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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark one) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005  o
    
    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 þ No o Indicate by check mark whether registrant is an accelerated filer Yes þ No o 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 May 1, 2005Common Stock, par value $1 per share
    
    31,666,217
 Commission file number 333-59287 R.H. DONNELLEY INC. * 
 (Exact name of registrant as specified in its charter) Delaware
    
    36-2467635(State of Incorporation)
    
    (I.R.S. Employer Identification No.)1001 Winstead Drive, Cary, N.C.
    
    27513(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone
number, including area code (919) 297-1600




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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 March 31, 2005 and December 31, 2004
    
    
    4Consolidated Statements of Operations and Comprehensive Income (Loss) for
the three months ended March 31, 2005 and 2004
    
    
    5Consolidated Statements of Cash Flows for the three months ended March 31, 2005
and 2004
    
    
    6Consolidated Statement of Changes in Shareholders (Deficit) Equity for the
three months ended March 31, 2005
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    30Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    48Item 4. Controls and Procedures
    
    
    49PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    49Item 4. Submission of Matters to a Vote of Security Holders
    
    
    56Item 6. Exhibits
    
    
    57SIGNATURES
    
    
    66
 2




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Part I. FINANCIAL INFORMATION  R.H. Donnelley Corporation and Subsidiaries Consolidated Balance Sheets (Unaudited)
 March 31,
    
    
    December 31,(in thousands, except share and per share data)
    
    2005
    
    
    2004AssetsCurrent AssetsCash and cash equivalents
    
    $
    7,573
    
    
    $
    10,755Accounts receivableBilled
    
    
    108,060
    
    
    
    112,107Unbilled
    
    
    380,157
    
    
    
    376,419Allowance for doubtful accounts and sales claims
    
    
    (34,116
    )
    
    
    (33,093
    )Net accounts receivable
    
    
    454,101
    
    
    
    455,433Deferred directory costs
    
    
    116,158
    
    
    
    116,517Other current assets
    
    
    31,040
    
    
    
    40,604Total current assets
    
    
    608,872
    
    
    
    623,309Fixed assets and computer software, net
    
    
    39,752
    
    
    
    37,686Other non-current assets
    
    
    117,626
    
    
    
    102,628Intangible assets, net
    
    
    2,887,241
    
    
    
    2,905,330Goodwill
    
    
    319,014
    
    
    
    309,969Total Assets
    
    $
    3,972,505
    
    
    $
    3,978,922Liabilities, Redeemable Convertible Preferred
Stock and Shareholders (Deficit) EquityCurrent LiabilitiesAccounts payable and accrued liabilities
    
    $
    56,795
    
    
    $
    70,341Accrued interest
    
    
    39,585
    
    
    
    10,021Deferred directory revenue
    
    
    432,164
    
    
    
    381,424Current portion of long-term debt
    
    
    137,391
    
    
    
    162,011Total current liabilities
    
    
    665,935
    
    
    
    623,797Long-term debt
    
    
    3,160,160
    
    
    
    2,965,331Deferred income taxes, net
    
    
    119,810
    
    
    
    118,820Other non-current liabilities
    
    
    42,962
    
    
    
    36,878Total liabilities
    
    
    3,988,867
    
    
    
    3,744,826Commitments and contingenciesRedeemable convertible preferred stock (liquidation preference of $119,798 at
March 31, 2005 and $234,886 at December 31, 2004)
    
    
    110,411
    
    
    
    216,111Shareholders (Deficit) EquityCommon stock, par value $1 per share, 400,000,000 shares authorized,
51,621,894 shares issued
    
    
    51,622
    
    
    
    51,622Additional paid-in capital
    
    
    7,394
    
    
    
    107,238Unamortized restricted stock
    
    
    (35
    )
    
    
    (135
    )Warrants outstanding
    
    
    13,758
    
    
    
    13,758(Accumulated deficit) retained earnings
    
    
    (53,250
    )
    
    
    3,855Treasury stock, at cost, 19,972,267 shares at March 31, 2005 and 20,137,361 shares
at December 31, 2004
    
    
    (163,729
    )
    
    
    (163,603
    )Accumulated other comprehensive income
    
    
    17,467
    
    
    
    5,250Total shareholders (deficit) equity
    
    
    (126,773
    )
    
    
    17,985Total Liabilities, Redeemable Convertible Preferred
Stock and Shareholders (Deficit) Equity
    
    $
    3,972,505
    
    
    $
    3,978,922
 The accompanying notes are an integral part of the consolidated financial statements. 3




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R.H. Donnelley Corporation and Subsidiaries Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)
 Three months endedMarch 31,(in thousands, except per share data)
    
    2005
    
    
    2004Net revenue
    
    $
    207,339
    
    
    $
    143,807ExpensesOperating expenses
    
    
    102,406
    
    
    
    53,849General and administrative expenses
    
    
    13,085
    
    
    
    12,725Depreciation and amortization
    
    
    21,651
    
    
    
    14,392Total expenses
    
    
    137,142
    
    
    
    80,966Partnership income
    
    
    
    
    
    
    23,897Operating income
    
    
    70,197
    
    
    
    86,738Interest expense, net
    
    
    (57,497
    )
    
    
    (40,300
    )Income before income taxes
    
    
    12,700
    
    
    
    46,438Provision for income taxes
    
    
    4,953
    
    
    
    18,343Net income
    
    
    7,747
    
    
    
    28,095Preferred dividend
    
    
    3,319
    
    
    
    5,287Loss on repurchase of redeemable convertible preferred stock
    
    
    133,681
    
    
    
    (Loss) income available to common shareholders
    
    $
    (129,253
    )
    
    $
    22,808(Loss) earnings per shareBasic
    
    $
    (4.10
    )
    
    $
    0.57Diluted
    
    $
    (4.10
    )
    
    $
    0.54Shares used in computing (loss) earnings per shareBasic
    
    
    31,543
    
    
    
    31,059Diluted
    
    
    31,543
    
    
    
    32,295Comprehensive Income (Loss)Net income
    
    $
    7,747
    
    
    $
    28,095Unrealized gain (loss) on interest rate swaps, net of tax
    
    
    12,217
    
    
    
    (2,707
    )Comprehensive income
    
    $
    19,964
    
    
    $
    25,388
 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 Cash Flows (Unaudited)
 Three months endedMarch 31,(amounts in thousands)
    
    2005
    
    
    2004Cash Flows from Operating ActivitiesNet income
    
    $
    7,747
    
    
    $
    28,095Reconciliation of net income to net cash provided by operating activities:Depreciation and amortization
    
    
    21,651
    
    
    
    14,392Deferred income taxes
    
    
    21,768
    
    
    
    18,343Provision for bad debts
    
    
    6,800
    
    
    
    3,180Other non-cash charges
    
    
    4,863
    
    
    
    4,013Changes in assets and liabilities, net of effects from acquisition:Cash in excess of partnership income
    
    
    
    
    
    
    8,095Increase in accounts receivable
    
    
    (5,468
    )
    
    
    (14,145
    )Decrease (increase) in other assets
    
    
    7,428
    
    
    
    (3,673
    )Increase in accounts payable and accrued liabilities
    
    
    10,400
    
    
    
    21,753Increase in deferred directory revenue
    
    
    50,740
    
    
    
    13,466(Decrease) increase in other non-current liabilities
    
    
    (13,102
    )
    
    
    1,107Net cash provided by operating activities
    
    
    112,827
    
    
    
    94,626Cash Flows from Investing ActivitiesAdditions to fixed assets and computer software
    
    
    (5,515
    )
    
    
    (2,847
    )Net cash used in investing activities
    
    
    (5,515
    )
    
    
    (2,847
    )Cash Flows from Financing ActivitiesProceeds from the issuance of debt, net of costs
    
    
    291,742
    
    
    
    Borrowings under Revolver
    
    
    72,000
    
    
    
    Repurchase of redeemable convertible preferred stock
    
    
    (277,197
    )
    
    
    Debt repayments
    
    
    (201,635
    )
    
    
    (88,591
    )Increase (decrease) in checks not yet presented for payment
    
    
    1,943
    
    
    
    (4,233
    )Proceeds from employee stock option exercises
    
    
    2,653
    
    
    
    2,594Net cash used in financing activities
    
    
    (110,494
    )
    
    
    (90,230
    )(Decrease) increase in cash and cash equivalents
    
    
    (3,182
    )
    
    
    1,549Cash and cash equivalents, beginning of year
    
    
    10,755
    
    
    
    7,722Cash and cash equivalents, end of period
    
    $
    7,573
    
    
    $
    9,271Supplemental Information:Cash paid (received):Interest
    
    $
    24,502
    
    
    $
    13,296Income taxes, net
    
    $
    508
    
    
    $
    (11,916
    )
 The accompanying notes are an integral part of the consolidated financial statements. 5




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R.H. Donnelley Corporation and Subsidiaries Consolidated Statement of Changes in Shareholders (Deficit) Equity (Unaudited)
Three months ended March 31, 2005
 (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
    
    
    Income
    
    
    EquityBalance, December 31, 2004
    
    $
    158,860
    
    
    $
    (135
    )
    
    $
    13,758
    
    
    $
    3,855
    
    
    $
    (163,603
    )
    
    $
    5,250
    
    
    $
    17,985Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,747
    
    
    
    
    
    
    
    
    
    
    
    7,747Preferred dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,319
    )
    
    
    
    
    
    
    
    
    
    
    (3,319
    )Employee stock option exercises,
including tax benefit
    
    
    4,207
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (126
    )
    
    
    
    
    
    
    4,081Stock issued for employee bonus plans
    
    
    1,693
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,693Restricted stock amortization
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100Compensatory stock options
    
    
    900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    900Beneficial conversion feature
    
    
    (106,644
    )
    
    
    
    
    
    
    
    
    
    
    (61,533
    )
    
    
    
    
    
    
    
    
    
    
    (168,177
    )Unrealized gain on interest rate swaps,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,217
    
    
    
    12,217Balance, March 31, 2005
    
    $
    59,016
    
    
    $
    (35
    )
    
    $
    13,758
    
    
    $
    (53,250
    )
    
    $
    (163,729
    )
    
    $
    17,467
    
    
    $
    (126,773
    )
 The accompanying notes are an integral part of the consolidated financial statements. 6




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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 consolidated 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, 2004. 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
statement 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 search to find who sells the goods and services they are ready to purchase. We publish
Sprint®-branded directories in 18 states, with major markets including Las Vegas, Nevada
and Orlando and Lee County, Florida, with a total distribution of approximately 18 million serving
approximately 160,000 local and national advertisers. We also publish 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 all of our Sprint markets under the Best Red Yellow Pages®
brand at www.bestredyp.com and in the Chicagoland 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 (SBC
Directory Business) of SBC Communications, Inc. (SBC) in Illinois and Northwest Indiana,
including SBCs interests in The DonTech II Partnership (DonTech), a 50/50 general partnership
between us and SBC (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 consummated pursuant to, and in accordance with, the
terms of the Purchase Agreement, dated as of July 28, 2004, as amended, 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 Business are
included in our consolidated results from and after September 1, 2004. The acquired SBC Directory
Business now operates as R.H. Donnelley Publishing & Advertising of Illinois Partnership, an
indirect wholly owned subsidiary of the Company. See Note 3, Acquisitions for a further
description of the acquisition. On January 3, 2003, we completed the acquisition of the directory business (the SPA Directory
Business) of Sprint Corporation (Sprint) by acquiring all the outstanding capital stock of the
various entities comprising Sprint Publishing & Advertising (SPA) (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 Directory Business are included in our consolidated results from and after
January 3, 2003. The acquired SPA Directory Business now operates as R.H. Donnelley Publishing &
Advertising, Inc., an indirect wholly owned subsidiary of the Company. See Note 3, Acquisitions
for a further description of the acquisition. 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. 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 7




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life of a directory, which is typically 12 months (the deferral and amortization method).
Revenue from the sale of 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. 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.
Subject to the oversight of the board of directors, 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 were 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 reported commission revenue
based on the annual value of a sales contract in the period the contract was executed (calendar
sales) and reported expenses as incurred. Partnership income also included revenue participation
income from SBC. Revenue participation income was based on DonTech advertising sales and was
reported 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. As a result of the SBC
Directory Acquisition, SBC ceased paying us revenue participation income, we now consolidate all
net profits from DonTech and our DonTech partnership investment was eliminated. Consequently,
partnership income was no longer reported commencing on September 1, 2004. Rather, following the
SBC Directory Acquisition, the revenues, expenses and income of the acquired SBC 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) pay to the Company 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. In connection with the SBC Directory Acquisition, we entered into a transition services agreement
with SBC whereby SBC billed and collected from our advertising customers in the Illinois and
Northwest Indiana directories and remitted collections (net of specified holdback) to us through
early 2005. On a monthly basis commencing September 1, 2004, SBC provided an advance to us related
to those billings, and as such, we recorded an advance from SBC that was decreased as SBC collected
from our advertisers, thus satisfying that liability. In the first quarter of 2005, we assumed all
responsibility for billing and collections from SBC relating to our advertising customers in the Illinois and
Northwest Indiana directories. 8




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Deferred Financing Costs.Certain costs associated with the issuance of debt instruments are
capitalized and included in 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 make accelerated principal payments. Other deferred financing costs are
amortized using the straight-line method. Amortization of deferred financing costs included in
interest expense was $4.0 million and $3.4 million for the three months ended March 31, 2005 and
2004, 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 $4.3 million and $1.9 million for the three months ended March 31, 2005 and
2004, respectively. Concentration of Credit Risk.Approximately 86% 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 and advertisers desiring to expand their advertising programs 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 late fees to advertisers that do not pay by specified due dates. The remaining approximately 14% 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 local advertisers. At March 31, 2005, we had interest rate swap agreements with major financial institutions with a
notional value of $1,355 million. We are exposed to credit risk in the event that one or more of
the counterparties to the agreements does not, or cannot, meet their obligation. The notional
amount is used to measure interest to be paid or received and does not represent the amount of
exposure to credit loss. The loss would be limited to the amount that would have been received, if
any, over the remaining life of the swap agreement. The counterparties to the swap agreements are
major financial institutions with credit ratings of A or higher. 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 2.65% during the three months ended March 31, 2005. 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 March
31, 2005, 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.We account for earnings per share in accordance with Emerging Issues Task
Force Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement 128
(EITF 03-6), which 9




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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 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 our 8% redeemable convertible cumulative
preferred stock (Preferred Stock), the dilutive effect of which is calculated using the
if-converted method. The calculation of basic and diluted EPS for the three months ended March
31, 2005 and 2004 is presented below. Three months endedMarch 31,2005
    
    
    2004Basic EPSTwoClass Method(Loss) income available to common shareholders
    
    $
    (129,253
    )
    
    $
    22,808Amount allocable to common shareholders (1)
    
    
    100
    %
    
    
    77
    %(Loss) income allocable to common shareholders
    
    
    (129,253
    )
    
    
    17,562Weighted average common shares outstanding
    
    
    31,543
    
    
    
    31,059Basic (loss) earnings per sharetwoclass method
    
    $
    (4.10
    )
    
    $
    0.57Diluted EPS(Loss) income available to common shareholders
    
    $
    (129,253
    )
    
    $
    22,808Amount allocable to common shares (1)
    
    
    100
    %
    
    
    77
    %(Loss) income allocable to common shareholders
    
    
    (129,253
    )
    
    
    17,562Weighted average common shares outstanding
    
    
    31,543
    
    
    
    31,059Dilutive effect of stock options (2)
    
    
    
    
    
    
    1,236Dilutive effect of Preferred Stock assuming conversion(2)
    
    
    
    
    
    
    Weighted average diluted shares outstanding
    
    
    31,543
    
    
    
    32,295Diluted (loss) earnings per share
    
    $
    (4.10
    )
    
    $
    0.54
   (1)
    
    31,059 / (31,059 + 9,203) for the three months ended March 31, 2004. In computing EPS
using the two-class method, we have not allocated the net loss in the three months ended March
31, 2005 between common and preferred shareholders since preferred shareholders do not have a
contractual obligation to share in the net loss.(2)
    
    The effect of stock options in the three months ended March 31, 2005 and the assumed
conversion of the Preferred Stock in the three months ended March 31, 2005 and 2004 were
anti-dilutive and therefore are not included in the calculation of diluted EPS. Employee Stock Awards.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. Compensation expense related
to stock appreciation rights (SARs) is recognized 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 grant price
recognized over the vesting term. 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 grant
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 are accounted for as compensatory options, and we are recognizing non-cash 10




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##### 



compensation expense over the vesting period of the options. We recognized non-cash compensation
expense related to these stock options of $0.3 million in each of the three-month periods ended
March 31, 2005 and 2004. On July 28, 2004, the Company granted 0.9 million SARs to certain employees, including senior
management, in connection with the SBC Directory Acquisition. On February 24, 2005, the Company
granted 0.5 million SARs to certain employees under the Companys 2001 Stock Award and Incentive
Plan. 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 and FIN 28, Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans, 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 grant price recognized over the vesting term. We recognized non-cash compensation
related to these SARs of $0.6 million during the three months ended March 31, 2005. The following table reflects the pro forma net income (loss) and earnings (loss) per share for the
three months ended March 31, 2005 and 2004 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 net income (loss) and earnings (loss) per share in future years. Three months endedMarch 31,2005
    
    
    2004Net income, as reported
    
    $
    7,747
    
    
    $
    28,095Add: Stock-based compensation expense included in
reported net income, net of related tax effects
    
    
    545
    
    
    
    315Less: Stock-based compensation expense that would have
been included in the determination of net income if the
fair value method had been applied to all awards, net
of related tax effects
    
    
    (1,676
    )
    
    
    (1,329
    )Pro forma net income
    
    
    6,616
    
    
    
    27,081Loss on repurchase of preferred stock
    
    
    133,681
    
    
    
    Preferred dividend
    
    
    3,319
    
    
    
    5,287Pro forma (loss) income available to common shareholders
    
    $
    (130,384
    )
    
    $
    21,794Basic (loss) earnings per shareAs reported
    
    $
    (4.10
    )
    
    $
    0.57Pro forma
    
    $
    (4.13
    )
    
    $
    0.54Diluted (loss) earnings per shareAs reported
    
    $
    (4.10
    )
    
    $
    0.54Pro forma
    
    $
    (4.13
    )
    
    $
    0.52
 The pro forma information was determined based on the fair value of stock awards calculated using
the Black-Scholes option-pricing model with the following weighted average assumptions: 2005
    
    
    2004Dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    30
    %
    
    
    29
    %Risk-free interest rate
    
    
    3.9
    %
    
    
    2.2
    %Expected holding period
    
    5.0 years
    
    4.0 years
 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 11




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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.On December 16, 2004, the Financial Accounting Standards Board
(FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment (FAS 123(R)). FAS
123(R) requires companies to calculate the fair value of stock options granted to employees and
amortize that amount over the vesting period as an expense through the income statement. The
accounting provisions of FAS 123(R) are effective for fiscal years beginning after June 15, 2005,
but companies have a choice of transition methods including: Modified Prospective, Modified
Retrospective, or early adoption. The Company is presently evaluating the transition method that it
will adopt as well as the effective date for transition to FAS 123(R) and what impact adoption of
FAS 123(R) may have on the Company. 3. Acquisitions 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. As a result of the acquisition, we became the publisher of SBC-branded yellow
pages directories in Illinois and Northwest Indiana. The results of the SBC Directory Business are
included in our consolidated results from and after September 1, 2004. The acquired SBC Directory
Business now operates as R.H. Donnelley Publishing & Advertising of Illinois Partnership, an
indirect wholly owned subsidiary of the Company. On January 3, 2003, we completed the SPA Acquisition for $2.23 billion in cash and became the
publisher of Sprint-branded yellow pages directories in 18 states. The results of the SPA
Directory Business are included in our consolidated results from and after January 3, 2003. The
acquired SPA Directory Business now operates as R.H. Donnelley Publishing & Advertising, Inc., an
indirect wholly owned subsidiary of the Company. The primary purpose of each acquisition was to facilitate the Companys transformation from a sales
agent and pre-press vendor for yellow pages advertising to a leading publisher of yellow pages
directories with control over its business. 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 Sprint and the Company and SBC, 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 Directory Business of $204.1 million at September 1, 2004 or the deferred
revenue balance of the SPA Directory Business 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 in the absence of purchase accounting. 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 directories that were published prior to each acquisition as well as directories that
published in the month each acquisition was completed, totaling $175.8 million for SBC-branded
directories and $63.3 million for Sprint-branded directories, respectively. These costs
represented operating expenses that would have been recognized subsequent to the acquisitions under
the deferral and amortization method in the absence of purchase accounting. 12




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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 was
$18.1 million and $12.5 million for the three months ended March 31, 2005 and 2004, respectively.
The acquired long-term intangible assets and their respective book values at March 31, 2005 are
shown in the table below. DirectoryServices
    
    
    Local Customer
    
    
    National CMRAgreements
    
    
    Relationships
    
    
    Relationships
    
    
    Trade names
    
    
    TotalInitial 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
    
    
    (84,499
    )
    
    
    (30,000
    )
    
    
    (6,260
    )
    
    
    (4,500
    )
    
    
    (125,259
    )Net intangible assets
    
    $
    2,493,001
    
    
    $
    260,000
    
    
    $
    108,740
    
    
    $
    25,500
    
    
    $
    2,887,241
 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 (and its successors) in Illinois and Northwest Indiana
(the Territory), grants us the exclusive license (and obligation as specified in the agreement)
to produce, publish and distribute white pages directories in the Territory as SBCs agent and
grants us the exclusive license (and obligation as specified in the agreement) to use the SBC brand
and logo on print directories in the Territory. The non-competition agreement prohibits SBC (and
its affiliates and successors), 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 (and any successor products as specified in the
agreement). 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 assigned
to the SBC Directory Services Agreements and the SMARTpages reseller agreement of $950.0 million
and $2.5 million, respectively, was 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 grants us the exclusive license (and obligation as specified in the agreement) to
produce, publish and distribute yellow and white pages directories for Sprint (and its successors)
in 18 states where Sprint provided local telephone service at the time of the agreement. The
trademark license agreement grants us the exclusive license (and obligation as specified in the
agreement) to use certain specified Sprint trademarks, including the Sprint diamond logo, in those
markets, and the non-competition agreement prohibits Sprint (and its affiliates and successors) 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. 13




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##### 



The fair values of local and national customer relationships were determined based on the present
value of estimated future cash flows and are being amortized under the income forecast 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
approximately 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 $222.0 million and $97.0 million,
respectively, was recorded as goodwill. During the first quarter of 2005, we recorded an
adjustment increasing goodwill from the SBC Directory Acquisition by approximately $9.0 million
relating to a restructuring plan associated with SBC Directory Acquisition. See Note 8,
Restructuring Charges. 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 periodic impairment testing. No
impairment losses were recorded during this period. 5. Partnership Income and Investment 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, we now consolidate all net profits from DonTech and our DonTech
partnership investment was eliminated. Consequently, partnership income was no longer reported
commencing September 1, 2004. Partnership income from DonTech for the three months ended March 31,
2004 consisted of the following: 50% share of DonTech net profits
    
    $
    3,084Revenue participation income
    
    
    20,813Total DonTech income
    
    $
    23,897
 6. Long-Term Debt Long-term debt at March 31, 2005 and December 31, 2004 consisted of the following: March 31, 2005
    
    
    December 31, 2004Credit Facility
    
    $
    2,072,551
    
    
    $
    2,202,3428.875% Senior Notes due 2010
    
    
    325,000
    
    
    
    325,00010.875% Senior Subordinated Notes due 2012
    
    
    600,000
    
    
    
    600,0006.875% Senior Notes due 2013
    
    
    300,000
    
    
    
    Total
    
    
    3,297,551
    
    
    
    3,127,342Less current portion
    
    
    137,391
    
    
    
    162,011Long-term debt
    
    $
    3,160,160
    
    
    $
    2,965,331
 Our Senior Secured Credit Facility, as amended and restated (Credit Facility), consists of a $700
million Term Loan A-2, a $200 million Term Loan A-3, a $1,450 million Term Loan D and a $175
million Revolving Credit Facility (the Revolver) for an aggregate facility of $2,525 million.
Term Loans A-2, A-3 and D require quarterly principal payments. As of March 31, 2005, the
outstanding balances of Term Loans A-2, A-3 and D were $447 million, $165 million and $1,437
million, respectively, and $23 million was outstanding under the Revolver. The Revolver, Term
Loans A-2 and A-3 mature in December 2009, and Term Loan D 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 (defined below), 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 as
collateral to secure our obligations under the Credit Facility and the Senior Notes 14




---



##### 



(defined below). Our Credit Facility bears interest, at our option, at either:  
    The higher of (i) a base rate as determined by the Administrative Agent, Deutsche Bank
Trust Company Americas, plus a 1.00% margin on the Revolver and Term Loan A-2 and a 0.75%
margin on Term Loan A-3 and Term Loan D; and (ii) the Federal Funds Effective Rate (as
defined) plus 0.50%, plus a 1.00% margin on the Revolver and Term Loan A-2 and a 0.75%
margin on Term Loan A-3 and Term Loan D; or
    LIBOR rate plus a 2.00% margin on the Revolver and Term Loan A-2 and a 1.75% margin on
Term Loan A-3 and Term Loan D. We may elect interest periods of 1, 2, 3, 6, 9 or 12 months
for LIBOR borrowings. The weighted average interest rate of outstanding debt under the Credit Facility was 4.79% and
3.36% at March 31, 2005 and 2004, respectively. We have also issued $325 million of 8.875% Senior Notes due 2010 (Senior Notes) and $600 million
of 10.875% Subordinated Notes due 2012 (Subordinated Notes). Interest is paid on these Notes
semi-annually on June 15 and December 15. On January 14, 2005 we issued $300 million of 6.875% Senior Notes (Holdco Notes and collectively
with the Senior Notes and the Subordinated Notes, the Notes), the proceeds of which were used to
redeem approximately 50% of the then outstanding Preferred Stock from certain investment
partnerships affiliated with The Goldman Sachs Group, Inc. (collectively, the GS Funds), pay
transaction costs and repay debt associated with our Credit Facility. Interest is payable on the
Holdco Notes semi-annually in arrears on January 15 and July 15 of each year, commencing July 15,
2005. The Holdco Notes are unsecured obligations of the Company and mature on January 15, 2013. We
entered into a registration rights agreement, whereby we agreed, among other things to (1) file an
exchange offer registration statement with the SEC with respect to the Holdco Notes within 120 days
after January 14, 2005, (ii) use reasonable efforts to have such exchange offer registration
statement declared effective by the SEC within 180 days after January 14, 2005 and (iii) subject to
certain limitations, consummate the exchange offer to which the exchange offer registration
statement relates within 210 days after January 14, 2005. On February 6, 2004, we redeemed the remaining aggregate principal amount of the 9.125% 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. During the three months ended March
31, 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. The Credit Facility and the indentures governing the Notes contain usual and customary restrictive
covenants that, among other things, place limitations on our ability to (i) incur additional
indebtedness, including capital leases and liens; (ii) pay dividends and repurchase our capital
stock; (iii) enter into mergers, consolidations, acquisitions, asset dispositions and
sale-leaseback transactions; (iv) make capital expenditures; (v) issue capital stock of our
subsidiaries; and (vi) engage in transactions with our affiliates. The Credit Facility also
contains financial covenants relating to maximum consolidated leverage, minimum interest coverage
and maximum senior secured leverage as defined therein. 7. Redeemable Convertible Preferred Stock and Warrants We have 10 million shares of preferred stock authorized for issuance. At March 31, 2005 and
December 31, 2004, we had 100,301 and 200,604 shares of Preferred Stock outstanding, respectively.
The Preferred Stock, and any accrued and unpaid dividends, are convertible into common stock at any
time after issuance at a price of $24.05 per share 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 dividend will accrete. After October 1, 2005, we may pay the Preferred Stock
dividend in cash, subject to any limitations under our Credit Facility, or allow it to accrete, 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. 15




---



##### 



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
consecutive trading days. The Preferred Stock is redeemable in cash by us at any time on or after
January 3, 2013. The Preferred Stock is redeemable in cash at the option of the GS Funds in the
event of a Change in Control (as defined). At March 31, 2005 and December 31, 2004, the liquation
value of the Preferred Stock was $119.8 million and $234.9 million, respectively, and at March 31,
2005, the Preferred Stock was convertible into approximately 5.0 million shares of common stock.
Except in the case of a Change in Control (as defined), the redemption price of the Preferred Stock
at any time is the greater of the liquidation value of the Preferred Stock or the market value of
the Preferred Stock on an as converted basis at that time. The net proceeds received from the issuance of Preferred Stock were allocated to the Preferred
Stock, warrants 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. 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 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 months ended March 31, 2005 of $3.3 million consisted of the
stated 8% dividend of $2.7 million and a BCF of $0.6 million. The Preferred Stock dividend for
the three months ended March 31, 2004 of $5.3 million consisted of the stated 8% dividend of $4.3
million and a BCF of $1.0 million. On January 14, 2005, we repurchased approximately 50% of our outstanding Preferred Stock from the
GS Funds for $277.2 million in cash. In order to fund this repurchase, on January 14, 2005, we
issued $300 million of Holdco Notes. See Note 6, Long-Term Debt, for a further discussion of the
financing associated with this transaction. In connection with the Preferred Stock repurchase, we
recorded a reduction from earnings available to common shareholders of $133.7 million to reflect
the loss on the repurchase of these shares. The excess of the cash paid to the GS Funds over the
carrying amount of the repurchased Preferred Stock, plus the amount previously recognized for the
BCF associated with these shares has been recognized as the loss on repurchase. Such amount
represents a return to the GS Funds and, therefore has been treated in a manner similar to the
treatment of the Preferred Stock dividend. 8. Restructuring Charges 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 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 and third
quarters of 2004, additions to the reserve of $0.7 million and $0.1 million, respectively, were
recorded representing adjustments to previous severance and related cost estimates 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 were made with respect to the
former headquarters office lease during the three months ended March 31, 2005 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 Blountville, Tennessee. The
reserve represented the remaining lease payments, net of estimated sub-lease income, on the
pre-press facility. Payments of $0.1 million and $0.1 million were made with respect to the former
pre-press publishing facility during the three months ended March 31, 2005 and 2004, respectively,
and the remaining payments will be made through 2012. During the first quarter of 2005, we completed a restructuring relating to the integration of the
SBC Directory 16




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##### 



Business. Approximately 63 employees have been affected by the restructuring, 57 were terminated
during the first quarter of 2005, and 6 will be relocating to our corporate headquarters in Cary,
North Carolina. Additionally, we have vacated certain of our leased facilities in Chicago,
Illinois. We have estimated the costs associated with the terminated employees and the abandonment
of certain of our leased facilities to be approximately $8.7 million and such costs have been
charged against goodwill during the first quarter of 2005. All other costs associated with the
restructuring plan were estimated to be approximately $0.2 million and will be charged to earnings
as incurred. The table below shows the activity in our restructuring reserve during the three months ended March
31, 2005. Three MonthsEnded March 31,2005Balance at December 31, 2004
    
    $
    3,461Additions
    
    
    8,828Payments
    
    
    (1,549
    )Balance at March 31, 2005
    
    $
    10,740
 9. Benefit Plans Retirement Plans.We have 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. Our funding policy is to contribute an amount at least equal to the minimum legal funding
requirement. No contributions were required or made in 2004, 2003 or 2002. 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 our plan assets. We also have 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). We offer a defined contribution savings plan to substantially all employees and contribute $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.We have an unfunded postretirement benefit plan that provides
certain healthcare and life insurance benefits to certain full-time employees who reach retirement
age while working for the Company. In connection with the SBC Directory Acquisition, we assumed DonTechs benefit plans. Information
presented below for the three months ended March 31, 2005 includes amounts for the Company plans
and the DonTech plans. Information below for the three months ended March 31, 2004 excludes
amounts relating to the DonTech benefit plans since they were not our obligation at that time. The
retirement and postretirement plans of the Company and DonTech are similar in nature and both share
in a master trust. The net periodic benefit expense of R.H. Donnelleys and DonTechs pension and
postretirement benefit plans is presented below: 17




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##### 



Pension Benefits
    
    
    Postretirement BenefitsThree Months
    
    
    Three MonthsEnded March 31,
    
    
    Ended March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost
    
    $
    1,342
    
    
    $
    900
    
    
    $
    188
    
    
    $
    113Interest cost
    
    
    1,593
    
    
    
    963
    
    
    
    272
    
    
    
    165Expected return on plan assets
    
    
    (2,090
    )
    
    
    (1,458
    )
    
    
    
    
    
    
    Unrecognized prior service cost
    
    
    38
    
    
    
    27
    
    
    
    240
    
    
    
    130Amortization of unrecognized loss
    
    
    320
    
    
    
    138
    
    
    
    25
    
    
    
    32Net periodic benefit expense
    
    $
    1,203
    
    
    $
    570
    
    
    $
    725
    
    
    $
    440
 We expect to make contributions of approximately $1.0 million to our retirement and postretirement
benefit plans in 2005. 10. Business Segments During 2004, we 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, we consolidate all net profits from DonTech and our partnership investment in
DonTech was eliminated. Consequently, partnership income was no longer reported commencing on
September 1, 2004 and, 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 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 18




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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). 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 (collectively, the IRI Liabilities). 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 the IRI Liabilities, 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. On February 1, 2005, the U.S. District Court for the Southern District of New York entered a final
judgment against IRI dismissing IRIs claims with prejudice and on the merits. IRI has filed a
notice of appeal to the Second Circuit Court of Appeals. Due to the dismissal of this matter and
several layers of indemnity described above, our disclosure regarding this matter will be
relatively brief. In July 1996, IRI filed a complaint, 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 amended complaint alleged, among other claims, various violations of U.S. antitrust laws under
Sections 1 and 2 of the Sherman Antitrust Act. IRI sought damages in excess of $650.0 million,
which IRI sought to treble under the antitrust laws. IRI also sought punitive damages of an
unspecified amount, which we believe are precluded as a result of the prior dismissal of one of
IRIs claims. In December 2004, the Court entered an order that barred IRI from arguing that defendants pricing
practices or discounts were illegal or anti-competitive unless it could satisfy a specified burden
of proof. In response to this ruling, in a press release, IRI stated, in relevant part, without
this evidence, IRI believes that little would be left of IRIs case to take to trial. As a
result, IRI asked the Court to enter a final judgment against it so that it could take an immediate
appeal to the Second Circuit. Defendants did not object to this request. As noted above, the case
was dismissed by the District Court and IRI has filed an appeal. The Court of Appeals for the
Second Circuit has ordered that the appeal be argued no earlier than the week of June 13, 2005. In connection with the 1996 Distribution, Cognizant (now NMR), ACNielsen and D&B (now the Company)
entered into an Indemnity and Joint Defense Agreement. 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 we become subject. 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 with respect to the IRI
Liabilities and 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 would we be
liable, and then only to the extent that either of them could not satisfy their joint and several 19




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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. While, as described above, the IRI lawsuit has been dismissed with prejudice on the merits, IRI has
filed an appeal. Accordingly, 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
settlement of the matter below under Utilization of Capital Losses  1989  1990 (Capital
Losses Matter) during the fourth quarter of 2004. 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 Capital Loss Matter. 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. While we cannot assure you as to the outcome of these Legacy Tax Matters (other than the settled
Capital Losses Matter), 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 20




---



##### 



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 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. During the fourth quarter of 2004, we (as the taxpayer of record) entered into a settlement
agreement with the IRS resolving this Capital Losses Matter. As described above, we are fully
indemnified against any payments required to be made to the IRS resulting from this settlement. We
expect that the aggregate tax liability (including penalties) arising from this settlement will be
approximately $48 million payable to the IRS following receipt of various bills from the IRS
related to the settlement. In February 2005, the IRS issued the first bill for tax year 1990 in
the amount of $11.6 million, which was paid in full by our indemnitors. In March 2005, we (as
the taxpayer of record) received a second bill from the IRS in the amount of $35.9 million, which
was paid in full by our indemnitors (including D&B and Moodys paying any shortfall from IMS and
NMR as described in the following paragraph). We understand that D&B expects the IRS to issue
bills for the remaining balance of the settlement payment of approximately $0.6 million during the
first half of 2005. Because the settlement has been substantially paid, we will no longer report
on this particular matter in future filings. As noted above, the Tax Sharing Agreements provide that IMS and NMR are jointly and severally
liable for, and must pay one half of, the tax liabilities relating to the Capital Expense Matter.
We understand that IMS and NMR have advised D&B that they do not believe they are responsible for
certain portions of the remaining balance of the settlement payment. Nevertheless, under our
indemnity arrangements with D&B and Moodys, they would be jointly and severally liable for any
portion of the settlement not paid by IMS or NMR, and each of them have acknowledged to us their
responsibility for any shortfall from IMS or NMR. We understand that based upon their discussions
with IMS and NMR, D&B estimates that it and Moodys will be required to pay approximately $4.5
million (tax and interest, net of tax benefits) in excess of their allocable share of the
settlement under the terms of the Tax Sharing Agreements. We understand that D&B and Moodys
believe that the position of IMS and NMR is contrary to the provisions of the Tax Sharing
Agreements and that they have commenced discussions with respect to this dispute under the
negotiation process contemplated by the Tax Sharing Agreements. We understand that if such
negotiations are not successful, D&B intends to commence arbitration proceedings against IMS and
NMR to enforce the relevant provisions of the Tax Sharing Agreements. As the taxpayer of record,
we would likely need to commence such an arbitration proceeding ourselves on behalf of D&B and
Moodys. While we understand that D&B believes that it would prevail in any such arbitration, we
cannot assure you with respect to the ultimate outcome of such proceeding or the timing of its
resolution. Royalty Expense Deductions  1993  1997 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 $46.8 million (tax, interest and
penalties, net of tax benefits). 21




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##### 



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 $23.1 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 $23.1 million additional liability would be in addition to the
$46.8 million of additional liability related to royalty expense deductions discussed in the
previous paragraph. These matters are collectively referred to herein as the Royalty
Expense Matter. We previously reported in our Form 10-Q for the quarters ended June 30, 2004 and September 30, 2004
that we understood that D&B had reached a tentative settlement (Proposed Settlement)
with the IRS regarding the disallowance of the 1995 and 1996 royalty expense deductions portion of
the Royalty Expense Matter. We also previously reported that we understood 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 set forth
in the related Proposed Settlement. According to the terms of the Proposed Settlement, the taxpayer
would retain approximately 15% of the tax benefit associated with the Royalty Expense Matter for
1995 and 1996 and pay a penalty of approximately 7% with respect to the Royalty Expense Matter for
1995 and 1996. 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 $38.1 million (tax, interest and
penalties, net of tax benefits) based upon the financial terms of the final settlement
agreement tendered by the IRS. IMS has 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 its rights against us and D&B, IMS has urged NMR (which is in direct contractual
privity with us) to: 22




---



##### 



o
    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); ando
    assert breaches of contract and to terminate the obligations of IMS and
NMR 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. Although the IRS has withdrawn the Proposed Settlement with respect to tax years 1995 and 1996, D&B
is continuing to discuss a possible settlement of this matter with the IRS. If D&B is not
successful in settling this matter the IRS may issue notices preliminary to making assessments at
any time. If D&B were to challenge any such assessment for tax years other than 1993 and 1994 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. It is possible that the IRS may seek to issue notices with respect to
each of the positions noted above that D&B believes are inconsistent. The 1993, 1994, and 1997 royalty expense deduction portions of the Royalty Expense Matter remain
pending before the IRS. Amortization and Royalty Expense Deductions/Royalty Income  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 $62.1
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 23




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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 $141.9 million (tax, interest and penalties, net of tax benefits),
which would be in addition to the $62.1 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 with the IRS 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. It is possible that the IRS
may seek to issue notices with respect to each of the positions noted above that D&B believes are
inconsistent. 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 Senior
Notes and Subordinated Notes. The Company and the direct and indirect 100% owned subsidiaries of
R.H. Donnelley Inc. jointly and severally, fully and unconditionally, guarantee these debt
instruments. The Holdco Notes were issued as of January 14, 2005 and are not guaranteed by any of
the Companys subsidiaries. At March 31, 2005 and December 31, 2004, R.H. Donnelley Inc.s direct
wholly owned subsidiaries were R.H. Donnelley Publishing & Advertising, Inc., R.H. Donnelley APIL,
Inc., DonTech Holdings, LLC, The DonTech II Partnership, R.H. Donnelley Publishing & Advertising of
Illinois Holdings, LLC, R.H. Donnelley Publishing & Advertising of Illinois Partnership and Get
Digital Smart.com Inc. As of March 31, 2005, R.H. Donnelley Corporation has issued 100,301 shares of its Preferred Stock.
See Note 7, Redeemable 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 in these periods were not material. In general, substantially all of the net assets of the Company and its subsidiaries are restricted
from being paid as dividends to any third party, and our subsidiaries are restricted from paying
dividends, loans or advances to R.H. 24




---



##### 



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. R.H. Donnelley Corporation
Consolidating Condensed Balance Sheet
March 31, 2005 R.H. Donnelley
    
    
    R.H. Donnelley
    
    
    
    
    
    
    
    
    
    
    ConsolidatedCorp.
    
    
    Inc.
    
    
    Guarantor
    
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    
    (Issuer)
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    CorporationAssetsCash and cash equivalents
    
    
    
    
    
    $
    3,853
    
    
    $
    3,720
    
    
    
    
    
    
    $
    7,573Accounts receivable, net
    
    
    
    
    
    
    
    
    
    
    454,101
    
    
    
    
    
    
    
    454,101Intercompany receivables
    
    
    54,574
    
    
    
    
    
    
    
    
    
    
    
    (54,574
    )
    
    
    Deferred directory costs
    
    
    
    
    
    
    
    
    
    
    116,158
    
    
    
    
    
    
    
    116,158Other current assets
    
    
    
    
    
    
    16,895
    
    
    
    14,145
    
    
    
    
    
    
    
    31,040Total current assets
    
    
    54,574
    
    
    
    20,748
    
    
    
    588,124
    
    
    
    (54,574
    )
    
    
    608,872Investment in subsidiaries
    
    
    227,618
    
    
    
    1,933,105
    
    
    
    
    
    
    
    (2,160,723
    )
    
    
    Fixed assets, net
    
    
    
    
    
    
    33,895
    
    
    
    5,857
    
    
    
    
    
    
    
    39,752Other assets
    
    
    5,800
    
    
    
    110,386
    
    
    
    1,440
    
    
    
    
    
    
    
    117,626Intercompany notes & other
receivables
    
    
    
    
    
    
    1,277,869
    
    
    
    
    
    
    
    (1,277,869
    )
    
    
    Intangible assets, net
    
    
    
    
    
    
    
    
    
    
    2,886,861
    
    
    
    380
    
    
    
    2,887,241Goodwill
    
    
    
    
    
    
    
    
    
    
    319,014
    
    
    
    
    
    
    
    319,014Total assets
    
    $
    287,992
    
    
    $
    3,376,003
    
    
    $
    3,801,296
    
    
    $
    (3,492,786
    )
    
    $
    3,972,505Liabilities, Preferred Stock
and Shareholders DeficitAccounts payable & accrued
liabilities
    
    $
    
    
    
    $
    24,134
    
    
    $
    76,885
    
    
    $
    (44,224
    )
    
    $
    56,795Accrued interest
    
    
    4,354
    
    
    
    35,231
    
    
    
    
    
    
    
    
    
    
    
    39,585Deferred directory revenue
    
    
    
    
    
    
    
    
    
    
    432,164
    
    
    
    
    
    
    
    432,164Intercompany payables
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Current portion LTD
    
    
    
    
    
    
    137,391
    
    
    
    
    
    
    
    
    
    
    
    137,391Total current liabilities
    
    
    4,354
    
    
    
    196,756
    
    
    
    509,049
    
    
    
    (44,224
    )
    
    
    665,935Long-term debt
    
    
    300,000
    
    
    
    2,860,160
    
    
    
    
    
    
    
    
    
    
    
    3,160,160Intercompany notes & other
payables
    
    
    
    
    
    
    
    
    
    
    1,277,869
    
    
    
    (1,277,869
    )
    
    
    Deferred income taxes, net
    
    
    
    
    
    
    61,421
    
    
    
    68,359
    
    
    
    (9,970
    )
    
    
    119,810Other long-term liabilities
    
    
    
    
    
    
    30,048
    
    
    
    12,914
    
    
    
    
    
    
    
    42,962Redeemable convertible
preferred stock
    
    
    110,411
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110,411Shareholders (deficit) equity
    
    
    (126,773
    )
    
    
    227,618
    
    
    
    1,933,105
    
    
    
    (2,106,723
    )
    
    
    (126,773
    )Total liabilities, preferred
stock and shareholders
equity
    
    $
    287,992
    
    
    $
    3,376,003
    
    
    $
    3,801,296
    
    
    $
    (3,492,786
    )
    
    $
    3,972,505
 25




---



##### 



R.H. Donnelley Corporation
Consolidating Condensed Balance Sheet
December 31, 2004 R.H. Donnelley
    
    
    R.H. Donnelley
    
    
    
    
    
    
    
    
    
    
    ConsolidatedCorp.
    
    
    Inc.
    
    
    Guarantor
    
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    
    (Issuer)
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    CorporationAssetsCash and cash equivalents
    
    $
    
    
    
    $
    6,008
    
    
    $
    4,747
    
    
    $
    
    
    
    $
    10,755Accounts receivable, net
    
    
    
    
    
    
    
    
    
    
    455,433
    
    
    
    
    
    
    
    455,433Deferred directory costs
    
    
    
    
    
    
    
    
    
    
    155,959
    
    
    
    (39,442
    )
    
    
    116,517Other current assets
    
    
    
    
    
    
    18,456
    
    
    
    693,933
    
    
    
    (671,785
    )
    
    
    40,604Total current assets
    
    
    
    
    
    
    24,464
    
    
    
    1,310,072
    
    
    
    (711,227
    )
    
    
    623,309Investment in subsidiaries
    
    
    234,096
    
    
    
    1,895,478
    
    
    
    

    
    
    
    (2,129,574
    )
    
    
    Fixed assets, net
    
    
    
    
    
    
    31,125
    
    
    
    6,562
    
    
    
    (1
    )
    
    
    37,686Other assets
    
    
    
    
    
    
    101,061
    
    
    
    1,567
    
    
    
    
    
    
    
    102,628Notes receivable
    
    
    
    
    
    
    2,124,745
    
    
    
    
    
    
    
    (2,124,745
    )
    
    
    Intangible assets, net
    
    
    
    
    
    
    
    
    
    
    2,905,026
    
    
    
    304
    
    
    
    2,905,330Goodwill
    
    
    
    
    
    
    
    
    
    
    309,969
    
    
    
    
    
    
    
    309,969Total assets
    
    $
    234,096
    
    
    $
    4,176,873
    
    
    $
    4,533,196
    
    
    $
    (4,965,243
    )
    
    $
    3,978,922Liabilities,
Preferred Stock and Shareholders Equity (Deficit)Accounts payable and
accrued liabilities
    
    $
    
    
    
    $
    366,086
    
    
    $
    45,091
    
    
    $
    (330,815
    )
    
    $
    80,362Deferred directory revenue
    
    
    
    
    
    
    
    
    
    
    381,424
    
    
    
    
    
    
    
    381,424Current portion LTD
    
    
    
    
    
    
    162,011
    
    
    
    111,840
    
    
    
    (111,840
    )
    
    
    162,011Total current liabilities
    
    
    
    
    
    
    528,097
    
    
    
    538,355
    
    
    
    (442,655
    )
    
    
    623,797Long-term debt
    
    
    
    
    
    
    3,314,522
    
    
    
    2,012,905
    
    
    
    (2,362,096
    )
    
    
    2,965,331Deferred income taxes, net
    
    
    
    
    
    
    70,612
    
    
    
    53,366
    
    
    
    (5,158
    )
    
    
    118,820Other long-term liabilities
    
    
    
    
    
    
    29,546
    
    
    
    33,092
    
    
    
    (25,760
    )
    
    
    36,878Redeemable convertible
preferred stock
    
    
    216,111
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    216,111Shareholders equity
    
    
    17,985
    
    
    
    234,096
    
    
    
    1,895,478
    
    
    
    (2,129,574
    )
    
    
    17,985Total liabilities,
preferred stock and
shareholders equity
    
    $
    234,096
    
    
    $
    4,176,873
    
    
    $
    4,533,196
    
    
    $
    (4,965,243
    )
    
    $
    3,978,922
 26




---



##### 



R.H. Donnelley Corporation
Consolidating Condensed Statement of Operations
For the Three Months Ended March 31, 2005 R.H. Donnelley
    
    
    R.H. Donnelley
    
    
    
    
    
    
    
    
    
    
    ConsolidatedCorp.
    
    
    Inc.
    
    
    Guarantor
    
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    
    (Issuer)
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    CorporationNet revenue
    
    
    
    
    
    $
    
    
    
    
    247,108
    
    
    
    (39,769
    )
    
    $
    207,339Expenses
    
    
    
    
    
    
    7,035
    
    
    
    158,318
    
    
    
    (28,211
    )
    
    
    137,142Operating income
    
    
    
    
    
    
    (7,035
    )
    
    
    88,790
    
    
    
    (11,558
    )
    
    
    70,197Interest
expense, net of interest income
    
    
    (4,555
    )
    
    
    (6,988
    )
    
    
    (45,954
    )
    
    
    
    
    
    
    (57,497
    )Pre-tax income (loss)
    
    
    (4,555
    )
    
    
    (14,023
    )
    
    
    42,836
    
    
    
    (11,558
    )
    
    
    12,700Income tax expense (benefit)
    
    
    1,718
    
    
    
    3,827
    
    
    
    (14,818
    )
    
    
    4,320
    
    
    
    (4,953
    )Net income
    
    
    (2,837
    )
    
    
    (10,196
    )
    
    
    28,018
    
    
    
    (7,238
    )
    
    
    7,747Preferred dividend
    
    
    (3,319
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,319
    )Loss on repurchase of
preferred stock
    
    
    (133,681
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (133,681
    )Income available to common
shareholders
    
    $
    (139,837
    )
    
    $
    (10,196
    )
    
    $
    28,018
    
    
    $
    (7,238
    )
    
    $
    (129,253
    )
 R.H. Donnelley Corporation
Consolidating Condensed Statement of Operations
For the Three Months Ended March 31, 2004 R.H. Donnelley
    
    
    R.H. Donnelley
    
    
    
    
    
    
    
    
    
    
    ConsolidatedCorp.
    
    
    Inc.
    
    
    Guarantor
    
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    
    (Issuer)
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    CorporationNet revenue
    
    $
    
    
    
    $
    5,210
    
    
    $
    138,597
    
    
    
    
    
    
    $
    143,807Expenses
    
    
    
    
    
    
    21,587
    
    
    
    59,379
    
    
    
    
    
    
    
    80,966Partnership income
    
    
    28,477
    
    
    
    66,209
    
    
    
    20,814
    
    
    
    (91,603
    )
    
    
    23,897Operating income
    
    
    28,477
    
    
    
    49,832
    
    
    
    100,032
    
    
    
    (91,603
    )
    
    
    86,738Interest expense
    
    
    
    
    
    
    (40,300
    )
    
    
    
    
    
    
    
    
    
    
    (40,300
    )Pre-tax income
    
    
    28,477
    
    
    
    9,532
    
    
    
    100,032
    
    
    
    (91,603
    )
    
    
    46,438Income tax expense (benefit)
    
    
    
    
    
    
    (18,945
    )
    
    
    (36,905
    )
    
    
    (383
    )
    
    
    (18,343
    )Net income
    
    
    28,477
    
    
    
    28,477
    
    
    
    63,127
    
    
    
    (91,986
    )
    
    
    28,095Preferred dividend
    
    
    (5,287
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,287
    )Income available to common
shareholders
    
    $
    23,190
    
    
    $
    28,477
    
    
    $
    63,127
    
    
    $
    (91,986
    )
    
    $
    22,808
 27




---



##### 



R.H. Donnelley Corporation
Consolidating Condensed Statement of Cash Flows
For the Three Months Ended March 31, 2005 R.H.R.H. Donnelley
    
    
    Donnelley
    
    
    
    
    
    
    
    
    
    
    ConsolidatedCorp.
    
    
    Inc.
    
    
    Guarantor
    
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    
    (Issuer)
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    CorporationCash flow from operations
    
    $
    
    
    
    $
    (738
    )
    
    $
    120,879
    
    
    $
    (7,314
    )
    
    $
    112,827Cash flow from investing activities
    
    
    
    
    
    
    (5,475
    )
    
    
    (40
    )
    
    
    
    
    
    
    (5,515
    )Cash flow from financing activities:Proceeds from issuance of debt
    
    
    291,742
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    291,742Borrowings under revolver
    
    
    
    
    
    
    72,000
    
    
    
    
    
    
    
    
    
    
    
    72,000Repurchase of preferred stock
    
    
    (277,197
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (277,197
    )Debt repayments
    
    
    
    
    
    
    (201,635
    )
    
    
    
    
    
    
    
    
    
    
    (201,635
    )Intercompany transfers
    
    
    (17,198
    )
    
    
    133,693
    
    
    
    (123,809
    )
    
    
    7,314
    
    
    
    Other
    
    
    2,653
    
    
    
    
    
    
    
    1,943
    
    
    
    
    
    
    
    4,596Net cash flow from financing activities
    
    
    
    
    
    
    4,058
    
    
    
    (121,866
    )
    
    
    7,314
    
    
    
    (110,494
    )Change in cash
    
    
    
    
    
    
    (2,155
    )
    
    
    (1,027
    )
    
    
    
    
    
    
    (3,182
    )Cash at beginning of year
    
    
    
    
    
    
    6,008
    
    
    
    4,747
    
    
    
    
    
    
    
    10,755Cash at end of period
    
    $
    
    
    
    $
    3,853
    
    
    $
    3,720
    
    
    $
    
    
    
    $
    7,573
 R.H. Donnelley Corporation
Consolidating Condensed Statement of Cash Flows
For the Three Months Ended March 31, 2004 R.H.R.H. Donnelley
    
    
    Donnelley
    
    
    
    
    
    
    
    
    
    
    ConsolidatedCorp.
    
    
    Inc.
    
    
    Guarantor
    
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    
    (Issuer)
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    CorporationCash flow from operations
    
    $
    
    
    
    $
    (13,358
    )
    
    $
    108,738
    
    
    $
    (754
    )
    
    $
    94,626Cash flow from investing activities
    
    
    
    
    
    
    (2,847
    )
    
    
    
    
    
    
    
    
    
    
    (2,847
    )Cash flow from financing activities:Debt repayments
    
    
    
    
    
    
    (88,591
    )
    
    
    
    
    
    
    
    
    
    
    (88,591
    )Intercompany transfers
    
    
    
    
    
    
    105,988
    
    
    
    (108,381
    )
    
    
    754
    
    
    
    (1,639
    )Net cash flow from financing activities
    
    
    
    
    
    
    17,397
    
    
    
    (108,381
    )
    
    
    754
    
    
    
    (90,230
    )Change in cash
    
    
    
    
    
    
    1,192
    
    
    
    357
    
    
    
    
    
    
    
    1,549Cash at beginning of year
    
    
    
    
    
    
    6,900
    
    
    
    822
    
    
    
    
    
    
    
    7,722Cash at end of period
    
    $
    
    
    
    $
    8,092
    
    
    $
    1,179
    
    
    $
    
    
    
    $
    9,271
 28




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations Forward-Looking Information Certain statements contained in this Form 10-Q regarding 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, could, and
similar expressions, are used to identify such forward-looking statements. All forward-looking
statements reflect only our current beliefs and assumptions with respect to our future results,
business plans, and prospects, and are based solely on information currently available to us.
Accordingly, these statements are subject to significant risks and uncertainties and our actual
results, business plans and prospects could differ significantly from those expressed in, or
implied by, these statements. We caution readers not to place undue reliance on, and we undertake
no obligation to update, other than imposed by law, any forward-looking statements. Unless
otherwise indicated, the terms Company, we, us and our refer to R.H. Donnelley Corporation
and its direct and indirect wholly owned subsidiaries. Such risks and uncertainties are described
in detail in our Annual Report on Form 10-K for the year ended
December 31, 2004 (Form 10-K). Corporate Overview We are a leading yellow pages publisher and directional media company. Directional media is where
consumers search to find who sells the goods and services they are ready to purchase. We publish
Sprint-branded directories in 18 states, with major markets including Las Vegas, Nevada and Orlando
and Lee County, Florida, with a total distribution of approximately 18 million serving
approximately 160,000 local and national advertisers. We also publish 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 all of our Sprint markets under the Best Red Yellow Pages
brand at www.bestredyp.com
and in the Chicagoland 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 (SBC
Directory Business) of SBC Communications, Inc. (SBC) in Illinois and Northwest Indiana,
including SBCs interests in The DonTech II Partnership (DonTech), a 50/50 general partnership
between us and SBC (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 consummated pursuant to, and in accordance with, the
terms of the Purchase Agreement, dated as of July 28, 2004, as amended, 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 Business are
included in our consolidated results from and after September 1, 2004. The acquired SBC Directory
Business now operates as R.H. Donnelley Publishing & Advertising of Illinois Partnership, an
indirect wholly owned subsidiary of the Company. On January 3, 2003, we completed the acquisition of the directory business (the SPA Directory
Business) of Sprint Corporation (Sprint) by acquiring all the outstanding capital stock of the
various entities comprising Sprint Publishing & Advertising (SPA) (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 Directory Business are included in our consolidated results from and after
January 3, 2003. The acquired SPA Directory Business now operates as R.H. Donnelley Publishing &
Advertising, Inc., an indirect wholly owned subsidiary of the Company. Recent Developments On January 14, 2005, we repurchased approximately 50% of our outstanding 8% redeemable convertible
cumulative preferred stock (Preferred Stock) from certain investment partnerships affiliated with
The Goldman Sachs Group, 29




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##### 



Inc. (collectively, the GS Funds), for $277.2 million in cash. In order to fund this repurchase,
on January 14, 2005, we issued $300 million of 6.875% Senior Notes (Holdco Notes). See
Liquidity and Capital Resources below for a further discussion of the financing associated with
this transaction. In connection with the Preferred Stock repurchase, we recorded a reduction in
earnings available to common shareholders of $133.7 million to reflect the loss on the repurchase
of these shares. The excess of the cash paid to the GS Funds over the carrying amount of the
repurchased Preferred Stock, plus the amount previously recognized for the BCF associated with
these shares has been recognized as the loss on repurchase. Segment Reporting During 2004, we 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, we now consolidate all net profits from DonTech and our partnership
investment in DonTech was eliminated. Consequently, partnership income was no longer reported
commencing on September 1, 2004 and, 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. 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, any change in credit policy, historical charge-off patterns, recovery
rates and other data when determining our allowance for doubtful accounts. We 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 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 these allowance percentages would
have impacted 2004 GAAP net income by approximately $3.6 million and 2004 adjusted pro forma net
income by $6.3 million. See Adjusted and Pro Forma Amounts and Other Non-GAAP Measures below for
a description and reconciliation of adjusted pro forma net income to reported GAAP net income. Pension Benefits Our pension plan obligations and related assets of the Companys defined benefit retirement plans
and those related to the DonTech employees of the SBC Directory Business are presented in Note 9 of
the consolidated financial statements included in Item 1 of this Quarterly Report and Note 10 of
the consolidated financial statements included in Item 8 of our
Form 10-K. 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 30




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##### 



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 consider 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, 2004, the weighted-average actuarial
assumptions were: discount rate of 5.75%; long-term rate of return on plan assets of 8.25%; and
assumed salary increases of 3.66%. Net periodic pension costs recognized in 2004 were $4.0
million. A 1% change in the discount rate would affect net income by approximately $0.8 million; a
1% change in the long-term rate of return on plan assets would affect net income by approximately
$0.7 million; and a 1% change in assumed salary increases would affect net income by approximately
$0.4 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 periodic impairment testing 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, 2004, 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 and
goodwill at December 31, 2004 been impaired by 1%, net income on both a reported GAAP and adjusted
pro forma basis in 2004 would have been adversely impacted by approximately $19.5 million. See
Adjusted and Pro Forma Amounts and Other Non-GAAP Measures below for a description and
reconciliation of adjusted pro forma net income to reported GAAP net income. Additionally, management must assess whether the remaining useful lives of the intangible assets
represent the period that the intangible assets are expected to contribute to our cash flow. 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, 2004,
amortization of intangible assets was approximately $57.3 million. Had the remaining useful lives
of the intangible assets been shortened by 10%, net income on a reported GAAP and the adjusted pro
forma basis in 2004 would have been adversely impacted by approximately $3.0 million and $5.1
million, respectively. See Adjusted and Pro Forma Amounts and Other Non-GAAP Measures below for a
description and reconciliation of adjusted pro forma net income to reported GAAP net income. 31




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New Accounting Pronouncements New Accounting Pronouncements.On December 16, 2004, the Financial Accounting Standards Board
(FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment (FAS 123(R)). FAS
123(R) requires companies to calculate the fair value of stock options granted to employees, and
amortize that amount over the vesting period as an expense through the income statement. The
accounting provisions of FAS 123(R) are effective for fiscal years beginning after June 15, 2005,
but companies have a choice of transition methods, including: Modified Prospective, Modified
Retrospective, or early adoption. The Company is presently evaluating the transition method that it
will adopt as well as the effective date for transition to FAS 123(R) and what impact adoption of
FAS 123(R) may have on the Company. 32




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RESULTS OF OPERATIONS
Three months ended March 31, 2005 and 2004 Factors Affecting Comparability Acquisitions As a result of the SBC Directory Acquisition and the SPA Acquisition, the related financings and
associated purchase accounting, our 2005 reported GAAP results are not comparable to our 2004
reported GAAP results. Under the deferral and amortization method of revenue recognition, the
billable value of directories published is recognized as revenue in subsequent reporting periods.
However, purchase accounting 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 2005 and 2004 GAAP
results are not indicative of our underlying operating and financial performance. Accordingly,
management is presenting adjusted and 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 2004.
Management believes that the presentation of this adjusted and 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 and adjusted pro forma amounts disclosed under the caption
Adjusted and 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 and adjusted pro forma results reasonably represent results as if the
businesses had been combined for the three-month periods ended March 31, 2005 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 and adjusted pro forma amounts are
strictly comparable, nor are they indicative of results for future periods. Before the SBC Directory Acquisition, we reported our 50% share of DonTech net income as
partnership income in our consolidated statement of operations. 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. Upon the
SBC Directory Acquisition, SBC ceased paying us revenue participation income, we consolidate all
net profits of DonTech and our partnership investment was eliminated. Consequently, commencing on
September 1, 2004, we no longer report partnership income. During 2004 until the SBC Directory
Acquisition, we earned revenue from pre-press publishing and other ancillary services related to
the SBC Directory Business and we continued to report partnership income from our investment in
DonTech. GAAP Reported Results Net Revenue The components of our net revenue in the three months ended March 31, 2005 and 2004 were as
follows: Three Months Ended March 31,(amounts in millions)
    
    2005
    
    
    2004
    
    
    $ ChangeGross directory advertising
revenue
    
    $
    206.9
    
    
    $
    138.8
    
    
    $
    68.1Sales allowances
    
    
    (2.0
    )
    
    
    (1.4
    )
    
    
    (0.6
    )Net directory advertising revenue
    
    
    204.9
    
    
    
    137.4
    
    
    
    67.5Pre-press publishing fees
    
    
    
    
    
    
    4.8
    
    
    
    (4.8
    )Other revenue
    
    
    2.4
    
    
    
    1.6
    
    
    
    0.8Total
    
    $
    207.3
    
    
    $
    143.8
    
    
    $
    63.5
 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, 33




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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 and other related 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 months ended March 31, 2005 was $207.3 million compared to $143.8
million in the same period in the prior year. The primary increase in total net revenue is
primarily a result of the SBC Directory Acquisition. Gross directory advertising revenue in the
first quarter of 2005 includes $63.0 million in revenues from SBC-branded directories with no
comparable revenue for the same period in 2004. Due to purchase accounting, directory revenue for
the three months ended March 31, 2005 excluded the amortization of publication sales for
SBC-branded directories published before October 2004 under the deferral and amortization method
totaling $51.9 million that would have been reported absent purchase accounting. Purchase
accounting resulting from the SBC Directory Acquisition will continue to adversely impact reported
net revenue during 2005. Purchase accounting resulting from the Sprint Acquisition negatively
impacted net revenue for the three months ended March 31, 2004
by $1.1 million due to Sprint-branded directories that published prior to the SPA Acquisition, which would have
been recognized during the period had it not been for purchase accounting required under GAAP. Revenue from pre-press publishing and other related services was $4.8 million in the three months
ended March 31, 2004, with no comparable revenue in the first quarter of 2005. The decrease in
pre-press publishing fees 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. Other revenue includes late fees paid on outstanding customer balances, commissions earned on sales
contracts with respect to advertising placed into other publishers directories, sales of
directories and certain other products and fees from telephone companies for publishing their
information pages. Other revenue for the three months ended March 31, 2004 included $0.4 million
for sales-related computer application services rendered to DonTech on behalf of SBC, which we
ceased providing as of September 1, 2004. Expenses The components of our total expenses for the three months ended March 31, 2005 and 2004 were as
follows: Three Months Ended March 31,(amounts in millions)
    
    2005
    
    
    2004
    
    
    $ ChangeOperating expenses
    
    $
    102.4
    
    
    $
    53.8
    
    
    $
    48.6G&A expenses
    
    
    13.0
    
    
    
    12.7
    
    
    
    0.3D&A expenses
    
    
    21.7
    
    
    
    14.4
    
    
    
    7.3Total
    
    $
    137.1
    
    
    $
    80.9
    
    
    $
    56.2
 Substantially all expenses are derived from our directory publishing business. Before the SBC
Directory Acquisition, DonTech was accounted for under the equity method. We began recognizing
expenses related to the SBC Directory Business on September 1, 2004. 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. All other expenses are recognized as incurred. Operating Expenses Total operating expenses in the three months ended March 31, 2005 were $102.4 million compared to
$53.8 million in the same periods in the prior year. The primary components of the $48.6 million
increase in operating expenses are shown below: 34




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(amounts in millions)
    
    ChangeExpenses recorded in the first quarter of 2005 resulting from the SBC Directory Acquisition
    
    $
    26.6Cost uplift from the SBC transaction recorded in the first quarter of 2005
    
    
    17.0Increased marketing and advertising expenses
    
    
    2.7Increased bad debt, commission and salesperson expenses
    
    
    3.1Increased print, paper and distribution costs
    
    
    1.9Cost uplift from the SPA Acquisition recorded in the first quarter of 2004
    
    
    (2.7
    )Total 2005 increase in operating expenses, compared to 2004
    
    $
    48.6
 Operating expenses for the three months ended March 31, 2005 increased $48.6 million compared to
the same period in 2004 primarily as a result of the SBC Directory Acquisition. Expenses of $26.6
million incurred to support the SBC business include bad debt, commissions, salesperson expenses,
printing, distribution, advertising and other operating expenses. There were no comparable
expenses for the three months ended March 31, 2004. 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 SBCs deferred costs for all pre-acquisition (including
September 2004) directories as required by purchase accounting, our reported operating expenses in
the first quarter of 2005 did not include certain expenses associated with those directories
totaling approximately $8.0 million. Due to these adjustments, directory expenses for the three
months ended March 31, 2005 include only the amortization of deferred directory costs relating to
directories published beginning in October 2004. As a result of purchase accounting required by GAAP, we recorded the deferred directory costs
related to directories that were scheduled to publish subsequent to the SBC Directory Acquisition
and SPA Acquisition at their fair value, determined as (a) the estimated billable value of the
published directory less (b) the expected costs to complete the directories, plus (c) a normal
profit margin. We refer to this purchase accounting entry as cost uplift. The fair value of
these costs was determined to be $81.3 million and $14.8 million for the SBC Directory Acquisition
and the SPA Acquisition, respectively. These costs are amortized as operating expenses over the
terms of the applicable directories and such amortization totaled $17.0 million for the three
months ended March 31, 2005 relating to the SBC Directory Acquisition and $2.7 million for the
three months ended March 31, 2004 relating to the SPA Acquisition. Marketing and advertising expenses were $2.7 million higher in the first quarter of 2005, compared
to the same period in 2004, due to our increased investment in certain of our larger markets. Bad
debt expense, commission and salesperson expenses during the quarter were $3.1 million higher,
compared to the same period in 2004, due to favorable sales performance, particularly in certain
Sprint markets. Print, paper and distribution costs were $1.9 million higher in the first quarter,
2005 compared to the same period in 2004, due to market enhancements and higher page counts in
certain of our larger directories. Purchase accounting from the SBC Directory Acquisition will continue to impact reported expenses in
2005. We expect operating expenses in 2005 to be significantly higher than 2004 due to a full year
of results from the SBC Directory Business. 35




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##### 



General and Administrative Expenses General and administrative (G&A) expenses in the three months ended March 31, 2005 and 2004 were
$13.0 million and $12.7 million, respectively. The primary components of the $0.3 million increase
in G&A expenses is shown in the table below: (amounts in millions)
    
    ChangeIncreased billing, credit and collection expenses to support the SBC Directory Business
    
    $
    1.9Increased corporate governance and administrative expenses to support the SBC Directory Business
    
    
    1.8Corporate headquarters relocation costs recorded in the first quarter, 2004
    
    
    (3.4
    )Total 2005 increase in operating expenses, compared to 2004
    
    $
    0.3
 G&A expenses were impacted by $1.9 million of increased billing, credit and collection expenses
primarily to support the addition of the SBC Directory Business. Corporate governance costs and
other G&A expenses, including financial services, human resources and administrative services also
increased by $1.8 million in the three months ended March 31, 2005, compared to the same period in
2004, to support the SBC Directory Business. These increases were offset by $3.4 million of
expenses in the first quarter of 2004 associated with the relocation of our corporate headquarters
to Cary, North Carolina with no comparable expense in 2005. On an annual basis, we expect G&A
expenses in 2005 to be higher than 2004 due to a full year of results from the acquired SBC
Directory Business. Depreciation and Amortization Depreciation and amortization (D&A) expenses for the three months ended March 31, 2005 and 2004
were $21.7 million and $14.4 million, respectively. Amortization of intangible assets was $18.1
million and $12.5 million for the three months ended March 31, 2005 and 2004, respectively. The
increase in amortization expense is due to the increase in intangible assets resulting from the SBC
Directory Acquisition. On an annual basis, we expect amortization expense in 2005 to be
significantly higher than 2004 due to a full year impact related to the intangible assets acquired
in connection with the SBC Directory Acquisition. Depreciation of fixed assets and amortization of
computer software was $3.6 million and $1.9 million in the three months ended March 31, 2005 and
2004, respectively. The increase in depreciation expense was due to higher depreciation of certain
computer software. Partnership Income Partnership income for the three months ended March 31, 2004 was $23.9 million with no
corresponding amount for the three months ended March 31, 2005. During the three months ended March
31, 2004, partnership income related 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 from SBC based on
the amount of DonTech calendar sales during the period. As a result of the SBC Directory
Acquisition, SBC ceased paying us revenue participation income and we now consolidate all net
profits in DonTech. Thus, the DonTech partnership investment was eliminated. Accordingly,
commencing on September 1, 2004, we no longer report partnership income. 36




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##### 



Operating Income Operating income for the three months ended March 31, 2005 and 2004 was as follows: Three Months Ended March 31,(amounts in millions)
    
    2005
    
    
    2004
    
    
    $ ChangeTotal
    
    $
    70.2
    
    
    $
    86.7
    
    
    $
    (16.5
    )
 Operating income for the three months ended March 31, 2005 of $70.2 million decreased by $16.5
million from operating income of $86.7 million in the same period in the prior year. The decrease
in operating income during the first quarter of 2005 was primarily a result of the SBC Directory
Acquisition and the related purchase accounting impact on our revenues and expenses, as described
above. While net revenue increased in 2005 by $63.5 million over net revenue in the same period in
2004, primarily resulting from the SBC Directory Acquisition, offsetting that increase in net
revenue was an increase in total operating expenses in 2005 of $56.2 million, also primarily as a
result of the SBC Directory Acquisition. The primary reason that our costs relating to the SBC
Directory Business increased nearly as much as our revenues in the first quarter of 2005 is because while
all directory advertising revenue is deferred under our deferral and amortization method, only a
portion of total costs related to publication of the directories are deferred under the deferral
and amortization method. Therefore, under purchase accounting, when the entire balance of deferred
revenue and deferred directory costs were eliminated at the time of the SBC Directory Acquisition,
the elimination had a disproportionately higher impact on revenues than it did on expenses.
Accordingly, after the adjustments required by purchase accounting, operating expenses in the first
quarter of 2005 were disproportionately higher than the related revenue. If the effects of
purchase accounting were eliminated, adjusted operating income in 2005 would have been
substantially higher (and relatively proportional to the increase in net revenues) compared to GAAP
operating income in 2004. See Adjusted and Pro Forma Amounts and Other Non-GAAP Measures below. Purchase accounting from the SBC Directory Acquisition will continue to impact reported results
during 2005. On a full year basis, we expect operating income to be higher in 2005 than in 2004
due to a full year of results from the acquired SBC Directory Business. Interest Expense, Net Net interest expense for the three months ended March 31, 2005 was $57.5 million compared to $40.3
million in the same period in 2004. The increase in net interest expense of $17.2 million is a
result of higher outstanding debt balances associated with the SBC Directory Acquisition, combined
with higher interest rates, compared to the prior year. Additionally, interest expense in 2005
includes interest costs associated with the $300 million 6.875% Senior Notes issued on January 14,
2005. Interest expense in first quarter of 2004 includes a $1.2 million charge resulting from the
redemption in 2004 of the remaining 9.125% Senior Subordinated Notes due 2008. See Liquidity and
Capital Resources for a further description of our debt obligations and the provisions of the
related debt instruments. Net interest expense in 2005 includes $4.0 million of non-cash
amortization of deferred financing costs, compared to $3.4 million of non-cash amortization of
deferred financing costs in the same period in the prior year. Income Taxes The effective tax rate on income before income taxes of 39.0% for the three months ended March 31,
2005 compares to 39.5% on income before income taxes for the same period in the prior year. The
year-to-date effective rate as of March 31, 2005 reflects a decrease in the state and local tax
rate as a result of the integration of the SBC Directory Acquisition and the SPA Acquisition. Net (Loss) Income and (Loss) Earnings Per Share Net income for the three months ended March 31, 2005 and 2004 was $7.7 million and $28.1 million,
respectively. The results for 2005 were adversely affected by purchase accounting that precluded us
from recognizing deferred revenue and certain expenses associated with those directories published
prior to the SBC Directory Acquisition, including all September 2004 published directories.
Purchase accounting from the SBC Directory Acquisition will continue to impact reported results
during 2005. 37




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##### 



The 8% dividend on our Preferred Stock reduces net income or increases the net loss, resulting in
(loss) income available to common shareholders from which (loss) 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 first quarter of 2005 and 2004 of $3.3 million and $5.3 million,
respectively, consisted of the stated 8% dividend of $2.7 million and $4.3 million, respectively,
and a BCF of $0.6 million and $1.0 million, respectively. On January 14, 2005, we repurchased approximately 50% of our outstanding Preferred Stock from the
GS Funds for $277.2 million in cash. In connection with the Preferred Stock repurchase, we recorded
a reduction in earnings available to common shareholders of $133.7 million to reflect the loss on
the repurchase of these shares. The excess of the cash paid to the GS Funds over the carrying
amount of the repurchased Preferred Stock, plus the amount previously recognized for the BCF
associated with these shares has been recognized as the loss on repurchase. The resulting (loss) income available to common shareholders was $(129.3) million and $22.8 million
in the three months ended March 31, 2005 and 2004, respectively. All earnings per share (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
March 31, 2005, basic and diluted EPS were $(4.10). Because there was a reported net loss available
to common shareholders, 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 months ended March 31, 2005 were the same. For the three months ended
March 31, 2004, basic and diluted EPS were $0.57 and $0.54 per share, respectively. Adjusted and 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 purchase accounting, our 2005 reported GAAP results are not comparable to our 2004
reported GAAP results. Under the deferral and amortization method of revenue recognition, the
billable value of directories published is recognized as revenue in subsequent reporting periods.
However, purchase accounting 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 2005 and 2004 GAAP
results are not indicative of our underlying operating and financial performance. Accordingly,
management is presenting adjusted and 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 2004.
Management believes that the presentation of this adjusted and 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 and adjusted pro forma amounts disclosed in this section or
elsewhere are non-GAAP measures, which are reconciled to the most comparable GAAP measures under
that caption below. While we believe the adjusted and adjusted pro forma results reasonably
represent results as if the businesses had been combined for the three-month periods ended March
31, 2005 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 and
adjusted pro forma amounts are strictly comparable, nor are they indicative of results for future
periods. 38




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##### 



Three months ended March 31, 2005AdjustmentsReported
    
    
    SBC Directory
    
    
    SPA(amounts in millions)
    
    GAAP
    
    
    Acquisition
    
    
    Acquisition
    
    
    AdjustedNet revenue
    
    $
    207.3
    
    
    $
    51.9
    (1)
    
    $
    
    
    
    $
    259.2Expenses, other than
depreciation and
amortization
    
    
    115.4
    
    
    
    (8.0

)(2)
    
    
    
    
    
    
    107.4Depreciation and amortization
    
    
    21.7
    
    
    
    
    
    
    
    
    
    
    
    21.7Operating income
    
    $
    70.2
    
    
    $
    59.9
    
    
    $
    
    
    
    $
    130.1
 Three months ended March 31, 2004AdjustmentsReported
    
    
    SBC Directory
    
    
    SPA
    
    
    Adjusted(amounts in millions)
    
    GAAP
    
    
    Acquisition
    
    
    Acquisition
    
    
    Pro FormaNet revenue
    
    $
    143.8
    
    
    $
    112.0
    (1)
    
    $
    1.1

(5)
    
    $
    256.9Expenses, other than
depreciation and amortization
    
    
    66.6
    
    
    
    36.1
    (2)
    
    
    (2.7

)(6)
    
    
    100.0Depreciation and amortization
    
    
    14.4
    
    
    
    7.0
    (3)
    
    
    
    
    
    
    21.4Partnership income
    
    
    23.9
    
    
    
    (23.9
    ) (4)
    
    
    
    
    
    
    Operating income
    
    $
    86.7
    
    
    $
    45.0
    
    
    $
    3.8
    
    
    $
    135.5
   (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 expenses for directories that published prior to the SBC Directory
Acquisition, including September 2004 published directories, which would have been recognized
during the period had it not been for purchase accounting required
under GAAP for both three month periods. The pro forma adjustments
for the three months ended March 31, 2004 also includes (a) DonTechs
selling and operational expenses prior to September 1, 2004, which were eliminated in
consolidation upon the SBC Directory Acquisition, and (b) certain differences in the
application of accounting policies and practices between RHD and the
acquired entities.Additionally, as a result of purchase accounting, we recorded the deferred directory costs
related to directories that were scheduled to publish subsequent to the SBC Directory
Acquisition at their fair value. The impact of such costs has also been removed.(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 gross revenue and sales claims and allowances for Sprint-branded directories that
published prior to the SPA Acquisition including January 2003 published directories, which
would have been recognized during the period had it not been for purchase accounting required
under GAAP. 39




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##### 



(6)
    Represents expenses for directories that published prior to the SPA Acquisition, including
January 2003 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 fair value of deferred
directory costs related to directories that were scheduled to publish subsequent to the SPA
Acquisition at their fair value. The impact of such costs has also been removed. 2005 Adjusted Revenue Compared to 2004 Adjusted Pro Forma Revenue The components of 2005 adjusted revenue and 2004 adjusted pro forma revenue for the three months
ended March 31 of each year are as follows: Three Months Ended March 31, 2005SBCReported
    
    
    Directory
    
    
    SPA(amounts in millions)
    
    GAAP
    
    
    Acquisition
    
    
    Acquisition
    
    
    AdjustedGross directory advertising revenue
    
    $
    206.9
    
    
    $
    52.2
    (1)
    
    $
    
    
    
    $
    259.1Sales claims and allowances
    
    
    (2.0
    )
    
    
    (0.3
    )(1)
    
    
    
    
    
    
    (2.3
    )Net directory advertising revenue
    
    
    204.9
    
    
    
    51.9
    
    
    
    
    
    
    
    256.8Other revenue
    
    
    2.4
    
    
    
    
    
    
    
    
    
    
    
    2.4Net revenue
    
    $
    207.3
    
    
    $
    51.9
    
    
    $
    
    
    
    $
    259.2
 Three Months Ended March 31, 2004SBCReported
    
    
    Directory
    
    
    SPA
    
    
    Adjusted(amounts in millions)
    
    GAAP
    
    
    Acquisition
    
    
    Acquisition
    
    
    Pro FormaGross directory advertising revenue
    
    $
    138.8
    
    
    $
    116.5
    (1)
    
    $
    1.1
    (4)
    
    $
    256.4Sales claims and allowances
    
    
    (1.4
    )
    
    
    (0.6
    )(1)
    
    
    
    
    
    
    (2.0
    )Net directory advertising revenue
    
    
    137.4
    
    
    
    115.9
    
    
    
    1.1
    
    
    
    254.4Pre-press publishing fees
    
    
    4.8
    
    
    
    (4.8
    )  (2)
    
    
    
    
    
    
    Other revenue
    
    
    1.6
    
    
    
    0.9
    (3)
    
    
    
    
    
    
    2.5Net revenue
    
    $
    143.8
    
    
    $
    112.0
    
    
    $
    1.1
    
    
    $
    256.9
   (1)
    
    Represents gross revenue and sales claims and allowances for directories that published
prior to the SBC Directory Acquisition, including September 2004 published directories,
which would have been recognized during the period had it not been for purchase accounting
required under GAAP.(2)
    
    Represents the elimination of pre-press publishing and related 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 Sprint-branded directories
that published prior to the SPA Acquisition including January 2003 published directories,
which would have been recognized during the period had it not been for purchase accounting
required under GAAP. 40




---



##### 



Adjusted net revenue for the three months ended March 31, 2005 was $259.2 million, an increase of
$2.3 million from adjusted pro forma net revenue of $256.9 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 increase in adjusted gross directory
advertising revenues for the quarter ended March 31, 2005 versus the prior year was due to higher
Sprint directory revenue from higher advertising renewal rates and new business in our major Sprint
markets for which directories published in the last nine months of 2004 and the first three months
of 2005. This was partially offset by a decline in the publication value of our SBC directories in
Illinois and northwest Indiana in the last nine months of 2004 and the first three months of 2005
that resulted in lower directory revenue. 2005 Adjusted Expenses Compared to 2004 Adjusted Pro Forma Expenses and 2005 Adjusted Operating
Income Compared to 2004 Adjusted Pro Forma Operating Income Adjusted operating and G&A expenses in the three months ended March 31, 2005 of $107.4 million
increased by $7.4 million from adjusted pro forma operating and G&A expenses of $100.0 million in
the comparable period in the prior year. The primary components of the $7.4 million increase are
shown below: (amounts in millions
    
    ChangeIncreased internet listing fees
    
    $
    2.7Increased marketing and advertising
    
    
    2.4Increased commission and salesperson expenses
    
    
    2.0Increased print, paper and distribution costs
    
    
    1.9Increased billing, credit and collection expenses to support the SBC Directory
Business
    
    
    1.9Increased corporate governance and administrative expenses to support the SBC
Directory Business
    
    
    1.8Corporate headquarters relocation costs recorded in the first quarter, 2004
    
    
    (3.4
    )Reduced customer service, information technology, and other indirect expenses
    
    
    (1.9
    )Total 2005 increase in adjusted
operating and G&A expenses, compared
to 2004 adjusted pro forma operating
and G&A expenses
    
    $
    7.4
 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 internet listing fees were $2.7 million
higher in the three months ended March 31, 2005, compared to adjusted pro forma expenses in the
same period of 2004, due to a roll out of our on-line products in Sprint markets and the newly
acquired SBC Directory Business. On an adjusted basis, marketing and advertising expense was $2.4
million higher in the first quarter of 2005 due to our increased investment in certain of our
larger markets. Adjusted commission and salesperson expenses were $2.0 million higher in the first
quarter of 2005, compared to the first quarter of 2004, due to favorable sales performances in
certain larger Sprint markets and increased sales headcount. Adjusted billing, credit and
collection expenses were $1.9 million higher in the first quarter of 2005 due primarily to
additional support requirements for the SBC Directory Business.
Adjusted print, paper and distribution costs were $1.9 million
greater due to increased page counts in certain markets. Adjusted corporate governance
costs increased $1.8 million in the three months ended March 31, 2005, compared to adjusted pro
forma expenses in the same period of 2004, to support the administrative requirements of the SBC
Directory Business, including increased audit and Sarbanes-Oxley expenses. These increases were
offset by $3.4 million of expenses in the first quarter of 2004 associated with the relocation of
our corporate headquarters to Cary, North Carolina with no comparable expense in 2005. Adjusted
expenses for customer service, information technology, and certain other indirect expenses were
$1.9 million lower in the quarter due to operational efficiencies and timing of the expenses. Adjusted depreciation and amortization (D&A) for the three months ended March 31, 2005 and
adjusted pro forma D&A for the three months ended March 31, 2004 was $21.7 million and $21.4
million, respectively. Adjusted operating income for the three months ended March 31, 2005 was $130.1 million, a decrease
of $5.4 million from adjusted pro forma operating income in the three months ended March 31, 2004
of $135.5 million, 41




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##### 



reflecting the variances between revenues and expenses from period to period
described above. 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 method, the amount of revenue recognized during a period is not directly
related to the sales trends, economic conditions and business confidence during that period.
Publication sales are 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. Sprint-branded publication sales for the three months ended March 31, 2005 were $158.3 million, up
$7.2 million or 4.8% from publication sales of $151.1 million in the three months ended March 31,
2004. SBC-branded publication sales for the three months ended March 31, 2005 were $98.3 million,
down 2.7% from publication sales of $101.0 million in the same period of 2004. 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 three months of 2005. The decrease
in SBC-branded publication sales is attributable to unsatisfactory
execution on sales campaigns, most of which commenced prior to our
acquisition of the business there, plus continued softness in the Chicago area economy.
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: Three monthsended March 31,(amounts in millions)
    
    2005
    
    
    2004Publication sales - Sprint-branded directories
    
    $
    158.3
    
    
    $
    151.1Publication sales - Sprint-branded directories -
percentage change over prior year
    
    
    4.8
    %Adjustments for changes in directory
publication date(s)
    
    
    
    
    
    
    0.2Publication sales previously
    
    
    
    
    
    
    151.3Publication sales - SBC-branded directories
    
    
    98.3
    
    
    
    101.0Publication sales - SBC-branded directories  percentage
change over prior year
    
    
    (2.7
    %)Less pre-acquisition publication sales for SBC-branded
directories not recognized as revenue in current period
due to purchase accounting
    

    
    
    
    
    
    (101.0
    )Less current period publication sales for Sprint-branded
directories not recognized as revenue in current period
due to the deferral method of accounting
    
    
    (113.9
    )
    
    
    (109.8
    )Less current period publication sales for SBC-branded
directories not recognized as revenue in current period
due to the deferral method of accounting
    
    
    (81.4
    )Plus net revenue reported in the period for publication
sales from prior periods, for Sprint-branded directories
    
    
    99.4
    
    
    
    97.3Plus net revenue reported in the period for publication
sales from prior periods, excluding January through
September 2004 publication sales for all SBC-branded
directories
    
    
    46.1Net directory advertising revenue
    
    
    206.8
    
    
    
    138.8Pre-press publishing revenue
    
    
    
    
    
    
    4.8Other revenue
    
    
    0.5
    
    
    
    0.2Net revenue  GAAP
    
    
    207.3
    
    
    
    143.8
 42




---



##### 



Three monthsended March 31,(amounts in millions)
    
    2005
    
    
    2004Plus net revenue from Sprint-branded directories for all
January, 2003 Sprint-branded directories that would have
been recognized during the period absent purchase
accounting adjustments required under GAAP
    
    
    
    
    
    
    1.1Plus net revenue from SBC-branded directories prior to the
acquisition that would have been recognized during the
period absent purchase accounting adjustments required
under GAAP had the transaction occurred on January 1,
2003
    
    
    51.9
    
    
    
    116.8Less pre-press publishing revenue that would not have been
recorded had the SBC transaction occurred on January 1,
2003
    
    
    
    
    
    
    (4.8
    )Net Revenue-Adjusted
    
    $
    259.2Net Revenue-Adjusted pro forma
    
    
    
    
    
    $
    256.9
 43




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##### 



LIQUIDITY AND CAPITAL RESOURCES Our Senior Secured Credit Facility, as amended and restated (Credit Facility), consists of a $700
million Term Loan A-2, a $200 million Term Loan A-3, a $1,450 million Term Loan D and a $175
million Revolving Credit Facility (the Revolver) for an aggregate facility of $2,525 million.
Term Loans A-2, A-3 and D require quarterly principal payments. As of March 31, 2005, the
outstanding balances of Term Loans A-2, A-3 and D were $447 million, $165 million and $1,437
million, respectively, and $23 million was outstanding under the Revolver. The Revolver, Term
Loans A-2 and A-3 mature in December 2009, and Term Loan D 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 (defined below), 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 as
collateral to secure 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 the Administrative Agent, Deutsche Bank
Trust Company Americas, plus a 1.00% margin on the Revolver and Term Loan A-2 and a 0.75%
margin on Term Loan A-3 and Term Loan D; and (ii) the Federal Funds Effective Rate (as
defined) plus 0.50%, plus a 1.00% margin on the Revolver and Term Loan A-2 and a 0.75%
margin on Term Loan A-3 and Term Loan D; or
    LIBOR rate plus a 2.00% margin on the Revolver and Term Loan A-2 and a 1.75% margin on
Term Loan A-3 and Term Loan D. We may elect interest periods of 1, 2, 3, 6, 9 or 12 months
for LIBOR borrowings. The weighted average interest rate of outstanding debt under the Credit Facility was 4.79% and
3.36% at March 31, 2005 and 2004, respectively. We have also issued $325 million of 8.875% Senior Notes due 2010 (the Senior Notes) and $600
million of 10.875% Subordinated Notes due 2012 (the Senior Subordinated Notes). Interest is paid
on these Notes semi-annually on June 15 and December 15. On January 14, 2005 we issued $300 million of 6.875% Senior Notes (Holdco Notes and collectively
with the Senior Notes and the Subordinated Notes, the Notes), the proceeds of which were used to
redeem approximately 50% of the then outstanding Preferred Stock from the GS Funds, pay transaction
costs and repay debt associated with our Credit Facility. Interest is payable on the Holdco Notes
semi-annually in arrears on January 15 and July 15 of each year, commencing July 15, 2005. The
Holdco Notes are unsecured obligations of the Company and mature on January 15, 2013. We entered
into a registration rights agreement, whereby we agreed, among other things to (1) file an exchange
offer registration statement with the SEC with respect to the Holdco Notes within 120 days after
January 14, 2005, (ii) use reasonable efforts to have such exchange offer registration statement
declared effective by the SEC within 180 days after January 14, 2005 and (iii) subject to certain
limitations, consummate the exchange offer to which the exchange offer registration statement
relates within 210 days after January 14, 2005. Aggregate outstanding debt as of March 31, 2005 was $3,297.6 million. During the three months
ended March 31, 2005, we made scheduled principal payments of $23.6 million and prepaid an
additional $65.0 million in principal under our Credit Facility. Additionally, excess proceeds of
$16.8 million from the Holdco Notes after redemption of the
Preferred Stock from the GS Funds plus $6.0
million in mandatory payments were used to pay $22.8 million in
principal under the Credit Facility. At March 31, 2005, we had $7.6 million of cash and cash equivalents and checks not yet presented
for payment of $7.7 million and available borrowings under the Revolver of $152.0 million. During
the three months ended March 31, 2005, $72.0 million was borrowed under the Revolver, of which
$90.2 million was repaid during the quarter including $18.2 million of the outstanding balance as
of December 31, 2004. No borrowings have been made under Term Loan C. During 2005, we expect to
periodically utilize the Revolver as a financing resource to balance the timing of our periodic and
accelerated payments made under the Credit Facility with the timing of cash receipts from
operations. Our present intention is to repay borrowings on the Revolver in a timely manner and
keep any outstanding amounts to a minimum. 44




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##### 



The Credit Facility and the indentures governing the Notes contain usual and customary restrictive
covenants that, among other things, place limitations on our ability to (i) incur additional
indebtedness, including capital leases and liens; (ii) pay dividends and repurchase our capital
stock; (iii) enter into mergers, consolidations, acquisitions, asset dispositions and
sale-leaseback transactions; (iv) make capital expenditures; (v) issue capital stock of our
subsidiaries; and (vi) engage in transactions with our affiliates. The Credit Facility also
contains financial covenants relating to maximum consolidated leverage, minimum interest coverage
and maximum senior secured leverage as defined therein. 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 $112.8 million for the three months ended March 31,
2005. Key contributors to operating cash flow include the following:  
    $62.8 million consisting of $7.7 million in net income
plus $55.1 million of net non-cash charges consisting of $21.7 million of depreciation and
amortization, $6.8 million in bad debt provision, $21.8 million in deferred taxes and
$4.8 million in other non-cash charges.
    $45.2 million net source of cash from a $50.7 million increase in deferred directory
revenue less an increase in accounts receivable of $5.5 million. 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 one-twelfth of
the billing value is recognized as revenue and billed to customers. In connection with
the SBC Directory Acquisition, while we did not record the deferred revenue for
directories published prior to the acquisition due to purchase accounting, we did
acquire the associated unbilled receivables and the rights to bill and collect these
receivables, which totaled approximately $207.3 million.
    $10.4 million net source of cash from an increase in accounts payable and accrued
liabilities, reflecting a $29.6 million increase in accrued interest payable on
outstanding notes due semi-annually on June 15 and December 15 and partially offset by a
decease of accrued bonuses and other accrued liabilities of $19.2 million.
    $13.1 million net use of cash from a $19.7 decrease in deferred taxes and a $6.1
million increase in other non-current liabilities reflecting a $5.2 million increase in
the restructuring reserve relating to the SBC Directory Business. Cash used in investing activities for the three months ended March 31, 2005 was $5.5 million used
to purchase fixed assets, primarily computer equipment and software. Cash used in financing activities through March 31, 2005 was $110.5 million and includes the
following:  
    $291.7 million in net proceeds from the issuance of Holdco Notes for the redemption
of outstanding Preferred Stock. 45




---



##### 




    $277.2 million used for the redemption of Preferred Stock.
    $72.0 million in borrowings under the Revolver.
    $201.6 million of debt repayments including $46.4 million in scheduled and mandatory
payments, $65.0 million in pre-payments and $90.2 million of Revolver repayments
(including $18.2 million from the outstanding Revolver balance at December 31, 2004).
    $1.9 million in the increased value of checks not presented for payment.
    $2.7 million in proceeds from the exercise of employee stock options. In its review of the Companys financial statements in this Quarterly Report on Form 10-Q,
management identified in the Companys press release dated April 28, 2005, which was included as
Exhibit 99.1 to our Current Report on Form 8-K furnished to
the SEC on April 28, 2005, a balance
sheet reclassification to the amounts disclosed. The reclassification, that amounted to $3.2
million, resulted in an increase to cash and an increase to checks in transit included in accrued
liabilities as of March 31, 2005. This reclassification has been made in this Form 10-Q. Cash flow provided by operating activities was $94.6 million in the first quarter of 2004. Key
contributors to operating cash flow include the following:  
    $68.0 million consisting of $28.1 million in net income plus $39.9 million of net
non-cash charges primarily consisting of $14.4 million of depreciation and amortization,
$3.2 million in the bad debts provision, $4.0 million in other non-cash charges and
$18.3 in deferred taxes.
    $21.8 million increase in accounts payable and accrued liabilities, primarily the
$23.0 million increase in accrued interest payable on outstanding notes due
semi-annually on June 15 and December 15 and the $11.9 million of net income tax
refunds, less a $11.9 million decrease in incentive and other salary accruals and a $1.2
million decrease in trade accounts payable and accrued expenses.
    $14.1 million increase in accounts receivable and a $13.4 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 one-twelfth of the billing value is recognized as
revenue and customers are billed on a periodic basis.
    $8.1 million in cash received from partnerships in excess of recorded partnership
income representing a source of cash. Partnership income during the three months ended
March 31, 2004 consists 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 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.
    $3.7 million increase in other assets primarily deferred directory costs. Deferred
directory costs represent cash payments for certain costs associated with the
publication of directories. Since deferred directory costs are initially deferred when
incurred, the cash payments are made prior to the expense being recognized. Cash used in investing activities in the first quarter of 2004 was $2.8 million used to purchase
fixed assets, primarily computer equipment and computer software. Cash used in financing activities in the first quarter of 2004 was $90.2 million and includes the
following:  
    $67.4 million in principal payments on debt borrowed under the Credit Facility. Of
this amount, $10.4 million represents scheduled quarterly payments and $57.0 million
represents principal payments made on an accelerated basis, at our option, from excess
cash flow generated from operations. 46




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
    $21.2 million in principal payments on the remaining 9 1/8% Senior Subordinated Notes.
    $4.2 million in the decreased value of checks not yet presented for payment.
    $2.6 million in proceeds from the exercise of employee stock options. 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 March 31, 2005. Under the terms of
the agreements, the Company receives variable interest based on three-month LIBOR and pays a fixed
rate of interest. NotionalEffective Dates
    
    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)
    
    
    3.160% - 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. 47




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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 and that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated
to the Companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.The Company provided a report in its Annual Report on Form 10-K for the year ended
December 31, 2004 that included, among other things, managements assessment of the
effectiveness of the Companys internal controls over financial reporting. In addition,
the Company provided in its Form 10-K a written opinion prepared by its independent
registered public accounting firm in connection with managements assessment.Management excluded from its assessment of the Companys internal control over financial
reporting as of December 31, 2004 certain elements of the internal control over
financial reporting of the directory publishing business of SBC Communications, Inc. in
Illinois and Northwest Indiana that the Company acquired in September 2004 because this
acquisition represented a material purchase business combination. Subsequent to the
acquisition, certain elements of the acquired business internal control over financial
reporting and related functions, processes and systems were integrated during 2004 into
the Companys existing internal control over financial reporting and related functions,
processes and systems. Those elements of the acquired business internal control over
financial reporting that were not integrated during 2004 into the Companys existing
internal control over financial reporting were excluded from managements assessment of
the effectiveness of internal control over financial reporting as of December 31, 2004.
During the first quarter of 2005, all significant elements of the acquired business
internal control over financial reporting have been integrated into the Companys
existing internal control over financial reporting and related functions, processes and
systems and have been included in managements evaluation of the disclosure controls and
procedures for the period covered by this Quarterly Report on Form 10-Q.(b)
    Changes in Internal Control Over Financial Reporting. 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. 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. 48




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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). 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 (collectively, the IRI Liabilities). 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 the IRI Liabilities, 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. On February 1, 2005, the U.S. District Court for the Southern District of New York entered a final
judgment against IRI dismissing IRIs claims with prejudice and on the merits. IRI has filed a
notice of appeal to the Second Circuit Court of Appeals. Due to the dismissal of this matter and
several layers of indemnity described above, our disclosure regarding this matter will be
relatively brief. In July 1996, IRI filed a complaint, 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 amended complaint alleged, among other claims, various violations of U.S. antitrust laws under
Sections 1 and 2 of the Sherman Antitrust Act. IRI sought damages in excess of $650.0 million,
which IRI sought to treble under the antitrust laws. IRI also sought punitive damages of an
unspecified amount, which we believe are precluded as a result of the prior dismissal of one of
IRIs claims. In December 2004, the Court entered an order that barred IRI from arguing that defendants pricing
practices or discounts were illegal or anti-competitive unless it could satisfy a specified burden
of proof. In response to this ruling, in a press release, IRI stated, in relevant part, without
this evidence, IRI believes that little would be left of IRIs case to take to trial. As a
result, IRI asked the Court to enter a final judgment against it so that it could take an immediate
appeal to the Second Circuit. Defendants did not object to this request. As noted above, the case
was
dismissed by the District Court and IRI has filed an appeal. The Court of Appeals for the Second
Circuit has ordered that the appeal be argued no earlier than the week of June 13, 2005. In connection with the 1996 Distribution, Cognizant (now NMR), ACNielsen and D&B (now the Company)
entered 49




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into an Indemnity and Joint Defense Agreement. 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 we become subject. 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 with respect to the IRI
Liabilities and 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 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. While, as described above, the IRI lawsuit has been dismissed with prejudice on the merits, IRI has
filed an appeal. Accordingly, 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
settlement of the matter below under Utilization of Capital Losses  1989  1990 (Capital
Losses Matter) during the fourth quarter of 2004. 50




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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 Capital Loss Matter. 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. While we cannot assure you as to the outcome of these Legacy Tax Matters (other than the settled
Capital Losses Matter), 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 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. During the fourth quarter of 2004, we (as the taxpayer of record) entered into a settlement
agreement with the IRS resolving this Capital Losses Matter. As described above, we are fully
indemnified against any payments required to be made to the IRS resulting from this settlement. We
expect that the aggregate tax liability (including penalties) arising from this settlement will be
approximately $48 million payable to the IRS following receipt of various bills from the IRS
related to the settlement. In February 2005, the IRS issued the first bill for tax year 1990 in
the amount of $11.6 million, which was paid in full by our indemnitors. In March 2005, we (as the
taxpayer of record) received a second bill from the IRS in the amount of $35.9 million, which was
paid in full by our indemnitors (including D&B and Moodys paying any shortfall from IMS and NMR as
described in the following paragraph). We understand that D&B expects the IRS to issue bills for
the remaining balance of the settlement payment of approximately $0.6 million during the first half
of 2005. Because the settlement amount has been substantially paid, we will no longer report on
this particular matter in future filings. As noted above, the Tax Sharing Agreements provide that IMS and NMR are jointly and severally
liable for, and must pay one half of, the tax liabilities relating to the Capital Expense Matter.
We understand that IMS and NMR have advised D&B that they do not believe they are responsible for
certain portions of the remaining balance of the settlement payment. Nevertheless, under our
indemnity arrangements with D&B and Moodys, they would be jointly and severally liable for any
portion of the settlement not paid by IMS or NMR, and each of them have acknowledged to us their
responsibility for any shortfall from IMS or NMR. We understand that based upon their discussions
with IMS and NMR, D&B estimates that it and Moodys will be required to pay approximately $4.5
million (tax and interest, net of tax benefits) in excess of their allocable share of the
settlement under the terms of the Tax Sharing Agreements. We understand that D&B and Moodys
believe that the position of IMS and NMR is contrary to the provisions of the Tax Sharing
Agreements and that they have commenced discussions with respect to 51




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this dispute under the negotiation process contemplated by the Tax Sharing Agreements. We
understand that if such negotiations are not successful, D&B intends to commence arbitration
proceedings against IMS and NMR to enforce the relevant provisions of the Tax Sharing Agreements.
As the taxpayer of record, we would likely need to commence such an arbitration proceeding
ourselves on behalf of D&B and Moodys. While we understand that D&B believes that it would
prevail in any such arbitration, we cannot assure you with respect to the ultimate outcome of such
proceeding or the timing of its resolution. Royalty Expense Deductions  1993  1997 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
$46.8 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 $23.1 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 $23.1 million additional liability would be in addition to the
$46.8 million of additional liability related to royalty expense deductions discussed in the
previous paragraph. These matters are collectively referred to herein as the Royalty Expense
Matter. We previously reported in our Form 10-Q for the quarters ended June 30, 2004 and September 30, 2004
that we understood that D&B had reached a tentative settlement (Proposed Settlement) with the
IRS regarding the disallowance of the 1995 and 1996 royalty expense deductions portion of the
Royalty Expense Matter. We also previously reported that we understood 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 set forth
in the related Proposed Settlement. According to the terms of the Proposed Settlement, the taxpayer
would retain approximately 15% of the tax benefit associated with the Royalty Expense Matter for
1995 and 1996 and pay a penalty of approximately 7% with respect to the Royalty Expense Matter for
1995 and 1996. 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 52




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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 $38.1 million (tax, interest and
penalties, net of tax benefits) based upon the financial terms of the final settlement agreement
tendered by the IRS. IMS has 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 its rights against us and D&B, IMS has urged NMR (which is in direct contractual
privity with us) to:  o
    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); ando
    assert breaches of contract and to terminate the obligations of IMS and
NMR 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. Although the IRS has withdrawn the Proposed Settlement with respect to tax years 1995 and
1996, D&B is continuing to discuss a possible settlement of this matter with the IRS. If D&B is
not successful in settling this matter the IRS may issue notices preliminary to making assessments
at any time. If D&B were to challenge any such assessment for tax years other than 1993 and 1994 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. It is possible that the IRS may seek to issue notices with respect to
each of the positions noted above that D&B believes are inconsistent. The 1993, 1994, and 1997 royalty expense deduction portions of the Royalty Expense Matter remain
pending before the IRS. Amortization and Royalty Expense Deductions/Royalty Income  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. 53




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##### 



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 $62.1
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 $141.9 million (tax, interest and penalties, net of tax benefits),
which would be in addition to the $62.1 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 with the IRS 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. It is possible that the IRS may seek
to issue notices with respect to each of the positions noted above that D&B believes are
inconsistent. 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. 54




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Item 4. Submission of Matters to a Vote of Security Holders Our Annual Meeting of Stockholders (Meeting) was held in Cary, N.C. on April 26, 2005. At the
Meeting, the Companys stockholders elected David M. Veit as a Class III director to serve a
three-year term as follows: VotesName
    
    Votes For
    
    
    WithheldDavid M. Veit
    
    
    22,885,722
    
    
    
    7,782,180
 The Board of Directors now comprises nine members consisting of three classes of three directors
each. As described in our Proxy Statement relating to the Meeting, pursuant to the Certificate of
Designations governing our Preferred Stock, the holders of the Preferred Stock are entitled to
elect two directors to the Companys Board of Directors, without any approval or veto right by
the Companys other stockholders. In accordance with that provision, at the Meeting, the holders
of the Preferred Stock unanimously (voting the equivalent of
4,951,599 shares of our common stock in favor) re-elected Messrs. Robert R. Gheewalla and Terrence M. OToole
as Class III directors to serve three-year terms. The other members of our Board of Directors
(Kenneth G. Campbell, Nancy Cooper, Robert Kamerschen, David C. Swanson, Barry Lawson Williams
and Edwina Woodbury) were not subject to re-election by stockholders this year and continue in
office. At the Meeting, the Companys stockholders also approved the 2005 Stock Award and Incentive
Plan as follows: Votes For
    
    
    Votes Against
    
    
    AbstentionsApproval of the 2005 Stock
Award and Incentive Plan
    
    
    20,121,289
    
    
    
    6,291,100
    
    
    
    588,977
 At the Meeting, the Companys stockholders also ratified the appointment of PricewaterhouseCoopers
LLP (PwC) to serve as the Companys independent registered public accounting firm for 2005 as
follows: Votes For
    
    
    Votes Against
    
    
    AbstentionsRatification of the appointment of PwC
    
    
    30,433,450
    
    
    
    228,523
    
    
    
    5,929
 Lastly, at the Meeting, the Companys stockholders also approved a stockholder proposal relating to
the Companys stockholder rights plan, as follows: Votes For
    
    
    Votes Against
    
    
    AbstentionsStockholder Proposal re: Rights Plan
    
    
    15,020,528
    
    
    
    11,914,711
    
    
    
    66,127
 With respect to the approval of the 2005 Stock Award and Incentive Plan and the approval of the
stockholder proposal, there were also 3,666,536 broker non-votes. 55




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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)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).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
    
    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)3.5
    
    Certificate of Designations of Convertible Cumulative Preferred Stock of
R.H. Donnelley Corporation (incorporated by reference to Exhibit 3.2 to the
Current Report on Form 8-K, filed with the Securities and Exchange
Commission on January 17, 2003, Commission File No. 001-07155)
 56




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##### 



Exhibit No.
    
    Document3.6
    
    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
    
    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)4.2
    
    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)4.3
    
    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)4.4
    
    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)4.5
    
    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)4.6
    
    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)4.7
    
    Indenture dated as of December 3, 2002 between R.H. Donnelley Inc. (as
successor to R.H. Donnelley Finance Corporation I), as Issuer, and The Bank
of New York, as Trustee, with respect to the 8.875% Senior Notes due 2010
(incorporated by reference to Exhibit 4.13 to the Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 20, 2003,
Commission File No. 001-07155)4.8
    
    Supplemental Indenture dated as of January 3, 2003 among R.H. Donnelley
Inc., as Issuer, the Company and the other guarantors signatory thereto, as
Guarantors, and The Bank of New York, as Trustee, with respect to the 8.875%
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)4.9
    
    Form of 8.875% Senior Notes due 2010 (included in Exhibit 4.13)
 57




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##### 



Exhibit No.
    
    Document4.10
    
    Guarantees relating to the 8.875% Senior Notes due 2010 (incorporated by
reference to Exhibit 4.16 to the Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 20, 2003, Commission File No.
001-07155)4.11
    
    Indenture dated as of December 3, 2002 between R.H. Donnelley Inc. (as
successor to R.H. Donnelley Finance Corporation I), as Issuer, and The Bank
of New York, as Trustee, with respect to the 10.875% Senior Subordinated
Notes due 2012 (incorporated by reference to Exhibit 4.17 to the Annual
Report on Form 10-K filed with the Securities and Exchange Commission on
March 20, 2003, Commission File No. 001-07155)4.12
    
    Supplemental Indenture dated as of January 3, 2003 among R.H. Donnelley
Inc., as Issuer, the Company and the other guarantors signatory thereto, as
Guarantors, and The Bank of New York, as Trustee, with respect to the
10.875% Senior Subordinated Notes due 2012 (incorporated by reference to
Exhibit 4.18 to the Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 20, 2003, Commission File No. 001-07155)4.13
    
    Form of 10.875% Senior Subordinated Notes due 2012 (included in Exhibit 4.17)4.14
    
    Guarantees relating to the 10.875% 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)4.15
    
    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 10.875% 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)4.16
    
    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 8.875% 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)4.17
    
    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 10.875% 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)4.18
    
    Senior Guarantees relating to Second Supplemental Indenture to the Indenture
governing the 8.875% 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)4.19
    
    Senior Subordinated Guarantees relating to the Third Supplemental Indenture
to the Indenture governing the 10.875% 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)
 58




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##### 



Exhibit No.
    
    Document4.20#
    
    Indenture, dated as of January 14, 2005, among R.H. Donnelly Corporation and
The Bank of New York, as trustee (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 January 19, 2005, Commission File No. 001-07155)4.21
    
    Form of 6 7/8% Senior Notes due 2013 (included in Exhibit 4.26)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)10.5
    
    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)
 59




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##### 



Exhibit No.
    
    Document10.8#
    
    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^
    
    Key Employees Performance Unit Plan, as amended and restated (incorporated
by reference to Exhibit 10.15 to Amendment No. 3 to the Registration
Statement on Form S-4, filed with the Securities and Exchange Commission on
September 28, 1998, Registration No. 333-59287)10.11^
    
    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)10.12^
    
    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)10.13^
    
    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)10.14^
    
    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)10.15^
    
    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)10.16^
    
    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)10.17^
    
    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)10.18^
    
    Form of Stock Appreciation Rights Agreement (incorporated by reference to
Exhibit 10.21 to the Companys Quarterly Report on Form 10-Q for the three
month period ended September 30, 2004, filed with the Securities and
Exchange Commission on November 9, 2004, Commission File No. 001-07155)
 60




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##### 



Exhibit No.
    
    Document10.19^
    
    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)10.20^
    
    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)10.21^
    
    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)10.22^
    
    Employment Agreement effective March 1, 2002 between the Company and Steven
M. Blondy (incorporated by reference to Exhibit 10.30 to the Companys
Quarterly Report on Form 10-Q for the three months ended June 30, 2002,
filed with the Securities and Exchange Commission on August 14, 2002,
Commission File No. 001-07155)10.23^
    
    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)10.24^
    
    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)10.25
    
    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)10.26
    
    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)10.27
    
    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)10.28#
    
    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)
 61




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##### 



Exhibit No.
    
    Document10.29#
    
    Trademark License Agreement, dated as of January 3, 2003, by and among
Sprint Directory Trademark Company, LLC, R.H. Donnelley Publishing &
Advertising, Inc. (f/k/a Sprint Publishing & Advertising, Inc.), CenDon
L.L.C. and R.H. Donnelley Directory Company (f/k/a Centel Directory
Company) (incorporated by reference to Exhibit 10.2 to the Current Report on
Form 8-K, filed with the Securities and Exchange Commission on January 17,
2003, Commission File No. 001-07155)10.30#
    
    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)10.31
    
    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)10.32
    
    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)10.33#
    
    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)10.34
    
    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)10.35
    
    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)
 62




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##### 



Exhibit No.
    
    Document10.36
    
    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)10.37#
    
    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)10.38
    
    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)10.39#
    
    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)10.40
    
    First Amendment, dated as of December 6, 2004, to the Amended and Restated
Credit Agreement, dated as of September 1, 2004, by and among R.H. Donnelley
Corporation, R.H. Donnelley Inc., the lenders from time to time parties
thereto, Deutsche Bank Trust Company Americas, as administrative agent and
J.P. Morgan Securities Inc. as sole bookrunner and sole lead arranger and
the other agents party thereto (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 December 8, 2004, Commission File No. 001-07155)10.41
    
    Second Amendment, dated as of January 7, 2005, to the Amended and Restated
Credit Agreement, dated as of September 1, 2004, by and among R.H. Donnelley
Corporation, R.H. Donnelley Inc., the lenders from time to time parties
thereto, Deutsche Bank Trust Company Americas, as administrative agent and
the other agents party thereto (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 January 11, 2005, Commission File No. 001-07155)
 63




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##### 



Exhibit No.
    
    Document10.42
    
    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)10.43
    
    Reaffirmation, dated as of December 6, 2004, by R.H. Donnelley Corporation,
R.H. Donnelley Inc. and its subsidiaries in favor of Deutsche Bank Trust
Company Americas, as administrative agent (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 December 8, 2004, Commission File No.
001-07155)10.44#
    
    Closing Agreement dated as of December 13, 2004 by and between the Company
and the Commissioner of the Internal Revenue Service (incorporated by
reference to Exhibit 99.1 to the Companys Current Report on Form 8-K, filed
with the Securities and Exchange Commission on December 16, 2004, Commission
File No. 001-07155)10.45#
    
    Stock Purchase Agreement dated as of January 10, 2005, by and among R.H.
Donnelley Corporation and certain investment partnerships affiliated with
The Goldman Sachs Group, 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 January 11, 2005, Commission File No. 001-07155)10.46
    
    Registration Rights Agreement, dated as of January 14, 2005, among R.H.
Donnelley Corporation and the initial purchasers that are party thereto
(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 January 19,
2005, Commission File No. 001-07155)31.1*
    
    Certification of Quarterly Report on Form 10-Q for the period ended March
31, 2005 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 March
31, 2005 by Steven M. Blondy, Senior Vice President and Chief Financial
Officer 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 March
31, 2005 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 March
31, 2005 by Steven M. Blondy, Senior Vice President and Chief Financial
Officer for R.H. Donnelley Inc. under Section 302 of the Sarbanes-Oxley Act
 64




---



##### 



Exhibit No.
    
    Document32.1*
    
    Certification of Quarterly Report on Form 10-Q for the period ended March
31, 2005 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 March
31, 2005 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#
    
    The Company agrees to furnish supplementally a copy of any omitted exhibits or schedules
to
the Securities and Exchange Commission upon request. 65




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##### 



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: May 10, 2005
    
    By:
    
    /s/ Steven M. BlondySteven M. BlondySenior Vice President and Chief Financial Officer(Principal Financial Officer)Date: May 10, 2005
    
    By:
    
    /s/ Robert A. GrossRobert A. GrossVice 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: May 10, 2005
    
    By:
    
    /s/ Steven M. BlondySteven M. BlondySenior Vice President and Chief Financial Officer(Principal Financial Officer)Date: May 10, 2005
    
    By:
    
    /s/ Robert A. GrossRobert A. GrossVice President and Controller(Principal Accounting Officer)
 66




---



##### 



Exhibit Index Exhibit No.
    
    Document31.1*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended March 31, 2005 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 March 31, 2005 by Steven M. Blondy, Senior Vice
President and Chief Financial Officer 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 March 31, 2005 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 March 31, 2005 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 March 31, 2005 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 March 31, 2005 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 67