for a description of the Preferred Stock).

(3)  Declining usage of print yellow pages directories and changes in technology
Since 1997, overall usage of printed yellow pages directories in the United States has declined. We cannot assure you that usage of our yellow pages directories will remain stable and not decline. We believe that declines in usage of printed directories are in part a result of increased usage of Internet-based directory products. We cannot assure you that we will be able to provide services over the Internet successfully or that we will be able to compete successfully with other Internet-based directory services. Any declines in usage could impair our ability to maintain or increase advertising prices, cause businesses that purchase advertising in our yellow pages directories to reduce or discontinue those purchases and discourage businesses that do not purchase advertising in our yellow pages directories from doing so. Any of the factors that may contribute to a decline in usage of our printed directories, or a combination of them, could impair our revenues and have a material adverse effect on our business.

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The yellow pages directory advertising business is subject to changes arising from developments in technology, including information distribution methods and users’ technological preferences. The use of the Internet by consumers as a means to transact commerce may result in new technologies being developed and services being provided that could compete with our products and services. As a result of these factors, our growth and future financial performance may depend on our ability to develop and market new products and services and create new distribution channels, while enhancing existing products, services and distribution channels, in order to incorporate the latest technological advances and accommodate changing user preferences, including the use of the Internet. If we fail to anticipate or respond adequately to changes in technology and user preferences or are unable to finance the capital expenditures necessary to respond to such changes, our results of operations or financial condition could be materially adversely affected.

(4)  SBC’s or DonTech’s actions could adversely impact our business
DonTech is our 50/50 perpetual partnership with an affiliate of SBC Communications Inc. (“SBC”). As the exclusive sales agent for SBC directories in Illinois and northwest Indiana, DonTech is responsible for the management of its sales forces, including compensation, recruiting and training and other sales related matters. As the publisher, SBC has responsibility for and control over all other matters, including, without limitation, product development, pricing, scheduling, marketing, distribution, billing, collections, credit and customer service. While we believe that DonTech and its economic interests are generally aligned with those of SBC with respect to SBC’s yellow pages directory operations, SBC could implement policies and decisions (in which DonTech or we would likely have little or no participation or influence) and/or perform its obligations in a manner that could have a material adverse effect on our results of operations or financial condition and, potentially, on our relationship with SBC. We cannot assure you that any such policies or decisions would not have a material adverse effect on our results of operations, financial condition or our relationship with SBC. We also maintain a large receivable balance from SBC and any liquidity difficulties that SBC may experience could materially impact our results of operations or financial condition.

The DonTech partnership agreement and related SBC contractual arrangements have perpetual terms. These arrangements only terminate upon the occurrence of certain enumerated events, including, without limitation, the unremedied breaches of certain material provisions thereof, the mutual agreement of the parties, the bankruptcy of a partner or parent or a change in control of a partner (excluding a change in control of the ultimate parent company of the partner). In addition, under applicable law, the contractual arrangements potentially may not remain in effect in perpetuity. We cannot assure you that the DonTech relationship will remain in full force and effect into perpetuity, without material modification or at all, that DonTech and SBC will perform all of their respective material obligations (particularly payment obligations) under these agreements or that SBC will not seek to terminate these arrangements. In the event any such party seeks to terminate these contractual arrangements, the other party may dispute such attempted termination and, in such case, a court or arbitrator may be required to determine the appropriateness of any such attempted termination. We cannot assure you as to the outcome of any such proceeding. Any such termination or material modification of the agreements or failure by SBC or DonTech to perform their respective material obligations would have a material adverse effect on our results of operations or financial condition.

(5)  Competition
The U.S. directory advertising industry is highly competitive. More than 240 independent publishers operating in the United States compete with regional bell operating company (“RBOC”) directory publishers and other telephone utility publishers. In most markets, we compete with one or more yellow pages directory publishers, which are predominantly independent publishers. In some markets, we compete on a limited basis with RBOC directory publishers in adjacent markets. One of these publishers, Verizon Information Services, the directory business affiliated with Verizon Communications, Inc., has announced plans to publish directories and offer local Internet directory services in markets beyond where Verizon Communications offers local phone service, including in several SPA markets. Effectively, Verizon Information Services will be competing as an independent publisher in those markets. While no other RBOC or utility publisher has announced similar plans, we cannot assure you that other RBOC or utility publishers will not do so in the future. Many of the parent companies of these telephone utility publishers are larger than us and have greater financial resources than we have. No assurances can be given that we will be able to compete effectively with these other publishers for advertising sales or acquisitions in the future.

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We also compete for advertising sales with other media, including newspapers, magazines, radio, direct mail, the Internet and television. Many of these competitors are larger than us and have greater financial resources than we have. Additionally, advances in technology have brought new participants, new products and new channels to the industry, including increasing use of electronic delivery of directory information as an advertising medium. We cannot assure you that we will be able to successfully compete in responding to any such developments.

In addition, the Telecommunications Act of 1996, which effectively opened local telephone markets to increased competition, may adversely impact the market position of telephone utilities, including those with which we have relationships. Because the Telecommunications Act of 1996 has opened local telephone markets to increased competition, we cannot assure you that Sprint, or SBC will remain a dominant local telephone service provider in its local service areas. If Sprint were no longer a dominant local telephone service provider in any particular local service area, our license to be the exclusive publisher for Sprint in its markets and to use the Sprint brand name on our directories in those markets may not be as valuable as we presently anticipate, and we may not realize some of the anticipated benefits under our commercial arrangements with Sprint and its affiliates. If SBC was no longer a dominant local telephone service provider in any DonTech service area, the financial results we recognize from DonTech could be adversely affected.

(6)  Our ability to successfully integrate SPA into our operations
The integration of SPA into our operations involves a number of risks, including:

	•		difficulty integrating operations and personnel at different locations;
	•		diversion of management attention;
	•		potential disruption of ongoing business because of the unknown reactions to the combination of SPA and us by vendors, customers and other key constituencies;
	•		difficulties in assimilating the technologies, services and products of SPA;
	•		inability to retain key personnel;
	•		inability to successfully incorporate acquired business components with our existing infrastructure; and
	•		inability to maintain uniform standards, controls, procedures and policies.

If we are unable to effectively integrate operations and personnel in a timely and efficient manner, we may not realize the benefits expected from the acquisition. Failure to overcome these risks or any other problems encountered in connection with the acquisition could slow our growth or lower our quality of services, which could reduce customer demand.

(7)  Reliance on, and extension of credit to, small- and medium-sized businesses
A significant portion of our revenue is derived from selling advertising to small- and medium-sized businesses. In the ordinary course of our yellow pages publishing business, we extend credit to these advertisers for advertising purchases. Small- and medium-sized businesses, however, tend to have fewer financial resources and higher financial failure rates than large businesses. In addition, collection procedures for delinquent accounts can take an extended period of time and involve increased costs. Consequently, we could be adversely affected by our dependence on and our extension of credit to small- and medium-sized businesses.

(8)  Dependence on third-party providers of printing, distribution and delivery services
We depend on third parties for the printing and distribution of our directories. We currently have two contracts for the printing of our directories with R.R. Donnelley & Sons (“R.R. Donnelley”). Although these contracts do not expire until December 2005 and December 2007, because of the large print volume and specialized binding of directories, there are a limited number of companies capable of servicing our printing needs. Accordingly, the inability or unwillingness of R.R. Donnelley to provide printing services to us on acceptable terms or at all could have a material adverse effect on our business. No common ownership or other business affiliation exists between R.R. Donnelley and us.

We also have contracts for the delivery of our directories to the individual households and businesses in the geographic area covered by the directories. These contracts are scheduled to expire in February 2004 and may be terminated by our vendors upon 120 days written notice. There are a limited number of companies capable of

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servicing our delivery needs. Accordingly, the inability or unwillingness of our current vendors to provide delivery services to us on acceptable terms or at all could have a material adverse effect on our business.

(9)  General Economic Factors
Our business results could be adversely affected by a prolonged national or regional economic recession. Typically, our advertising revenues, as well as those of yellow pages publishers in general, do not fluctuate widely with economic cycles. However, such a prolonged national or regional economic recession could have a material adverse effect on our business, results of operations or financial condition. In addition, any residual economic effects of, and uncertainties regarding (i) the terrorist attacks that occurred on September 11, 2001, (ii) the general possibility, express threat or future occurrence of similar terrorist or other related disruptive events, or (iii) the threat of or the United States’ involvement in war, especially with respect to the major markets in which we operate that depend heavily upon travel, tourism or the military, could also adversely affect our business.

(10)  Fluctuations in the price and availability of paper
After the acquisition, our principal raw material is paper, which our printer currently purchases on our behalf at agreed upon prices. These prices are at or near the spot market price, as we do not currently have long-term purchase arrangements or commitments from paper mills or other outside suppliers. Accordingly, we are subject to price increases and delays in receiving this principal raw material. Further, changes in the supply of, or demand for, paper could affect delivery times and prices. As conditions warrant, we may enter into longer term supply agreements in the future. Paper is one of our largest variable cost items and will account for approximately 10% to 15% of annual operating expenses. We cannot assure you that we will have available necessary raw materials at reasonable prices or that any increases in paper costs would not have a material adverse effect on our business, results of operations or financial condition.

(11)  The sale of advertising to national accounts is coordinated by third parties that we do not control
We expect that approximately 15% of our revenues in 2003 will be derived from the sale of advertising to national or large regional companies, such as rental car companies, automobile repair shops and pizza delivery businesses, that purchase advertising in several of our directories. In order to sell advertising to these accounts, we contract with CMRs, who are independent third parties that act as agents for national companies and design their advertisements, arrange for the placement of those advertisements in directories and provide billing services. As a result, our relationships with these national advertisers depend significantly on the performance of these third party CMRs whom we do not control. Although we believe that relationships with these CMRs have been mutually beneficial, if some or all of the CMRs with whom we have established relationships were unable or unwilling to provide services to us on acceptable terms or at all, such inability or unwillingness could materially adversely affect our business.

(12)  Turnover among our sales force or key management
Our success depends to a significant extent on our ability to identify, hire, train and retain qualified sales personnel in each of the markets in which we operate. We expend a significant amount of resources and management time on identifying and training our sales representatives. Our ability to attract and retain qualified sales personnel depends on numerous factors, including factors outside of our control, such as conditions in the local employment markets in which we operate. A decrease in the number of sales representatives could adversely affect our results of operations, financial condition and liquidity, as well as our ability to service our debt.

Furthermore, we depend on the continued services of key personnel, including our experienced senior management team as well as our regional sales management personnel. Although we believe that we could replace our senior management team and other key employees within a reasonable time period should the need arise, the loss of these key personnel could have a material adverse effect on our business.

(13)  The loss of important intellectual property rights.
Some of our trademarks such as the “Sprint” and “Donnelley” brand names and other intellectual property rights are important to our business. We rely upon a combination of copyright and trademark laws as well as contractual arrangements, including licensing agreements, particularly with respect to Sprint markets, to establish and protect our intellectual property rights. We are required from time to time to bring lawsuits against third parties in order to protect our intellectual property rights. Similarly, we are, and from time to time expect to be, party to proceedings where third parties challenge our rights. We cannot be sure that any lawsuits or other actions brought by us will be

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successful or that we will not be found to infringe the intellectual property rights of third parties. Although we are not aware of any material infringements of any trademark rights that are significant to our business, any lawsuits, regardless of their outcome, could result in substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition or results of operations. In addition, we only have rights to use the Sprint name and diamond logo in certain markets. The loss of important intellectual property rights such as trademarks could have a material adverse effect upon our business, financial condition and results of operations.

(14)  Impact of bankruptcy proceedings against Sprint during the term of the SPA commercial arrangements
Contract rights under the directory services license agreement, trademark license agreement and non-competition agreement with Sprint constitute a substantial portion of our commercial arrangements with Sprint. Pursuant to these commercial arrangements, we are the exclusive directory publisher for Sprint in the markets in which Sprint currently provides telephone service and, under certain circumstances, in markets that are acquired by Sprint in the future. If a bankruptcy case were to be commenced by or against Sprint, it is possible that all or part of the directory services license agreement and/or non-competition agreement could be considered an executory contract and could therefore be subject to rejection by Sprint or a trustee appointed in a bankruptcy case pursuant to Section 365 or Section 1123 of the United States Bankruptcy Code.

If one or more of these agreements were rejected, the applicable agreement may not be specifically enforceable, in which case we would have only an unsecured claim for damages against Sprint for the breach of contract resulting from the rejection. If the directory services license agreement were rejected, we would, among other things, no longer be entitled to be Sprint’s exclusive publisher of telephone directories in the affected markets. We could also lose our right to enforce the provisions of the agreement under which we have the right to license trademarks of successor local exchange carriers in the Sprint markets. If the non-competition agreement was rejected and specific enforcement was not available, Sprint would, among other things, no longer be precluded from publishing print telephone directories or selling local directory advertising in the applicable restricted markets.

Sprint has created a bankruptcy remote special purpose vehicle in the form of a limited liability company and contributed and assigned the trademarks being licensed to us under the trademark license agreement to this limited liability company. The operating agreements of this limited liability company require, among other things, that the board of managers of this entity include one independent manager that is unaffiliated with Sprint. The consent of this independent manager is required for the entity to take certain actions, including, among other things, commencement of a bankruptcy proceeding. Because the trademarks were contributed to this limited liability company, our rights under the trademark license agreement are not subject to rejection in the event of a bankruptcy proceeding involving Sprint unless there is also a bankruptcy proceeding involving this limited liability company. Although we believe that the likelihood of this entity being the subject of a bankruptcy proceeding is limited by this structure and the governing provisions of the operating agreement, if the trademark license agreement were rejected in a bankruptcy proceeding, we would lose the right to use the Sprint brand name for the SPA directories. We cannot assure you that any loss of rights under certain of these arrangements with Sprint would not have a material adverse effect on our financial condition or results of operations.

(15)  Our ability to enforce the non-competition agreement with Sprint
Sprint has agreed, in general, not to publish print telephone directories or sell local advertising for use in directories in the acquired markets during the term of the non-competition agreement. However, under state and federal law, a covenant not to compete is only enforceable:

	•		to the extent it is necessary to protect a legitimate business interest of the party seeking enforcement;
	•		if it does not unreasonably restrain the party against whom enforcement is sought; and
	•		if it is not contrary to the public interest.

Enforceability of a non-competition covenant is determined by a court based on all of the facts and circumstances of the specific case at the time enforcement is sought. For this reason, it is not possible for us to predict whether, or to what extent, a court will enforce Sprint’s covenants not to compete against us during the term of the non-competition agreement. If a court were to determine that the non-competition agreement is unenforceable, Sprint could compete directly against us in the directory publishing business in the previously restricted markets. We cannot assure you that our inability to enforce the non-competition agreement with Sprint would not have a material adverse effect on

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our financial condition or results of operations.

Significant Business Development

On January 3, 2003, we completed the acquisition of SPA for $2,213.5 million in cash, after a preliminary working capital adjustment. The purchase price is subject to a final working capital adjustment. SPA is the publisher of 260 revenue-generating yellow pages directories in 18 states. Prior to this acquisition, we acted as a sales agent and pre-press publishing vendor for SPA for 44 of these directories in 4 states. The acquisition transforms the Company from a sales agent and pre-press vendor into a leading publisher of yellow pages directories.

To finance the acquisition, we entered into a new $1,525 million Credit Facility, consisting of a $500 million Term Loan A, a $900 million Term Loan B and a $125 million Revolver. We also issued $325 million 8 7/8% Notes and $600 million 10 7/8% Notes. Finally, the GS Funds purchased $200 million of Preferred Stock.

To take advantage of favorable market conditions and to ensure the timely consummation of the SPA acquisition, we issued the Notes and borrowed the Term Loan B in December 2002. The total gross proceeds of $1,825 million were deposited and held in escrow pending the SPA acquisition closing. The GS Funds also invested an initial $70 million through the purchase of 70,000 shares of Preferred Stock. This investment was a portion of their $200 million commitment. At the closing of the SPA acquisition, the GS Funds purchased the remaining $130 million of Preferred Stock and we borrowed the Term Loan A and $10 million under the Revolver.

In connection with the transaction, we entered into a directory services license agreement, a trademark license agreement and a non-competition agreement with Sprint . The directory services license agreement gives us the exclusive right to produce, publish and distribute directories for Sprint in the markets where Sprint currently provides local telephone service. The trademark license agreement gives us the exclusive right to use certain Sprint trademarks, including the Sprint diamond logo, in those markets. The non-competition agreement prohibits Sprint from producing, publishing and distributing print directories or selling local advertising in those markets, with certain limited exceptions. These agreements are all interrelated and each has initial terms of 50 years, subject to earlier termination under specified circumstances.

Prior to the acquisition, we provided sales agency and pre-press publishing services to SPA. Accordingly, at December 31, 2002, we had an aggregate receivable of $43.3 million for commissions, pre-press publishing fees and priority distribution income from SPA. As a result of the acquisition, these receivables became intercompany items and were included as part of the purchase price. Also, long-term liabilities at December 31, 2002 include an amount due to Sprint of $7.0 million, which we paid in cash at the closing.

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 will be included in our consolidated results from and after January 3, 2003, the acquisition closing date. Accordingly, the results of SPA are not included in our audited financial statements at or for the year ended December 31, 2002.

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The allocation of the purchase price to the fair value of assets acquired and liabilities assumed is shown in the table below. The purchase price allocation is preliminary and based on the best information currently available and could change as additional information arises.

The Company – Prior to the SPA Acquisition

The discussion below relates to the results of the Company for the three years ended December 31, 2002. Through 2002, we were a leading independent marketer of yellow pages advertising services in the United States. Our business was organized into two reportable operating segments: the DonTech Partnership and Directory Advertising Services.

DonTech

DonTech is a 50/50 perpetual partnership with an operating unit of SBC. DonTech acts as the exclusive sales agent for yellow pages directories published by SBC in Illinois and northwest Indiana and receives a commission from SBC. Income from DonTech is comprised of our 50% interest in the net profits of DonTech and revenue participation income received directly from an affiliate of SBC. Revenue participation income is based on a percentage of DonTech advertising sales and comprises approximately 80% to 85% of the total annual income related to DonTech. Total income from DonTech accounted for 76%, 79% and 72% of operating income before General & Corporate costs and other unallocated expenses for the years ended December 31, 2002, 2001 and 2000, respectively. Certain general and administrative expenses incurred to support this business are not allocated to the DonTech segment. As income from DonTech accounts for a significant portion of our operating income, a material decline in the advertising sales of DonTech would likely have a material adverse effect on our results of operations and financial condition. We also provide certain pre-press publishing services for those SBC directories for which DonTech sells advertising, the income from which was included in our DAS segment as described below. Although DonTech provides advertising sales of yellow pages and other directory products similar to DAS, the partnership is considered a separate operating segment since, among other things, the partnership has its own Board of Directors and the employees of DonTech, including its officers and managers, are not our employees. Following the SPA transaction, DonTech continues to act as a sales agent for SBC and earn commissions when an advertising contract is signed. Further, we will continue to account for DonTech under the equity method of accounting.

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Historical Directory Advertising Services

Within our DAS segment, we sold yellow pages advertising for affiliated entities of Sprint and performed pre-press publishing services for yellow pages directories. We were the exclusive sales agent in the greater Orlando, Florida market (“Central Florida”) for an operating unit of Sprint and the exclusive sales agent in Nevada, Florida, Virginia and North Carolina for CenDon LLC (“CenDon”), a joint venture with Centel Directory Company (“Centel”), a subsidiary of Sprint. Other Sprint affiliates sold yellow pages advertising in other markets in these states. We received sales commissions on all advertising sold for Sprint and CenDon and a priority distribution on our membership interest in CenDon. The amount of priority distribution earned was based on a percentage of CenDon advertising sales. Prior to the acquisition, a material decline in advertising sales in these markets could have had a material adverse effect on our results of operations and financial condition.

The DAS segment also included pre-press publishing services provided to SBC and Sprint for their respective yellow pages directories for which we sold advertising under separately negotiated contracts. The agreement with SBC extends through 2008. The agreement with Sprint was scheduled to expire in 2003. We also provided pre-press publishing services to an unaffiliated third party under an agreement that expired at the end of 2002. We have jointly agreed to an orderly transition of work that will take place during the first quarter of 2003. Revenue from our pre-press publishing services operation accounted for approximately 42%, 43% and 23% of total consolidated revenue in 2002, 2001 and 2000, respectively. However, going forward, revenue from pre-press publishing services will account for a significantly lower percentage of total revenue as consolidated revenues will be considerably higher. DAS also included all information technology costs.

The results of the DAS segment for 2000 included the operating results of the Cincinnati proprietary directory business, the Bell Atlantic sales agency business, the Get Digital Smart Internet business and equity losses of ChinaBig.com Limited (“ChinaBig”) through the dates of transactions that caused changes in the reporting of each respective business. The 2000 results of DAS also include a one-time operating income benefit of $15.8 million from the restructuring and extension of the CenDon Partnership. See “– Factors Affecting Comparability” below for more information.

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. For additional information on our accounting policies, see Note 1 to the Consolidated Financial Statements in Item 8.

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. DonTech is accounted for under the equity method as we do not have control, but do have the ability to exercise significant influence over its operating and financial policies. Accordingly, the results of DonTech are not consolidated in our financial statements, but our share of its net profits is reported as partnership and joint venture income in our Consolidated Statements of Operations.

Revenue Recognition. During the three years ended December 31, 2002, we earned sales commission revenue from the sale of advertising on behalf of Sprint and fees for pre-press publishing services. As a sales agent for Sprint, we recognized sales commission revenue at the time an advertising contract was executed with a customer. Sales commission revenue was recorded net of potential sales allowances, which were estimated, based on historical experience. If an advertiser was not satisfied with its yellow pages advertisement (e.g. misspelled business name, incorrect business address or number, etc.), the publisher had discretion to adjust the contract value. Since commissions were earned based on the aggregate value of advertising contracts, our commissions would have also been adjusted under those circumstances. Concurrent with the recognition of sales commission revenue, we recorded a sales allowance of approximately 1% of sales commission revenue, based on historical experience. The amount of sales allowance recorded was subsequently adjusted based on actual results. Historically, the actual amount of sales allowances was consistent with our estimates and significant adjustments were not made. Revenue from pre-press publishing operations was recognized as services were performed. We recognized no allowances for

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pre-press publishing services.

As a result of the acquisition, we will recognize revenue from the sale of directory advertising in Sprint Yellow Pages® directories and certain related direct costs under the deferral and amortization method, whereby revenues and direct costs are recognized ratably over the life of a directory, which is typically twelve months. Revenue recognition for pre-press publishing services remains unchanged.

Trade Receivables. Trade receivables represented sales commissions earned from the sale of advertising on behalf of Sprint and fees earned for pre-press publishing services. We established an allowance for doubtful accounts for sales commissions based upon historical experience and contractual limitations. The sales agency agreement between Centel and us limited our exposure to bad debts at a specified percentage of sales. Actual bad debts for CenDon directories over the last three years exceeded our maximum contractual exposure. Accordingly, an increase in the actual bad debt rate would not have directly impacted our results of operations or financial condition. Under the Central Florida sales agency agreement, our exposure to bad debts was not contractually limited. We estimated our bad debt expense based on historical experience and made subsequent adjustments, if necessary, based on actual results. Receivables for sales commissions were billed to the publisher upon directory publication and collected in accordance with contractual provisions, typically in the same month of publication, but no later than nine months after publication.

Receivables for pre-press publishing services were billed and collected in accordance with the terms of the applicable agreement, generally a monthly pro rata amount based on the annual contract value. If actual volumes exceeded contracted volumes, an additional amount is billed to the publisher at year-end. Although we will no longer bill Sprint for these services, we will continue to bill and collect from SBC through the end of the contract in 2008.

After the acquisition, our receivables from advertising sales in Sprint Yellow Pages® directories represent the full contract value of the advertisement as opposed to a commission on the contract value. Rather than SPA being our trade debtor, we have assumed a direct billing relationship with directory advertisers. We bill most local advertisers on a monthly basis over the life of a directory. See “Concentration of Credit Risk” below and “ – Forward Looking Information – Reliance on, and extension of credit to, small- and medium-sized businesses.” SBC remains our trade debtor with respect to the sale of advertising in DonTech markets.

Pension and Other Postretirement Benefits. Pension and other postretirement benefits represent estimated amounts to be paid to employees in the future. The accounting for benefits reflects the recognition of these benefit costs over the employees’ approximate service period based on the terms of the plan and the investment and funding decisions made. The determination of the benefit obligations and the net 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 net periodic benefit cost. The assumed discount rate is the rate at which the pension benefits could be settled. We use the rates on Aa corporate bonds as a basis for determining our discount rate assumption. The expected long-term rate of return on plan assets is based on the mix of assets held by the plan and the expected long-term rates of return within each asset class. The anticipated trend of future health care costs is based on historical experience and external factors. See Note 9 to the Consolidated Financial Statements in Item 8 for further information regarding our benefit plans.

Effective January 1, 2003, we reduced our rate of return on plan assets from 9.75% to 8.25%. As a result of low investment returns over the last few years, as well as our outlook for the long-term, particularly for equity securities, we determined that the assumed rate of return of 9.75% no longer reflected our best estimate of future long-term returns. Based on the current investment environment and the pension plan’s asset allocation, we determined that a long-term rate of return of 8.25% better reflected our expectations for future long-term returns. For the year ended December 31, 2002, pension income was $1.7 million. Had our assumed rate of return on plan assets been 8.25% at the beginning of 2002, pension income would have been approximately $0.6 million. We estimate that pension expense will be approximately $1.2 million in 2003.

Earnings per Share. Basic earnings per common share (EPS) are generally calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding. However, because the 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

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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 are calculated by dividing net income 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.

Concentration of Credit Risk. We maintain a significant receivable balance from SBC for revenue participation income and pre-press publishing services. 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 receivables for revenue participation and pre-press publishing services are recorded at net realizable value. We do not foresee a material credit risk associated with the collection of these receivables, although we can give no assurance that full payment will continue to be received on a timely basis. At December 31, 2002, we also had aggregate receivables from SPA for commissions, pre-press publishing fees and priority distribution income of $43.3 million. As a result of the acquisition, these receivables became intercompany items.

After the acquisition, a significant portion of our net revenue is derived from selling 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 advertisers, including all new advertisers, are subject to a credit review, and if the advertiser qualifies, we 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 and 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. National advertising is typically paid in full within 30 days of directory publication by the associated CMR.

Employee Stock Options. We follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations (APB 25) in accounting for our stock option plan, and, accordingly, no compensation expense related to the issuance of stock options to employees or non-employee directors has been recognized in the three years ended December 31, 2002. We also grant stock options to certain key employees of DonTech. Because DonTech employees are not our employees, current accounting rules require that we recognize compensation expense over the vesting period based on the fair value of the options. We recognized compensation expense of $0.2 million, $0.7 million and $0.2 million in 2002, 2001 and 2000, respectively.

In 2002, options to purchase 1,486,000 shares of our common stock (“Founders Grant”) were granted to certain employees contingent on the consummation of the SPA acquisition. Under APB 25, we will recognize expense of $5.1 million over the next four years.

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.

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The fair value of stock options used to compute the pro forma disclosures is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

In December 2002, the Financial Accounting Standards Board (“FASB”) issued FAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment to FAS 123.” This statement provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock based employee compensation. In addition, the statement amends the disclosure requirements of FAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock based employee compensation and the effect on reported results. The statement is effective for calendar year 2003; however, at this time, we do not intend to voluntarily adopt the provisions of FAS 123.

New Accounting Pronouncements

In April 2002, the FASB issued FAS 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This statement, among other things, changes the way gains and losses from the extinguishment of debt are reported. Previously, all gains and losses from the extinguishment of debt were required to be reported as an extraordinary item, net of related tax effect. Under FAS 145, gains and losses from the extinguishment of debt should be reported as part of on-going operations, unless the extinguishment of debt is both an unusual and infrequent event for the entity. Previously reported extraordinary gains and losses from the extinguishment of debt that are not unusual or infrequent should be reclassified. This statement is effective for calendar year 2003; however, as permitted, we adopted this statement at the end of 2002. Previously reported extraordinary losses from the extinguishment of debt have been reclassified. Accordingly, interest expense includes the write-off of deferred financing costs associated with the prepayment of debt of $0.5 million, $0.7 million and $1.1 million in 2002, 2001 and 2000, respectively. The adoption of this statement did not impact previously reported net income.

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

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This Interpretation elaborates on the disclosures to be made by a guarantor in financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements for periods ending after December 15, 2002. We do not guarantee any obligations of third parties (including DonTech); however its indirect subsidiaries jointly and severally, fully and

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unconditionally guarantee the debt obligations of R.H. Donnelley Inc. See Note 13 to the Consolidated Financial Statements in Item 8.

See Note 1 to the Consolidated Financial Statements in Item 8 for additional information on our accounting policies.

RESULTS OF OPERATIONS
Three Years Ended December 31, 2002

Factors Affecting Comparability

During 2000, the following transactions resulted in a pre-tax net gain of $86.5 million ($53.5 million after-tax) and a one-time operating income benefit of $15.8 million:

	•		We executed an agreement with affiliates of Bell Atlantic Corporation, (now known as Verizon Communications, “Bell Atlantic”), for the early termination of our sales agency agreements, sold our Cincinnati proprietary operations and ceased operations of our Get Digital Smart Internet business (“GDS”).
	•		We restructured and extended the CenDon sales agency relationship through 2010. The original relationship was set to expire in 2004.
	•		In connection with an investment by an unaffiliated third party in ChinaBig, we became a passive investor, and as such, no longer recognized our share of the losses of ChinaBig.

Disposition of Businesses and Related Cost Cutting Actions

On April 27, 2000, we sold our Cincinnati proprietary directory business to Yellow Book USA, Inc. for $8 million.

On June 30, 2000, we entered into an agreement with Bell Atlantic for the early termination of the directory services agreements, as amended (the “Agency Agreements”) between Bell Atlantic and us. Pursuant to the Agency Agreements, we served as exclusive sales agent for Bell Atlantic directories covering substantially all of New York State. The Agency Agreements were scheduled to expire in 2003 and 2005. Under the terms of the agreement, we received a termination payment of $114 million and commission payments for those sales that occurred prior to the closing.

In December 2000, we ceased operations of GDS. GDS was formally launched in February 2000 in the Miami/Ft. Lauderdale market to test the economic viability of providing a variety of products and services designed to deliver a comprehensive package of Internet marketing and e-commerce capabilities to small- and medium-sized local businesses. While the test demonstrated that there was a demand for the products and services being offered, GDS was not broadly capable of providing an adequate return on investment within its originally planned time horizon. We recognized one-time costs of $2.9 million related to the shutdown of the business.

We also implemented cost-cutting measures in 2000, including headcount reductions, at our pre-press publishing facility in Raleigh and corporate headquarters consistent with the new operating structure.

CenDon Partnership Restructuring and Extension

Effective for directories that published after June 30, 2000, we entered into a series of agreements with SPA that effectively restructured the CenDon Partnership as a limited liability company and extended the sales agency arrangement through 2010 (“CenDon Restructuring”). Both the partnership agreement and sales agency agreement were set to expire in 2004. The revised arrangement focused our responsibilities on sales and certain pre-press publishing services and established us as the exclusive sales agent for SPA’s directory products in the markets previously covered by the partnership agreement. SPA assumed responsibility for the printing and delivery of directories, which were previously performed by the CenDon Partnership, and related support services such as marketing, customer service and collections, which were previously performed by us. Under the revised arrangement, SPA managed CenDon. We received sales commissions on all advertising sold, and in consideration for transferring control over the publishing functions to SPA, we also received a priority distribution. The priority

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distribution was designed to allow us to maintain the same level of profitability that we would have earned under the predecessor CenDon Partnership through its scheduled expiration date in 2004. Under the revised arrangement, total payments from CenDon (sales commission plus priority distribution) were expected to average approximately 37% of CenDon advertising sales through 2004. Starting with sales into 2005 directories, we would not have received a priority distribution but would have received a supplemental sales commission for sales into 2005 through 2007 directories. Total payments from CenDon (sales commission plus supplemental sales commission) in 2005 were expected to be approximately 35% of CenDon advertising sales and to decline four percentage points per year through 2007. For sales into 2008 through 2010 publications, we would have received our base 23% commission on CenDon advertising sales.

Under the revised arrangement, revenue and related costs were recognized at the time of sale, whereas, under the previous CenDon Partnership, where we shared responsibility for the publishing and delivery functions, revenue and related costs were recognized at the time of directory publication. Accordingly, a one-time operating income benefit of $15.8 million was recorded in 2000 related to advertising sales made and costs incurred prior to the effective date of the agreement for directories that published subsequent to the effective date of the agreement.

ChinaBig Investment and Impairment Charge

We presently have a nominal 18% interest in ChinaBig, which publishes yellow pages directories and offers Internet directory services in the People’s Republic of China. In connection with an equity investment by an unaffiliated third party and in order to facilitate the raising of additional capital and provide greater flexibility, on June 15, 2000, ChinaBig and each existing investor restructured the existing joint venture agreement of ChinaBig to, among other things, significantly reduce our ability to influence the operations of ChinaBig. As a result, we became a passive investor in ChinaBig and began to account for this investment under the cost method. Prior to June 15, 2000, we accounted for this investment under the equity method. Therefore, subsequent to June 15, 2000, equity losses of ChinaBig were no longer recognized in the consolidated statement of operations.

In November 2001, we received an independent third party valuation of ChinaBig’s current business plan, capital needs and outlook for profitability and cash flow. The valuation was conducted in connection with a proposed equity financing. The results of the valuation provided a range of possible estimated fair values for ChinaBig, all of which implied that the fair value of this investment was substantially lower than the carrying value of $13.4 million. Accordingly, an impairment charge of $11.4 million was recorded in 2001 to write this investment down to an amount that we believed was the best estimate of the current fair value of the investment at that time. After reviewing ChinaBig’s 2002 operating results, we determined that sufficient evidence did not exist to support the carrying value of this investment and that the probability of realizing any value from this investment in the foreseeable future was remote. Accordingly, an additional impairment charge of $2.0 million was recorded to write off the remaining book value of the investment in 2002.

Restructuring and Special Charge

In 2001, a restructuring and special charge of $18.6 million was recorded in connection with executive management employment transition arrangements and the expiration of a pre-press publishing contract, which was expected to result in the elimination of approximately 100 positions during 2002. The charge included:

	•		$9.9 million associated with executive management transition arrangements, including severance, accrued pension benefits and other related costs;
	•		$3.3 million for other employee severance and related costs;
	•		$4.4 million for idle leased space in the Raleigh publishing facility and planned relocation of the corporate headquarters due to excess capacity; and
	•		$1.0 million for professional fees and the write-off of assets no longer considered useable.

As a result of the SPA acquisition, we determined that certain costs originally anticipated in the restructuring charge would not be incurred. Specifically, idle leased space in the Raleigh publishing facility will now be utilized, planned severance and other related costs will be significantly less and the corporate headquarters is no longer expected to be relocated. Accordingly, income of $6.4 million was recognized in 2002 from the reversal of $6.7 million of the original reserve, partially offset by a charge of $0.3 million for additional costs paid in connection with the executive management transition.

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As Adjusted Results

Due to the disposition of businesses during 2000 and the one-time benefit from the CenDon Restructuring, we have presented 2000 results on both a reported basis and an as adjusted basis to facilitate comparisons with 2001 and 2002 reported results. The as adjusted information was derived by excluding from the reported amounts the revenue, advertising sales, and expenses of the Bell Atlantic, Cincinnati and GDS operations through the date of their disposition, as well as the one-time items from the CenDon Restructuring. We believe the as adjusted information is more indicative of our underlying financial and operational performance and better reflected the results of our continuing businesses at that time. The as adjusted information does not purport to represent what our actual results would have been had the transactions occurred as of the assumed dates or to project the results of operations or financial condition for any future period.

We have historically presented both the reported results and as adjusted information for 2000 as described above in our Management’s Discussion and Analysis of Financial Condition and Results of Operations. In addition, our narrative discussion of the results and underlying reasons for variances from one period to another focused on the as adjusted information because management believed it was more indicative of underlying financial and operating performance. However, in response to the Securities and Exchange Commission’s recent adoption of Regulation G and related rules, the discussion below focuses on the underlying reasons and causes of variances in the reported amounts from one period to the next. We have maintained the tabular presentation of both the reported results and as adjusted information and disclosure of reconciling items for comparative purposes.

Net Revenue

During the reporting periods, revenue was derived entirely from our DAS segment (with the exception of $0.2 million of revenue from GDS in 2000). As a sales agent for Sprint, we earned commission revenue based on the annual billing value of advertisements sold for Sprint directories in the period (“Sprint calendar sales”). Sales commission revenue was recorded net of an estimate for potential claims allowances. We also earned revenue from providing pre-press publishing services.

The amount of commission revenue recognized was directly correlated to Sprint calendar sales recorded during the period. We managed the sale of advertising on a directory-by-directory basis and organized each directory into a sales campaign. A typical sales campaign lasts two to five months and ends approximately two months before a directory is scheduled to be published. Therefore, changes in the beginning and ending dates of a sales campaign and the actual sales recorded at any point during the campaign can vary from one period to the next. These variations could have caused sales commission revenue in the period to be materially different from the prior comparative period. Reported and as adjusted net revenue were as follows:

($ amounts in millions)																2002 vs. 2001								2001 vs. 2000
				2002				2001				2000				$ Change				% Change				$ Change				% Change
Reported
Commission revenue				$	43.1			$	42.7			$	115.7			$	0.4				0.9	%		$	(73.0	)			(63.1	)%
Sales allowances					(0.4	)			1.1				(6.9	)			(1.5	)			n/m				8.0				n/m
Net commission revenue					42.7				43.8				108.8				(1.1	)			(2.5	)			(65.0	)			(59.7	)
Pre-press publishing fees					31.1				32.9				32.3				(1.8	)			(5.5	)			0.6				1.9
	Total revenue – DAS				73.8				76.7				141.1				(2.9	)			(3.8	)			(64.4	)			(45.6	)
GDS					—				—				0.2				—				—				(0.2	)			n/m
		Total		$	73.8			$	76.7			$	141.3			$	(2.9	)			(3.8	)%		$	(64.6	)			(45.7	)%
As adjusted
Commission revenue (a)				$	43.1			$	42.7			$	47.2			$	0.4				0.9	%		$	(4.5	)			(9.5	)%
Sales allowances (a)					(0.4	)			1.1				(2.2	)			(1.5	)			n/m				3.3				n/m
Net commission revenue					42.7				43.8				45.0				(1.1	)			(2.5	)			(1.2	)			(2.7	)
Pre-press publishing fees					31.1				32.9				32.3				(1.8	)			(5.5	)			0.6				1.9
	Total revenue – DAS				73.8				76.7				77.3				(2.9	)			(3.8	)			(0.6	)			(0.8	)
GDS (b)					—				—				—				—				—				—				--
		Total		$	73.8			$	76.7			$	77.3			$	(2.9	)			(3.8	)%		$	(0.6	)			(0.8	)%

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Net revenue was $73.8 million, $76.7 million and $141.3 million for 2002, 2001 and 2000, respectively. Net commission revenue decreased $1.1 million in 2002 compared to 2001 primarily due to the reversal of $1.4 million of sales claims allowances in 2001. Fees from pre-press publishing services declined $1.8 million primarily due to a reduction in volumes resulting from the expiration of a pre-press publishing contract in December 2002.

Net revenue in 2001 declined $64.6 million, or 45.7% from 2000 primarily due to the loss of revenue in 2001 from the Bell Atlantic business and a revenue benefit of $21.0 million in 2000 from the CenDon Restructuring. Revenue from Bell Atlantic in 2000 was $42.8 million. On an as adjusted basis, revenue in 2000 was $77.3 million, which was in-line with 2001 revenue.

Calendar Advertising Sales

Commission revenue, priority distribution income from Sprint, and revenue participation income from SBC are directly correlated to the value of advertising sales made during the period. The table below sets forth the value of advertising that we sold on behalf of Sprint (and Bell Atlantic in 2000) and that DonTech sold on behalf of SBC during the periods noted. DonTech manages its selling process in a manner similar to how we manage our selling process. Accordingly, the annual billing value of advertisements sold for SBC directories in the period (“DonTech calendar sales”) can vary from one period to the next due to changes in the beginning and ending dates of a sales campaign and the actual sales recorded at any point during the campaign.

Reported and as adjusted calendar sales by segment were as follows:

($ amounts
in millions)																2002 vs. 2001								2001 vs. 2000
				2002				2001				2000				$ Change				% Change				$ Change				% Change
Reported
	DonTech			$	402.9			$	422.6			$	428.2			$	(19.7	)			(4.7	)%		$	(5.6	)			(1.3	)%
	DAS				186.8				185.3				469.5				1.5				0.8				(284.2	)			(60.5	)
		Total		$	589.7			$	607.9			$	897.7			$	(18.2	)			(3.0	)%		$	(289.8	)			(32.3	)%
As adjusted
	DonTech			$	402.9			$	422.6			$	428.2			$	(19.7	)			(4.7	)%		$	(5.6	)			(1.3	)%
	DAS (a)				186.8				185.3				191.7				1.5				0.8				(6.4	)			(3.3	)
		Total		$	589.7			$	607.9			$	619.9			$	(18.2	)			(3.0	)%		$	(12.0	)			(1.9	)%

Calendar sales were $589.7 million, $607.9 million and $897.7 million for 2002, 2001 and 2000, respectively. DonTech calendar sales declined 4.7% in 2002 and 1.3% in 2001. The decline in 2002 DonTech calendar sales reflects continued advertiser uncertainty from weak economic conditions, competition and changes in the servicing of sales campaigns to call on customers closer to the time when directories publish. The decline in 2001 reflects the weakening economic environment, which began affecting DonTech sales in the latter part of 2001, increased competition in Chicago and low consumer confidence resulting in advertisers not increasing their advertising spending and lower new business sales.

DAS calendar sales increased slightly during 2002 compared to 2001 as we began to see signs that these markets may be trending back towards historical growth levels. DAS sales in 2001 decreased 60.5% compared to 2000 mainly due to the loss of Bell Atlantic sales of $182.0 million and a one-time sales benefit of $95.8 million from the CenDon Restructuring. Excluding these items, calendar sales declined $6.4 million or 3.3% due to the weakening economy, tighter credit standards in light of the weakening economy and increased uncertainty among advertisers in certain Sprint markets. The effects of the weakening economy and increased uncertainty were exacerbated in the

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tourist-based markets of Las Vegas and Orlando.

Publication Advertising Sales

Management also reviews and analyzes the value of advertising sales on behalf of Sprint (and Bell Atlantic in 2000) and by DonTech on behalf of SBC in directories that published during the period (“publication sales”). We compare publication sales for the period against publication sales for the same directories published in the prior year period (a “same store sales” type metric). We believe that a comparison of publication sales from one period to another gives an indication of underlying sales growth in directories as this metric removes the timing factors associated with a sales campaign. However, publication sales did not have a direct correlation to our reported revenue or profitability in the indicated period because calendar sales drive revenue and profitability and occur prior to publication dates.

Reported and as adjusted publication sales by segment were as follows:

($ amounts
in millions)																2002 vs. 2001								2001 vs. 2000
				2002				2001				2000				$ Change				% Change				$ Change				% Change
Reported
	DonTech			$	418.2			$	434.0			$	430.5			$	(15.8	)			(3.6	)%		$	3.5				0.8	%
	DAS				184.7				193.5				431.4				(8.8	)			(4.5	)			(237.9	)			(55.1	)
		Total		$	602.9			$	627.5			$	861.9			$	(24.6	)			(3.9	)%		$	(234.4	)			(27.2	)%
As adjusted
	DonTech			$	418.2			$	434.0			$	430.5			$	(15.8	)			(3.6	)%		$	3.5				0.8	%
	DAS (a)				184.7				193.5				193.3				(8.8	)			(4.5	)			0.2				0.1
		Total		$	602.9			$	627.5			$	623.8			$	(24.6	)			(3.9	)%		$	3.7				0.6	%