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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
-------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------- -------------------
Commission file number 001-07155
R.H. DONNELLEY CORPORATION (Exact
name of registrant as specified in its charter)
Delaware 13-2740040
---------------------------- -------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
One Manhattanville Road, Purchase N.Y. 10577
--------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether registrant is an accelerated filer Yes X No
---- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title of Class Shares Outstanding at August 1, 2003
-------------- ------------------------------------
Common Stock, par value $1 per share 30,775,088
Commission file number 333-59287
R.H. DONNELLEY INC. *
(Exact name of registrant as specified in its charter)
Delaware 36-2467635
---------------------------------- ---------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
One Manhattanville Road, Purchase N.Y. 10577
----------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code (914) 933-6400
---------------
* R.H. Donnelley Inc. is a wholly owned subsidiary of R.H. Donnelley
Corporation. R.H. Donnelley Inc. meets the conditions set forth in General
Instructions H 1(a) and (b) of Form 10-Q and is therefore filing this report
with respect to R.H. Donnelley Inc. with the reduced disclosure format. R.H.
Donnelley Inc. became subject to the filing requirements of Section 15(d) on
October 1, 1998 in connection with the public offer and sale of its 9 1/8%
Senior Subordinated Notes. In addition, R.H. Donnelley Inc. is the obligor of 8
7/8% senior notes due 2010 and 10 7/8% senior subordinated notes due 2012. As of
August 1, 2003, 100 shares of R.H. Donnelley Inc. common stock, no par value,
were outstanding.
1
R.H. DONNELLEY CORPORATION
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
- ----------------------------------- ----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2003 and December 31, 2002.......... 3
Consolidated Statements of Operations for the three and six months ended 4
June 30, 2003 and 2002......................................................
Consolidated Statements of Cash Flows for the six months ended
June 30, 2003 and 2002...................................................... 5
Notes to Consolidated Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................... 32
Item 4. Controls and Procedures............................................................. 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 33
Item 4 Submission of Matters to a Vote of Security Holders................................. 37
Item 6. Exhibits and Reports on Form 8-K.................................................... 38
SIGNATURES..................................................................................... 47
2
R.H. Donnelley Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
June 30, December 31,
(in thousands, except share and per share data) 2003 2002
- ------------------------------------------------------------------------------------------- ----------------- ----------------
Assets
Current Assets
Cash and cash equivalents........................................................... $ -- $ 7,787
Restricted cash..................................................................... -- 1,928,700
----------------- ----------------
Total cash, cash equivalents and restricted cash............................... -- 1,936,487
Accounts receivable
Billed............................................................................ 52,990 --
Unbilled.......................................................................... 249,319 31,978
Allowance for doubtful accounts and sales allowances.............................. (31,300) (4,772)
----------------- ----------------
Net accounts receivable........................................................ 271,009 27,206
Deferred directory costs............................................................ 40,098 --
Other current assets................................................................ 7,353 4,981
----------------- ----------------
Total current assets........................................................... 318,460 1,968,674
Fixed assets and computer software - net............................................ 21,907 12,008
Partnership investment.............................................................. 179,912 202,236
Other non-current assets............................................................ 92,547 40,457
Intangible assets, net.............................................................. 1,890,084 --
Goodwill............................................................................ 94,858 --
----------------- ----------------
Total Assets................................................................... $ 2,597,768 $ 2,223,375
----------------- ----------------
Liabilities, Redeemable Convertible Preferred
Stock and Shareholders' Deficit
Current Liabilities
Accounts payable and accrued liabilities............................................ $ 21,827 $ 9,043
Deferred directory revenue.......................................................... 208,975 --
Accrued interest payable............................................................ 6,016 11,218
Current portion of long-term debt................................................... 59,729 13,780
----------------- ----------------
Total current liabilities...................................................... 296,547 34,041
Long-term debt...................................................................... 2,146,584 2,075,470
Deferred income taxes - net......................................................... 19,020 60,783
Other non-current liabilities....................................................... 15,892 20,222
----------------- ----------------
Total liabilities.............................................................. 2,478,043 2,190,516
Commitments and contingencies
Redeemable convertible preferred stock (redemption value at June 30, 2003, $208,572).. 189,797 63,459
Shareholders' Deficit
Common stock, par value $1 per share, authorized -
400,000,000 shares; issued - 51,621,894 shares for 2003 and 2002.................. 51,622 51,622
Additional paid-in capital.......................................................... 126,477 63,586
Warrants outstanding................................................................ 13,758 5,330
Accumulated (deficit) earnings...................................................... (94,625) 13,605
Other comprehensive loss............................................................ (3,257) --
Treasury stock, at cost, 20,895,914 shares for 2003 and 21,900,818 shares for 2002.. (164,047) (164,743)
----------------- ----------------
Total shareholders' deficit.................................................... (70,072) (30,600)
----------------- ----------------
Total Liabilities, Redeemable Convertible Preferred
Stock and Shareholders' Deficit....................................... $ 2,597,768 $ 2,223,375
----------------- ----------------
The accompanying notes are an integral part of the consolidated financial statements.
3
R.H. Donnelley Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------------- ----------------------------
(amounts in thousands, except per share data) 2003 2002 2003 2002
- --------------------------------------------------- ---------------- ------------ ------------- --------------
Net revenue.................................. $ 38,634 $ 19,894 $ 51,053 $ 38,721
Expenses
Operating expenses........................ 34,862 14,088 66,795 25,755
General and administrative expenses....... 12,206 4,720 22,216 9,765
Depreciation and amortization............. 16,443 1,557 32,471 3,164
---------------- ------------ ------------- --------------
Total expenses.......................... 63,511 20,365 121,482 38,684
Partnership income........................... 35,341 40,864 58,974 68,012
---------------- ------------ ------------- --------------
Operating income (loss)................. 10,464 40,393 (11,455) 68,049
Interest expense, net........................ (43,253) (5,973) (91,928) (12,194)
Other income................................. 723 -- 1,523 --
---------------- ------------ ------------- --------------
(Loss) income before income taxes....... (32,066) 34,420 (101,860) 55,855
(Benefit) provision for income taxes......... (13,155) 13,251 (41,762) 21,504
---------------- ------------ ------------- --------------
Net (loss) income....................... (18,911) 21,169 (60,098) 34,351
Preferred dividend........................... 5,978 -- 48,132 --
---------------- ------------ ------------- --------------
Net (loss) income available to common
shareholders.......................... $ (24,889) $ 21,169 $ (108,230) $ 34,351
---------------- ------------ ------------- --------------
Earnings (loss) per share
Basic................................... $ (0.81) $ 0.71 $ (3.56) $ 1.16
---------------- ------------ ------------- --------------
Diluted................................. $ (0.81) $ 0.70 $ (3.56) $ 1.14
---------------- ------------ ------------- --------------
Weighted average shares outstanding
Basic................................... 30,605 29,692 30,424 29,573
---------------- ------------ ------------- --------------
Diluted................................. 30,605 30,415 30,424 30,265
---------------- ------------ ------------- --------------
Comprehensive (Loss) Income:
Net (loss) income............................ $ (18,911) $ 21,169 $(60,098) $ 34,351
Unrealized (loss) gain on interest rate swaps,
net of tax ............................. (3,257) 101 (3,257) (1,561)
---------------- ------------ ------------- --------------
Comprehensive (loss) income.................. $ (22,168) $ 21,270 $(63,355) $ 32,790
---------------- ------------ ------------- --------------
The accompanying notes are an integral part of the consolidated financial statements.
4
R.H. Donnelley Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six months ended
June 30,
---------------------------------
(amounts in thousands) 2003 2002
- ------------------------------------------------------------------------------- ------------------- -------------
Cash Flows from Operating Activities
Net (loss) income........................................................ $ (60,098) $ 34,351
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization....................................... 32,471 3,164
Deferred income tax................................................. (41,762) 312
Provision for doubtful accounts..................................... 288 1,467
Other noncash charges............................................... 6,856 1,103
Cash in excess of partnership income................................ 6,058 5,164
Changes in assets and liabilities, net of effects from acquisition:
Decrease (increase) in accounts receivable.......................... 15,548 (3,964)
Increase in other current assets.................................... (24,617) --
Decrease (increase) in other assets................................. 181 (413)
Decrease in accounts payable and accrued liabilities................ (13,362) (12,769)
Increase in deferred revenue........................................ 208,975 --
Increase (decrease) in other non-current liabilities................ 984 (207)
------------------- -------------
Net cash provided by operating activities.................... 131,522 28,208
Cash Flows from Investing Activities
Additions to fixed assets and computer software.......................... (5,473) (1,300)
Acquisition of SPA....................................................... (2,259,633) --
Decrease in restricted cash - funds held in escrow at year-end........... 1,825,000 --
Decrease in restricted cash - other ..................................... 69,300 --
------------------- -------------
Net cash used in investing activities........................ (370,806) (1,300)
Cash Flows from Financing Activities
Proceeds from the issuance of debt, net of costs......................... 461,307 --
Proceeds from the issuance of Redeemable Convertible Preferred
Stock and warrants, net of costs.................................... 125,683 --
Pre-acquisition debt refinanced with proceeds from new debt.............. (243,005) --
Repayment of new debt.................................................... (152,787) (42,500)
Borrowings under the Revolver............................................ 24,100 --
Proceeds from employee stock option exercises............................ 16,199 3,298
------------------- -------------
Net cash provided by (used in) financing activities.......... 231,497 (39,202)
Decrease in cash and cash equivalents.................................... (7,787) (12,294)
Cash and cash equivalents, beginning of year............................. 7,787 14,721
------------------- -------------
Cash and cash equivalents, end of period................................. $ -- $ 2,427
------------------- -------------
Supplemental Information:
Cash used to pay:
Interest.............................................................. $ 89,036 $ 12,647
------------------- -------------
Income taxes.......................................................... $ -- $ 16,566
------------------- -------------
The accompanying notes are an integral part of the consolidated financial statements.
5
R.H. Donnelley Corporation and Subsidiaries Notes to Consolidated Financial
Statements (Unaudited) (amounts in thousands, except per share data)
1. Basis of Presentation
The interim financial statements of R.H. Donnelley Corporation and its direct
and indirect wholly owned subsidiaries (the "Company," "we," "us" and "our")
have been prepared in accordance with the instructions to Quarterly Report on
Form 10-Q and should be read in conjunction with the financial statements and
related notes included in our Annual Report on Form 10-K for the year ended
December 31, 2002. The results of interim periods are not necessarily indicative
of results for the full year or any subsequent period. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of financial position, results of operations
and cash flows at the dates and for the periods presented have been included.
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
2. Business Combination
On January 3, 2003, we acquired Sprint Corporation's directory publishing
business, Sprint Publishing & Advertising ("SPA"), for $2,229,763 and are now
the publisher of 260 revenue-generating yellow pages directories in 18 states.
Prior to the acquisition, we served as the exclusive sales agent and pre-press
publishing vendor for SPA directories in certain markets. This acquisition
transformed us from a sales agent and pre-press vendor into a leading publisher
of yellow pages directories. The results of the SPA business are included in our
consolidated results from and after January 3, 2003, the acquisition closing
date. SPA is now being operated as R.H. Donnelley Publishing & Advertising, Inc.
("RHDPA"), an indirect, wholly owned subsidiary of the Company.
The acquisition was accounted for as a purchase business combination in
accordance with SFAS 141 "Business Combinations." The purchase price was
allocated to the tangible and identifiable intangible assets acquired and
liabilities assumed based on their respective estimated fair values on the
acquisition date. The fair value of certain long-term intangible assets and
their respective useful lives were determined by an independent third party with
expert knowledge in the area of valuing acquired businesses and our industry.
Management believes that the allocation of the purchase price to the assets
acquired and liabilities assumed is final; however, additional information could
come to our attention that would require us to revise the purchase price
allocation. Identifiable intangible assets acquired included directory services
agreements entered into between Sprint and us, customer relationships and
acquired trade names (see Note 4). A summarized unaudited condensed balance
sheet of the consolidated Company at January 3, 2003 is presented below.
Liabilities, Redeemable Convertible Preferred
Assets Stock and Shareholders' Equity
----------------------------------- --------------- ----------------------------------------------- ---------------
Cash and cash equivalents...... $ 23,986 Current liabilities......................... $ 46,101
Other current assets........... 308,852 Current portion long-term debt.............. 58,668
--------------- ---------------
Total current assets...... 332,838 Total current liabilities............ 104,769
Partnership investment......... 185,969 Long-term debt.............................. 2,297,577
Other non-current assets....... 124,140 Other non-current liabilities............... 73,956
Intangible assets.............. 1,915,000
Goodwill....................... 77,953 Redeemable convertible preferred stock...... 143,553
Shareholders' equity........................ 16,045
--------------- ---------------
Total Liabilities, Redeemable Convertible
Total assets................... $2,635,900 Preferred Stock and Shareholders' Equity.... $2,635,900
--------------- ---------------
6
Summarized unaudited condensed pro forma information for the three and six
months ended June 30, 2002 assuming the SPA acquisition occurred on January 1,
2002 is presented below.
Three months Six months
ended ended
June 30, 2002 June 30, 2002
------------------- ----------------
Net revenue.............................................. $142,460 $ 287,047
Operating income......................................... 87,260 162,996
Net income............................................... 25,689 44,330
Preferred dividend....................................... 4,080 70,454
Net income (loss) available to common shareholders....... 21,730 (25,909)
3. Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the
accounts of R.H. Donnelley Corporation and its direct and indirect wholly owned
subsidiaries. All intercompany transactions and balances have been eliminated.
The DonTech Partnership ("DonTech") is accounted for under the equity method as
we do not have control, but do have the ability to exercise significant
influence over DonTech's operating and financial policies. Accordingly,
DonTech's results are not consolidated in our financial statements, but our
share of its net profits is reported as partnership income in the Consolidated
Statements of Operations.
Revenue Recognition. We earn revenue from the sale of advertising into our
yellow pages directories. Revenue from the sale of advertising is deferred when
a directory is published and recognized ratably over the life of a directory,
which is typically twelve months (the "deferral and amortization method").
Revenue is recorded net of an estimate for claims and allowances based on
historical experience. We adjust our estimate when information or circumstances
indicate that the current estimate may not adequately represent the amount of
claims and allowances we may incur in the future. We also earn revenue from
pre-press publishing services provided to SBC Communications Inc. ("SBC") for
those directories in the DonTech markets. Revenue from pre-press publishing
services is recognized as services are performed.
Deferred Directory Costs. Deferred directory costs include costs directly
attributable to the advertising sales process. These costs include sales
commissions, printing, paper and initial distribution expenses. Deferred
directory costs are initially deferred when incurred and recognized ratably over
the life of a directory. These costs also include an allowance for sales claims
and bad debts, which are initially deferred and recognized ratably over the life
of a directory.
Equity Method Accounting. We account for DonTech under the equity method whereby
we recognize our 50% share of the net income of DonTech as partnership income in
our consolidated statements of operations. Partnership income also includes
revenue participation income from SBC. Revenue participation income is based on
DonTech advertising sales and is recognized when a sales contract is executed
with a customer. Our investment in DonTech includes our 50% share of the net
assets of DonTech and the revenue participation receivable from SBC and is
reported as partnership investment on the consolidated balance sheet.
Derivative Financial Instruments. Our derivative financial instruments are
currently limited to interest rate swap agreements used to mitigate our exposure
to changes in interest rates on variable rate debt. We have interest rate swap
agreements with a total notional value of $255,000 that effectively converts
$255,000 of variable rate debt to fixed rate debt. Under the terms of the swap
agreements, we receive variable interest based on three-month LIBOR and pay a
fixed rate of 2.85%. The swaps mature on March 31, 2007.
The interest rate swaps and the hedged item (3 month LIBOR-based interest
payments on $255,000 of bank debt) have been designed so that the critical terms
(interest reset dates, duration and index) coincide. The interest rate swaps
have been designated as cash flow hedges. In accordance with SFAS 133, to the
extent the swaps are effective, changes in the fair value of the swaps are
recorded in other comprehensive income or loss, a component of shareholders'
equity. Any ineffectiveness is recorded through earnings.
7
Earnings per Share. Basic earnings per common share (EPS) are generally
calculated by dividing net income available to common shareholders by the
weighted average number of common shares outstanding. However, because our
redeemable convertible cumulative preferred stock ("Preferred Stock") contains
certain participation rights, EITF Topic D-95, "Effect of Participating
Securities on the Computation of Basic Earnings Per Share," ("Topic D-95")
requires that the dilutive effect of those securities be included in the
weighted average number of shares outstanding. Furthermore, Topic D-95 requires
that the dilutive effect to be included in basic EPS may be calculated using
either the if-converted method or the two-class method. However, the dilutive
effect of the Preferred Stock cannot be less than that which would result from
the application of the two-class method. We have elected to use the if-converted
method in calculating basic EPS. Diluted EPS equals net income divided by the
weighted average common shares outstanding plus common share equivalents. Common
share equivalents include stock options and warrants, the dilutive effect of
which is calculated using the treasury stock method, and Preferred Stock, the
potential dilutive effect of which is calculated using the if-converted method.
The calculation of basic and diluted EPS for the quarter and six months ended
June 30, 2003 is presented below.
Three months Six months
ended ended
June 30, 2003 June 30, 2003
- ----------------------------------------------------------------------- ---------------- -----------------
Basic EPS - If-Converted Method
Loss available to common shareholders........................ $(24,889) $(108,230)
Preferred Stock dividend..................................... 5,978 48,132
---------------- -----------------
Net loss..................................................... $(18,911) $ (60,098)
---------------- -----------------
Weighted average common shares outstanding................... 30,605 30,424
Weighted average common shares assuming conversion
of Preferred Stock......................................... 8,672 8,588
---------------- -----------------
Weighted average common equivalent shares assuming
conversion of Preferred Stock.............................. 39,277 39,012
---------------- -----------------
Basic loss per share - if-converted method...................... $ (0.48) $(1.54)
---------------- -----------------
Basic EPS - Two-Class Method
Loss available to common shareholders........................ $(24,889) $(108,230)
Amount allocable to common shares (1)........................ 78% 78%
---------------- -----------------
Rights to undistributed losses............................... (19,413) (84,419)
Weighted average common shares outstanding................... 30,605 30,424
---------------- -----------------
Basic earnings per share - two-class method (2).............. $ (0.81) $ (3.56)
---------------- -----------------
8
(1) 30,605 / (30,605 + 8,672) for the quarter ended June 30, 2003 and 30,424 /
(30,424 + 8,588) for the six months ended June 30, 2003.
(2) Basic EPS calculated under the two-class method was a loss of $0.63 for the
quarter ended June 30, 2003 and a loss of $2.77 the six months ended June
30, 2003. However, where there is a net loss in a period, the application
of the two-class method is anti-dilutive. Accordingly, reported basic EPS
are calculated as the loss available to common shareholders divided by the
weighted average basic shares outstanding.
Diluted EPS
Loss available to common shareholders........................... $(24,889) $(108,230)
---------------- -----------------
Weighted average common shares outstanding...................... 30,605 30,424
Dilutive effect of stock options (3)............................ -- --
Dilutive effect of Preferred Stock assuming conversion (3)...... -- --
---------------- -----------------
Weighted average diluted shares outstanding..................... 30,605 30,424
---------------- -----------------
Diluted EPS (4)................................................. $(0.81) $(3.56)
---------------- -----------------
(3) The effect of stock options and the assumed conversion of the Preferred
Stock were anti-dilutive and are not included in the calculation of diluted
EPS.
(4) Because there was a reported net loss in the quarter, the calculation of
diluted earnings per share was anti-dilutive compared to basic earnings per
share for the three months and six months ended June 30, 2003. Diluted
earnings per share cannot be greater than basic earnings per share (or less
of a loss). Therefore, reported diluted earnings per share and basic
earnings per share for the three and six-month periods ended June 30, 2003
were the same.
For the quarter and six months ended June 30, 2002, basic EPS equals net income
divided by the weighted average common shares outstanding and diluted EPS equals
net income divided by the weighted average common shares outstanding plus
potentially dilutive common shares, primarily stock options.
Concentration of Credit Risk. Approximately 85% of our advertising revenue is
derived from the sale of advertising to local small- and medium-sized
businesses. These advertisers enter into twelve-month advertising sales
contracts and typically make monthly payments over the term of the contract.
Some advertisers pre-pay the full amount or a portion of the contract value.
Most new advertisers are subject to a credit review. If the advertisers qualify,
we may extend credit to them for their advertising purchase. Small- and
medium-sized businesses tend to have fewer financial resources and higher
financial failure rates than large businesses. In addition, full collection of
delinquent accounts can take an extended period of time and involve significant
costs. While we do not believe that extending credit to our local advertisers
will have a material adverse affect on our results of operations or financial
condition, no assurances can be given. We do not require collateral from our
advertisers, although we do charge interest to advertisers who do not pay within
specified due dates.
The remaining 15% of our advertising revenue is derived from the sale of
advertising to national or large regional chains, such as rental car companies,
automobile repair shops and pizza delivery businesses. Substantially all of the
revenue derived through national accounts is serviced through Certified
Marketing Representatives ("CMRs"), with which we contract. CMRs are independent
third parties that act as agents for national companies. The CMRs are
responsible for billing the national customers for their advertising. We receive
payment for the value of advertising placed in our directory, net of the CMR's
commission, directly from the CMR. While we are still exposed to credit risk,
the amount of losses from these accounts are less than the local accounts as the
advertisers, and in some cases, the CMRs, tend to be larger companies with
greater financial resources than the local advertisers.
We maintain a significant receivable balance with SBC for revenue participation
and pre-press publishing services fees. The revenue participation receivable is
subject to adjustment, based on collections by SBC from individual advertisers;
however, the adjustment is limited based on contractual provisions. The
receivable is recorded at net realizable value. We do not currently foresee a
material credit risk associated with this receivable, although there can be no
assurance that full payment will be received on a timely basis.
We have interest rate swap agreements with major financial institutions with a
notional value of $255,000. We are exposed to credit risk in the event that one
or more of the counterparties to the agreements does not, or cannot meet their
obligation. The notional amount is used to measure interest to be paid or
received and does not represent the amount of exposure to credit loss. The loss
would be limited to the amount that would have been received, if any, over the
remaining life of the swap agreement. The counterparties to the swap agreements
are major financial institutions with credit ratings of A or higher. We do not
currently foresee a material credit risk associated with these swap agreements.
Employee Stock Options. We follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for our stock option plan. Compensation expense
related to the issuance of stock options to employees or non-employee directors
is not recognized if the exercise price of the stock option is equal to the fair
market value of the underlying stock at the grant date. We recognized
compensation expense related to stock options of $426 in the quarter ended June
30, 2003 and $1,048 for the six months ended June 30, 2003. Compensation expense
in 2002 related to stock options was minimal.
The following table reflects the pro forma net income and earnings per share
assuming we applied the fair value method of SFAS No. 123 "Accounting for
Stock-Based Compensation." The pro forma disclosures shown are not necessarily
representative of the effects on income and earnings per share in future years.
9
Three Months Ended Six Months Ended
June 30, June 30,
------------- ------------ -------------- ------------
2003 2002 2003 2002
------------- ------------ -------------- ------------
Net (loss) income
As reported................................... $ (18,911) $21,169 $(60,098) $34,351
Pro forma..................................... (19,762) 20,472 (64,293) 32,955
Net (loss) income available to common shareholders
As reported................................... $(24,889) $21,169 $(108,230) $34,351
Pro forma..................................... (25,740) 20,472 (112,425) 32,955
Basic earnings per share
As reported................................... $ (0.81) $ 0.71 $ (3.56) $ 1.16
Pro forma..................................... (0.84) 0.69 (3.70) 1.11
Diluted earnings per share
As reported................................... $ (0.81) $ 0.70 $ (3.56) $ 1.14
Pro forma..................................... (0.84) 0.67 (3.70) 1.09
The pro forma information was determined based on the fair value of stock
options calculated using the Black-Scholes option-pricing model with the
following assumptions:
2003 2002
-------------- --------------
Dividend yield................................................. 0% 0%
Expected volatility............................................ 35% 35%
Risk-free interest rate........................................ 2.6% 3.1%
Expected holding period........................................ 4 years 4 years
4. Intangible Assets and Goodwill
As a result of the SPA acquisition, certain long-term intangible assets and
their respective useful lives were identified and valued by an independent third
party. The net book value of intangible assets at June 30, 2003 is presented
below. Amortization expense was $24,916 for the first half of 2003. Amortization
expense for intangible assets for 2003 through 2008 will be approximately
$50,000 per year.
Directory
Services Local customer National CMR
Agreements relationships relationships Trade names TOTAL
----------------- ------------------ ------------------ -------------- ----------------
Estimated useful life........ 50 years 15 years 30 years 15 years
----------------- ------------------ ------------------ --------------
Initial fair value........... $1,625,000 $200,000 $60,000 $30,000 $1,915,000
Accumulated amortization.... (16,250) (6,666) (1,000) (1,000) (24,916)
----------------- ------------------ ------------------ -------------- ----------------
Net intangible assets........ $1,608,750 $193,334 $59,000 $29,000 $1,890,084
----------------- ------------------ ------------------ -------------- ----------------
Directory services agreements between Sprint and the Company includes a
directory services license agreement, a trademark license agreement and a
non-competition agreement (collectively "Directory Services Agreements"). The
directory services license agreement gives us the exclusive right to produce,
publish and distribute directories for Sprint in the markets where Sprint
provided local telephone service at the time of the agreement. The trademark
license agreement gives us the exclusive right to use certain specified Sprint
trademarks, including the Sprint diamond logo, in those markets and the
non-competition agreement prohibits Sprint from producing, publishing and
distributing print directories or selling local advertising in those markets,
with certain limited exceptions. The fair value of these agreements was
determined based on the present value of estimated future cash flows and is
being amortized under the straight-line method over 50 years.
10
The fair value of local and national customer relationships was determined based
on the present value of estimated future cash flows and historical attrition
rates and is being amortized under an accelerated method that recognizes the
value derived from customer relationships is greater in the earlier years and
steadily declines over time. The weighted average useful life of these
relationships is 18 years.
The fair value of acquired trade names was determined based on the "relief from
royalty" method, which values the trade names based on the estimated amount that
a company would have to pay in an arms length transaction to use these trade
names. These assets are being amortized under the straight-line method over 15
years.
Goodwill represents the excess of the purchase price for SPA over the net
tangible and intangible assets acquired. In accordance with SFAS 142 "Goodwill
and Other Intangible Assets," goodwill is not amortized, but is subject to
impairment testing. No impairment losses were recorded during the period. All
goodwill is included in the Donnelley segment (see Note 9 for segment
information).
5. Partnership Income
Partnership income in 2003 includes our 50% share of the net income of DonTech
(accounted for under the equity method) and revenue participation income from
SBC. Partnership income in 2002 also included a priority distribution on our
membership interest in CenDon, LLC. As a result of the SPA acquisition, we no
longer report priority distribution income. Partnership income for the three and
six months ended June 30, 2003 and 2002 consisted of the following:
Three Months ended Six months ended
June 30, June 30,
---------------------------- ---------------------------
2003 2002 2003 2002
------------- -------------- ------------- -------------
Revenue participation income.............................. $ 28,553 $ 29,882 $ 49,001 $ 49,300
50% share of DonTech net income........................... 6,788 6,745 9,973 9,232
Priority distribution income.............................. -- 4,237 -- 9,480
------------- -------------- ------------- -------------
Partnership income........................................ $ 35,341 $ 40,864 $ 58,974 $ 68,012
------------- -------------- ------------- -------------
Summarized combined financial information for DonTech is shown in the table
below.
Three months ended Six months ended
June 30, June 30,
---------------------------- ---------------------------
2003 2002 2003 2002
------------- -------------- ------------- -------------
Net revenue............................................... $ 30,315 $ 31,645 $ 51,870 $ 52,284
Operating income.......................................... 13,750 13,468 20,138 18,597
Net income................................................ 13,575 13,489 19,947 18,464
Total assets of DonTech were $120,955 at June 30, 2003 and $128,914 at December
31, 2002.
6. Long-term Debt and Credit Facilities
Long-term debt at June 30, 2003 and December 31, 2002 consisted of the
following:
June 30, 2003 December 31, 2002
-------------------- -----------------------
8 7/8% Senior Notes due 2010................................ $ 325,000 $ 325,000
10 7/8% Senior Subordinated Notes due 2012.................. 600,000 600,000
Senior Secured Credit Facilities............................ 1,260,068 900,000
9 1/8% Senior Subordinated Notes due 2008................... 21,245 150,000
Pre-acquisition Senior Secured Term Facilities.............. -- 114,250
-------------------- -----------------------
Total................................................... 2,206,313 2,089,250
Less current portion........................................ 59,729 13,780
-------------------- -----------------------
Long-term debt.......................................... $2,146,584 $2,075,470
-------------------- -----------------------
11
In connection with the SPA acquisition, we entered into a $1,525,000 Credit
Facility ("Credit Facility"), consisting of a $500,000 Term Loan A, a $900,000
Term Loan B and a $125,000 Revolving Credit Facility (the "Revolver") and issued
$325,000 8 7/8% Senior Notes due 2010 ("Senior Notes") and $600,000 10 7/8%
Subordinated Notes due 2012 ("Subordinated Notes," and collectively with the
Senior Notes, the "Notes"). By December 31, 2002, we had issued the Notes and
borrowed $900,000 under the Term Loan B. The gross proceeds of $1,825,000 were
held in escrow pending the SPA acquisition closing. On January 3, 2003, we
borrowed $500,000 under the Term Loan A and the $1,825,000 of gross proceeds
from the Notes and Term Loan B was released from escrow. These funds were used
to acquire SPA, refinance existing debt and pay transactions costs. Amounts
outstanding prior to the acquisition under our former senior secured term
facilities of $114,250 were refinanced and in connection with a tender offer and
exit consent solicitation, we repurchased $128,755 of the 9 1/8% Senior
Subordinated Notes due 2008 ("Pre-acquisition Notes").
The Term Loan A and Term Loan B require quarterly principal payments and mature
in December 2008 and June 2010, respectively. There was $24,100 outstanding
under the Revolver at June 30, 2003.
7. Redeemable Convertible Preferred Stock and Warrants
We have authorization to issue up to 10 million shares of preferred stock. At
June 30, 2003, 200,604 shares of Preferred Stock were outstanding. On January 3,
2003, we issued 130,000 shares of Preferred Stock and warrants to purchase
1,072,500 shares of our common stock to investment partnerships affiliated with
The Goldman Sachs Group, Inc. (collectively, the "GS Funds") for gross proceeds
of $130,000. This investment by the GS Funds represented the remaining
investment amount of their $200,000 commitment. On January 3, 2003, the 70,000
shares of Series B-1 Preferred Stock purchased by the GS Funds in November 2002
automatically converted into 70,604 shares of Preferred Stock. The Preferred
Stock (and any accrued but unpaid dividends) is convertible by the GS Funds at
any time into common stock at a price of $24.05 and earns a cumulative dividend
of 8% compounded quarterly. Due to clarification of an ambiguity in the
Preferred Stock documentation, we cannot pay Preferred Stock dividends in cash
until October 2005; therefore, the dividend will accrete through September 2005.
Beginning in October 2005, we can pay the Preferred Stock dividend in cash or
allow it to accrete, at our option. We may redeem the Preferred Stock in cash at
any time on or after January 3, 2006 if the market price (as defined) of our
common stock exceeds 200% of the conversion price for 30 trading days. The
Preferred Stock is redeemable in cash by us at any time on or after January 3,
2013. The Preferred Stock is redeemable in cash at the option of the GS Funds in
the event of a change in control (as defined). At June 30, 2003, the redemption
value of the Preferred Stock was $208,572 and at December 31, 2002, the
redemption value of the Preferred Stock was $70,544.
The net proceeds received were allocated to the Preferred Stock and warrants
based on their relative fair values. The fair value of the Preferred Stock was
based on an independent valuation of the security. The fair value of the
warrants issued January 3, 2003 was $10.43 based on the Black-Scholes model and
the following assumptions:
Dividend yield................................................. 0%
Expected volatility............................................ 35%
Risk-free interest rate........................................ 2.9%
Expected holding period........................................ 5 years
Because the fair market value of the underlying common stock on the date of
issuance ($28.96) was greater than the conversion price, a beneficial conversion
feature ("BCF") of $38,216 was recognized. In addition, due to the clarification
of the Preferred Stock documentation mentioned above, a BCF of approximately
$1,000 will be recognized each quarter through September 2005. The preferred
dividend for the quarter and six months ended June 30, 2003 includes a deemed
dividend for a BCF of $1,888 and $40,104, respectively. At June 30, 2003, the
Preferred Stock was convertible into 8,672,429 shares of common stock.
8. Restructuring Charge
As a result of the acquisition, we acquired a liability for severance for
certain SPA positions that were eliminated immediately after the acquisition.
The severance liability for those positions was $696 and through June 30, 2003,
payments of $564 have been made. During the quarter, we announced plans to
shutdown one of our publishing facilities in Tennessee (the "2003 Restructuring
Actions"). Approximately 120 positions will be affected by the shutdown of this
facility, which is expected to be completed by the end of the year. A charge of
$3,121 was recorded in the period for severance and other related costs.
12
In July 2003, we also announced plans to relocate the corporate headquarters
functions in Overland Park, Kansas and Purchase, New York to Raleigh, North
Carolina. Approximately 145 positions will be affected by this consolidation,
which we anticipate will be completed by the end of the first quarter 2004.
Management is still in the process of estimating the costs related to this
consolidation, but expects to record a charge in the third quarter related to
severance, retention bonuses, employee relocations, lease termination and other
related costs of approximately $4,000 to $6,000.
The 2001 restructuring actions related to the elimination of certain pre-press
publishing positions as a result of the expiration of a third-party pre-press
publishing contract. These restructuring actions are substantially completed and
the remaining reserve relates to severance, which is being paid over time in
accordance with our policies and applied against the reserve.
The table below shows the activity in our restructuring reserves during 2003.
2001 2003
Restructuring Restructuring
Actions Actions
------------------ ------------------
Balance at January 1, 2003....................... $ 1,675 $ --
Additions to reserve charged to goodwill......... -- 696
Additions to reserve charged to earnings......... -- 3,121
Payments......................................... (508) (564)
------------------ ------------------
Balance at June 30, 2003......................... $ 1,167 $ 3,253
------------------ ------------------
9. Business Segments
We have revised our historical segment reporting to reflect the change in the
business that resulted from the SPA acquisition and to reflect the way
management now reviews and analyzes the business. Our reportable operating
segments are Donnelley and DonTech. Donnelley includes the revenue from our
Sprint-branded yellow pages directories and pre-press publishing services and
all operating and administrative expenses. The DonTech segment includes revenue
participation income and our 50% interest in the net profits of DonTech.
Although DonTech provides advertising sales of yellow pages and other directory
products similar to Donnelley, the partnership is considered a separate
operating segment since, among other things, it has its own Board of Directors
and the employees of DonTech, including officers and managers, are not employees
of the Company.
We evaluate the performance of our segments based primarily on operating
income and earnings before interest, taxes, depreciation and amortization
("EBITDA"). We evaluate and report the performance of our segments based on
EBITDA because we believe that EBITDA is a useful measure of our underlying
operating performance and ability to satisfy our significant debt service
requirements. Segment information for the quarter and six months ended June 30,
2002 has been adjusted to be comparable to the 2003 presentation. Segment
information for the three and six-months ended June 30, 2003 and 2002 is as
follows:
2003 Three Months Ended June 30 Six Months Ended June 30
------------------------------------------ -----------------------------------------
Donnelley DonTech Total Donnelley DonTech Total
Net revenue...................... $ 38,634 $ -- $ 38,634 $ 51,053 $ -- $ 51,053
Operating income (loss).......... (24,877) 35,341 10,464 (70,429) 58,974 (11,455)
EBITDA (1)....................... (7,711) 35,341 27,630 (36,435) 58,974 22,539
Total assets..................... 2,417,856 179,912 2,597,768
13
2002 Three Months Ended June 30 Six Months Ended June 30
-------------- -------------- ------------ -------------- ------------- ------------
Donnelley DonTech Total Donnelley DonTech Total
Net revenue...................... $ 19,894 $ -- $ 19,894 $ 38,721 $ -- $ 38,721
Operating income (loss).......... 3,766 36,627 40,393 9,517 58,532 68,049
EBITDA (1)....................... 5,323 36,627 41,950 12,681 58,532 71,213
Total assets..................... 93,109 187,783 280,892
(1) EBITDA is not a measurement of operating performance computed in accordance
with generally accepted accounting principles and should not be considered
as a substitute for operating income or net income prepared in conformity
with generally accepted accounting principles. In addition, EBITDA may not
be comparable to similarly titled measures of other companies. The most
comparable GAAP measure for EBITDA is net income. The reconciliation of net
income to EBITDA is as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ------------------------------------
2003 2002 2003 2002
---------------- ---------------- ----------------- ------------------
Net (loss) income.................. $ (18,911) $ 21,169 $ (60,098) $ 34,351
+ tax expense (benefit)........... (13,155) 13,251 (41,762) 21,504
+ interest expense, net........... 43,253 5,973 91,928 12,194
+ depreciation and amortization...... 16,443 1,557 32,471 3,164
---------------- ---------------- ----------------- ------------------
EBITDA............................. $ 27,630 $ 41,950 $ 22,539 $ 71,213
---------------- ---------------- ----------------- ------------------
We also evaluate the performance of Donnelley and DonTech based on advertising
sales. Advertising sales are a critical measure of performance that we review
and play an important role in our decision to allocate financial resources
between our segments. For a discussion of advertising sales, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations."
10. Litigation
We are involved in various legal proceedings arising in the ordinary course of
our business, as well as certain extraordinary litigation and tax matters
described below. We periodically assess our liabilities and contingencies in
connection with these matters based upon the latest information available to us.
For those matters where it is probable that we have incurred a loss and the loss
or range of loss can be reasonably estimated, we record reserves in our
consolidated financial statements. In other instances, we are unable to make a
reasonable estimate of any liability because of the uncertainties related to
both the probable outcome and amount or range of loss. As additional information
becomes available, we adjust our assessment and estimates of such liabilities
accordingly.
Based on our review of the latest information available, we believe our ultimate
liability in connection with pending legal proceedings, including the
extraordinary litigation and tax matters described below, will not have a
material adverse effect on our results of operations, cash flows or financial
position, as described further below.
In order to understand our potential exposure under the extraordinary litigation
and tax matters described below under the captions "Information Resources, Inc."
and "Tax Matters," one needs to understand the relationship between us and The
Dun & Bradstreet Corporation, and certain of its predecessors and affiliates
that, through various corporate reorganizations and contractual commitments,
have assumed varying degrees of responsibility with respect to such matters.
In November 1996, the company then known as The Dun & Bradstreet Corporation
("D&B1") separated (the "1996 Distribution") through a spin-off into three
separate public companies: D&B1, ACNielsen Corporation ("ACNielsen") and
Cognizant Corporation ("Cognizant"). In June 1998, D&B1 separated (the "1998
Distribution") through a spin-off into two separate public companies: D&B1,
which changed its name to R.H. Donnelley Corporation ("Donnelley"), and a new
company named The Dun & Bradstreet Corporation ("D&B2"). Later in 1998,
Cognizant separated (the "Cognizant Distribution") through a spin-off into two
separate public companies: IMS Health Incorporated ("IMS") and Nielsen Media
Research, Inc. ("NMR"). In September 2000, D&B2 separated (the "2000
Distribution") through a spin-off into two separate public companies: D&B2,
which changed its name to Moody's Corporation ("Moody's"), and a new company
named The Dun & Bradstreet Corporation ("D&B3," and together with D&B1 and D&B2,
also referred to elsewhere in this Quarterly Report on Form 10-Q as "D&B"). As a
result of the form of our separation from D&B, we are the corporate successor
of, and technically the defendant and taxpayer referred to below as D&B.
14
Rockland Yellow Pages
In 1999, Sandy Goldberg, Dellwood Publishing, Inc. and Rockland Yellow Pages
initiated a lawsuit against the Company and Bell Atlantic Corporation in the
United States District Court for the Southern District of New York. The Rockland
Yellow Pages is a proprietary directory that competes against a Bell Atlantic
directory in the same region, for which we served as Bell Atlantic's advertising
sales agent through June 30, 2000. The complaint alleged that the defendants
disseminated false information concerning the Rockland Yellow Pages, which
resulted in damages to the Rockland Yellow Pages. In May 2001, the District
Court dismissed substantially all of plaintiffs' claims, and in August 2001, the
remaining claims were either withdrawn by the plaintiffs or dismissed by the
District Court. The plaintiffs then filed a complaint against the same
defendants in New York State Supreme Court, in Rockland County, alleging
virtually the same state law tort claim previously dismissed by the District
Court and seeking unspecified damages. In October 2001, defendants filed a
motion to dismiss this complaint. In May 2002, the Court granted defendants'
motion to dismiss the complaint. Plaintiffs filed an appeal of this dismissal.
In April 2003, the Appellate Division dismissed all but one count of the
complaint, which count alleges immaterial compensatory damages with respect to
only one advertiser. Accordingly, we presently do not believe that the final
outcome of this matter will have a material adverse effect on our results of
operations or financial condition.
Information Resources, Inc.
In 1996, Information Resources, Inc. ("IRI"), filed a complaint in the United
States District Court for the Southern District of New York, naming as
defendants the Company, as successor of D&B, ACNielsen Company and IMS
International Inc., at the time of the filing, all wholly owned subsidiaries of
D&B. IRI alleges, among other things, various violations of the antitrust laws,
including alleged violations of Sections 1 and 2 of the Sherman Act. The
complaint also alleges a claim of tortious interference with a contract and a
claim of tortious interference with a prospective business relationship. These
claims relate to the acquisition by defendants of Survey Research Group Limited
("SRG"). IRI alleges SRG violated an alleged agreement with IRI when it agreed
to be acquired by the defendants and that the defendants induced SRG to breach
that agreement. IRI is seeking damages in excess of $350,000, which amount IRI
seeks to treble under antitrust laws. IRI is also seeking punitive damages of an
unspecified amount. No trial date has been set, and discovery is ongoing. Under
the agreements relating to the 1996 Distribution, Cognizant, AC Nielsen and D&B
agreed to conduct a joint defense and allocated liabilities amongst themselves.
Under the agreements relating to the 1998 Distribution, D&B assumed the defense
and agreed to indemnify us against any payments that we may be required to make,
including related legal fees. As required by those agreements, Moody's
Corporation, which subsequently separated from D&B in the 2000 Distribution, has
agreed to be jointly and severally liable with D&B for the indemnity obligation
to us. At this stage in the proceedings, we are unable to predict the outcome of
this matter. While we cannot assure you as to any outcome, management presently
believes that D&B and Moody's have sufficient financial resources, borrowing
capacity and indemnity rights against IMS and NMR (who succeeded to Cognizant's
indemnity obligations under the Cognizant Distribution) to reimburse us for any
payments we may be required to make and related costs we may incur in connection
with this matter.
Tax Matters
D&B entered into global tax planning initiatives in the normal course of its
business, principally through tax-free restructurings of both their foreign and
domestic operations. The status of Internal Revenue Service ("IRS") reviews of
these initiatives is summarized below.
Pursuant to a series of agreements relating to the 1996, 1998, Cognizant and
2000 Distributions, IMS and NMR are jointly and severally liable for, and must
pay one-half, and D&B and Moody's are jointly and severally liable for, and must
pay the other half, of any payments over $137,000 for taxes, accrued interest
and other amounts resulting from unfavorable IRS rulings on the tax matters
summarized below (other than the matter summarized below as "Amortization
Expense Deductions - 1997 - 2002," for which D&B and Moody's, jointly and
severally, are solely responsible). D&B, on our behalf, was contractually
obligated to pay, and did pay, the first $137,000 of tax liability in connection
with the matter summarized below as "Utilization of Capital Losses - 1989 -
1990." Under the agreements relating to the 1998 Distribution, D&B agreed to
assume the defense and to indemnify us for any tax liability that may be
assessed against us and any related costs and expenses that we may incur in
connection with any of these tax matters. Also, as required by those agreements,
Moody's has agreed to be jointly and severally liable with D&B for the indemnity
obligation to us. Under the agreements relating to the 2000 Distribution, D&B
and Moody's have, between each other, agreed to each be financially responsible
for 50% of any potential liabilities that may arise to the extent such potential
liabilities are not directly attributable to each party's respective business
operations.
15
While we cannot assure you as to any outcome in these matters, management
presently believes that D&B and Moody's have sufficient financial resources,
borrowing capacity and indemnity rights against IMS and NMR (who succeeded to
Cognizant's indemnity obligations under the Cognizant Distribution) to reimburse
us for any payments we may be required to make and related costs we may incur in
connection with these tax matters.
Utilization of Capital Losses - 1989 - 1990
In 2000, D&B filed an amended tax return with respect to the utilization of
capital losses in 1989 and 1990 in response to a formal IRS assessment. The
amended tax return reflected an additional $561,600 of tax and interest due. In
2000, D&B paid the IRS $349,300 while IMS (on behalf of itself and NMR) paid
$212,300 to the IRS. We understand that this payment was made under dispute in
order to stop additional interest from accruing, that D&B is contesting the
IRS's formal assessment and would also contest the assessment of amounts, if
any, in excess of the amounts paid, and that D&B has filed a petition for a
refund in the United States District Court. This case is expected to go to trial
in 2004.
Subsequent to making its payment to the IRS in 2000, IMS sought to obtain
partial reimbursement from NMR under the terms of the agreements relating to the
Cognizant Distribution. NMR paid IMS less than IMS sought. Accordingly, in 2001,
IMS filed an arbitration proceeding against NMR claiming that NMR underpaid to
IMS its proper allocation of the above tax payments as provided by the
agreements relating to the Cognizant Distribution. Neither D&B nor we were party
to the Cognizant Distribution. IMS nonetheless sought to include us in this
arbitration, arguing that if NMR should prevail in its interpretation against
IMS, then IMS could seek to enforce the same interpretation against us (as
successor to D&B) under the agreements relating to the 1996 Distribution. The
arbitration panel ruled that we were a proper party to this arbitration
proceeding. In April 2003, the arbitration panel dismissed all claims against us
and found for IMS. If, on appeal of that ruling, NMR should prevail against IMS
and, in turn, IMS should prevail against us, then we believe that our additional
liability would be approximately $15,000, net of tax benefits. As noted above,
D&B and Moody's would be jointly and severally obligated to indemnify us against
any such additional liability and related costs.
We believe the fact that D&B and IMS have already paid the IRS a substantial
amount of additional taxes with respect to the contested tax planning strategies
significantly mitigates our risk. While no assurances can be given, we currently
believe that D&B and Moody's have sufficient financial resources, borrowing
capacity and indemnity rights against IMS and NMR to reimburse us for any
payments we may be required to make and related costs we may incur with respect
to this matter.
Royalty Expense Deductions - 1994 - 1996
During the second quarter of 2002, D&B (on our behalf) received a Notice of
Proposed Adjustment from the IRS with respect to a transaction entered into in
1993. In this Notice, the IRS proposed to disallow certain royalty expense
deductions claimed by D&B on its 1994, 1995 and 1996 tax returns. The IRS
previously concluded an audit of this transaction for taxable years 1993 and
1994 and did not disallow any similarly claimed deductions. We understand that
D&B disagrees with the position taken by the IRS in its Notice and has filed a
responsive brief to this effect with the IRS. If the IRS were to issue a formal
assessment consistent with the Notice, then a payment of the disputed amounts
would be required, if D&B opted to challenge the assessment in U.S. District
Court rather than in U.S. Tax Court. In the event of such challenge by D&B, the
required payment by D&B to the IRS would be up to $42,000 ($48,000 offset by a
$6,000 tax benefit). In verbal communications between D&B and the IRS during
2002, we understand that the IRS has expressed some willingness to withdraw its
proposed disallowance of certain royalty expense deductions of $7,500 for 1994.
However, we also understand that the IRS has expressed its intent to seek
penalties of $7,500 for 1995 and 1996 based on its interpretation of applicable
law. We have been advised that D&B would challenge the IRS's interpretation.
Again, under the agreements relating to the 1998 and 2000 Distributions, D&B and
Moody's have agreed to jointly and severally defend and indemnify us against any
such liability and related costs.
16
Notwithstanding the verbal communications with the IRS in 2002 noted above
regarding royalty expense deductions of $7,500 for 1994, in a February 2003
letter to D&B (on our behalf) the IRS asserted that it intends to take a
position regarding prior tax years that would have the effect of disallowing a
portion of the 1994 royalty expense deduction, our share of which would be
$5,000 if the IRS prevailed. We understand that D&B disagrees with the IRS's
position. Also, in February 2003, D&B (on our behalf) received a Preliminary
Partnership Summary Report from the IRS that challenges the tax treatment of
certain royalty payments received by a partnership in which D&B was a partner.
As stated in its Report, the IRS would reallocate certain partnership income to
D&B, which if the IRS prevailed would require an additional payment from us of
$20,000 (which includes tax, interest and penalty, net of associated tax
benefits). Again, under the agreements relating to the 1998 and 2000
Distributions, D&B and Moody's have agreed to jointly and severally defend and
indemnify us against any such liability and related costs.
Amortization Expense Deductions - 1997 - 2002
We understand that the IRS has sought certain documentation from D&B with
respect to a transaction entered into in 1997 that produces amortization expense
deductions for D&B. While we understand that D&B believes the deductions are
appropriate, the IRS could ultimately challenge them and issue an assessment. If
the IRS were to prevail or the assessment were to be challenged by us in U.S.
District Court, we understand that D&B estimates that its cash payment to the
IRS with respect to deductions claimed to date and including any potential
assessment of penalties of $6,500, could be up to $46,400, or $43,000 net of
associated tax benefits. This transaction is scheduled to expire in 2012 and,
unless earlier terminated by D&B, the cash exposure, based on current interest
rates and tax rates, would increase at a rate of approximately $2,300 per
quarter (including potential penalties) as future amortization expenses are
deducted. Again, under the agreements relating to the 1998 and 2000
Distributions, D&B and Moody's are required to jointly and severally indemnify
us against any such liability and related costs.
Conclusion
As a result of our assessment of our exposure in these matters, especially in
light of our indemnity arrangements with D&B and Moody's, and their financial
resources, borrowing capacity and indemnity rights against IMS and NMR, no
material amounts have been accrued for in our consolidated financial statements
for any of these D&B-related litigation and tax matters.
Coastal Termite and Pest Control
In 2001, Marnan Group, Inc., doing business as Coastal Termite and Pest Control
("Coastal"), filed a complaint in the United States District Court for the
Middle District of Florida against SPA. The complaint, as amended, alleged that
SPA breached certain directory advertising contracts between 1996 and 1999,
fraudulently induced Coastal to enter into another directory advertising
contract and tortiously interfered with Coastal's business relationships with
its customers. Coastal is seeking damages for lost contract benefits, lost
profits and diminution of business value in an unspecified amount, including
pre-judgment interest. In January 2002, SPA filed a motion to dismiss certain of
Coastal's claims. In September 2002, the court denied SPA's motion to dismiss.
Nonetheless, we do not believe that the final outcome of this matter will have a
material adverse effect on our results of operations or financial condition.
Other matters
We are also involved in other legal proceedings, claims and litigation arising
in the ordinary conduct of our business. Although we cannot assure you of any
outcome, management presently believes that the outcome of such legal
proceedings will not have a material adverse effect on our results of operations
or financial condition.
17
11. Guarantees
R.H. Donnelley Inc. is a direct wholly owned subsidiary of the Company and the
issuer of the Notes and Pre-acquisition Notes. The Company and the direct and
indirect wholly owned subsidiaries of R.H. Donnelley Inc. jointly and severally,
fully and unconditionally, guarantee the Notes and Pre-acquisition Notes. At
June 30, R.H. Donnelley Inc.'s direct wholly owned subsidiaries are R.H.
Donnelley Publishing & Advertising, Inc., R.H. Donnelley APIL, Inc., R.H.
Donnelley CD, Inc. and Get Digital Smart.com Inc. R.H. Donnelley Acquisitions,
Inc. is a wholly owned subsidiary of R.H. Donnelley APIL, Inc. The following
consolidating condensed financial statements should be read in conjunction with
the consolidated financial statements of the Company.
R.H. Donnelley Corporation
Consolidating Condensed Balance Sheet
June 30, 2003
R.H. R.H. Consolidated
Donnelley R.H. Donnelley Donnelley Other R.H.
Corp. Inc. Publishing & Guarantor Donnelley
(Parent) (Issuer) Advertising subsidiaries Eliminations Corporation
------------- ---------------- ------------- ------------- --------------- --------------
Assets
Cash and cash equivalents.. $ -- $ -- $ -- $ -- $ -- $ --
Accounts receivable, net... -- -- 271,009 -- -- 271,009
Other current assets....... 4,142 41,723 1,586 -- 47,451
Fixed assets, net.......... -- 14,069 7,838 -- -- 21,907
Investment in subsidiaries. 119,725 2,527,464 -- 2,184,232 (4,651,509) 179,912
Intercompany advance....... -- -- -- 2,280,865 (2,280,865) --
Intangible assets.......... -- -- 1,890,084 -- -- 1,890,084
Other assets............... -- 92,540 7 -- -- 92,547
Goodwill................... -- -- 94,858 -- -- 94,858
------------- ---------------- ------------- ------------- --------------- --------------
Total assets............... $119,725 $2,638,215 $2,305,519 $4,466,683 $(6,932,374) $2,597,768
------------- ---------------- ------------- ------------- --------------- --------------
Liabilities, Redeemable
Convertible Preferred
Stock and Shareholders'
Deficit
Accounts payable and accrued
liabilities............. $ -- $ 77,439 $ (39,112) $ 53,306 $ (63,790) $ 27,843
Deferred directory revenue. -- -- 208,975 -- -- 208,975
Current portion long-term debt -- 59,729 -- -- -- 59,729
Long-term debt............. -- 2,146,584 -- -- -- 2,146,584
Other long-term liabilities... -- 76,658 17 -- (41,763) 34,912
Intercompany loan.......... -- -- 2,180,875 -- (2,180,875) --
Redeemable convertible
preferred stock......... 189,797 -- -- -- -- 189,797
Shareholders' (deficit) equity (70,072) 277,805 (45,236) 4,413,377 (4,645,946) (70,072)
------------- ---------------- ------------- ------------- --------------- --------------
Total liabilities, redeemable
convertible preferred
stock and shareholders' $ 119,725 $2,638,215 $ 2,305,519 $4,466,683 $(6,932,374) $2,597,768
deficit.................
------------- ---------------- ------------- ------------- --------------- --------------
18
R.H. Donnelley Corporation
Consolidating Condensed Statement of Operations
R.H.
R.H. R.H. Donnelley Other
For the Three Months Ended Donnelley Donnelley Publishing Guarantor Consolidated
June 30, 2003 Corp. Inc. & subsidiaries R.H.
(Parent) (Issuer) Advertising Corporation Eliminations Donnelley
------------- -------------- ------------- -------------- ------------- ---------------
Net revenue.............. $ -- $ 6,448 $ 32,186 $ -- $ -- $ 38,634
Expenses................. -- 18,564 44,572 375 -- 63,511
Partnership and equity
(loss) income......... (18,525) 21,690 -- 60,224 (28,048) 35,341
------------- -------------- ------------- -------------- ------------- ---------------
Operating (loss) income.. (18,525) 9,574 (12,386) 59,849 (28,048) 10,464
Interest (expense) income.... -- (46,818) (46,474) 50,039 -- (43,253)
Other income............. -- 723 -- -- -- 723
------------- -------------- ------------- -------------- ------------- ---------------
Pre-tax (loss) income.... (18,525) (36,521) (58,860) 109,888 (28,048) (32,066)
Income tax expense (benefit). 386 (17,996) (23,893) 28,348 -- (13,155)
------------- -------------- ------------- -------------- ------------- ---------------
Net (loss) income........ (18.911) (18,525) (34,967) 81,540 (28,048) (18,911)
Preferred Stock dividend. 5,978 -- -- -- -- 5,978
------------- -------------- ------------- -------------- ------------- ---------------
Net (loss) income available
to common shareholders.... $ (24,889) $ (18,525) $ (34,967) $ 81,540 $ (28,048) $(24,889)
------------- -------------- ------------- -------------- ------------- ---------------
For the Three Months Ended
June 30, 2002
Net revenue.............. $ -- $ 19,894 $ -- $ -- $ -- $19,894
Expenses................. -- 20,343 -- 22 -- 20,365
Partnership and equity income 21,169 28,783 -- 35,221 (44,309) 40,864
------------ --------------- ------------- -------------- -------------- --------------
Operating income......... 21,169 28,334 -- 35,199 (44,309) 40,393
Interest (expense) income.... -- (7,755) -- 1,782 -- (5,973)
------------ --------------- ------------- -------------- -------------- --------------
Pre-tax income........... 21,169 20,579 -- 36,981 (44,309) 34,420
Income tax expense (benefit). -- (590) -- 13,841 -- 13,251
------------ --------------- ------------- -------------- -------------- --------------
Net income............... $ 21,169 $ 21,169 $ -- $ 23,140 $ (44,309) $21,169
------------ --------------- ------------- -------------- -------------- --------------
For the Six Months Ended
June 30, 2003
Net revenue.............. $ -- $ 13,003 $ 38,050 $ -- $ -- $ 51,053
Expenses................. -- 35,380 85,691 411 -- 121,482
Partnership and equity
(loss) income......... (60,447) 17,339 -- 111,538 (9,456) 58,974
------------- -------------- ------------- -------------- ------------- ---------------
Operating (loss) income.. (60,447) (5,038) (47,641) 111,127 (9,456) (11,455)
Interest (expense) income.... -- (95,493 (94,909) 98,474 -- (91,928)
Other income............. -- 1,523 -- -- -- 1,523
------------- -------------- ------------- -------------- ------------- ---------------
Pre-tax (loss) income.... (60,447) (99,008) (142,550) 209,601 (9,456) (101,860)
Income tax expense (benefit). (349) (38,561) (56,165) 53,313 -- (41,762)
------------- -------------- ------------- -------------- ------------- ---------------
Net (loss) income........ (60,098) (60,447) (86,385) 156,288 (9,456) (60,098)
Preferred Stock dividend. 48,132 -- -- -- -- 48,132
------------- -------------- ------------- -------------- ------------- ---------------
Net (loss) income available
to common shareholders $(108,230) $ (60,447) $ (86,385) $ 156,288 $ (9,456) $ (108,230)
------------- -------------- ------------- -------------- ------------- ---------------
For the Six Months Ended
June 30, 2002
Net revenue.............. $ -- $ 38,721 $ -- $ -- $ -- $ 38,721
Expenses................. -- 38,617 -- 67 -- 38,684
Partnership and equity income 34,351 47,540 -- 60,991 (74,870) 68,012
------------- -------------- ------------- -------------- ------------- ---------------
Operating income......... 34,351 47,644 -- 60,924 (74,870) 68,049
Interest (expense) income.... -- (15,759) -- 3,565 -- (12,194)
------------- -------------- ------------- -------------- ------------- ---------------
Pre-tax income........... 34,351 31,885 -- 64,489 (74,870) 55,855
Income tax expense (benefit). -- (2,466) -- 23,970 -- 21,504
------------- -------------- ------------- -------------- ------------- ---------------
Net income............... $ 34,351 $ 34,351 $ -- $ 40,519 $ (74,870) $ 34,351
------------- -------------- ------------- -------------- ------------- ---------------
19
R.H. Donnelley Corporation
Consolidating Condensed Statement of Cash Flows
R.H. Donnelley R.H. R.H. Donnelley Other Consolidated
For the Six Months Ended Corp. Donnelley Publishing & Guarantor R.H. Donnelley
June 30, 2003 (Parent) Inc. Advertising subsidiaries Corporation
(Issuer)
---------------- -------------- ------------------ ------------------ -----------------
Cash flow from operations.... $ -- $ (100,959) $ 22,842 $ 209,639 $ 131,522
Cash flow from investing
activities................... 69,300 (407,926) (32,180) -- (370,806)
Cash flow from financing
activities................... (69,300) 501,140 9,338 (209,681) 231,497
---------------- -------------- ------------------ ------------------ -----------------
Change in cash............... -- (7,745) -- (42) (7,787)
Cash at beginning of period.. -- 7,745 -- 42 7,787
---------------- -------------- ------------------ ------------------ -----------------
Cash at end of period........ $ -- $ -- $ -- $ -- $ --
---------------- -------------- ------------------ ------------------ -----------------
For the Six Months Ended
June 30, 2002
Cash flow from operations.... $ -- $ (17,153) $ -- $ 45,361 $ 28,208
Cash flow from investing
activities................... -- (1,300) -- -- (1,300)
Cash flow from financing
activities................... -- 6,144 -- (45,346) (39,202)
---------------- -------------- ------------------ ------------------ -----------------
Change in cash............... -- (12,309) -- 15 (12,294)
Cash at beginning of period.. -- 14,667 -- 54 14,721
---------------- -------------- ------------------ ------------------ -----------------
Cash at end of period........ $ -- $ 2,358 $ -- $ 69 $ 2,427
---------------- -------------- ------------------ ------------------ -----------------
20
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Information
Certain statements contained in this Form 10-Q regarding R.H. Donnelley's future
operating results, performance, business plans or prospects and any other
statements not constituting historical fact are "forward-looking statements"
subject to the safe harbor created by the Private Securities Litigation Reform
Act of 1995. Where possible, words such as "believe," "expect," "anticipate,"
"should," "will," "would," "planned," "estimated," "potential," "goal,"
"outlook," "could," and similar expressions, are used to identify such
forward-looking statements. All forward-looking statements reflect only our
current beliefs and assumptions with respect to our future results, business
plans, and prospects, and are based solely on information currently available to
us. Accordingly, these statements are subject to significant risks and
uncertainties and our actual results, business plans and prospects could differ
significantly from those expressed in, or implied by, these statements. We
caution readers not to place undue reliance on, and we undertake no obligation
to update, other than imposed by law, any forward-looking statements. Unless
otherwise indicated, the terms "Company," "we," "us" and "our" refer to R.H.
Donnelley Corporation and its direct and indirect wholly owned subsidiaries.
Such risks and uncertainties are described in detail in our Annual Report on
Form 10-K for the year ended December 31, 2002.
The Company
On January 3, 2003, we acquired Sprint Corporation's ("Sprint") directory
operations, Sprint Publishing and Advertising ("SPA") for $2,229.8 million in
cash and are now the publisher of 260 revenue-generating Sprint Yellow Pages(R)
directories in 18 states. Prior to the acquisition, we served as the exclusive
sales agent and pre-press publishing vendor for SPA directories in certain
markets. The acquisition transformed us from a sales agent and pre-press vendor
into a leading publisher of yellow pages directories. The acquisition was
accounted for as a purchase business combination and the purchase price was
allocated to the tangible and identifiable intangible assets acquired and
liabilities assumed based on their respective fair values on the acquisition
date. The results of the SPA business are included in our consolidated results
from and after January 3, 2003, the acquisition closing date. SPA is now
operated as R.H. Donnelley Publishing & Advertising, Inc. ("RHDPA"), an
indirect, wholly owned subsidiary of the Company.
Through the DonTech Partnership ("DonTech"), we are also the exclusive sales
agent to sell yellow pages advertising for 129 SBC Communications Inc. ("SBC")
directories in Illinois and northwest Indiana. DonTech was not affected by the
acquisition and continues to act as the exclusive sales agent to SBC.
We have revised our historical segment reporting to reflect the change in the
business that resulted from the SPA acquisition and to reflect the way
management now reviews and analyzes the business. Our reportable operating
segments are Donnelley and DonTech.
Donnelley
Donnelley includes the revenue from our Sprint-branded yellow pages directories
and pre-press publishing services and all operating and administrative expenses.
As the publisher of yellow pages directories, directory revenue is recognized
under the deferral and amortization method based on the annual billing value of
the advertisements sold in a directory ("publication sales"), subject to sales
claims and allowances. Prior to the acquisition, we sold yellow pages
advertising in certain Sprint directories on behalf of SPA and earned a
commission based on the contract value of those sales, subject to an allowance
for sales claims and bad debts. Revenue from pre-press publishing services is
based on contractual terms.
DonTech
DonTech is a 50/50 perpetual partnership in which the Company and an operating
unit of SBC are the partners. DonTech acts as the exclusive sales agent for
yellow pages directories published by SBC in Illinois and northwest Indiana.
DonTech sells advertising in SBC directories on behalf of SBC and receives a
commission from SBC. Our income associated with DonTech is comprised of two
components, our 50% interest in the net income of DonTech and revenue
participation income received directly from SBC, which is based on a percentage
of DonTech advertising sales. The DonTech segment includes revenue participation
income and our 50% interest in the net profits of DonTech. We also provide
certain pre-press publishing and billing services under separately negotiated
contracts for the yellow pages directories of SBC for which DonTech sells
advertising and sales related computer application services to DonTech. The fees
received for these services are included in our Donnelley segment, as they
relate more to our pre-press publishing services than DonTech sales activities.
21
Although DonTech provides advertising sales of yellow pages and other directory
products similar to Donnelley, the partnership is considered a separate
operating segment since, among other things, it has its own Board of Directors
and the employees of DonTech, including officers and managers, are not employees
of the Company.
Critical Accounting Policies
Certain amounts in our financial statements require that management make
assumptions and estimates based on the best available information at that time.
Actual results could vary from these estimates and assumptions. Those accounting
policies that involve assumptions or estimates on our part that could have a
material effect on results of operations or financial condition if the actual
results differ from the assumptions or estimates are presented below. See Note 3
in Item 1 "Financial Statements" for additional information on our accounting
policies.
Principles of Consolidation. The consolidated financial statements include the
accounts of R.H. Donnelley Corporation and its direct and indirect wholly owned
subsidiaries. All intercompany transactions and balances have been eliminated.
The DonTech Partnership ("DonTech") is accounted for under the equity method as
we do not have control, but do have the ability to exercise significant
influence over DonTech's operating and financial policies. Accordingly,
DonTech's revenue and expenses are not consolidated in our financial statements,
but our share of its net profits is reported as partnership income in the
consolidated statements of operations.
Revenue Recognition. We earn revenue from the sale of advertising into our
yellow pages directories. Revenue from the sale of advertising is deferred when
a directory is published and recognized ratably over the life of a directory,
which is typically twelve months (the "deferral and amortization method").
Revenue is recorded net of an estimate for claims and allowances based on
historical experience. We adjust our estimate based on actual results or when
information or circumstances indicate that the current estimate may not
adequately represent the amount of claims and allowances we may incur in the
future. A 1% change in our claims and allowances rate would impact revenue by $5
to $6 million annually. We also earn revenue from pre-press publishing services
provided to SBC for those directories in the DonTech markets. Revenue from
pre-press publishing services is recognized as services are performed.
For the 2002 period, we earned sales commission revenue from the sale of
advertising on behalf of SPA and fees for pre-press publishing services. As a
sales agent for SPA, we recognized sales commission revenue, net of an allowance
for sales claims and bad debts, at the time an advertising contract was executed
with a customer.
Deferred Directory Costs. Deferred directory costs include costs directly
attributable to the advertising sales process. These costs include sales
commissions, printing, paper and initial distribution expenses. Deferred
directory costs are initially deferred when incurred and recognized ratably over
the life of a directory. These costs also include an allowance for sales claims
and bad debt, which are initially deferred and recognized ratably over the life
of a directory.
Receivables. Advertisers enter into a twelve-month contract for their
advertising. Most advertisers are billed a pro rata amount of their contract
value on a monthly basis. Billed receivables represent the amount that has been
billed to advertisers. Unbilled receivables represent amounts for published
directories that have yet to be billed to advertisers in accordance with the
terms of their contract. We establish an estimate of our allowance for doubtful
accounts for billed and unbilled receivables based upon historical experience.
We adjust our estimate based on actual results or when information or
circumstances indicate that our current estimate may not represent the amount of
bad debts we may incur in the future. A 1% change in our bad debt rate would
impact expenses by $5 to $6 million annually.
We provide pre-press publishing services to SBC for those directories sold by
DonTech under a separately negotiated contract that expires in 2008. Receivables
for services are billed and collected in accordance with the terms of the
agreement, generally a monthly pro rata amount based on the annual estimated
contract value. An additional amount is billed or reimbursed to SBC early in the
following year based on a reconciliation of actual volumes compared to
contractual volumes.
Concentration of Credit Risk. Approximately 85% of our advertising revenue is
derived from the sale of advertising to local small- and medium-sized
businesses. These advertisers enter into twelve-month advertising sales
contracts and typically make monthly payments over the term of the contract.
Some advertisers pre-pay the full amount or a portion of the contract value.
Most new advertisers are subject to a credit review. If the advertisers qualify,
we may extend credit to them for their advertising purchase. Small- and
medium-sized businesses tend to have fewer financial resources and higher
financial failure rates than large businesses. In addition, full collection of
delinquent accounts can take an extended period of time and involve increased
costs. While we do not believe that extending credit to our local advertisers
will have a material adverse affect on our results of operations or financial
condition, no assurances can be given. We do not require collateral from our
advertisers, although we do charge interest to advertisers who do not pay within
specified due dates.
22
The remaining 15% of our advertising revenue is derived from the sale of
advertising to national or large regional chains, such as rental car companies,
insurance companies, banks and automobile manufacturers. Substantially all of
the revenue derived through national accounts is serviced through Certified
Marketing Representatives ("CMRs"), with which we contract. CMRs are independent
third parties that act as agents for national companies. The CMRs are
responsible for billing the national customers for their advertisement. We
receive payment for the value of advertising placed in our directory, net of the
CMR's commission, directly from the CMR. While we are still exposed to credit
risk, the amount of losses from these accounts are usually less than the local
accounts as the advertisers, and in some cases, the CMRs, tend to be larger
companies with greater financial resources than the local advertisers.
We maintain a significant receivable balance with SBC for revenue participation
and pre-press publishing services fees. The revenue participation receivable is
subject to adjustment, based on collections by SBC from individual advertisers;
however, the adjustment is limited based on contractual provisions. The
receivable is recorded at net realizable value. We do not currently foresee a
material credit risk associated with this receivable, although there can be no
assurance that full payment will be received on a timely basis.
We have interest rate swap agreements with major financial institutions with a
notional value of $255 million. We are exposed to credit risk in the event that
one or more of the counterparties to the agreements does not, or cannot meet
their obligation. The notional amount is used to measure interest to be paid or
received and does not represent the amount of exposure to credit loss. The loss
would be limited to the amount that would have been received, if any, over the
remaining life of the swap agreement. The counterparties to the swap agreements
are major financial institutions with credit ratings of A or higher. While we do
not currently foresee a material credit risk associated with these swap
agreements, no assurances can be given.
Intangible Assets and Goodwill. Intangible assets consist of directory services
agreements between Sprint and the Company entered into as part of the SPA
acquisition, established customer relationships and trade names. The fair value
of these intangible assets is being amortized over their estimated useful lives.
The estimated fair value and useful lives of these intangible assets were
determined based on an independent valuation and deemed by management to be
reasonable. Annual amortization expense for the next five years is approximately
$50 million. An increase or decrease of one year in the estimated useful lives
of each of these assets would change the annual amortization expense by
approximately $2 million.
The directory services agreements consist of a directory services license
agreement, a trademark license agreement and a non-competition agreement
(collectively "Directory Services Agreements"). The fair value of these
agreements was determined based on the present value of estimated future cash
flows and is being amortized under the straight-line method over 50 years.
The fair value of customer relationships was determined based on the present
value of estimated future cash flows and historical attrition rates and is being
amortized under an accelerated method that recognizes the value derived from
customer relationships is greater in the earlier years and steadily declines
over time. The weighted average useful life of these relationships is 18 years.
The fair value of the acquired trade names was determined based on the "relief
from royalty" method, which values the trade names based on the estimated amount
that a company would have to pay in an arms length transaction to use these
trade names. These assets are being amortized under the straight-line method
over 15 years.
Goodwill represents the excess of the purchase price for SPA over the net
tangible and intangible assets acquired. In accordance with SFAS 142 "Goodwill
and Other Intangible Assets," goodwill is not amortized, but is subject to
impairment testing. No impairment losses were recorded during the period.
23
Derivative Financial Instruments. Our derivative financial instruments are
currently limited to interest rate swap agreements used to mitigate our exposure
to changes in interest rates on variable rate debt. We have interest rate swap
agreements with a total notional value of $255 million that effectively converts
$255 million of variable rate debt to fixed rate debt. Under the terms of the
swap agreements, we receive variable interest based on three-month LIBOR and pay
a fixed rate of 2.85%. The swaps mature on March 31, 2007.
The interest rate swaps and the hedged item (3 month LIBOR-based interest
payments on $255 million of bank debt) have been designed so that the critical
terms (interest reset dates, duration and index) coincide. The interest rate
swaps have been designated as cash flow hedges. In accordance with SFAS 133, to
the extent the swaps are effective, changes in the fair value of the swaps are
recorded in other comprehensive income or loss, a component of shareholders'
equity. Any ineffectiveness is recorded through earnings. Through June 30, 2003,
the swaps have provided a perfect hedge of the hedged item (e.g. the cash flows
from the swaps exactly offset the interest payments made during the quarter on
$255 million of bank debt) and no ineffectiveness has been charged to earnings.
Pension and Other Postretirement Benefits. Pension and other postretirement
benefits represent estimated amounts to be paid to employees in the future. The
accounting for benefit costs reflects the recognition of these future costs over
the employee's approximate service period based on the terms of the plans and
investment and funding decisions. The determination of the future obligation and
the periodic pension and other postretirement benefit costs requires management
to make assumptions regarding the discount rate, return on retirement plan
assets, increase in future compensation and health care cost trends. Changes in
these assumptions can have a significant impact on the projected benefit
obligation, funding requirement and periodic benefit cost. Our discount rate,
which discounts our future obligation to its present value, is based on rates of
return on Aa corporate bonds. The expected rate of return on plan assets is
based on the mix of assets held by the plan and their historical long-term rates
of return. The anticipated trend of future health care costs is based on
historical experience and external factors.
Effective January 1, 2003, we reduced our rate of return on plan assets from
9.75% to 8.25%. Based on the current investment environment, our outlook for
future returns and the pension plan's asset allocation, we determined that a
long-term rate of return of 8.25% was a more appropriate assumption.
Earnings per Share. Basic earnings per common share (EPS) are generally
calculated by dividing net income available to common shareholders by the
weighted average number of common shares outstanding. However, because the
redeemable convertible cumulative preferred stock ("Preferred Stock") contains
certain participation rights, EITF Topic D-95, "Effect of Participating
Securities on the Computation of Basic Earnings Per Share," ("Topic D-95")
requires that the dilutive effect of those securities be included in the
weighted average number of shares outstanding. Furthermore, Topic D-95 requires
that the dilutive effect to be included in basic EPS may be calculated using
either the if-converted method or the two-class method. However, the dilutive
effect of the Preferred Stock cannot be less than that which would result from
the application of the two-class method. We have elected to use the if-converted
method in calculating basic EPS.
Diluted EPS equals net income divided by the weighted average common shares
outstanding plus common share equivalents. Common share equivalents include
stock options and warrants, the dilutive effect of which is calculated using the
treasury stock method, and Preferred Stock, the potential dilutive effect of
which is calculated using the if-converted method.
24
RESULTS OF OPERATIONS
Three and six months ended June 30, 2003 and 2002
Because of the SPA acquisition, related financing and associated
accounting, results for 2003 prepared in accordance with generally accepted
accounting principles ("GAAP") are not comparable to our 2002 GAAP results
previously reported. Also, because purchase accounting rules prevent us from
recognizing deferred revenue and expenses for those directories that published
prior to the acquisition, including all January 2003 published directories,
reported 2003 revenue and expenses are not representative of revenue and
expenses that would be reported in subsequent years. These purchase accounting
adjustments will continue to effect reported results into 2004. Accordingly, in
addition to a discussion of the reported 2003 results compared to the reported
2002 results, we are also providing a comparison of 2003 adjusted results, which
eliminates the effect of purchase accounting on deferred revenue and expenses,
to 2002 pro forma results, which assumes the acquisition occurred on January 1,
2002. See "- Adjusted and Pro Forma Results" below for the reconciliation of
2003 and 2002 reported results to 2003 adjusted and 2002 pro forma results.
Net Revenue
Revenue is derived entirely from our Donnelley segment. We earn revenue
primarily from the sale of advertising in our yellow-pages directories. Net
revenue was $38.6 million and $51.0 million for the quarter and six months ended
June 30, 2003, respectively, compared to $19.9 million and $38.8 million for the
quarter and six months ended June 30, 2002, respectively. The increase in 2003
is primarily due to the acquisition. Revenue for the 2002 periods included
commission revenue on advertising sales made on behalf of SPA and revenue from
pre-press publishing services, whereas revenue in 2003 includes the amortization
of publication sales for directories published subsequent to the acquisition
under the deferral and amortization method and revenue from pre-press publishing
services. Revenue from pre-press publishing services for the quarter and six
months ended June 30, 2003 declined $1.3 million and $4.3 million, compared to
the quarter and six months ended June 30, 2002, respectively, primarily due to
the loss of revenue from SPA. As a result of the acquisition, services
previously provided to SPA are now performed internally with revenue and
expenses eliminated in consolidation.
Expenses
Expenses are derived entirely from our Donnelley segment. Total expenses
were $63.5 million and $121.5 million for the quarter and six months ended June
30, 2003, respectively, and $20.4 million and $38.7 million for the quarter and
six months ended June 30, 2002, respectively. Operating expenses were $34.8
million and $66.8 million for the quarter and six months ended June 30, 2003,
respectively, and $14.1 million and $25.7 million for the quarter and six months
ended June 30, 2002, respectively. The increase in operating expenses in the
2003 periods is primarily due to the acquisition and an increase in expenses in
our new role as publisher compared to our prior role as a sales agent. Direct
sales costs, which includes sales person compensation and lease expense for
sales offices, were $7.8 million and $14.1 million higher than last year's
quarter and six months ended June 30, 2002, respectively, due to an increase in
the number of directories, the number of sales personnel and the number of sales
offices. As a publisher, we also incur costs for the printing (including the
cost of paper) and distribution of directories, as well as marketing and
advertising costs, which we did not incur as a sales agent. Total expenses for
these items for the quarter and six months ended June 30, 2003 were $5.3 million
and $9.8 million, respectively. Publishing and information technology expenses
were $5.4 million and $12.1 million higher for the quarter and six months ended
June 30, 2003, respectively. Operating expenses also include $2.9 million and
$3.9 million for the three and six months ended June 30, 2003, respectively, for
the amortization of a purchase accounting adjustment to increase the deferred
directory costs acquired to their fair value.
General and administrative expenses were $12.2 million and $22.2 million for the
quarter and six months ended June 30, 2003, respectively, and $4.7 million and
$9.8 million for the quarter and six months ended June 30, 2002, respectively.
This increase is attributable to general and administrative expenses related to
the acquired SPA business for the quarter and six months ended June 30, 2003 of
$3.0 million and $6.3 million, respectively, a charge of $3.1 million for the
quarter and six months ended June 30, 2003 related to the shutdown of one of our
publishing facilities in Tennessee, higher insurance costs in the quarter and
six months ended June 30, 2003 of $0.9 million and $1.9 million, respectively
and compensation expense for employee stock options of $0.4 million and $1.0
million for the quarter and six months ended June 30, 2003, respectively. In
October 2002, we granted stock options to certain key employees that were
contingent upon the closing of the SPA acquisition. On the date of the SPA
closing, the fair market value of our common stock was greater than the exercise
price. Accordingly, we will recognize compensation expense of approximately
$5.1 million over the next four years.
25
Depreciation and amortization was $16.4 million and $32.5 million for the
quarter and six months ended June 30, 2003, respectively, and $1.6 million and
$3.2 million for the quarter and six months ended June 30, 2002, respectively.
The increase is primarily due to the amortization of intangible assets, which
was not incurred in 2002. Amortization of intangible assets was $12.5 million
and $24.9 million for the quarter and six months ended June 30, 2003,
respectively. Depreciation of fixed assets and amortization of computer software
was $2.3 million higher for the quarter and $4.4 million higher for the
six-month period due to the acquisition of SPA depreciable assets.
Partnership Income
Partnership income in 2003 and 2002 includes our 50% share of the net
income of DonTech and revenue participation income from SBC. As a sales agent
for SBC, DonTech earns commission revenue based on the annual value of sales
contracts executed during the period ("calendar sales"). We also earn revenue
participation income based on the level of calendar sales during the period.
DonTech's net income and our revenue participation income are directly
correlated to DonTech's calendar sales and a material decline in their calendar
sales could have an adverse effect on our consolidated results. DonTech manages
the sale of advertising ("sales campaign") on a directory-by-directory basis or
project basis (a project consists of two or more directories in a geographic
area). A typical sales campaign lasts two to five months and ends approximately
two months prior to publication. Accordingly, changes in the beginning and
ending dates of a sales campaign and the actual sales recorded at any point
during the sales campaign can vary from one period to the next. These
variations, or timing factors, can cause partnership income to be materially
different from the prior year comparative period. Partnership income in 2002
also included priority distribution income on our membership interest in CenDon,
LLC. As a result of the SPA acquisition, we no longer report priority
distribution income.
Partnership income related to DonTech was $35.3 million in the second quarter of
2003 compared to $36.6 million in the second quarter of 2002, and $59.0 million
for the six months ended June 30, 2003 compared to $58.5 million for the six
months ended June 30, 2002. The decrease in the second quarter 2003 compared to
the second quarter 2002 was due to lower calendar sales resulting from continued
weak economic conditions in the Midwest, intense competition in the local media
market and a shift of advertising sales previously serviced in the first
quarter. Calendar sales for the six-month period ended June 30, 2003 were also
lower than the comparable 2002 period as a result of weak economic conditions
and competition; however, lower partnership expenses more than offset the impact
on partnership income from lower calendar sales. See "- Advertising Sales" below
for a reconciliation of DonTech calendar sales, a non-GAAP measure, to reported
partnership income, the most comparable GAAP measure. Priority distribution
income for the quarter and six months ended June 30, 2002 was $4.3 million and
$9.5 million, respectively.
Operating Income / Loss
We had operating income of $10.5 million and operating loss of $11.5 million for
the quarter and six months ended June 30, 2003, respectively, and operating
income of $40.4 million and $68.1 million for the quarter and six months ended
June 30, 2002, respectively. Operating income from DonTech was $35.3 million in
the second quarter of 2003 compared to $36.6 million in the second quarter of
2002, and $59.0 million for the six months ended June 30, 2003 compared to $58.5
million for the six months ended June 30, 2002. See "- Partnership Income" above
for a discussion of DonTech income.
Operating loss from Donnelley was $24.8 million and $70.5 million for the
quarter and six months ended June 30, 2003, respectively, compared to operating
income of $3.8 million and $9.5 million for the quarter and six months ended
June 30, 2002, respectively. The significant decline in Donnelley operating
income was mainly due to purchase accounting rules that prevent us from
recognizing deferred revenue and expenses associated with those directories
published prior to the acquisition and the increase in expenses incurred as a
publisher.
Interest Expense
Net interest expense was $43.3 million and $91.9 million for the quarter and six
months ended June 30, 2003, respectively, and $6.0 million and $12.2 million for
the quarter and six months ended June 30, 2002, respectively. Interest expense
in 2003 is not comparable to 2002 due to the substantial amount of debt issued
in connection with the SPA acquisition (see "- Liquidity and Capital
Resources").
26
Other Income
Other income of $0.7 million in the second quarter of 2003 and $1.5 million in
the six month period ended June 30, 2003 represents a gain on hedging
activities. At December 31, 2002, a $75 million notional value interest rate
swap did not qualify for hedge accounting treatment due to the then-pending
repayment of existing variable rate debt in connection with the SPA acquisition.
In December 2002, a charge of $1.5 million was recorded to reclassify the
cumulative change in the fair value of the swap that was previously recognized
in accumulated other comprehensive loss on the balance sheet to earnings. The
change in the fair value of the swap was recorded through earnings in 2003 and,
since the swap was held through its maturity in June 2003, a gain of $1.5
million was recognized.
Net Income (Loss), Net Income (Loss) Available to Common Shareholders and
Earnings Per Share
Net loss was $18.9 million and $60.1 million for the quarter and six months
ended June 30, 2003, respectively, compared to net income of $21.2 million and
$34.4 million for the quarter and six months ended June 30, 2002, respectively.
The net loss in 2003 was due to purchase accounting rules that prevented us from
recognizing deferred revenue and expenses associated with those directories
published prior to the acquisition, higher expenses as a publisher and
significantly higher interest expense. The Preferred Stock dividend was $6.0
million for the second quarter 2003 and $48.1 million for the six months ended
June 30, 2003. These amounts include a "deemed dividend" of $1.9 million and
$40.1 million for the quarter and six-months ended June 30, 2003 for a
beneficial conversion feature. Net loss available to common shareholders, or net
loss after the Preferred Stock dividend, was $24.9 million and $108.2 million
for the quarter and six months ended June 30, 2003.
Basic and diluted earnings per share were a loss of $0.81 and $3.56 for the
quarter and six months ended June 30, 2003, respectively. Because there was a
net loss for the quarter and six months ended June 30, 2003, diluted earnings
per share were anti-dilutive compared to basic earnings per share. Diluted
earnings per share cannot be greater (or less of a loss) than basic earnings per
share; therefore, basic and diluted earnings per share reported for the quarter
and six months ended June 30, 2003 were the same. Basic and diluted earnings per
share for the quarter ended June 30, 2002 were $0.71 and $0.70, respectively and
basic and diluted earnings per share for the six months ended June 30, 2002 were
$1.16 and $1.14, respectively.
Adjusted and Pro Forma Results
As a result of the SPA acquisition, our 2003 results are not comparable to our
previously reported 2002 results. Additionally, due to purchase accounting rules
that prevent us from recognizing deferred revenue and expenses associated with
directories that published prior to the acquisition, our reported 2003 results
are not indicative of our underlying operations and financial performance.
Accordingly, management is presenting adjusted results for 2003 that eliminate
the purchase accounting impacts on revenue and expenses and pro forma results
for 2002 that assume the acquisition and related financing occurred January 1,
2002. Management believes that the presentation of these adjusted and pro forma
results will help investors better and more easily compare 2003 underlying
operating results against what the combined company performance would likely
have been in the comparable 2002 periods. However, while management believes
that the 2002 pro forma amounts reasonably represent results as if the two
businesses had been combined as of January 1, 2002, because of differences in
the application of accounting policies between SPA and RHD, management does not
believe the pro forma 2002 amounts are strictly comparable to adjusted 2003
results on a quarterly basis.
27
amounts in millions Three months ended June 30,
----------------- ----------------- ---- ----------------
Reported Adjustments Adjusted
----------------- ----------------- ---- ----------------
2003
Net revenue................................. $ 38.6 $ 105.0 (1) $ 143.6
Operating expenses.......................... 34.8 19.4 (2) 54.2
General and administrative expenses......... 12.2 -- 12.2
Depreciation and amortization............... 16.4 -- 16.4
Partnership income.......................... 35.3 -- 35.3
----------------- ----------------- ---- ----------------
Operating income............................ $ 10.5 $ 85.6 $ 96.1
----------------- ----------------- ---- ----------------
Reported Adjustments Pro forma
----------------- ----------------- ---- ----------------
2002
Net revenue................................. $ 19.9 $ 122.6 (3) $ 142.5
Operating expenses.......................... 14.1 53.2 (4) 67.3
General and administrative expenses......... 4.7 3.6 (5) 8.3
Depreciation and amortization............... 1.6 14.6 (6) 16.2
Partnership income.......................... 40.9 (4.3) (7) 36.6
----------------- ----------------- ---- ----------------
Operating income............................ $ 40.4 $ 46.9 $ 87.3
----------------- ----------------- ---- ----------------
amounts in millions Six months ended June 30,
------------------ ---------------- ---- ----------------
Reported Adjustments Adjusted
------------------ ---------------- ---- ----------------
2003
Net revenue................................. $ 51.0 $ 236.1 (1) $ 287.1
Operating expenses.......................... 66.8 46.0 (2) 112.8
General and administrative expenses......... 22.2 -- 22.2
Depreciation and amortization............... 32.5 -- 32.5
Partnership income.......................... 59.0 -- 59.0
------------------ ---------------- ---- ----------------
Operating (loss) income..................... $ (11.5) $ 190.1 $ 178.6
------------------ ---------------- ---- ----------------
Reported Adjustments Pro forma
------------------ ---------------- ---- ----------------
2002
Net revenue................................. $ 38.8 $ 248.3 (3) $ 287.1
Operating expenses.......................... 25.7 105.4 (4) 131.1
General and administrative expenses......... 9.8 9.3 (5) 19.1
Depreciation and amortization............... 3.2 29.2 (6) 32.4
Partnership income.......................... 68.0 (9.5) (7) 58.5
------------------ ---------------- ---- ----------------
Operating income............................ $ 68.1 $ 94.9 $ 163.0
------------------ ---------------- ---- ----------------
(1) Represents the net revenue for directories that published prior to the
acquisition that would have been recognized during the period had it
not been for purchase accounting adjustments required under GAAP.
(2) Represents the operating expenses for directories that published prior
to the acquisition that would have been recognized during the period,
in accordance with RHD's accounting policies, had it not been for
purchase accounting adjustments required under GAAP.
(3) Represents revenue recognized by SPA during the period less RHD
commission revenue and pre-press publishing revenue from SPA included
in the reported amounts. The RHD commission revenue and pre-press
publishing revenue would have been eliminated as intercompany revenue
had the acquisition occurred on January 1, 2002. Revenue recognized by
SPA for the quarter and six months ended June 30, 2002 was $136.5
million and $273.7 million, respectively, and RHD commission revenue
and pre-press publishing revenue from SPA for the quarter and six
months ended June 30, 2002 was $13.9 million and $25.4 million,
respectively.
28
(4) Represents operating expenses recognized by SPA during the period, net
of commission and pre-press publishing expenses for services provided
by RHD, plus expense related to the amortization of a required purchase
accounting adjustment to increase deferred directory costs acquired to
fair value. The SPA commission and pre-press publishing expenses for
services provided by RHD would have been eliminated as intercompany
expenses had the acquisition occurred on January 1, 2002. SPA expenses
for the quarter and six months ended June 30, 2002, net of commission
and pre-press publishing expenses for services provided by RHD were
$50.2 million and $97.9 million, respectively, and the additional
expense related to a required purchase accounting adjustment for the
quarter and six months ended June 30, 2002 was $3.0 million and $7.5
million, respectively.
(5) Represents general and administrative expenses recognized by SPA during
the period.
(6) Represents depreciation and amortization expense recognized by SPA for
the quarter and six months ended June 30, 2002 of $2.2 million and $4.3
million, respectively plus amortization expense for intangible assets
acquired in the acquisition assuming it occurred on January 1, 2002 of
$12.4 million and $24.9 million for the quarter and six months ended
June 30, 2002, respectively.
(7) Represents income from CenDon, LLC recognized by RHD and included in
reported amounts, which would have been eliminated as intercompany
income had the acquisition occurred on January 1, 2002.
Adjusted net revenue in the second quarter 2003 was $143.6 million, an increase
of 0.8% from $142.5 million of pro forma revenue in the second quarter of 2002.
The increase was primarily due to higher pre-press publishing revenue resulting
from the reconciliation of prior year volumes to contractual volumes, which
resulted in additional billings for services performed. Adjusted and pro forma
net revenue for the six months ended June 30, 2003 and 2002 was $287.1 million.
Adjusted operating expenses in the second quarter 2003 were $54.2 million
compared to pro forma operating expenses of $67.3 million for the same period
last year. Adjusted operating expenses for the six months ended June 30, 2003
were $112.7 million compared to pro forma operating expenses of $131.1 million
for the six months ended June 30, 2002. These decreases were attributable to
lower bad debt expense for the quarter and six months ended June 30, 2003 of
approximately $7 million and $9 million, respectively, and lower print and paper
costs for the quarter and six months ended June 30, 2003 of approximately $3
million and $6 million, respectively. The remaining variance is primarily due to
the timing of expense recognition caused by a difference between SPA and RHD
accounting policies.
Adjusted general and administrative expenses in the second quarter 2003 were
$12.2 million compared to pro forma general and administrative expenses of $8.4
million in the second quarter 2002. Adjusted general and administrative expenses
for the six months ended June 30, 2003 were $22.3 million compared to pro forma
general and administrative expenses of $19.1 million for the six months ended
June 30, 2002. The increase in the 2003 periods was due to by a charge of $3.1
million related to the shutdown of one of our pre-press publishing facilities in
Tennessee.
Advertising Sales
Management utilizes publication sales as its primary sales performance measure.
Management believes that a comparison of publication sales for the same
directories from one period to another gives a better indication of underlying
sales trends, economic conditions and business confidence than a comparison of
directory revenue due to the deferral and amortization method. Because directory
revenue is recognized ratably over the life of a directory under the deferral
and amortization method, the amount of revenue recognized during a period is not
directly related to the sales trends, economic conditions and business
confidence during that period. Publication sales are comparable to a
"same-store" sales measure and are utilized and disclosed by many directory
publishers, thus facilitating comparison of sales performance among publishers.
For the second quarter 2003, publication sales for the Donnelley segment were
$132.9 million, up 0.3% from publication sales for the Donnelley segment of
$132.5 million last year. The increase in publication sales resulted from
continued improvement in advertiser renewal rates offset by weaker performance
in several military markets due to troop deployment in connection with the Iraqi
conflict. Publication sales are a non-GAAP measure and the most comparable GAAP
measure related to the Donnelley segment is net revenue. A reconciliation of
publication sales to net revenue is presented below.
29
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
amounts in millions 2003 2002 2003 2002
--------------- --------------- ---------------- --------------
Publication sales in the period.................. $ 132.9 $ 132.5 $ 278.0 $ 275.6
Less publication sales for January 2003 directories
not recognized as revenue due to purchase
accounting.................................... (102.4)
Less publication sales not recognized as revenue in
current period................................ (111.9) (149.3)
Less publication sales for SPA directories not sold
by RHD........................................ (104.7) (200.5)
Plus revenue recognized from prior period
publication sales............................. 10.5 10.5
--------------- --------------- ---------------- --------------
Publication sales reported by RHD in 2002........ 27.8 75.1
Less the value of executed sales contracts reported
as calendar sales in prior periods............ (22.7) (45.9)
Plus the value of sales contracts executed during
the period to be reported as publication sales in
future periods................................ 47.9 66.5
--------------- --------------
Calendar sales reported by RHD in 2002........... $ 53.0 $ 95.7
--------------- --------------
Net directory advertising revenue................ 31.5 36.8
Net commission revenue on 2002 calendar sales.... $ 12.2 $ 22.0
Pre-press publishing revenue..................... 6.0 7.3 12.1 16.2
Other revenue.................................... 1.1 0.4 2.1 0.6
--------------- --------------- ---------------- --------------
Net revenue...................................... $ 38.6 $ 19.9 $ 51.0 $ 38.8
--------------- --------------- ---------------- --------------
Management also utilizes publication sales to evaluate the sales performance of
DonTech. Although partnership income from DonTech is not directly correlated to
DonTech publication sales, management believes that this measure provides a
better indication of underlying sales trends, economic conditions and business
confidence in the DonTech markets than calendar sales or partnership income.
Publication sales at DonTech represent the annual billing value of the SBC
directories published during the period for which DonTech sells advertising. For
the second quarter, publication sales were $90.8 million, which was consistent
with $90.6 million of sales in the same period of 2002. For the six month period
ended June 30, 2003, publication sales were $179.4 million compared to $184.7
million for the six-month period ended June 30, 2002. This decline of 2.9%
reflects the weak economic conditions and business confidence in the Midwest, as
well as the impact of local media competition in the Chicago market. Publication
sales for DonTech are a non-GAAP measure and the most comparable GAAP measure is
partnership income. A reconciliation of publication sales to calendar sales to
partnership income is provided below.
30
Three months ended Six months ended
June 30, June 30,
------------------------------ -------------------------------
amounts in million 2003 2002 2003 2002
-------------- --------------- --------------- ---------------
DonTech publication sales in the period.......... $ 90.8 $ 90.6 $ 179.4 $ 184.7
Less the value of executed sales contracts reported
as calendar sales in prior periods............ (86.8) (85.8) (173.1) (177.3)
Plus the value of sales contracts executed during the
period to be reported as publication sales in
future periods................................ 116.1 120.4 199.1 199.6
-------------- --------------- --------------- ---------------
DonTech calendar sales in the period............. $ 120.1 $ 125.2 $ 205.4 $ 207.0
-------------- --------------- --------------- ---------------
Commission revenue from above calendar sales..... $ 30.3 $ 31.6 $ 51.9 $ 52.2
Partnership net expenses......................... (16.8) (18.1) (32.0) (33.7)
-------------- --------------- --------------- ---------------
Partnership profit............................... $ 13.5 $ 13.5 $ 19.9 $ 18.5
-------------- --------------- --------------- ---------------
Company's 50% share of partnership profits....... $ 6.8 $ 6.8 $ 10.0 $ 9.3
Revenue participation income from SBC sales...... 28.5 29.8 49.0 49.2
-------------- --------------- --------------- ---------------
Total income from DonTech........................ 35.3 36.6 59.0 58.5
Priority distribution income from CenDon, LLC.... -- 4.3 -- 9.5
-------------- --------------- --------------- ---------------
Partnership income............................... $ 35.3 $ 40.9 $ 59.0 $ 68.0
-------------- --------------- --------------- ---------------
LIQUIDITY AND CAPITAL RESOURCES
In connection with the SPA acquisition, we entered into a $1,525 million Credit
Facility ("Credit Facility"), consisting of a $500 million Term Loan A, a $900
million Term Loan B and a $125 million Revolving Credit Facility (the
"Revolver") and issued $325 million 8 7/8% Senior Notes due 2010 ("Senior
Notes") and $600 million 10 7/8% Subordinated Notes due 2012 ("Subordinated
Notes," and collectively with the Senior Notes, the "Notes"). These funds were
used to acquire SPA, refinance existing debt and pay transactions costs. Amounts
outstanding prior to the acquisition under our former senior secured term
facilities of $114.2 million were refinanced and in connection with a tender
offer and exit consent solicitation, we repurchased $128.8 million of the 9 1/8%
Senior Subordinated Notes due 2008 ("Pre-acquisition Notes").
Our primary source of liquidity is cash flows from operations as well as
available borrowing capacity under the Revolver. At June 30, 2003, we had $100.9
million of borrowing capacity under the Revolver. Our primary liquidity
requirements are to fund operating expenses and service our debt. Our ability to
meet these requirements will depend on our ability to generate cash flow in the
future. Our primary sources of cash flow consist mainly of cash receipts from
the sale of advertising in our yellow pages directories, revenue participation
payments from SBC and cash distributions from DonTech. These sources are
directly dependent on the value of yellow pages advertising sold and can be
impacted by, among other factors, general economic conditions, competition from
other yellow pages directory publishers and other alternative products, consumer
confidence and the level of demand for yellow pages advertising. We believe that
cash flow from operations, along with borrowing capacity under the Revolver,
will be adequate to fund our operations and meet our debt service requirements
for at least the next 12 to 24 months. However, we make no assurances that our
business will generate sufficient cash flow from operations or that sufficient
borrowing will be available under the Revolver to enable us to fund our
operations and meet all debt service requirements.
Cash flow from operations was $131.5 million for the six months ended June 30,
2003 and $28.2 million for the same period in 2002. When we purchased SPA, we
acquired the rights associated with the collection of over $250 million of
accounts receivables under advertising contracts executed prior to the SPA
acquisition, but we did not acquire the associated deferred revenue liability.
As a result, the increase in deferred revenue resulted in a source of cash of
$209.0 million. Deferred revenue represents the value of published directories
that will be recognized as revenue over the remaining life of the directories.
Because we did not acquire the pre-acquisition deferred revenue liability of
SPA, we are not amortizing the revenue associated with those directories that
were published prior to the acquisition (including all January 2003
directories). However, we continue to bill and collect from advertisers the
amounts due for directories published prior to the acquisition in accordance
with terms of the advertising contract. The increase in other current assets
resulted in a use of cash of $24.6 million primarily due to payments made to
sales persons and vendors for directories that will publish at a later date.
These payments are deferred until the directory is published. Through June 30,
2003, we also made interest payments of $89.0 million for borrowings under our
Credit Facility, the Notes and Pre-acquisition Notes.
31
Cash used in investing activities was $370.8 million through June 30, 2003 and
$1.3 million through June 30, 2002. During the first quarter of 2003, we paid
$2,259.6 million to acquire SPA and fund transaction costs, of which, $1,825.0
million raised prior to year-end 2002 was released from escrow. Also prior to
year-end 2002, we issued $70 million of Preferred Stock to investment
partnerships affiliated with The Goldman Sachs Group, Inc. (collectively, the
"GS Funds") in November 2002. The net proceeds received of $69.3 million were
reported as restricted cash at year-end 2002. The remaining funds were obtained
from additional borrowings under the Credit Facility and the issuance of
Preferred Stock at the closing (see cash flow from financing activities below).
Cash provided by financing activities was $231.5 million through June 30,
2003 compared to cash used in financing activities of $39.2 million through June
30, 2002. On January 3, 2003, we borrowed $500 million under the Credit Facility
and received net proceeds after issuance costs of $461.3 million. We also issued
$130 million of Preferred Stock and received net proceeds after issuance costs
of $125.7 million. With the proceeds raised from the issuance of debt and
Preferred Stock, we refinanced pre-acquisition debt of $243 million, which
consisted of $114.2 million of variable rate bank debt and $128.8 million of the
Pre-acquisition Notes. Through June 30, 2003, we also repaid $128.7 million of
acquisition-related debt, net of $24.1 million of borrowings under the Revolver
and received $16.2 million from stock option exercises. Cash used by financing
activities through June 30, 2002 consisted of debt repayments of $42.5 million
and $3.3 million received from stock option exercises.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Risk Management
The Credit Facility bears interest at variable rates. Accordingly, our earnings
and cash flow are affected by changes in interest rates. The terms of the Credit
Facility required that we enter into hedge agreements to provide either a fixed
interest rate or interest rate protection on at least 50% of our total
outstanding debt. To satisfy the requirements under the Credit Facility and to
mitigate our exposure to changes in interest rates, in March 2003, we entered
into three interest rate swap agreements with a total notional value of $255
million. These interest rate swaps effectively convert $255 million of variable
rate debt to fixed rate debt. After the effect of the swaps, total fixed rate
debt comprises 54% of our total debt portfolio. Under the terms of these swap
agreements, we receive variable interest based on three-month LIBOR and pay a
fixed rate of 2.85%. The swaps mature on March 31, 2007.
The outstanding interest rate swaps expose us to credit risk in the event that
the counterparties to the agreements do not or cannot meet their obligations.
The notional amount is used to measure interest to be paid or received and does
not represent the amount of exposure to credit loss. The loss would be limited
to the amount that would have been received, if any, over the remaining life of
the swap agreements. The counterparties to the swaps are major financial
institutions and we expect the counterparties to be able to perform their
obligations under the swaps. We use derivative financial instruments for hedging
purposes only and not for trading or speculative purposes.
Market Risk Sensitive Instruments
The swaps and the hedged item (3 month LIBOR-based interest payments on $255
million of bank debt) have been designed so that the critical terms (interest
reset dates, duration and index) coincide. The interest rate swap agreements
have been designated as cash flow hedges. In accordance with SFAS 133, to the
extent the swaps are effective, changes in the fair value of the swaps are
recorded in other comprehensive income or loss, a component of shareholders'
equity. Any ineffectiveness is recorded through earnings. The fair value of the
swaps was determined based on quoted market prices. At June 30, 2003, the
unrealized fair value of the swaps, which represents the difference between what
the Company would pay to terminate the swaps, and the book value of the swaps,
was a loss of $5.5 million (a loss of $3.2 million after tax). The unrealized
after-tax fair value of the swaps was recognized in other comprehensive loss as
the swaps provided a perfect hedge of the hedged item (e.g. the cash flows from
the swaps exactly offset the interest payments made during the quarter on $255
million of bank debt).
32
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Based on their
evaluation, as of the end of the period covered by this Quarterly Report on
Form 10-Q, of the effectiveness of the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended), the principal executive
officer and principal financial officer of the Company have each concluded
that such disclosure controls and procedures are effective and sufficient
to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission's rules and forms.
(b) Changes in internal controls over financial reporting. There have not been
any significant changes in the Company's internal controls over financial
reporting identified in connection with the evaluation described in (a)
above that have materially affected, or is reasonable likely to materially
affect the Company's internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various legal proceedings arising in the ordinary course of
our business, as well as certain extraordinary litigation and tax matters
described below. We periodically assess our liabilities and contingencies in
connection with these matters based upon the latest information available to us.
For those matters where it is probable that we have incurred a loss and the loss
or range of loss can be reasonably estimated, we record reserves in our
consolidated financial statements. In other instances, we are unable to make a
reasonable estimate of any liability because of the uncertainties related to
both the probable outcome and amount or range of loss. As additional information
becomes available, we adjust our assessment and estimates of such liabilities
accordingly.
Based on our review of the latest information available, we believe our ultimate
liability in connection with pending legal proceedings, including the
extraordinary litigation and tax matters described below, will not have a
material adverse effect on our results of operations, cash flows or financial
position, as described further below.
In order to understand our potential exposure under the extraordinary litigation
and tax matters described below under the captions "Information Resources, Inc."
and "Tax Matters," one needs to understand the relationship between us and The
Dun & Bradstreet Corporation, and certain of its predecessors and affiliates
that, through various corporate reorganizations and contractual commitments,
have assumed varying degrees of responsibility with respect to such matters.
In November 1996, the company then known as The Dun & Bradstreet Corporation
("D&B1") separated (the "1996 Distribution") through a spin-off into three
separate public companies: D&B1, ACNielsen Corporation ("ACNielsen") and
Cognizant Corporation ("Cognizant"). In June 1998, D&B1 separated (the "1998
Distribution") through a spin-off into two separate public companies: D&B1,
which changed its name to R.H. Donnelley Corporation ("Donnelley"), and a new
company named The Dun & Bradstreet Corporation ("D&B2"). Later in 1998,
Cognizant separated (the "Cognizant Distribution") through a spin-off into two
separate public companies: IMS Health Incorporated ("IMS") and Nielsen Media
Research, Inc. ("NMR"). In September 2000, D&B2 separated (the "2000
Distribution") through a spin-off into two separate public companies: D&B2,
which changed its name to Moody's Corporation ("Moody's"), and a new company
named The Dun & Bradstreet Corporation ("D&B3," and together with D&B1 and D&B2,
also referred to elsewhere in this Quarterly Report on Form 10-Q as "D&B"). As a
result of the form of our separation from D&B, we are the corporate successor
of, and technically the defendant and taxpayer referred to below as D&B.
Rockland Yellow Pages
In 1999, Sandy Goldberg, Dellwood Publishing, Inc. and Rockland Yellow Pages
initiated a lawsuit against the Company and Bell Atlantic Corporation in the
United States District Court for the Southern District of New York. The Rockland
Yellow Pages is a proprietary directory that competes against a Bell Atlantic
directory in the same region, for which we served as Bell Atlantic's advertising
sales agent through June 30, 2000. The complaint alleged that the defendants
disseminated false information concerning the Rockland Yellow Pages, which
resulted in damages to the Rockland Yellow Pages. In May 2001, the District
Court dismissed substantially all of plaintiffs' claims, and in August 2001, the
remaining claims were either withdrawn by the plaintiffs or dismissed by the
District Court. The plaintiffs then filed a complaint against the same
defendants in New York State Supreme Court, in Rockland County, alleging
virtually the same state law tort claim previously dismissed by the District
Court and seeking unspecified damages. In October 2001, defendants filed a
motion to dismiss this complaint. In May 2002, the Court granted defendants'
motion to dismiss the complaint. Plaintiffs filed an appeal of this dismissal.
In April 2003, the Appellate Division dismissed all but one count of the
complaint, which count alleges immaterial compensatory damages with respect to
only one advertiser. Accordingly, we presently do not believe that the final
outcome of this matter will have a material adverse effect on our results of
operations or financial condition.
33
Information Resources, Inc.
In 1996, Information Resources, Inc. ("IRI"), filed a complaint in the United
States District Court for the Southern District of New York, naming as
defendants the Company, as successor of D&B, ACNielsen Company and IMS
International Inc., at the time of the filing, all wholly owned subsidiaries of
D&B. IRI alleges, among other things, various violations of the antitrust laws,
including alleged violations of Sections 1 and 2 of the Sherman Act. The
complaint also alleges a claim of tortious interference with a contract and a
claim of tortious interference with a prospective business relationship. These
claims relate to the acquisition by defendants of Survey Research Group Limited
("SRG"). IRI alleges SRG violated an alleged agreement with IRI when it agreed
to be acquired by the defendants and that the defendants induced SRG to breach
that agreement. IRI is seeking damages in excess of $350 million, which amount
IRI seeks to treble under antitrust laws. IRI is also seeking punitive damages
of an unspecified amount. No trial date has been set, and discovery is ongoing.
Under the agreements relating to the 1996 Distribution, Cognizant, AC Nielsen
and D&B agreed to conduct a joint defense and allocated liabilities amongst
themselves. Under the agreements relating to the 1998 Distribution, D&B assumed
the defense and agreed to indemnify us against any payments that we may be
required to make, including related legal fees. As required by those agreements,
Moody's Corporation, which subsequently separated from D&B in the 2000
Distribution, has agreed to be jointly and severally liable with D&B for the
indemnity obligation to us. At this stage in the proceedings, we are unable to
predict the outcome of this matter. While we cannot assure you as to any
outcome, management presently believes that D&B and Moody's have sufficient
financial resources, borrowing capacity and indemnity rights against IMS and NMR
(who succeeded to Cognizant's indemnity obligations under the Cognizant
Distribution) to reimburse us for any payments we may be required to make and
related costs we may incur in connection with this matter.
Tax Matters
D&B entered into global tax planning initiatives in the normal course of its
business, principally through tax-free restructurings of both their foreign and
domestic operations. The status of Internal Revenue Service ("IRS") reviews of
these initiatives is summarized below.
Pursuant to a series of agreements relating to the 1996, 1998, Cognizant and
2000 Distributions, IMS and NMR are jointly and severally liable for, and must
pay one-half, and D&B and Moody's are jointly and severally liable for, and must
pay the other half, of any payments over $137 million for taxes, accrued
interest and other amounts resulting from unfavorable IRS rulings on the tax
matters summarized below (other than the matter summarized below as
"Amortization Expense Deductions - 1997 - 2002," for which D&B and Moody's,
jointly and severally, are solely responsible). D&B, on our behalf, was
contractually obligated to pay, and did pay, the first $137 million of tax
liability in connection with the matter summarized below as "Utilization of
Capital Losses - 1989 - 1990." Under the agreements relating to the 1998
Distribution, D&B agreed to assume the defense and to indemnify us for any tax
liability that may be assessed against us and any related costs and expenses
that we may incur in connection with any of these tax matters. Also, as required
by those agreements, Moody's has agreed to be jointly and severally liable with
D&B for the indemnity obligation to us. Under the agreements relating to the
2000 Distribution, D&B and Moody's have, between each other, agreed to each be
financially responsible for 50% of any potential liabilities that may arise to
the extent such potential liabilities are not directly attributable to each
party's respective business operations.
While we cannot assure you as to any outcome in these matters, management
presently believes that D&B and Moody's have sufficient financial resources,
borrowing capacity and indemnity rights against IMS and NMR (who succeeded to
Cognizant's indemnity obligations under the Cognizant Distribution) to reimburse
us for any payments we may be required to make and related costs we may incur in
connection with these tax matters.
34
Utilization of Capital Losses - 1989 - 1990
In 2000, D&B filed an amended tax return with respect to the utilization of
capital losses in 1989 and 1990 in response to a formal IRS assessment. The
amended tax return reflected an additional $561.6 million of tax and interest
due. In 2000, D&B paid the IRS $349.3 million while IMS (on behalf of itself and
NMR) paid $212.3 million to the IRS. We understand that this payment was made
under dispute in order to stop additional interest from accruing, that D&B is
contesting the IRS's formal assessment and would also contest the assessment of
amounts, if any, in excess of the amounts paid, and that D&B has filed a
petition for a refund in the United States District Court. This case is expected
to go to trial in 2004.
Subsequent to making its payment to the IRS in 2000, IMS sought to obtain
partial reimbursement from NMR under the terms of the agreements relating to the
Cognizant Distribution. NMR paid IMS less than IMS sought. Accordingly, in 2001,
IMS filed an arbitration proceeding against NMR claiming that NMR underpaid to
IMS its proper allocation of the above tax payments as provided by the
agreements relating to the Cognizant Distribution. Neither D&B nor we were party
to the Cognizant Distribution. IMS nonetheless sought to include us in this
arbitration, arguing that if NMR should prevail in its interpretation against
IMS, then IMS could seek to enforce the same interpretation against us (as
successor to D&B) under the agreements relating to the 1996 Distribution. The
arbitration panel ruled that we were a proper party to this arbitration
proceeding. In April 2003, the arbitration panel dismissed all claims against us
and found for IMS. If, on appeal of that ruling, NMR should prevail against IMS
and, in turn, IMS should prevail against us, then we believe that our additional
liability would be approximately $15 million, net of tax benefits. As noted
above, D&B and Moody's would be jointly and severally obligated to indemnify us
against any such additional liability and related costs.
We believe the fact that D&B and IMS have already paid the IRS a substantial
amount of additional taxes with respect to the contested tax planning strategies
significantly mitigates our risk. While no assurances can be given, we currently
believe that D&B and Moody's have sufficient financial resources, borrowing
capacity and indemnity rights against IMS and NMR to reimburse us for any
payments we may be required to make and related costs we may incur with respect
to this matter.
Royalty Expense Deductions - 1994 - 1996
During the second quarter of 2002, D&B (on our behalf) received a Notice of
Proposed Adjustment from the IRS with respect to a transaction entered into in
1993. In this Notice, the IRS proposed to disallow certain royalty expense
deductions claimed by D&B on its 1994, 1995 and 1996 tax returns. The IRS
previously concluded an audit of this transaction for taxable years 1993 and
1994 and did not disallow any similarly claimed deductions. We understand that
D&B disagrees with the position taken by the IRS in its Notice and has filed a
responsive brief to this effect with the IRS. If the IRS were to issue a formal
assessment consistent with the Notice, then a payment of the disputed amounts
would be required, if D&B opted to challenge the assessment in U.S. District
Court rather than in U.S. Tax Court. In the event of such challenge by D&B, the
required payment by D&B to the IRS would be up to $42 million ($48 million
offset by a $6 million tax benefit). In verbal communications between D&B and
the IRS during 2002, we understand that the IRS has expressed some willingness
to withdraw its proposed disallowance of certain royalty expense deductions of
$7.5 million for 1994. However, we also understand that the IRS has expressed
its intent to seek penalties of $7.5 million for 1995 and 1996 based on its
interpretation of applicable law. We have been advised that D&B would challenge
the IRS's interpretation. Again, under the agreements relating to the 1998 and
2000 Distributions, D&B and Moody's have agreed to jointly and severally defend
and indemnify us against any such liability and related costs.
Notwithstanding the verbal communications with the IRS in 2002 noted above
regarding royalty expense deductions of $7.5 million for 1994, in a February
2003 letter to D&B (on our behalf) the IRS asserted that it intends to take a
position regarding prior tax years that would have the effect of disallowing a
portion of the 1994 royalty expense deduction, our share of which would be $5
million if the IRS prevailed. We understand that D&B disagrees with the IRS's
position. Also, in February 2003, D&B (on our behalf) received a Preliminary
Partnership Summary Report from the IRS that challenges the tax treatment of
certain royalty payments received by a partnership in which D&B was a partner.
As stated in its Report, the IRS would reallocate certain partnership income to
D&B, which if the IRS prevailed would require an additional payment from us of
$20 million (which includes tax, interest and penalty, net of associated tax
benefits). Again, under the agreements relating to the 1998 and 2000
Distributions, D&B and Moody's have agreed to jointly and severally defend and
indemnify us against any such liability and related costs.
35
Amortization Expense Deductions - 1997 - 2002
We understand that the IRS has sought certain documentation from D&B with
respect to a transaction entered into in 1997 that produces amortization expense
deductions for D&B. While we understand that D&B believes the deductions are
appropriate, the IRS could ultimately challenge them and issue an assessment. If
the IRS were to prevail or the assessment were to be challenged by us in U.S.
District Court, we understand that D&B estimates that its cash payment to the
IRS with respect to deductions claimed to date and including any potential
assessment of penalties of $6.5 million, could be up to $46.4 million, or $43
million net of associated tax benefits. This transaction is scheduled to expire
in 2012 and, unless earlier terminated by D&B, the cash exposure, based on
current interest rates and tax rates, would increase at a rate of approximately
$2.3 million per quarter (including potential penalties) as future amortization
expenses are deducted. Again, under the agreements relating to the 1998 and 2000
Distributions, D&B and Moody's are required to jointly and severally indemnify
us against any such liability and related costs.
Conclusion
As a result of our assessment of our exposure in these matters, especially in
light of our indemnity arrangements with D&B and Moody's, and their financial
resources, borrowing capacity and indemnity rights against IMS and NMR, no
material amounts have been accrued for in our consolidated financial statements
for any of these D&B-related litigation and tax matters.
Coastal Termite and Pest Control
In 2001, Marnan Group, Inc., doing business as Coastal Termite and Pest Control
("Coastal"), filed a complaint in the United States District Court for the
Middle District of Florida against SPA. The complaint, as amended, alleged that
SPA breached certain directory advertising contracts between 1996 and 1999,
fraudulently induced Coastal to enter into another directory advertising
contract and tortiously interfered with Coastal's business relationships with
its customers. Coastal is seeking damages for lost contract benefits, lost
profits and diminution of business value in an unspecified amount, including
pre-judgment interest. In January 2002, SPA filed a motion to dismiss certain of
Coastal's claims. In September 2002, the court denied SPA's motion to dismiss.
Nonetheless, we do not believe that the final outcome of this matter will have a
material adverse effect on our results of operations or financial condition.
Other matters
We are also involved in other legal proceedings, claims and litigation arising
in the ordinary conduct of our business. Although we cannot assure you of any
outcome, management presently believes that the outcome of such legal
proceedings will not have a material adverse effect on our results of operations
or financial condition.
36
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Stockholders ("Meeting") was held in White Plains, N.Y. on
May 1, 2003. At the Meeting, the Company's stockholders elected each of the
three Class I directors nominated for election by the Board of Directors to
serve a three-year term as follows:
Votes
Name Votes For Withheld
---- --------- --------
Nancy E. Cooper 31,503,108 4,490,248
Robert Kamerschen 35,435,230 558,126
David C. Swanson 35,602,607 390,749
The Board of Directors now comprises nine members consisting of three classes of
three directors each. The other members of our Board of Directors (Kenneth G.
Campbell, Robert R. Gheewalla, Terrence M. O'Toole, Carol J. Parry, David M.
Veit and Barry Lawson Williams) were not subject to re-election by stockholders
this year and continue in office.
At the Meeting, the Company's stockholders also ratified the appointment of
PricewaterhouseCoopers LLP ("PwC") to serve as the Company's independent
accountants for 2003 as follows:
Votes For Votes Against Abstentions
--------- ------------- -----------
Ratification of the appointment of PwC 30,133,922 5,831,302 28,132
Lastly, at the Meeting, the Company's stockholders also approved a stockholder
proposal relating to the Company's stockholder rights plan, as follows:
Votes For Votes Against Abstentions
--------- ------------- -----------
Stockholder Proposal re: Rights Plan 16,350,870 13,303,609 6,338, 877
With respect to the proposal relating to the Company's stockholder rights plan,
abstentions also included broker non-votes.
The Company announced in February that the Board had adopted a Three-Year
Independent Director Evaluation ("TIDE") policy with respect to its rights plan.
Under this TIDE policy, a committee comprised of independent directors of the
Company will review and evaluate the stockholder rights plan at least once every
three years to determine, in light of all relevant factors, whether the plan
continues to serve the best interests of the Company and all of its stockholders
or whether it should be modified or terminated. The Board has completed the
first review of its stockholder rights plan pursuant to its TIDE policy. The
Corporate Governance Committee, which is an independent Board committee,
conducted the review with the advice and assistance of its outside financial and
legal advisors. The Committee concluded after a review of all relevant factors
that the rights plan continues to serve the best interests of the Company and
all of its stockholders. Accordingly, the Committee recommended and the Board
resolved to maintain the rights plan in its current form. The next TIDE review
of the Company's rights plan will occur not later than May 2006.
37
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
No. Document
------ --------
3.1 Certificate of Incorporation of the Company (incorporated by reference
to Exhibit 3.1 to the Quarterly Report on Form 10-Q for the three
months ended March 31, 1999, Commission File No. 001-07155)
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to
the Quarterly Report on Form 10-Q for the three months ended March 31,
1999, Commission File No. 001-07155)
3.3 Certificate of Incorporation of R.H. Donnelley Inc. (incorporated by
reference to Exhibit 3.3 to Amendment No. 1 to the Registration
Statement on Form S-4, filed with the Securities and Exchange
Commission on August 7, 1998, Registration No. 333-59287)
3.4 By-laws of R.H. Donnelley Inc. (incorporated by reference to Exhibit
3.4 to the Registration Statement on Form S-4, filed with the
Securities and Exchange Commission on July 17, 1998, Registration No.
333-59287)
3.5 Certificate of Designations of Convertible Cumulative Preferred Stock
of R.H. Donnelley Corporation (incorporated by reference to Exhibit
3.2 to the Current Report on Form 8-K, filed with the Securities and
Exchange Commission on January 17, 2003, Commission File No.
001-07155)
3.6 Certificate of Designations of Series B-1 Convertible Cumulative
Preferred Stock of R.H. Donnelley Corporation (incorporated by
reference to Exhibit 3.1 to the Current Report Form 8-K, filed with
the Securities and Exchange Commission on December 3, 2002, Commission
File No. 001-07155)
4.1 Indenture dated as of June 5, 1998 between R.H. Donnelley Inc., as
Issuer, the Company, as Guarantor, and the Bank of New York, as
Trustee, with respect to the 91/8% Senior Subordinated Notes due 2008
(incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-4, filed with the Securities and Exchange
Commission on July 17, 1998, Registration No. 333-59287)
4.2 Form of the 91/8% Senior Subordinated Notes due 2008 (included in
Exhibit 4.1)
4.3 Company Guarantee (included in Exhibit 4.1)
4.4 First Supplemental Indenture, dated as of November 25, 2002, among
R.H. Donnelley Inc., as Issuer, and R.H. Donnelley Corporation, R.H.
Donnelley Acquisitions, Inc., R.H. Donnelley APIL, Inc., R.H.
Donnelley CD, Inc. and Get Digital Smart.com, Inc., as Guarantors, and
the Bank of New York, as Trustee, with respect to the 9 1/8% Senior
Subordinated Notes due 2008 (incorporated by reference to Exhibit 4.1
to the Current Report on Form 8-K, filed with the Securities and
Exchange Commission on November 25, 2002, Commission File No.
001-07155)
38
Exhibit
No. Document
------ --------
4.5 Second Supplemental Indenture, dated as of December 20, 2002, among
R.H. Donnelley Inc., as Issuer, and R.H. Donnelley Corporation, R.H.
Donnelley Acquisitions, Inc., R.H. Donnelley Acquisitions II, Inc.,
R.H. Donnelley APIL, Inc., R.H. Donnelley CD, Inc. and Get Digital
Smart.com, Inc., as Guarantors, and the Bank of New York, as Trustee,
with respect to the 9 1/8% Senior Subordinated Notes due 2008
(incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K, filed with the Securities and Exchange Commission on
December 20, 2002, Commission File No. 001-07155)
4.6 Third Supplemental Indenture, dated as of December 20, 2002 (operative
as of January 3, 2003), among R.H. Donnelley Inc., as Issuer, and R.H.
Donnelley Corporation, R.H. Donnelley Acquisitions, Inc., R.H.
Donnelley Acquisitions II, Inc., R.H. Donnelley APIL, Inc., R.H.
Donnelley CD, Inc. and Get Digital Smart.com, Inc., as Guarantors, and
the Bank of New York, as Trustee, with respect to the 9 1/8% Senior
Subordinated Notes due 2008 (incorporated by reference to Exhibit 4.1
to the Current Report on Form 8-K, filed with the Securities and
Exchange Commission on January 6, 2003, Commission File No. 001-07155)
4.7 Indenture dated as of December 3, 2002 between R.H. Donnelley Inc. (as
successor to R.H. Donnelley Finance Corporation I), as Issuer, and the
Bank of New York, as Trustee, with respect to the 8 7/8% Senior Notes
due 2010 (incorporated by reference to Exhibit 4.13 to the Annual
Report on Form 10-K filed with the Securities and Exchange Commission
on March 20, 2003, Commission File No. 001-07155)
4.8 Supplemental Indenture dated as of January 3, 2003 among R.H.
Donnelley Inc., as Issuer, the Company and the other guarantors
signatory thereto, as Guarantors, and the Bank of New York, as
Trustee, with respect to the 8 7/8% Senior Notes due 2010
(incorporated by reference to Exhibit 4.14 to the Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March
20, 2003)
4.9 Form of 8 7/8% Senior Notes due 2010 (included in Exhibit 4.7)
4.10 Guarantees relating to the 8 7/8% Senior Notes due 2010 (incorporated
by reference to Exhibit 4.16 to the Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 20, 2003,
Commission File No. 001-07155)
4.11 Indenture dated as of December 3, 2002 between R.H. Donnelley Inc. (as
successor to R.H. Donnelley Finance Corporation I), as Issuer, and the
Bank of New York, as Trustee, with respect to the 10 7/8% Senior
Subordinated Notes due 2012 (incorporated by reference to Exhibit 4.17
to the Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 20, 2003, Commission File No. 001-07155)
4.12 Supplemental Indenture dated as of January 3, 2003 among R.H.
Donnelley Inc., as Issuer, the Company and the other guarantors
signatory thereto, as Guarantors, and the Bank of New York, as
Trustee, with respect to the 10 7/8% Senior Subordinated Notes due
2012 (incorporated by reference to Exhibit 4.18 to the Annual Report
on Form 10-K filed with the Securities and Exchange Commission on
March 20, 2003, Commission File No. 001-07155)
4.13 Form of 10 7/8% Senior Subordinated Notes due 2012 (included in
Exhibit 4.11)
4.14 Guarantees relating to the 10 7/8% Senior Subordinated Notes due 2012
(incorporated by reference to Exhibit 4.20 to the Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March
20, 2003, Commission File No. 001-07155)
39
Exhibit
No. Document
------ --------
4.15 Registration Rights Agreement, dated as of December 3, 2002, by and
among R.H. Donnelley Inc. and Salomon Smith Barney, Bear, Stearns &
Co., Inc. and Deutsche Bank Securities Inc., as representatives of the
initial purchasers (incorporated by reference to Exhibit 4.15 to the
Registration Statement on Form S-3 filed with the SEC on July 31,
2003, Registration No. 333-104964)
4.16 Rights Agreement, dated as of October 27, 1998 between R.H. Donnelley
Corporation and First Chicago Trust Company (incorporated by reference
to Exhibit 4 to the Registration Statement on Form 8-A, filed with the
Securities and Exchange Commission on November 5, 1998, Registration
No. 001-07155)
4.17 Amendment No. 1 to Rights Agreement dated as of February 26, 2001 by
and among R.H. Donnelley Corporation, First Chicago Trust Company of
New York (as initial Rights Agent) and The Bank of New York (as
successor Rights Agent) (incorporated by reference to Exhibit 4.5 to
the Annual Report on Form 10-K for the year ended December 31, 2000,
Commission File No. 001-07155)
4.18 Amendment No. 2 to Rights Agreement, dated as of September 21, 2002,
between the Company and The Bank of New York, as successor Rights
Agent (incorporated by reference to Exhibit 4.1 to the Current Report
on Form 8-K, filed with the Securities and Exchange Commission on
October 1, 2002, Commission File No. 001-07155)
4.19 Form of Warrant Agreement, dated as of November 25, 2002, between the
Company and investment partnerships affiliated with The Goldman Sachs
Group, Inc. (incorporated by reference to Exhibit 4.1 to the Current
Report on Form 8-K, filed with the Securities and Exchange Commission
on January 17, 2003, Commission File No. 001-07155)
10.1 Form of Distribution Agreement between the Company (f/k/a The Dun &
Bradstreet Corporation) and The New Dun & Bradstreet Corporation
(incorporated by reference to Exhibit 99.2 to the Form 8-K of the
Company (f/k/a The Dun & Bradstreet Corporation), filed on June 30,
1998, Commission File No. 001-07155)
10.2 Form of Tax Allocation Agreement between the Company (f/k/a The Dun &
Bradstreet Corporation) and The New Dun & Bradstreet Corporation
(incorporated by reference to Exhibit 99.3 to the Form 8-K of the
Company (f/k/a The Dun & Bradstreet Corporation), filed on June 30,
1998, Commission File No. 001-07155)
10.3 Form of Employee Benefits Agreement between the Company (f/k/a The Dun
& Bradstreet Corporation) and The New Dun & Bradstreet Corporation
(incorporated by reference to Exhibit 99.4 to the Form 8-K of the
Company (f/k/a The Dun & Bradstreet Corporation), filed on June 30,
1998, Commission File No. 001-07155)
10.4 Form of Intellectual Property Agreement between the Company (f/k/a The
Dun & Bradstreet Corporation) and The New Dun & Bradstreet Corporation
(incorporated by reference to Exhibit 99.5 to the Form 8-K of the
Company (f/k/a The Dun & Bradstreet Corporation), filed on June 30,
1998, Commission File No. 001-07155)
10.5 Form of Amended and Restated Transition Services Agreement between the
Company (f/k/a The Dun & Bradstreet Corporation), The New Dun &
Bradstreet Corporation, Cognizant Corporation, IMS Health
Incorporated, ACNielsen Corporation and Gartner Group, Inc.
(incorporated by reference to Exhibit 99.9 to the Form 8-K of the
Company (f/k/a The Dun & Bradstreet Corporation), filed on June 30,
1998, Commission File No. 001-07155)
40
Exhibit
No. Document
------ --------
10.6 Credit Agreement among the Company, R.H. Donnelley Inc., The Chase
Manhattan Bank, as Administrative Agent and the Lenders party thereto
(incorporated by reference to Exhibit 10.9 to the Registration
Statement on Form S-4, filed with the Securities and Exchange
Commission on July 17, 1998, Registration No. 333-59287)
10.7 First Amendment to Credit Agreement, dated as of March 4, 1999, among
the Company, R.H. Donnelley Inc., The Chase Manhattan Bank, as
Administrative Agent, and the Lenders party thereto (incorporated by
reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
three months ended March 31, 1999, Commission File No. 001-07155)
10.8 DonTech II Partnership Agreement, effective August 19, 1997, by and
between R.H. Donnelley Inc. (f/k/a The Reuben H. Donnelley
Corporation) and Ameritech Publishing of Illinois, Inc. (incorporated
by reference to Exhibit 10.10 to Amendment No. 1 to the Registration
Statement on Form S-4, filed with the Securities and Exchange
Commission on August 7, 1998, Registration No. 333-59287)
10.9 Revenue Participation Agreement, dated as of August 19, 1997, by and
between APIL Partners Partnership and R.H. Donnelley Inc. (f/k/a The
Reuben H. Donnelley Corporation) (incorporated by reference to Exhibit
10.11 to Amendment No. 1 to the Registration Statement on Form S-4,
filed with the Securities and Exchange Commission on August 7, 1998,
Registration No. 333-59287)
10.10 Master Agreement, executed August 19, 1997, by and among R.H.
Donnelley Inc. (f/k/a The Reuben H. Donnelley Corporation), the
Company (f/k/a The Dun & Bradstreet Corporation), The Am-Don
Partnership a/k/a DonTech, DonTech II, Ameritech Publishing, Inc.,
Ameritech Publishing of Illinois, Inc., Ameritech Corporation, DonTech
I Publishing Company LLC and the APIL Partners Partnership
(incorporated by reference to Exhibit 10.12 to Amendment No. 1 to the
Registration Statement on Form S-4, filed with the Securities and
Exchange Commission on August 7, 1998, Registration No. 333-59287)
10.11 Exclusive Sales Agency Agreement, effective August 19, 1997, between
APIL Partners Partnership and DonTech II (incorporated by reference to
Exhibit 10.13 to Amendment No. 1 to the Registration Statement on Form
S-4, filed with the Securities and Exchange Commission on August 7,
1998, Registration No. 333-59287)
10.12 Second Amended and Restated Partnership Agreement, effective as of
August 19, 1997, by and between R.H. Donnelley Inc. (f/k/a The Reuben
H. Donnelley Corporation) and Ameritech Publishing of Illinois
(incorporated by reference to Exhibit 10.14 to Amendment No. 1 to the
Registration Statement on Form S-4, filed with the Securities and
Exchange Commission on August 7, 1998, Registration No. 333-59287)
10.13 Agreement for Publishing Services, dated as of January 1, 2002
between Ameritech Publishing Inc. and R.H. Donnelley Inc. (certain
portions of this exhibit have been omitted and filed separately with
the Securities and Exchange Commission pursuant to an Application for
an Order Granting Confidential Treatment) (incorporated by reference
to Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for
the three months ended March 31, 2002, Commission File No. 001-07155)
41
Exhibit
No. Document
------ --------
10.14 Limited Liability Company Agreement of CenDon, L.L.C. dated April 27,
2000 between R.H. Donnelley Inc. and Centel Directory Company (certain
portions of this exhibit have been omitted and filed separately with
the Securities and Exchange Commission pursuant to an Application for
an Order Granting Confidential Treatment) (incorporated by reference
to Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q for
the three months ended June 30, 2002, Commission File No. 001-07155)
10.15 Sales Agency Agreement dated April 27, 2000 among R.H. Donnelley
Inc., Centel Directory Company and CenDon, L.L.C. (incorporated by
reference to Exhibit 10.15 to the Company's Quarterly Report on Form
10-Q for the three months ended June 30, 2002, Commission File No.
001-07155)
10.16 Agreement for Publishing Services dated April 27, 2000 between R.H.
Donnelley and CenDon, L.L.C. (certain portions of this exhibit have
been omitted and filed separately with the Securities and Exchange
Commission pursuant to an Application for an Order Granting
Confidential Treatment) (incorporated by reference to Exhibit 10.16 to
the Company's Quarterly Report on Form 10-Q for the three months ended
June 30, 2002, Commission File No. 001-07155)
10.17^ Key Employees' Performance Unit Plan, as amended and restated
(incorporated by reference to Exhibit 10.15 to Amendment No. 3 to the
Registration Statement on Form S-4, filed with the Securities and
Exchange Commission on September 28, 1998, Registration No. 333-59287)
10.18^ 1991 Key Employees' Stock Option Plan, as amended and restated
through April 25, 2000 (incorporated by reference to Exhibit 10.17 to
the Company's Quarterly Report on Form 10-Q for the three months ended
March 31, 2000, Commission File No. 001-07155)
10.19^ Amended and Restated 1998 Directors' Stock Plan (incorporated by
reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, Commission File No. 001-07155)
10.20^ Pension Benefit Equalization Plan (incorporated by reference to
Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001, Commission File No. 001-07155)
10.21^ 2001 Stock Award and Incentive Plan (incorporated by reference to
Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001, Commission File No. 001-07155)
10.22^ 2001 Partner Share Plan (incorporated by reference to Exhibit 99.1
to Registration Statement on Form S-8, filed with the Securities and
Exchange Commission on April 30, 2001, Registration No. 333-59790)
10.23^ Form of Non-Qualified Stock Option Agreement (incorporated by
reference to Exhibit 99.02 to Registration Statement on Form S-8,
filed with the Securities and Exchange Commission on July, 25, 2001,
Registration No. 333-65822)
10.24^ Form of Annual Incentive Program Award (incorporated by reference to
Exhibit 99.03 to Registration Statement on Form S-8, filed with the
Securities and Exchange Commission on July, 25, 2001, Registration No.
333-65822)
42
Exhibit
No. Document
------ --------
10.25^ Form of Performance Unit Program Award (incorporated by reference to
Exhibit 99.04 to Registration Statement on Form S-8, filed with the
Securities and Exchange Commission on July, 25, 2001, Registration No.
333-65822)
10.26^ Deferred Compensation Plan (incorporated by reference to Exhibit
4.01 to the Company's Registration Statement on Form S-8, filed with
the Securities and Exchange Commission on November 24, 1999,
Registration No. 333-91613)
10.27^ Amended and Restated Employment Agreement dated as of December 27,
2001 between the Company and Frank R. Noonan (incorporated by
reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001, Commission File No. 001-07155)
10.28^ Amended and Restated Employment Agreement dated as of December 27,
2001 between the Company and Philip C. Danford (incorporated by
reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001, Commission File No. 001-07155)
10.29^ Employment Agreement effective as of May 1, 2002 between the Company
and David C. Swanson (incorporated by reference to Exhibit 10.29 to
the Company's Quarterly Report on Form 10-Q for the three months ended
June 30, 2002, Commission File No. 001-07155)
10.30^ Employment Agreement effective September 21, 2002 between the
Company and Peter J. McDonald (incorporated by reference to Exhibit
10.30 to the Company's Quarterly Report on Form 10-Q for the three
months ended September 30, 2002, Commission File No. 001-07155)
10.31^ Employment Agreement effective March 1, 2002 between the Company and
Steven M. Blondy (incorporated by reference to Exhibit 10.30 to the
Company's Quarterly Report on Form 10-Q for the three months ended
June 30, 2002, Commission File No. 001-07155)
10.32^ Employment Agreement dated as of September 28, 1998 between the
Company and Frank M. Colarusso (incorporated by reference to Exhibit
10.32 to the Annual Report on Form 10-K for the year ended December
31, 2000, Commission File No. 001-07155)
10.33^ Amendment No. 1 to Employment Agreement dated as of July 27, 2000
between the Company and Frank M. Colarusso (incorporated by reference
to Exhibit 10.33 to the Annual Report on Form 10-K for the year ended
December 31, 2000, Commission File No. 001-07155)
10.34^ Amendment No. 2 to Employment Agreement dated as of February 27,
2001 between the Company and Frank M. Colarusso (incorporated by
reference to Exhibit 10.34 to the Annual Report on Form 10-K for the
year ended December 31, 2000, Commission File No. 001-07155)
10.35^ Employment Agreement dated as of September 26, 2000 between the
Company and William C. Drexler (incorporated by reference to Exhibit
10.35 to the Annual Report on Form 10-K for the year ended December
31, 2000, Commission File No. 001-07155)
10.36^ Amendment No. 1 to Employment Agreement dated as of February 27,
2001 between the Company and William C. Drexler (incorporated by
reference to Exhibit 10.36 to the Annual Report on Form 10-K for the
year ended December 31, 2000, Commission File No. 001-07155)
43
Exhibit
No. Document
------ --------
10.37^ Employment Agreement dated as of January 1, 2001 between the Company
and Robert J. Bush (incorporated by reference to Exhibit 10.37 to the
Annual Report on Form 10-K for the year ended December 31, 2000,
Commission File No. 001-07155)
10.38^ Amendment No. 1 to Employment Agreement dated as of February 27,
2001 between the Company and Robert J. Bush (incorporated by reference
to Exhibit 10.38 to the Annual Report on Form 10-K for the year ended
December 31, 2000, Commission File No. 001-07155)
10.39^ Separation Agreement and Release dated as of July 25, 2003 between
the Company and Frank M. Colarusso
10.40 Stock Purchase Agreement, dated as of September 21, 2002, by and
among R.H. Donnelley Corporation, Sprint Corporation and Centel
Directories LLC (incorporated by reference to Exhibit 2.1 to the
Current Report on Form 8-K dated October 1, 2002, Commission File No.
001-07155)
10.41 Preferred Stock and Warrant Purchase Agreement, dated as of September
21, 2002, among R.H. Donnelley Corporation and investment partnerships
affiliated with The Goldman Sachs Group, Inc. (incorporated by
reference to Exhibit 2.2 to the Current Report on Form 8-K dated
October 1, 2002, Commission File No. 001-07155)
10.42 Letter Agreement, dated as of November 25, 2002, among the Company,
R.H. Donnelley Inc. and investment partnerships affiliated with The
Goldman Sachs Group, Inc. (incorporated by reference to Exhibit 10.1
to Current Report on Form 8-K, filed with the Securities and Exchange
Commission on December 3, 2002, Commission File No. 001-0715)
10.43 Registration Rights Agreement, dated as of November 25, 2002, among
the Company and investment partnerships affiliated with The Goldman
Sachs Group, Inc. (incorporated by reference to Exhibit 10.2 to
Current Report on Form 8-K, filed with the Securities and Exchange
Commission on December 3, 2002, Commission File No. 001-07155)
10.44 Letter Agreement dated as of January 3, 2003 among the Company, R.H.
Donnelley Inc. and investment partnerships affiliated with The Goldman
Sachs Group, Inc. (incorporated by reference to Exhibit 10.8 to the
Current Report on Form 8-K, filed with the Securities and Exchange
Commission on January 17, 2003, Commission File No. 001-07155)
10.45* Letter Agreement, dated as of July 22, 2003, among the Company and
investment partnerships affiliated with The Goldman Sachs Group, Inc.
10.46 Directory Services License Agreement, dated as of January 3, 2003, by
and among R.H. Donnelley Publishing & Advertising, Inc. (f/k/a Sprint
Publishing & Advertising, Inc.), CenDon L.L.C., R.H. Donnelley
Directory Company (f/k/a Centel Directory Company), Sprint
Corporation, Sprint Directory Trademark Company, LLC and the Sprint
Local Telecommunications Division (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K, filed with the
Securities and Exchange Commission on January 17, 2003, Commission
File No. 001-07155)
44
Exhibit
No. Document
------ --------
10.47 Trademark License Agreement, dated as of January 3, 2003, by and
among Sprint Directory Trademark Company, LLC, R.H. Donnelley
Publishing & Advertising, Inc. (f/k/a Sprint Publishing & Advertising,
Inc.), CenDon L.L.C. and R.H. Donnelley Directory Company (f/k/a
Centel Directory Company) (incorporated by reference to Exhibit 10.2
to the Current Report on Form 8-K, filed with the Securities and
Exchange Commission on January 17, 2003, Commission File No.
001-07155)
10.48 Publisher Trademark License Agreement, dated as of January 3, 2003,
by and among R.H. Donnelley Publishing & Advertising, Inc. (f/k/a
Sprint Publishing & Advertising, Inc.), R.H. Donnelley Directory
Company (f/k/a Centel Directory Company) and Sprint Corporation
(incorporated by reference to Exhibit 10.3 to the Current Report on
Form 8-K, filed with the Securities and Exchange Commission on January
17, 2003, Commission File No. 001-07155)
10.49 Non-Competition Agreement, dated as of January 3, 2003, by and among
the Company, R.H. Donnelley Publishing & Advertising, Inc. (f/k/a
Sprint Publishing & Advertising, Inc.), CenDon L.L.C., R.H. Donnelley
Directory Company (f/k/a Centel Directory Company), Sprint Corporation
and the Sprint Local Telecommunications Division (incorporated by
reference to Exhibit 10.4 to the Current Report on Form 8-K, filed
with the Securities and Exchange Commission on January 17, 2003,
Commission File No. 001-07155)
10.50 Subscriber Listings Agreement, dated as of January 3, 2003, by and
among R.H. Donnelley Publishing & Advertising, Inc. (f/k/a Sprint
Publishing & Advertising, Inc.), CenDon L.L.C., R.H. Donnelley
Directory Company (f/k/a Centel Directory Company), Sprint Corporation
and the Sprint Local Telecommunications Division (incorporated by
reference to Exhibit 10.5 to the Current Report on Form 8-K, filed
with the Securities and Exchange Commission on January 17, 2003,
Commission File No. 001-07155)
10.51 Credit Agreement, dated as of December 6, 2002, among the Company,
R.H. Donnelley Inc., R.H. Donnelley Finance Corporation II
(subsequently merged with and into R.H. Donnelley Inc.), the several
lenders from time to time party thereto, Bear Stearns Corporate
Lending Inc. and Citicorp North America, Inc., as joint syndication
agents, BNP Paribas and Fleet National Bank, as joint documentation
agents, Deutsche Bank Trust Company Americas, as administrative agent,
and Deutsche Bank Securities Inc., Salomon Smith Barney Inc. and Bear,
Stearns & Co. Inc., as joint lead arrangers and joint bookrunners
(incorporated by reference to Exhibit 10.10 to the Current Report on
Form 8-K, filed with the Securities and Exchange Commission on January
17, 2003, Commission File No. 001-07155)
21 Subsidiaries of the Company (incorporated by reference to Exhibit 21
to the Annual Report on Form 10-K for the year ended December 31,
2000, Commission File No. 001-07155)
31.1* Certification of Quarterly Report on Form 10-Q for the period ended
June 30, 2003 under Section 302 of Sarbanes-Oxley Act by David C.
Swanson, Chief Executive Officer for R.H. Donnelley Corporation
31.2* Certification of Quarterly Report on Form 10-Q for the period ended
June 30, 2003 under Section 302 of Sarbanes-Oxley Act by Steven M.
Blondy, Senior Vice President and Chief Financial Officer for R.H.
Donnelley Corporation
45
Exhibit
No. Document
------ --------
31.3* Certification of Quarterly Report on Form 10-Q for the period ended
June 30, 2003 under Section 302 of Sarbanes-Oxley Act David C.
Swanson, Chief Executive Officer for R.H. Donnelley Inc.
31.4* Certification of Quarterly Report on Form 10-Q for the period ended
June 30, 2003 under Section 302 of Sarbanes-Oxley Act by Steven M.
Blondy, Senior Vice President and Chief Financial Officer for R.H.
Donnelley Inc.
32.1* Certification of Quarterly Report on Form 10-Q for the period ended
June 30, 2003 under Section 906 of the Sarbanes-Oxley Act by David C.
Swanson, Chief Executive Officer and Steven M. Blondy, Senior Vice
President and Chief Financial Officer for R.H. Donnelley Corporation
32.2* Certification of Quarterly Report on Form 10-Q for the period ended
June 30, 2003 under Section 906 of the Sarbanes-Oxley Act by David C.
Swanson, Chief Executive Officer and Steven M. Blondy, Senior Vice
President and Chief Financial Officer for R.H. Donnelley Inc.
- ---------------------
* Filed herewith
^ Management contract or compensatory plan
(b) Reports on Form 8-K:
On July 23, 2003, the Company furnished a Current Report on Form 8-K disclosing
under Item 9 (nominally, but substantively under Item 12) certain quarterly
publication cycle advertising sales and adjusted pro forma financial results for
each of the quarters ended March 31, 2002, June 30, 2002, September 30, 2002 and
December 31, 2002 that gave effect to the Company's acquisition of Sprint
Publishing & Advertising, assuming the acquisition occurred on January 1, 2002.
On July 23, 2003, the Company furnished a Current Report on Form 8-K disclosing
under Items 7 and 9 ( nominally, but substantively under Item 12) certain
financial results of the Company for the three and six months ended June 30,
2003, and attached a copy of its related press release as Exhibit 99.1.
On June 2, 2003, the Company furnished a Current Report on Form 8-K disclosing
under Item 9 that on June 3, 2003, certain members of senior management of the
Company were scheduled to make a presentation at a media industry conference
sponsored by Deutsche Bank Securities Inc. During its presentation at that
conference, management intended to present a slide presentation. The Company
attached a copy of the slide presentation as Exhibit 99.1.
On May 2, 2003, the Company filed a Current Report on Form 8-K disclosing under
Item 5 certain information required by Regulation G, Item 10(e) of Regulation
S-K and Item 12 of Form 8-K regarding non-GAAP financial measures that the
Company intends to routinely publicly disclose.
On May 2, 2003, the Company furnished a Current Report on Form 8-K disclosing
under Items 7 and 9 (nominally, but substantively under Item 12) certain
financial results of the Company for the three months ended March 31, 2003, and
attached a copy of its related press release as Exhibit 99.1.
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
R.H. DONNELLEY CORPORATION
Date: August 13, 2003 By: /s/ Steven M. Blondy
---------------------
Steven M. Blondy
Senior Vice President and Chief Financial
Officer
Date: August 13, 2003 By: /s/ William C. Drexler
----------------------
William C. Drexler
Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
R.H. DONNELLEY INC.
Date: August 13, 2003 By: /s/ Steven M. Blondy
--------------------
Steven M. Blondy
Senior Vice President and
Chief Financial Officer
Date: August 13, 2003 By: /s/ William C. Drexler
----------------------
William C. Drexler
Vice President and Controller
47
EXHIBIT INDEX
Exhibit
Number Document
10.39^* Separation Agreement and Release dated as of July 25, 2003
between the Company and Frank M. Colarusso
10.45* Letter Agreement, dated as of July 22, 2003, among the Company
and investment partnerships affiliated with The Goldman Sachs
Group, Inc.
31.1* Certification of Quarterly Report on Form 10-Q for the period
ended June 30, 2003 under Section 302 of Sarbanes-Oxley Act by
David C. Swanson, Chief Executive Officer for R.H. Donnelley
Corporation
31.2* Certification of Quarterly Report on Form 10-Q for the period
ended June 30, 2003 under Section 302 of Sarbanes-Oxley Act by
Steven M. Blondy, Senior Vice President and Chief Financial
Officer for R.H. Donnelley Corporation
31.3* Certification of Quarterly Report on Form 10-Q for the period
ended June 30, 2003 under Section 302 of Sarbanes-Oxley Act David
C. Swanson, Chief Executive Officer for R.H. Donnelley Inc.
31.4* Certification of Quarterly Report on Form 10-Q for the period
ended June 30, 2003 under Section 302 of Sarbanes-Oxley Act by
Steven M. Blondy, Senior Vice President and Chief Financial
Officer for R.H. Donnelley Inc.
32.1* Certification of Quarterly Report on Form 10-Q for the period
ended June 30, 2003 by David C. Swanson, Chief Executive Officer
and Steven M. Blondy, Senior Vice President and Chief Financial
Officer for R.H. Donnelley Corporation
32.2* Certification of Quarterly Report on Form 10-Q for the period
ended June 30, 2003 by David C. Swanson, Chief Executive Officer
and Steven M. Blondy, Senior Vice President and Chief Financial
Officer for R.H. Donnelley Inc.