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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark one) (X)
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004 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 
  Delaware
    
    13-2740040(State of Incorporation)
    
    (I.R.S. Employer Identification No.)1001 Winstead Drive, Cary, N.C.
    
    27513(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 November 1, 2004Common Stock, par value $1 per share
    
    31,432,379
 Commission file number 333-59287 R.H. DONNELLEY INC. * 
   Delaware
    
    36-2467635(State of Incorporation)
    
    (I.R.S. Employer Identification No.)1001 Winstead Drive, Cary, N.C.
    
    27513(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code (800) 497-6329




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*   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, which were redeemed in full on February 6, 2004. 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 and is subject to the filing
requirements of Section 15(d) as a result of such notes. As of November 1,
2004, 100 shares of R.H. Donnelley Inc. common stock, no par value, were
outstanding. 2




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R.H. DONNELLEY CORPORATION INDEX TO FORM 10-Q PAGEPART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets at September 30, 2004 and December 31, 2003
    
    
    4Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2004 and 2003
    
    
    5Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003
    
    
    6Consolidated Statement of Changes in Shareholders (Deficit) Equity for the nine months ended September 30, 2004
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    32Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    56Item 4. Controls and Procedures
    
    
    57PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    58Item 6. Exhibits
    
    
    65SIGNATURES
    
    
    75
 3




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Part I. FINANCIAL INFORMATION 
 Item 1. Financial Statements
 R.H. Donnelley Corporation and Subsidiaries 
 Consolidated Balance Sheets (Unaudited)
 September 30,
    
    December 31,(in thousands, except share and per share data)
    
    2004
    
    2003AssetsCurrent AssetsCash and cash equivalents
    
    $
    2,892
    
    
    $
    7,722Accounts receivableBilled
    
    
    98,298
    
    
    
    49,203Unbilled
    
    
    349,068
    
    
    
    173,734Allowance for doubtful accounts and sales claims
    
    
    (38,297
    )
    
    
    (11,956
    )Net accounts receivable
    
    
    409,069
    
    
    
    210,981Deferred directory costs
    
    
    115,417
    
    
    
    33,034Other current assets
    
    
    29,459
    
    
    
    32,854Total current assets
    
    
    556,837
    
    
    
    284,591Fixed assets and computer software, net
    
    
    34,881
    
    
    
    20,624Partnership investment
    
    
    
    
    
    
    175,729Other non-current assets
    
    
    104,972
    
    
    
    95,583Intangible assets, net
    
    
    2,923,122
    
    
    
    1,865,167Goodwill
    
    
    301,846
    
    
    
    97,040Total Assets
    
    $
    3,921,658
    
    
    $
    2,538,734Liabilities, Redeemable Convertible Preferred
Stock and Shareholders Equity (Deficit)Current LiabilitiesAccounts payable and accrued liabilities
    
    $
    56,244
    
    
    $
    19,083Checks not yet presented for payment
    
    
    10,356
    
    
    
    6,708Accrued interest
    
    
    33,323
    
    
    
    7,711Deferred directory revenue
    
    
    240,029
    
    
    
    216,525Current portion of long-term debt
    
    
    126,224
    
    
    
    49,586Total current liabilities
    
    
    466,176
    
    
    
    299,613Long-term debt
    
    
    3,066,622
    
    
    
    2,042,547Deferred income taxes, net
    
    
    130,292
    
    
    
    33,629Other non-current liabilities
    
    
    28,319
    
    
    
    20,967Total liabilities
    
    
    3,691,409
    
    
    
    2,396,756Commitments and contingenciesRedeemable convertible preferred stock (liquidation preference of
$230,280 at September 30, 2004 and $216,998 at December 31, 2003)
    
    
    211,505
    
    
    
    198,223Shareholders Equity (Deficit)Common stock, par value $1 per share, 400,000,000 shares authorized,
51,621,894 shares issued
    
    
    51,622
    
    
    
    51,622Additional paid-in capital
    
    
    98,726
    
    
    
    92,610Unamortized restricted stock
    
    
    (268
    )
    
    
    (531
    )Warrants outstanding
    
    
    13,758
    
    
    
    13,758Retained earnings (accumulated deficit)
    
    
    18,779
    
    
    
    (49,954
    )Treasury stock, at cost, 20,211,297 shares at September 30, 2004
and 20,589,520 shares
at December 31, 2003
    
    
    (163,676
    )
    
    
    (163,741
    )Accumulated other comprehensive loss
    
    
    (197
    )
    
    
    (9
    )Total shareholders equity (deficit)
    
    
    18,744
    
    
    
    (56,245
    )Total Liabilities, Redeemable Convertible Preferred
Stock and Shareholders Equity (Deficit)
    
    $
    3,921,658
    
    
    $
    2,538,734
 The accompanying notes are an integral part of the consolidated financial statements. 4




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R.H. Donnelley Corporation and Subsidiaries 
 Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,(in thousands, except per share data)
    
    2004
    
    2003
    
    2004
    
    2003Net revenue
    
    $
    144,405
    
    
    $
    89,309
    
    
    $
    432,853
    
    
    $
    140,363ExpensesOperating expenses
    
    
    59,287
    
    
    
    39,718
    
    
    
    170,266
    
    
    
    106,614General and administrative expenses
    
    
    13,689
    
    
    
    14,781
    
    
    
    41,648
    
    
    
    36,894Depreciation and amortization
    
    
    17,009
    
    
    
    16,576
    
    
    
    46,348
    
    
    
    49,047Total expenses
    
    
    89,985
    
    
    
    71,075
    
    
    
    258,262
    
    
    
    192,555Partnership income
    
    
    19,266
    
    
    
    32,606
    
    
    
    77,967
    
    
    
    91,580Operating income
    
    
    73,686
    
    
    
    50,840
    
    
    
    252,558
    
    
    
    39,388Interest expense, net
    
    
    (43,157
    )
    
    
    (45,531
    )
    
    
    (120,951
    )
    
    
    (137,460
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,523Income (loss) before income taxes
    
    
    30,529
    
    
    
    5,309
    
    
    
    131,607
    
    
    
    (96,549
    )Provision (benefit) for income taxes
    
    
    12,055
    
    
    
    1,406
    
    
    
    51,981
    
    
    
    (40,355
    )Net income (loss)
    
    
    18,474
    
    
    
    3,903
    
    
    
    79,626
    
    
    
    (56,194
    )Preferred dividend
    
    
    5,501
    
    
    
    5,082
    
    
    
    16,180
    
    
    
    53,214Income (loss) available to common shareholders
    
    $
    12,973
    
    
    $
    (1,179
    )
    
    $
    63,446
    
    
    $
    (109,408
    )Earnings (loss) per shareBasic
    
    $
    0.32
    
    
    $
    (0.04
    )
    
    $
    1.57
    
    
    $
    (3.58
    )Diluted
    
    $
    0.31
    
    
    $
    (0.04
    )
    
    $
    1.51
    
    
    $
    (3.58
    )Shares used in computing earnings (loss) per shareBasic
    
    
    31,341
    
    
    
    30,850
    
    
    
    31,208
    
    
    
    30,571Diluted
    
    
    32,676
    
    
    
    30,850
    
    
    
    32,452
    
    
    
    30,571Comprehensive Income (Loss)Net income (loss)
    
    $
    18,474
    
    
    $
    3,903
    
    
    $
    79,626
    
    
    $
    (56,194
    )Unrealized (loss) gain on interest rate swaps, net of tax
    
    
    (3,349
    )
    
    
    1,732
    
    
    
    (188
    )
    
    
    (1,525
    )Comprehensive income (loss)
    
    $
    15,125
    
    
    $
    5,635
    
    
    $
    79,438
    
    
    $
    (57,719
    )
 The accompanying notes are an integral part of the consolidated financial statements. 5




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R.H. Donnelley Corporation and Subsidiaries 
 Consolidated Statements of Cash Flows (Unaudited)
 Nine months endedSeptember 30,(amounts in thousands)
    
    2004
    
    2003Cash Flows from Operating ActivitiesNet income (loss)
    
    $
    79,626
    
    
    $
    (56,194
    )Reconciliation of net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    46,348
    
    
    
    49,047Deferred income taxes
    
    
    51,981
    
    
    
    (39,529
    )Provision for bad debts
    
    
    11,125
    
    
    
    (3,201
    )Other non-cash charges
    
    
    14,782
    
    
    
    11,950Changes in assets and liabilities, net of effects from acquisitions:Cash in excess of partnership income
    
    
    1,426
    
    
    
    3,966(Increase) decrease in accounts receivable
    
    
    (1,691
    )
    
    
    69,269Increase in other assets
    
    
    (96
    )
    
    
    (38,655
    )Increase in accounts payable and accrued liabilities
    
    
    37,646
    
    
    
    9,421Increase in deferred directory revenue
    
    
    23,504
    
    
    
    217,417Increase in other non-current liabilities
    
    
    59,052
    
    
    
    2,606Net cash provided by operating activities
    
    
    323,703
    
    
    
    226,097Cash Flows from Investing ActivitiesAdditions to fixed assets and computer software
    
    
    (12,104
    )
    
    
    (7,900
    )Acquisitions, net of cash received
    
    
    (1,413,620
    )
    
    
    (2,259,633
    )Decrease in restricted cash  funds held in escrow at year end
    
    
    
    
    
    
    1,825,000Decrease in restricted cash  other
    
    
    
    
    
    
    69,300Net cash used in investing activities
    
    
    (1,425,724
    )
    
    
    (373,233
    )Cash Flows from Financing ActivitiesProceeds from the issuance of debt, net of costs
    
    
    1,318,947
    
    
    
    461,307Proceeds from the issuance of Redeemable Convertible Preferred
Stock and warrants, net of costs
    
    
    
    
    
    
    125,683Pre-acquisition debt refinanced with proceeds from new debt
    
    
    
    
    
    
    (243,005
    )Debt repayments
    
    
    (268,219
    )
    
    
    (257,239
    )Borrowings under the Revolver
    
    
    36,600
    
    
    
    37,600Increase in checks not yet presented for payment
    
    
    3,648
    
    
    
    Proceeds from employee stock option exercises
    
    
    6,215
    
    
    
    20,805Net cash provided by financing activities
    
    
    1,097,191
    
    
    
    145,151Decrease in cash and cash equivalents
    
    
    (4,830
    )
    
    
    (1,985
    )Cash and cash equivalents, beginning of year
    
    
    7,722
    
    
    
    7,787Cash and cash equivalents, end of period
    
    $
    2,892
    
    
    $
    5,802Supplemental Information:Cash paid (received):Interest
    
    $
    85,647
    
    
    $
    105,795Income taxes, net
    
    $
    (71,365
    )
    
    $
    
 The accompanying notes are an integral part of the consolidated financial statements. 6




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R.H. Donnelley Corporation and Subsidiaries 
 Consolidated Statement of Changes in Shareholders (Deficit) Equity (Unaudited)
Nine months ended September 30, 2004
 (Accumulated
    
    
    
    
    
    Accumulated
    
    TotalCommon Stock
    
    Unamortized
    
    
    
    
    
    Deficit)
    
    
    
    
    
    Other
    
    Shareholdersand Additional
    
    Restricted
    
    Warrants
    
    Retained
    
    
    
    
    
    Comprehensive
    
    (Deficit)(in thousands)
    
    Paid-in Capital
    
    Stock
    
    Outstanding
    
    Earnings
    
    Treasury Stock
    
    Loss
    
    EquityBalance, December 31, 2003
    
    $
    144,232
    
    
    $
    (531
    )
    
    $
    13,758
    
    
    $
    (49,954
    )
    
    $
    (163,741
    )
    
    $
    (9
    )
    
    $
    (56,245
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,626
    
    
    
    
    
    
    
    
    
    
    
    79,626Preferred dividend
    
    
    (5,287
    )
    
    
    
    
    
    
    
    
    
    
    (10,893
    )
    
    
    
    
    
    
    
    
    
    
    (16,180
    )Employee stock option exercises,
including tax benefit
    
    
    6,127
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    424
    
    
    
    
    
    
    
    6,551Stock issued for employee bonus plans
    
    
    1,613
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89
    
    
    
    
    
    
    
    1,702Issuance of restricted stock
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    Restricted stock amortization
    
    
    
    
    
    
    263
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    263Stock acquired for treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (456
    )
    
    
    
    
    
    
    (456
    )Additional compensatory stock issued in
Founders grant
    
    
    773
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    773Beneficial conversion feature from
issuance of Preferred Stock
    
    
    2,898
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,898Unrealized loss on interest rate swaps,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (188
    )
    
    
    (188
    )Balance, September 30, 2004
    
    $
    150,348
    
    
    $
    (268
    )
    
    $
    13,758
    
    
    $
    18,779
    
    
    $
    (163,676
    )
    
    $
    (197
    )
    
    $
    18,744
 The accompanying notes are an integral part of the consolidated financial statements. 7




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R.H. Donnelley Corporation and Subsidiaries 
 Notes to Consolidated Financial Statements (Unaudited)  (tabular amounts in thousands, except per share data)
 1. Business and Basis of Presentation The interim financial statements of R.H. Donnelley Corporation and its direct
and indirect wholly owned subsidiaries (the Company, RHD, 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, 2003. 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 period amounts have been reclassified to
conform to the current years presentation. We are a leading yellow pages publisher and directional media company.
Directional media is where consumers go to find who sells the goods and
services they are ready to purchase. We currently publish 389 yellow pages
directories, including 260 Sprint-branded directories in 18 states, with major
markets including Las Vegas, Orlando, and Lee County, Florida, with a total
distribution of approximately 18 million serving approximately 160,000 local
and national advertisers, and 129 SBC-branded directories in Illinois and
Northwest Indiana, with a total distribution of approximately 10 million
serving approximately 100,000 local and national advertisers. We also offer
online city guides and search web sites in our major Sprint markets under the
Best Red Yellow Pages brand at www.bestredyp.com and in the Chicago area at
www.chicagolandyp.com. We also sell local advertising in Illinois and
Northwest Indiana onto www.SMARTpages.com, SBCs Internet yellow pages
platform. On September 1, 2004, we completed the acquisition of the directory publishing
business of SBC Communications, Inc. (SBC) in Illinois and Northwest Indiana,
including SBCs interests in The DonTech II Partnership, a 50/50 general
partnership between us and SBC (DonTech) (collectively, the SBC Directory
Acquisition), for $1.41 billion in cash, after working capital adjustments and
the settlement of a $30 million liquidation preference owed to us related to
DonTech. The acquisition was accomplished pursuant to, and in accordance with,
the terms of the Purchase Agreement, dated as of July 28, 2004, by and among
the Company, Ameritech Corporation (Ameritech), a direct wholly owned
subsidiary of SBC, and Ameritech Publishing, Inc. (API), a direct wholly
owned subsidiary of Ameritech. 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 SBC
Directory Acquisition business are included in our consolidated results from
September 1, 2004. The acquired SBC directory business operates as R.H.
Donnelley Publishing & Advertising of Illinois Partnership, an indirect wholly
owned subsidiary of the Company. On January 3, 2003, we acquired all the outstanding capital stock of the
various entities comprising Sprint Publishing and Advertising (SPA), Sprint
Corporations (Sprint) directory publishing business (collectively, the SPA
Acquisition), for $2.23 billion in cash. 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 January 3, 2003.
The acquired SPA business operates as R.H. Donnelley Publishing & Advertising,
Inc., an indirect wholly owned subsidiary of the Company. 2. Summary of 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. Reclassifications.For 2003, preferred stock dividends of $58.4 million have
been reclassified from accumulated deficit to additional paid-in capital. Revenue Recognition.We earn revenue principally from the sale of advertising
into our yellow pages directories. Revenue from the sale of such advertising
is deferred when a directory is published and recognized ratably over the life
of a directory, which is typically 12 months (the deferral and amortization
method). Revenue from the sale of 8




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advertising is recorded net of an allowance
for sales claims, estimated based on historical experience on a
directory-by-directory basis. We increase or decrease this estimate as
information or circumstances indicate that the estimate may no longer
adequately represent the amount of claims we may incur for a directory in the
future. Before the SBC Directory Acquisition, we also earned revenue from
providing pre-press publishing services to SBC for those directories in the
DonTech markets. Revenue from these pre-press publishing services was
recognized as services were performed. Deferred Directory Costs. Certain costs directly related to the selling and
production of our directories are initially deferred when incurred and
recognized ratably over the life of a directory, which is typically 12 months.
These costs include sales commissions and print, paper and initial distribution
costs. Such costs that are paid prior to directory publication are classified
as other current assets. Equity Method Accounting.Before the SBC Directory Acquisition, DonTech was a
50/50 perpetual partnership in which we and a subsidiary of SBC were the
partners. DonTech was a separate legal entity that provided its services with
its own employees and a stand-alone management team. The employees of DonTech
had the right, authority and power to do any act to accomplish, and enter into
any contract incidental to attain, the purposes of the partnership. No
employees of either RHD or SBC had been involved in the day-to-day operations
of DonTech and, because the partners shared equally in the net profits and each
had one voting member on the DonTech board of directors, neither partner had
the unilateral ability to control or influence the operations of DonTech.
Accordingly, through September 1, 2004, we accounted for DonTech under the
equity method and did not consolidate the DonTech results in our financial
statements. Before the SBC Directory Acquisition, we recognized our 50% share of DonTech
net income as partnership income in our consolidated statement of operations.
DonTech recognized commission revenue based on the annual value of a sales
contract in the period the contract was executed (calendar sales) and
recognized expenses as incurred. Partnership income also included revenue
participation income from SBC. Revenue participation income was based on
DonTech advertising sales and was recognized when a sales contract was executed
with a customer. Our investment in DonTech and the revenue participation
receivable from SBC had been reported as partnership investment on the
consolidated balance sheet prior to the SBC Directory Acquisition. Upon the
SBC Directory Acquisition, SBC ceased paying us revenue participation income
and we no longer recognize our 50% net profits from DonTech. Thus, the DonTech
partnership investment was eliminated and, accordingly, commencing on September
1, 2004, we no longer recognize partnership income. Rather the revenues,
expenses and income of the acquired directory business are directly recorded in
our statement of operations. Cash and Cash Equivalents.Cash equivalents include liquid investments with a
maturity of less than three months at their time of purchase. We place our
investments with high quality financial institutions. At times, such
investments may be in excess of federally insured limits. Accounts Receivable.Accounts receivable consist of balances owed to us by our
advertising customers. Advertisers typically enter into a 12-month contract
for their advertising. Most local advertisers are billed a pro rata amount of
their contract value on a monthly basis. On behalf of national advertisers,
Certified Marketing Representatives (CMRs) typically pay to us the total
contract value of their advertising, net of their commission, within 60 days
after the publication month. Billed receivables represent the amount that has
been billed to advertisers. Unbilled receivables represent contractually owed
amounts for published directories that have yet to be billed to advertisers.
Billed receivables are recorded net of an allowance for doubtful accounts and
sales claims, estimated based on historical experience on a
directory-by-directory basis. We increase or decrease this estimate as
information or circumstances indicate that the estimate may no longer
adequately represent the amount of bad debts and sales claims we may incur. We have a transition services agreement with SBC whereby SBC bills and collects
from our advertising customers in the Illinois and Northwest Indiana
directories and remits collections (net of a specified holdback) to us through
early 2005. On a monthly basis, SBC purchases the receivables related to those
directories from us on a full recourse basis, and as such, we continue to
include our portion of the billed and unbilled receivables and any related
allowance for doubtful accounts and sales claims on our consolidated balance
sheet. We record an advance
from SBC that is decreased as SBC collects from our advertisers, thus
satisfying that liability. In early 2005, we will buy back all accounts receivable balances from SBC. Thereafter, we will perform all billing and
collection functions in house. Deferred Financing Costs.Certain costs associated with the issuance of debt
instruments are capitalized and included in 9




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##### 



other non-current assets on the
consolidated balance sheet. These costs are amortized to interest expense over
the terms of the respective debt agreements. The bond outstanding method is
used to amortize deferred financing costs relating to debt instruments with
respect to which we accelerate principal payments. Other deferred financing
costs are amortized using the straight-line method. Amortization of deferred
financing costs included in interest expense was $3.1 million and $4.6 million
for the three months ended September 30, 2004 and 2003, respectively, and $10.2
million and $10.9 million for the nine months ended September 30, 2004 and
2003, respectively. Advertising Expense.We recognize advertising expenses as incurred. These
expenses include public relations, media, on-line advertising and other
promotional and sponsorship costs. Total advertising expense was $2.3 million
and $1.9 million for the three months ended September 30, 2004 and 2003,
respectively, and $8.1 million and $5.7 million for the nine months ended
September 30, 2004 and 2003, respectively. Advertising expense for the nine
months ended September 30, 2004 includes $1.1 million of advertising costs that
pertain to 2003. Concentration of Credit Risk.Approximately 85% of our directory advertising
revenue is derived from the sale of advertising to local small- and
medium-sized businesses. These advertisers typically enter into 12-month
advertising sales contracts and make monthly payments over the term of the
contract. Some advertisers prepay 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 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 effect 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 that do not pay by specified due dates. The remaining approximate 15% of our directory 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 CMRs with which we contract. CMRs are independent third parties that
act as agents for national advertisers. 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 has been historically 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. At September 30, 2004, we had interest rate swap agreements with major
financial institutions with a notional value of $1,355 million, of which $800
million was executed in the third quarter of 2004 primarily as a result of the
financing related to the SBC Directory Acquisition. 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; however, no assurances can be
given. Derivative Financial Instruments.We do not use derivative financial
instruments for trading or speculative purposes. Our derivative financial
instruments are limited to interest rate swap agreements used to manage
exposure to fluctuations in interest rates on variable rate debt. These
agreements effectively convert $1,355 million of our variable rate debt to
fixed rate debt, mitigating our exposure to increases in interest rates. Under
the terms of the swap agreements, we receive variable interest based on the
three-month LIBOR and pay a weighted average fixed rate of 3.19%. The swaps
mature at varying dates beginning October 2005 through September 2009. The
weighted average rate received was 1.63% and 1.37% during the three and nine
months ended September 30,
2004, respectively. These periodic payments and receipts are recorded as
interest expense. The interest rate swaps have been designated as cash flow hedges to hedge
three-month LIBOR-based interest payments on $1,355 million of bank debt. To
the extent the swaps provide an effective hedge, changes in the fair value of
the swaps are recorded in other comprehensive income, a component of
shareholders equity. Any ineffectiveness is recorded through earnings. As of
September 30, 2004, our interest rate swaps provided an effective hedge of the
three-month LIBOR-based interest payments on $1,355 million of bank debt, and
no ineffectiveness was included in earnings. Earnings per Share.In March 2004, the Emerging Issues Task Force (EITF)
reached a final consensus on EITF 10




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##### 



Issue No. 03-6, Participating Securities and
the Two-Class Method under FASB Statement 128(EITF 03-6), which established
standards regarding the computation of earnings per share (EPS) by companies
that have issued securities other than common stock that contractually entitle
the holder to participate in dividends and earnings of the company. EITF 03-6
was effective for interim periods ending June 30, 2004 for calendar year
companies. We adopted the provisions of EITF 03-6 during the first quarter of
2004. EITF 03-6 requires earnings available to common shareholders for the
period, after deduction of preferred stock dividends, to be allocated between
the common and preferred shareholders based on their respective rights to
receive dividends. Basic EPS is then calculated by dividing income (loss)
allocable to common shareholders by the weighted average number of shares
outstanding. EITF 03-6 does not require the presentation of basic and diluted
EPS for securities other than common stock; therefore, the following EPS
amounts only pertain to our common stock. Under the guidance of EITF 03-6, diluted EPS are calculated by dividing income
(loss) allocable to common shareholders by the weighted average common shares
outstanding plus dilutive potential common stock. Potential common stock
includes stock options and warrants, the dilutive effect of which is calculated
using the treasury stock method, and Preferred Stock, the dilutive effect of
which is calculated using the if-converted method. The calculation of basic
and diluted EPS for the three and nine months ended September 30, 2004 and 2003
is presented below. Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Basic EPSTwoClass MethodIncome (loss) available to common shareholders
    
    $
    12,973
    
    
    $
    (1,179
    )
    
    $
    63,446
    
    
    $
    (109,408
    )Amount allocable to common shareholders (1)
    
    
    77
    %
    
    
    100
    %
    
    
    77
    %
    
    
    100
    %Income (loss) allocable to common shareholders
    
    
    9,989
    
    
    
    (1,179
    )
    
    
    48,853
    
    
    
    (109,408
    )Weighted average common shares outstanding
    
    
    31,341
    
    
    
    30,850
    
    
    
    31,208
    
    
    
    30,571Basic earnings (loss) per sharetwoclass method
    
    $
    0.32
    
    
    $
    (0.04
    )
    
    $
    1.57
    
    
    $
    (3.58
    )Diluted EPSIncome (loss) available to common shareholders
    
    $
    12,973
    
    
    $
    (1,179
    )
    
    $
    63,446
    
    
    $
    (109,408
    )Amount allocable to common shares (1)
    
    
    77
    %
    
    
    100
    %
    
    
    77
    %
    
    
    100
    %Income (loss) allocable to common shareholders
    
    
    9,989
    
    
    
    (1,179
    )
    
    
    48,853
    
    
    
    (109,408
    )Weighted average common shares outstanding
    
    
    31,341
    
    
    
    30,850
    
    
    
    31,208
    
    
    
    30,571Dilutive effect of stock options (2)
    
    
    1,335
    
    
    
    
    
    
    
    1,244
    
    
    
    Dilutive effect of Preferred Stock assuming conversion (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average diluted shares outstanding
    
    
    32,676
    
    
    
    30,850
    
    
    
    32,452
    
    
    
    30,571Diluted earnings (loss) per share
    
    $
    0.31
    
    
    $
    (0.04
    )
    
    $
    1.51
    
    
    $
    (3.58
    )
  (1)
    
    31,341 / (31,341 + 9,575) for the three months ended September 30, 2004
and 31,208 / (31,208 + 9,575) for the nine months ended September 30,
2004. In computing basic EPS using the two-class method, we have not
allocated the loss available to common shareholders in the three and nine
months ended September 30, 2003 between common and preferred shareholders
since the preferred shareholders do not have a contractual obligation to
share in any loss.(2)
    
    The effect of certain stock options in the three and nine months ended
September 30, 2003 and the assumed conversion of the Preferred Stock in
the three and nine months ended September 30, 2004 and 2003 were
anti-dilutive and therefore are not included in the calculation of diluted
EPS. 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 only recognized if the exercise price of the stock option is less than the
fair market value of the underlying stock at the measurement date. 11




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##### 



Grants were made in October 2002 of 1.5 million options (Founders Grant) to
certain employees, including senior management, in connection with the SPA
Acquisition. These options were granted with an exercise price equal to the
fair market value of the Companys common stock on the measurement date.
However, the award of these options was contingent upon the successful closing
of the SPA Acquisition. Therefore, these options were subject to forfeiture
until January 3, 2003, by which time the fair market value of the Companys
common stock exceeded the exercise price. Accordingly, these options were
accounted for as compensatory options, and we are recognizing non-cash
compensation expense over the vesting period of the options. We recognized
non-cash compensation expense related to these stock options of $0.2 million
and $0.3 million in the three months ended September 30, 2004 and 2003,
respectively, and $0.8 million and $1.3 million in the nine months ended
September 30, 2004 and 2003, respectively. On July 28, 2004, the Company granted 0.9 million stock appreciation rights
(SARs) to certain employees, including senior management, in connection with
the SBC Directory Acquisition. The SARs were granted with an exercise price
equal to the fair market value of the Companys common stock on the grant date.
The maximum appreciation of each SAR is 100% of the initial exercise price.
In accordance with APB 25, we recognize non-cash compensation at the end of
each period in the amount by which the quoted market value of the underlying
shares covered by the grant exceeds the exercise price over the vesting term.
We recognized non-cash compensation related to these SARs of $0.2 million
during the three and nine months ended September 30, 2004. The following table reflects the pro forma net income (loss) and earnings
(loss) per share for the three and nine months ended September 30, 2004 and
2003 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. Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss), as reported
    
    $
    18,474
    
    
    $
    3,903
    
    
    $
    79,626
    
    
    $
    (56,194

    )Add: Stock-based compensation expense included in
reported net income (loss), net of related tax effects
    
    
    133
    
    
    
    258
    
    
    
    468
    
    
    
    876Less: Stock-based compensation expense that would have
been included in the determination of net income (loss)
if the fair value method had been applied to all
awards, net of related tax effects
    
    
    (1,796
    )
    
    
    (604
    )
    
    
    (3,753
    )
    
    
    (4,179
    )Pro forma net income (loss)
    
    
    16,811
    
    
    
    3,557
    
    
    
    76,341
    
    
    
    (59,497
    )Preferred dividend
    
    
    5,501
    
    
    
    5,082
    
    
    
    16,180
    
    
    
    53,214Pro forma income (loss) available to common shareholders
    
    $
    11,310
    
    
    $
    (1,525
    )
    
    $
    60,161
    
    
    $
    (112,711
    )Basic earnings (loss) per shareAs reported
    
    $
    0.32
    
    
    $
    (0.04
    )
    
    $
    1.57
    
    
    $
    (3.58
    )Pro forma
    
    $
    0.28
    
    
    $
    (0.05
    )
    
    $
    1.48
    
    
    $
    (3.69
    )Diluted earnings (loss) per shareAs reported
    
    $
    0.31
    
    
    $
    (0.04
    )
    
    $
    1.51
    
    
    $
    (3.58
    )Pro forma
    
    $
    0.27
    
    
    $
    (0.05
    )
    
    $
    1.43
    
    
    $
    (3.69
    )
 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: 2004
    
    2003Dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    27
    %
    
    
    35
    %Risk-free interest rate
    
    
    3.2
    %
    
    
    2.6
    %Expected holding period
    
    4 years
    
    4 years
 12




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##### 



Estimates.The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenue and certain expenses and the disclosure of contingent assets and
liabilities. Actual results could differ materially from those estimates and
assumptions. Estimates and assumptions are used in the determination of sales
allowances, allowances for doubtful accounts, depreciation and amortization,
employee benefit plans and restructuring reserves, among others. New Accounting Pronouncements.In March 2004, the EITF reached a final
consensus on EITF 03-6 that established standards regarding the computation of
EPS by companies that have issued securities other than common stock that
contractually entitle the holder to participate in dividends and earnings of
the company. EITF 03-6 was effective for interim periods ending on or after
June 30, 2004 for calendar year companies. We adopted the provisions of EITF
03-6 during the first quarter of 2004. In May 2004, the Financial Accounting Standards Board issued Financial Staff
Position (FSP) No. FAS 106-2, Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,
which provides guidance on accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 for employers that
sponsor postretirement healthcare plans that provide drug benefits. The Act
introduces prescription drug care benefits under Medicare and also allows for
certain sponsors of postretirement benefit plans with a drug benefit to receive
a non-taxable federal subsidy if certain criteria are met. The FSP requires
interim and annual period financial statements beginning after June 15, 2004 to
include the effect of the subsidy on the measurement of net periodic
postretirement benefit costs. Pending final guidance on determining actuarial
equivalency, the Company has not yet been able to determine the impact of the
Act on its postretirement benefit plans. As a result, the accumulated
postretirement benefit obligation and net periodic postretirement benefit costs
do not yet reflect the effects of the Act. 3. Business Combinations On September 1, 2004, we completed the SBC Directory Acquisition for $1.41
billion in cash, after working capital adjustments and the settlement of a $30
million liquidation preference owed to us related to DonTech. The
fair value of the tangible and identifiable intangible assets
acquired and liabilities assumed for the SBC Directory Acquisition
was $1.38 billion. As a result of
the acquisition, we became the publisher of 129 revenue-generating, SBC-branded
yellow pages directories in Illinois and Northwest Indiana. The results of the
SBC Directory Acquisition business are included in our consolidated results
from and after September 1, 2004. On January 3, 2003, we completed the SPA Acquisition for $2.23 billion in cash
and became the publisher of approximately 260 revenue-generating,
Sprint-branded yellow pages directories in 18 states. The results of the SPA
business are included in our consolidated results from and after January 3,
2003. The acquisitions were accounted for as purchase business combinations in
accordance with SFAS 141, Business Combinations. Each purchase price was
allocated to the related tangible and identifiable intangible assets acquired
and liabilities assumed based on their respective estimated fair values on the
acquisition dates. Certain long-term intangible assets were identified and
recorded at their estimated fair value. Identifiable intangible assets
acquired include directory services agreements between the Company and each of
Sprint and SBC, respectively, customer relationships and acquired trademarks
and trade names. In accordance with SFAS 142, Goodwill and Other Intangible
Assets, the fair values of the identifiable intangible assets are being
amortized over their estimated useful lives in a manner that best reflects the
economic benefits derived from such assets. Goodwill is not amortized but is
subject to impairment testing on an annual basis. See Note 4, Intangible Assets
and Goodwill, for a further description of our intangible assets and goodwill. Under purchase accounting rules, we did not assume or record the deferred
revenue balance associated with SBC-branded directories of $204.2 million at
September 1, 2004 or the deferred revenue balance associated with Sprint-branded
directories of $315.9 million at January 3, 2003. These amounts represented
revenue that would have been recognized subsequent to each acquisition under
the deferral and amortization method had the acquisitions not occurred.
Accordingly, we did not and will not record revenue associated with directories
that were published prior to each acquisition, as well as directories that were
published in the month each acquisition was completed. Although the deferred
revenue balances were eliminated, we retained all the rights associated with
the collection of amounts due under and contractual obligations under the
advertising contracts executed prior to the acquisitions. As a result, the
billed and unbilled accounts receivable balances acquired in both acquisitions
became assets of the Company. Also under purchase accounting rules, we did not
assume or record the deferred directory costs related to those 13




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##### 



directories that were published prior to each acquisition as well as
directories that published in the month each acquisition was completed,
totaling $175.6 million for SBC-branded directories and $63.3 million for
Sprint-branded directories. These costs represented operating expenses that
would have been recognized subsequent to the acquisitions under the deferral
and amortization method had the acquisitions not occurred. Further, under
purchase accounting rules, the remaining $32.1 million of the SBC Directory
Acquisition businesss deferred directory costs at September 1, 2004 related to
directories that were scheduled to publish subsequent to the acquisition.
Under purchase accounting rules, we recorded these costs at their fair value,
determined as the estimated billable value of the published directory less the
expected costs to complete that directory plus a normal profit margin. The
fair value of these costs was determined to be $81.3 million, which is $49.2
million higher than their carrying value of $32.1 million. Accordingly, we
recorded $49.2 million of additional deferred directory costs as part of our
purchase price allocation, which we refer to as cost uplift that will be amortized as expense over the life of
the related directories. In connection with the SPA Acquisition, the fair
value of such costs was $16.6 million of which $8.3 million represented the
cost uplift. Summarized condensed pro forma information for the three and nine month periods
ended September 30, 2004 and 2003 assuming the SBC Directory Acquisition and
related financing occurred at the beginning of each period is presented below. This pro
forma financial information has been prepared in accordance with Article 11 of
Regulation S-X and differs materially from the adjusted pro forma data
presented in Item 2 of this Quarterly Report on Form 10-Q in that while this
pro forma information also includes the combined SBC Directory Acquisition and Donnelley
GAAP results for 2003 and 2004, it does not adjust these results to remove the
effects of purchase accounting related to the SPA Acquisition and the SBC
Directory Acquisition or certain other items described in Item 2
under the caption Adjusted Pro Forma Amounts and Other
Non-GAAP Measures. Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    2003(dollars in millions)Net revenue
    
    $
    259.8
    
    
    $
    204.8
    
    
    $
    773.4
    
    
    $
    483.5Operating income (loss)
    
    
    138.0
    
    
    
    93.5
    
    
    
    401.3
    
    
    
    164.7Pre-tax income
    
    
    85.7
    
    
    
    34.4
    
    
    
    243.9
    
    
    
    (10.9
    )Net income (loss)
    
    
    51.7
    
    
    
    22.3
    
    
    
    147.8
    
    
    
    (6.3
    )Income (loss)
available to common
shareholders
    
    
    46.2
    
    
    
    17.2
    
    
    
    131.6
    
    
    
    (59.5
    )Diluted earnings
(loss) per share
    
    $
    1.09
    
    
    $
    0.56
    
    
    $
    3.12
    
    
    $
    (1.94
    )
 4. Intangible Assets and Goodwill As a result of the SBC Directory Acquisition and the SPA Acquisition, certain
long-term intangible assets were identified and recorded at their estimated
fair value. Amortization expense for intangible assets was $14.6 million and
$12.5 million for the three months ended September 30, 2004 and 2003,
respectively, and $39.5 million and $37.4 million for the nine months ended
September 30, 2004 and 2003, respectively. The acquired long-term intangible
assets and their respective book values at September 30, 2004 are shown in the
table below. Directory Services
    
    Local customer
    
    National CMRAgreements
    
    relationships
    
    relationships
    
    Trade names
    
    TotalEstimated useful lives
    
    50 years
    
    15-18 years
    
    30 years
    
    15 yearsInitial fair value:SBC
    
    $
    952,500
    
    
    $
    90,000
    
    
    $
    55,000
    
    
    $
    
    
    
    $
    1,097,500Sprint
    
    
    1,625,000
    
    
    
    200,000
    
    
    
    60,000
    
    
    
    30,000
    
    
    
    1,915,000Total
    
    
    2,577,500
    
    
    
    290,000
    
    
    
    115,000
    
    
    
    30,000
    
    
    
    3,012,500Accumulated amortization
    
    
    (58,507
    )
    
    
    (23,703
    )
    
    
    (3,668
    )
    
    
    (3,500
    )
    
    
    (89,378
    )Net intangible assets
    
    $
    2,518,993
    
    
    $
    266,297
    
    
    $
    111,332
    
    
    $
    26,500
    
    
    $
    2,923,122
 14




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##### 



Directory services agreements between SBC and the Company include a directory
services license agreement, a non-competition agreement, a SMARTpages reseller
agreement and a directory publishing listing agreement (collectively, SBC
Directory Services Agreements) with certain affiliates of SBC. The directory
services license agreement designates us as the official and exclusive provider
of yellow pages directory services for SBC in Illinois and Northwest Indiana
(the Territory), grants us the exclusive license to produce, publish and
distribute white pages directories in the Territory as SBCs agent and gives us
the exclusive right to use the SBC brand and logo on print directories in the
Territory. The non-competition agreement prohibits SBC and it affiliates, with
certain limited exceptions, from (1) producing, publishing and distributing
yellow and white pages print directories in the Territory, (2) soliciting or
selling local or national yellow or white pages advertising for inclusion in
such directories, and (3) soliciting or selling local internet yellow pages
advertising for certain internet yellow pages directories in the Territory or
licensing SBC marks to any third party for that purpose. The SMARTpages
reseller agreement gives us the exclusive right to sell local internet yellow
pages advertising and the non-exclusive right to sell internet yellow pages
advertising with respect to geographies outside the Territory to any advertiser
(excluding national advertisers) located inside the Territory onto SBCs
SMARTpages.com platform. The directory publishing listing license agreement
gives us the right to purchase and use basic SBC subscriber listing information
and updates for the purpose of publishing directories. The SBC Directory
Services Agreements (other than the SMARTpages reseller agreement) have initial
terms of 50 years, subject to automatic renewal and early termination under
specified circumstances. The SMARTpages reseller agreement has a term of 5
years. 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 the indicated terms. Directory services agreements between Sprint and the Company include a
directory services license agreement, a trademark license agreement and a
non-competition agreement (collectively SPA Directory Services Agreements)
with certain affiliates of Sprint. The directory services license agreement
gives us the exclusive right to produce, publish and distribute directories for
Sprint in 18 states 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 in those
markets from selling local directory advertising, with certain limited
exceptions, or producing, publishing and distributing print directories. The
SPA Directory Services Agreements have initial terms of 50 years, subject to
automatic renewal and early termination under specified circumstances. 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 values of local and national customer relationships were determined
based on the present value of estimated future cash flows and historical
attrition rates and are being amortized under an accelerated method that
assumes 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 20 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. The excess purchase price for the SBC Directory Acquisition and the SPA
Acquisition over the net tangible and identifiable intangible assets acquired
of $204,806 and $97,040, respectively, was recorded as goodwill. Our
intercompany net receivables in connection with the SBC Directory Acquisition
and the SPA Acquisition of $141,209 and $28,487, respectively, were eliminated
and included in goodwill. While we do not anticipate significant changes to the fair value of net assets
acquired, additional information could come to our attention that may require
us to revise the purchase price allocation in connection with the SBC Directory
Acquisition. 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. 5. Partnership Income Before the SBC Directory Acquisition, partnership income included our 50% share
of the net profits of DonTech and revenue participation income received
directly from SBC, which was based on the value of advertising sales. As a
result of the SBC Directory Acquisition, SBC ceased paying us revenue
participation income and we no longer recognize our 50% net profits from DonTech.
Thus, the DonTech partnership was eliminated and, accordingly, 15




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commencing on September 1, 2004 we no longer recognize partnership income.
Partnership income during the three and nine months ended September 30, 2004
and 2003 consisted of the following: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenue participation income
    
    $
    15,861
    
    
    $
    26,539
    
    
    $
    65,190
    
    
    $
    75,53950% share of DonTech net income
    
    
    3,405
    
    
    
    6,067
    
    
    
    12,777
    
    
    
    16,041Partnership income
    
    $
    19,266
    
    
    $
    32,606
    
    
    $
    77,967
    
    
    $
    91,580
 6. Long-Term Debt Long-term debt at September 30, 2004 and December 31, 2003 consisted of the
following: September 30, 2004
    
    December 31, 2003Credit Facility
    
    $
    2,267,846
    
    
    $
    1,145,8888 7/8% Senior Notes due 2010
    
    
    325,000
    
    
    
    325,00010 7/8% Senior Subordinated Notes due 2012
    
    
    600,000
    
    
    
    600,0009 1/8% Senior Subordinated Notes
    
    
    
    
    
    
    21,245Total
    
    
    3,192,846
    
    
    
    2,092,133Less current portion
    
    
    126,224
    
    
    
    49,586Long-term debt
    
    $
    3,066,622
    
    
    $
    2,042,547
 In connection with the SBC Directory Acquisition, we amended and restated on
September 1, 2004 our Senior Secured Credit Facility (Credit Facility), which
consists of a $700 million Term Loan A-2, a $1,650 million Term Loan B-2 and a
$175 million Revolving Credit Facility (the Revolver) for an aggregate
facility of $2,525 million. Term Loans A-2 and B-2 require quarterly principal
payments. As of September 30, 2004, the outstanding balances of Term Loans A-2
and B-2 were $592.7 million and $1,644.8 million, respectively. As of September
30, 2004, there were $30.3 million in borrowings under the Revolver. There were
no borrowings under the Revolver as of December 31, 2003. The Revolver and Term
Loan A-2 mature in December 2009, and Term Loan B-2 matures in June 2011.
The Credit Facility provides for a new Term Loan C for
potential borrowings up to $400 million, such proceeds, if borrowed, to be used
to fund acquisitions, for retirement of Notes, and for redemption of,
and payment of dividends on, the Preferred Stock, subject
to certain limitations. Substantially all of our assets, including the capital
stock of our subsidiaries, are pledged to collateralize our obligations under
the Credit Facility and the Senior Notes (defined below). Our Credit Facility bears interest, at our option, at either:  
    
    The higher of (i) a base rate as determined by Deutsche Bank
Securities Inc., Salomon Smith Barney Inc. or Bear, Stearns & Co.
Inc., plus a 1.00% margin on the Revolver and Term Loan A-2 and a 1.25%
margin on Term Loan B-2; and (ii) the Federal Funds Effective Rate (as
defined) plus 1/2 of 1%, plus a 1.00% margin on the Revolver and Term
Loan A-2 and a 1.25% margin on Term Loan B-2; or
    
    LIBOR rate plus a 2.00% margin on the Revolver and Term Loan A-2
and a 2.25% margin on Term Loan B-2. We may elect interest periods of
1, 2, 3, 6, 9 or 12 months for LIBOR borrowings. The effective interest rate on the Credit Facility, including the interest rate
swaps, during the three and nine months ended September 30, 2004 was 4.54% and
4.25%, respectively. We have also 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). Interest is paid on the
Notes semi-annually on June 15 and December 15. The Senior Notes were secured
in conjunction with the restatement of the Credit Facility in connection with
the SBC Directory Acquisition. On February 6, 2004, we redeemed the remaining aggregate principal amount of
the 9 1/8 % Senior Subordinated Notes due 2008 totaling $21.2 million at a
redemption price of 104.563% of the principal amount thereof, plus accrued and
unpaid interest. For the nine months ended September 30, 2004, we recorded
interest expense related to these notes of $1.2 million, consisting of a
premium over par value paid at redemption of $1.0 million, plus the write-off
of $0.2 million of unamortized deferred financing costs. 16




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7. Redeemable Convertible Preferred Stock and Warrants We have 10 million shares of preferred stock authorized for issuance. At
September 30, 2004 and December 31, 2003, we had 200,604 shares of Preferred
Stock outstanding. The Preferred Stock, and any accrued and unpaid dividends,
is convertible into common stock at any time at a price of $24.05 and earns a
cumulative dividend of 8% compounded quarterly. We cannot pay cash dividends
on the Preferred Stock through September 2005, during which time the dividends
will accrue. After October 1, 2005, we may pay the Preferred Stock dividends
in cash, subject to any limitations under our Credit Facility, or allow it to
accrue, at our option. In connection with the issuance of the Preferred Stock,
we also issued warrants to purchase 1.65 million shares of our common stock
with exercise prices ranging between $26.82 and $28.62, which are exercisable
at any time during a five-year term. 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 of 45 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 holder in the event of a change in
control (as defined). At September 30, 2004 and December 31, 2003, the
redemption value of the Preferred Stock was $230.3 million and $217.0 million,
respectively, and at September 30, 2004, the Preferred Stock was convertible
into approximately 9.6 million shares of common stock. The net proceeds received from the issuance of Preferred Stock were allocated
to the Preferred Stock, warrants issued along with Preferred Stock and the
beneficial conversion feature (BCF) of the Preferred Stock based on their
relative fair values. The fair value of the Preferred Stock was estimated
using the dividend discount method, which determines the fair value based on
the discounted cash flows of the security. The BCF is a function of the
conversion price of the Preferred Stock, the fair value of the warrants and the
fair market value of the underlying common stock on the date of issuance of the
preferred stock. In connection with the issuance of our Preferred Stock and
each subsequent quarterly dividend date, a BCF was recorded because the fair
value of the underlying common stock at the time of issuance of the preferred
stock was greater than the conversion price of the Preferred Stock. The BCF is
treated as a deemed dividend because the Preferred Stock was convertible into
common stock immediately after issuance. The Preferred Stock dividend for the
three and nine months ended September 30, 2004 of $5.5 million and $16.2
million, respectively, consisted of the stated 8% dividend of $4.5 million and
$13.3 million, respectively, and a BCF of $1.0 million and $2.9 million,
respectively. The Preferred Stock dividend for the three and nine months
ended September 30, 2003 of $5.1 million and $53.2 million, respectively,
consisted of the stated 8% dividend of $4.2 million and $12.2 million,
respectively, and a BCF of $0.9 million and $41.0 million, respectively. The
BCF recorded in the nine months ended September 30, 2003 was higher than BCF
amounts recorded in subsequent periods, reflecting the issuance of the
preferred stock and related warrants in January 2003. 8. Restructuring Charge Following the SPA Acquisition, we consolidated publishing and technology
operations, sales offices and administrative personnel and relocated the
headquarters functions in Overland Park, Kansas and Purchase, New York to Cary,
North Carolina. Approximately 140 people were affected by the relocation of
the headquarters functions in Overland Park, Kansas and Purchase, New York, of
which 75 have been included in the restructuring reserve. The remaining 65
people have relocated with the Company. In 2003, $9.5 million was charged to
earnings primarily representing severance and related costs associated with the
consolidation of the publishing and technology operations, sales offices and
administrative personnel and the relocation of our headquarters. In the second
quarter of 2004, an additional reserve of $0.7 million was recorded
representing an adjustment to previous severance and related cost estimates. In
the third quarter of 2004, an additional reserve of $0.1 million was recorded
representing an adjustment to previous severance cost estimates. Payments of
$2.0 million and $6.1 million were made during the three and nine months ended
September 30, 2004, respectively, and the remaining costs will be paid in 2004
and 2005. An additional reserve of $2.1 million was recorded during the second
quarter of 2004, representing the estimated fair value of the remaining lease
payments, net of estimated sub-lease income, on the former headquarters office
lease in New York. Payments of $0.2 million and $0.3 million were made with
respect to the former headquarters office lease during the three and nine
months ended September 30, 2004, respectively, and the remaining payments will
be made through 2006. In 2003, a $2.2 million reserve was recorded, with an offsetting charge to
goodwill, representing the closure of the pre-press publishing facility
operated by SPA in Tennessee. The reserve represented the remaining lease
payments, net of estimated sub-lease income, on the pre-press facility.
Payments of $0.2 million and $0.5 million were made 17




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with respect to the former pre-press publishing facility during the three and
nine months ended September 30, 2004, respectively, and the remaining payments
will be made through 2012. The table below shows the activity in our restructuring reserve during the
three and nine months ended September 30, 2004. Three MonthsEnded September 30,2004Balance at June 30, 2004
    
    $
    7,177Additions to reserve charged to earnings
    
    
    79Payments
    
    
    (2,317
    )Balance at September 30, 2004
    
    $
    4,939
 Nine MonthsEnded September 30,2004Balance at January 1, 2004
    
    $
    8,499Additions to reserve charged to earnings
    
    
    3,280Payments
    
    
    (6,840
    )Balance at September 30, 2004
    
    $
    4,939
 9. Benefit Plans Retirement Plans.R. H. Donnelley has a defined benefit pension plan covering
substantially all employees with at least one year of service. The benefits to
be paid to employees are based on age, years of service and a percentage of
total annual compensation. The percentage of compensation allocated to a
retirement account ranges from 3.0% to 12.5% depending on age and years of
service (cash balance benefit). Benefits for certain employees who were
participants in the predecessor The Dun & Bradstreet Corporation (D&B)
defined benefit pension plan are also determined based on the participants
average compensation and years of service (final average pay benefit) and
benefits to be paid will equal the greater of the final average pay benefit or
the cash balance benefit. Pension costs, on an annual basis, are determined
using the projected unit credit actuarial cost method. R.H. Donnelleys
funding policy is to contribute an amount at least equal to the minimum legal
funding requirement. No contributions were required to be made in 2003, 2002
or 2001. The underlying pension plan assets are invested in diversified
portfolios consisting primarily of equity and debt securities. A measurement
date of December 31 is used for the majority of R. H. Donnelleys plan assets. R. H. Donnelley also has an unfunded non-qualified defined benefit pension
plan, the Pension Benefit Equalization Plan (PBEP), which covers senior
executives and certain key employees. Benefits are based on years of service
and compensation (including compensation not permitted to be taken into account
under the previously mentioned defined benefit pension plan). R. H. Donnelley offers a defined contribution savings plan to substantially all
employees and contributes $0.50 for each dollar contributed by a participating
employee, up to a maximum of 6% of each participating employees salary
(including bonus and commissions). Other Postretirement Benefits.R. H. Donnelley has an unfunded postretirement
benefit plan that provides certain healthcare and life insurance benefits to
those full-time employees who reach retirement age while working for the
Company. 18




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The net periodic benefit expense of R.H. Donnelleys pension and postretirement
benefit plans for the three and nine months ended September 30, 2004 and 2003
was as follows: Pension BenefitsThree Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    900
    
    
    $
    821
    
    
    $
    2,700
    
    
    $
    2,443Interest cost
    
    
    963
    
    
    
    928
    
    
    
    2,889
    
    
    
    2,764Expected return on plan assets
    
    
    (1,458
    )
    
    
    (1,478
    )
    
    
    (4,374
    )
    
    
    (4,431
    )Unrecognized prior service cost
    
    
    27
    
    
    
    26
    
    
    
    81
    
    
    
    80Amortization of unrecognized loss
    
    
    138
    
    
    
    1
    
    
    
    414
    
    
    
    1Net periodic benefit expense
    
    $
    570
    
    
    $
    298
    
    
    $
    1,710
    
    
    $
    857
 Other BenefitsThree Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    113
    
    
    $
    122
    
    
    $
    339
    
    
    $
    366Interest cost
    
    
    165
    
    
    
    122
    
    
    
    495
    
    
    
    366Unrecognized prior service cost
    
    
    130
    
    
    
    (17
    )
    
    
    390
    
    
    
    (51
    )Amortization of unrecognized loss
    
    
    32
    
    
    
    25
    
    
    
    96
    
    
    
    75Net periodic benefit expense
    
    $
    440
    
    
    $
    252
    
    
    $
    1,320
    
    
    $
    756
 Net pension benefit expense for DonTechs pension plan was $131 and for
DonTechs postretirement benefit plan was $72 for the three and nine months
ended September 30, 2004, which represents the expense since the date of the
SBC Directory Acquisition. We do not expect to make significant cash contributions to the retirement and
postretirement benefit plans in 2004. In May 2004, the Financial Accounting Standards Board issued Financial Staff
Position (FSP) No. FAS 106-2, Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,
which provides guidance on accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 for employers that
sponsor postretirement healthcare plans that provide drug benefits. The Act
introduces prescription drug care benefits under Medicare and also allows for
certain sponsors of postretirement benefit plans with a drug benefit to receive
a non-taxable federal subsidy if certain criteria are met. The FSP requires
interim and annual period financial statements beginning after June 15, 2004 to
include the effect of the subsidy on the measurement of net periodic
postretirement benefit costs. Pending final guidance on determining actuarial
equivalency, the Company has not yet been able to determine the impact of the
Act on its postretirement benefit plans. As a result, the accumulated
postretirement benefit obligation and net periodic postretirement benefit costs
do not yet reflect the effects of the Act. 10. Business Segments We have revised our historical segment reporting to reflect the change in our
business that resulted from the SBC Directory Acquisition and to reflect how
management now reviews and analyzes the business. Our business of publishing
yellow pages directories is now conducted in one reportable operating segment.
All pre-press publishing services and other ancillary services previously
performed on behalf of others are now performed entirely on behalf of the
directories we now publish. As a result of the SBC Directory Acquisition, SBC
ceased paying us revenue participation income and we no longer
recognize our 50%
net profits from DonTech. Thus, the DonTech partnership investment was
eliminated and, consequently, partnership income was no longer recognized
commencing on September 1, 2004. Accordingly, the previously reported DonTech
operating segment is no longer applicable. 11. Litigation We are involved in various legal proceedings arising in the ordinary course of
our business, as well as certain 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 19




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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
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 below. No material amounts have been accrued in our financial
statements with respect to any of these matters. In order to understand our potential exposure under the litigation and tax
matters described below under the captions Information Resources, Inc. and
Tax Matters, you need to understand the relationship between us and D&B, and
certain of our 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
separated through a spin-off (1996 Distribution) into three separate public
companies: The Dun and Bradstreet Corporation, ACNielsen Corporation
(ACNielsen), and Cognizant Corporation (Cognizant). In June 1998, The Dun &
Bradstreet Corporation separated through a spin-off (1998 Distribution) into
two separate public companies: R.H. Donnelley Corporation (formerly The Dun &
Bradstreet Corporation) and a new company that changed its name to The Dun &
Bradstreet Corporation. Later in 1998, Cognizant separated through a spin-off
(Cognizant Distribution) into two separate public companies: IMS Health
Incorporated (IMS), and Nielsen Media Research, Inc. (NMR). In September
2000, The Dun & Bradstreet Corporation separated into two separate public
companies: Moodys Corporation, (Moodys) (formerly The Dun & Bradstreet
Corporation), and a new company that changed its name to The Dun & Bradstreet
Corporation. As a result of the form of R.H. Donnelley Corporations separation
from The Dun & Bradstreet Corporation in 1998, we are the corporate successor
of and technically the defendant and taxpayer referred to below as D&B with
respect to any matter accruing prior to June 30 1998. Information Resources, Inc. The following is a description of an antitrust lawsuit filed in 1996 by
Information Resources, Inc. (IRI). As more fully described below, VNU N.V., a
publicly traded Dutch company (VNU), and its U.S. subsidiaries VNU, Inc., AC
Nielsen, AC Nielsen (US), Inc. (ACN (US)), and NMR (collectively, the VNU
Parties), have assumed exclusive joint and several liability for any judgment
or settlement of this antitrust lawsuit. As a result of the indemnity
obligation, we do not have any exposure to a judgment or settlement of this
lawsuit unless the VNU Parties default on their obligations. In the event of
such default, we have contingent liability for this matter as a result of our
succeeding to D&Bs liabilities and obligations as part of the 1998
Distribution. In such event, however, under the contractual commitments
described below, any such amounts that we might need to pay would be shared
equally (50% each) by D&B and Moodys, on a joint and several basis. Only if
D&B and Moodys were unable to bear all or a part of this liability, would we
be liable, and then only to the extent that either of them could not satisfy
their joint and several indemnity obligations to us. In July 1996, IRI filed a complaint, and subsequently amended in 1997, in the
United States District Court for the Southern District of New York, naming as
defendants D&B (now, the Company, as successor of D&B), A.C. Nielsen Company (a
subsidiary of ACNielsen) and IMS (then known as Cognizant), at the time of the
filing, all wholly owned subsidiaries of D&B. The complaint alleges various violations of U.S. antitrust laws under Sections
1 and 2 of the Sherman Antitrust 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s antitrust claims allege that the defendants developed and implemented a
plan to undermine IRIs ability to compete within the U.S. and foreign markets
in North America, Latin America, Asia, Europe and Australia/New Zealand through
a series of anti-competitive practices, including: unlawfully tying/bundling
services in the markets in which defendants allegedly had monopoly power with
services in markets in which ACNielsen competed with IRI; entering into
exclusionary contracts with retailers in certain countries to deny IRIs access
to sales data necessary to 20




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provide retail tracking services or to artificially raise the cost of that
data; predatory pricing; acquiring foreign market competitors with the intent
of impeding IRIs efforts to expand; disparaging IRI to financial analysts and
clients; and denying IRI access to capital necessary for it to compete. IRIs complaint originally sought damages in excess of $350.0 million, which
amount IRI sought to treble under antitrust laws. IRI has since revised its
allegation of damages to exceed $650.0 million, which IRI also seeks to treble.
IRI has filed with the Court the report of its expert who has opined that IRI
suffered damages of between $581.6 million and $651.7 million from the
defendants alleged practices. IRI also seeks punitive damages of an
unspecified amount. In April 2003, the court denied a motion for partial summary judgment by the
defendants that sought to dismiss certain of IRIs claims and granted in part a
motion by IRI seeking reconsideration of certain summary judgment rulings the
Court had previously made in favor of the defendants. The motion granted by
the court concerns IRIs claims of injuries from defendants alleged conduct in
certain foreign markets. Pursuant to a scheduling order entered by the Court on April 8, 2004, discovery
ended on November 1, 2004, and trial is scheduled to begin April 18, 2005. On June 21, 2004, pursuant to a stipulation between IRI and defendants, the
Court ordered that certain of IRIs claims be dismissed with prejudice from the
lawsuit, including the claim for tortious interference with the SRG
acquisition. We believe that the dismissal of the tortious interference claims
also precludes any claim for punitive damages. In connection with the 1996 Distribution, Cognizant (now NMR), ACNielsen and
D&B (now the Company) entered into an Indemnity and Joint Defense Agreement
(the Original JDA), pursuant to which they agreed to:  
    
    allocate potential liabilities that may relate to, arise out of or
result from the IRI lawsuit (IRI Liabilities); and
    
    conduct a joint defense of such action. In particular, the Original JDA provided that:  
    
    ACNielsen would assume exclusive liability
for IRI Liabilities up to a maximum amount to
be calculated at such time as such
liabilities become payable as a result of a
final non-appealable judgment or any
settlement permitted under the Original JDA
(the ACN Maximum Amount); and
    
    D&B and Cognizant would share liability equally for any
amounts in excess of the ACN Maximum Amount. As a result of VNUs acquisition of ACNielsen in 2001, VNU assumed ACNielsens
liabilities under the Original JDA and pursuant to the Original JDA would be
included with ACNielsen in the computation of the ACN Maximum Amount. On July 30, 2004, the VNU Parties, the Company, D&B, Moodys and IMS entered
into an Amended and Restated Indemnity and Joint Defense Agreement (the
Amended JDA). Pursuant to the Amended JDA, any and all IRI Liabilities incurred by us, D&B,
Moodys or IMS relating to a judgment (even if not final) or any settlement
being entered into in the IRI action will be jointly and severally assumed and
fully discharged exclusively by the VNU Parties. Under the Amended JDA, the VNU
Parties have agreed to, jointly and severally, indemnify us, D&B, Moodys and
IMS from and against all IRI Liabilities to which they become subject. As a
result, the concept of ACN Maximum Amount which had been used under the
Original JDA to cap ACNielsens liability for the IRI Liabilities no longer
exists, and all such liabilities are the responsibility of the VNU Parties
pursuant to the Amended JDA. In addition, the Amended JDA provides that if it becomes necessary to post any
bond pending an appeal of an adverse judgment, then the VNU Parties shall
obtain the bond required for the appeal and shall pay the full cost of 21




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such bond. In connection with entering into the Amended JDA, the Company, D&B, Moodys and
IMS agreed to amend certain covenants of the Original JDA to provide
operational flexibility for ACNielsen going forward. In addition, the Amended
JDA includes certain amendments to the covenants of ACNielsen (which, under the
Amended JDA, are now also applicable to ACN (US), which we understand holds
ACNielsens operating assets) which are designed to preserve such parties
claim-paying ability and protect the Company, D&B, Moodys and IMS. Among other
covenants, ACNielsen and ACN (US) agreed that neither they nor any of their
respective subsidiaries will incur any indebtedness to any affiliated person,
except indebtedness which its payment will, after a payment obligation under
the Amended JDA comes due, be conditioned on, and subordinated to, the payment
and performance of the obligations of such parties under the Amended JDA. VNU
has agreed to having a process agent in New York to receive on its behalf
service of any process concerning the Amended JDA. 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 any liabilities arising under the Original JDA, and IRI
Liabilities arising from the IRI action itself, and in each case 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. We understand
that D&B and Moodys have agreed amongst themselves to share equally (50% each)
these indemnity obligations to us. Only if D&B and Moodys were unable to bear
all or a part of their aggregate 50% share of the liability in excess of the
cap, would we be liable, and then only to the extent that either of them could
not satisfy their joint and several indemnity obligations to us. Because liability for violations of the antitrust laws is joint and several and
because the rights and obligations relating to the Amended JDA are based on
contractual relationships, the failure of the VNU Parties to fulfill their
obligations under the Amended JDA could result in the other parties bearing all
or a share of the IRI Liabilities. Joint and several liability for the IRI
Liabilities means that even where more than one defendant is determined to have
been responsible for an alleged wrongdoing, the plaintiff can collect all or
part of the judgment from just one of the defendants. This is true regardless
of whatever contractual allocation of responsibility the defendants and any
other indemnifying parties may have made, including the allocations described
above between the VNU Parties, the Company, D&B, Moodys and IMS. Accordingly, and as a result of the allocations of liability described above,
in the event the VNU Parties default on their obligations under the Amended
JDA, each of D&B and Moodys will be jointly and severally responsible for the
payment of any portion of any judgment or settlement ultimately payable by the
Company (which is the defendant in the IRI action), which could be as high as
all of the IRI Liabilities. We are unable to predict the outcome of the IRI litigation or the financial
condition of any of the VNU Parties or the other defendants at the time of any
such outcome (and hence we cannot estimate their ability to pay the IRI
Liabilities pursuant to the Amended JDA or the judgment or settlement in the
IRI action). Nonetheless, while we cannot assure you as to the outcome of this
matter, management presently believes that the VNU Parties have sufficient
financial resources and borrowing capacity to satisfy their obligations under
the Amended JDA and, if they default, D&B and Moodys have sufficient financial
resources and borrowing capacity to reimburse us for any payments we may be
required to make and related costs we may incur in connection with this matter.
Therefore, management presently believes that the ultimate resolution of this
matter would not have a material adverse effect on the Companys results of
operations, cash flows or financial condition. Accordingly, no amount in
respect of this matter has been accrued in our consolidated financial
statements. Tax Matters D&B entered into global tax-planning initiatives in the normal course of its
business, primarily through tax-free restructurings of both its foreign and
domestic operations (collectively, Legacy Tax Matters). The IRS is currently
disputing certain tax positions taken with respect to the Legacy Tax Matters.
The status of these Legacy Tax Matters is summarized below, including the
status of the tentative settlements of two of these matters described in our
Form 10-Q for the quarter ended June 30, 2004 (Q2 Form10-Q). Pursuant to a series of tax sharing and other agreements (collectively, Tax
Sharing Agreements) relating to the spin-offs and separations referred to
above, IMS and NMR are jointly and severally liable for, and must pay one-half
of, and D&B and Moodys are jointly and severally liable for, and must pay the
other half of, any payments over 22




---



##### 



$137.0 million for taxes, accrued interest and other amounts resulting from the
Legacy Tax Matters summarized below (other than the matter summarized below
under  Amortization and Royalty Expense Deductions/Royalty Income 
1997-2004, 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 $137.0 million of tax liability in connection with the matter
summarized below as  Utilization of Capital Losses  1989-1990. Under the terms of the 1998 Distribution, D&B agreed to assume the defense and
to indemnify us against 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 Legacy 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 terms of certain of the other spin-offs and separations, D&B
and Moodys have, between each other, agreed to 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. Only if D&B and Moodys were unable to bear all or a part of these
liabilities, would we be liable, and then only to the extent that both of them
could not satisfy their joint and several indemnity obligations to us. As we previously reported in our Q2 Form10-Q, we understand that D&B has
negotiated with the IRS a tentative settlement of all outstanding issues
related to the matters described below under Utilization of Capital Losses 
1989-1990 (Capital Losses Matter) and, with respect to the matters described
below under Royalty Expense Deductions  1993-1997 (Royalty Expense
Matter), has negotiated a tentative settlement for tax years 1995 and 1996,
which represented the great majority of the probable exposure for the Royalty
Expense Matter (collectively, the Proposed Settlements). Having achieved the
Proposed Settlements, the next step in the resolution process is for the
relevant parties and the IRS to negotiate and execute final settlement
agreements reflecting the terms of the respective Proposed Settlements, and
then for the IRS to tender to the relevant taxpayer parties final settlement
agreements. We understand that D&B is presently awaiting receipt of a final
settlement agreement from the IRS with respect to the Capital Losses Matter
and, as further described below, D&B recently received from the IRS a final
settlement agreement with respect to the Royalty Expense Matter. These
Proposed Settlements and any proposed final settlement agreements are
tentative, and will not bind any of the parties until final settlement
agreements are executed. While we cannot assure you as to the outcome in these Legacy Tax Matters,
management presently believes that D&B and Moodys have sufficient financial
resources, borrowing capacity and, where applicable, indemnity rights against
IMS and NMR (who succeeded to Cognizants indemnity obligations under the
Cognizant Distribution) and IMS and NMR in turn have sufficient financial
resources and borrowing capacity to satisfy their respective indemnity
obligations to D&B and Moodys, so as to reimburse us for any payments we may
be required to make and related costs we may incur in connection with these
Legacy Tax Matters. Therefore, management presently believes that the ultimate
resolution of these Legacy Tax Matters would not have a material adverse effect
on the Companys results of operations, cash flows or financial condition. Utilization of Capital Losses  1989  1990 (Proposed Settlement Pending) 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 notice of
adjustment. The amended tax return reflected an additional $561.6 million of
tax and interest due. In 2000, D&B paid the IRS approximately $349.3 million
and IMS (on behalf of itself and NMR) paid the IRS approximately $212.3
million. We understand that these payments were made under dispute in order to
stop additional interest from accruing and that D&B has filed a complaint for a
refund in the United States District Court. As noted above, we understand that
D&B has reached a Proposed Settlement of this Capital Losses Matter with the
IRS and is expecting to receive a final settlement agreement reflecting the
terms of such Proposed Settlement. The Proposed Settlement and any final
settlement agreement is tentative and non-binding until a definitive settlement
agreement is executed. The Proposed Settlement requires that the complaint for
a refund be withdrawn and that D&B make an additional payment to the IRS. We
understand that D&B expects that the net impact to D&Bs cash flow to settle
this matter could be up to $14.0 million (tax, interest, and penalties, net of
tax benefits), although we cannot assure you with respect to whether or not
this Capital Losses Matter will be finally resolved or when or on what terms. Royalty Expense Deductions  1993  1997 (Proposed Settlement Pending) In the second quarter of 2003, D&B received (on our behalf) a proposed notice
of deficiency from the IRS with respect to a partnership transaction entered
into in 1993. Specifically, the IRS proposed to disallow certain royalty
expense deductions claimed by D&B on its 1993 through 1996 tax returns. We
understand that D&B estimates that 23




---



##### 



the disallowance of the 1993 and 1994 royalty expense deductions would result
in a loss to it of approximately $5.0 million in pending tax refunds and that
the additional tax liability to it with respect to the disallowance of the 1995
and 1996 royalty expense deductions could be up to approximately $45.5 million
(tax, interest and penalties, net of tax benefits). In addition, and also in the second quarter of 2003, D&B received from the IRS
on behalf of the partnership associated with the above transaction a notice of
proposed partnership adjustment challenging the tax treatment of certain
royalty payments received by the partnership in which D&B was a partner. In
that notice, the IRS is seeking to reallocate certain partnership income to
D&B. In January and April 2004, D&B received additional IRS notices (similar
to those received in the second quarter of 2003) associated with D&Bs
remaining interest in the partnership transaction (as described above) for the
three months in 1997 for which the entities were partners. The additional tax
liability with respect to D&Bs share of this income for the notices received
in the second quarter of 2003 and January and April 2004 could be up to $22.5
million (tax, interest and penalties, net of tax benefits). We understand that
D&B believes that these positions regarding the partnership are inconsistent
with the IRS position with respect to the same royalty expense deductions
described above. This $22.5 million additional liability would be in addition
to the $45.5 million of additional liability related to royalty expense
deductions discussed in the previous paragraph. As noted above, we understand that D&B has reached a Proposed Settlement with
the IRS regarding the disallowance of the 1995 and 1996 royalty expense
deductions portion of the Royalty Expense Matter. We also understand that
during the third quarter of 2004, the IRS tendered to D&B (on our behalf) a
final settlement agreement with respect to the Royalty Expense Matter for tax
years 1995 and 1996, reflecting the financial terms (but not necessarily
reflecting all other terms) set forth in the related Proposed Settlement. The
Proposed Settlement and any final settlement agreement is tentative and
non-binding until a definitive settlement agreement is executed. In accordance with the Tax Sharing Agreements, we and D&B sought consent to
execute the final settlement agreement for the Royalty Expense Matter for tax
years 1995 and 1996 from the relevant parties having financial responsibilities
for that matter under the Tax Sharing Agreements (i.e., Moodys, IMS, NMR and
D&B). All such parties consented to the final settlement agreement tendered by
the IRS, with the exception of NMR and IMS. As a result of NMRs and IMSs decision not to consent to the Royalty Expense
Matter final settlement agreement, on November 1, 2004, D&B informed the IRS
that we could not execute the final settlement agreement. On November 3, 2004,
the IRS informed D&B that it was withdrawing the final settlement agreement
with respect to the Royalty Expense Matter. As a result, we cannot predict at
this time whether or not, or when, the parties will be able to conclude
negotiations with the IRS with respect to a final settlement agreement
regarding the Royalty Expense Matters for tax years 1995 and 1996 on the
financial terms and/or other terms set forth in the Proposed Settlement, if at
all. The Tax Sharing Agreements, which govern each of the parties rights and
obligations under these circumstances, provide (the Royalty Expense Indemnity
& Defense Provisions) that, a party withholding consent to a proposed
settlement shall continue or initiate further proceedings with the IRS at
its own expense, and the liability of [the parties previously in control of
such proceedings] shall be limited to the liability that would have resulted
from the proposed settlement agreement [that was not consented to] (including
interest, additions to tax and penalties which have accrued at that time.)
We believe, therefore, as a result of the failure of NMR and IMS to provide
their consent, our contingent (assuming each of D&B and Moodys fail to satisfy
their indemnity obligations to us) liability for this Royalty Expense Matter
with respect to tax years 1995 and 1996 has been effectively capped at the
amounts provided in the final settlement agreement tendered by the IRS. We also
believe that in accordance with the Royalty Expense Indemnity & Defense
Provisions, NMR and IMS would be jointly and severally liable for any excess
amounts above those reflected in the final settlement agreement tendered by the
IRS that may ultimately be owing under this Royalty Expense Matter with respect
to tax years 1995 and 1996. We understand that D&B estimates that the ultimate
resolution of this portion of the Royalty Expense Matter would have a projected
net impact to its cash flow of $37.2 million (tax, interest and penalties, net
of tax benefits). IMS has recently alleged various breaches of our and D&Bs obligations under
the Tax Sharing Agreements related to D&Bs management and attempted settlement
of this matter with the IRS. In addition to reserving it rights against us
and D&B, IMS has urged NMR (which is in direct contractual privity with us) to:  
    
    challenge our application of the Royalty Expense
Indemnity & Defense Provisions of the Tax Sharing Agreements 
specifically that NMR should reject our position that NMR must
now lead 24




---



##### 



the defense and that NMR and IMS jointly and severally
indemnify us for any financial outcome that is less advantageous
to us than the final settlement agreement); ando
    
    assert breaches of contract and to terminate the
obligations of IMS and NMR to be jointly and severally liable
for, and pay, one-half of the liabilities associated with the
Legacy Tax Matters as provided under the Tax Sharing Agreements
generally. We and our legal counsel, and we understand D&B and their legal counsel,
believe that neither NMR nor IMS have any right or the legal basis to terminate
their indemnity obligations under the Tax Sharing Agreements, and that any
attempt by them to do so will be found to be without merit, although we cannot
assure you with respect to the ultimate outcome of that issue or with respect
to the timing of its resolution. We anticipate commencing arbitration proceedings along with D&B to enforce our
respective rights under the Royalty Expense Indemnity & Defense Provisions and
other provisions of the Tax Sharing Agreements should the negotiation process
required by the Tax Sharing Agreements fail to resolve the parties dispute.
While we believe that we should prevail in such arbitration, and thereby
effectively cap our exposure with respect to the Royalty Expense Matter for tax
years 1995 and 1996 at the levels described above, we cannot assure you as to
the ultimate outcome of this matter or with respect to the timing of its
resolution. The 1993, 1994, and 1997 royalty expense deduction portions of the Royalty
Expense Matter remain pending before the IRS. We understand that D&B estimates
that the disallowance of the deductions for those tax years represents an
exposure to it of approximately $6.6 million (tax, interest, and penalties, net
of tax benefits). Amortization Expense Deductions  1997  2004 In the fourth quarter of 2003, D&B received (on our behalf) IRS notices of
proposed adjustment with respect to a partnership transaction entered into in
1997. In addition, D&B received, on behalf of the partnership, various IRS
materials further explaining the examining agents position with respect to the
activities of the partnership in 1997 and 1998. In April 2004, D&B received (on our behalf) proposed notices of deficiency from
the IRS, proposing adjustments with respect to the same partnership transaction
entered into in 1997 described above. The adjustments proposed in the April
notices reflect the notices of proposed adjustment and other IRS materials
referred to above. Specifically, the IRS asserted that certain amortization expense deductions
claimed by D&B on its 1997 and 1998 tax returns should be disallowed. We
understand that D&B estimates that the additional tax liability to it as a
result of the disallowance of the 1997 and 1998 amortization deductions and the
disallowance of such deductions claimed from 1999 to date could be up to $57.8
million (tax, interest and penalties, net of tax benefits). This transaction
is scheduled to expire in 2012 and, unless earlier terminated, based on current
interest rates and tax rates, additional tax exposure would increase at a rate
of approximately $2.1 million per quarter (including potential penalties) as
future amortization expenses are deducted. In addition, the IRS has asserted that royalty expense deductions, claimed by
D&B on its tax returns for 1997 and 1998 for royalties paid to the partnership
should be disallowed. The IRS also has asserted that the receipt of these same
royalties by the partnership should be reallocated to and reported as royalty
income by D&B, including the portions of the royalties that were allocated to
third party partners in the partnership, and, thus, included in their taxable
income. We understand that D&B believes that the IRS stated positions with
respect to the treatment of the royalty expense and royalty income are mutually
inconsistent, making it unlikely that the IRS will prevail on both of the
positions. As a result, we understand that D&B estimates that after taking
into account certain other tax benefits resulting from the IRS position on the
partnership it is unlikely that there will be any additional cash tax payments
due in addition to the amounts noted above related to the amortization expense
deduction. In the event the IRS were to prevail on both positions with respect to the
royalty expense/income, which D&B believes unlikely, D&B estimates that the
additional tax liability to it as a result of the disallowance of the 1997 and
1998 royalty expense deductions, the disallowance of such deductions claimed
from 1999 to date and the inclusion of the reallocated royalty income for all
relevant years could be up to $139.5 million (tax, interest and penalties, net
of tax benefits), which would be in addition to the $57.8 million noted above
related to the amortization expense deduction. 25




---



##### 



We understand that D&B has filed protests relating to these matters with the
IRS Office of Appeals. We understand that during the third quarter of 2004,
D&B was informed by the IRS Office of Appeals that this matter was being
returned to the Examination Division of the IRS for further development of the
issues. We understand that D&B is attempting to resolve these matters at the
Appeals phase before proceeding to litigation, if necessary. If D&B were to
challenge, at any time, any of these IRS positions for years 1997 and 1998 in
U.S. District Court or the U.S. Court of Federal Claims, rather than in U.S.
Tax Court, the disputed amounts for each applicable year would need to be paid
in advance for the Court to have jurisdiction over the case. Conclusion As a result of our assessment of our exposure in these matters relating to our
prior relationship with D&B and its former affiliates, especially in light of
our indemnity arrangements with D&B and Moodys (and the VNU Parties with
respect to the IRI matter), and their respective financial resources, borrowing
capacity and, in the case of certain Legacy Tax Matters, indemnity rights
against IMS and NMR, and in turn IMS and NMRs respective financial resources
and borrowing capacity to satisfy their respective indemnity obligations to D&B
and Moodys, no material amounts have been accrued in our consolidated
financial statements for any of these D&B-related litigation and tax matters. 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 and no material amounts have been accrued in
our consolidated financial statements with respect to these matters. 12. Guarantees R.H. Donnelley Inc. is a direct wholly owned subsidiary of the Company and the
issuer of the Notes. The Company and the direct and indirect wholly owned
subsidiaries of R.H. Donnelley Inc. jointly and severally, fully and
unconditionally, guarantee these debt instruments. At September 30, 2004, R.H.
Donnelley Inc.s direct wholly owned subsidiaries were R.H. Donnelley
Publishing & Advertising, Inc., R.H. Donnelley APIL, Inc., Get Digital
Smart.com Inc., R H. Donnelley Publishing & Advertising of Illinois
Partnership, DonTech Holdings, LLC., R.H. Donnelley Publishing & Advertising of
Illinois Holdings, LLC and DonTech. As of September 30, 2004, R.H. Donnelley Corporation has issued 200,604 shares
of its Preferred Stock. See Note 7, Redeemable Convertible Preferred Stock and
Warrants, for a further description of the terms of the Preferred Stock and the
related dividend requirements. See Note 11, Litigation, for a description of
various legal proceedings in which the Company is involved and related
contingencies. R.H. Donnelley Corporation receives dividends from R.H. Donnelley Inc. for the
payment of income taxes and certain other public company matters. Dividends
for these items in these periods were not material. In general, the Company and its subsidiaries are restricted from paying
dividends to any third party, and our subsidiaries are restricted from paying
dividends, loans or advances to R.H. Donnelley Corporation, with very limited
exceptions, under the terms of our Credit Facility. See Note 6, Long-Term
Debt, for a further description of our debt instruments. 26




---



##### 



R.H. Donnelley Corporation
Consolidating Condensed Balance Sheet
September 30, 2004 R.H.R.H.
    
    DonnelleyDonnelley
    
    Publishing &R.H. Donnelley
    
    R.H. Donnelley
    
    Publishing &
    
    Advertising of
    
    OtherCorp.
    
    Inc.
    
    Advertising,
    
    Illinois
    
    Guarantor
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    Inc.
    
    Partnership
    
    Subsidiaries
    
    Eliminations
    
    CorporationAssetsCash and cash equivalents
    
    $
    
    
    
    $
    9,359
    
    
    $
    (6,476
    )
    
    $
    57
    
    
    $
    (48
    )
    
    $
    
    
    
    $
    2,892Accounts receivable, net
    
    
    
    
    
    
    
    
    
    
    227,964
    
    
    
    181,105
    
    
    
    
    
    
    
    
    
    
    
    409,069Deferred directory costs
    
    
    
    
    
    
    (4,210
    )
    
    
    36,857
    
    
    
    15
    
    
    
    82,755
    
    
    
    
    
    
    
    115,417Other current assets
    
    
    
    
    
    
    20,138
    
    
    
    7,548
    
    
    
    910
    
    
    
    843
    
    
    
    19
    
    
    
    29,459Total current assets
    
    
    
    
    
    
    25,287
    
    
    
    265,894
    
    
    
    182,087
    
    
    
    83,551
    
    
    
    19
    
    
    
    556,837Investment in subsidiaries
    
    
    230,249
    
    
    
    5,989,590
    
    
    
    (2,124,955
    )
    
    
    26,803
    
    
    
    2,830,454
    
    
    
    (6,952,141
    )
    
    
    Fixed assets, net
    
    
    
    
    
    
    27,605
    
    
    
    1,677
    
    
    
    
    
    
    
    5,599
    
    
    
    
    
    
    
    34,881Other assets
    
    
    
    
    
    
    96,879
    
    
    
    
    
    
    
    
    
    
    
    8,092
    
    
    
    
    
    
    
    104,972Intangible assets, net
    
    
    
    
    
    
    
    
    
    
    1,827,792
    
    
    
    
    
    
    
    1,095,330
    
    
    
    
    
    
    
    2,923,122Goodwill
    
    
    
    
    
    
    
    
    
    
    97,040
    
    
    
    
    
    
    
    204,806
    
    
    
    
    
    
    
    301,846Total assets
    
    $
    230,249
    
    
    $
    6,139,361
    
    
    $
    67,447
    
    
    $
    208,890
    
    
    $
    4,227,831
    
    
    $
    (6,952,122
    )
    
    $
    3,921,658Liabilities, Preferred
Stock and Shareholders
Equity (Deficit)Accounts payable and
accrued liabilities
    
    $
    
    
    
    $
    55,104
    
    
    $
    21,251
    
    
    
    10,482
    
    
    $
    13,085
    
    
    
    
    
    
    $
    99,922Deferred directory revenue
    
    
    
    
    
    
    
    
    
    
    239,953
    
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    240,029Current portion LTD
    
    
    
    
    
    
    126,224
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126,224Total current liabilities
    
    
    
    
    
    
    181,328
    
    
    
    261,204
    
    
    
    10,558
    
    
    
    13,086
    
    
    
    
    
    
    
    466,175Long-term debt
    
    
    
    
    
    
    3,066,622
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,066,622Deferred income taxes, net
    
    
    
    
    
    
    4,303
    
    
    
    95,728
    
    
    
    
    
    
    
    30,406
    
    
    
    (145
    )
    
    
    130,292Other long-term liabilities
    
    
    
    
    
    
    26,604
    
    
    
    980
    
    
    
    
    
    
    
    443
    
    
    
    292
    
    
    
    28,319Redeemable convertible
preferred stock
    
    
    211,505
    
    
    
    211,505
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (211,505
    )
    
    
    211,505Shareholders equity
    
    
    18,744
    
    
    
    2,648,999
    
    
    
    (290,465
    )
    
    
    198,332
    
    
    
    4,183,897
    
    
    
    (6,740,763
    )
    
    
    18,744Total liabilities,
preferred stock and
shareholders equity
    
    $
    230,249
    
    
    $
    6,139,361
    
    
    $
    67,447
    
    
    $
    208,890
    
    
    $
    4,227,831
    
    
    $
    (6,952,121
    )
    
    $
    3,921,658
 27




---



##### 



R.H. Donnelley Corporation
Consolidating Condensed Balance Sheet
December 31, 2003 R.H. DonnelleyR.H. Donnelley
    
    R.H. Donnelley
    
    Publishing &
    
    Other
    
    
    
    
    
    ConsolidatedCorp.
    
    Inc.
    
    Advertising,
    
    Guarantor
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    Inc.
    
    Subsidiaries
    
    Eliminations
    
    CorporationAssetsCash and cash equivalents
    
    $
    
    
    
    $
    6,900
    
    
    $
    801
    
    
    $
    21
    
    
    $
    
    
    
    $
    7,722Accounts receivable, net
    
    
    
    
    
    
    
    
    
    
    210,981
    
    
    
    
    
    
    
    
    
    
    
    210,981Deferred directory costs
    
    
    
    
    
    
    
    
    
    
    33,034
    
    
    
    
    
    
    
    
    
    
    
    33,034Other current assets
    
    
    
    
    
    
    12,696
    
    
    
    20,158
    
    
    
    
    
    
    
    
    
    
    
    32,854Total current assets
    
    
    
    
    
    
    19,596
    
    
    
    264,974
    
    
    
    21
    
    
    
    
    
    
    
    284,591Investment in subsidiaries
    
    
    141,978
    
    
    
    2,362,171
    
    
    
    (2,124,955
    )
    
    
    4,250,311
    
    
    
    (4,453,776
    )
    
    
    175,729Fixed assets, net
    
    
    
    
    
    
    17,201
    
    
    
    3,424
    
    
    
    
    
    
    
    (1
    )
    
    
    20,624Other assets
    
    
    
    
    
    
    95,583
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95,583Intangible assets
    
    
    
    
    
    
    
    
    
    
    1,865,167
    
    
    
    
    
    
    
    
    
    
    
    1,865,167Goodwill
    
    
    
    
    
    
    
    
    
    
    97,040
    
    
    
    
    
    
    
    
    
    
    
    97,040Total assets
    
    
    141,978
    
    
    $
    2,494,551
    
    
    $
    105,650
    
    
    $
    4,250,332
    
    
    $
    (4,453,777
    )
    
    $
    2,538,734Liabilities, Preferred Stock
and Shareholders DeficitAccrued liabilities
    
    $
    
    
    
    $
    119,155
    
    
    $
    19,292
    
    
    $
    
    
    
    $
    (104,945
    )
    
    $
    33,502Deferred revenue
    
    
    
    
    
    
    
    
    
    
    216,525
    
    
    
    
    
    
    
    
    
    
    
    216,525Current portion LTD
    
    
    
    
    
    
    49,586
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,586Total current liabilities
    
    
    
    
    
    
    168,741
    
    
    
    235,817
    
    
    
    
    
    
    
    (104,945
    )
    
    
    299,613Long-term debt
    
    
    
    
    
    
    2,042,547
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,042,547Deferred tax
    
    
    
    
    
    
    (22,739
    )
    
    
    (50,480
    )
    
    
    106,848
    
    
    
    
    
    
    
    33,629Other long-term liabilities
    
    
    
    
    
    
    20,940
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    20,967Redeemable convertible
preferred stock
    
    
    198,223
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198,223Shareholders (deficit) equity
    
    
    (56,245
    )
    
    
    285,062
    
    
    
    (79,714
    )
    
    
    4,143,484
    
    
    
    (4,348,832
    )
    
    
    (56,245
    )Total liabilities, preferred
stock and shareholders
(deficit) equity
    
    $
    141,978
    
    
    $
    2,494,551
    
    
    $
    105,650
    
    
    $
    4,250,332
    
    
    $
    (4,453,777
    )
    
    $
    2,538,734
 28




---



##### 



R.H. Donnelley Corporation
Consolidating Condensed Statement of Operations
For the Three Months Ended September 30, 2004 R.H.R.H.
    
    DonnelleyDonnelley
    
    Publishing &R.H. Donnelley
    
    R.H. Donnelley
    
    Publishing &
    
    Advertising of
    
    OtherCorp.
    
    Inc.
    
    Advertising,
    
    Illinois
    
    Guarantor
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    Inc.
    
    Partnership
    
    Subsidiaries
    
    Eliminations
    
    CorporationRevenue
    
    $
    
    
    
    $
    3,105
    
    
    $
    140,759
    
    
    $
    540
    
    
    $
    8,310
    
    
    $
    (8,310
    )
    
    $
    144,405Expenses
    
    
    
    
    
    
    (29,387
    )
    
    
    89,498
    
    
    
    40,552
    
    
    
    5,591
    
    
    
    (16,270
    )
    
    
    89,985Partnership income
    
    
    
    
    
    
    3,405
    
    
    
    
    
    
    
    
    
    
    
    23,820
    
    
    
    (7,959
    )
    
    
    19,266Equity income (loss)
    
    
    79,625
    
    
    
    148,793
    
    
    
    
    
    
    
    
    
    
    
    (37,886
    )
    
    
    (190,530
    )
    
    
    Operating income (loss)
    
    
    79,625
    
    
    
    184,690
    
    
    
    51,261
    
    
    
    (40,012
    )
    
    
    (11,348
    )
    
    
    (190,531
    )
    
    
    73,686Interest expense
    
    
    
    
    
    
    43,157
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,157Pre-tax income (loss)
    
    
    79,625
    
    
    
    141,533
    
    
    
    51,261
    
    
    
    (40,012
    )
    
    
    (11,348
    )
    
    
    (190,530
    )
    
    
    30,529Income tax (benefit) expense
    
    
    
    
    
    
    (40,265
    )
    
    
    56,948
    
    
    
    (40,012
    )
    
    
    (4,628
    )
    
    
    
    
    
    
    12,055Net income (loss)
    
    
    79,625
    
    
    
    181,798
    
    
    
    (5,687
    )
    
    
    
    
    
    
    (6,720
    )
    
    
    (190,530
    )
    
    
    18,474Preferred dividend
    
    
    5,501
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,501Income (loss) available to
common shareholders
    
    $
    74,124
    
    
    $
    181,798
    
    
    $
    (5,687
    )
    
    $
    (40,012
    )
    
    $
    (6,720
    )
    
    $
    (190,530
    )
    
    $
    12,973
 R.H. Donnelley Corporation
Consolidating Condensed Statement of Operations
For the Three Months Ended September 30, 2003 R.H.DonnelleyR.H. Donnelley
    
    R.H. Donnelley
    
    Publishing &
    
    Other
    
    
    
    
    
    ConsolidatedCorp.
    
    Inc.
    
    Advertising
    
    Guarantor
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    Inc.
    
    Subsidiaries
    
    Eliminations
    
    CorporationNet revenue
    
    $
    
    
    
    $
    4,594
    
    
    $
    84,715
    
    
    $
    
    
    
    $
    
    
    
    $
    89,309Expenses
    
    
    
    
    
    
    21,437
    
    
    
    49,607
    
    
    
    31
    
    
    
    
    
    
    
    71,075Partnership and equity
(loss) income
    
    
    3,798
    
    
    
    46,898
    
    
    
    
    
    
    
    58,373
    
    
    
    (76,463
    )
    
    
    32,606Operating (loss) income
    
    
    3,798
    
    
    
    30,055
    
    
    
    35,108
    
    
    
    58,373
    
    
    
    (76,463
    )
    
    
    50,840Interest (expense) income
    
    
    
    
    
    
    (47,313
    )
    
    
    (48,169
    )
    
    
    49,951
    
    
    
    
    
    
    
    (45,531
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pre-tax (loss) income
    
    
    3,798
    
    
    
    (17,258
    )
    
    
    (13,061
    )
    
    
    108,293
    
    
    
    (76,463
    )
    
    
    (5,309
    )Income tax expense (benefit).
    
    
    (105
    )
    
    
    (21,056
    )
    
    
    (5,146
    )
    
    
    27,713
    
    
    
    
    
    
    
    (1,406
    )Net (loss) income
    
    
    3,903
    
    
    
    3,798
    
    
    
    (7,915
    )
    
    
    80,580
    
    
    
    (76,463
    )
    
    
    (3,903
    )Preferred dividend
    
    
    5,082
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,082(Loss) income available to
common shareholders
    
    $
    (1,179
    )
    
    $
    3,798
    
    
    $
    (7,915
    )
    
    $
    80,580
    
    
    $
    (76,463
    )
    
    $
    (1,179
    )
 29




---



##### 



R.H. Donnelley Corporation
Consolidating Condensed Statement of Operations
For the Nine Months Ended September 30, 2004 R.H.R.H.
    
    DonnelleyDonnelley
    
    Publishing &R.H. Donnelley
    
    R.H. Donnelley
    
    Publishing &
    
    Advertising of
    
    Other
    
    
    
    
    
    ConsolidatedCorp.
    
    Inc.
    
    Advertising,
    
    Illinois
    
    Guarantor
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    Inc.
    
    Partnership
    
    Subsidiaries
    
    Eliminations
    
    CorporationNet revenue
    
    $
    
    
    
    $
    12,971
    
    
    $
    419,341
    
    
    $
    540
    
    
    $
    8,310
    
    
    $
    (8,310
    )
    
    $
    432,853Expenses
    
    
    
    
    
    
    16,380
    
    
    
    211,955
    
    
    
    (40,552
    )
    
    
    5,642
    
    
    
    (16,269
    )
    
    
    258,262Partnership income
    
    
    
    
    
    
    12,777
    
    
    
    
    
    
    
    
    
    
    
    73,148
    
    
    
    (7,959
    )
    
    
    77,967Equity income
    
    
    79,625
    
    
    
    148,793
    
    
    
    
    
    
    
    
    
    
    
    (37,886
    )
    
    
    (190,532
    )
    
    
    Operating
income (loss)
    
    
    79,625
    
    
    
    158,161
    
    
    
    207,386
    
    
    
    (40,012
    )
    
    
    37,929
    
    
    
    (190,531
    )
    
    
    252,558Interest expense
    
    
    
    
    
    
    120,951
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,951Pre-tax income
    
    
    79,625
    
    
    
    37,210
    
    
    
    207,386
    
    
    
    (40,012
    )
    
    
    37,929
    
    
    
    (190,531
    )
    
    
    131,607Income tax (benefit) expense
    
    
    
    
    
    
    (42,415
    )
    
    
    81,431
    
    
    
    
    
    
    
    12,965
    
    
    
    
    
    
    
    51,981Net income
    
    
    79,625
    
    
    
    79,625
    
    
    
    125,955
    
    
    
    (40,012
    )
    
    
    24,964
    
    
    
    (190,531
    )
    
    
    79,626Preferred dividend
    
    
    16,180
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,180Income available to common
shareholders
    
    $
    63,445
    
    
    $
    79,625
    
    
    $
    125,955
    
    
    $
    (40,012
    )
    
    $
    24,964
    
    
    $
    (190,531
    )
    
    $
    63,446
 R.H. Donnelley Corporation
Consolidating Condensed Statement of Operations
For the Nine Months Ended September 30, 2003 R.H.R.H. Donnelley
    
    R.H. Donnelley
    
    Donnelley
    
    Other
    
    
    
    
    
    ConsolidatedCorp.
    
    Inc.
    
    Publishing &
    
    Guarantor
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    Advertising
    
    Subsidiaries
    
    Eliminations
    
    CorporationNet revenue
    
    $
    
    
    
    $
    17,597
    
    
    $
    122,766
    
    
    $
    
    
    
    $
    
    
    
    $
    140,363Expenses
    
    
    
    
    
    
    56,817
    
    
    
    135,296
    
    
    
    442
    
    
    
    
    
    
    
    192,555Partnership (loss) income
    
    
    (56,649
    )
    
    
    64,237
    
    
    
    
    
    
    
    169,911
    
    
    
    (85,919
    )
    
    
    91,580Operating (loss) income
    
    
    (56,649
    )
    
    
    (25,017
    )
    
    
    (12,530
    )
    
    
    169,469
    
    
    
    (85,919
    )
    
    
    39,388Interest (expense) income
    
    
    
    
    
    
    (142,806
    )
    
    
    (143,079
    )
    
    
    148,425
    
    
    
    
    
    
    
    (137,460
    )Other income
    
    
    
    
    
    
    1,523
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,523Pre-tax (loss) income
    
    
    (56,649
    )
    
    
    (16,266
    )
    
    
    (155,609
    )
    
    
    317,894
    
    
    
    (85,919
    )
    
    
    (96,549
    )Income tax (benefit) expense
    
    
    (455
    )
    
    
    (59,617
    )
    
    
    (61,310
    )
    
    
    81,027
    
    
    
    
    
    
    
    (40,355
    )Net (loss) income
    
    
    (56,194
    )
    
    
    (56,619
    )
    
    
    (94,299
    )
    
    
    236,867
    
    
    
    (85,919
    )
    
    
    (56,194
    )Preferred dividend
    
    
    53,214
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,214(Loss) income available to
common shareholders
    
    $
    (109,408
    )
    
    $
    (56,649
    )
    
    $
    (94,299
    )
    
    $
    236,867
    
    
    $
    (85,919
    )
    
    $
    (109,408
    )
 30




---



##### 



R.H. Donnelley Corporation
Consolidating Condensed Statement of Cash Flows
For the Nine Months Ended September 30, 2004 R.H.R.H.
    
    DonnelleyDonnelley
    
    Publishing &
    
    
    
    
    
    
    
    
    
    ConsolidatedR.H. Donnelley
    
    R.H.
    
    Publishing &
    
    Advertising of
    
    Other
    
    
    
    
    
    R.H.Corp.
    
    Donnelley Inc.
    
    Advertising,
    
    Illinois
    
    Guarantor
    
    
    
    
    
    Donnelley(Parent)
    
    (Issuer)
    
    Inc.
    
    Partnership
    
    Subsidiaries
    
    Eliminations
    
    CorporationCash flow from operations
    
    $
    
    
    
    $
    68,076
    
    
    $
    329,949
    
    
    $
    (9,950
    )
    
    $
    132,460
    
    
    $
    (196,832
    )
    
    $
    323,703Cash flow from investing activities
    
    
    
    
    
    
    (17,398
    )
    
    
    38,036
    
    
    
    (12,594
    )
    
    
    (1,433,768
    )
    
    
    
    
    
    
    (1,425,724
    )Cash flow from financing activitiesDebt repayments
    
    
    
    
    
    
    (261,918
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (261,918
    )Intercompany transfers
    
    
    (6,215
    )
    
    
    (1,135,123
    )
    
    
    (397,335
    )
    
    
    22,601
    
    
    
    1,301,240
    
    
    
    (196,832
    )
    
    
    Other
    
    
    6,215
    
    
    
    1,348,821
    
    
    
    4,072
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,359,109Net cash flow from financing
activities
    
    
    
    
    
    
    (48,220
    )
    
    
    (375,263
    )
    
    
    22,601
    
    
    
    1,301,240
    
    
    
    (196,832
    )
    
    
    1,097,191Change in cash
    
    
    
    
    
    
    2,458
    
    
    
    (7,277
    )
    
    
    57
    
    
    
    (68
    )
    
    
    
    
    
    
    (4,830
    )Cash at beginning of year
    
    
    
    
    
    
    6,900
    
    
    
    801
    
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    7,722Cash at end of period
    
    $
    
    
    
    $
    9,358
    
    
    $
    (6,476
    )
    
    $
    57
    
    
    $
    (47
    )
    
    $
    
    
    
    $
    2,892
 R.H. Donnelley Corporation
Consolidating Condensed Statement of Cash Flows
For the Nine Months Ended September 30, 2003 R.H. Donnelley
    
    
    
    
    
    ConsolidatedR.H. Donnelley
    
    R.H.
    
    Publishing &
    
    Other
    
    R.H.Corp.
    
    Donnelley Inc.
    
    Advertising,
    
    Guarantor
    
    Donnelley(Parent)
    
    (Issuer)
    
    Inc.
    
    Subsidiaries
    
    CorporationCash flow from operations
    
    $
    
    
    
    $
    (129,950
    )
    
    $
    43,954
    
    
    $
    312,093
    
    
    $
    226,097Cash flow from investing activities
    
    
    69,300
    
    
    
    (410,214
    )
    
    
    (32,292
    )
    
    
    
    
    
    
    (373,233
    )Cash flow from financing activities
    
    
    (69,300
    )
    
    
    538,217
    
    
    
    11,638
    
    
    
    (312,128
    )
    
    
    145,151Change in cash
    
    
    
    
    
    
    (1,974
    )
    
    
    24
    
    
    
    (35
    )
    
    
    (1,985
    )Cash at beginning of year
    
    
    
    
    
    
    7,745
    
    
    
    
    
    
    
    42
    
    
    
    7,787Cash at end of period
    
    $
    
    
    
    $
    5,771
    
    
    $
    24
    
    
    $
    7
    
    
    $
    5,802
 13. Lease Commitments The lease of the new corporate headquarters building in Cary, North Carolina
commenced April 1, 2004 and expires September 30, 2015. The lease terms
include eight months of free rent and escalating rent thereafter. Total cash
rental payments of $16.0 million will be recognized as rent expense on a
straight-line basis over the lease term. In accordance with FASB Technical
Bulletin No. 88-1, Issues Relating to Accounting for Leases, landlord lease
incentives totaling $2.7 million were recorded during the second quarter of
2004 with a corresponding increase in leasehold improvements, which are being
amortized ratably as a monthly reduction to rent expense over the lease term.
The leasehold improvements are being amortized over the term of the lease or
their useful lives, whichever is less. In connection with the SBC Directory Acquisition, we assumed certain leased
office facilities relating to DonTechs sales operations and its
headquarters. Total cash rental payments, net of sublease rental income, of
$13.8 million will be recognized on a straight-line basis over the terms of
the lease agreements ending in 2013. 31




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations Forward-Looking Information Certain statements contained in this Quarterly Report on Form 10-Q regarding
our 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, may, predicts, could, and similar
expressions, and the negative of those words and other comparable 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. All forward-looking statements attributable to us
or on our behalf are expressly qualified in their entirety by this cautionary
statement. Such risks and uncertainties are described in detail in our Annual
Report on Form 10-K for the year ended December 31, 2003 and our other filings
with the SEC, and, in addition, include the following risks and uncertainties
arising from or otherwise relating to our recent acquisition of the directory
publishing business of SBC Communications, Inc. (SBC) in Illinois and
Northwest Indiana, including SBCs interests in The DonTech II Partnership, our
50/50 general partnership with SBC (DonTech) (collectively, the SBC
Directory Acquisition), and related financing. Unless otherwise indicated, the terms Donnelley, Company, we, us and
our refer to R.H. Donnelley Corporation and its direct and indirect wholly
owned subsidiaries.  (1)
    
    We may not be able to successfully integrate the SBC Directory
Acquisition into our operations, which could adversely affect our
business. The integration of the directory publishing business in Illinois and Northwest
Indiana into our operations involves a number of risks, including:  
    
    difficulty integrating operations;
    
    diversion of management attention;
    
    potential disruption of ongoing business because of the unknown reactions to the combination of the acquired business and
Donnelley by vendors, customers and other key constituencies;
    
    difficulties in assimilating the employees, technologies, services and products of the acquired business;
    
    inability to retain key personnel;
    
    inability to successfully incorporate acquired business components with Donnelleys existing infrastructure; and
    
    inability to maintain uniform standards, controls, procedures and policies. If we are unable to effectively integrate operations in a timely and efficient
manner, we may not realize the benefits expected from the SBC Directory
Acquisition. Failure to overcome these risks or any other problems encountered
in connection with the SBC Directory Acquisition could slow our growth or lower
the quality of our services, which could reduce customer demand.  (2)
    
    Our ability to meet substantial debt service obligations We have a substantial amount of debt and significant debt service obligations
in the remainder of 2004 and thereafter, due in large part to the financing
related to the SBC Directory Acquisition. As of September 30, 2004, we had
total outstanding debt of $3,192.8 million. See Liquidity and Capital
Resources below for further details regarding our debt obligations and
instruments. While we believe we are less leveraged than many of our
competitors that are not affiliated with larger telephone companies,
nevertheless, as a result of our significant amount of debt and debt service
obligations, we face increased risks associated with, but not limited to, the
following:  
    
    our ability to obtain additional financing in excess of the borrowing
capacity under our $175 million
Revolving Credit Facility (the Revolver) and/or under the $400 million of incremental borrowings potentially available under Term
Loan C (as described in further detail in Liquidity and Capital Resources  below) on satisfactory terms to fund working capital
requirements, capital expenditures, acquisitions, investments, debt service 32




---



##### 



requirements and other general corporate requirements is
limited;
    
    we are more vulnerable to general economic downturns, competition and industry conditions, which could
place us at a competitive disadvantage compared to our competitors that may be less leveraged;
    
    we face increased exposure to rising interest rates as a portion of our debt is at variable interest rates;
    
    we have reduced availability of cash flow to fund working capital requirements, capital expenditures,
acquisitions or other strategic initiatives, investments and other general corporate requirements because
a substantial portion of our cash flow will be needed to service our debt obligations; and
    
    we have limited flexibility in planning for, or reacting to, changes in our business and the industry in
which we operate. Our ability to pay principal and interest on our debt obligations will depend
upon our future operating performance and our ability to refinance debt. If we
are unable to service our debt and fund our business, we may be forced to
reduce or delay capital expenditures, defer or refuse to pursue certain
strategic initiatives, seek additional debt financing or equity capital,
restructure or refinance our debt or sell assets. We cannot assure you that we
would be able to obtain additional financing, refinance existing debt or sell
assets on satisfactory terms or at all.  (3)
    
    Restrictive covenants under our debt and Preferred Stock agreements The indentures governing our 8 7/8% Senior Notes (Senior Notes) due 2010 and
10 7/8% Senior Subordinated Notes (Subordinated Notes) due 2012
(collectively, the Notes) and our Senior Secured Credit Facility, as amended
and restated on September 1, 2004 in connection with the SBC Directory
Acquisition (Credit Facility), include a number of significant restrictive
covenants. See Liquidity and Capital Resources below for further details
regarding our debt instruments. These covenants could adversely affect us by
limiting our ability to plan for or react to market conditions or to meet our
capital needs. These covenants, among other things, restrict our ability and
the ability of our subsidiaries to:  
    
    incur additional debt;
    
    pay dividends on our equity interests or repurchase equity interests;
    
    make certain investments;
    
    enter into certain types of transactions with affiliates;
    
    limit dividends or other payments by our restricted subsidiaries to us;
    
    use assets as security in other transactions; and
    
    sell certain assets or merge with or into other companies. In addition, our Credit Facility includes other and more restrictive covenants
and prohibits us from prepaying the Notes while borrowings under the Credit
Facility are outstanding. The Credit Facility also requires us to maintain
certain financial ratios and meet other financial tests. Our failure to comply
with these covenants could result in an event of default, which, if not cured
or waived, could require us to repay these borrowings before their scheduled
due date. If we were unable to make this repayment or otherwise refinance
these borrowings, the lenders under the Credit Facility and the holders of our
Senior Notes, which became secured in connection with the restatement of the
Credit Facility for the SBC Directory Acquisition, could foreclose on our
assets, substantially all of which have been subjected to security interests in
favor of the lenders under the Credit Facility and the holders of our Senior
Notes. In addition, these lenders could elect to declare all amounts borrowed
under the Credit Facility, together with accrued interest, to be due and
payable, which, in some instances, would be an event of default under the
indentures governing the Notes. If we were unable to refinance these
borrowings on favorable terms, our results of operations and financial
condition could be adversely impacted by increased costs and less favorable
terms, including rates and covenants. Any future refinancing of the Credit
Facility is likely to contain similar restrictive covenants. Furthermore, the terms of the purchase agreement with respect to our
redeemable, convertible, cumulative preferred stock (Preferred Stock), among
other things, restricts our ability and the ability of our subsidiaries to:  
    
    incur additional debt;
    
    enter into major corporate transactions;
    
    pay dividends on shares of our common stock or repurchase shares of our common stock;
    
    enter into certain types of transactions with affiliates; and
    
    sell or acquire certain assets. Our failure to comply with these terms would result in a breach of this
agreement, which could have a material 33




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##### 



adverse effect on our business.  (4)
    
    The loss of important intellectual property rights or decrease in the
value of our affiliation with Sprint or SBC local telephone companies Some trademarks such as the Sprint, SBC and Donnelley brand names and
other intellectual property rights are important to our business. We rely upon
a combination of copyright and trademark laws as well as contractual
arrangements, including licensing agreements, particularly with respect to
Sprint and SBC markets, to establish and protect our intellectual property
rights. We are required from time to time to bring lawsuits against third
parties to protect our intellectual property rights. Similarly, from time to
time, we are party to proceedings whereby third parties challenge our rights.
We cannot be sure that any lawsuits or other actions brought by us will be
successful or that we will not be found to infringe the intellectual property
rights of third parties. Although we are not aware of any material
infringements of any trademark rights that are significant to our business, any
lawsuits, regardless of their outcome, could result in substantial costs and
diversion of resources and could have a material adverse effect on our
business, financial condition or results of operations. In addition, we only
have rights to use the Sprint and SBC name and logos in certain markets. The
loss of important intellectual property rights such as trademarks could have a
material adverse effect upon our business, financial condition and results of
operations. In addition, the Telecommunications Act of 1996 opened local telephone markets
to increased competition, which may adversely impact the market position of
telephone utilities, including Sprint Corporation (Sprint) and SBC. In
addition, Federal Communication Commission rules regarding local number
portability, advances in communications technology (such as wireless devices
and voice over Internet protocol) and demographic factors (such as potential
shifts in younger generations away from wireline telephone communications
towards wireless or other communications technologies) may further erode the
market position of telephone utilities, including Sprint and SBC. As a result,
we cannot assure you that Sprint or SBC will remain the primary local telephone
service provider in its local service areas. If either Sprint or SBC were no
longer the primary local telephone service provider in any particular local
service area, our license to be the exclusive publisher in their respective
markets and to use the Sprint or SBC brand name, as the case may be, on our
directories in those markets may not be as valuable as we presently anticipate,
and we may not realize some of the anticipated benefits under our commercial
arrangements with Sprint or SBC.  (5)
    
    Impact of bankruptcy proceedings against Sprint and SBC during the term
of the commercial arrangements Contract rights under the directory services license agreement, trademark
license agreement and non-competition agreement with Sprint and its affiliates,
as well as under the directory services license agreement and non-competition
agreement with SBC and its affiliates constitute a substantial portion of our
commercial arrangements with Sprint and SBC, as the case may be. Pursuant to
these commercial arrangements, we are the exclusive directory publisher for
Sprint in the markets where Sprint provided telephone service at the time of
the relevant agreements and for SBC in Illinois and Northwest Indiana. If a
bankruptcy case were to be commenced by or against Sprint or SBC, as the case
may be, it is possible that all or part of the applicable agreements could be
considered an executory contract and could therefore be subject to rejection by
Sprint or SBC, as the case may be, or by a trustee appointed in a bankruptcy
case pursuant to Section 365 or Section 1123 of the United States Bankruptcy
Code. If one or more of these agreements were rejected, the applicable agreement may
not be specifically enforceable, in which case we would have only an unsecured
claim for damages against Sprint or SBC, as the case may be, for the breach of
contract resulting from the rejection. If the applicable directory services
license agreement were rejected, we would, among other things, no longer be
entitled to be Sprints or SBCs, as the case may be, exclusive publisher of
telephone directories in the affected markets. We could also lose our right to
use Sprints and/or SBCs name and logo, as the case may be, and to enforce the
provisions of the applicable agreements under which we have the right to
license trademarks of successor local exchange carriers in the Sprint or SBC
markets, as the case may be. If the applicable non-competition agreement were
rejected and specific enforcement were not available, Sprint or SBC, as the
case may be, would, among other things, no longer be precluded from publishing
print telephone directories or
selling certain advertising in the applicable restricted markets. In connection with the SPA Acquisition, Sprint created a bankruptcy remote
special purpose vehicle in the form of a limited liability company and
contributed and assigned the trademarks being licensed to us under the
trademark license agreement to this limited liability company. The operating
agreements of this limited liability company 34




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require, among other things, that
the board of managers of this entity include one independent manager that is
unaffiliated with Sprint. The consent of this independent manager is required
for the entity to take certain actions, including, among other things,
commencement of a bankruptcy proceeding. Because the trademarks were
contributed to this limited liability company, our rights under the trademark
license agreement are not subject to rejection in the event of a bankruptcy
proceeding involving Sprint unless there is also a bankruptcy proceeding
involving this limited liability company. Although we believe that the
likelihood of this entity being the subject of a bankruptcy proceeding is
limited by this structure and the governing provisions of the operating
agreement, if the trademark license agreement were rejected in a bankruptcy
proceeding, we would lose the right to use the Sprint brand name for the former
SPA directories we now publish in those markets. In the SBC Directory Acquisition, no bankruptcy remote special purpose vehicles
have been established so that we are relatively more susceptible to bankruptcy
risk with respect to the commercial arrangement with SBC and its affiliates,
although management believes that SBCs credit rating and financial position
are significantly better than that of Sprint at the time of the SPA
Acquisition. We cannot assure you that any loss of rights under any of these arrangements
with Sprint and its affiliates or SBC and its affiliates would not have a
material adverse effect on our financial condition or results of operations.  (6)
    
    Our inability to enforce the non-competition agreement with Sprint or SBC In connection with the SPA Acquisition and the SBC Directory Acquisition,
Sprint and SBC, each entered into a non-competition agreement with us. The
Sprint non-competition agreement prohibits Sprint in the markets where Sprint
provided local telephone service at the time of the transaction from selling
local directory advertising or producing, publishing and distributing print
directories, with certain limited exceptions. The SBC non-competition
agreement prohibits SBC from producing, publishing and distributing print
directories in Illinois and Northwest Indiana, from selling local or national
directory advertising in such directories and from selling local internet
yellow pages advertising for certain internet yellow pages directories (or from
licensing certain SBC marks to a third party for that purpose), subject to
limited exceptions. However, under state and federal law, a covenant not to
compete is only enforceable:  
    
    to the extent it is necessary to protect a legitimate business interest of the party seeking enforcement;
    
    if it does not unreasonably restrain the party against whom enforcement is sought; and
    
    if it is not contrary to the public interest. Enforceability of a non-competition covenant is determined by a court based on
all of the facts and circumstances of the specific case at the time enforcement
is sought. For this reason, it is not possible for us to predict whether, or
to what extent, a court will enforce either Sprint or SBCs covenants not to
compete against us during the term of the non-competition agreement. If a
court were to determine that the non-competition agreement is unenforceable,
Sprint or SBC, as the case may be, could compete directly against us in the
previously restricted markets. We cannot assure you that our inability to
enforce the non-competition agreement with Sprint or SBC would not have a
material adverse effect on our financial condition or results of operations.  (7)
    
    Early termination of commercial arrangements Our commercial arrangements with each of Sprint and SBC have an initial term of
50 years, subject to specified automatic renewal and early termination
provisions. These commercial arrangements with Sprint and SBC may be
terminated by them prior to their stated term under certain specified
circumstances, some of which at times may be beyond our reasonable control
and/or which may require extraordinary efforts or the incurrence of material
excess costs on our part in order to avoid breach of the applicable agreement.
The respective details of these early termination provisions are included in
the respective agreements, which are filed as exhibits to this Quarterly Report
on Form 10-Q, and were summarized with respect to the SBC Directory Acquisition
in our Current Report on Form 8-K furnished to the Securities and Exchange
Commission on September 3, 2004. We cannot assure you that these arrangements
will remain in place for their full stated term or that we will be able to
avoid all potential breaches of
or defaults under these commercial arrangements. Further, we cannot assure you
that any remedy exercised by Sprint or SBC, as the case may be, under any of
these arrangements with Sprint or SBC would not have a material adverse effect
on our financial condition or results of operations. 35




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(8)
    
    Exposure to the Midwest economy Following and giving pro forma effect to the SBC Directory Acquisition,
approximately 45% of our net revenues will be derived from the sale of
SBC-branded directory advertising (and other related products and services) in
Illinois and Northwest Indiana. The Midwest economy, and particularly Chicago,
has been relatively slower to recover from the economic recession than many
other parts of the country and many of our other markets, especially many of
our Nevada and Florida markets. While the SBC Directory Acquisition moderated
our dependence on and risk associated with heavily tourist-driven economies, it
increased our exposure to and risk associated with the slower growth Midwest
economy. As a result, we may experience lower than previously expected revenue
growth in the future.  (9)
    
    Transition Services Arrangements with SBC In connection with the SBC Directory Acquisition, we entered into a transition
services agreement with SBC pursuant to which affiliates of SBC continue to
perform certain functions on behalf of the acquired directory business
following the closing of the acquisition. The primary transition services
provided by SBC and its affiliates under this agreement include certain
information technology support, certain marketing services, certain pre-press
publishing and distribution services, and certain customer service and billing
and collection services. Substantially all of these functions will be assumed by us
at various times through the third quarter of 2005. While there are certain
performance standards and estimated costs specified in the transition services
agreement and we expect SBC to faithfully and appropriately discharge its
obligations under the agreement consistent with the specified standards and
estimated costs, we do not control SBC so that there can be no assurance that
all of these functions will be successfully executed on a timely basis or that
we will not have to expend extraordinary efforts or material costs in excess of
those estimated in the transition services agreement. Further, we cannot assure
you that any interruption in these services or such extraordinary efforts or
costs would not have a material adverse effect on our financial condition or
results of operations. One of the most critical functions being performed by SBC under the
transition services agreement relates to billing and collection. Under that
agreement, the local SBC telephone company bills and collects from our local
advertising customers in the Illinois and Northwest Indiana directories and
remits collections (net of a specified holdback) to us through early 2005.
On a monthly basis, SBC purchases the receivables related to those
directories from us on a full recourse basis, and as such, we continue to
include our portion of the billed and unbilled receivables and any related
allowance for doubtful accounts and sales claims on our consolidated balance
sheet. We record an advance from SBC that is decreased as SBC collects from
our advertisers, thus satisfying that liability. In early 2005, we
will buy back from SBC all uncollected
accounts receivable balances. Thereafter, we will perform all billing and collection
functions in house. We presently expect the customer billing conversion to take place during the
first quarter of 2005. SBC is responsible for the initial process of
extracting all unbilled future customer billing and receivables balances due
from the telephone company billing systems. RHD is responsible for loading
the new billing, reconciliation, and issuing direct bills to our customers
upon conversion. While every effort is being made by the joint project team
of SBC and RHD management to successfully execute this critical step in the
acquisition integration process, considering the large bill volume and
relative complexity of the systems processes involved, we cannot assure you
that we will not have some interruption in services, extraordinary cost or
customer dissatisfaction resulting from this conversion or that any such
impacts would not have a material adverse effect on our financial condition
or results of operations. Corporate Overview We are a leading yellow pages publisher and directional media company.
Directional media is where consumers go to find who sells the goods and
services they are ready to purchase. We currently publish 389 yellow pages
directories, including 260 Sprint-branded directories in 18 states, with major
markets including Las Vegas, Orlando, and Lee County, Florida, with a total
distribution of approximately 18 million serving approximately 160,000 local
and national
advertisers, and 129 SBC-branded directories in Illinois and Northwest Indiana,
with a total distribution of approximately 10 million serving approximately
100,000 local and national advertisers. We also offer online city guides and
search web sites in our major Sprint markets under the Best Red Yellow Pages
brand at www.bestredyp.com and in the Chicago area at www.chicagolandyp.com.
We also sell local advertising in Illinois and Northwest Indiana onto
www.SMARTpages.com, SBCs Internet yellow pages platform. 36




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On January 3, 2003, we acquired all the outstanding capital stock of the
various entities comprising Sprint Publishing and Advertising (SPA), Sprints
directory publishing business (collectively, the SPA Acquisition), for $2.23
billion in cash. 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 January 3, 2003. The
acquired SPA business operates as R.H. Donnelley Publishing & Advertising,
Inc., an indirect wholly owned subsidiary of the Company. Recent Developments On September 1, 2004, we completed the SBC Directory Acquisition for $1.41
billion in cash, after working capital adjustments and the settlement of a $30
million liquidation preference owed to us related to DonTech. The
fair value of the tangible and identifiable intangible assets
acquired and liabilities assumed for the SBC Directory Acquisition
was $1.38 billion. The acquisition
was accomplished pursuant to, and in accordance with, the terms of the Purchase
Agreement, dated as of July 28, 2004, by and among the Company, Ameritech
Corporation (Ameritech), a direct wholly owned subsidiary of SBC, and
Ameritech Publishing, Inc. (API), a direct wholly owned subsidiary of
Ameritech. 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 SBC Directory
Acquisition business are included in our consolidated results from September 1,
2004. The acquired SBC directory business operates as R.H. Donnelley
Publishing & Advertising of Illinois Partnership, an indirect wholly owned
subsidiary of the Company. Segment Reporting We have revised our historical segment reporting to reflect the change in our
business that resulted from the SBC Directory Acquisition and to reflect how
management now reviews and analyzes the business. Our business of publishing
yellow pages directories is now conducted in one reportable operating segment.
All pre-press publishing services and other ancillary services previously
performed on behalf of others are now performed entirely on behalf of the
directories we now publish. As a result of the SBC Directory Acquisition, SBC
ceased paying us revenue participation income and we no longer
recognize our 50%
net profits from DonTech. Thus, the DonTech partnership investment was
eliminated and, consequently, partnership income was no longer recognized
commencing on September 1, 2004. Accordingly, the previously reported DonTech
operating segment is no longer applicable. Critical Accounting Estimates The preparation of financial statements in accordance with generally accepted
accounting principles (GAAP) requires management to estimate the effect of
various matters that are inherently uncertain as of the date of the financial
statements. Each of these estimates varies in regard to the level of judgment
involved and its potential impact on the Companys reported financial results.
Estimates are deemed critical when a different estimate could have reasonably
been used or when changes in the estimate are reasonably likely to occur from
period to period, and could materially impact the Companys financial
condition, changes in financial condition or results of operations. The
Companys significant accounting polices are discussed in Note 2 of the
consolidated financial statements included in Item 1 of this Quarterly Report.
The critical estimates inherent in these accounting polices are discussed
below. Management believes the current assumptions and other considerations used to
estimate these amounts in the
Companys consolidated financial statements are appropriate. Each of these
critical accounting estimates pertains to the Company both before and after
giving effect to the SBC Directory Acquisition, provided however, that the
quantitative aspects and estimated effects on net income disclosed below do not
apply to or include our previously reported DonTech operating segment or the
acquired SBC directory business. The Company will include in its next Annual
Report on Form 10-K quantitative information with respect to these critical
accounting estimates as they relate to the combined company, including the
acquired SBC directory business. Allowance for Doubtful Accounts and Sales Claims We record our revenue net of an allowance for sales claims. In addition, we
record a provision for bad debts. The provision for bad debts and allowance
for sales claims are estimated for each directory based on historical
experience. We also evaluate the current condition of our customer balances,
bankruptcy filings, historical charge-off patterns, recovery rates and other
data when determining our allowance for doubtful accounts reserve. We 37




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review
these estimates periodically to assess whether additional adjustment is needed
based on economic events or other circumstances, including actual experience at
the end of the billing and collection cycle with respect to each directory. We
presently believe that the allowance for doubtful accounts and sales claims is
adequate to cover anticipated losses under current conditions; however,
significant deterioration in any of the factors noted above or in the overall
economy could materially change these expectations. The provisions for sales
claims and doubtful accounts are estimated based on a percentage of revenue.
Accordingly, an additional 1% change in either of these allowance percentages
would impact net income by approximately $3.0 million annually. Pension Benefits Our pension plan obligations and related assets of our defined benefit
retirement plans are presented in Note 9 to our consolidated financial
statements. Plan assets consist primarily of marketable equity and debt
instruments and are valued using market quotations. Plan obligations and annual
pension expense are determined by independent actuaries and through the use of
a number of assumptions. Key assumptions in measuring the plan obligations
include the discount rate, the rate of future salary increases and the
long-term expected return on plan assets. In determining the discount rate, we
look at yields on high-quality, fixed-income investments with maturities
corresponding to the anticipated timing of the benefit payments. Salary
increase assumptions are based upon historical experience and anticipated
future management actions. Asset returns are based upon the anticipated
average rate of earnings expected on invested funds of the plan over the long
run. At December 31, 2003, the
weighted-average actuarial assumptions were: discount rate of 6.0%; long-term
rate of return on plan assets of 8.25%; and assumed salary increases of 3.66%.
Net periodic pension costs recognized in 2003 were $1.1 million. A 1% change
in the discount rate would affect net income by approximately $0.5 million; a
1% change in the long-term rate of return on plan assets would affect net
income by approximately $0.4 million; and a 1% change in assumed salary
increases would affect net income by approximately $0.3 million. Intangible Assets and Goodwill Valuation and Amortization Our intangible assets consist of directory services agreements between the
Company and each of Sprint and SBC, respectively, established customer
relationships and trademarks and trade names, all resulting from the SPA
Acquisition and the SBC Directory Acquisition. The intangible assets are being
amortized over the period the assets are expected to contribute to the cash
flow of the Company, which reflect the expected pattern of benefit. Our
recorded goodwill resulted from the SPA Acquisition and the SBC Directory
Acquisition and is not subject to amortization. The intangible assets are subject to an impairment test in accordance with
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets(SFAS 144), and the goodwill is
subject to an impairment test in accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets(SFAS
142). The Company reviews the carrying value of its intangible assets for
impairment at least annually or more frequently whenever events or
circumstances indicate that their carrying amount may not be recoverable. The
impairment test for the intangible assets is performed by comparing the
carrying amount of the intangible assets to the sum of the undiscounted
expected future cash flows. In accordance with SFAS 144, impairment exists if
the sum of the future undiscounted cash flows is less than the carrying amount
of the intangible asset, or to its related group of assets. Impairment would
result in a write-down of the intangible asset to its estimated fair value
based on the discounted future cash flows. Goodwill is tested for
impairment by comparing the carrying amount of the reporting unit to which it
was assigned to the estimated fair value of the reporting unit. In accordance
with SFAS 142, impairment exists if the carrying amount of the reporting unit
is less than its estimated fair value. Impairment would result in a write-down
equal to the difference between the carrying amount and the estimated fair
value of the reporting unit. We used certain estimates and assumptions in our impairment evaluation,
including, but not limited to, projected future cash flows, revenue growth,
customer attrition levels, and estimated write-offs. As of December 31, 2003,
management believes that there was no impairment to the intangible assets or
goodwill. However, significant deterioration in our business, the assumptions
underlying the impairment evaluations, or in the overall economy, could result
in impairment charges in future reporting periods. Had the aggregate net book
value of the intangible assets at December 31, 2003 been impaired by 1%, net
income would have been adversely impacted by approximately $11.0 million. Additionally, management must assess whether the remaining useful lives of the
intangible assets represent the 38




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period that the intangible assets are expected
to contribute to the cash flow of the Company. In our assessment process, we
used certain estimates and assumptions, including projected future cash flows,
customer attrition levels and industry and economic conditions. In accordance
with SFAS 142, we evaluate the remaining useful lives annually to determine
whether events or circumstances warrant a revision to the remaining period of
amortization. If the estimated remaining useful lives change, the remaining
carrying amount of the intangible asset would be amortized prospectively over
that revised remaining useful life. For the year ended December 31, 2003,
amortization of intangible assets was approximately $50 million. Should the
remaining useful lives of the intangible assets be shortened by 10%, net income
would be adversely impacted by approximately $3.0 million. New Accounting Pronouncements. In March 2004, the Emerging Issues Task Force (EITF) reached a final
consensus on EITF Issue No. 03-6, Participating Securities and the Two-Class
Method under FASB Statement 128(EITF 03-6), which established standards
regarding the computation of earnings per share (EPS) by companies that have
issued securities other than common stock that contractually entitle the holder
to participate in dividends and earnings of the company. EITF 03-6 was
effective for interim periods ending on or after June 30, 2004 for calendar
year companies. We adopted the provisions of EITF 03-6 during the first quarter
of 2004. In May 2004, the Financial Accounting Standards Board issued Financial Staff
Position (FSP) No. FAS 106-2, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act
of 2003, which provides guidance on accounting for the effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 for
employers that sponsor postretirement healthcare plans that provide drug
benefits. The Act introduces prescription drug care benefits under Medicare
and also allows for certain sponsors of postretirement benefit plans with a
drug benefit to receive a non-taxable federal subsidy if certain criteria are
met. The FSP requires interim and annual period financial statements
beginning after June 15, 2004 to include the effect of the subsidy on the
measurement of net periodic postretirement benefit costs. Pending final
guidance on determining actuarial equivalency, the Company has not yet been
able to determine the impact of the Act on its postretirement benefit plans.
As a result, the accumulated postretirement benefit obligation and net
periodic postretirement benefit costs do not yet reflect the effects of the
Act. 39




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RESULTS OF OPERATIONS
Three and Nine Months ended September 30, 2004 and 2003 Factors Affecting Comparability Acquisitions As a result of the SBC Directory Acquisition and the SPA Acquisition, the
related financings and associated accounting, our 2004 reported GAAP results
are not comparable to our 2003 reported GAAP results. Additionally, our
reported GAAP results for 2005 will not be comparable to our 2004 reported GAAP
results. Under the deferral and amortization method of revenue recognition,
certain directories published prior to each acquisition would have been
recognized as revenue in subsequent reporting periods. However, purchase
accounting considerations precluded us from recognizing directory revenue and
certain expenses associated with directories that published prior to each
acquisition, including all directories published in the month each acquisition
was completed. Thus, our reported 2004 and 2003 GAAP results are not indicative
of our underlying operating and financial performance. Accordingly, management
is presenting adjusted pro forma information that, among other things,
eliminates the purchase accounting impact on revenue and certain expenses for
each acquisition and assumes the SBC Directory Acquisition and related
financing occurred at the beginning of 2003. Management believes that the
presentation of this adjusted pro forma information will help financial
statement users better and more easily compare current period underlying
operating results against what the combined company performance would more
likely have been in the comparable prior period. All of the adjusted pro forma
amounts disclosed under the caption Adjusted Pro Forma Amounts and Other
Non-GAAP Measures or elsewhere are non-GAAP measures, which are reconciled to
the most comparable GAAP measures under that caption below. While we believe
the adjusted pro forma results reasonably represent results as if the
businesses had been combined for the full years 2003 and 2004, because of
differences in the application of accounting policies and practices between the
Company and the acquired entities, management does not believe these adjusted
pro forma amounts are strictly comparable. GAAP Reported Results Net Revenue The components of our net revenue in the three and nine months ended September
30, 2004 and 2003 were as follows: Three Months September 30,
    
    Nine Months Ended September 30,(amounts in millions)
    
    2004
    
    2003
    
    $ Change
    
    2004
    
    2003
    
    $ ChangeGross directory advertising
revenue
    
    $
    141.2
    
    
    $
    84.8
    
    
    $
    56.4
    
    
    $
    420.4
    
    
    $
    121.9
    
    
    $
    298.5Sales allowances
    
    
    (1.6
    )
    
    
    (0.8
    )
    
    
    (0.8
    )
    
    
    (4.6
    )
    
    
    (1.2
    )
    
    
    (3.4
    )Net directory advertising revenue
    
    
    139.6
    
    
    
    84.0
    
    
    
    55.6
    
    
    
    415.8
    
    
    
    120.7
    
    
    
    295.1Pre-press publishing fees
    
    
    3.1
    
    
    
    4.6
    
    
    
    (1.5
    )
    
    
    13.0
    
    
    
    17.6
    
    
    
    (4.6
    )Other revenue
    
    
    1.7
    
    
    
    0.7
    
    
    
    1.0
    
    
    
    4.1
    
    
    
    2.1
    
    
    
    2.0Total
    
    $
    144.4
    
    
    $
    89.3
    
    
    $
    55.1
    
    
    $
    432.9
    
    
    $
    140.4
    
    
    $
    292.5
 Following the SBC Directory Acquisition, substantially all of our revenue is
derived from our directory publishing business. Before the SBC Directory
Acquisition, DonTech was accounted for under the equity method. Our directory
advertising revenue is earned primarily from the sale of advertising in yellow
pages directories we publish, net of sales allowances. Revenue from directory
advertising sales is recognized under the deferral and amortization method,
whereby revenue from advertising sales is initially deferred when the directory
is published and recognized ratably over the directorys life, which is
typically 12 months. Before the SBC Directory Acquisition, we also earned
pre-press publishing fees with respect to services we rendered on behalf of SBC
for the SBC-branded directories we now publish. These fees were and other
revenue is recognized when earned. Total net revenue in the three and nine months ended September 30, 2004 was
$144.4 million and $432.9 million, respectively, as compared to $89.3 million
and $140.4 million, respectively, in the same periods in the prior year. The
increase in total net revenue in 2004 is primarily a result of purchase
accounting related to the SPA Acquisition 40




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##### 



that adversely impacted 2003 results.
Due to purchase accounting, directory revenue for the three and nine months
ended September 30, 2003 excluded the amortization of publication sales for
Sprint-branded directories published before February 2003 under the deferral
and amortization method totaling $53.2 million and $289.2 million,
respectively, that would have been reported absent purchase accounting. While
purchase accounting related to the SBC Directory Acquisition also negatively
impacted third quarter 2004 results, because that transaction closed on
September 1, 2004, its impact is not as material to the third quarter of 2004.
Purchase accounting resulting from the SBC Directory Acquisition will continue
to adversely impact reported results through 2005. Revenue from pre-press publishing services was $3.1 million and $13.0 million
in the three and nine months ended September 30, 2004, respectively, as
compared to $4.6 million and $17.6 million, respectively, in the same periods
in the prior year. The decrease in pre-press publishing fees for the three
month period is a result of the Company no longer providing such services to
SBC following the SBC Directory Acquisition. We now support internally the
SBC-branded directories we publish following the SBC Directory Acquisition.
The decrease in pre-press publishing fees for the nine-month period also
reflects fees earned from a third party pre-press publishing contract for which
we ceased providing services in the first half of 2003. There were no
comparable revenues earned in 2004. Other revenue includes late fees paid on outstanding customer balances, sales
of directories and certain other products and fees from telephone companies for
publishing their information pages. Other revenue in 2004 and 2003 also
included fees for sales-related computer application services rendered to
DonTech on behalf of SBC, which we ceased providing as of September 1, 2004.
Changes in these items account for the difference in other revenue between 2004
and 2003. Expenses The components of our total expenses for the three and nine months ended
September 30, 2004 and 2003 were as follows: Three Months Ended September 30,
    
    Nine Months Ended September 30,(amounts in millions)
    
    2004
    
    2003
    
    $ Change
    
    2004
    
    2003
    
    $ ChangeOperating expenses
    
    $
    59.3
    
    
    $
    39.7
    
    
    $
    19.6
    
    
    $
    170.3
    
    
    $
    106.5
    
    
    $
    63.8G&A expenses
    
    
    13.7
    
    
    
    14.8
    
    
    
    (1.1
    )
    
    
    41.7
    
    
    
    37.0
    
    
    
    4.7D&A expenses
    
    
    17.0
    
    
    
    16.6
    
    
    
    0.4
    
    
    
    46.3
    
    
    
    49.1
    
    
    
    (2.8
    )Total
    
    $
    90.0
    
    
    $
    71.1
    
    
    $
    18.9
    
    
    $
    258.3
    
    
    $
    192.6
    
    
    $
    65.7
 Substantially all reported expenses are derived from our directory publishing
business. Before the SBC Directory Acquisition, DonTech was accounted for under
the equity method. Certain costs directly related to the selling and
production of directories are initially deferred and recognized ratably over
the life of the directory. These costs include sales commissions and print,
paper and initial distribution costs. Operating Expenses Total operating expenses in the three and nine months ended September 30, 2004
were $59.3 million and $170.3 million, respectively, as compared to $39.7
million and $106.5 million, respectively, in the same periods in the prior
year. The increase in operating expenses in 2004 is primarily a result of the
same purchase accounting in 2003 that impacted revenues described above.
Similar to the deferral and amortization method of revenue recognition, certain
costs directly related to the selling and production of our directories are
initially deferred when
incurred and recognized ratably over the life of a directory. Due to the
elimination of SPAs deferred revenue and deferred costs for all
pre-acquisition (including January 2003) directories as required by purchase
accounting, our reported operating expenses in 2003 did not include certain
expenses associated with those directories totaling approximately $12.7 million
and $58.7 million for the three and nine months ended September 30, 2003,
respectively. Due to these adjustments, directory expenses for the three and
nine months ended September 30, 2003 include only the amortization of deferred
directory costs relating to directories published beginning in February 2003.
While purchase accounting related to the SBC Directory Acquisition also
impacted third quarter 2004 results, because that 41




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##### 



transaction closed on
September 1, 2004, its impact is not as material to the third quarter of 2004.
Purchase accounting resulting from the SBC Directory Acquisition will continue
to impact reported results through 2005. Additionally, as a result of purchase accounting, we recorded the deferred
directory costs related to sales contracts executed prior to the
respective acquisition
date for directories that were scheduled to publish subsequent to the SPA
Acquisition and SBC Directory Acquisition at their fair value, determined as the estimated billable value of
the published directory less the expected costs to complete the directories
plus a normal margin. The fair value of these costs was determined to be $81.3
million and $16.6 million for the SBC Directory Acquisition and the SPA
Acquisition, respectively. These costs are amortized as operating
expenses over the terms of the related directories and totaled $0.1 million and
$3.6 million for the three and nine months ended September 30, 2004,
respectively, compared to $3.5 million and $7.5 million, respectively, for the
comparable periods in 2003. Bad debt provision for the three and nine months ended September 30, 2004 was
$5.3 million and $0.5 million higher, respectively, compared to the same
periods in 2003, due to favorable adjustments and bad debt recoveries recorded
in 2003, particularly in the third quarter of 2003, resulting from favorable
performance in our collection process. For the three and nine months ended
September 30, 2004, sales costs were $0.9 million and $4.8 million higher,
respectively, compared to the same periods in 2003, due to higher commission
expense and sales bonuses resulting from favorable publication sales results.
Operating expenses for the three and nine months ended September 30, 2004 also
included $3.3 million for sales costs related to the Illinois and northwest
Indiana markets due to the SBC transaction. Further, marketing and
advertising expenses were $0.5 million higher in the quarter and $3.5 million
higher year-to-date 2004 due to additional marketing research expenses and
advertising promotional activities, including the timing of such expenses in
2004 compared to 2003. Also advertising expense for the nine months ended
September 30, 2004 includes $1.1 million of advertising costs that pertain to
2003. Partially offsetting these cost increases, net publishing and
information technology costs were lower by approximately $3.5 million and $8.9
million for the three and nine months ended September 30, 2004, respectively,
primarily due to the elimination of duplicate facility and associated
operational costs resulting from the integration of the SPA Acquisition. The
majority of these duplicative costs were eliminated subsequent to the first
half of 2003. General and Administrative Expenses General and administrative (G&A) expenses in the three and nine months ended
September 30, 2004 were $13.7 million and $41.7 million, respectively, as
compared to $14.8 million and $37.0 million, respectively, in the same periods
in the prior year. G&A expenses were impacted primarily by incremental costs of
$1.0 million and $8.8 million in the three and nine months ended September 30,
2004, respectively, relating to the relocation of our corporate offices to
Cary, North Carolina and sales office relocation. In the third quarter of 2003, G&A expenses included $4.7 million related to our headquarters relocation.  During the third quarter of
2004, we reversed a $0.4 million charge recorded in the prior quarter relating
to a preliminary estimate of an additional matching contribution associated
with our defined contribution plan, which we subsequently determined not to be
payable. In addition, the nine months ended September 30, 2003 included a $3.1
million charge related to the shutdown of duplicative facilities resulting from the Sprint Acquisition. Depreciation and Amortization Depreciation and amortization (D&A) for the three and nine months ended
September 30, 2004 was $17.0 million and $46.3 million, respectively, as
compared to $16.6 million and $49.0 million, respectively, in the same periods
in the prior year. Amortization of intangible assets was $14.6 million and
$39.5 million for the three and nine months ended September 30, 2004,
respectively, and $12.5 million and $37.4 million, respectively, for the
comparable periods in 2003. The increase in amortization expense is due to the
increase in intangible assets resulting from the SBC transaction and
amortization of leasehold improvements relating to the relocation of our
corporate offices to Cary, North Carolina. Depreciation of fixed assets and
amortization of computer software was $2.4 million and $6.8 million in the
three and nine months ended September 30, 2004, respectively, and $4.1 million
and $11.7 million, respectively, in the same periods in the prior year. This
decrease is due to certain fixed assets and computer software that were fully
depreciated in 2003. Partnership Income As a result of the SBC Directory Acquisition, SBC ceased paying us revenue
participation income and we no longer recognize our 50% net profits in DonTech.
Thus, the DonTech partnership investment was eliminated. Accordingly, 42




---



##### 



commencing on September 1, 2004, we no longer recognize partnership income. In
2003 and 2004, partnership income related exclusively to our 50% share of the
net income of DonTech (accounted for under the equity method) and revenue
participation income from SBC. As a sales agent for SBC, DonTech earned
commission revenue based on the annual value of local sales contracts executed
during the period (calendar sales). We also earned revenue participation
income based on the amount of calendar sales during the period. Partnership
income was $19.3 million and $78.0 million for the three and nine months ended
September 30, 2004, respectively, as compared to $32.6 million and $91.6
million, respectively, in the same periods in the prior year. The decrease in
partnership income for the three and nine months ended September 30, 2004 is a
direct result of no longer recognizing partnership income following the SBC
Directory Acquisition. Operating Income Operating income for the three and nine months ended September 30, 2004 and
2003 was as follows: Three Months Ended September 30,
    
    Nine Months Ended September 30,(amounts in millions)
    
    2004
    
    2003
    
    $ Change
    
    2004
    
    2003
    
    $ ChangeTotal
    
    $
    73.7
    
    
    $
    50.8
    
    
    $
    22.9
    
    
    $
    252.6
    
    
    $
    39.4
    
    
    $
    213.2
 Reported operating income for the three months ended September 30, 2004 of
$73.7 million increased by $22.9 million from operating income of $50.8 million
in the same period in the prior year. Reported operating income for the nine
months ended September 30, 2004 of $252.6 million increased by $213.2 million
from operating income of $39.4 million in the same period in the prior year.
The increase in operating income during 2004 was primarily a result of purchase
accounting rules that precluded us from recognizing revenue and certain
expenses in 2003 for those directories that published prior to the SPA
Acquisition, including all January 2003 published directories, partially offset
by expense and partnership income items discussed above. While purchase
accounting related to the SBC Directory Acquisition also negatively impacted
third quarter 2004 results, because that transaction closed on September 1,
2004, its impact is not as material to the third quarter of 2004. Purchase
accounting from the SBC Directory Acquisition will continue to adversely impact
reported results through 2005. Interest Expense, Net Net interest expense was $43.2 million and $121.0 million for the three and
nine months ended September 30, 2004, respectively, as compared to $45.5
million and $137.5 million, respectively, in the same periods in the prior
year. The decrease in net interest expense is a result of lower outstanding
debt balances and lower interest rates in 2004 as compared to the prior year,
partially offset by a $1.2 million charge to interest expense resulting from
the redemption of the remaining 9 1/8% Senior Subordinated Notes in the first
quarter of 2004 and interest expense for September 2004 relating to additional
borrowings used to finance the SBC Directory Acquisition. The impact of
interest expense associated with the additional borrowings used to finance the
SBC Directory Acquisition will be more pronounced in future periods due to a
full period of impact. The $1.2 million charge consisted of the premium over
par value paid at redemption of the remaining 9 1/8% Senior Subordinated Notes
of $1.0 million, plus the non-cash write-off of $0.2 million of unamortized
deferred financing costs. Interest expense for the three and nine months ended
September 30, 2004 included non-cash amortization of deferred financing costs
of $3.1 million and $10.2 million, respectively, versus $4.6 million and $10.9
million for the comparable periods in 2003, respectively. The decrease in these
costs is a result of lower debt balances in 2004 as compared to 2003. Other Income Other income of $1.5 million for the nine months ended September 30, 2003
represents a gain on hedging activities. In December 2002, a charge of $1.5
million was recorded to reclassify to earnings the cumulative change in the
fair value of the swap that was previously recognized in accumulated other
comprehensive loss on the balance sheet due to the loss of hedge accounting
treatment. In 2003, we recognized a corresponding gain of $1.5 million as the
swap matured. In the first and second quarters of 2003, we recognized $0.8
million and $0.7 million of this gain, respectively. The swap matured in June
2003. 43




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##### 



Income Taxes The effective tax rate on income before income taxes of 39.5% for the three and
nine months ended September 30, 2004 compares to 26.5% on income before income
taxes and 41.8% on loss before income taxes, respectively, in the same periods
in the prior year. The reported effective tax rate for the three months ended
September 30, 2003 reflects a favorable settlement in 2003 of certain prior
year state and local tax audits. The year-to-date effective tax rate for
September 2003 reflects an increase in the state and local tax rate as a result
of the SPA Acquisition, combined with the favorable settlement of the
aforementioned state and local tax audits. The tax benefit for the nine months
ended September 30, 2003 was attributable to a net operating loss related to
tax deductions in connection with the SPA Acquisition. Net Income (Loss) and Earnings (Loss) Per Share Net income for the three and nine months ended September 30, 2004 was $18.5
million and $79.6 million, respectively, as compared to net income of $3.9
million and a net loss of $56.2 million for the same periods in the prior
year. The results for 2003 were adversely affected by purchase accounting that
precluded us from recognizing deferred revenue and certain expenses associated
with those directories published prior to the SPA Acquisition, including all
January 2003 published directories. While purchase accounting related to the
SBC Directory Acquisition also negatively impacted third quarter 2004 results,
because that transaction closed on September 1, 2004, its impact is not as
material to the third quarter of 2004. Purchase accounting from the SBC
Directory Acquisition will continue to adversely impact reported results
through 2005. The dividend on our 8% redeemable convertible cumulative preferred stock
(Preferred Stock) reduces net income or increases the net loss, resulting in
income (loss) available to common shareholders from which earnings per share
amounts are calculated. The amount of the Preferred Stock dividend includes the
stated 8% dividend, plus a deemed dividend for a beneficial conversion feature
(BCF). The BCF is a function of the conversion price of the Preferred Stock,
the fair value of the related warrants issued with the Preferred Stock and the
fair market value of the underlying common stock on the date of issuance of the
preferred stock. In connection with the issuance of our Preferred Stock and
each subsequent quarterly accrued dividend, a BCF has been recorded because the
fair value of the underlying common stock at the time of issuance of the
preferred stock was greater than the conversion price of the Preferred Stock.
The full amount of the BCF is treated as a deemed dividend because the
Preferred Stock was convertible into common stock immediately after issuance in
January 2003. The Preferred Stock dividend in the third quarter of 2004 and
2003 of $5.5 million and $5.1 million, respectively, consisted of the stated 8%
dividend of $4.5 million and $4.2 million, respectively, and a BCF of $1.0
million and $0.9 million, respectively. The Preferred Stock dividend for the
nine months ended September 30, 2004 and 2003 of $16.2 million and $53.2
million, respectively, consisted of the stated 8% dividend of $13.3 million and
$12.2 million, respectively, and a BCF of $2.9 million and $41.0 million,
respectively. The BCF recorded in the first nine months of 2003 was more
significant than BCF amounts recorded in subsequent periods, reflecting the
issuance of the Preferred Stock and related warrants in January 2003. The
resulting income (loss) available to common shareholders was $13.0 million and
$63.4 million in the three and nine months ended September 30, 2004,
respectively, as compared to $(1.2) million and $(109.4) million for the same
periods in the prior year. All EPS amounts have been calculated using the two-class method. See Note 2,
Summary of Significant Accounting Policies,in Part 1  Item 1 of this
quarterly report for further details and computations of the basic and diluted
EPS amounts. For the three months ended September 30, 2004, basic and diluted
EPS were $0.32 and $0.31, respectively. For the nine months ended September 30,
2004, basic and diluted EPS were $1.57 and $1.51
per share, respectively. For the three and nine months ended September 30,
2003, basic and diluted EPS were a loss of $0.04, and a loss of $3.58,
respectively. Because there was a reported net loss in each of the periods in
2003, the calculation of diluted EPS was anti-dilutive compared to basic EPS.
Diluted EPS cannot be greater than basic EPS (or less of a loss). Therefore,
reported diluted EPS and basic EPS for the three and nine months ended
September 30, 2003 were the same. Adjusted Pro Forma Amounts and Other Non-GAAP Measures As a result of the SBC Directory Acquisition and the SPA Acquisition, the
related financings and associated accounting, our 2004 reported GAAP results
are not comparable to our 2003 reported GAAP results. Additionally, our
reported GAAP results for 2005 will not be comparable to our 2004 reported GAAP
results. Under the deferral and amortization method of revenue recognition,
certain directories published prior to each acquisition would have 44




---



##### 



been
recognized as revenue in subsequent reporting periods. However, purchase
accounting considerations precluded us from recognizing directory revenue and
certain expenses associated with directories that published prior to each
acquisition, including all directories published in the month each acquisition
was completed. Thus, our reported 2004 and 2003 GAAP results are not indicative
of our underlying operating and financial performance. Accordingly, management
is presenting adjusted pro forma information that, among other things,
eliminates the purchase accounting impact on revenue and certain expenses for
each acquisition and assumes the SBC Directory Acquisition and related
financing occurred at the beginning of 2003. Management believes that the
presentation of this adjusted pro forma information will help financial
statement users better and more easily compare current period underlying
operating results against what the combined company performance would more
likely have been in the comparable prior period. All of the adjusted pro forma
amounts disclosed below or elsewhere are non-GAAP measures, which are
reconciled to the most comparable GAAP measures below. While we believe the
adjusted pro forma results reasonably represent results as if the businesses
had been combined for the full years 2003 and 2004, because of differences in
the application of accounting policies and practices between the Company and
the acquired entities, management does not believe these adjusted pro forma
amounts are strictly comparable. Three months ended September 30, 2004AdjustmentsReported
    
    SBC Directory
    
    SPA
    
    Adjusted(amounts in millions)
    
    GAAP
    
    Acquisition
    
    Acquisition
    
    Pro FormaNet revenue
    
    $
    144.4
    
    
    $
    115.4
    (1)
    
    $
    
    
    
    $
    259.8Expenses, other than
depreciation and amortization
    
    
    73.0
    
    
    
    27.1
    (2)
    
    
    (0.1)
    (6)
    
    
    100.0Depreciation and amortization
    
    
    17.0
    
    
    
    4.7
    (3)
    
    
    
    
    
    
    21.7Partnership income
    
    
    19.3
    
    
    
    (19.3
    )(4)
    
    
    
    
    
    
    Operating income
    
    $
    73.7
    
    
    $
    64.3
    
    
    $
    0.1
    
    
    $
    138.1
 Three months ended September 30, 2003AdjustmentsReported
    
    SBC Directory
    
    SPA
    
    Adjusted(amounts in millions)
    
    GAAP
    
    Acquisition
    
    Acquisition
    
    Pro FormaNet revenue
    
    $
    89.3
    
    
    $
    115.5
    (1)
    
    $
    53.2
    (5)
    
    $
    258.0Expenses, other than
depreciation and amortization
    
    
    54.5
    
    
    
    33.3
    (2)
    
    
    12.7
    (6)
    
    
    100.5Depreciation and amortization
    
    
    16.6
    
    
    
    6.9
    (3)
    
    
    
    
    
    
    23.5Partnership income
    
    
    32.6
    
    
    
    (32.6
    ) (4)
    
    
    
    
    
    
    Operating income
    
    $
    50.8
    
    
    $
    42.7
    
    
    $
    40.5
    
    
    $
    134.0
 45




---



##### 



Nine months ended September 30, 2004AdjustmentsReported
    
    SBC Directory
    
    SPA
    
    Adjusted(amounts in millions)
    
    GAAP
    
    Acquisition
    
    Acquisition
    
    Pro FormaNet revenue
    
    $
    432.9
    
    
    $
    340.5
    (1)
    
    $
    1.4
    (5)
    
    $
    774.8Expenses, other than
depreciation and amortization
    
    
    212.0
    
    
    
    95.0
    (2)
    
    
    (3.6
    )(6)
    
    
    303.4Depreciation and amortization
    
    
    46.3
    
    
    
    18.8
    (3)
    
    
    
    
    
    
    65.1Partnership income
    
    
    78.0
    
    
    
    (78.0
    )(4)
    
    
    
    
    
    
    Operating income
    
    $
    252.6
    
    
    $
    148.7
    
    
    $
    5.0
    
    
    $
    406.3
 Nine months ended September 30, 2003AdjustmentsReported
    
    SBC Directory
    
    SPA
    
    Adjusted(amounts in millions)
    
    GAAP
    
    Acquisition
    
    Acquisition
    
    Pro FormaNet revenue
    
    $
    140.4
    
    
    $
    343.1
    (1)
    
    $
    289.2
    (5)
    
    $
    772.7Expenses, other than
depreciation and amortization
    
    
    143.5
    
    
    
    105.3
    (2)
    
    
    58.7
    (6)
    
    
    307.5Depreciation and amortization
    
    
    49.1
    
    
    
    20.9
    (3)
    
    
    
    
    
    
    70.0Partnership income
    
    
    91.6
    
    
    
    (91.6
    )(4)
    
    
    
    
    
    
    Operating income
    
    $
    39.4
    
    
    $
    125.3
    
    
    $
    230.5
    
    
    $
    395.2
  (1)
    
    Represents revenue for directories that published prior to the SBC
Directory Acquisition, plus all September 2004 published directories,
which would have been recognized during the period had it not been for
purchase accounting required under GAAP.  (2)
    
    Represents (a) expenses for directories that published prior to the SBC
Directory Acquisition, plus all September 2004 published directories,
which would have been recognized during the period had it not been for
purchase accounting required under GAAP, (b) DonTechs selling and
operational expenses prior to September 1, 2004, which were eliminated in
consolidation upon the SBC Directory Acquisition, and (c) certain
differences in the application of accounting policies and practices
between RHD and the acquired entities.  (3)
    
    Represents the additional depreciation and amortization expense related
to the tangible and identifiable intangible assets acquired in the SBC
Directory Acquisition over their estimated useful lives.  (4)
    
    Represents the elimination of equity accounting used to account for RHDs
50% ownership in DonTech and the revenue participation income from SBC
recognized prior to the SBC Directory Acquisition.  (5)
    
    Represents revenue for directories that published prior to the SPA
Acquisition, plus all January 2003 published directories, which would have
been recognized during the period had it not been for purchase accounting
required under GAAP.  (6)
    
    Represents expenses for directories that published prior to the SPA
Acquisition, plus all January 2003 46




---



##### 



published directories, which would have
been recognized during the period had it not been for purchase accounting
required under GAAP. Also includes the effect of differences in the
application of accounting policies and practices between legacy SPA and
the Company. Additionally, as a result of purchase accounting, we
recorded the deferred directory costs related to sales contracts prior to
the acquisition date for directories that were scheduled to publish
subsequent to the SPA Acquisition at their fair value. The impact of such
costs has also been removed. 2004 Adjusted Pro Forma Revenue Compared to 2003 Adjusted Pro Forma Revenue The components of 2004 adjusted pro forma revenue and 2003 adjusted pro forma
revenue for the three and nine months ended September 30 are as follows: Three Months Ended September 30, 2004SBCReported
    
    Directory
    
    SPA
    
    Adjusted(amounts in millions)
    
    GAAP
    
    Acquisition
    
    Acquisition
    
    Pro FormaGross directory advertising revenue
    
    $
    141.2
    
    
    $
    115.7
    (1)
    
    $
    
    
    
    $
    256.9Sales claims and allowances
    
    
    (1.6
    )
    
    
    (0.1
    )(1)
    
    
    
    
    
    
    (1.7
    )Net directory advertising revenue
    
    
    139.6
    
    
    
    115.6
    
    
    
    
    
    
    
    255.2Pre-press publishing fees
    
    
    3.1
    
    
    
    (3.1
    )(2)
    
    
    
    
    
    
    Other revenue
    
    
    1.7
    
    
    
    2.9
    (3)
    
    
    
    
    
    
    4.6Net revenue
    
    $
    144.4
    
    
    $
    115.4
    
    
    $
    
    
    
    $
    259.8
 Three Months Ended September 30, 2003SBCReported
    
    Directory
    
    SPA
    
    Adjusted(amounts in millions)
    
    GAAP
    
    Acquisition
    
    Acquisition
    
    Pro FormaGross directory advertising revenue
    
    $
    84.8
    
    
    $
    119.3
    (1)
    
    $
    53.8
    (4)
    
    $
    257.9Sales claims and allowances
    
    
    (0.8
    )
    
    
    (0.8
    )(1)
    
    
    (0.6
    ) (4)
    
    
    (2.2
    )Net directory advertising revenue
    
    
    84.0
    
    
    
    118.5
    
    
    
    53.2
    
    
    
    255.7Pre-press publishing fees
    
    
    4.6
    
    
    
    (4.6
    )(2)
    
    
    
    
    
    
    Other revenue
    
    
    0.7
    
    
    
    1.6
    (3)
    
    
    
    
    
    
    2.3Net revenue
    
    $
    89.3
    
    
    $
    115.5
    
    
    $
    53.2
    
    
    $
    258.0
 47




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##### 



Nine Months Ended September 30, 2004SBCReported
    
    Directory
    
    SPA
    
    Adjusted(amounts in millions)
    
    GAAP
    
    Acquisition
    
    Acquisition
    
    Pro FormaGross directory advertising revenue
    
    $
    420.4
    
    
    $
    348.1
    (1)
    
    $
    1.4
    (4)
    
    $
    769.9Sales claims and allowances
    
    
    (4.6
    )
    
    
    (0.5
    )(1)
    
    
    
    
    
    
    (5.1
    )Net directory advertising revenue
    
    
    415.8
    
    
    
    347.6
    
    
    
    1.4
    
    
    
    764.8Pre-press publishing fees
    
    
    13.0
    
    
    
    (13.0
    )(2)
    
    
    
    
    
    
    Other revenue
    
    
    4.1
    
    
    
    5.9
    (3)
    
    
    
    
    
    
    10.0Net revenue
    
    $
    432.9
    
    
    $
    340.5
    
    
    $
    1.4
    
    
    $
    774.8
 Nine Months Ended September 30, 2003SBCReported
    
    Directory
    
    SPA
    
    Adjusted(amounts in millions)
    
    GAAP
    
    Acquisition
    
    Acquisition
    
    Pro FormaGross directory advertising revenue
    
    $
    121.9
    
    
    $
    359.4
    (1)
    
    $
    292.5
    (4)
    
    $
    773.8Sales claims and allowances
    
    
    (1.2
    )
    
    
    (3.6
    )(1)
    
    
    (3.3
    )(4)
    
    
    (8.1
    )Net directory advertising revenue
    
    
    120.7
    
    
    
    355.8
    
    
    
    289.2
    
    
    
    765.7Pre-press publishing fees
    
    
    17.6
    
    
    
    (17.6
    )(2)
    
    
    
    
    
    
    Other revenue
    
    
    2.1
    
    
    
    4.9
    (3)
    
    
    
    
    
    
    7.0Net revenue
    
    $
    140.4
    
    
    $
    343.1
    
    
    $
    289.2
    
    
    $
    772.7
  (1)
    
    Represents gross revenue and sales claims and allowances for
directories that published prior to the SBC Directory Acquisition, plus
all September 2004 published directories, which would have been
recognized during the period had it not been for purchase accounting
required under GAAP. During the 2004 periods, SBC adjusted prior
period sales allowance provisions, which accounts for the relatively
modest impact of purchase accounting on that during the three and nine month periods.(2)
    
    Represents the elimination of pre-press publishing fees recognized
prior to the SBC Directory Acquisition, which were eliminated in
consolidation upon the SBC Directory Acquisition.(3)
    
    Represents other revenue, primarily consisting of other yellow
pages Internet-based advertising and other product revenue recognized
as earned.(4)
    
    Represents gross revenue and sales claims and allowances for
directories that published prior to the SPA Acquisition, plus all
January 2003 published directories, which would have been recognized
during the period had it not been for purchase accounting required
under GAAP. Adjusted pro forma net revenue in the three months ended September 30, 2004 was
$259.8 million, an increase of $1.8 million or 0.7 % from adjusted pro forma
net revenue of $258.0 million in the prior comparable period. Adjusted pro
forma net revenue for the nine months ended September 30, 2004 was $774.8
million, an increase of $2.1 million or 0.3% from adjusted pro forma net
revenue of $772.7 million in the prior comparable period. Under the deferral
and amortization method of revenue recognition, revenue from directory
advertising sales is initially deferred when a directory is published and
recognized ratably over the life of the directory, which is typically 12
months. The decrease in adjusted pro forma gross directory advertising
revenues for the quarter and nine months ended September 30, 2004 versus the
prior year was due to a decline in the publication value of our SBC directories
in Illinois and northwest Indiana in the first nine months of 2004 and the last
three months of 2003 that resulted in lower directory revenue. This was
partially offset by favorable sales allowance adjustments taken by SBC prior to 48




---



##### 



the acquisition and higher Sprint directory revenue from higher advertising
renewal rates and new business in our major Sprint markets for which
directories published in the first nine months of 2004 and the last three
months of 2003. 2004 Adjusted Pro Forma Expenses Compared to 2003 Adjusted Pro Forma Expenses Adjusted pro forma operating and G&A expenses in the three months ended
September 30, 2004 of $100.0 million decreased by $0.5 million or 0.5% from
adjusted pro forma operating and G&A expenses of $100.5 million in the
comparable period in the prior year. Similar to the deferral and amortization
method of revenue recognition, certain costs directly related to the selling
and production of our directories are initially deferred when incurred and
recognized ratably over the life of a directory. Adjusted pro forma bad debt
expense was $3.4 million higher in the three months ended September 30, 2004
compared to the same period in 2003 due to significant favorable adjustments to
provision expense and bad debt recoveries that occurred in 2003, particularly
in the third quarter of 2003, resulting from improvements in our collection
process. This was offset by $3.5 million in lower publishing and information
technology costs during the third quarter of 2004 due to the elimination of
duplicate facilities in 2003 resulting from the Sprint transaction.
Additionally, adjusted pro forma operating and G&A expenses were higher in the
quarter due to $1.5 million in transactional legal, accounting and other
expenses and $1.0 million in headquarters relocation-related expenses. In
2003, adjusted pro forma operating and G&A expenses included $4.7 million
related to our headquarters relocation. For the nine months ended September 30, 2004, adjusted pro forma operating and
G&A expenses decreased by $4.1 million or 1.3%, to $303.4 million from adjusted
pro forma operating and G&A expenses of $307.5 million in the comparable period
in 2003. Adjusted pro forma bad debt expense was $9.6 million lower
year-to-date than in the comparable period in 2003 due to favorable provision
adjustments primarily relating to the SBC directories that were recorded by SBC
prior to the acquisition. Publishing and information technology costs were
$8.9 million lower in the period due to the elimination of duplicate facilities
that resulted from the Sprint transaction. In addition, adjusted pro forma
operating and G&A expenses for the nine months ended September 30, 2003
included a $3.1 million charge related to the shutdown of duplicative
facilities resulting from the Sprint transaction compared to $1.1 million for
the nine months ended September 30, 2004 related to relocation of sales
offices. Offsetting these lower costs were $4.8 million in increased
commission and salesperson costs due to favorable sales performance in certain
of our larger Sprint markets, $3.0 million in increased corporate headquarters
relocation costs and $3.5 million in increased market research and advertising
promotional activities, including $1.1 million of advertising costs that pertain
to 2003. Adjusted pro forma depreciation and amortization (D&A) for the three and nine
months ended September 30, 2004 was $21.7 million and $65.1 million,
respectively, as compared to $23.5 million and $70.0 million in the same
periods in the prior year. Depreciation of fixed assets and amortization of
computer software was lower in 2004 by $2.4 million and $6.2 million in the
three and nine months ended September 30, 2004, respectively, due to certain
fixed assets and computer software related to the Sprint transaction that were
fully depreciated in 2003. Adjusted pro forma operating income in the three months ended September 30,
2004 was $138.1 million, an increase of $4.1 million or 3.1% from adjusted pro
forma operating income in the three months ended September 30, 2003 of $134.0
million, reflecting the above variances. Adjusted pro forma operating income
in the nine months ended September 30, 2004 was $406.3 million, an increase of
$11.1 million or 2.8% from adjusted pro forma operating income in the nine
months ended September 30, 2003 of $395.2 million. Advertising Sales  Publication Sales Management reviews and evaluates the value of advertising sales in directories
that published during the period (publication sales) as its primary sales
performance measure. Management believes that a comparison of publication sales
for the same directories from one period to the next gives a better indication
of underlying sales trends, economic conditions and business confidence than a
comparison of directory revenue recognized using the deferral and amortization
method. Because we recognize directory revenue ratably over the life of a
directory under the deferral and amortization, 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
similar to a same-store sales measure. If events occur during the current
period that affect the comparability of publication sales to the prior year
period, such as changes in directory publication dates, then prior year
publication sales amounts are adjusted to conform to the current period
presentation. 49




---



##### 



Sprint-branded publication sales for the three months ended September 30, 2004
were $153.4 million, up $4.8 million or 3.2% from publication sales of $148.6
million in the three months ended September 30, 2003. SBC-branded publication
sales for the three months ended September 30, 2004 were $72.0 million, down
0.8% from publication sales of $72.5 million in the same period of 2003.
Sprint-branded publication sales for the nine months ended September 30, 2004
were $442.5 million, up $11.5 million or 2.7% from publication sales of $431.0
million in the nine months ended September 30, 2003. SBC-branded publication
sales for the nine months ended September 30, 2004 were $277.4 million, down
2.2% from publication sales of $283.7 million in 2003. The increase in
Sprint-branded publication sales resulted from higher advertiser renewal rates
and new business in our major Sprint markets for directories published in the
first nine months of 2004. These results were partially offset by weaker
performance in certain smaller Sprint markets. The decrease in SBC-branded
publication sales resulted from continued softness in the Chicago area economy
and less-than-optimal execution and investment as a result of the previous
DonTech structure for the quarter and year to date. Publication sales are a
non-GAAP measure for which the most comparable GAAP measure is net revenue. A
reconciliation of publication sales to net revenue reported in accordance with
GAAP is presented below: 50




---



##### 



Three months
    
    Nine monthsended September 30,
    
    ended September 30,(amounts in millions)
    
    2004
    
    2003
    
    2004
    
    2003Publication sales-Sprint-branded directories
    
    $
    153.4
    
    
    $
    148.6
    
    
    $
    442.5
    
    
    $
    431.0Adjustments for changes in directory
publication date(s)
    
    
    
    
    
    
    11.7
    
    
    
    
    
    
    
    7.3Publication sales disclosed in third quarter
2003
    
    
    
    
    
    
    160.3
    
    
    
    
    
    
    
    438.3Publication sales SBC-branded directories
    
    
    72.0
    
    
    
    72.5
    
    
    
    277.4
    
    
    
    283.7Less publication sales for all January 2003
Sprint-branded directories not recognized
as revenue in the current period due to
purchase accounting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (102.4
    )Less publication sales for all September
2004 SBC-branded directories not recognized
as revenue in the current period due to
purchase accounting
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.1
    )
    
    
    Less pre-acquisition publication sales for
SBC-branded directories not recognized as
revenue in current
period
    
    
    (71.9
    )
    
    
    (72.5
    )
    
    
    (277.3
    )
    
    
    (283.7
    )Less current period publication sales for
Sprint-branded directories not recognized
as revenue in current period due to
deferral method of accounting
    
    
    (112.7
    )
    
    
    (121.8
    )
    
    
    (231.0
    )
    
    
    (271.1
    )Plus net revenue reported in the period for
publication sales from prior periods,
excluding publication sales for all
January 2003 Sprint-branded directories
    
    
    98.9
    
    
    
    45.5
    
    
    
    204.3
    
    
    
    55.9Net directory advertising revenue on above
publication sales
    
    
    139.6
    
    
    
    84.0
    
    
    
    415.8
    
    
    
    120.7Pre-press publishing revenue
    
    
    3.1
    
    
    
    4.6
    
    
    
    13.0
    
    
    
    17.6Other revenue
    
    
    1.7
    
    
    
    0.7
    
    
    
    4.1
    
    
    
    2.1Net
revenue - GAAP
    
    
    144.4
    
    
    
    89.3
    
    
    
    432.9
    
    
    
    140.4Plus: Net revenue that would have been
reported absent purchase accounting for
Sprint-branded publication sales made prior
to acquisition plus all January 2003 Sprint
branded directories
    
    
    
    
    
    
    53.2
    
    
    
    1.4
    
    
    
    289.2Plus: Pro forma net revenue that would have
been reported assuming the SBC transaction
had occurred on January 1, 2003 and
eliminating the effects of purchase
accounting
    
    
    115.4
    
    
    
    115.5
    
    
    
    340.5
    
    
    
    343.1Net Revenue-Adjusted pro forma
    
    $
    259.8
    
    
    $
    258.0
    
    
    $
    774.8
    
    
    $
    772.7
 51




---



##### 



LIQUIDITY AND CAPITAL RESOURCES Our Senior Secured Credit Facility, as amended and restated on September 1,
2004 in connection with the SBC Directory Acquisition, consists of a $700
million Term Loan A-2, a $1,650 million Term Loan B-2 and a $175 million
Revolving Credit Facility for an aggregate facility of $2,525 million. Term
Loans A-2 and B-2 require quarterly principal payments. As of September 30,
2004, the outstanding balances of Term Loans A-2 and B-2 were $592.7 million
and $1,644.8 million, respectively, and $30.3 million was outstanding under the
Revolver. There were no borrowings under the Revolver as of December 31, 2003.
The Revolver and Term Loan A-2 mature in December 2009, and Term Loan B-2
matures in June 2011. The Credit Facility provides for a
new Term Loan C for potential borrowings up to $400 million, such proceeds, if
borrowed, to be used to fund acquisitions, for retirement of Notes,
and for redemption of, and payment of dividends on, the Preferred Stock, subject to certain
limitations. Substantially all of our assets, including the capital stock of
our subsidiaries, are pledged to collateralize our obligations under the Credit
Facility and the Senior Notes. Our Credit Facility bears interest, at our option, at either:  
    
    The higher of (i) a base rate as determined by Deutsche Bank
Securities Inc., Salomon Smith Barney Inc. or Bear, Stearns & Co. Inc.,
plus a 1.00% margin on the Revolver and Term Loan A-2 and a 1.25%
margin on Term Loan B-2; and (ii) the Federal Funds Effective Rate (as
defined) plus 1/2 of 1%, plus a 1.00% margin on the Revolver and Term
Loan A-2 and a 1.25% margin on Term Loan B-2; or
    
    LIBOR rate plus a 2.00% margin on the Revolver and Term Loan A-2
and a 2.25% margin on Term Loan B-2. We may elect interest periods of
1, 2, 3, 6, 9 or 12 months for LIBOR borrowings. The effective interest rate on the Credit Facility during the three and nine
months ended September 30, 2004 was 4.54% and 4.25%, respectively. We have also issued $325 million 8 7/8% Senior Notes due 2010 and $600 million
10 7/8% Subordinated Notes due 2012. Interest is paid on the Notes
semi-annually on June 15 and December 15. The Senior Notes were secured in
conjunction with the restatement of the Credit Facility in connection with the
SBC Directory Acquisition. Aggregate outstanding debt as of September 30, 2004 was $3,192.8 million.
During the nine months ended September 30, 2004, we made scheduled principal
payments of $40.7 million and prepaid an additional $200.0 million in principal
under our Credit Facility. During the first quarter of 2004, we also redeemed
the remaining aggregate principal amount of the 9 1/8% Senior Subordinated
Notes totaling $21.2 million at a redemption price of 104.563% of the principal
amount thereof, plus accrued and unpaid interest. Interest expense of $1.2
million relating to these notes was recorded in the nine months ended September
30, 2004 consisting of a premium over par value paid at redemption of $1.0
million, plus the write-off of $0.2 million of unamortized deferred financing
costs. At September 30, 2004, we had $2.9 million of cash and cash equivalents before
checks not yet presented for payment of $10.4 million, available borrowings
under the Revolver of $144.7 million. During the nine months ended September 30, 2004,
$36.6 million was borrowed under the Revolver, of which $6.3 million was repaid
before quarter end. No borrowings have been made under Term Loan C. Our
primary source of liquidity will continue to be cash flows from operations as
well as available borrowing capacity under the Revolver. We expect our primary
liquidity requirement will be to fund operations and for principal and interest
payments on our debt. Our ability to meet our debt service requirements will
depend on our ability to generate cash flow in the future. Our primary sources
of cash flow will consist mainly of cash receipts from the sale of advertising
in our yellow pages directories 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 flows from
operations, along with borrowing capacity under the Revolver, will be adequate
to fund our operations and capital expenditures and to 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 flows from
operations or that sufficient borrowing will be available under the Revolver or
Term Loan C to enable us to fund our operations, capital expenditures and meet
all debt service requirements, to pursue all of our strategic initiatives or
for other purposes. Cash flows provided by
operating activities was $323.7 million for the nine
months ended September 30, 2004. Key contributors to operating cash flow
include the following: 52




---



##### 




    
    $203.8 million consisting of $79.6 million in net income plus
$124.2 million of net non-cash charges primarily consisting of $46.3
million of depreciation and amortization, $11.1 million in the bad
debts provision, $14.8 million in other non-cash charges and $52.0 in
deferred taxes.
    
    $37.6 million increase in accounts payable and accrued
liabilities, reflecting a $25.6 million increase in accrued interest
payable on outstanding notes due semi-annually on June 15 and
December 15 and $12.5 million of federal income tax refunds.
Additionally, accounts payable and accrued liabilities includes a $4.5 million advance from SBC under
the transition services agreement relating to the accounts receivable
billing and collection functions, offset by the timing of invoices
received as compared to invoices paid during the nine months ended
September 30, 2004.
    
    $1.7 million decrease in accounts receivable and a $23.5
million increase in deferred directory revenue. We analyze the
change in deferred revenue and accounts receivable together because
when a directory is published, the annual billing value of that
directory is initially deferred and unbilled accounts receivable are
established. Each month thereafter, typically 1/12 of the billing
value is recognized as revenue and customers are billed on a periodic
basis.
    
    $1.4 million in cash received from partnership in excess of
recorded partnership income representing a source of cash.
Partnership income during the nine months ended September 30, 2004
consisted of our 50% interest in DonTechs net income and the revenue
participation income from SBC. Before the SBC Directory Acquisition,
we received cash from DonTech and SBC subsequent to the time we
recorded the associated partnership income; therefore, in periods of
declining DonTech partnership income, cash received related to prior
periods exceeded the income recognized from the current period.
Commencing on September 1, 2004, we no longer recognize any income
associated with the DonTech partnership or revenue participation
income from SBC.
    
    $59.1 million increase in other non-current liabilities
reflects a $58.9 million refund pertaining to the Companys election
to carryback a federal net operating loss in connection with the SPA
Acquisition. Cash used in investing activities for the nine months ended September 30, 2004
was $1,425.7 million and includes
the following:  
    
    $1,413.6 million in cash payments in connection with the SBC
Directory Acquisition, including transaction costs, less $4.4 million
cash received from DonTech.
    
    $14.9 million used to purchase fixed assets, primarily computer
equipment, software and leasehold improvements Cash provided by financing activities through September 30, 2004 was $1,097.2
million and includes the following:  
    
    $1,318.9 million in net borrowings under the Credit Facility
consisting of $600.5 and $731.8 in borrowings under Terms Loans A-2
and B-2, respectively, net of transaction costs of $13.4 million.
The funds received under the Credit Facility were used to finance the
SBC Directory Acquisition.
    
    $247.0 million in principal payments on debt borrowed under the
Credit Facility. Of this amount, $40.7 million represents scheduled
quarterly payments, $200.0 million represents principal payments made
on an accelerated basis, at our option, from excess cash flow
generated from operations, and $6.3 million represents principal
payments on the Revolver.
    
    $21.2 million in principal payments on the remaining 9 1/8% Senior Subordinated Notes.
    
    $36.6 million in borrowings under the Revolver.
    
    $3.7 million in the increased value of checks not yet presented for payment. 53




---



##### 




    
    $6.2 million in proceeds from the exercise of employee stock options. Cash flows provided by operating activities was $226.1 million through
September 30, 2003. Key contributors to operating cash flow included the
following:  
    
    $(37.9) million consisting of $(56.2) million in net loss plus
$18.3 million of net non-cash charges primarily consisting of $49.0
million of depreciation and amortization, $(3.2) million in the bad
debts provision, $11.9 million in other non-cash charges and $(39.4)
million in deferred taxes.
    
    $217.4 million increase in deferred revenue primarily resulting
from directories published subsequent to the SPA Acquisition.
Deferred revenue represents the value of published directories that
will be recognized as revenue over the remaining life of the
directories. As a result of purchase accounting considerations, we
did not record deferred revenue associated with SPA directories
published prior to the transaction, including all January 2003
directories. Prior to the SPA Acquisition, we did not have deferred
directory revenue. Consequently, deferred revenue increased by the
value of directories published during the period (excluding January
2003 directories) and was reduced by the amount amortized and
recognized as directory revenue.
    
    $69.3 million decrease in accounts receivable due to higher
cash collections on accounts receivable. As a result of the SPA
Acquisition, we acquired the rights associated with the collection of
over $250 million of accounts receivable under advertising contracts
executed prior to the SPA Acquisition. Prior to the acquisition,
accounts receivable collections were for our commission on
advertising sales contracts executed.
    
    $4.0 million in cash received from partnership in excess of
recorded partnership income representing a source of cash.
Partnership income during the nine months ended September 30, 2003
consisted of our 50% interest in DonTechs net income and the revenue
participation income from SBC. We received cash from DonTech and SBC
subsequent to the time we record the associated partnership income;
therefore, in periods of declining DonTech partnership income, cash
received related to prior periods typically exceeds the income
recognized from the current period.
    
    $38.7 million increase in other assets resulted in a use of
cash primarily due to payments made to sales persons and vendors for
directories that were scheduled to publish at a later date. These
payments were deferred until the directory was published. Cash used in investing activities through September 30, 2003 was $373.2 million
and included the following:  
    
    $2,259.6 million in cash payments to acquire SPA and pay
transaction costs.
    
    $1,825.0 million in funds raised prior to year-end 2002 under
the Credit Facility were released from
escrow in the first quarter of 2003 in connection with the acquisition of
SPA.
    
    $69.3 million in net proceeds raised prior to year-end 2002
from the issuance of $70 million of Preferred Stock and released from
escrow in the first quarter of 2003 in connection with the SPA
Acquisition.
    
    $7.9 million used to purchase fixed assets, primarily computer
equipment and computer software. Cash provided by financing activities through September 30, 2003 was $145.2
million and included the following:  
    
    $461.3 million in net borrowings under the Credit Facility.
    
    $125.7 million in net proceeds from the issuance of $130 million of Preferred Stock.
    
    $243.0 million in principal payments on pre-acquisition debt,
which consisted of $114.2 million of variable rate bank debt and
$128.8 million of fixed rate bond debt, with borrowings from the
Credit Facility and proceeds from the Preferred Stock. 54




---



##### 




    
    $219.6 million of $257.2 principal payments on
acquisition-related debt in the first quarter of 2003 with the cash
flows generated by operations, less $37.6 in borrowings under the
revolver.
    
    $20.8 million in proceeds from the exercise of employee stock
options. In preparation of the Companys financial statements in this Quarterly Report
on Form 10-Q, management made certain reclassifications within the consolidated
statement of cash flows for the nine months ended September 30, 2004 versus its
press release dated October 27, 2004, which was included as Exhibit 99.1 to our
Current Report on Form 8-K furnished to the SEC on October 28, 2004. One
reclassification involves transaction costs of $13.4 million associated with
the financing of the SBC Directory Acquisition that have been reported as a
decrease in cash flows from financing activities and a corresponding increase
in cash flows from operating activities. The second reclassification involves
cash received from DonTech of $4.4 million in connection with the SBC Directory Acquisition
that has been reported as an increase in cash flows from investing activities
and a corresponding decrease in cash flows from operating activities.
The third item relates to a reclassification of fixed asset additions
of $2.9 million in connection with the SBC Directory Acquisition
that have been reported as an increase in cash flows for investing
activities and a corresponding decrease in cash flows from operating
activities. The net
increase in cash flows from operating and investing activities
resulting from those reclassifications for the nine months ended
September 30, 2004 was $6.1 million and $7.3 million,
respectively, offset by a $13.4 million decrease in cash flows from
financing activities. The Contractual Obligations table presented below sets forth our annual
commitments as of September 30, 2004 for principal payments on our debt, as
well as other cash obligations for the next five years and thereafter. The debt
repayments as presented in this table include only the scheduled principal
payments under our current debt agreements and do not include any anticipated
prepayments or interest charges. Payment due by
period(amounts in millions)
    
    
    
    
    
    Less than
    
    1-3
    
    4-5
    
    After 5Contractual Obligations
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    YearsLong-Term Debt(1)
    
    $
    3,192.8
    
    
    $
    126.2
    
    
    $
    228.5
    
    
    $
    289.5
    
    
    $
    2,548.6Operating Leases(2)
    
    
    47.5
    
    
    
    6.8
    
    
    
    20.1
    
    
    
    6.8
    
    
    
    13.8Unconditional Purchase
Obligations(3)
    
    
    76.2
    
    
    
    16.9
    
    
    
    59.3
    
    
    
    
    
    
    
    Other Long-Term
Liabilities(4)
    
    
    38.7
    
    
    
    0.5
    
    
    
    1.1
    
    
    
    1.2
    
    
    
    35.9Transition Services(5)
    
    
    10.4
    
    
    
    10.1
    
    
    
    0.3
    
    
    
    
    
    
    
    Total Contractual
Obligations
    
    $
    3,365.6
    
    
    $
    160.5
    
    
    $
    309.3
    
    
    $
    297.5
    
    
    $
    2,598.30
 (1) Included in long-term debt are amounts owed under our Credit Facility and
the Notes. (2) We enter into operating leases in the normal course of business.
Substantially all lease agreements have fixed payment terms based on the
passage of time. Some lease agreements provide us with renewal or early
termination options. Our future operating lease obligations would change if we
exercised these renewal or early termination options and if we entered into
additional operating lease agreements. The amounts in the table assume we do
not exercise any such renewal or early termination options. (3) We have an unconditional purchase obligation with one vendor regarding the
purchase of paper that extends through the end of 2006. Our purchase
obligations are based on annual minimum quantities at pre-established pricing.
Amounts in the table above reflect such pricing and minimum quantities under
this contract. Should the market price of the paper drop below the
pre-established pricing, our vendor is obligated to negotiate with us a lower
paper price. Any quantities used above the contractual minimums would increase
our payment obligations. We have no contractual obligations beyond 2006. (4) We have a defined benefit plan covering substantially all employees. Our
funding policy is to contribute an amount at least equal to the minimum legal
funding requirement. No contributions were required in the three-year period
ended December 31, 2003. Based on past performance and the uncertainty of the
dollar amounts to be paid, if any, we have excluded such amounts from the above
table. We have an unfunded postretirement plan that provides 55




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certain healthcare and life insurance benefits to those full-time employees who
reach retirement age while working for the Company. Those expected future
benefit payments, including administrative expenses, net of employee
contributions, are included in the table above. (5) In connection with the SBC Directory Acquisition, we entered into a
transition services agreement with SBC, whereby SBC would provide certain
ongoing operational services, such as billing and collection services, on our
behalf relating to the directory operations we acquired through the third
quarter of 2005. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk and Risk Management The Credit Facility bears interest at variable rates and, accordingly, our
earnings and cash flow are affected by changes in interest rates. The Credit
Facility requires that we maintain hedge agreements to provide either a fixed
interest rate or interest rate protection on at least 50% of our total
outstanding debt. The Company has entered into the following interest rate
swaps that effectively convert variable rate debt to fixed rate debt as of
September 30, 2004. Under the terms of the agreements, the Company receives
variable interest based on three-month LIBOR and pays a fixed rate of interest. Effective Dates
    
    Notional Amounts
    
    Pay rates
    
    Maturity Dates(amounts in millions)April 1, 2003
    
    $
    255
    (1)
    
    2.850%
    
    March 31, 2007October 9, 2003
    
    $
    150
    
    
    1.959%
    
    October 9, 2005June 21, 2004
    
    $
    50
    
    
    3.230%
    
    June 21, 2006June 23, 2004
    
    $
    50
    
    
    3.170%
    
    June 23, 2006June 28, 2004
    
    $
    50
    
    
    3.110%
    
    June 28, 2006July 2, 2004
    
    $
    50
    
    
    3.200%
    
    July 3, 2006September 7, 2004
    
    $
    200
    (2)
    
    3.490% - 3.750%
    
    September 8, 2008-September 7, 2009September 15, 2004
    
    $
    250
    (3)
    
    3.200% - 3.910%
    
    September 15, 2007-September 15, 2009September 17, 2004
    
    $
    150
    (1)
    
    3.210% - 3.740%
    
    September 17, 2007-September 17, 2009September 23, 2004
    
    $
    150
    (1)
    
    3.140% - 3.438%
    
    September 24, 2007-September 24, 2008Total
    
    $
    1,355
  (1)
    
    consists of three swaps(2)
    
    consists of two swaps(3)
    
    consists of four swaps 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 interest rate swap agreements have been designated as cash flow hedges. In
accordance with the provisions of SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS 137 and SFAS 138, the
swaps are recorded at fair value. On a quarterly basis, the fair value of the
swaps are determined based on quoted market prices and, assuming effectiveness,
the difference between the fair value and the book value of the swaps are
recognized in other comprehensive income, a component of shareholders equity.
Any ineffectiveness of the swaps is required to be recognized in earnings. The
swaps and the hedged item (three-month LIBOR-based interest payments on $1,355
million of bank debt) have been designed so that the critical terms (interest
reset dates, duration and index) coincide. Assuming the critical terms continue
to coincide, the cash flows from the swaps will exactly offset the cash flows
of the hedged item and no ineffectiveness will exist. 56




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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-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934) 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.The Company is required to provide a report in its Annual Report on
Form 10-K for the year ended December 31, 2004 that will include,
among other things, managements assessment of the effectiveness of
the Companys internal controls over financial reporting. In
addition, the Company is required to provide in its Form 10-K a
written attestation prepared by its independent auditors in
connection with such managements assessment.The Company completed the SBC Directory Acquisition on September 1,
2004. Management is diligently conducting an evaluation of all of the
Companys internal controls over financial reporting, including that
of the acquired business. Due to the size and timing of this recent
acquisition, management may be unable to complete its assessment of
the internal controls over financial reporting with respect to
portions of the acquired SBC Directory business by the end of the
year. As a result, management may take advantage of and rely on the
guidance provided by the Staff of the Securities and Exchange
Commission with respect to the exclusion from its assessment of the
internal controls over financial reporting with respect to material
business acquisitions completed during the fiscal year. If the
Company does rely on the guidance of the Staff and exclude some
portion of the acquired business from its assessment of the internal
controls over financial reporting, the Company will include a detailed
explanation of what portion of the acquired business has been so
excluded and its significance, as well as the reasons for its
exclusion, in its report to be included in the Form 10-K.(b)
    
    Changes in Internal Control.There have not been any
changes in the Companys internal control over financial reporting
that occurred during the Companys most recent fiscal quarter that
has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting. 57




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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 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
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 below. No material amounts have been accrued in our financial
statements with respect to any of these matters. In order to understand our potential exposure under the litigation and tax
matters described below under the captions Information Resources, Inc. and
Tax Matters, you need to understand the relationship between us and D&B, and
certain of our 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
separated through a spin-off (1996 Distribution) into three separate public
companies: The Dun and Bradstreet Corporation, ACNielsen Corporation
(ACNielsen), and Cognizant Corporation (Cognizant). In June 1998, The Dun &
Bradstreet Corporation separated through a spin-off (1998 Distribution) into
two separate public companies: R.H. Donnelley Corporation (formerly The Dun &
Bradstreet Corporation) and a new company that changed its name to The Dun &
Bradstreet Corporation. Later in 1998, Cognizant separated through a spin-off
(Cognizant Distribution) into two separate public companies: IMS Health
Incorporated (IMS), and Nielsen Media Research, Inc. (NMR). In September
2000, The Dun & Bradstreet Corporation separated into two separate public
companies: Moodys Corporation, (Moodys) (formerly The Dun & Bradstreet
Corporation), and a new company that changed its name to The Dun & Bradstreet
Corporation. As a result of the form of R.H. Donnelley Corporations separation
from The Dun & Bradstreet Corporation in 1998, we are the corporate successor
of and technically the defendant and taxpayer referred to below as D&B with
respect to any matter accruing prior to June 30 1998. Information Resources, Inc. The following is a description of an antitrust lawsuit filed in 1996 by
Information Resources, Inc. (IRI). As more fully described below, VNU N.V., a
publicly traded Dutch company (VNU), and its U.S. subsidiaries VNU, Inc., AC
Nielsen, AC Nielsen (US), Inc. (ACN (US)), and NMR (collectively, the VNU
Parties), have assumed exclusive joint and several liability for any judgment
or settlement of this antitrust lawsuit. As a result of the indemnity
obligation, we do not have any exposure to a judgment or settlement of this
lawsuit unless the VNU Parties default on their obligations. In the event of
such default, we have contingent liability for this matter as a result of our
succeeding to D&Bs liabilities and obligations as part of the 1998
Distribution. In such event, however, under the contractual commitments
described below, any such amounts that we might need to pay would be shared
equally (50% each) by D&B and Moodys, on a joint and several basis. Only if
D&B and Moodys were unable to bear all or a part of this liability, would we
be liable, and then only to the extent that either of them could not satisfy
their joint and several indemnity obligations to us. In July 1996, IRI filed a complaint, and subsequently amended in 1997, in the
United States District Court for the Southern District of New York, naming as
defendants D&B (now, the Company, as successor of D&B), A.C. Nielsen Company (a
subsidiary of ACNielsen) and IMS (then known as Cognizant), at the time of the
filing, all wholly owned subsidiaries of D&B. The complaint alleges various violations of U.S. antitrust laws under Sections
1 and 2 of the Sherman Antitrust Act. The complaint also alleges a claim of
tortious interference with a contract and a claim of tortious interference with
a 58




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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s antitrust claims allege that the defendants developed and implemented a
plan to undermine IRIs ability to compete within the U.S. and foreign markets
in North America, Latin America, Asia, Europe and Australia/New Zealand through
a series of anti-competitive practices, including: unlawfully tying/bundling
services in the markets in which defendants allegedly had monopoly power with
services in markets in which ACNielsen competed with IRI; entering into
exclusionary contracts with retailers in certain countries to deny IRIs access
to sales data necessary to provide retail tracking services or to artificially
raise the cost of that data; predatory pricing; acquiring foreign market
competitors with the intent of impeding IRIs efforts to expand; disparaging
IRI to financial analysts and clients; and denying IRI access to capital
necessary for it to compete. IRIs complaint originally sought damages in excess of $350.0 million, which
amount IRI sought to treble under antitrust laws. IRI has since revised its
allegation of damages to exceed $650.0 million, which IRI also seeks to treble.
IRI has filed with the Court the report of its expert who has opined that IRI
suffered damages of between $581.6 million and $651.7 million from the
defendants alleged practices. IRI also seeks punitive damages of an
unspecified amount. In April 2003, the court denied a motion for partial summary judgment by the
defendants that sought to dismiss certain of IRIs claims and granted in part a
motion by IRI seeking reconsideration of certain summary judgment rulings the
Court had previously made in favor of the defendants. The motion granted by
the court concerns IRIs claims of injuries from defendants alleged conduct in
certain foreign markets. Pursuant to a scheduling order entered by the Court on April 8, 2004, discovery
ended on November 1, 2004, and trial is scheduled to begin April 18, 2005. On June 21, 2004, pursuant to a stipulation between IRI and defendants, the
Court ordered that certain of IRIs claims be dismissed with prejudice from the
lawsuit, including the claim for tortious interference with the SRG
acquisition. We believe that the dismissal of the tortious interference claims
also precludes any claim for punitive damages. In connection with the 1996 Distribution, Cognizant (now NMR), ACNielsen and
D&B (now the Company) entered into an Indemnity and Joint Defense Agreement
(the Original JDA), pursuant to which they agreed to:  
    
    allocate potential liabilities that may relate to, arise out of or
result from the IRI lawsuit (IRI Liabilities); and
    
    conduct a joint defense of such action. In particular, the Original JDA provided that:  
    
    ACNielsen would assume exclusive liability
for IRI Liabilities up to a maximum amount to
be calculated at such time as such
liabilities become payable as a result of a
final non-appealable judgment or any
settlement permitted under the Original JDA
(the ACN Maximum Amount); and
    
    D&B and Cognizant would share liability equally for any
amounts in excess of the ACN Maximum Amount. As a result of VNUs acquisition of ACNielsen in 2001, VNU assumed ACNielsens
liabilities under the Original JDA and pursuant to the Original JDA would be
included with ACNielsen in the computation of the ACN Maximum Amount. On July 30, 2004, the VNU Parties, the Company, D&B, Moodys and IMS entered
into an Amended and Restated Indemnity and Joint Defense Agreement (the
Amended JDA). Pursuant to the Amended JDA, any and all IRI Liabilities incurred by us, D&B,
Moodys or IMS relating to a 59




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judgment (even if not final) or any settlement being entered into in the IRI
action will be jointly and severally assumed and fully discharged exclusively
by the VNU Parties. Under the Amended JDA, the VNU Parties have agreed to,
jointly and severally, indemnify us, D&B, Moodys and IMS from and against all
IRI Liabilities to which they become subject. As a result, the concept of ACN
Maximum Amount which had been used under the Original JDA to cap ACNielsens
liability for the IRI Liabilities no longer exists, and all such liabilities
are the responsibility of the VNU Parties pursuant to the Amended JDA. In addition, the Amended JDA provides that if it becomes necessary to post any
bond pending an appeal of an adverse judgment, then the VNU Parties shall
obtain the bond required for the appeal and shall pay the full cost of such
bond. In connection with entering into the Amended JDA, the Company, D&B, Moodys and
IMS agreed to amend certain covenants of the Original JDA to provide
operational flexibility for ACNielsen going forward. In addition, the Amended
JDA includes certain amendments to the covenants of ACNielsen (which, under the
Amended JDA, are now also applicable to ACN (US), which we understand holds
ACNielsens operating assets) which are designed to preserve such parties
claim-paying ability and protect the Company, D&B, Moodys and IMS. Among other
covenants, ACNielsen and ACN (US) agreed that neither they nor any of their
respective subsidiaries will incur any indebtedness to any affiliated person,
except indebtedness which its payment will, after a payment obligation under
the Amended JDA comes due, be conditioned on, and subordinated to, the payment
and performance of the obligations of such parties under the Amended JDA. VNU
has agreed to having a process agent in New York to receive on its behalf
service of any process concerning the Amended JDA. 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 any liabilities arising under the Original JDA, and IRI
Liabilities arising from the IRI action itself, and in each case 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. We understand
that D&B and Moodys have agreed amongst themselves to share equally (50% each)
these indemnity obligations to us. Only if D&B and Moodys were unable to bear
all or a part of their aggregate 50% share of the liability in excess of the
cap, would we be liable, and then only to the extent that either of them could
not satisfy their joint and several indemnity obligations to us. Because liability for violations of the antitrust laws is joint and several and
because the rights and obligations relating to the Amended JDA are based on
contractual relationships, the failure of the VNU Parties to fulfill their
obligations under the Amended JDA could result in the other parties bearing all
or a share of the IRI Liabilities. Joint and several liability for the IRI
Liabilities means that even where more than one defendant is determined to have
been responsible for an alleged wrongdoing, the plaintiff can collect all or
part of the judgment from just one of the defendants. This is true regardless
of whatever contractual allocation of responsibility the defendants and any
other indemnifying parties may have made, including the allocations described
above between the VNU Parties, the Company, D&B, Moodys and IMS. Accordingly, and as a result of the allocations of liability described above,
in the event the VNU Parties default on their obligations under the Amended
JDA, each of D&B and Moodys will be jointly and severally responsible for the
payment of any portion of any judgment or settlement ultimately payable by the
Company (which is the defendant in the IRI action), which could be as high as
all of the IRI Liabilities. We are unable to predict the outcome of the IRI litigation or the financial
condition of any of the VNU Parties or the other defendants at the time of any
such outcome (and hence we cannot estimate their ability to pay the IRI
Liabilities pursuant to the Amended JDA or the judgment or settlement in the
IRI action). Nonetheless, while we cannot assure you as to the outcome of this
matter, management presently believes that the VNU Parties have sufficient
financial resources and borrowing capacity to satisfy their obligations under
the Amended JDA and, if they default, D&B and Moodys have sufficient financial
resources and borrowing capacity to reimburse us for any payments we may be
required to make and related costs we may incur in connection with this matter.
Therefore, management presently believes that the ultimate resolution of this
matter would not have a material adverse effect on the Companys results of
operations, cash flows or financial condition. Accordingly, no amount in
respect of this matter has been accrued in our consolidated financial
statements. 60




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Tax Matter D&B entered into global tax-planning initiatives in the normal course of its
business, primarily through tax-free restructurings of both its foreign and
domestic operations (collectively, Legacy Tax Matters). The IRS is currently
disputing certain tax positions taken with respect to the Legacy Tax Matters.
The status of these Legacy Tax Matters is summarized below, including the
status of the tentative settlements of two of these matters described in our
Form 10-Q for the quarter ended June 30, 2004 (Q2 Form10-Q). Pursuant to a series of tax sharing and other agreements (collectively, Tax
Sharing Agreements) relating to the spin-offs and separations referred to
above, IMS and NMR are jointly and severally liable for, and must pay one-half
of, and D&B and Moodys are jointly and severally liable for, and must pay the
other half of, any payments over $137.0 million for taxes, accrued interest and
other amounts resulting from the Legacy Tax Matters summarized below (other
than the matter summarized below under  Amortization and Royalty Expense
Deductions/Royalty Income  1997-2004, 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 $137.0 million of tax liability in
connection with the matter summarized below as  Utilization of Capital Losses
 1989-1990. Under the terms of the 1998 Distribution, D&B agreed to assume the defense and
to indemnify us against 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 Legacy 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 terms of certain of the other spin-offs and separations, D&B
and Moodys have, between each other, agreed to 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. Only if D&B and Moodys were unable to bear all or a part of these
liabilities, would we be liable, and then only to the extent that both of them
could not satisfy their joint and several indemnity obligations to us. As we previously reported in our Q2 Form10-Q, we understand that D&B has
negotiated with the IRS a tentative settlement of all outstanding issues
related to the matters described below under Utilization of Capital Losses 
1989-1990 (Capital Losses Matter) and, with respect to the matters described
below under Royalty Expense Deductions  1993-1997 (Royalty Expense
Matter), has negotiated a tentative settlement for tax years 1995 and 1996,
which represented the great majority of the probable exposure for the Royalty
Expense Matter (collectively, the Proposed Settlements). Having achieved the
Proposed Settlements, the next step in the resolution process is for the
relevant parties and the IRS to negotiate and execute final settlement
agreements reflecting the terms of the respective Proposed Settlements, and
then for the IRS to tender to the relevant taxpayer parties final settlement
agreements. We understand that D&B is presently awaiting receipt of a final
settlement agreement from the IRS with respect to the Capital Losses Matter
and, as further described below, D&B recently received from the IRS a final
settlement agreement with respect to the Royalty Expense Matter. These
Proposed Settlements and any proposed final settlement agreements are
tentative, and will not bind any of the parties until final settlement
agreements are executed. While we cannot assure you as to the outcome in these Legacy Tax Matters,
management presently believes that D&B and Moodys have sufficient financial
resources, borrowing capacity and, where applicable, indemnity rights against
IMS and NMR (who succeeded to Cognizants indemnity obligations under the
Cognizant Distribution) and IMS and NMR in turn have sufficient financial
resources and borrowing capacity to satisfy their respective indemnity
obligations to D&B and Moodys, so as to reimburse us for any payments we may
be required to make and related costs we may incur in connection with these
Legacy Tax Matters. Therefore, management presently believes that the ultimate
resolution of these Legacy Tax Matters would not have a material adverse effect
on the Companys results of operations, cash flows or financial condition. Utilization of Capital Losses  1989  1990 (Proposed Settlement Pending) 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 notice of
adjustment. The amended tax return reflected an additional $561.6 million of
tax and interest due. In 2000, D&B paid the IRS approximately $349.3 million
and IMS (on behalf of itself and NMR) paid the IRS approximately
$212.3 million. We understand that these payments were made under dispute in
order to stop additional interest from accruing and that D&B has filed a
complaint for a refund in the United States District Court. As noted 61




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above, we
understand that D&B has reached a Proposed Settlement of this Capital Losses
Matter with the IRS and is expecting to receive a final settlement agreement
reflecting the terms of such Proposed Settlement. The Proposed Settlement and
any final settlement agreement is tentative and non-binding until a definitive
settlement agreement is executed. The Proposed Settlement requires that the
complaint for a refund be withdrawn and that D&B make an additional payment to
the IRS. We understand that D&B expects that the net impact to D&Bs cash flow
to settle this matter could be up to $14.0 million (tax, interest, and
penalties, net of tax benefits), although we cannot assure you with respect to
whether or not this Capital Losses Matter will be finally resolved or when or
on what terms. Royalty Expense Deductions  1993  1997 (Proposed Settlement Pending) In the second quarter of 2003, D&B received (on our behalf) a proposed notice
of deficiency from the IRS with respect to a partnership transaction entered
into in 1993. Specifically, the IRS proposed to disallow certain royalty
expense deductions claimed by D&B on its 1993 through 1996 tax returns. We
understand that D&B estimates that the disallowance of the 1993 and 1994
royalty expense deductions would result in a loss to it of approximately $5.0
million in pending tax refunds and that the additional tax liability to it with
respect to the disallowance of the 1995 and 1996 royalty expense deductions
could be up to approximately $45.5 million (tax, interest and penalties, net of
tax benefits). In addition, and also in the second quarter of 2003, D&B received from the IRS
on behalf of the partnership associated with the above transaction a notice of
proposed partnership adjustment challenging the tax treatment of certain
royalty payments received by the partnership in which D&B was a partner. In
that notice, the IRS is seeking to reallocate certain partnership income to
D&B. In January and April 2004, D&B received additional IRS notices (similar
to those received in the second quarter of 2003) associated with D&Bs
remaining interest in the partnership transaction (as described above) for the
three months in 1997 for which the entities were partners. The additional tax
liability with respect to D&Bs share of this income for the notices received
in the second quarter of 2003 and January and April 2004 could be up to $22.5
million (tax, interest and penalties, net of tax benefits). We understand that
D&B believes that these positions regarding the partnership are inconsistent
with the IRS position with respect to the same royalty expense deductions
described above. This $22.5 million additional liability would be in addition
to the $45.5 million of additional liability related to royalty expense
deductions discussed in the previous paragraph. As noted above, we understand that D&B has reached a Proposed Settlement with
the IRS regarding the disallowance of the 1995 and 1996 royalty expense
deductions portion of the Royalty Expense Matter. We also understand that
during the third quarter of 2004, the IRS tendered to D&B (on our behalf) a
final settlement agreement with respect to the Royalty Expense Matter for tax
years 1995 and 1996, reflecting the financial terms (but not necessarily
reflecting all other terms) set forth in the related Proposed Settlement. The
Proposed Settlement and any final settlement agreement is tentative and
non-binding until a definitive settlement agreement is executed. In accordance with the Tax Sharing Agreements, we and D&B sought consent to
execute the final settlement agreement for the Royalty Expense Matter for tax
years 1995 and 1996 from the relevant parties having financial responsibilities
for that matter under the Tax Sharing Agreements (i.e., Moodys, IMS, NMR and
D&B). All such parties consented to the final settlement agreement tendered by
the IRS, with the exception of NMR and IMS. As a result of NMRs and IMSs decision not to consent to the Royalty Expense
Matter final settlement agreement, on November 1, 2004, D&B informed the IRS
that we could not execute the final settlement agreement. On November 3, 2004,
the IRS informed D&B that it was withdrawing the final settlement agreement
with respect to the Royalty Expense Matter. As a result, we cannot predict at
this time whether or not, or when, the parties will be able to conclude
negotiations with the IRS with respect to a final settlement agreement
regarding the Royalty Expense Matters for tax years 1995 and 1996 on the
financial terms and/or other terms set forth in the Proposed Settlement, if at
all. The Tax Sharing Agreements, which govern each of the parties rights and
obligations under these circumstances, provide (the Royalty Expense Indemnity
& Defense Provisions) that, a party withholding consent to a proposed
settlement shall continue or initiate further proceedings with the IRS at
its own expense, and the liability of [the parties previously in control of
such proceedings] shall be limited to the liability that would have resulted
from the proposed settlement agreement [that was not consented to] (including
interest, additions to [t]ax and penalties which
have accrued at that time.) We believe, therefore, as a result of the failure
of NMR and IMS to provide their consent, our contingent (assuming each of D&B
and Moodys fail to satisfy their indemnity obligations to us) liability for
this Royalty Expense Matter with respect to tax years 1995 and 1996 has been
effectively capped at the 62




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##### 



amounts provided in the final settlement agreement
tendered by the IRS. We also believe that in accordance with the Royalty
Expense Indemnity & Defense Provisions, NMR and IMS would be jointly and
severally liable for any excess amounts above those reflected in the final
settlement agreement tendered by the IRS that may ultimately be owing under
this Royalty Expense Matter with respect to tax years 1995 and 1996. We
understand that D&B estimates that the ultimate resolution of this portion of
the Royalty Expense Matter would have a projected net impact to its cash flow
of $37.2 million (tax, interest and penalties, net of tax benefits). IMS has recently alleged various breaches of our and D&Bs obligations under
the Tax Sharing Agreements related to D&Bs management and attempted settlement
of this matter with the IRS. In addition to reserving it rights against us
and D&B, IMS has urged NMR (which is in direct contractual privity with us) to:  
    
    challenge our application of the Royalty Expense
Indemnity & Defense Provisions of the Tax Sharing Agreements 
specifically that NMR should reject our position that NMR must
now lead the defense and that NMR and IMS jointly and severally
indemnify us for any financial outcome that is less advantageous
to us than the final settlement agreement); and
    
    assert breaches of contract and to terminate the
obligations of IMS and NMR to be jointly and severally liable
for, and pay, one-half of the liabilities associated with the
Legacy Tax Matters as provided under the Tax Sharing Agreements
generally. We and our legal counsel, and we understand D&B and their legal counsel,
believe that neither NMR nor IMS have any right or the legal basis to terminate
their indemnity obligations under the Tax Sharing Agreements, and that any
attempt by them to do so will be found to be without merit, although we cannot
assure you with respect to the ultimate outcome of that issue or with respect
to the timing of its resolution. We anticipate commencing arbitration proceedings along with D&B to enforce our
respective rights under the Royalty Expense Indemnity & Defense Provisions and
other provisions of the Tax Sharing Agreements should the negotiation process
required by the Tax Sharing Agreements fail to resolve the parties dispute.
While we believe that we should prevail in such arbitration, and thereby
effectively cap our exposure with respect to the Royalty Expense Matter for tax
years 1995 and 1996 at the levels described above, we cannot assure you as to
the ultimate outcome of this matter or with respect to the timing of its
resolution. The 1993, 1994, and 1997 royalty expense deduction portions of the Royalty
Expense Matter remain pending before the IRS. We understand that D&B estimates
that the disallowance of the deductions for those tax years represents an
exposure to it of approximately $6.6 million (tax, interest, and penalties, net
of tax benefits). Amortization Expense Deductions  1997  2004 In the fourth quarter of 2003, D&B received (on our behalf) IRS notices of
proposed adjustment with respect to a partnership transaction entered into in
1997. In addition, D&B received, on behalf of the partnership, various IRS
materials further explaining the examining agents position with respect to the
activities of the partnership in 1997 and 1998. In April 2004, D&B received (on our behalf) proposed notices of deficiency from
the IRS, proposing adjustments with respect to the same partnership transaction
entered into in 1997 described above. The adjustments proposed in the April
notices reflect the notices of proposed adjustment and other IRS materials
referred to above. Specifically, the IRS asserted that certain amortization expense deductions
claimed by D&B on its 1997 and 1998 tax returns should be disallowed. We
understand that D&B estimates that the additional tax liability to it as a
result of the disallowance of the 1997 and 1998 amortization deductions and the
disallowance of such deductions claimed from 1999 to date could be up to $57.8
million (tax, interest and penalties, net of tax benefits). This transaction
is scheduled to expire in 2012 and, unless earlier terminated, based on current
interest rates and tax rates, additional tax exposure would increase at a rate
of approximately $2.1 million per quarter (including potential penalties) as
future amortization expenses are deducted. In addition, the IRS has asserted that royalty expense deductions, claimed by
D&B on its tax returns for 1997 and 1998 for royalties paid to the partnership
should be disallowed. The IRS also has asserted that the receipt of these same
royalties by the partnership should be reallocated to and reported as royalty
income by D&B, including the 63




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##### 



portions of the royalties that were allocated to
third party partners in the partnership, and, thus, included in their taxable
income. We understand that D&B believes that the IRS stated positions with
respect to the treatment of the royalty expense and royalty income are mutually
inconsistent, making it unlikely that the IRS will prevail on both of the
positions. As a result, we understand that D&B estimates that after taking
into account certain other tax benefits resulting from the IRS position on the
partnership it is unlikely that there will be any additional cash tax payments
due in addition to the amounts noted above related to the amortization expense
deduction. In the event the IRS were to prevail on both positions with respect to the
royalty expense/income, which D&B believes unlikely, D&B estimates that the
additional tax liability to it as a result of the disallowance of the 1997 and
1998 royalty expense deductions, the disallowance of such deductions claimed
from 1999 to date and the inclusion of the reallocated royalty income for all
relevant years could be up to $139.5 million (tax, interest and penalties, net
of tax benefits), which would be in addition to the $57.8 million noted above
related to the amortization expense deduction. We understand that D&B has filed protests relating to these matters with the
IRS Office of Appeals. We understand that during the third quarter of 2004,
D&B was informed by the IRS Office of Appeals that this matter was being
returned to the Examination Division of the IRS for further development of the
issues. We understand that D&B is attempting to resolve these matters at the
Appeals phase before proceeding to litigation, if necessary. If D&B were to
challenge, at any time, any of these IRS positions for years 1997 and 1998 in
U.S. District Court or the U.S. Court of Federal Claims, rather than in U.S.
Tax Court, the disputed amounts for each applicable year would need to be paid
in advance for the Court to have jurisdiction over the case. Conclusion As a result of our assessment of our exposure in these matters relating to our
prior relationship with D&B and its former affiliates, especially in light of
our indemnity arrangements with D&B and Moodys (and the VNU Parties with
respect to the IRI matter), and their respective financial resources, borrowing
capacity and, in the case of certain Legacy Tax Matters, indemnity rights
against IMS and NMR, and in turn IMS and NMRs respective financial resources
and borrowing capacity to satisfy their respective indemnity obligations to D&B
and Moodys, no material amounts have been accrued in our consolidated
financial statements for any of these D&B-related litigation and tax matters. 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 and no material amounts have been accrued in
our consolidated financial statements with respect to these matters. 64




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##### 



Item 6. Exhibits  (a)
    
    Exhibits: Exhibit No.
    
    Document2.1
    
    Stock Purchase Agreement, dated as of September 21, 2002, by and among the
Company, Sprint Corporation and Centel Directories LLC (incorporated by
reference to Exhibit 2.1 to the Current Report on Form 8-K, filed with the
Securities and Exchange Commission on October 1, 2002, Commission File No.
001-07155). The Company agrees to furnish supplementally a copy of any
omitted schedules to the Securities and Exchange Commission upon request.2.2
    
    Supplemental Agreement to Stock Purchase Agreement, dated as of December 31,
2002, by and among the Company, Sprint Corporation and Centel Directories LLC
(incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K,
filed with the Securities and Exchange Commission on January 17, 2003,
Commission File No. 001-07155). The Company agrees to furnish supplementally
a copy of any omitted schedules to the Commission upon request.2.3
    
    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, filed with the Securities and Exchange
Commission on October 1, 2002, Commission File No. 001-07155)2.4
    
    Purchase Agreement dated as of July 28, 2004 by and among R.H. Donnelley
Corporation, Ameritech Corporation and Ameritech Publishing, Inc.
(incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
filed with the SEC on August 2, 2004, Commission File No. 001-07155)2.5
    
    Purchase Agreement, dated as of July 28, 2004, by and among R.H. Donnelley
Corporation, Ameritech Corporation and Ameritech Publishing, Inc.
(incorporated by reference to Exhibit 2.1 to the Companys Current Report on
Form 8-K, filed with the Securities and Exchange Commission on August 2,
2004, Commission File No. 001-07155)2.6
    
    Amendment No. 1 to the Purchase Agreement, dated as of September 1, 2004, by
and among R.H. Donnelley Corporation, Ameritech Corporation and Ameritech
Publishing, Inc. (incorporated by reference to Exhibit 2.2 to the Companys
Current Report on Form 8-K, filed with the Securities and Exchange Commission
on September 3, 2004, Commission File No. 001-07155)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, filed with the Securities and Exchange Commission on May 14,
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,
filed with the Securities and Exchange Commission on May 14, 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)
 65




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##### 



Exhibit No.
    
    Document3.5
    
    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, among 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 the Company, 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 91/8% 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)4.5
    
    Second Supplemental Indenture, dated as of December 20, 2002, among R.H.
Donnelley Inc., as Issuer, and the Company, 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 91/8% 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 the Company, 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 91/8% 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
    
    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, Commission File No.
001-07155)4.8
    
    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, filed with the Securities and Exchange
Commission on March 28, 2001, Commission File No. 001-07155)
 66




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##### 



Exhibit No.
    
    Document4.9
    
    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)4.10
    
    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)4.11
    
    Form of Warrant Agreement, dated January 3, 2003, between the Company and
investment partnerships affiliated with The Goldman Sachs Group, Inc.
(incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K,
filed with the Securities and Exchange Commission on January 17, 2003,
Commission File No. 001-07155)4.12
    
    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 the Current Report on Form
8-K, filed with the Securities and Exchange Commission on December 3, 2002,
Commission File No. 001-07155)4.13
    
    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 87/8% 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)4.14
    
    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 87/8%
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, Commission File No. 001-07155)4.15
    
    Form of 87/8% Senior Notes due 2010 (included in Exhibit 4.13)4.16
    
    Guarantees relating to the 87/8% 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)4.17
    
    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 107/8% 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)4.18
    
    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 107/8%
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)4.19
    
    Form of 107/8% Senior Subordinated Notes due 2012 (included in Exhibit 4.17)4.20
    
    Guarantees relating to the 107/8% 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)
 67




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##### 



Exhibit No.
    
    Document4.21
    
    Second Supplemental Indenture dated as of
January 9, 2004 among R.H. Donnelley Inc.,
as Issuer, the Company and 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 4.21
to the Annual Report on Form 10-K filed
with the Securities and Exchange
Commission on March 12, 2004, Commission
File No. 001-07155)4.22
    
    Second Supplemental Indenture, dated as of
September 1, 2004, by and among R.H.
Donnelley Inc., the guarantors party
thereto and The Bank of New York, as
Trustee, with respect to the 8 7/8% Senior
Notes due 2010 of R.H. Donnelley Inc.
(incorporated by reference to Exhibit 4.1
to the Companys Current Report on Form
8-K, filed with the Securities and
Exchange Commission on September 3, 2004,
Commission File No. 001-07155)4.23
    
    Third Supplemental Indenture, dated as of
September 1, 2004, by and among R.H.
Donnelley Inc., the guarantors party
thereto and The Bank of New York, as
Trustee, with respect to the 10 7/8%
Senior Subordinated Notes due 2012 of R.H.
Donnelley Inc. (incorporated by reference
to Exhibit 4.2 to the Companys Current
Report on Form 8-K, filed with the
Securities and Exchange Commission on
September 3, 2004, Commission File No.
001-07155)4.24
    
    Senior Guarantees relating to Second
Supplemental Indenture to the Indenture
governing the 8 7/8% Senior Notes due 2010
(incorporated by reference to Exhibit 4.3
to the Companys Current Report on Form
8-K, filed with the Securities and
Exchange Commission on September 3, 2004,
Commission File No. 001-07155)4.25
    
    Senior Subordinated Guarantees relating to
the Third Supplemental Indenture to the
Indenture governing the 10 7/8% Notes due
2012 (incorporated by reference to Exhibit
4.4 to the Companys Current Report on
Form 8-K, filed with the Securities and
Exchange Commission on September 3, 2004,
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 Current Report on Form
8-K of the Company (f/k/a The Dun &
Bradstreet Corporation), filed with the
Securities and Exchange Commission on
September 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 Current Report on Form
8-K of the Company (f/k/a The Dun &
Bradstreet Corporation), filed with the
Securities and Exchange Commission on
September 30, 1998, Commission File No.
001-07155)10.3
    
    Amended and Restated Indemnity and Joint
Defense Agreement dated as of July 30,
2004, by and among VNU, N.V., VNU, Inc.,
ACNielson Corporation, AC Nielson (US),
Inc., Nielson Media Research, Inc., R.H.
Donnelley Corporation, the Dun &
Bradstreet Corporation, Moodys
Corporation, and IMS Health Incorporated
(incorporated by reference to Exhibit 10.3
to the Quarterly Report on Form 10-Q filed
with the Securities and Exchange
Commission on August 9, 2004, Commission
File No. 001-07155).10.4
    
    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)
 68




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##### 



Exhibit No.
    
    Document10.5
    
    Amendment No. 1 to DonTech II Partnership
Agreement dated as of January 28, 2000
between R.H. Donnelley Inc. and Ameritech
Publishing of Illinois, Inc. (incorporated
by reference to Exhibit 10.4 to the Annual
Report on Form 10-K filed with the
Securities and Exchange Commission on
March 12, 2004, Commission File No.
001-07155)10.6
    
    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)10.7
    
    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)10.8
    
    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)10.9
    
    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, filed with the Securities and
Exchange Commission on May 10, 2002,
Commission File No. 001-07155)10.10
    
    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 September 30,
2002, filed with the Securities and
Exchange Commission on August 14, 2002,
Commission File No. 001-07155)10.11
    
    Sales Agency Agreement dated as of 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
September 30, 2002, filed with the
Securities and Exchange Commission on
August 14, 2002, Commission File No.
001-07155)10.12
    
    Agreement for Publishing Services dated as
of 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 September 30,
2002, filed with the Securities and
Exchange Commission on August 14, 2002,
Commission File No. 001-07155)10.13^
    
    Key Employees Performance Unit Plan, as
amended and restated (incorporated by
reference to Exhibit 10.15 to Amendment
No. 3 to the Registration Statement on
Form S-
 69




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##### 



Exhibit No.
    
    Document4, filed with the Securities and
Exchange Commission on September 28, 1998,
Registration No. 333-59287)10.14^
    
    1991 Key Employees Stock Option Plan, as
amended and restated through April 25,
2000 (incorporated by reference to Exhibit
10.17 to the Companys Quarterly Report on
Form 10-Q for the three months ended
September 30, 2000, filed with the
Securities and Exchange Commission on
November 13, 2000, Commission File No.
001-07155)10.15^
    
    Amended and Restated 1998 Directors Stock
Plan (incorporated by reference to Exhibit
10.18 to the Companys Annual Report on
Form 10-K for the year ended December 31,
1999, filed with the Securities and
Exchange Commission on March 27, 2000,
Commission File No. 001-07155)10.16^
    
    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, filed with the Securities and
Exchange Commission on March 27, 2002,
Commission File No. 001-07155)10.17^
    
    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, filed with the Securities and
Exchange Commission on March 27, 2002,
Commission File No. 001-07155)10.18^
    
    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)10.19^
    
    Form of Annual Incentive Program Award
(incorporated by reference to Exhibit
99.03 to the Registration Statement on
Form S-8, filed with the Securities and
Exchange Commission on July 25, 2001,
Registration No. 333-65822)10.20^
    
    Form of Performance Unit Program Award
(incorporated by reference to Exhibit
99.04 to the Registration Statement on
Form S-8, filed with the Securities and
Exchange Commission on July 25, 2001,
Registration No. 333-65822)10.21^*
    
    Form of Stock Appreciation Rights
Agreement10.22^
    
    Deferred Compensation Plan (incorporated
by reference to Exhibit 4.01 to the
Companys Registration Statement on Form
S-8, filed with the Securities and
Exchange Commission on November 24, 1999,
Registration No. 333-91613)10.23^
    
    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 September 30, 2002, filed with the
Securities and Exchange Commission on
August 14, 2002, Commission File No.
001-07155)10.24^
    
    Employment Agreement effective September
21, 2002 between the Company and Peter J.
McDonald (incorporated by reference to
Exhibit 10.30 to the Quarterly Report on
Form 10-Q for the nine months ended
September 30, 2002, filed with the
Securities and Exchange Commission on
November 12, 2002, Commission File No.
001-07155)10.25^
    
    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 September 30, 2002, filed with the
Securities and Exchange Commission on
August 14, 2002, Commission File No.
001-07155)10.26^
    
    Separation Agreement and Release dated as
of July 25, 2003 between the Company and
Frank M. Colarusso (incorporated by
reference to Exhibit 10.39 to the
Companys Quarterly Report on Form 10-Q
for the three month period ended September
30, 2003,
 70




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##### 



Exhibit No.
    
    Documentfiled with the Securities and
Exchange Commission on August 13, 2003,
Commission File No. 001-07155)10.27
    
    Employment Agreement dated as of September
26, 2000 between the Company and William
C. Drexler (incorporated by reference to
Exhibit 10.35 to the Companys Annual
Report on Form 10-K for the year ended
December 31, 2000, filed with the
Securities and Exchange Commission on
March 28, 2001, Commission File No.
001-07155)10.28
    
    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 Companys Annual Report on
Form 10-K for the year ended December 31,
2000, filed with the Securities and
Exchange Commission on March 28, 2001,
Commission File No. 001-07155)10.29
    
    Employment Agreement dated as of January
1, 2001 between the Company and Robert J.
Bush (incorporated by reference to Exhibit
10.37 to the Companys Annual Report on
Form 10-K for the year ended December 31,
2000, filed with the Securities and
Exchange Commission on March 28, 2001,
Commission File No. 001-07155)10.30
    
    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 Companys Annual Report
on Form 10-K for the year ended December 31, 2000, filed with
the Securities and Exchange Commission on March 28, 2001,
Commission File No. 001-07155)10.31
    
    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 the Current Report on Form 8-K,
filed with the Securities and Exchange Commission on December
3, 2002, Commission File No. 001-07155)10.32
    
    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)10.33
    
    Letter Agreement, dated as of July 22, 2003 among the Company
and investment partnerships affiliated with The Goldman Sachs
Group, Inc. (incorporated by reference to Exhibit 10.45 to the
Companys Quarterly Report on Form 10-Q for the three months
ended September 30, 2003, filed with the Securities and
Exchange Commission on August 13, 2003, Commission File No.
001-07155)10.34
    
    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)10.35
    
    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)
 71




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##### 



Exhibit No.
    
    Document10.36
    
    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)10.37
    
    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)10.38
    
    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)10.39
    
    Directory Services License Agreement, dated as of September 1,
2004, among R.H. Donnelley Corporation, R.H. Donnelley
Publishing & Advertising of Illinois Partnership (formerly
known as The APIL Partners Partnership), DonTech II
Partnership, Ameritech Corporation, SBC Directory Operations,
Inc. and SBC Knowledge Ventures, L.P. (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K, filed with the Securities and Exchange Commission on
September 3, 2004, Commission File No. 001-07155)10.40
    
    Non-Competition Agreement, dated as of September 1, 2004,
between R.H. Donnelley Corporation and SBC Communications,
Inc. (incorporated by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K, filed with the
Securities and Exchange Commission on September 3, 2004,
Commission File No. 001-07155)10.41
    
    SMARTpages Reseller Agreement, dated as of September 1, 2004,
among SBC Communications, Inc., Southwestern Bell Yellow
Pages, Inc., SBC Knowledge Ventures, L.P., R.H. Donnelley
Corporation, R.H. Donnelley Publishing & Advertising of
Illinois Partnership (formerly known as The APIL Partners
Partnership) and DonTech II Partnership (incorporated by
reference to Exhibit 10.3 to the Companys Current Report on
Form 8-K, filed with the Securities and Exchange Commission on
September 3, 2004, Commission File No. 001-07155)10.42
    
    Ameritech Directory Publishing Listing License Agreement,
dated as of September 1, 2004, among R.H. Donnelley Publishing
& Advertising of Illinois Partnership (formerly known as The
APIL Partners Partnership), DonTech II Partnership and
Ameritech Services Inc. (incorporated by reference to Exhibit
10.4 to the Companys Current Report on Form 8-K, filed with
the Securities and Exchange Commission on September 3, 2004,
Commission File No. 001-07155)
 72




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##### 



Exhibit No.
    
    Document10.43
    
    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 book runners (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)10.44
    
    First Amendment, dated as of December 5, 2003, among the
Company, R.H. Donnelley Inc., the financial institutions
parties thereto, Deutsche Bank Securities Inc., CitiGroup
Global Markets Inc. and Bear, Stearns & Co. Inc., as joint
lead arrangers and joint book runners, Bear Stearns Corporate
Lending Inc. and Citicorp North America, Inc., as joint
syndication agents, BNP Paribas and Fleet National Bank, as
documentation agents, and Deutsche Bank Trust Company
Americas, as administrative agent, to the Credit Agreement,
dated as of December 6, 2002 (incorporated by reference to
Exhibit 99.1 to the Current Report on Form 8-K, filed with the
Securities and Exchange Commission on February 26, 2004,
Commission File No. 001-07155)10.45
    
    Amended and Restated Credit Agreement, dated as of September
1, 2004, by and among, R.H. Donnelley Inc., as borrower, R.H.
Donnelley Corporation, the lenders from time to time parties
thereto, J.P. Morgan Securities Inc. and Bear, Stearns & Co.
Inc., as joint lead arrangers and joint bookrunners, JPMorgan
Chase Bank and Bear Stearns Corporate Lending Inc., as
co-syndication agents, Citicorp North America, Inc. and
Goldman Sachs Credit Partners L.P., as co-documentation
agents, and Deutsche Bank Trust Company Americas, as
administrative agent (incorporated by reference to Exhibit
10.5 to the Companys Current Report on Form 8-K, filed with
the Securities and Exchange Commission on September 3, 2004,
Commission File No. 001-07155)10.46
    
    Amended and Restated Guaranty and Collateral Agreement, dated
as of September 1, 2004, by and among R.H. Donnelley
Corporation, R.H. Donnelley Inc., R.H. Donnelley APIL, Inc.,
R.H. Donnelley Publishing & Advertising, Inc., Get Digital
Smart.com Inc., R.H. Donnelley Publishing & Advertising of
Illinois Partnership, DonTech II Partnership, DonTech
Holdings, LLC, and R.H. Donnelley Publishing & Advertising of
Illinois Holdings, LLC (incorporated by reference to Exhibit
10.6 to the Companys Current Report on Form 8-K, filed with
the Securities and Exchange Commission on September 3, 2004,
Commission File No. 001-07155)21*
    
    Subsidiaries of the Company31.1*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended September 30, 2004 by David C. Swanson, Chief Executive
Officer of R.H. Donnelley Corporation under Section 302 of the
Sarbanes-Oxley Act31.2*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended September 30, 2004 by Steven M. Blondy, Senior Vice
President and Chief Financial Officer of R.H. Donnelley
Corporation under Section 302 of the Sarbanes-Oxley Act31.3*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended September 30, 2004 by David C. Swanson, Chief Executive
Officer for R.H. Donnelley Inc. under Section 302 of the
Sarbanes-Oxley Act31.4*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended September 30, 2004 by Steven M. Blondy, Senior Vice
President and Chief Financial Officer for R.H. Donnelley Inc.
under Section 302 of the Sarbanes-Oxley Act
 73




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##### 



Exhibit No.
    
    Document32.1*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended September 30, 2004 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 Corporation32.2*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended September 30, 2004 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 74




---



##### 



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 CORPORATIONDate: November 9, 2004
    
    By:
    
    /s/ Steven M. BlondySteven M. BlondySenior Vice President and Chief Financial Officer(Principal Financial Officer)Date: November 9, 2004
    
    By:
    
    /s/ Thomas D. DOrazioThomas D. DOrazioVice President and Controller(Principal Accounting Officer)
 Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. R.H. DONNELLEY INC.Date: November 9, 2004
    
    By:
    
    /s/ Steven M. BlondySteven M. BlondySenior Vice President and Chief Financial Officer(Principal Financial Officer)Date: November 9, 2004
    
    By:
    
    /s/ Thomas D. DOrazioThomas D. DOrazioVice President and Controller(Principal Accounting Officer)
 75




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##### 



Exhibit Index Exhibit No.
    
    Document10.21*
    
    Form of Stock Appreciation Rights
Agreement21*
    
    Subsidiaries of the Company31.1*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended September 30, 2004 by David C. Swanson, Chief Executive
Officer of R.H. Donnelley Corporation under Section 302 of the Sarbanes-Oxley Act31.2*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended September 30, 2004 by Steven M. Blondy, Senior Vice
President and Chief Financial Officer of R.H. Donnelley Corporation under Section 302 of the
Sarbanes-Oxley Act31.3*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended September 30, 2004 by David C. Swanson, Chief Executive
Officer for R.H. Donnelley Inc. under Section 302 of the
Sarbanes-Oxley Act31.4*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended September 30, 2004 by Steven M. Blondy, Senior Vice
President and Chief Financial Officer for R.H. Donnelley Inc.
under Section 302 of the Sarbanes-Oxley Act32.1*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended September 30, 2004 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 Corporation32.2*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended September 30, 2004 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.
    76