##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark one) (X)
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004  (  )
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period
from __________  to __________ Commission file number 001-07155 R.H. DONNELLEY CORPORATION 
  Delaware
    
    13-2740040(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 1001 Winstead Drive, Cary, N.C.
    
    27513(Address of principal executive offices)
    
    (Zip Code)
 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No (  ) Indicate by check mark whether registrant is an accelerated filer Yes (X) No (  ) Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: Title of Class
    
    Shares Outstanding at August 1, 2004Common Stock, par value $1 per share
    
    31,294,817
 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 (800) 497-6329




---



##### 



* R.H. Donnelley Inc. is a wholly owned subsidiary of R.H. Donnelley
Corporation. R.H. Donnelley Inc. meets the conditions set forth in General
Instructions H (1)(a) and (b) of Form 10-Q and is therefore filing this report
with respect to R.H. Donnelley Inc. with the reduced disclosure format. R.H.
Donnelley Inc. became subject to the filing requirements of Section 15(d) on
October 1, 1998 in connection with the public offer and sale of its 9 1/8%
Senior Subordinated Notes, which were redeemed in full on February 6, 2004. In
addition, R.H. Donnelley Inc. is the obligor of 8 7/8% Senior Notes due 2010
and 10 7/8% Senior Subordinated Notes due 2012 and is subject to the filing
requirements of Section 15(d) as a result of such notes. As of August 1, 2004,
100 shares of R.H. Donnelley Inc. common stock, no par value, were outstanding. 2




---



##### 



R.H. DONNELLEY CORPORATION INDEX TO FORM 10-Q PAGEPART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets at June 30, 2004 and December 31, 2003
    
    
    4Consolidated Statements of Operations and Comprehensive Income (Loss) for
the three and six months ended June 30, 2004 and 2003
    
    
    5Consolidated Statements of Cash Flows for the six months ended June 30, 2004
and 2003
    
    
    6Consolidated Statement of Changes in Shareholders (Deficit) Equity for the six
months ended June 30, 2004
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    32Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    52Item 4. Controls and Procedures
    
    
    52PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    54Item 4. Submission of Matters to a Vote of Security Holders
    
    
    59Item 6. Exhibits and Reports on Form 8-K
    
    
    61SIGNATURES
    
    
    70
  3




---



##### 



Part I. FINANCIAL INFORMATION 
  R.H. Donnelley Corporation and Subsidiaries 
 Consolidated Balance Sheets (Unaudited)
 June 30,
    
    December 31,(in thousands, except share and per share data)
    
    2004
    
    2003AssetsCurrent AssetsCash and cash equivalents
    
    $
    10,594
    
    
    $
    7,722Accounts receivableBilled
    
    
    46,775
    
    
    
    49,203Unbilled
    
    
    187,507
    
    
    
    173,734Allowance for doubtful accounts and sales claims
    
    
    (10,762
    )
    
    
    (11,956
    )Net accounts receivable
    
    
    223,520
    
    
    
    210,981Deferred directory costs
    
    
    35,229
    
    
    
    33,034Income tax receivable
    
    
    58,910
    
    
    
    Other current assets
    
    
    23,251
    
    
    
    32,854Total current assets
    
    
    351,504
    
    
    
    284,591Fixed assets and computer software, net
    
    
    28,027
    
    
    
    20,624Partnership investment
    
    
    174,160
    
    
    
    175,729Other non-current assets
    
    
    91,004
    
    
    
    95,583Intangible assets, net
    
    
    1,840,251
    
    
    
    1,865,167Goodwill
    
    
    97,040
    
    
    
    97,040Total Assets
    
    $
    2,581,986
    
    
    $
    2,538,734Liabilities, Redeemable Convertible PreferredStock and Shareholders Equity (Deficit)Current LiabilitiesAccounts payable and accrued liabilities
    
    $
    26,846
    
    
    $
    19,083Checks not yet presented for payment
    
    
    16,178
    
    
    
    6,708Accrued interest
    
    
    7,088
    
    
    
    7,711Deferred directory revenue
    
    
    227,773
    
    
    
    216,525Current portion of long-term debt
    
    
    28,896
    
    
    
    49,586Total current liabilities
    
    
    306,781
    
    
    
    299,613Long-term debt
    
    
    1,913,771
    
    
    
    2,042,547Deferred income taxes, net
    
    
    121,906
    
    
    
    33,629Other non-current liabilities
    
    
    26,953
    
    
    
    20,967Total liabilities
    
    
    2,369,411
    
    
    
    2,396,756Commitments and contingencies
Redeemable convertible preferred stock (liquidation preference of $225,765 at
June 30, 2004 and $216,998 at December 31, 2003)
    
    
    206,990
    
    
    
    198,223Shareholders Equity (Deficit)Common stock, par value $1 par value, 400,000,000 shares authorized,
51,621,894 shares issued
    
    
    51,622
    
    
    
    51,622Additional paid-in capital
    
    
    95,310
    
    
    
    92,610Unamortized restricted stock
    
    
    (356
    )
    
    
    (531
    )Warrants outstanding
    
    
    13,758
    
    
    
    13,758Retained earnings (accumulated deficit)
    
    
    5,807
    
    
    
    (49,954
    )Treasury stock, at cost, 20,338,063 shares at June 30, 2004 and 20,589,520 shares
at December 31, 2003
    
    
    (163,709
    )
    
    
    (163,741
    )Accumulated other comprehensive income (loss)
    
    
    3,153
    
    
    
    (9
    )Total shareholders equity (deficit)
    
    
    5,585
    
    
    
    (56,245
    )Total Liabilities, Redeemable Convertible PreferredStock and Shareholders Equity (Deficit)
    
    $
    2,581,986
    
    
    $
    2,538,734
 The accompanying notes are an integral part of the consolidated financial statements. 4




---



##### 



R.H. Donnelley Corporation and Subsidiaries 
 Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)
 Three months ended
    
    Six months endedJune 30,
    
    June 30,(in thousands, except per share data)
    
    2004
    
    2003
    
    2004
    
    2003Net revenue
    
    $
    144,641
    
    
    $
    38,634
    
    
    $
    288,448
    
    
    $
    51,053ExpensesOperating expenses
    
    
    56,932
    
    
    
    34,862
    
    
    
    110,890
    
    
    
    66,795General and administrative expenses
    
    
    15,429
    
    
    
    12,206
    
    
    
    28,046
    
    
    
    22,216Depreciation and amortization
    
    
    14,947
    
    
    
    16,443
    
    
    
    29,339
    
    
    
    32,471Total expenses
    
    
    87,308
    
    
    
    63,511
    
    
    
    168,275
    
    
    
    121,482Partnership income
    
    
    34,803
    
    
    
    35,341
    
    
    
    58,701
    
    
    
    58,974Operating income (loss)
    
    
    92,136
    
    
    
    10,464
    
    
    
    178,874
    
    
    
    (11,455
    )Interest expense, net
    
    
    (37,496
    )
    
    
    (43,253
    )
    
    
    (77,796
    )
    
    
    (91,928
    )Other income
    
    
    
    
    
    
    723
    
    
    
    
    
    
    
    1,523Income (loss) before income taxes
    
    
    54,640
    
    
    
    (32,066
    )
    
    
    101,078
    
    
    
    (101,860
    )Provision (benefit) for income taxes
    
    
    21,583
    
    
    
    (13,155
    )
    
    
    39,926
    
    
    
    (41,762
    )Net income (loss)
    
    
    33,057
    
    
    
    (18,911
    )
    
    
    61,152
    
    
    
    (60,098
    )Preferred dividend
    
    
    5,392
    
    
    
    5,978
    
    
    
    10,678
    
    
    
    48,132Income (loss) available to common shareholders
    
    $
    27,665
    
    
    $
    (24,889
    )
    
    $
    50,474
    
    
    $
    (108,230
    )Earnings (loss) per shareBasic
    
    $
    0.68
    
    
    $
    (0.81
    )
    
    $
    1.25
    
    
    $
    (3.56
    )Diluted
    
    $
    0.65
    
    
    $
    (0.81
    )
    
    $
    1.20
    
    
    $
    (3.56
    )Shares used in computing earnings (loss) per shareBasic
    
    
    31,204
    
    
    
    30,605
    
    
    
    31,132
    
    
    
    30,424Diluted
    
    
    32,546
    
    
    
    30,605
    
    
    
    32,379
    
    
    
    30,424Comprehensive Income (Loss)Income (loss) available to common shareholders
    
    $
    27,665
    
    
    $
    (24,889
    )
    
    $
    50,474
    
    
    $
    (108,230
    )Unrealized gain (loss) on interest rate swaps, net of tax
    
    
    5,869
    
    
    
    (3,257
    )
    
    
    3,161
    
    
    
    (3,257
    )Comprehensive income (loss)
    
    $
    33,534
    
    
    $
    (28,146
    )
    
    $
    53,635
    
    
    $
    (111,487
    )
 The accompanying notes are an integral part of the consolidated financial statements. 5




---



##### 



R.H. Donnelley Corporation and Subsidiaries 
 Consolidated Statements of Cash Flows (Unaudited)
 Six months endedJune 30(amounts in thousands)
    
    2004
    
    2003Cash Flows from Operating ActivitiesNet income (loss)
    
    $
    61,152
    
    
    $
    (60,098
    )Reconciliation of net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    29,339
    
    
    
    32,471Deferred income taxes
    
    
    39,926
    
    
    
    (41,762
    )Provision for bad debts
    
    
    6,491
    
    
    
    288Other non-cash charges
    
    
    11,031
    
    
    
    6,856Changes in assets and liabilities, net of effects from acquisition:Cash in excess of partnership income
    
    
    1,569
    
    
    
    6,058(Increase) decrease in accounts receivable
    
    
    (19,030
    )
    
    
    15,548Decrease (increase) in other assets
    
    
    1,863
    
    
    
    (24,436
    )Increase (decrease) in accounts payable and accrued liabilities
    
    
    2,729
    
    
    
    (13,362
    )Increase in deferred directory revenue
    
    
    11,248
    
    
    
    208,975Increase in other non-current liabilities
    
    
    1,142
    
    
    
    984Net cash provided by operating activities
    
    
    147,460
    
    
    
    131,522Cash Flows from Investing ActivitiesAdditions to fixed assets and computer software
    
    
    (8,857
    )
    
    
    (5,473
    )Acquisition of SPA, net of cash received
    
    
    
    
    
    
    (2,259,633
    )Decrease in restricted cash  funds held in escrow at year end
    
    
    
    
    
    
    1,825,000Decrease in restricted cash  other
    
    
    
    
    
    
    69,300Net cash used in investing activities
    
    
    (8,857
    )
    
    
    (370,806
    )Cash Flows from Financing ActivitiesProceeds from the issuance of debt, net of costs
    
    
    
    
    
    
    461,307Proceeds from the issuance of Redeemable Convertible Preferred
Stock and warrants, net of costs
    
    
    
    
    
    
    125,683Pre-acquisition debt refinanced with proceeds from new debt
    
    
    
    
    
    
    (243,005
    )Debt repayments
    
    
    (150,866
    )
    
    
    (152,787
    )Borrowings under the Revolver
    
    
    1,400
    
    
    
    24,100Increase in checks not yet presented for payment
    
    
    9,470
    
    
    
    Proceeds from employee stock option exercises
    
    
    4,265
    
    
    
    16,199Net cash (used in) provided by financing activities
    
    
    (135,731
    )
    
    
    231,497Increase (decrease) in cash and cash equivalents
    
    
    2,872
    
    
    
    (7,787
    )Cash and cash equivalents, beginning of year
    
    
    7,722
    
    
    
    7,787Cash and cash equivalents, end of period
    
    $
    10,594
    
    
    $
    Supplemental Information:Cash paid (received):Interest
    
    $
    70,881
    
    
    $
    89,036Income taxes, net
    
    $
    (12,443
    )
    
    $
    
 The accompanying notes are an integral part of the consolidated financial statements. 6




---



##### 



R.H. Donnelley Corporation and Subsidiaries 
 Consolidated Statement of Changes in Shareholders (Deficit) Equity (Unaudited)
Six months ended June 30, 2004
 (Accumulated
    
    
    
    
    
    Accumulated
    
    TotalCommon Stock and
    
    
    
    
    
    Unamortized
    
    Deficit)
    
    
    
    
    
    Other
    
    ShareholdersAdditional
    
    Warrants
    
    Restricted
    
    Retained
    
    
    
    
    
    Comprehensive
    
    (Deficit)(in thousands)
    
    Paid-in Capital
    
    Outstanding
    
    Stock
    
    Earnings
    
    Treasury Stock
    
    (Loss) Income
    
    EquityBalance, December 31, 2003
    
    $
    144,232
    
    
    $
    13,758
    
    
    $
    (531
    )
    
    $
    (49,954
    )
    
    $
    (163,741
    )
    
    $
    (9
    )
    
    $
    (56,245
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,152
    
    
    
    
    
    
    
    
    
    
    
    61,152Preferred dividend
    
    
    (5,287
    )
    
    
    
    
    
    
    
    
    
    
    (5,391
    )
    
    
    
    
    
    
    
    
    
    
    (10,678
    )Employee stock option exercises,
including tax benefit
    
    
    4,187
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    318
    
    
    
    
    
    
    
    4,505Stock issued for employee bonus plans
    
    
    1,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    1,406Issuance of restricted stock
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    Restricted stock amortization
    
    
    
    
    
    
    
    
    
    
    175
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175Stock acquired for treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (358
    )
    
    
    
    
    
    
    (357
    )Additional compensatory stock issued in
Founders grant
    
    
    553
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    553Beneficial conversion feature from
issuance of Preferred Stock
    
    
    1,913
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,913Unrealized gain on interest rate swaps,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,162
    
    
    
    3,161Balance, June 30, 2004
    
    $
    146,932
    
    
    $
    13,758
    
    
    $
    (356
    )
    
    $
    5,807
    
    
    $
    (163,709
    )
    
    $
    3,153
    
    
    $
    5,585
 The accompanying notes are an integral part of the consolidated financial statements. 7




---



##### 



R.H. Donnelley Corporation and Subsidiaries 
 Notes to Consolidated Financial Statements (Unaudited)  (tabular amounts in thousands, except per share data)
 1. Business and Basis of Presentation The interim financial statements of R.H. Donnelley Corporation and its direct
and indirect wholly owned subsidiaries (the Company, RHD, we, us and
our) have been prepared in accordance with the instructions to Quarterly
Report on Form 10-Q and should be read in conjunction with the financial
statements and related notes included in our Annual Report on Form 10-K for the
year ended December 31, 2003. The results of interim periods are not
necessarily indicative of results for the full year or any subsequent period.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of financial position,
results of operations and cash flows at the dates and for the periods presented
have been included. Certain prior year amounts have been reclassified to
conform to the current years presentation. We are a leading yellow pages publisher and directional media company.
Directional media is where consumers go to find who sells the goods and
services they are ready to purchase. We currently publish approximately 260
directories under the Sprint Yellow Pages ® brand in 18 states, with major
markets including Las Vegas, Orlando, and Lee County, Florida, with a total
circulation of approximately 18 million serving approximately 160,000 local and
4,000 national advertisers. We also offer online city guides and search web
sites in these and other major markets under the Best Red Yellow Pages brand at
www.bestredyp.com. In addition, through The DonTech II Partnership
(DonTech), our perpetual partnership with an affiliate of SBC Communications
Inc. (SBC), we serve as the exclusive sales agent for 129 SBC-branded
directories under the SBC ® Yellow Pages brand in Illinois and northwest
Indiana, with a total circulation of approximately 10 million serving
approximately 100,000 local advertisers. On January 3, 2003, we acquired all the outstanding capital stock of the
various entities comprising Sprint Publishing and Advertising (SPA), Sprint
Corporations (Sprint) directory publishing business, for $2,229.8 million in
cash. The acquisition was accounted for as a purchase business combination and
the purchase price was allocated to the tangible and identifiable intangible
assets acquired and liabilities assumed based on their respective fair values
on the acquisition date. The results of the SPA business are included in our
consolidated results from and after January 3, 2003. SPA operates as R.H.
Donnelley Publishing & Advertising, Inc., an indirect, wholly owned subsidiary
of the Company. 2. Summary of Significant Accounting Policies Principles of Consolidation.The consolidated financial statements include
the accounts of R.H. Donnelley Corporation and its direct and indirect wholly
owned subsidiaries. All intercompany transactions and balances have been
eliminated. Reclassifications.In 2003 preferred stock dividends of $44.8 million have been
reclassified from accumulated deficit to additional paid-in capital. Revenue Recognition.We earn revenue principally from the sale of advertising
into our Sprint-branded yellow pages directories. Revenue from the sale of
such advertising is deferred when a directory is published and recognized
ratably over the life of a directory, which is typically 12 months (the
deferral and amortization method). Revenue from the sale of 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. We also earn revenue from providing pre-press publishing
services to SBC for those directories in the DonTech markets. Revenue from
pre-press publishing services is recognized as services are 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. 8




---



##### 



Equity Method Accounting.DonTech is a 50/50 perpetual partnership in which
we and a subsidiary of SBC are the partners. DonTech is a separate legal
entity that provides its services with its own employees and a stand-alone
management team. The employees of DonTech have 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 are involved in the day-to-day operations of
DonTech and, because the partners share equally in the net profits and each has
one voting member on the DonTech board of directors, neither partner has the
unilateral ability to control or influence the operations of DonTech.
Accordingly, we account for DonTech under the equity method and do not
consolidate the DonTech results in our financial statements. We recognize our 50% share of the net income of DonTech as partnership income
in our consolidated statement of operations. DonTech recognizes commission
revenue based on the annual value of a sales contract in the period the
contract is executed (calendar sales) and recognizes expenses as incurred.
Partnership income also includes revenue participation income from SBC.
Revenue participation income is based on DonTech advertising sales and is
recognized when a sales contract is executed with a customer. Our investment
in DonTech and the revenue participation receivable from SBC are reported as
partnership investment on the consolidated balance sheet. On July 28, 2004,
the Company signed a definitive agreement to acquire SBCs directory publishing
business in Illinois and Northwest Indiana, including SBCs interest in
DonTech, for $1.42 billion in cash. See Note 14, Subsequent Events. Cash and Cash Equivalents.Cash equivalents include liquid investments with a
maturity of less than three months at their time of acquisition. 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 from our
advertising customers. Advertisers typically enter into a 12-month contract
for their advertising. Most local advertisers are billed a pro rata amount of
their contract value on a monthly basis. On behalf of national advertisers,
Certified Marketing Representatives (CMRs) typically pay to us the total
contract value of their advertising, net of their commission, within 60 days
after the publication month. Billed receivables represent the amount that has
been billed to advertisers. Unbilled receivables represent contractually owed
amounts for published directories that have yet to be billed to advertisers.
Billed receivables are recorded net of an allowance for doubtful accounts and
sales claims, estimated based on historical experience on a
directory-by-directory basis. We increase or decrease this estimate as
information or circumstances indicate that the estimate may no longer
adequately represent the amount of bad debts and sales claims we may incur. Income Taxes.Income tax receivable reflects the Companys election to
carryback a federal net operating loss in connection with the SPA acquisition. Deferred Financing Costs.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 related debt agreements. The bond outstanding method is used
to amortize deferred financing costs relating to debt instruments with respect
to which we accelerate principal payments. Other deferred financing costs are
amortized using the straight-line method. Amortization of deferred financing
costs included in interest expense was $3.7 million and $2.4 million for the
three months ended June 30, 2004 and 2003, respectively, and $7.1 million and
$6.3 million for the six months ended June 30, 2004 and 2003, respectively. Advertising Expense.We recognize advertising expenses as incurred. These
expenses include public relations, media, on-line advertising and other
promotional and sponsorship costs. Total advertising expense was $3.7 million
and $2.2 million for the three months ended June 30, 2004 and 2003,
respectively, and $5.6 million and $4.1 million for the six months ended June
30, 2004 and 2003, respectively. Advertising expense for the three months
ended June 30, 2004 includes $1.1 million and $0.3 million of advertising costs
that pertain to 2003 and the first quarter of 2004, respectively. Concentration of Credit Risk.Approximately 85% of our directory advertising
revenue is derived from the sale of advertising to local small- and
medium-sized businesses. These advertisers typically enter into 12-month
advertising sales contracts and make monthly payments over the term of the
contract. Some advertisers prepay the full amount or a portion of the contract
value. Most new advertisers are subject to a credit review. If the
advertisers qualify, we 9




---



##### 



may extend credit to them for their advertising purchase. Small- and
medium-sized businesses tend to have fewer financial resources and higher
failure rates than large businesses. In addition, full collection of
delinquent accounts can take an extended period of time and involve significant
costs. While we do not believe that extending credit to our local advertisers
will have a material adverse effect on our results of operations or financial
condition, no assurances can be given. We do not require collateral from our
advertisers, although we do charge interest to advertisers that do not pay by
specified due dates. The remaining approximate 15% of our directory advertising revenue is derived
from the sale of advertising to national or large regional chains, such as
rental car companies, automobile repair shops and pizza delivery businesses.
Substantially all of the revenue derived through national accounts is serviced
through CMRs with which we contract. CMRs are independent third parties that
act as agents for national companies. The CMRs are responsible for billing the
national customers for their advertising. We receive payment for the value of
advertising placed in our directory, net of the CMRs commission, directly from
the CMR. While we are still exposed to credit risk, the amount of losses from
these accounts have been historically less than the local accounts as the
advertisers, and in some cases, the CMRs tend to be larger companies with
greater financial resources than the local advertisers. We maintain a significant receivable balance with SBC for revenue participation
and pre-press publishing services fees. The revenue participation receivable
is subject to limited upward adjustment based on contractual provisions. The
receivable is recorded at net realizable value. We do not currently foresee a
material credit risk associated with this receivable, although there can be no
assurance that full payment will be received on a timely basis. At June 30, 2004, we had interest rate swap agreements with major financial
institutions with a notional value of $555.0 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 $555.0 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 2.70%. The swaps
mature in October 2005, June 2006 and March 2007. The weighted average rate
received was 1.13% and 1.14% during the three and six months ended June 30,
2004, respectively. These periodic payments and receipts are recorded as
interest expense. The interest rate swaps have been designated as cash flow hedges to hedge
three-month LIBOR-based interest payments on $555.0 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
June 30, 2004, our interest rate swaps provided an effective hedge of the
three-month LIBOR-based interest payments on $555.0 million of bank debt, and
no ineffectiveness was included in earnings. Earnings per Share.In March 2004, the Emerging Issues Task Force (EITF)
reached a final consensus on EITF Issue No. 03-6, Participating Securities and
the Two-Class Method under FASB Statement 128(EITF 03-6), which established
standards regarding the computation of earnings per share (EPS) by companies
that have issued securities other than common stock that contractually entitle
the holder to participate in dividends and earnings of the company. EITF 03-6
is effective for interim periods ending June 30, 2004 for calendar year
companies. We adopted the provisions of EITF 03-6 during the first quarter of
2004. EITF 03-6 requires earnings available to common shareholders for the
period, after deduction of preferred stock dividends, to be allocated between
the common and preferred shareholders based on their respective rights to
receive dividends. Basic EPS is then calculated by dividing income (loss)
allocable to common shareholders by the weighted average number of shares
outstanding. EITF 03-6 does not require the presentation of basic and diluted
EPS for securities other than common stock; therefore, the following EPS
amounts only pertain to our common stock. 10




---



##### 



Under the guidance of EITF 03-6, diluted EPS are calculated by dividing income
(loss) allocable to common shareholders by the weighted average common shares
outstanding plus dilutive potential common stock. Potential common stock
includes stock options and warrants, the dilutive effect of which is calculated
using the treasury stock method, and Preferred Stock, the dilutive effect of
which is calculated using the if-converted method. The calculation of basic
and diluted EPS for the three and six months ended June 30, 2004 and 2003 is
presented below. Three months ended
    
    Six months endedJune 30,
    
    June 30,(in thousands, except per share data)
    
    2004
    
    2003
    
    2004
    
    2003Basic EPSTwoClass MethodIncome (loss) available to common shareholders
    
    $
    27,665
    
    
    $
    (24,889
    )
    
    $
    50,474
    
    
    $
    (108,230
    )Amount allocable to common shareholders(1)
    
    
    77
    %
    
    
    100
    %
    
    
    77
    %
    
    
    100
    %Income (loss) allocable to common shareholders
    
    
    21,302
    
    
    
    (24,889
    )
    
    
    38,865
    
    
    
    (108,230
    )Weighted average common shares outstanding
    
    
    31,204
    
    
    
    30,605
    
    
    
    31,132
    
    
    
    30,424Basic earnings (loss) per sharetwoclass method.
    
    $
    0.68
    
    
    $
    (0.81
    )
    
    $
    1.25
    
    
    $
    (3.56
    )
  (1)
    
    31,204 / (31,204 + 9,387) for the three months ended June 30, 2004 and
31,132 / (31,132 + 9,295) for the six months ended June 30, 2004. In
computing basic EPS using the two-class method, we have not allocated the
net loss in the three and six months ended June 30, 2003 between common
and preferred shareholders since the preferred shareholders do not have a
contractual obligation to share in the net loss. Diluted EPSIncome (loss) available to common shareholders
    
    $
    27,665
    
    
    $
    (24,889
    )
    
    $
    50,474
    
    
    $
    (108,230
    )Amount allocable to common shares (1)
    
    
    77
    %
    
    
    100
    %
    
    
    77
    %
    
    
    100
    %Income (loss) allocable to common shareholders
    
    
    21,302
    
    
    
    (24,889
    )
    
    
    38,865
    
    
    
    (108,230
    )Weighted average common shares outstanding
    
    
    31,204
    
    
    
    30,605
    
    
    
    31,132
    
    
    
    30,424Dilutive effect of stock options (2)
    
    
    1,342
    
    
    
    
    
    
    
    1,247
    
    
    
    Dilutive
effect of Preferred Stock assuming conversion (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average diluted shares outstanding
    
    
    32,546
    
    
    
    30,605
    
    
    
    32,379
    
    
    
    30,424Diluted earnings (loss) per share
    
    $
    0.65
    
    
    $
    (0.81
    )
    
    $
    1.20
    
    
    $
    (3.56
    )
  (2)
    
    The effect of certain stock options in the three and six months ended
June 30, 2003 and the assumed conversion of the Preferred Stock in the
three and six months ended June 30, 2004 and 2003 were anti-dilutive and
therefore are not included in the calculation of diluted EPS. Employee Stock Options.We follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees(APB 25), and related
interpretations in accounting for our stock option plan. Compensation expense
related to the issuance of stock options to employees or non-employee directors
is only recognized if the exercise price of the stock option is less than the
fair market value of the underlying stock at the grant date. A grant was made in October 2002 of 1.5 million options (Founders Grant) to
certain employees, including senior management in connection with the
acquisition of SPA. These options were granted with an exercise price equal to
the fair market value of the Companys common stock on the date of grant.
However, the award of these options was contingent upon the successful closing
of the SPA acquisition. Therefore, these options were subject to forfeiture
until January 3, 2003, by which time the fair market value of the Companys
common stock exceeded the exercise price. Accordingly, these options were
accounted for as compensatory options, and we are recognizing non-cash
compensation expense over the vesting period of the options. We recognized
non-cash compensation expense related to these stock options of $0.3 million
and $0.6 million in the three months ended June 30, 2004 and 2003,
respectively, and $0.6 million and $1.0 million in the six months ended June
30, 2004 and 2003, respectively. 11




---



##### 



The following table reflects the pro forma net income (loss) and earnings
(loss) per share for the three and six months ended June 30, 2004 and 2003
assuming we applied the fair value method of SFAS No. 123, Accounting for
Stock-Based Compensation. The pro forma disclosures shown are not necessarily
representative of the effects on income and earnings per share in future years. Three months ended
    
    Six months endedJune 30,
    
    June 30,(in thousands, except per share data)
    
    2004
    
    2003
    
    2004
    
    2003Net income (loss), as reported
    
    $
    33,057
    
    
    $
    (18,911
    )
    
    $
    61,152
    
    
    $
    (60,098
    )Add: Stock-based compensation expense included in
reported net income (loss), net of related tax effects
    
    
    238
    
    
    
    426
    
    
    
    553
    
    
    
    1,501Less: Stock-based compensation expense that would have
been included in the determination of net income (loss)
if the fair value method had been applied to all
awards, net of related tax effects
    
    
    (1,618
    )
    
    
    (1,277
    )
    
    
    (2,933
    )
    
    
    (5,696
    )Pro forma net income (loss)
    
    
    31,677
    
    
    
    (19,762
    )
    
    
    58,772
    
    
    
    (64,293
    )Preferred dividend
    
    
    5,392
    
    
    
    5,978
    
    
    
    10,678
    
    
    
    48,132Pro forma income (loss) available to common shareholders
    
    $
    26,285
    
    
    $
    (25,740
    )
    
    $
    48,094
    
    
    $
    (112,425
    )Basic earnings (loss) per shareAs reported
    
    $
    0.68
    
    
    $
    ( 0.81
    )
    
    $
    1.25
    
    
    $
    (3.56
    )Pro forma
    
    $
    0.65
    
    
    $
    ( 0.84
    )
    
    $
    1.19
    
    
    $
    (3.70
    )Diluted earnings (loss) per shareAs reported
    
    $
    0.65
    
    
    $
    (0.81
    )
    
    $
    1.20
    
    
    $
    (3.56
    )Pro forma
    
    $
    0.62
    
    
    $
    (0.84
    )
    
    $
    1.14
    
    
    $
    (3.70
    )
 The pro forma information was determined based on the fair value of stock
options calculated using the Black-Scholes option-pricing model with the
following assumptions: 2004
    
    2003Dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    29
    %
    
    
    35
    %Risk-free interest rate
    
    
    2.2
    %
    
    
    2.6
    %Expected holding period
    
    4 years
    
    4 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 estimates and
assumptions. Estimates and assumptions are used in the determination of sales
allowances, allowances for doubtful accounts, depreciation and amortization,
employee benefit plans and restructuring reserves, among others. New Accounting Pronouncements.In March 2004, the EITF reached a final
consensus on EITF 03-6 that established standards regarding the computation of
EPS by companies that have issued securities other than common stock that
contractually entitle the holder to participate in dividends and earnings of
the company. EITF 03-6 is effective for interim periods ending on or after
June 30, 2004 for calendar year companies. We adopted the provisions of EITF
03-6 during the first quarter of 2004. In May 2004, the Financial Accounting Standards Board issued Financial Staff
Position No. FAS 106-2, Accounting 12




---



##### 



and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003, which provides guidance on
accounting for the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 for employers that sponsor postretirement health care
plans that provide drug benefits. The Act introduces prescription drug care
benefits under Medicare and also allows for certain sponsors of postretirement
benefit plans with a drug benefit to receive a non-taxable federal subsidy if
certain criteria are met. The FSP will require interim and annual period
financial statements beginning after June 15, 2004 to include the effect of the
subsidy on the measurement of net periodic postretirement benefit costs. The
Company is in the process of evaluating the impact of the Act on the
consolidated financial statements and will adopt the FSP in the third quarter
of 2004, as required. 3. Business Combination On January 3, 2003, we acquired all of the outstanding capital stock of the
various entities comprising SPA for $2,229.8 million and became the publisher
of approximately 260 revenue-generating, Sprint-branded yellow pages
directories in 18 states. The results of the SPA business are included in our
consolidated results from and after January 3, 2003, the acquisition closing
date. The acquisition was accounted for as a purchase business combination in
accordance with SFAS 141, Business Combinations.The purchase price was
allocated to the tangible and identifiable intangible assets acquired and
liabilities assumed based on their respective estimated fair values on the
acquisition date. The fair value of certain long-term intangible assets were
identified and recorded at their estimated fair value. Identifiable intangible
assets acquired include directory services agreements between Sprint and us,
customer relationships and acquired trade names. In accordance with SFAS 142,
Goodwill and Other Intangible Assets, the fair value of the identifiable
intangible assets is 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 of SPA at January 3, 2003 of $315.9 million. This amount
represented revenue that would have been recognized subsequent to the
acquisition under the deferral and amortization method had the acquisition not
occurred. Accordingly, we did not record revenue associated with directories
that were published prior to the acquisition and during January 2003. Although
the deferred revenue balance was eliminated, we retained all the rights
associated with the collection of amounts due under and obligations under the
advertising contracts executed prior to the SPA acquisition. As a result,
SPAs billed and unbilled accounts receivable balances became assets of the
Company. Also under purchase accounting rules, we did not assume or record the
deferred directory costs at January 3, 2003 related to those directories that
were published prior to the acquisition and during January 2003, totaling $63.3
million. These costs represented operating expenses that would have been
recognized subsequent to the acquisition under the deferral and amortization
method had the acquisition not occurred. 13




---



##### 



4. Intangible Assets and Goodwill As a result of the SPA acquisition, certain long-term intangible assets were
identified and recorded at their estimated fair value. Amortization expense
for intangible assets was $12.4 million for both the three months ended June
30, 2004 and 2003 and $24.9 million for both the six months ended June 30, 2004
and 2003. The acquired long-term intangible assets and their respective book
values at June 30, 2004 are shown in the table below. Directory Services
    
    Local customer
    
    National CMRAgreements
    
    relationships
    
    relationships
    
    Trade names
    
    TotalEstimated useful life
    
    50 years
    
    15 years
    
    30 years
    
    15 yearsInitial fair value
    
    $
    1,625,000
    
    
    $
    200,000
    
    
    $
    60,000
    
    
    $
    30,000
    
    
    $
    1,915,000Accumulated amortization
    
    
    (48,749
    )
    
    
    (20,000
    )
    
    
    (3,000
    )
    
    
    (3,000
    )
    
    
    (74,749
    )Net intangible assets
    
    $
    1,576,251
    
    
    $
    180,000
    
    
    $
    57,000
    
    
    $
    27,000
    
    
    $
    1,840,251
 Directory services agreements between Sprint and the Company include a
directory services license agreement, a trademark license agreement and a
non-competition agreement (collectively Directory Services Agreements) with
certain affiliates of Sprint. The directory services license agreement gives
us the exclusive right to produce, publish and distribute directories for
Sprint in 18 states where Sprint provided local telephone service at the time
of the agreement. The trademark license agreement gives us the exclusive right
to use certain specified Sprint trademarks, including the Sprint diamond logo,
in those markets, and the non-competition agreement prohibits Sprint in those
markets from selling local directory advertising, with certain limited
exceptions, or producing, publishing and
distributing print directories. The fair value of these agreements was
determined based on the present value of estimated future cash flows and is
being amortized under the straight-line method over 50 years. The fair value of local and national customer relationships was determined
based on the present value of estimated future cash flows and historical
attrition rates and is being amortized under an accelerated method that 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 18 years. The fair value of acquired trade names was determined based on the relief from
royalty method, which values the trade names based on the estimated amount
that a company would have to pay in an arms length transaction to use these
trade names. These assets are being amortized under the straight-line method
over 15 years. Goodwill represents the excess of the purchase price for SPA over the net
tangible and intangible assets acquired. In accordance with SFAS 142, Goodwill
and Other Intangible Assets, goodwill is not amortized, but is subject to
impairment testing. No impairment losses were recorded during the period. All
goodwill is included in the Donnelley segment (see Note 10, Business Segments,
for a further description of our segment information). 5. Partnership Investment Partnership income includes our 50% share of the net profits of DonTech and
revenue participation income received directly from SBC, which is based on the
value of advertising sales. Partnership income for the three and six months
ended June 30, 2004 and 2003 consisted of the following: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenue participation income
    
    $
    28,515
    
    
    $
    28,553
    
    
    $
    49,329
    
    
    $
    49,00050% share of DonTech net income
    
    
    6,288
    
    
    
    6,788
    
    
    
    9,372
    
    
    
    9,974Partnership income
    
    $
    34,803
    
    
    $
    35,341
    
    
    $
    58,701
    
    
    $
    58,974
 14




---



##### 



Summarized financial information of DonTech is shown in the table below. These
results are not consolidated in our financial statements. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net revenue
    
    $
    30,179
    
    
    $
    30,315
    
    
    $
    51,982
    
    
    $
    51,870Operating income
    
    
    12,574
    
    
    
    13,750
    
    
    
    18,639
    
    
    
    20,138Net income
    
    
    12,577
    
    
    
    13,575
    
    
    
    18,744
    
    
    
    19,947
 Total assets of DonTech were $117.0 million at June 30, 2004 and $117.5 million
at December 31, 2003. Our investment in DonTech, including the revenue
participation receivable from SBC, was $174.1 million at June 30, 2004 and
$175.7 million at December 31, 2003. On July 28, 2004, the Company signed a
definitive agreement to acquire SBCs directory publishing business in Illinois
and Northwest Indiana, including SBCs interest in DonTech, for a total of
$1.42 billion in cash. See Note 14, Subsequent Events. 6. Long-Term Debt Long-term debt at June 30, 2004 and December 31, 2003 consisted of the
following: June 30,
    
    December 31,2004
    
    2003Credit Facility
    
    $
    1,017,667
    
    
    $
    1,145,8888 7/8% Senior Notes due 2010
    
    
    325,000
    
    
    
    325,00010 7/8% Senior Subordinated Notes due 2012
    
    
    600,000
    
    
    
    600,0009 1/8% Senior Subordinated Notes
    
    
    
    
    
    
    21,245Total
    
    
    1,942,667
    
    
    
    2,092,133Less current portion
    
    
    28,896
    
    
    
    49,586Long-term debt
    
    $
    1,913,771
    
    
    $
    2,042,547
 Our Senior Secured Credit Facility, as amended (Credit Facility), consists of
a $241 million Term Loan A-2, a $925 million Term Loan B-2 and a $125 million
Revolving Credit Facility (the Revolver). Term Loans A-2 and B-2 require
quarterly principal payments. As of June 30, 2004, the outstanding balances of
Term Loans A-2 and B-2 were $99.5 million and $918.2 million, respectively. The
Revolver and Term Loan A-2 mature in December 2008, and Term Loan B-2 matures
in June 2010. Substantially all of our assets, including the capital stock of
our subsidiaries, are pledged to collateralize our obligations under the Credit
Facility. As of June 30, 2004 and December 31, 2003, there were no borrowings
under the Revolver. Our Credit Facility bears interest, at our option at either:  
    
    The higher of (i) a base rate as determined by Deutsche Bank
Securities Inc., Salomon Smith Barney Inc. or Bear, Stearns & Co. Inc.,
plus a 2.25% margin on the Revolver and a 1.25% margin on Term Loans
A-2 and B-2; and (ii) the Federal Funds Effective Rate (as defined)
plus 1/2 of 1%, plus a 2.25% margin on the Revolver and a 1.25% margin
on Term Loans A-2 and B-2; or
    
    LIBOR rate plus a 3.25% margin on the Revolver and a 2.25% margin
on Term Loans A-2 and B-2. We may elect interest periods of 1, 2, 3, 6,
9 or 12 months for LIBOR borrowings. The effective interest rate on the Credit Facility during the three and six
months ended June 30, 2004 was 4.00% and 3.97%, respectively. We are in the
process of amending our Credit Facility in connection with the acquisition of
SBCs directory publishing business in Illinois and Northwest Indiana. For
additional information, see Note 14, Subsequent Events. 15




---



##### 



We have also issued $325.0 million 8 7/8% Senior Notes due 2010 (Senior
Notes) and $600.0 million 10 7/8% Subordinated Notes due 2012 (Subordinated
Notes, and collectively with the Senior Notes, the Notes). Interest is paid
on the Notes semi-annually on June 15 and December 15. On February 6, 2004, we redeemed the remaining aggregrate principal amount of
the 9 1/8 % Senior Subordinated Notes due 2008 totaling $21.2 million at a
redemption price of 104.563% of the principal amount thereof, plus accrued and
unpaid interest. In the six months ended June 30, 2004, we recorded interest
expense related to these notes of $1.2 million, consisting of a premium over
par value paid at redemption of $1.0 million, plus the write-off of $0.2
million of unamortized deferred financing costs. 7. Redeemable Convertible Preferred Stock and Warrants We have 10 million shares of preferred stock authorized for issuance. At June
30, 2004 and December 31, 2003, we had 200,604 shares of Preferred Stock
outstanding. 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
and earns a cumulative dividend of 8% compounded quarterly. We cannot pay cash
dividends on the Preferred Stock through September 2005, during which time the
dividends will accrue. After October 1, 2005, we may pay the Preferred Stock
dividends in cash, subject to any limitations under our Credit Facility, or
allow it to accrue, at our option. We may redeem the Preferred Stock in cash at any time on or after January 3,
2006 if the market price (as defined) of our common stock exceeds 200% of the
conversion price for 30 of 45 trading days. The Preferred Stock is redeemable
in cash by us at any time on or after January 3, 2013. The Preferred Stock is
redeemable in cash at the option of the holder in the event of a change in
control (as defined). At June 30, 2004 and December 31, 2003, the redemption
value of the Preferred Stock was $225.8 million and $217.0 million,
respectively, and at June 30, 2004, the Preferred Stock was convertible into
approximately 9.4 million shares of common stock. 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 of the preferred stock. In connection with the
issuance of our Preferred Stock and each subsequent quarterly dividend date, a
BCF was recorded because the fair value of the underlying common stock at the
time of issuance of the preferred stock was greater than the conversion price
of the Preferred Stock. The BCF is treated as a deemed dividend because the
Preferred Stock was convertible into common stock immediately after issuance.
The Preferred Stock dividend for the three and six months ended June 30, 2004
of $5.4 million and $10.7 million, respectively, consisted of the stated 8%
dividend of $4.4 million and $8.7 million, respectively, and a BCF of $1.0
million and $1.9 million, respectively. The Preferred Stock dividend for the
three and six months ended June 30, 2003 of $6.0 million and $48.1 million,
respectively, consisted of the stated 8% dividend of $4.1 million and $8.0
million, respectively, and a BCF of $1.9 million and $40.1 million,
respectively. The BCF recorded in the six months ended June 30, 2003 was higher
than BCF amounts recorded in subsequent periods, reflecting the issuance of the
preferred stock and related warrants in January 2003. 8. Restructuring Charge As a result of the SPA acquisition, we consolidated publishing and technology
operations, sales offices and administrative personnel and relocated the
headquarters functions in Overland Park, Kansas and Purchase, New York to Cary,
North Carolina. Approximately 140 people were affected by the relocation of
the headquarters functions in Overland Park, Kansas and Purchase, New York, of
which 75 have been included in the restructuring reserve. The remaining 65
people have relocated with the Company. In 2003, $9.5 million was charged to
earnings primarily representing severance and related costs associated with the
consolidation of the publishing and technology operations, sales offices and
administrative personnel and the relocation of our headquarters. In the second
quarter of 2004, an additional reserve of $0.7 million was recorded
representing an adjustment to previous severance and related cost estimates.
Payments of $2.7 million and $4.1 million were made during the three and six
months ended 16




---



##### 



June 30, 2004, respectively, and the remaining costs will be paid in 2004 and
2005. An additional reserve of $2.1 million was recorded during the second
quarter of 2004, representing the estimated fair value of the remaining lease
payments, net of estimated sub-lease income on the former headquarters office
lease. Payments of $0.1 million were made with respect to the former
headquarters office lease during the three and six months ended June 30, 2004
and the remaining payments will be made through 2006. In 2003 a $2.2 million reserve was recorded, with an offsetting charge to
goodwill, representing the closure of the pre-press publishing facility
operated by SPA in Tennessee. The reserve represented the remaining lease
payments, net of estimated sub-lease income, on the pre-press facility.
Payments of $0.2 million and $0.3 million were made with respect to the former
pre-press publishing facility during the three and six months ended June 30,
2004, respectively, and the remaining payments will be made through 2012. The table below shows the activity in our restructuring reserve during the
three and six months ended June 30, 2004. Three MonthsEnded June 30, 2004Balance at March 31, 2004
    
    $
    7,331Additions to reserve charged to earnings
    
    
    2,844Payments
    
    
    (2,998
    )Balance at June 30, 2004
    
    $
    7,177
 Six MonthsEnded June 30, 2004Balance at January 1, 2004
    
    $
    8,499Additions to reserve charged to earnings
    
    
    3,201Payments
    
    
    (4,523
    )Balance at June 30, 2004
    
    $
    7,177
 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 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 to be made in 2003, 2002 or 2001. The underlying pension plan assets
are invested in diversified portfolios consisting primarily of equity and debt
securities. We use a measurement date of December 31 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 17




---



##### 



contributed by a participating employee, up to a maximum of 6% of each
participating employees salary (including bonus and commissions). The plan
provides that in the event the Companys EPS increases by a specified amount
between consecutive annual reporting periods, RHD is required to make an
additional matching contribution based on a formula specified in the plan.
During the second quarter of 2004, the Company provided for an additional
matching contribution resulting from an increase in EPS between 1999 and 2000.
The additional matching contribution charged to operations in the second
quarter of 2004 was $0.7 million, inclusive of interest and penalties and net
of plan forfeitures. The plan has been subsequently amended to eliminate the
provision requiring additional matching contributions. Other Postretirement Benefits.We have an unfunded postretirement benefit
plan that provides certain healthcare and life insurance benefits to those
full-time employees who reach retirement age while working for the Company. The net periodic benefit expense of the retirement plans for the three and six
months ended June 30, 2004 and 2003 was as follows: Pension BenefitsThree Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    900
    
    
    $
    811
    
    
    $
    1,800
    
    
    $
    1,622Interest cost
    
    
    963
    
    
    
    918
    
    
    
    1,926
    
    
    
    1,836Expected return on plan assets
    
    
    (1,458
    )
    
    
    (1,477
    )
    
    
    (2,916
    )
    
    
    (2,954
    )Unrecognized prior service cost
    
    
    27
    
    
    
    27
    
    
    
    54
    
    
    
    54Amortization of unrecognized loss
    
    
    138
    
    
    
    
    
    
    
    276
    
    
    
    Net periodic benefit expense
    
    $
    570
    
    
    $
    279
    
    
    $
    1,140
    
    
    $
    558Other BenefitsThree Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    113
    
    
    $
    122
    
    
    $
    226
    
    
    $
    244Interest cost
    
    
    165
    
    
    
    122
    
    
    
    330
    
    
    
    244Unrecognized prior service cost
    
    
    130
    
    
    
    (17
    )
    
    
    260
    
    
    
    (34
    )Amortization of unrecognized loss
    
    
    32
    
    
    
    25
    
    
    
    64
    
    
    
    50Net periodic benefit expense
    
    $
    440
    
    
    $
    252
    
    
    $
    880
    
    
    $
    504
 We do not expect to make significant cash contributions to the retirement and
postretirement benefit plans in 2004. In May 2004, the Financial Accounting Standards Board issued Financial Staff
Position No. FAS 106-2, Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003, which
provides guidance on accounting for the effects of the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 for employers that sponsor
postretirement health care plans that provide drug benefits. The Act
introduces prescription drug care benefits under Medicare and also allows for
certain sponsors of postretirement benefit plans with a drug benefit to receive
a non-taxable federal subsidy if certain criteria are met. The FSP will
require interim and annual period financial statements beginning after June 15,
2004 to include the effect of the subsidy on the measurement of net periodic
postretirement benefit costs. The Company is in the process of evaluating the
impact of the Act on the consolidated financial statements and will adopt the
FSP in the third quarter of 2004, as required. 10. Business Segments Our reportable operating segments are Donnelley and DonTech. Donnelley
includes the revenue from approximately 260 Sprint-branded yellow pages
directories, revenue from our pre-press publishing services contract with SBC
and all operating and administrative expenses. The DonTech segment includes
revenue participation income and our 50% interest in the net profits of
DonTech. Although DonTech provides advertising sales of yellow pages and other 18




---



##### 



directory products similar to Donnelley, the partnership is considered a
separate operating segment since, among other things, it has its own board of
directors and the employees of DonTech, including officers and managers, are
not employees of the Company. We evaluate the performance of our segments based primarily on operating income
and earnings before interest, taxes, depreciation and amortization (EBITDA).
We evaluate and report the performance of our segments based on EBITDA because
we believe that EBITDA is a useful measure of our underlying operating
performance and ability to satisfy our significant debt service requirements. We also evaluate the performance of Donnelley and DonTech based on the value of
advertising sales in directories published during the period (publication
sales). Advertising sales are a critical measure of performance that we
review and that play an important role in our decision to allocate financial
resources between our segments. Segment information for the three and six months ended June 30, 2004 and 2003
is as follows: Three Months Ended June 30, 2004
    
    Six Months Ended June 30, 2004Donnelley
    
    DonTech
    
    Total
    
    Donnelley
    
    DonTech
    
    TotalNet revenue
    
    $
    144,641
    
    
    $
    
    
    
    $
    144,641
    
    
    $
    288,448
    
    
    $
    
    
    
    $
    288,448Operating income
    
    
    57,333
    
    
    
    34,803
    
    
    
    92,136
    
    
    
    120,173
    
    
    
    58,701
    
    
    
    178,874Depreciation and
amortization
    
    
    14,947
    
    
    
    
    
    
    
    14,947
    
    
    
    29,339
    
    
    
    
    
    
    
    29,339EBITDA (1)
    
    
    72,280
    
    
    
    34,803
    
    
    
    107,083
    
    
    
    149,512
    
    
    
    58,701
    
    
    
    208,213Total assets
    
    
    2,407,826
    
    
    
    174,160
    
    
    
    2,581,986
 Three Months Ended June 30, 2003
    
    Six Months Ended June 30, 2003Donnelley
    
    DonTech
    
    Total
    
    Donnelley
    
    DonTech
    
    TotalNet revenue
    
    $
    38,634
    
    
    $
    
    
    
    $
    38,634
    
    
    $
    51,053
    
    
    $
    
    
    
    $
    51,053Operating (loss) income
    
    
    (24,877
    )
    
    
    35,341
    
    
    
    10,464
    
    
    
    (70,429
    )
    
    
    58,974
    
    
    
    (11,455
    )Depreciation and
amortization
    
    
    16,443
    
    
    
    
    
    
    
    16,443
    
    
    
    32,471
    
    
    
    
    
    
    
    32,471EBITDA (1)
    
    
    (7,711
    )
    
    
    35,341
    
    
    
    27,630
    
    
    
    (36,435
    )
    
    
    58,974
    
    
    
    22,539Total assets
    
    
    2,417,856
    
    
    
    179,912
    
    
    
    2,597,768
  (1)
    
    EBITDA is not a measurement of operating performance computed in
accordance with generally accepted accounting principles (GAAP) and
should not be considered as a substitute for operating income or net
income prepared in conformity with GAAP. In addition, EBITDA may not be
comparable to similarly titled measures of other companies. See the
reconciliation of EBITDA to net income, the most comparable GAAP measure,
below. The most comparable GAAP measure for EBITDA is net income. The reconciliation
of net income (loss) to EBITDA is presented below. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    33,057
    
    
    $
    (18,911
    )
    
    $
    61,152
    
    
    $
    (60,098
    )+ tax expense (benefit)
    
    
    21,583
    
    
    
    (13,155
    )
    
    
    39,926
    
    
    
    (41,762
    )+ interest expense, net
    
    
    37,496
    
    
    
    43,253
    
    
    
    77,796
    
    
    
    91,928+ depreciation and
amortization
    
    
    14,947
    
    
    
    16,443
    
    
    
    29,339
    
    
    
    32,471EBITDA
    
    $
    107,083
    
    
    $
    27,630
    
    
    $
    208,213
    
    
    $
    22,539
 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 19




---



##### 



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. In order to understand our potential exposure under the litigation and tax
matters described below under the captions Information Resources, Inc. and
Tax Matters, you need to understand the relationship between us and D&B, and
certain of our predecessors and affiliates that, through various corporate
reorganizations and contractual commitments, have assumed varying degrees of
responsibility with respect to such matters. In November 1996, the company then known as The Dun & Bradstreet Corporation
separated through a spin-off (1996 Distribution) into three separate public
companies: The Dun and Bradstreet Corporation, ACNielsen Corporation
(ACNielsen), and Cognizant Corporation (Cognizant). In June 1998, The Dun &
Bradstreet Corporation separated through a spin-off (1998 Distribution) into
two separate public companies: R.H. Donnelley Corporation (formerly The Dun &
Bradstreet Corporation) and a new company that changed its name to The Dun &
Bradstreet Corporation. Later in 1998, Cognizant separated through a spin-off
(Cognizant Distribution) into two separate public companies: IMS Health
Incorporated (IMS), and Nielsen Media Research, Inc. (NMR). In September
2000, The Dun & Bradstreet Corporation separated into two separate public
companies: Moodys Corporation, (Moodys) (formerly The Dun & Bradstreet
Corporation), and a new company that changed its name to The Dun & Bradstreet
Corporation. As a result of the form of R.H. Donnelley Corporations separation
from The Dun & Bradstreet Corporation in 1998, we are the corporate successor
of and technically the defendant and taxpayer referred to below as D&B with
respect to any matter accruing prior to June 30, 1998. Information Resources, Inc. The following is a description of an antitrust lawsuit filed in 1996 by
Information Resources, Inc. (IRI). As more fully described below, VNU N.V., a
publicly traded Dutch company (VNU), and its U.S. subsidiaries VNU, Inc.,
ACNielsen, AC Nielsen (US), Inc. (ACN (US)), and NMR (collectively, the VNU
Parties), have assumed exclusive joint and several liability for any judgment
or settlement of this antitrust lawsuit. As a result of the indemnity
obligation, we do not have any exposure to a judgment or settlement of this
lawsuit unless the VNU Parties default on their obligations. In the event of
such default, we have contingent liability for this matter as a result of our
succeeding to D&Bs liabilities and obligations as part of the 1998
Distribution. In such event, however, under the contractual commitments
described below, any such amounts that we might need to pay would be shared
equally (50% each) by D&B and Moodys. Only if D&B and Moodys were unable to
bear all or a part of this liability, would we be liable, and then only to the
extent that either of them could not satisfy their joint and several indemnity
obligations to us. In July 1996, IRI filed a complaint, and subsequently amended in 1997, in the
United States District Court for the Southern District of New York, naming as
defendants D&B (now, the Company, as successor of D&B), A.C. Nielsen Company (a
subsidiary of ACNielsen) and IMS (then known as Cognizant), at the time of the
filing, all wholly owned subsidiaries of D&B. The complaint alleges various violations of U.S. antitrust laws under Sections
1 and 2 of the Sherman Antitrust Act. The complaint also alleges a claim of
tortious interference with a contract and a claim of tortious interference with
a prospective business relationship. These claims relate to the acquisition by
defendants of Survey Research Group Limited (SRG). IRI alleges SRG violated
an alleged agreement with IRI when it agreed to be acquired by the defendants
and that the defendants induced SRG to breach that agreement. IRIs antitrust claims allege that the defendants developed and implemented a
plan to undermine IRIs ability to compete within the U.S. and foreign markets
in North America, Latin America, Asia, Europe and Australia/New Zealand through
a series of anti-competitive practices, including: unlawfully tying/bundling
services in the markets in which defendants allegedly had monopoly power with
services in markets in which ACNielsen competed with IRI; 20




---



##### 



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




---



##### 



of the VNU Parties pursuant to the Amended JDA. In addition, the Amended JDA provides that if it becomes necessary to post any
bond pending an appeal of an adverse judgment, then the VNU Parties shall
obtain the bond required for the appeal and shall pay the full cost of such
bond. In connection with entering into the Amended JDA, the Company, D&B, Moodys and
IMS agreed to amend certain covenants of the Original JDA to provide
operational flexibility for ACNielsen going forward. In addition, the Amended
JDA includes certain amendments to the covenants of ACNielsen (which, under the
Amended JDA, are now also applicable to ACN (US), which we understand holds
ACNielsens operating assets) which are designed to preserve such parties
claim-paying ability and protect the Company, D&B, Moodys and IMS. Among other
covenants, ACNielsen and ACN (US) agreed that neither they nor any of their
respective subsidiaries will incur any indebtedness to any affiliated person,
except indebtedness which its payment will, after a payment obligation under
the Amended JDA comes due, be conditioned on, and subordinated to, the payment
and performance of the obligations of such parties under the Amended JDA. VNU
has agreed to having a process agent in New York to receive on its behalf
service of any process concerning the Amended JDA. Under the agreements relating to the 1998 Distribution, D&B assumed the defense
and agreed to indemnify us against any payments that we may be required to
make, including any liabilities arising under the Original JDA, and IRI
Liabilities arising from the IRI action itself, and in each case related legal
fees. As required by those agreements, Moodys Corporation, which subsequently
separated from D&B in the 2000 Distribution, has agreed to be jointly and
severally liable with D&B for the indemnity obligation to us. We understand
that D&B and Moodys have agreed amongst themselves to share equally (50% each)
these indemnity obligations to us. Only if D&B and Moodys were unable to bear
all or a part of their aggregate 50% share of the liability in excess of the
cap, would we be liable, and then only to the extent that either of them could
not satisfy their joint and several indemnity obligations to us.
Because liability for violations of the antitrust laws is joint and several and
because the rights and obligations relating to the Amended JDA are based on
contractual relationships, the failure of the VNU Parties to fulfill their
obligations under the Amended JDA could result in the other parties bearing all
or a share of the IRI Liabilities. Joint and several liability for the IRI
Liabilities means that even where more than one defendant is determined to have
been responsible for an alleged wrongdoing, the plaintiff can collect all or
part of the judgment from just one of the defendants. This is true regardless
of whatever contractual allocation of responsibility the defendants and any
other indemnifying parties may have made, including the allocations described
above between the VNU Parties, the Company, D&B, Moodys and IMS. Accordingly, and as a result of the allocations of liability described above,
in the event the VNU Parties default on their obligations under the Amended
JDA, each of D&B and Moodys will be responsible for the payment of 50% of the
portion of any judgment or settlement ultimately payable by the Company (which
is the defendant in the IRI action), which could be as high as all of the IRI
Liabilities. We are unable to predict the outcome of the IRI litigation or the financial
condition of any of the VNU Parties or the other defendants at the time of any
such outcome (and hence we cannot estimate their ability to pay the IRI
Liabilities pursuant to the Amended JDA or the judgment or settlement in the
IRI action). Nonetheless, while we cannot assure you as to the outcome of this
matter, management presently believes that the VNU Parties have sufficient
financial resources and borrowing capacity to satisfy their obligations under
the Amended JDA and, if they default, D&B and Moodys have sufficient financial
resources and borrowing capacity to reimburse us for any payments we may be
required to make and related costs we may incur in connection with this matter.
Therefore, management presently believes that the ultimate resolution of this
matter would not have a material adverse effect on the Companys results of
operations, cash flows or financial condition. Accordingly, no amount in
respect of this matter has been accrued in our consolidated financial
statements. Tax Matters D&B entered into global tax-planning initiatives in the normal course of its
business, primarily through tax-free restructurings of both its foreign and
domestic operations. The status of Internal Revenue Service reviews of these
initiatives is summarized below. 22




---



##### 



We understand that D&B recently reached a basis for settlement with the IRS
regarding the two legacy tax matters described below under the headings
Utilization of Capital Losses  1989-1990 and Royalty Expense Deductions 
1993-1997. These agreements are tentative, and will not bind either the IRS
or D&B until final settlement agreements are executed. Upon final settlement,
we understand that D&B expects that the net impact to D&Bs cash flow for these
two matters could be up to $51.0 million (tax, interest, and penalties, net of
associated tax benefits). Pursuant to a series of 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 unfavorable IRS rulings on the
matters summarized below (other than the matter summarized below under 
Amortization and Royalty Expense Deductions/Royalty Income  1997-2004, for
which D&B and Moodys, jointly and severally, are solely responsible). D&B, on
our behalf, was contractually obligated to pay, and did pay, the first $137.0
million of tax liability in connection with the matter summarized below as 
Utilization of Capital Losses  1989-1990. Under the terms of the 1998 Distribution, D&B agreed to assume the defense and
to indemnify us for any tax liability that may be assessed against us and any
related costs and expenses that we may incur in connection with any of these
tax matters. Also, as required by those agreements, Moodys has agreed to be
jointly and severally liable with D&B for the indemnity obligation to us. Under
the 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 in these matters, management
presently believes that D&B and Moodys have sufficient financial resources,
borrowing capacity and indemnity rights against IMS and NMR (who succeeded to
Cognizants indemnity obligations under the Cognizant Distribution) 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 tax matters. Therefore, management
presently believes that the ultimate resolution of these 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 (Tentative Settlement Pending) In 2000, D&B filed an amended tax return with respect to the utilization of
capital losses in 1989 and 1990 in response to a formal IRS notice of
adjustment. The amended tax return reflected an additional $561.6 million of
tax and interest due. In 2000, D&B paid the IRS approximately $349.3 million
and IMS (on behalf of itself and NMR) paid the IRS approximately $212.3
million. We understand that these payments were made under dispute in order to
stop additional interest from accruing and that D&B has filed a complaint for a
refund in the United States District Court. As noted above, we understand that
D&B recently reached a basis for settlement of this matter with the IRS. The
agreement is tentative and non-binding until a definitive settlement agreement
is executed. The pending settlement requires that the complaint for a refund
be withdrawn and that D&B make an additional payment to the IRS. We understand
that D&B expects that the net impact to D&Bs cash flow to settle this matter
could be up to $14.0 million (tax, interest, and penalties, net of associated
tax benefits), and that such payments will be made in 2004. Royalty Expense Deductions  1993  1997 (Tentative Settlement Pending) In the second quarter of 2003, D&B received (on our behalf) a proposed notice
of deficiency from the IRS with respect to a partnership transaction entered
into in 1993. Specifically, the IRS is proposing 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 of approximately $5.0 million
in pending tax refunds and that the additional tax liability with respect to
the disallowance of the 1995 and 1996 royalty expense deductions could be up to
approximately $45.0 million (tax, interest and penalties, net of associated tax
benefits). 23




---



##### 



In addition, and also in the second quarter of 2003, D&B received from the IRS
on behalf of the partnership associated with the above transaction a notice of
proposed partnership adjustment challenging the tax treatment of certain
royalty payments received by the partnership in which D&B was a partner. In
that notice, the IRS is seeking to reallocate certain partnership income to
D&B. In January and April 2004, D&B received additional IRS notices (similar
to those received in the second quarter of 2003) associated with D&Bs
remaining interest in the partnership transaction (as described above) for the
three months in 1997 for which the entities were partners. The additional tax
liability with respect to D&Bs share of this income for the notices received
in the second quarter of 2003 and January and April 2004 could be up to $22.3
million (tax, interest and penalties, net of associated tax benefits). We
understand that D&B believes that these positions regarding the partnership are
inconsistent with the IRS position with respect to the same royalty expense
deductions described above. This $22.3 million additional liability would be
in addition to the $45.0 million of additional liability related to royalty
expense deductions discussed in the previous paragraph. As noted above, we understand that D&B recently reached a basis for
settlement regarding the disallowance of the 1995 and 1996 royalty expense
deductions. The agreement is tentative and non-binding until a definitive
settlement agreement is executed. The agreement would eliminate the
inconsistent positions described above. We understand that D&B expects that
the net impact to D&Bs cash flow with respect to the agreement could be up to
$37.0 million (tax, interest, and penalties, net of associated tax benefits),
and that such payments will be made in 2004. We also understand that D&B
continues to discuss with IRS Appeals the 1993, 1994, and 1997 royalty expense
deductions, described above, which amounts represent $6.5 million (tax,
interest, and penalties, net of associated tax benefits). Amortization Expense Deductions  1997  2004 In the fourth quarter of 2003, D&B received (on our behalf) IRS notices of
proposed adjustment with respect to a partnership transaction entered into in
1997. In addition, D&B received, on behalf of the partnership, various IRS
materials further explaining the examining agents position with respect to the
activities of the partnership in 1997 and 1998. In April 2004, D&B received (on our behalf) proposed notices of deficiency from
the IRS, proposing adjustments with respect to the same partnership transaction
entered into in 1997 described above. The adjustments proposed in the April
notice 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 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 $55.7
million (tax, interest and penalties, net of associated 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 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 $138.8 million (tax, interest and penalties, net
of 24




---



##### 



associated tax benefits), which would be in addition to the $55.7 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, attempting to resolve these matters at the Appeals phase
before proceeding to litigation, if necessary. If D&B were to challenge, at any
time, any of these IRS positions for years 1997 and 1998 in U.S. District Court
or the U.S. Court of Federal Claims, rather than in U.S. Tax Court, the
disputed amounts for each applicable year would need to be paid in advance for
the Court to have jurisdiction over the case. Conclusion As a result of our assessment of our exposure in these matters relating to our
prior relationship with D&B and its former affiliates, especially in light of
our indemnity arrangements with D&B and Moodys (and the VNU Parties with
respect to the IRI matter), and their respective financial resources, borrowing
capacity and, in the case of 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 9 1/8 % Senior Subordinated Notes due 2008, which were redeemed
in full on February 6, 2004, the Notes. The Company and the direct and
indirect wholly owned subsidiaries of R.H. Donnelley Inc. jointly and
severally, fully and unconditionally, guarantee these debt instruments. At
June 30, 2004, R.H. Donnelley Inc.s direct wholly owned subsidiaries were R.H.
Donnelley Publishing & Advertising, Inc., R.H. Donnelley APIL, Inc. and Get
Digital Smart.com Inc. As of June 30, 2004, R.H. Donnelley Corporation has issued 200,604 shares of
its Preferred Stock. See Note 7, Redeemable Convertible Preferred Stock and
Warrants, for a further description of the terms of the Preferred Stock and the
related dividend requirements. See Note 11, Litigation, for a description of
various legal proceedings in which the Company is involved and related
contingencies. R.H. Donnelley Corporation receives dividends from R.H. Donnelley Inc. for the
payment of income taxes and certain other public company matters. Dividends for
these items in these periods were not material. In general, the Company and its subsidiaries are restricted from paying
dividends to any third party, and our subsidiaries are restricted from paying
dividends, loans or advances to R.H. Donnelley Corporation, with very limited
exceptions, under the terms of our Credit Facility. See Note 6, Long-Term
Debt, for a further description of our debt instruments. 25




---



##### 



R.H. Donnelley Corporation Consolidating Condensed Balance Sheet
 June 30, 2004
 R.H.R.H. Donnelley
    
    R.H. Donnelley
    
    Donnelley
    
    Other
    
    
    
    
    
    ConsolidatedCorp.
    
    Inc.
    
    Publishing &
    
    Guarantor
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    Advertising
    
    Subsidiaries
    
    Eliminations
    
    CorporationAssetsCash and cash equivalents
    
    $
    
    
    
    $
    8,694
    
    
    $
    1,880
    
    
    $
    20
    
    
    $
    
    
    
    $
    10,594Accounts receivable, net
    
    
    
    
    
    
    
    
    
    
    223,520
    
    
    
    
    
    
    
    
    
    
    
    223,520Deferred directory costs
    
    
    
    
    
    
    
    
    
    
    35,229
    
    
    
    
    
    
    
    
    
    
    
    35,229Other current assets
    
    
    
    
    
    
    17,054
    
    
    
    65,107
    
    
    
    
    
    
    
    
    
    
    
    82,161Total current assets
    
    
    
    
    
    
    25,748
    
    
    
    325,736
    
    
    
    20
    
    
    
    
    
    
    
    351,504Investment in subsidiaries
    
    
    212,575
    
    
    
    3,818,864
    
    
    
    (1,968,816
    )
    
    
    124,256
    
    
    
    (2,012,719
    )
    
    
    174,160Fixed assets, net
    
    
    
    
    
    
    24,291
    
    
    
    3,736
    
    
    
    
    
    
    
    
    
    
    
    28,027Other assets
    
    
    
    
    
    
    91,005
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    91,004Intangible assets, net
    
    
    
    
    
    
    
    
    
    
    1,840,251
    
    
    
    
    
    
    
    
    
    
    
    1,840,251Goodwill
    
    
    
    
    
    
    
    
    
    
    97,040
    
    
    
    
    
    
    
    
    
    
    
    97,040Total assets
    
    $
    212,575
    
    
    $
    3,959,908
    
    
    $
    297,947
    
    
    $
    124,276
    
    
    $
    (2,012,720
    )
    
    $
    2,581,986Liabilities, Preferred Stock
and Shareholders Equity
(Deficit)Accounts payable and accrued
liabilities
    
    $
    
    
    
    $
    126,520
    
    
    $
    23,579
    
    
    $
    3
    
    
    $
    (99,990
    )
    
    $
    50,112Deferred directory revenue
    
    
    
    
    
    
    
    
    
    
    227,773
    
    
    
    
    
    
    
    
    
    
    
    227,773Current portion LTD
    
    
    
    
    
    
    28,896
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,896Total current liabilities
    
    
    
    
    
    
    155,416
    
    
    
    251,352
    
    
    
    3
    
    
    
    (99,990
    )
    
    
    306,781Long-term debt
    
    
    
    
    
    
    1,913,771
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,913,771Deferred income taxes, net
    
    
    
    
    
    
    47,203
    
    
    
    39,813
    
    
    
    35,034
    
    
    
    (144
    )
    
    
    121,906Other long-term liabilities
    
    
    
    
    
    
    25,701
    
    
    
    973
    
    
    
    
    
    
    
    279
    
    
    
    26,953Redeemable convertible preferred
stock
    
    
    206,990
    
    
    
    206,990
    
    
    
    
    
    
    
    
    
    
    
    (206,990
    )
    
    
    206,990Shareholders equity
    
    
    5,585
    
    
    
    1,610,827
    
    
    
    5,809
    
    
    
    89,239
    
    
    
    (1,705,875
    )
    
    
    5,585Total liabilities, preferred
stock and
shareholders equity (deficit)
    
    $
    212,575
    
    
    $
    3,959,908
    
    
    $
    297,947
    
    
    $
    124,276
    
    
    $
    (2,012,720
    )
    
    $
    2,581,986
 26




---



##### 



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




---



##### 



R.H. Donnelley Corporation Consolidating Condensed Statement of Operations
 For the Three Months Ended June 30, 2004
 R.H.R.H. Donnelley
    
    R.H. Donnelley
    
    Donnelley
    
    Other
    
    
    
    
    
    ConsolidatedCorp.
    
    Inc.
    
    Publishing &
    
    Guarantor
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    Advertising
    
    Subsidiaries
    
    Eliminations
    
    CorporationNet revenue
    
    $
    
    
    
    $
    4,656
    
    
    $
    139,985
    
    
    $
    
    
    
    $
    
    
    
    $
    144,641Expenses
    
    
    
    
    
    
    24,179
    
    
    
    63,094
    
    
    
    35
    
    
    
    
    
    
    
    87,308Partnership income
    
    
    32,674
    
    
    
    106,488
    
    
    
    
    
    
    
    28,515
    
    
    
    (132,874
    )
    
    
    34,803Operating income
    
    
    32,674
    
    
    
    86,965
    
    
    
    76,891
    
    
    
    28,480
    
    
    
    (132,874
    )
    
    
    92,136Interest expense
    
    
    
    
    
    
    (37,496
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,496
    )Pre-tax income
    
    
    32,674
    
    
    
    49,469
    
    
    
    76,891
    
    
    
    28,480
    
    
    
    (132,874
    )
    
    
    54,640Income tax expense (benefit)
    
    
    
    
    
    
    16,795
    
    
    
    (4,873
    )
    
    
    10,044
    
    
    
    (383
    )
    
    
    21,583Net income
    
    
    32,674
    
    
    
    32,674
    
    
    
    81,764
    
    
    
    18,436
    
    
    
    (132,491
    )
    
    
    33,057Preferred dividend
    
    
    5,392
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,392Income available to common
shareholders
    
    $
    27,282
    
    
    $
    32,674
    
    
    $
    81,764
    
    
    $
    18,436
    
    
    $
    (132,491
    )
    
    $
    27,665
 R.H. Donnelley Corporation Consolidating Condensed Statement of Operations
 For the Three Months Ended June 30, 2003
 R.H.R.H. Donnelley
    
    R.H. Donnelley
    
    Donnelley
    
    Other
    
    
    
    
    
    ConsolidatedCorp.
    
    Inc.
    
    Publishing &
    
    Guarantor
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    Advertising
    
    Subsidiaries
    
    Eliminations
    
    CorporationNet revenue
    
    $
    
    
    
    $
    6,448
    
    
    $
    32,186
    
    
    $
    
    
    
    $
    
    
    
    $
    38,634Expenses
    
    
    
    
    
    
    18,564
    
    
    
    44,572
    
    
    
    375
    
    
    
    
    
    
    
    63,511Partnership (loss) income
    
    
    (18,525
    )
    
    
    21,690
    
    
    
    
    
    
    
    60,224
    
    
    
    (28,048
    )
    
    
    35,341Operating (loss) income
    
    
    (18,525
    )
    
    
    9,574
    
    
    
    (12,386
    )
    
    
    59,849
    
    
    
    (28,048
    )
    
    
    10,464Interest (expense) income
    
    
    
    
    
    
    (46,818
    )
    
    
    (46,474
    )
    
    
    50,039
    
    
    
    
    
    
    
    (43,253
    )Other income
    
    
    
    
    
    
    723
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    723Pre-tax (loss) income
    
    
    (18,525
    )
    
    
    (36,521
    )
    
    
    (58,860
    )
    
    
    109,888
    
    
    
    (28,048
    )
    
    
    (32,066
    )Income tax expense (benefit)
    
    
    386
    
    
    
    (17,996
    )
    
    
    (23,893
    )
    
    
    28,348
    
    
    
    
    
    
    
    (13,155
    )Net (loss) income
    
    
    (18,911
    )
    
    
    (18,525
    )
    
    
    (34,967
    )
    
    
    81,540
    
    
    
    (28,048
    )
    
    
    (18,911
    )Preferred dividend
    
    
    5,978
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,978(Loss) income available to
common shareholders
    
    $
    (24,889
    )
    
    $
    (18,525
    )
    
    $
    (34,967
    )
    
    $
    81,540
    
    
    $
    (28,048
    )
    
    $
    (24,889
    )
 28




---



##### 



R.H. Donnelley Corporation Consolidating Condensed Statement of Operations
 For the Six Months Ended June 30, 2004
 R.H.R.H. Donnelley
    
    R.H. Donnelley
    
    Donnelley
    
    Other
    
    
    
    
    
    ConsolidatedCorp.
    
    Inc.
    
    Publishing &
    
    Guarantor
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    Advertising
    
    Subsidiaries
    
    Eliminations
    
    CorporationNet revenue
    
    $
    
    
    
    $
    9,866
    
    
    $
    278,582
    
    
    $
    
    
    
    $
    
    
    
    $
    288,448Expenses
    
    
    
    
    
    
    45,767
    
    
    
    122,457
    
    
    
    51
    
    
    
    
    
    
    
    168,275Partnership income
    
    
    61,151
    
    
    
    172,698
    
    
    
    
    
    
    
    49,329
    
    
    
    (224,477
    )
    
    
    58,701Operating income
    
    
    61,151
    
    
    
    136,797
    
    
    
    156,125
    
    
    
    49,278
    
    
    
    (224,477
    )
    
    
    178,874Interest expense
    
    
    
    
    
    
    (77,796
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (77,796
    )Pre-tax income
    
    
    61,151
    
    
    
    59,001
    
    
    
    156,125
    
    
    
    49,278
    
    
    
    (224,477
    )
    
    
    101,078Income tax (benefit) expense
    
    
    
    
    
    
    (2,150
    )
    
    
    24,483
    
    
    
    17,593
    
    
    
    
    
    
    
    39,926Net income
    
    
    61,151
    
    
    
    61,151
    
    
    
    131,642
    
    
    
    31,685
    
    
    
    (224,477
    )
    
    
    61,152Preferred dividend
    
    
    10,678
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,678Income available to common
shareholders
    
    $
    50,473
    
    
    $
    61,151
    
    
    $
    131,642
    
    
    $
    31,685
    
    
    $
    (224,477
    )
    
    $
    50,474
 R.H. Donnelley Corporation Consolidating Condensed Statement of Operations
 For the Six Months Ended June 30, 2003
 R.H.R.H. Donnelley
    
    R.H. Donnelley
    
    Donnelley
    
    Other
    
    
    
    
    
    ConsolidatedCorp.
    
    Inc.
    
    Publishing &
    
    Guarantor
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    Advertising
    
    Subsidiaries
    
    Eliminations
    
    CorporationNet revenue
    
    $
    
    
    
    $
    13,003
    
    
    $
    38,050
    
    
    $
    
    
    
    $
    
    
    
    $
    51,053Expenses
    
    
    
    
    
    
    35,380
    
    
    
    85,691
    
    
    
    411
    
    
    
    
    
    
    
    121,482Partnership (loss) income
    
    
    (60,447
    )
    
    
    17,339
    
    
    
    
    
    
    
    111,538
    
    
    
    (9,456
    )
    
    
    58,974Operating (loss) income
    
    
    (60,447
    )
    
    
    (5,038
    )
    
    
    (47,641
    )
    
    
    111,127
    
    
    
    (9,456
    )
    
    
    (11,455
    )Interest (expense) income
    
    
    
    
    
    
    (95,493
    )
    
    
    (94,909
    )
    
    
    98,474
    
    
    
    
    
    
    
    (91,928
    )Other income
    
    
    
    
    
    
    1,523
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,523Pre-tax (loss) income
    
    
    (60,447
    )
    
    
    (99,008
    )
    
    
    (142,550
    )
    
    
    209,601
    
    
    
    (9,456
    )
    
    
    (101,860
    )Income tax (benefit) expense
    
    
    (349
    )
    
    
    (38,561
    )
    
    
    (56,165
    )
    
    
    53,313
    
    
    
    
    
    
    
    (41,762
    )Net (loss) income
    
    
    (60,098
    )
    
    
    (60,447
    )
    
    
    (86,385
    )
    
    
    156,288
    
    
    
    (9,456
    )
    
    
    (60,098
    )Preferred dividend
    
    
    48,132
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,132(Loss) income available to
common shareholders
    
    $
    (108,230
    )
    
    $
    (60,447
    )
    
    $
    (86,385
    )
    
    $
    156,288
    
    
    $
    (9,456
    )
    
    $
    (108,230
    )
 29




---



##### 



R.H. Donnelley Corporation Consolidating Condensed Statement of Cash Flows
 For the Six Months Ended June 30, 2004
 R.H. Donnelley
    
    R.H. Donnelley
    
    R.H. Donnelley
    
    Other
    
    
    
    
    
    ConsolidatedCorp.
    
    Inc.
    
    Publishing &
    
    Guarantor
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    Advertising
    
    Subsidiaries
    
    Eliminations
    
    CorporationCash flow from operations
    
    $
    
    
    
    $
    (81,513
    )
    
    $
    173,335
    
    
    $
    50,404
    
    
    $
    5,234
    
    
    $
    147,460Cash flow from investing activities
    
    
    
    
    
    
    (7,893
    )
    
    
    (964
    )
    
    
    
    
    
    
    
    
    
    
    (8,857
    )Cash flow from financing activitiesDebt repayments
    
    
    
    
    
    
    (150,866
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (150,866
    )Intercompany transfers
    
    
    
    
    
    
    237,798
    
    
    
    (182,160
    )
    
    
    (50,404
    )
    
    
    (5,234
    )
    
    
    Other
    
    
    
    
    
    
    4,268
    
    
    
    10,867
    
    
    
    
    
    
    
    
    
    
    
    15,135Net cash flow from financing activities
    
    
    
    
    
    
    91,200
    
    
    
    (171,293
    )
    
    
    (50,404
    )
    
    
    (5,234
    )
    
    
    (135,731
    )Change in cash
    
    
    
    
    
    
    1,794
    
    
    
    1,078
    
    
    
    
    
    
    
    
    
    
    
    2,872Cash at beginning of year
    
    
    
    
    
    
    6,900
    
    
    
    801
    
    
    
    21
    
    
    
    
    
    
    
    7,722Cash at end of period
    
    $
    
    
    
    $
    8,694
    
    
    $
    1,879
    
    
    $
    21
    
    
    $
    
    
    
    $
    10,594
 R.H. Donnelley Corporation Consolidating Condensed Statement of Cash Flows
 For the Six Months Ended June 30, 2003
 ConsolidatedR.H. Donnelley
    
    R.H.
    
    R.H. Donnelley
    
    Other
    
    R.H.Corp.
    
    Donnelley Inc.
    
    Publishing &
    
    Guarantor
    
    Donnelley(Parent)
    
    (Issuer)
    
    Advertising
    
    Subsidiaries
    
    CorporationCash flow from operations
    
    $
    
    
    
    $
    (100,959
    )
    
    $
    22,842
    
    
    $
    209,639
    
    
    $
    131,522Cash flow from investing activities
    
    
    69,300
    
    
    
    (407,926
    )
    
    
    (32,180
    )
    
    
    
    
    
    
    (370,806
    )Cash flow from financing activities
    
    
    (69,300
    )
    
    
    501,140
    
    
    
    9,338
    
    
    
    (209,681
    )
    
    
    231,497Change in cash
    
    
    
    
    
    
    (7,745
    )
    
    
    
    
    
    
    (42
    )
    
    
    (7,787
    )Cash at beginning of year
    
    
    
    
    
    
    7,745
    
    
    
    
    
    
    
    42
    
    
    
    7,787Cash at end of period
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 13. Lease Commitment The lease of the new corporate headquarters building in Cary, North Carolina
commenced April 1, 2004 and expires June 30, 2015. The lease terms include
eight months of free rent and escalating rent thereafter. Total cash rental
payments of $16.0 million will be recognized as rent expense on a straight-line
basis over the lease term. In accordance with FASB Technical Bulletin No. 88-1,
Issues Relating to Accounting for Leases, landlord lease incentives totaling
$2.7 million were recorded during the second quarter of 2004 with a
corresponding charge to leasehold improvements, which are being amortized
ratably as a monthly reduction to rent expense over the lease term. The
leasehold improvements are being amortized over the term of the lease or their
useful lives, whichever is less. 14. Subsequent Events On July 28, 2004, the Company signed a definitive agreement to acquire SBCs
directory publishing business in Illinois and Northwest Indiana, including
SBCs interest in DonTech, for $1.42 billion in cash after settlement of
approximately a $30 million liquidation preference owed to the Company with
respect to such directory publishing business. The transaction is expected to
be completed during the third quarter of 2004, subject to regulatory approval
and certain closing conditions. Upon completion of the transaction, RHD will
control and publish 389 yellow pages directories serving more than 260,000
local and national advertisers. Additionally, equity accounting related to
DonTech will no longer be applicable once the transaction is completed.
The Company is amending its Credit Facility in 30




---



##### 



connection with this acquisition to finance the purchase price. In connection with the closing of the transaction, the Company and/or certain
of its affiliates will enter into commercial arrangements with SBC and/or its
affiliates under which the Company will be the exclusive directory publisher
for SBC in Illinois and Northwest Indiana for an initial term of 50 years. In
addition, for the concurrent period (subject to certain exceptions), SBC will
generally agree not to (i) produce, publish or distribute print directories in
these territories or solicit or sell advertising for inclusion in such print
directories or (ii) solicit or sell local internet yellow pages advertising for
certain internet yellow pages directories or license its name in these
territories to a third party for that purpose. On July 2, 2004, we entered into an interest rate swap agreement with a total
notional value of $50.0 million.
This interest rate swap effectively converts $50.0 million of variable rate
debt to fixed rate debt. Under the terms
of this agreement, we receive variable interest based on three-month LIBOR and
pay a fixed rate of 3.20%.
This swap agreement matures on July 3, 2006. 31




---



##### 



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, 2003 and our other filings with the
SEC. Corporate Overview We are a leading yellow pages publisher and directional media company.
Directional media is where consumers go to find who sells the goods and
services they are ready to purchase. We currently publish approximately 260
directories under the Sprint Yellow Pages ® brand in 18 states, with major
markets including Las Vegas, Orlando, and Lee County, Florida, with a total
circulation of approximately 18 million serving approximately 160,000 local and
4,000 national advertisers. We also offer online city guides and search web
sites in these and other major markets under the Best Red Yellow Pages brand at
www.bestredyp.com. In addition, through The DonTech II Partnership
(DonTech), our perpetual partnership with an affiliate of SBC Communications
Inc. (SBC), we serve as the exclusive sales agent for 129 SBC-branded
directories under the SBC ® Yellow Pages brand in Illinois and northwest
Indiana, with a total circulation of approximately 10 million serving
approximately 100,000 local advertisers. On January 3, 2003, we acquired all the outstanding capital stock of the
various entities comprising Sprint Publishing and Advertising (SPA), Sprint
Corporations (Sprint) directory publishing business, for $2,229.8 million in
cash. The acquisition was accounted for as a purchase business combination and
the purchase price was allocated to the tangible and identifiable intangible
assets acquired and liabilities assumed based on their respective fair values
on the acquisition date. The results of the SPA business are included in our
consolidated results from and after January 3, 2003. SPA operates as R.H.
Donnelley Publishing & Advertising, Inc., an indirect, wholly owned subsidiary
of the Company. Recent Developments On July 28, 2004, the Company signed a definitive agreement to acquire SBCs
directory publishing business in Illinois and Northwest Indiana, including
SBCs interest in DonTech, for $1.42 billion in cash after settlement of
approximately a $30 million liquidation preference owed to the Company with
respect to such directory publishing business. The transaction is expected to
be completed during the third quarter of 2004, subject to regulatory approval
and certain closing conditions. Upon completion of the transaction, RHD will
control and publish 389 yellow pages directories serving more than 260,000
local and national advertisers. Additionally, equity accounting related to
DonTech will no longer be applicable once the transaction is completed. The
Company is amending its Credit Facility in connection with this acquisition to
finance the purchase price. See Liquidity and Capital Resources. In connection with the closing of the transaction, the Company and/or certain
of its affiliates will enter into commercial arrangements with SBC and/or its
affiliates under which the Company will be the exclusive directory publisher
for SBC in Illinois and Northwest Indiana for an initial term of 50 years. In
addition, for the concurrent period (subject to initial exceptions), SBC will
generally agree not to (i) produce, publish or distribute print directories in
these territories or solicit or sell advertising for inclusion in such print
directories or (ii) solicit or sell local internet yellow pages advertising for
certain internet yellow pages directories or license its name in these
territories to a third party for that purpose. 32




---



##### 



Segment Reporting Donnelley As the publisher of yellow pages directories, directory revenue is recognized
under the deferral and amortization method based on the annual billing value of
the advertisements sold in a directory (publication sales), subject to a
provision for sales claims and allowances. Revenue from the sale of such
advertising is deferred when a directory is published and recognized ratably
over the life of a directory, which is typically 12 months. Certain costs
directly related to selling and production of directories are also deferred
when incurred and recognized ratably over the life of a directory. These costs
include sales commissions and print, paper and initial distribution costs. All
of our other operating and administrative costs are included in this segment as
well and are expensed as incurred. We also earn revenue from pre-press
publishing and billing services provided to SBC for the yellow pages
directories for which DonTech sells advertising and from SBC for sales-related
computer application services provided to DonTech. The fees received for these
services are included in our Donnelley segment, as they relate more to our
pre-press publishing services than DonTech sales activities. DonTech DonTech is a 50/50 perpetual partnership with a subsidiary of SBC. DonTech
acts as the exclusive sales agent for yellow pages directories published by SBC
in Illinois and northwest Indiana and earns a commission from SBC at the time a
sales contract is signed. We account for our investment in DonTech under the
equity method and record our income from DonTech as partnership income. Our
reported income from DonTech is comprised of our 50% interest in the net
profits of DonTech and revenue participation income received directly from an
affiliate of SBC. Revenue participation income is based on a percentage of
DonTech advertising sales and comprises approximately 80% to 85% of our total
annual income related to DonTech. Total income from DonTech accounted for
approximately 28% of our total operating income before depreciation and
amortization for the six months ended June 30, 2004. Certain general and
administrative expenses incurred to support this business are not allocated to
the DonTech segment, but we believe such expenses are not material to our
segment reporting. The DonTech partnership is considered a separate operating segment because,
among other things, the partnership has its own Board of Directors and the
employees of DonTech, including its officers and managers, are not our
employees. The SPA transaction did not affect our partnership with SBC, and
DonTech continues to act as a sales agent for SBC. Further, we have
consistently accounted for our partnership interest in DonTech under the equity
method. 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. 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 is estimated for each directory based on historical
experience. We also evaluate the current condition of our customer balances,
bankruptcy filings, historical charge-off patterns, recovery rates and other
data when determining our allowance for doubtful accounts reserve. We 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 33




---



##### 



losses under current conditions; however, significant deterioration in any of
the factors noted above or in the overall economy could materially change these
expectations. The provisions for sales claims and doubtful accounts are
estimated based on a percentage of revenue. Accordingly, an additional 1%
change in either of these allowance percentages would impact net income by
approximately $3.0 million annually. Pension Benefits Our pension plan obligations and related assets of our defined benefit
retirement plans are presented in Note 9 to our consolidated financial
statements. Plan assets consist primarily of marketable equity and debt
instruments and are valued using market quotations. Plan obligations and annual
pension expense are determined by independent actuaries and through the use of
a number of assumptions. Key assumptions in measuring the plan obligations
include the discount rate, the rate of future salary increases and the
long-term expected return on plan assets. In determining the discount rate, we
look at yields on high-quality, fixed-income investments with maturities
corresponding to the anticipated timing of the benefit payments. Salary
increase assumptions are based upon historical experience and anticipated
future management actions. Asset returns are based upon the anticipated
average rate of earnings expected on invested funds of the plan over the
long-run. At December 31, 2003, the
weighted-average actuarial assumptions were: discount rate of 6.0%; long-term
rate of return on plan assets of 8.25%; and assumed salary increases of 3.66%.
Net periodic pension costs recognized in 2003 were $1.1 million. A 1% change
in the discount rate would affect net income by approximately $0.5 million; a
1% change in the long-term rate of return on plan assets would affect net
income by approximately $0.4 million; and a 1% change in assumed salary
increases would affect net income by approximately $0.3 million. Intangible Assets and Goodwill Valuation and Amortization Our intangible assets consist of directory service agreements between the
Company and Sprint, established customer relationships, and trade names, all
resulting from the SPA 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 is not subject to amortization. The intangible assets are subject to an impairment test in accordance with
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets(SFAS 144), and the goodwill is
subject to an impairment test in accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets(SFAS
142). The Company reviews the carrying value of its intangible assets for
impairment at least annually or more frequently whenever events or
circumstances indicate that their carrying amount may not be recoverable. The
impairment test for the intangible assets is performed by comparing the
carrying amount of the intangible assets to the sum of the undiscounted
expected future cash flows. In accordance with SFAS 144, impairment exists if
the sum of the future undiscounted cash flows is less than the carrying amount
of the intangible asset, or to its related group of assets. Impairment would
result in a write-down of the intangible asset to its estimated fair value
based on the discounted future cash flows. Goodwill is tested for impairment
by comparing the carrying amount of the reporting unit to which it was assigned
to the estimated fair value of the reporting unit. In accordance with SFAS
142, impairment exists if the carrying amount of the reporting unit is less
than its estimated fair value. Impairment would result in a write-down equal
to the difference between the carrying amount and the estimated fair value of
the reporting unit. We used certain estimates and assumptions in our impairment evaluation,
including, but not limited to, projected future cash flows, revenue growth,
customer attrition levels, and estimated write-offs. As of December 31, 2003,
management believes that there was no impairment to the intangible assets or
goodwill. However, significant deterioration in our business, the assumptions
underlying the impairment evaluations, or in the overall economy, could result
in impairment charges in future reporting periods. Had the aggregate net book
value of the intangible assets at December 31, 2003 been impaired by 1%, net
income would have been adversely impacted by approximately $11.0 million. Additionally, management must assess whether the remaining useful lives of the
intangible assets represent the period that the intangible assets are expected
to contribute to the cash flow of the Company. In our assessment process, we
used certain estimates and assumptions, including projected future cash flows,
customer attrition levels 34




---



##### 



and industry and economic conditions. In accordance with SFAS 142, we evaluate
the remaining useful lives annually to determine whether events or
circumstances warrant a revision to the remaining period of amortization. If
the estimated remaining useful lives change, the remaining carrying amount of
the intangible asset would be amortized prospectively over that revised
remaining useful life. For the year ended December 31, 2003, amortization of
intangible assets was approximately $50 million. Should the remaining useful
lives of the intangible assets be shortened by 10%, net income would be
adversely impacted by approximately $3.0 million. Management believes the current assumptions and other considerations used to
estimate these amounts in the Companys consolidated financial statements are
appropriate. Each of these critical accounting estimates pertains only to the
Donnelley segment, as further described in Note 10 to the consolidated
financial statements included in Item 1 of this quarterly report. We do not
believe we make any critical accounting estimates with respect to our DonTech
segment, but would do so after we consummate the pending acquisition. New Accounting Pronouncements. In March 2004, the Emerging Issues Task Force (EITF) reached a final
consensus on EITF Issue No. 03-6, Participating Securities and the Two-Class
Method under FASB Statement 128(EITF 03-6), which established standards
regarding the computation of earnings per share (EPS) by companies that have
issued securities other than common stock that contractually entitle the holder
to participate in dividends and earnings of the company. EITF 03-6 is
effective for interim periods ending on or after June 30, 2004 for calendar
year companies. We adopted the provisions of EITF 03-6 during the first quarter
of 2004. In May 2004, the Financial Accounting Standards Board issued Financial Staff
Position No. FAS 106-2, Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003, which
provides guidance on accounting for the effects of the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 for employers that sponsor
postretirement health care plans that provide drug benefits. The Act
introduces prescription drug care benefits under Medicare and also allows for
certain sponsors of postretirement benefit plans with a drug benefit to receive
a non-taxable federal subsidy if certain criteria are met. The FSP will
require interim and annual period financial statements beginning after June 15,
2004 to include the effect of the subsidy on the measurement of net periodic
postretirement benefit costs. The Company is in the process of evaluating the
impact of the Act on the consolidated financial statements and will adopt the
FSP in the third quarter of 2004, as required. 35




---



##### 



RESULTS OF OPERATIONS
Three and six months ended June 30, 2004 and 2003 Factors Affecting Comparability SPA Acquisition Because of the SPA acquisition, the related financing and associated
accounting, our 2003 GAAP results previously reported are not comparable to our
2004 results prepared in accordance with GAAP. Also, because purchase
accounting rules precluded us from recognizing revenue and certain expenses for
those directories that published prior to the acquisition, including all
January 2003 published directories, revenue and certain expenses reported in
2003 are not representative of revenue and certain expenses that would have
been reported in 2003 absent these purchase accounting adjustments.
Accordingly, in addition to a discussion of the reported 2004 GAAP results
compared to the reported 2003 GAAP results, we are also providing a comparison
of 2004 GAAP results to 2003 adjusted results. Among other things, the 2003
adjusted results exclude the effect of purchase accounting on deferred revenue
and certain expenses. For a detailed discussion of 2004 GAAP revenue and
expenses versus 2003 adjusted revenue and expenses, which we believe are more
comparable, as well as a detailed discussion of advertising sales, which drive
revenue, see Adjusted Amounts and Other Non-GAAP Measures below. Relocation Charges Expenses for the three and six months ended June 30, 2004 include primarily
severance, and move-related charges of $4.8 and $7.4 million, respectively,
relating to the relocation of our corporate offices to Cary, North Carolina.
These costs are included in general and administrative expenses. Net Revenue The components of our net revenue in the three and six months ended June 30,
2004 and 2003 were as follows: Three Months June 30,
    
    Six Months Ended June 30,(amounts in millions)
    
    2004
    
    2003
    
    $ Change
    
    2004
    
    2003
    
    $ ChangeGross directory advertising
revenue
    
    $
    140.3
    
    
    $
    31.7
    
    
    $
    108.6
    
    
    $
    279.2
    
    
    $
    37.0
    
    
    $
    242.2Sales allowances
    
    
    (1.5
    )
    
    
    (0.3
    )
    
    
    (1.2
    )
    
    
    (3.2
    )
    
    
    (0.4
    )
    
    
    (2.8
    )Net directory advertising revenue
    
    
    138.8
    
    
    
    31.4
    
    
    
    107.4
    
    
    
    276.0
    
    
    
    36.6
    
    
    
    239.4Pre-press publishing fees
    
    
    4.2
    
    
    
    6.0
    
    
    
    (1.8
    )
    
    
    9.0
    
    
    
    12.2
    
    
    
    (3.2
    )Other revenue
    
    
    1.6
    
    
    
    1.2
    
    
    
    .4
    
    
    
    3.4
    
    
    
    2.3
    
    
    
    1.1Total
    
    $
    144.6
    
    
    $
    38.6
    
    
    $
    106.0
    
    
    $
    288.4
    
    
    $
    51.1
    
    
    $
    237.3
 Revenue is derived entirely from our Donnelley segment since DonTech is
accounted for under the equity method. Our directory advertising revenue is
earned primarily from the sale of advertising in yellow pages directories we
publish, net of sales allowances. Revenue from directory advertising sales is
recognized under the deferral and amortization method, whereby revenue from
advertising sales is initially deferred when the directory is published and
recognized ratably over the directorys life, which is typically 12 months.
Pre-press publishing fees and other revenue are recognized when earned. Total
net revenue in the three and six months ended June 30, 2004 was $144.6 million
and $288.4 million, respectively, as compared to $38.6 million and $51.1
million in the same periods in the prior year. The increase in total net
revenue in 2004 is primarily a result of purchase accounting adjustments that
adversely impacted 2003 results as described above. Due to the adjustments,
directory revenue for the three and six months ended June 30, 2003 includes
only the amortization of publication sales beginning in February 2003 under
the deferral and amortization method. Revenue from pre-press publishing services was $4.2 million and $9.0 million in
the three and six months ended 36




---



##### 



June 30, 2004 as compared to $6.0 million and $12.2 million in the same period
in the prior year. The decrease in pre-press publishing fees for both the
three- and six-month periods is primarily due to fees earned from a third party
pre-press publishing contract for which we ceased providing services in the
first half of 2003. There were no comparable revenues earned in the first half
of 2004. Other revenue in 2004 and 2003 included fees for sales-related
computer application services rendered to DonTech on behalf of SBC, plus
revenue for late fees paid on outstanding customer balances, sales of
directories and fees from telephone companies for publishing their information
pages. Changes in these items account for the difference in other revenue
between 2004 and 2003. Expenses The components of our total expenses for the three and six months ended June
30, 2004 and 2003 were as follows: Three Months Ended June 30,
    
    Six Months Ended June 30,(amounts in millions)
    
    2004
    
    2003
    
    $ Change
    
    2004
    
    2003
    
    $ ChangeOperating expenses
    
    $
    56.9
    
    
    $
    34.9
    
    
    $
    22.0
    
    
    $
    110.9
    
    
    $
    66.8
    
    
    $
    44.1G&A expenses
    
    
    15.4
    
    
    
    12.2
    
    
    
    3.2
    
    
    
    28.0
    
    
    
    22.2
    
    
    
    5.8D&A expenses
    
    
    15.0
    
    
    
    16.4
    
    
    
    (1.4
    )
    
    
    29.4
    
    
    
    32.5
    
    
    
    (3.1
    )Total
    
    $
    87.3
    
    
    $
    63.5
    
    
    $
    23.8
    
    
    $
    168.3
    
    
    $
    121.5
    
    
    $
    46.8
 All reported expenses are derived entirely from our Donnelley segment since
DonTech is accounted for under
the equity method. Certain costs directly related to the selling and production
of directories are initially deferred
and recognized ratably over the life of the directory. Operating Expenses Total operating expenses in the three and six months ended June 30, 2004 were
$56.9 million and $110.9 million, respectively, as compared to $34.9 million
and $66.8 million in the same periods in the prior year. The increase in
operating expenses in 2004 is primarily a result of the same purchase
accounting adjustments in 2003 that impacted revenues described above. Similar
to the deferral and amortization method of revenue recognition, certain costs
directly related to the selling and production of our directories are initially
deferred when incurred and recognized ratably over the life of a directory.
Due to the elimination of SPAs deferred revenue and deferred costs for all
prior (including January 2003) directories as required by purchase accounting,
our reported operating expenses in 2003 did not include certain expenses
associated with those directories totaling approximately $19.4 million and
$46.0 million for the three and six months ended June 30, 2003. Due to these
adjustments, directory expenses for the three and six months ended June 30,
2003 include only the amortization of deferred directory costs relating to
directories published beginning in February 2003. Additionally, for the three
and six months ended June 30, 2004, sales costs were $2.6 million and $3.6
million higher, respectively, compared to the same periods in 2003, due to
higher commission expense and sales bonuses resulting from favorable
publication sales results over those periods. Operating expenses in the three
months ended June 30, 2004 include $1.1 million and $0.3 million of advertising
costs that pertain to 2003 and the first quarter of 2004 promotional
activities, respectively. While these amounts relate to prior accounting
periods, the failure to record them in such earlier periods is an oversight
from the process of relocating our corporate headquarters from New York to
North Carolina and did not arise or result from a material weakness in our
disclosure controls and procedures, including our internal controls over
financial reporting. Further, marketing expense was $1.1 million higher in the
quarter and year-to-date 2004 periods due to additional marketing research
expenses. Operating expenses also reflect the final purchase accounting
adjustments from the SPA acquisition of $0.8 million and $3.5 million in the
three and six months ended June 30, 2004, respectively. Partially offsetting
the increase in operating expenses is a reduction of bad debt expense of $2.9
million and $5.8 million for the three and six months ended June 30, 2004,
respectively, resulting from continued favorable performance in the collection
process. Additionally, publishing and information technology costs were lower
by approximately $2.1 million and $5.2 million for the three and six months
ended June 30, 2004, respectively, due to the elimination of duplicate facility
and associated operational costs resulting from the integration of the SPA
acquisition. The majority of these duplicative costs were eliminated subsequent
to the first half of 2003. 37




---



##### 



General and Administrative Expenses General and administrative (G&A) expenses in three and six months ended June
30, 2004 were $15.4 million and $28.0 million, respectively, as compared to
$12.2 million and $22.2 million in the same periods in the prior year. The
increase in G&A expenses is primarily attributable to incremental costs of $4.8
million and $7.4 million in the three and six months ended June 30, 2004
relating to the relocation of our corporate offices to Cary, North Carolina,
and increased employee-related costs, of approximately $1.0 million in the
quarter and $1.4 million for the first half of 2004. Included in the increased
employee-related costs for the quarter and year-to-date in 2004 is a $0.4
million charge relating to an additional matching contribution made in
connection with the Companys defined contribution plan. This charge resulted
from a plan provision, which has subsequently been eliminated, whereby an
additional matching contribution was required to be made anytime the Companys
EPS increased by a specified amount between consecutive annual reporting
periods. Such a specified increase occurred between 1999 and 2000, thus
requiring the additional matching contribution. While this amount relates to a
prior accounting period, the failure to record it in such earlier period
reflects an oversight and did not arise or result from a material weakness in
our disclosure controls and procedures, including our internal controls over
financial reporting. In addition, the three and six months ended June 30, 2003
included a $3.1 million charge related to the shutdown of one our publishing
facility in Tennessee. Depreciation and Amortization Depreciation and amortization (D&A) for the three and six months ended June
30, 2004 was $14.9 million and $29.4 million, respectively, as compared to
$16.4 million and $32.5 million in the same periods in the prior year.
Amortization of intangible assets was $12.4 million and $24.9 million for the
three and six months ended June 30, 2004 and 2003. Depreciation of fixed
assets and amortization of computer software was $2.5 million
and $4.5 million
in the three and six months ended June 30, 2004, respectively, and $4.0 million
and $7.6 million in the same periods in the prior year. This decrease is due to
certain fixed assets and computer software that were fully depreciated in 2003. Partnership Income Partnership income relates exclusively to our DonTech segment and includes 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
earns commission revenue based on the annual value of sales contracts executed
during the period (calendar sales). We also earn revenue participation income
based on the amount of calendar sales during the period. Partnership income was
$34.8 million and $58.7 million for the three and six months ended June 30,
2004, respectively, as compared to $35.3 million and $59.0 million in the same
periods in the prior year. The decrease in partnership income from DonTech for
the three months ended June 30, 2004 is primarily due to lower calendar sales
and higher operating costs incurred by DonTech in 2004 as compared to the same
periods in the prior year. The decrease in partnership income for the six
months ended June 30, 2004 is primarily due to higher operating costs,
partially offset by higher calendar sales versus the comparable period last
year. DonTechs higher operating costs include certain marketing related
initiatives, increased benefit costs and timing associated with variable sales
compensation. See Adjusted Amounts and Other Non-GAAP Measures  DonTech
Advertising Sales-Calendar and Publication Sales below for a further
description of these amounts. Operating Income / (Loss) Operating income (loss) by segment for the three and six months ended June 30,
2004 and 2003 was as follows: Three Months Ended June 30,
    
    Six Months Ended June 30,(amounts in millions)
    
    2004
    
    2003
    
    2004
    
    2003Donnelley
    
    $
    57.3
    
    
    $
    (24.9
    )
    
    $
    120.2
    
    
    $
    (70.4
    )DonTech
    
    
    34.8
    
    
    
    35.3
    
    
    
    58.7
    
    
    
    59.0Total
    
    $
    92.1
    
    
    $
    10.4
    
    
    $
    178.9
    
    
    $
    (11.4
    )
 38




---



##### 



39




---



##### 



Reported operating income for the three months ended June 30, 2004 of $92.1
million increased by $81.7 million from the operating income of $10.4 million
in the same period in the prior year. Reported operating income for the six
months ended June 30, 2004 of $178.9 million increased by $190.3 million from
the operating loss of $11.4 million in the same period in the prior year. The
increase in operating income was primarily a result of purchase accounting
rules that precluded us from recognizing revenue and certain expenses in 2003
for those directories that published prior to the acquisition, including all
January 2003 published directories. Interest Expense, Net Net interest expense was $37.5 million and $77.8 million for the three and six
months ended June 30, 2004, respectively, as compared to $43.3 million and
$91.9 million in the same periods in the prior year. Interest expense in 2004
includes $0.3 million related to the additional matching contribution described
in General and Adminstrative Expenses above. The decrease in net interest
expense is a result of lower outstanding debt balances and lower interest rates
in 2004 as compared to the prior year, offset by a $1.2 million charge to
interest expense resulting from the redemption of the remaining 9 1/8% Senior
Subordinated Notes in the first quarter of 2004. The $1.2 million charge
consisted of the premium over par value paid at redemption of $1.0 million,
plus the non-cash write-off of $0.2 million of unamortized deferred financing
costs. Interest expense for the three months ended June 30, 2004 and 2003
includes $3.7 million and $2.3 million of non-cash amortization of deferred
financing costs, respectively. Interest expense for the six months ended June
30, 2004 and 2003 includes $7.1 million and $6.3 million of non-cash
amortization of deferred financing costs, respectively. Other Income Other income of $0.7 million and $1.5 million for the three and six months
ended June 30, 2003 represents a gain on hedging activities. In December 2002,
a charge of $1.5 million was recorded to reclassify to earnings the cumulative
change in the fair value of the swap that was previously recognized in
accumulated other comprehensive loss on the balance sheet due to the loss of
hedge accounting treatment. In 2003, we recognized a corresponding gain of
$1.5 million as the swap matured. In the first and second quarters of 2003, we
recognized $0.8 million and $0.7 million of this gain, respectively. The swap
matured in June 2003. Net Income (Loss) and Earnings (Loss) Per Share Net income for the three and six months ended June 30, 2004 was $33.1 million
and $61.2 million, respectively, as compared to the net loss of $18.9 million
and $60.1 million for the same periods in the prior year. The results for 2003
were adversely affected by purchase accounting adjustments that prevented us
from recognizing deferred revenue and certain expenses associated with those
directories published prior to the acquisition, including all January 2003
published directories. The dividend on our 8% redeemable convertible cumulative preferred stock
(Preferred Stock) reduces net income or increases the net loss, resulting in
income (loss) available to common shareholders from which earnings per share
amounts are calculated. The amount of the Preferred Stock dividend includes the
stated 8% dividend, plus a deemed dividend for a beneficial conversion feature
(BCF). The BCF is a function of the conversion price of the Preferred Stock,
the fair value of the related warrants issued with the Preferred Stock and the
fair market value of the underlying common stock on the date of issuance of the
preferred stock. In connection with the issuance of our Preferred Stock and
each subsequent quarterly dividend date, a BCF was recorded because the fair
value of the underlying common stock at the time of issuance of the preferred
stock was greater than the conversion price of the Preferred Stock. The 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 second quarter of 2004 and 2003 of $5.4
million and $6.0 million, respectively, consisted of the stated 8% dividend of
$4.4 million and $4.1 million, respectively, and a BCF of $1.0 million and $1.9
million, respectively. The Preferred Stock dividend for the six months ended
June 30, 2004 and 2003 of $10.7 million and $ 48.1 million, respectively,
consisted of the stated 8% dividend of $8.8 million and $8.0 million,
respectively, and a BCF of $1.9 million and $40.1 million, respectively. The
BCF recorded in the first half of 2003 was more significant than BCF amounts
recorded in subsequent periods, reflecting the issuance of the Preferred Stock
and related warrants in 40




---



##### 



January 2003. The resulting income (loss) available to common shareholders was
$27.7 million and $50.5 million in the three and six months ended June 30,
2004, respectively, as compared to ($24.9) million and ($108.2) million for the
same periods in the prior year. All EPS amounts have been calculated using the two-class method. See Note 2,
Summary of Significant Accounting Policies,in Part 1  Item 1 of this
quarterly report for further details and computations of the basic and diluted
EPS amounts. For the three months ended June 30, 2004, basic EPS were $0.68
and diluted EPS were $0.65. For the six months ended June 30, 2004, basic EPS
were $1.25 and diluted EPS were $1.20 per share. For the three months ended
June 30, 2003, basic and diluted EPS were a loss of $0.81, and basic and
diluted EPS for the six months ended June 30, 2003 were a loss of $3.56.
Because there was a reported net loss in each of the periods in 2003, the
calculation of diluted EPS was anti-dilutive compared to basic EPS. Diluted
EPS cannot be greater than basic EPS (or less of a loss). Therefore, reported
diluted EPS and basic EPS for the three and six months ended June 30, 2003 were
the same. Adjusted Amounts and Other Non-GAAP Measures As a result of the SPA acquisition, our 2003 GAAP results previously reported
are not comparable to our 2004 results prepared in accordance with GAAP. Under
our deferral and amortization revenue recognition method, certain directories
published in 2002, plus all directories published in January 2003, would have
been recognized as revenue in 2003. However, purchase accounting adjustments
precluded us from recognizing directory revenue and certain expenses associated
with directories that published prior to the acquisition, plus all January 2003
published directories. Accordingly, our reported 2003 GAAP results are not
indicative of our underlying operations and financial performance during 2003.
Accordingly, management has presented adjusted results for the three and six
months ended June 30, 2003 that, among other things, eliminate the purchase
accounting impact on revenue and certain expenses to provide data better
comparable to our results for the three and six months ended June 30, 2004.
Management believes that the presentation of this adjusted information will
help readers better and more easily compare current period underlying
operational results to what our performance would likely have been in the
comparable 2003 periods, absent purchase accounting considerations. All of the
following adjusted amounts are non-GAAP measures, which have been reconciled to
the most comparable GAAP measures below. 41




---



##### 



Three monthsended June 30,2004
    
    Three months ended June 30, 2003Reported
    
    Reported(amounts in millions)
    
    GAAP
    
    GAAP
    
    Adjustments
    
    AdjustedNet revenue
    
    $
    144.6
    
    
    $
    38.6
    
    
    $
    105.0
    (1)
    
    $
    143.6Expenses, other than
depreciation and amortization
    
    
    72.4
    
    
    
    47.0
    
    
    
    19.4
    (2)
    
    
    66.4Depreciation and amortization.
    
    
    14.9
    
    
    
    16.4
    
    
    
    
    
    
    
    16.4Partnership income
    
    
    34.8
    
    
    
    35.3
    
    
    
    
    
    
    
    35.3Operating income
    
    $
    92.1
    
    
    $
    10.5
    
    
    $
    85.6
    
    
    $
    96.1Six monthsended June 30,2004
    
    Six months ended June 30, 2003Reported
    
    Reported(amounts in millions)
    
    GAAP
    
    GAAP
    
    Adjustments
    
    AdjustedNet revenue
    
    $
    288.4
    
    
    $
    51.0
    
    
    $
    236.1
    (1)
    
    $
    287.1Expenses, other than
depreciation and amortization
    
    
    138.9
    
    
    
    89.0
    
    
    
    46.0
    (2)
    
    
    135.0Depreciation and amortization.
    
    
    29.3
    
    
    
    32.5
    
    
    
    
    
    
    
    32.5Partnership income
    
    
    58.7
    
    
    
    59.0
    
    
    
    
    
    
    
    59.0Operating income (loss)
    
    $
    178.9
    
    
    $
    (11.5
    )
    
    $
    190.1
    
    
    $
    178.6
  (1)
    
    Represents revenue for directories that published prior to the
acquisition, plus all January 2003 published directories, which would have
been recognized during the period had it not been for purchase accounting
adjustments required under GAAP.  (2)
    
    Represents expenses for directories that published prior to the
acquisition, plus all January 2003 published directories, which would have
been recognized during the period had it not been for purchase accounting
adjustments required under GAAP, and the effect of differences in the
application of accounting policies between legacy SPA and the Company. 42




---



##### 



2004 GAAP Revenue and Expenses Compared to 2003 Adjusted Revenue and
Expenses The components of 2004 GAAP revenue and 2003 adjusted revenue for the three and
six months ended June 30 are as follows: Three Months Ended June 30,2004
    
    2003Reported
    
    Reported
    
    
    
    
    
    2003
    
    
    
    
    
    %(amounts in millions)
    
    GAAP
    
    GAAP
    
    Adjustments
    
    Adjusted
    
    $ Change
    
    ChangeGross directory advertising revenue
    
    $
    140.3
    
    
    $
    31.7
    
    
    $
    105.7
    (1)
    
    $
    137.4
    
    
    
    2.9
    
    
    
    2.0
    %Sales claims and allowances
    
    
    (1.5
    )
    
    
    (0.3
    )
    
    
    (1.2
    )(1)
    
    
    (1.5
    )
    
    
    0.0
    
    
    
    0.0Net directory advertising revenue
    
    
    138.8
    
    
    
    31.4
    
    
    
    104.5
    
    
    
    135.9
    
    
    
    2.9
    
    
    
    2.0Pre-press publishing fees
    
    
    4.2
    
    
    
    6.0
    
    
    
    
    
    
    
    6.0
    
    
    
    (1.8
    )
    
    
    (1.3
    )Other revenue
    
    
    1.6
    
    
    
    1.2
    
    
    
    0.5
    (2)
    
    
    1.7
    
    
    
    (0.1
    )
    
    
    (5.9
    )Net revenue
    
    $
    144.6
    
    
    $
    38.6
    
    
    $
    105.0
    
    
    $
    143.6
    
    
    $
    1.0
    
    
    
    0.7
    %
 Six Months Ended June 30,2004
    
    2003Reported
    
    Reported
    
    
    
    
    
    2003
    
    
    
    
    
    %(amounts in millions)
    
    GAAP
    
    GAAP
    
    Adjustments
    
    Adjusted
    
    $ Change
    
    ChangeGross directory advertising revenue
    
    $
    279.2
    
    
    $
    37.0
    
    
    $
    237.8
    (1)
    
    $
    274.8
    
    
    $
    4.4
    
    
    
    1.6
    %Sales claims and allowances
    
    
    (3.2
    )
    
    
    (0.4
    )
    
    
    (2.7
    )(1)
    
    
    (3.1
    )
    
    
    (0.1
    )
    
    
    3.2Net directory advertising revenue
    
    
    276.0
    
    
    
    36.6
    
    
    
    235.1
    
    
    
    271.7
    
    
    
    4.3
    
    
    
    1.6Pre-press publishing fees
    
    
    9.0
    
    
    
    12.2
    
    
    
    
    
    
    
    12.2
    
    
    
    (3.2
    )
    
    
    26.2Other revenue
    
    
    3.4
    
    
    
    2.3
    
    
    
    1.0
    (2)
    
    
    3.3
    
    
    
    (0.1
    )
    
    
    (0.3
    )Net revenue
    
    $
    288.4
    
    
    $
    51.1
    
    
    $
    236.1
    
    
    $
    287.2
    
    
    $
    1.2
    
    
    
    0.4
    %
  (1)
    
    Represents revenue and sales claims and allowances for
directories that published prior to the acquisition, plus all January
2003 published directories, which would have been recognized during
the period had it not been for purchase accounting adjustments
required under GAAP.(2)
    
    Represents other revenue, primarily revenue from graphics
production, related to directories that published prior to the
acquisition, plus all January 2003 published directories, which would
have been recognized during the period had it not been for purchase
accounting adjustments required under GAAP. Total net revenue in the three months ended June 30, 2004 was $144.6 million,
an increase of $1.0 million or
0.7 % from adjusted net revenue of $143.6 million in the comparable period in
the prior year. Total net revenue for the six months ended June 30, 2004 was
$288.4 million, an increase of $1.2 million or 0.4% from adjusted net revenue
of $287.2 million in the comparable period in the prior year. 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 revenue is a result of
higher advertiser renewal rates and new business in our major Sprint markets
for which directories published in the first half of 2004 and the second half
of 2003, which was partially offset by weaker performance in national sales
and certain smaller Sprint markets for which directories published in those
same periods. Further, the adjusted revenue in 2003 was lower than in 2004
due to the overall weaker performance in the first half of 2003 and second
half of 2002. In addition, due to the 43




---



##### 



deferral and amortization method,
sales growth in published directories is amortized to revenue over the life
of the
 directory, which delays recognition of publication sales growth as recorded
revenue growth. The decrease in pre-press publishing fees for the three and
six months ended June 30, 2004 of $1.8 million and $3.2 million,
respectively, is primarily a result of the expiration of a third party
pre-press publishing contract for which we ceased providing services in the
first half of 2003. Operating and G&A expenses in the three months ended June 30, 2004 of $72.4
million increased by $6.0 million or 9.0% from adjusted operating and
G&A expenses of $66.4 million in the comparable period in the prior year.
Similar to the deferral and amortization method of revenue recognition, certain
costs directly related to the selling and production of our directories are
initially deferred when incurred and recognized ratably over the life of a
directory. For the three months ended June 30, 2004, we incurred $4.8 million
relating to the relocation of our corporate offices to Cary, North Carolina.
Sales costs were $2.6 million higher in the quarter, compared to adjusted
second quarter 2003, due to higher commission expense and sales bonuses
resulting from favorable first and second quarter publication sales results.
Operating expenses in the three months ended June 30, 2004 include $1.1 million
and $0.3 million of advertising costs that pertain to 2003 and the first
quarter of 2004 promotional activities, respectively. While these amounts
relate to prior accounting periods, the failure to record them in such earlier
periods is an oversight from the process of relocating our corporate
headquarters from New York to North Carolina and did not arise or result from a
material weakness in our disclosure controls and procedures, including our
internal controls over financial reporting. Marketing expense was $1.1 million
higher in the quarter due to increased marketing research expense. Included in
general and administrative expenses for the quarter is a $0.4 million charge
relating to an additional matching contribution made in connection with the
Companys defined contribution plan. This charge resulted from a plan
provision, which has subsequently been eliminated, whereby an additional
matching contribution was required to be made anytime the Companys EPS
increased by a specified amount between consecutive annual reporting periods.
Such a specified increase occurred between 1999 and 2000, thus requiring the
additional matching contribution. Lastly, the remaining purchase accounting
adjustments of $0.8 million related to the SPA acquisition were recorded as
operating expenses in the three months ended June 30, 2004. Offsetting these
increases was lower bad debt expense of $2.9 million resulting from continued
favorable performance in the collection process. Additionally, Publishing and
IT synergy savings in the quarter was approximately $2.1 million, resulting
from the elimination of duplicative processes and facilities from the SPA
acquisition, compared to adjusted second quarter 2003. For the six months ended June 30, 2004, operating and G&A expenses increased by
$4.0 million or 3.0%, to $138.9 million from adjusted Operating and G&A
expenses of $134.9 million in the comparable period in 2003. Expenses related
to the relocation of our corporate headquarters were $7.4 million for the six
months ended June 30, 2004. Sales costs were $3.6 million higher for the
period, due to higher commission expense and sales bonuses resulting from
favorable first quarter and second quarter publication sales results.
Operating expenses in the six months ended June 30, 2004 include $1.1 million
of advertising costs that pertain to 2003 promotional activities and a $0.4
million charge relating to an additional matching contribution made in
connection with the Companys defined contribution plan, as described above.
Lastly, the remaining purchase accounting adjustments of $3.5 million related
to the SPA acquisition were recorded as operating expenses in the six months
ended June 30, 2004. Offsetting this was lower bad debt expense of $5.8 million
due to continued favorable performance in the collection process.
Additionally, Publishing and IT synergy savings was approximately $5.4 million
compared to the same period in 2003 due to the elimination in subsequent
periods of 2003 of duplicative facilities and processes resulting from the SPA
acquisition. Operating income in the three months ended June 30, 2004 was $92.1 million, a
decrease of $4.0 million or 4.2% from adjusted operating income in the
three months ended June 30, 2003 of $96.1 million, reflecting the above
variances. Operating income in the six months ended June 30, 2004 was $178.9
million, an increase of $0.3 million or 0.2% from adjusted operating income
in the six months ended June 30, 2003 of $178.6 million. Additionally, our
2004 operating results during the three and six months ended June 30, 2004 were
impacted by purchase accounting adjustments described above that precluded us
from recognizing $0.8 million and $3.5 million in additional operating income,
respectively. 44




---



##### 



Donnelley 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 for the Donnelley segment. Directory advertising revenue is
driven by publication sales. Management believes that a comparison of
publication sales for the same directories from one period to another gives a
better indication of underlying sales trends, economic conditions and business
confidence than a comparison of directory revenue recognized using the deferral
and amortization method. Because we recognize directory revenue ratably over
the life of a directory, the amount of revenue recognized during a period is
not directly related to the sales trends, economic conditions and business
confidence during that period. Publication sales are comparable to a
same-store sales measure and are utilized and disclosed by many directory
publishers, thus facilitating comparison of sales performance among publishers.
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. Publication sales in the three months ended June 30, 2004 for the Donnelley
segment were $137.8 million, up $2.9 million or 2.1% from publication sales
for the Donnelley segment of $134.9 million in the three months ended June 30,
2003. Publication sales in the six months ended June 30, 2004 for the Donnelley
segment were $289.1 million, up $6.7 million or 2.4% from publication sales for
the Donnelley segment of $282.4 million in the six months ended June 30, 2003.
The increase in publication sales resulted from higher advertiser renewal rates
and new business in our major Sprint markets for which directories published in
the first and second quarters of 2004. These results were partially offset by
weaker performance in national sales and certain smaller Sprint markets.
Publication sales are a non-GAAP measure for which the most comparable GAAP
measure related to the Donnelley segment is net revenue. A reconciliation of
publication sales to net revenue reported in accordance with GAAP is presented
below: Three months
    
    Six monthsended June 30,
    
    ended June 30,(amounts in millions)
    
    2004
    
    2003
    
    2004
    
    2003Publication sales-Donnelley segment
    
    $
    137.8
    
    
    $
    134.9
    
    
    $
    289.1
    
    
    $
    282.4Less: adjustment for changes in directory
publication date(s)
    
    
    
    
    
    
    (2.0
    )
    
    
    
    
    
    
    (4.4
    )Publication sales disclosed in second
quarter 2003 earnings release
    
    
    137.8
    
    
    
    132.9
    
    
    
    289.1
    
    
    
    278.0Less publication sales for January 2003
directories not recognized as revenue due to
purchase accounting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (102.4
    )Less current period publication sales
deferred and not recognized as revenue in
current period
    
    
    (115.9
    )
    
    
    (111.9
    )
    
    
    (176.4
    )
    
    
    (149.4
    )Plus net revenue recognized from prior period
publishing sales
    
    
    116.9
    
    
    
    10.4
    
    
    
    163.3
    
    
    
    10.4Net directory advertising revenue on above
publication sales
    
    
    138.8
    
    
    
    31.4
    
    
    
    276.0
    
    
    
    36.6Pre-press publishing revenue
    
    
    4.2
    
    
    
    6.0
    
    
    
    9.0
    
    
    
    12.2Other revenue
    
    
    1.6
    
    
    
    1.2
    
    
    
    3.4
    
    
    
    2.3Net revenue  GAAP
    
    
    144.6
    
    
    
    38.6
    
    
    
    288.4
    
    
    
    51.1Plus: Net revenue that would have been
reported for publication sales made prior to
acquisition plus all January 2003 published
directories absent purchase accounting
    
    
    
    
    
    
    105.0
    
    
    
    
    
    
    
    236.1Net Revenue-Adjusted
    
    $
    144.6
    
    
    $
    143.6
    
    
    $
    288.4
    
    
    $
    287.2
 45




---



##### 



DonTech Advertising Sales  Calendar and Publication Sales Calendar Sales As a sales agent for SBC-branded direcories, DonTech recognizes commission
revenue based on the annual value of a sales contract in the period the
contracts are executed (calendar sales). Management reviews calendar sales for
DonTech because this is a primary driver of our partnership income from
DonTech. DonTech manages the sale of advertising to customers on a
directory-by-directory basis or project basis (a project consists of two or
more directories in a geographic area) and organizes the sales into directories
as a sales campaign. Accordingly, changes in the beginning and ending dates of
a sales campaign and the actual sales recorded at any point during the campaign
can vary from one period to the next. These variations, or timing factors, can
cause calendar sales, and thus partnership income, to be materially different
from the prior comparative period. DonTech calendar sales in the three months
ended June 30, 2004 were $119.5 million, 0.5% lower than in the three months
ended June 30, 2003 of $120.1 million. Calendar sales in the six months ended
June 30, 2004 were $205.9 million, 0.2% higher than in the six months ended
June 30, 2003 of $205.4 million. These fluctuations are primarily attributable
to the softness in the Chicago-area economy affecting the timing of the value
of accounts sold in the first half of 2004 as compared to the first half of
2003. Income from DonTech consisted of the following: Three months ended June 30,
    
    Six months ended June 30,(amounts in millions)
    
    2004
    
    2003
    
    2004
    
    200350% share of DonTech net profits
    
    $
    6.3
    
    
    $
    6.8
    
    
    $
    9.4
    
    
    $
    10.0Revenue participation income
    
    
    28.5
    
    
    
    28.5
    
    
    
    49.3
    
    
    
    49.0Total partnership income
    
    $
    34.8
    
    
    $
    35.3
    
    
    $
    58.7
    
    
    $
    59.0
 Partnership income from DonTech in the three months ended June 30, 2004 of
$34.8 million decreased $0.5 million or 1.4% from $35.3 million in the
corresponding period in the prior year, and partnership income in the six
months ended June 30, 2004 of $58.7 million decreased $0.3 million or 0.5%
from $59.0 million in the corresponding period in the prior year. The
decrease in partnership income for both periods is primarily a result of
higher operating costs, including certain marketing related initiatives,
increased benefit costs and timing associated with variable sales
compensation, incurred by DonTech in 2004. Accordingly, our 50% share of
DonTechs profits decreased by $0.5 million and $0.6 million, respectively,
for the quarter and year-to-date periods. Revenue participation income
received from SBC was relatively flat between the 2004 and 2003 year-to-date
periods reflecting the slight change in DonTechs calendar sales from which
our revenue participation income is derived. Publication Sales Management also utilizes publication sales to evaluate the sales performance of
DonTech because management believes that this measure provides a better
indication of comparable sales year-over-year in the DonTech markets than a
comparison of partnership income from DonTech. This is due to the timing
factors that can impact calendar sales (and thus partnership income) as
described above. Publication sales at DonTech represent the annual billing
value of the SBC-branded directories published during the period for which
DonTech sells advertising. Publication sales in the three months ended June 30,
2004 were $89.4 million, down $1.4 million or 1.5% from $90.8 million in the
three months ended June 30, 2003. Publication sales in the six months ended
June 30, 2004 were $173.5 million, down $5.9 million or 3.3% from $179.4
million in the six months ended June 30, 2003. This decrease is a result of
continued weak economic factors in Illinois (particularly unemployment) and
competition in the local media market. Calendar sales and publication sales are
non-GAAP measures for which the most comparable GAAP measure related to DonTech
is partnership income. A reconciliation of publication sales and calendar sales
to partnership income is provided below. 46




---



##### 



Three months ended
    
    Six months endedJune 30,
    
    June 30,(amounts in millions)
    
    2004
    
    2003
    
    2004
    
    2003DonTech publication sales
    
    $
    89.4
    
    
    $
    90.8
    
    
    $
    173.5
    
    
    $
    179.4Less the value of contracts executed and
reported as calendar sales in prior periods
    
    
    (83.1
    )
    
    
    (86.8
    )
    
    
    (164.9
    )
    
    
    (173.1
    )Plus the value of contracts executed during
the period to be reported as publication
sales in future periods
    
    
    113.2
    
    
    
    116.1
    
    
    
    197.3
    
    
    
    199.1DonTech calendar sales in the period
    
    $
    119.5
    
    
    $
    120.1
    
    
    $
    205.9
    
    
    $
    205.4Commission revenue from above calendar sales
    
    $
    30.2
    
    
    $
    30.3
    
    
    $
    52.0
    
    
    $
    51.9Partnership net expenses
    
    
    (17.7
    )
    
    
    (16.8
    )
    
    
    (33.3
    )
    
    
    (32.0
    )Partnership profit
    
    $
    12.5
    
    
    $
    13.5
    
    
    $
    18.7
    
    
    $
    19.9Donnelleys 50% share of partnership profits
    
    $
    6.3
    
    
    $
    6.8
    
    
    $
    9.4
    
    
    $
    10.0Revenue participation income on above
calendar sales
    
    
    28.5
    
    
    
    28.5
    
    
    
    49.3
    
    
    
    49.0Partnership income-GAAP
    
    $
    34.8
    
    
    $
    35.3
    
    
    $
    58.7
    
    
    $
    59.0
 47




---



##### 



LIQUIDITY AND CAPITAL RESOURCES Our Senior Secured Credit Facility, as amended (Credit Facility), consists of
a $241 million Term Loan A-2, a $925 million Term Loan B-2 and a $125 million
Revolving Credit Facility (the Revolver). Term Loans A-2 and B-2 require
quarterly principal payments. As of June 30, 2004, the outstanding balances of
Term Loans A-2 and B-2 were $99.5 million and $918.2 million, respectively. The
Revolver and Term Loan A-2 mature in December 2008, and Term Loan B-2 matures
in June 2010. Substantially all of our assets, including the capital stock of
our subsidiaries, are pledged to collateralize our obligations under the Credit
Facility. As of June 30, 2004 and December 31, 2003, there were no outstanding
borrowings under the Revolver. We plan to amend our Credit Facility to
increase Term Loans A-2 and B-2 to finance the acquisition (Acquisition) of
SBCs directory publishing business in Illinois and Northwest Indiana,
including SBCs interest in DonTech. See Recent Developments. See also our
Current Report on Form 8-K furnished to the SEC on August 3, 2004 for further
details regarding the proposed amendment of our Credit Facility. Our Credit Facility bears interest, at our option at either:  
    
    The higher of (i) a base rate as determined by Deutsche Bank
Securities Inc., Salomon Smith Barney Inc. or Bear, Stearns & Co. Inc.,
plus a 2.25% margin on the Revolver and a 1.25% margin on Term Loans
A-2 and B-2; and (ii) the Federal Funds Effective Rate (as defined)
plus 1/2 of 1%, plus a 2.25% margin on the Revolver and a 1.25% margin
on Term Loans A-2 and B-2; or
    
    LIBOR rate plus a 3.25% margin on the Revolver and a 2.25% margin
on Term Loans A-2 and B-2. We may elect interest periods of 1, 2, 3, 6,
9 or 12 months for LIBOR borrowings. We have also issued $325 million 8 7/8% Senior Notes due 2010 (Senior Notes)
and $600 million 10 7/8% Subordinated Notes due 2012 (Subordinated Notes, and
collectively with the Senior Notes, the Notes). Interest is paid on the
Notes semi-annually on June 15 and December 15. Under the Credit Facility, we
obtained consent for a new Term Loan C for potential borrowings up to $400
million, such proceeds, if borrowed, to be used to fund acquisitions and
retirement of Notes and redemption of equity, subject to certain limitations. Aggregate outstanding debt as of June 30, 2004 was $1,942.7 million. During
the six months ended June 30, 2004, we made scheduled principal payments of
$18.3 million and prepaid an additional $110.0 million in principal under our
Credit Facility. During the first quarter of 2004, we also redeemed the
remaining aggregate principal amount of the 9 1/8% Senior Subordinated Notes
totaling $21.2 million at a redemption price of 104.563% of the principal
amount thereof, plus accrued and unpaid interest. Interest expense was charged
in the six months ended June 30, 2004 by $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 directory costs. At June 30, 2004, we had $10.6 million of cash and cash equivalents before
checks not yet presented for payment of $16.2 million, and available borrowings
under the Revolver of $125 million and $400 million under Term Loan C as
described above. During the three months ended June 30, 2004, $1.4 million in
borrowings have been made under the Revolver and repaid before quarter end. No
borrowings have been made under Term Loan C. Both before and after the
Acquisition, our primary source of liquidity will continue to be cash flows
from operations as well as available borrowing capacity under the Revolver.
Aside from the Acquisition, we expect our primary liquidity requirement will be
to fund operations and for principal and interest payments on our debt. Both
before and after the Acquisition, 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 prior to the
Acquisition, revenue participation payments and other cash distributions
related to DonTech. Upon completion of the Acquisition our principal source of
cash flow will consist of cash receipts from the sale of advertising in our
yellow page directories, including those in Illinois and Northwests Indiana.
These sources are directly dependent on the value of yellow pages advertising
sold and can be impacted by, among other factors, general economic conditions,
competition from other yellow pages directory publishers and other alternative
products, consumer confidence and the level of demand for yellow pages
advertising. Assuming the Credit Facility is amended as proposed, and the
acquisition is consummated, 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. In addition, the 48




---



##### 



Company will receive $58.9 million in the third quarter of 2004 resulting from
the Companys election to carryback a federal net operating loss in connection
with the SPA acquisition. However, we make no assurances that our business
will generate sufficient cash flow from operations or that sufficient borrowing
will be available under the Revolver or Term Loan C to enable us to fund our
operations, capital expenditures and meet all debt service requirements, or for
other purposes. Cash flow provided by operating activities was $147.5 million for the six
months ended June 30, 2004. Key contributors to operating cash flow include
the following:  
    
    $144.8 million consisting of $61.2 million in net income plus
$83.6 million of net non-cash charges primarily consisting of $29.3
million of depreciation and amortization, $6.5 million in the bad
debts provision, $7.9 million in other non-cash charges and $39.9 in
deferred taxes.  
    
    $2.7 million increase in accounts payable and accrued
liabilities, reflects a source of cash based on the timing of
invoices received as compared to invoices paid during the six months
ended June 30, 2004, resulting in a higher accounts payable and
accrued liability at quarter end.  
    
    $19.0 million increase in accounts receivable and an $11.2
million increase in deferred directory revenue. We analyze the
change in deferred revenue and accounts receivable together because
when a directory is published, the annual billing value of that
directory is initially deferred and unbilled accounts receivable are
established. Each month thereafter, typically 1/12 of the billing
value is recognized as revenue and customers are billed on a periodic
basis.  
    
    $1.6 million in cash received from partnership in excess of
recorded partnership income representing a source of cash.
Partnership income during the six months ended June 30, 2004 consists
of our 50% interest in DonTechs net income and the revenue
participation income from SBC. We receive cash from DonTech and SBC
subsequent to the time we record the associated partnership income;
therefore, in periods of declining DonTech partnership income, cash
received related to prior periods will exceed the income recognized
from the current period.  
    
    $1.9 million decrease in other assets reflects an $2.2 million
increase in deferred directory costs, offset by a decrease in prepaid
insurance of $2.3 million and a decrease of $1.8 million in other
current and non-current assets. 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 for the six months ended June 30, 2004 was
$8.9 million used to purchase fixed assets, primarily computer equipment,
software and leasehold improvements. Cash used in financing activities through June 30, 2004 was $135.7 million and
includes the following:  
    
    $129.7 million in principal payments on debt borrowed under the
Credit Facility. Of this amount, $18.3 million represents scheduled
quarterly payments, $110.0 million represents principal payments made
on an accelerated basis, at our option, from excess cash flow
generated from operations and $1.4 million represents principal
payments on the Revolver.  
    
    $21.2 million in principal payments on the remaining 9 1/8% Senior Subordinated Notes.  
    
    $1.4 million in borrowings under the Revolver.  
    
    $9.5 million in the increased value of checks not yet presented for payment.  
    
    $4.3 million in proceeds from the exercise of employee stock options. 49




---



##### 



Cash flow provided by operating activities was $131.5 million through June 30,
2003. Key contributors to operating cash flow included the following:  
    
    $(62.2) million consisting of $(60.1) million in net loss plus
$(2.1) million of net non-cash charges primarily consisting of $32.5
million of depreciation and amortization, $0.3 million in the bad
debts provision, $6.9 million in other non-cash charges and $(41.8)
million in deferred taxes.  
    
    $209.0 million increase in deferred revenue primarily resulting
from directories published subsequent to the SPA acquisition.
Deferred revenue represents the value of published directories that
will be recognized as revenue over the remaining life of the
directories. As a result of purchase accounting considerations, we
did not record deferred revenue associated with SPA directories
published prior to the transaction, including all January 2003
directories. Prior to the SPA acquisition, we did not have deferred
directory revenue. Consequently, deferred revenue increased by the
value of directories published during the period (excluding January
2003 directories) and was reduced by the amount amortized and
recognized as directory revenue.  
    
    $15.5 million decrease in accounts receivable due to higher
cash collections on accounts receivable. As a result of the SPA
acquisition, we acquired the rights associated with the collection of
over $250 million of accounts receivable under advertising contracts
executed prior to the SPA acquisition. Prior to the acquisition,
accounts receivable collections were for our commission on
advertising sales contracts executed.  
    
    $6.1 million in cash received from partnership in excess of
recorded partnership income representing a source of cash.
Partnership income during the six months ended June 30, 2003
consisted of our 50% interest in DonTechs net income and the revenue
participation income from SBC. We receive cash from DonTech and SBC
subsequent to the time we record the associated partnership income;
therefore, in periods of declining DonTech partnership income, cash
received related to prior periods typicallyexceeds the income
recognized from the current period.  
    
    $24.4 million increase in other assets resulted in a use of
cash primarily due to payments made to sales persons and vendors for
directories that were scheduled to publish at a later date. These
payments were deferred until the directory was published. Cash used in investing activities through June 30, 2003 was $370.8 million and
included the following:  
    
    $2,259.6 million in cash payments to acquire SPA and pay
transaction costs.  
    
    $1,825.0 million in funds raised prior to year-end 2002 under
the Credit Facility were released from
escrow in the first quarter of 2003 in connection with the acquisition of
SPA.  
    
    $69.3 million in net proceeds raised prior to year-end 2002
from the issuance of $70 million of Preferred Stock and released from
escrow in the first quarter of 2003 in connection with the SPA
acquisition.  
    
    $5.5 million used to purchase fixed assets, primarily computer equipment and computer software. 50




---



##### 



Cash provided by financing activities through June 30, 2003 was $231.5 million and included the following:  
    
    $461.3 million in net borrowings under the Credit Facility.  
    
    $125.7 million in net proceeds from the issuance of $130 million of Preferred Stock.  
    
    $243.0 million in principal payments on pre-acquisition debt,
which consisted of $114.2 million of variable rate bank debt and
$128.8 million of fixed rate bond debt, with borrowings from the
Credit Facility and proceeds from the Preferred Stock.  
    
    $128.7 million of $152.8 principal payments on
acquisition-related debt in the first quarter of 2003 with the cash
flows generated by operations, less $24.1 in borrowings under the
revolver.  
    
    $16.2 million in proceeds from the exercise of employee stock
options. 51




---



##### 



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 through
June 30, 2004. Under the terms of the agreements, the Company receives
variable interest based on three-month LIBOR and pays a fixed rate of interest. Effective Date
    
    Notional Amount
    
    Pay rate
    
    Maturity Dateamounts in millionsMarch 28, 2003
    
    $
    255
    (1)
    
    
    2.85
    %
    
    March 28, 2007October 9, 2003
    
    $
    150
    
    
    
    1.96
    %
    
    October 9, 2005June 21, 2004
    
    $
    50
    
    
    
    3.23
    %
    
    June 21, 2006June 23, 2004
    
    $
    50
    
    
    
    3.17
    %
    
    June 23, 2006June 28, 2004
    
    $
    50
    
    
    
    3.11
    %
    
    June 28, 2006
  (1)
    
    consists of three 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 $555
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. 
 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. 52




---



##### 



(b)
    
    Changes in Internal Control.There have not been any changes
in the Companys internal control over financial reporting that
occurred during the Companys most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect,
the Companys internal control over financial reporting. 53




---



##### 



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. In order to understand our potential exposure under the litigation and tax
matters described below under the captions Information Resources, Inc. and
Tax Matters, you need to understand the relationship between us and D&B, and
certain of our predecessors and affiliates that, through various corporate
reorganizations and contractual commitments, have assumed varying degrees of
responsibility with respect to such matters. In November 1996, the company then known as The Dun & Bradstreet Corporation
separated through a spin-off (1996 Distribution) into three separate public
companies: The Dun and Bradstreet Corporation, ACNielsen Corporation
(ACNielsen), and Cognizant Corporation (Cognizant). In June 1998, The Dun &
Bradstreet Corporation separated through a spin-off (1998 Distribution) into
two separate public companies: R.H. Donnelley Corporation (formerly The Dun &
Bradstreet Corporation) and a new company that changed its name to The Dun &
Bradstreet Corporation. Later in 1998, Cognizant separated through a spin-off
(Cognizant Distribution) into two separate public companies: IMS Health
Incorporated (IMS), and Nielsen Media Research, Inc. (NMR). In September
2000, The Dun & Bradstreet Corporation separated into two separate public
companies: Moodys Corporation, (Moodys) (formerly The Dun & Bradstreet
Corporation), and a new company that changed its name to The Dun & Bradstreet
Corporation. As a result of the form of R.H. Donnelley Corporations separation
from The Dun & Bradstreet Corporation in 1998, we are the corporate successor
of and technically the defendant and taxpayer referred to below as D&B with
respect to any matter accruing prior to June 30, 1998. Information Resources, Inc. The following is a description of an antitrust lawsuit filed in 1996 by
Information Resources, Inc. (IRI). As more fully described below, VNU N.V., a
publicly traded Dutch company (VNU), and its U.S. subsidiaries VNU, Inc.,
ACNielsen, AC Nielsen (US), Inc. (ACN (US)), and NMR (collectively, the VNU
Parties), have assumed exclusive joint and several liability for any judgment
or settlement of this antitrust lawsuit. As a result of the indemnity
obligation, we do not have any exposure to a judgment or settlement of this
lawsuit unless the VNU Parties default on their obligations. In the event of
such default, we have contingent liability for this matter as a result of our
succeeding to D&Bs liabilities and obligations as part of the 1998
Distribution. In such event, however, under the contractual commitments
described below, any such amounts that we might need to pay would be shared
equally (50% each) by D&B and Moodys. Only if D&B and Moodys were unable to
bear all or a part of this liability, would we be liable, and then only to the
extent that either of them could not satisfy their joint and several indemnity
obligations to us. In July 1996, IRI filed a complaint, and subsequently amended in 1997, in the
United States District Court for the Southern District of New York, naming as
defendants D&B (now, the Company, as successor of D&B), A.C. Nielsen Company (a
subsidiary of ACNielsen) and IMS (then known as Cognizant), at the time of the
filing, all wholly owned subsidiaries of D&B. The complaint alleges various violations of U.S. antitrust laws under Sections
1 and 2 of the Sherman Antitrust Act. The complaint also alleges a claim of
tortious interference with a contract and a claim of tortious interference with
a 54




---



##### 



prospective business relationship. These claims relate to the acquisition by
defendants of Survey Research Group Limited (SRG). IRI alleges SRG violated
an alleged agreement with IRI when it agreed to be acquired by the defendants
and that the defendants induced SRG to breach that agreement. IRIs antitrust claims allege that the defendants developed and implemented a
plan to undermine IRIs ability to compete within the U.S. and foreign markets
in North America, Latin America, Asia, Europe and Australia/New Zealand through
a series of anti-competitive practices, including: unlawfully tying/bundling
services in the markets in which defendants allegedly had monopoly power with
services in markets in which ACNielsen competed with IRI; entering into
exclusionary contracts with retailers in certain countries to deny IRIs access
to sales data necessary to provide retail tracking services or to artificially
raise the cost of that data; predatory pricing; acquiring foreign market
competitors with the intent of impeding IRIs efforts to expand; disparaging
IRI to financial analysts and clients; and denying IRI access to capital
necessary for it to compete. IRIs complaint originally sought damages in excess of $350.0 million, which
amount IRI sought to treble under antitrust laws. IRI has since revised its
allegation of damages to exceed $650.0 million, which IRI also seeks to treble.
IRI has filed with the Court the report of its expert who has opined that IRI
suffered damages of between $581.6 million and $651.7 million from the
defendants alleged practices. IRI also seeks punitive damages of an
unspecified amount. In April 2003, the court denied a motion for partial summary judgment by the
defendants that sought to dismiss certain of IRIs claims and granted in part a
motion by IRI seeking reconsideration of certain summary judgment rulings the
Court had previously made in favor of the defendants. The motion granted by
the court concerns IRIs claims of injuries from defendants alleged conduct in
certain foreign markets. Pursuant to a scheduling order entered by the Court on April 8, 2004, discovery
is scheduled to end on November 1, 2004, and trial is scheduled to begin April
18, 2005. On June 21, 2004, pursuant to a stipulation between IRI and defendants, the
Court ordered that certain of IRIs claims be dismissed with prejudice from the
lawsuit, including the claim for tortious interference with the SRG
acquisition. We believe that the dismissal of the tortious interference claims
also precludes any claim for punitive damages. In connection with the 1996 Distribution, Cognizant (now NMR), ACNielsen and
D&B (now the Company) entered into an Indemnity and Joint Defense Agreement
(the Original JDA), pursuant to which they agreed to:  
    
    allocate potential liabilities that may relate to, arise out of or
result from the IRI lawsuit (IRI Liabilities); and  
    
    conduct a joint defense of such action. In particular, the Original JDA provided that:  
    
    ACNielsen would assume exclusive liability
for IRI Liabilities up to a maximum amount to
be calculated at such time as such
liabilities become payable as a result of a
final non-appealable judgment or any
settlement permitted under the Original JDA
(the ACN Maximum Amount); and
    
    D&B and Cognizant would share liability equally for any
amounts in excess of the ACN Maximum Amount. As a result of VNUs acquisition of ACNielsen in 2001, VNU assumed ACNielsens
liabilities under the Original JDA and pursuant to the Original JDA would be
included with ACNielsen in the computation of the ACN Maximum Amount. 55




---



##### 



On July 30, 2004, the VNU Parties, the Company, D&B, Moodys and IMS entered
into an Amended and Restated Indemnity and Joint Defense Agreement (the
Amended JDA). Pursuant to the Amended JDA, any and all IRI Liabilities incurred by us, D&B,
Moodys or IMS relating to a judgment (even if not final) or any settlement
being entered into in the IRI action will be jointly and severally assumed and
fully discharged exclusively by the VNU Parties. Under the Amended JDA, the VNU
Parties have agreed to, jointly and severally, indemnify us, D&B, Moodys and
IMS from and against all IRI Liabilities to which they become subject. As a
result, the concept of ACN Maximum Amount which had been used under the
Original JDA to cap ACNielsens liability for the IRI Liabilities no longer
exists, and all such liabilities are the responsibility of the VNU Parties
pursuant to the Amended JDA. In addition, the Amended JDA provides that if it becomes necessary to post any
bond pending an appeal of an adverse judgment, then the VNU Parties shall
obtain the bond required for the appeal and shall pay the full cost of such
bond. In connection with entering into the Amended JDA, the Company, D&B, Moodys and
IMS agreed to amend certain covenants of the Original JDA to provide
operational flexibility for ACNielsen going forward. In addition, the Amended
JDA includes certain amendments to the covenants of ACNielsen (which, under the
Amended JDA, are now also applicable to ACN (US), which we understand holds
ACNielsens operating assets) which are designed to preserve such parties
claim-paying ability and protect the Company, D&B, Moodys and IMS. Among other
covenants, ACNielsen and ACN (US) agreed that neither they nor any of their
respective subsidiaries will incur any indebtedness to any affiliated person,
except indebtedness which its payment will, after a payment obligation under
the Amended JDA comes due, be conditioned on, and subordinated to, the payment
and performance of the obligations of such parties under the Amended JDA. VNU
has agreed to having a process agent in New York to receive on its behalf
service of any process concerning the Amended JDA. Under the agreements relating to the 1998 Distribution, D&B assumed the defense
and agreed to indemnify us against any payments that we may be required to
make, including any liabilities arising under the Original JDA, and IRI
Liabilities arising from the IRI action itself, and in each case related legal
fees. As required by those agreements, Moodys Corporation, which subsequently
separated from D&B in the 2000 Distribution, has agreed to be jointly and
severally liable with D&B for the indemnity obligation to us. We understand
that D&B and Moodys have agreed amongst themselves to share equally (50% each)
these indemnity obligations to us. Only if D&B and Moodys were unable to bear
all or a part of their aggregate 50% share of the liability in excess of the
cap, would we be liable, and then only to the extent that either of them could
not satisfy their joint and several indemnity obligations to us.
Because liability for violations of the antitrust laws is joint and several and
because the rights and obligations relating to the Amended JDA are based on
contractual relationships, the failure of the VNU Parties to fulfill their
obligations under the Amended JDA could result in the other parties bearing all
or a share of the IRI Liabilities. Joint and several liability for the IRI
Liabilities means that even where more than one defendant is determined to have
been responsible for an alleged wrongdoing, the plaintiff can collect all or
part of the judgment from just one of the defendants. This is true regardless
of whatever contractual allocation of responsibility the defendants and any
other indemnifying parties may have made, including the allocations described
above between the VNU Parties, the Company, D&B, Moodys and IMS. Accordingly, and as a result of the allocations of liability described above,
in the event the VNU Parties default on their obligations under the Amended
JDA, each of D&B and Moodys will be responsible for the payment of 50% of the
portion of any judgment or settlement ultimately payable by the Company (which
is the defendant in the IRI action), which could be as high as all of the IRI
Liabilities. We are unable to predict the outcome of the IRI litigation or the financial
condition of any of the VNU Parties or the other defendants at the time of any
such outcome (and hence we cannot estimate their ability to pay the IRI
Liabilities pursuant to the Amended JDA or the judgment or settlement in the
IRI action). Nonetheless, while we cannot assure you as to the outcome of this
matter, management presently believes that the VNU Parties have sufficient
financial resources and borrowing capacity to satisfy their obligations under
the Amended JDA and, if they default, D&B and Moodys have sufficient financial
resources and borrowing capacity to reimburse us for any payments we may be
required to make and related costs we may incur in connection with this matter.
Therefore, 56




---



##### 



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. The status of Internal Revenue Service reviews of these
initiatives is summarized below. We understand that D&B recently reached a basis for settlement with the IRS
regarding the two legacy tax matters described below under the headings
Utilization of Capital Losses  1989-1990 and Royalty Expense Deductions 
1993-1997. These agreements are tentative, and will not bind either the IRS
or D&B until final settlement agreements are executed. Upon final settlement,
we understand that D&B expects that the net impact to D&Bs cash flow for these
two matters could be up to $51.0 million (tax, interest, and penalties, net of
associated tax benefits). Pursuant to a series of 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 unfavorable IRS rulings on the
matters summarized below (other than the matter summarized below under 
Amortization and Royalty Expense Deductions/Royalty Income  1997-2004, for
which D&B and Moodys, jointly and severally, are solely responsible). D&B, on
our behalf, was contractually obligated to pay, and did pay, the first $137.0
million of tax liability in connection with the matter summarized below as 
Utilization of Capital Losses  1989-1990. Under the terms of the 1998 Distribution, D&B agreed to assume the defense and
to indemnify us for any tax liability that may be assessed against us and any
related costs and expenses that we may incur in connection with any of these
tax matters. Also, as required by those agreements, Moodys has agreed to be
jointly and severally liable with D&B for the indemnity obligation to us. Under
the 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 in these matters, management
presently believes that D&B and Moodys have sufficient financial resources,
borrowing capacity and indemnity rights against IMS and NMR (who succeeded to
Cognizants indemnity obligations under the Cognizant Distribution) 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 tax matters. Therefore, management
presently believes that the ultimate resolution of these 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 (Tentative Settlement Pending) In 2000, D&B filed an amended tax return with respect to the utilization of
capital losses in 1989 and 1990 in response to a formal IRS notice of
adjustment. The amended tax return reflected an additional $561.6 million of
tax and interest due. In 2000, D&B paid the IRS approximately $349.3 million
and IMS (on behalf of itself and NMR) paid the IRS approximately $212.3
million. We understand that these payments were made under dispute in order to
stop additional interest from accruing and that D&B has filed a complaint for a
refund in the United States District Court. As noted above, we understand that
D&B recently reached a basis for settlement of this matter with the IRS. The
agreement is tentative and non-binding until a definitive settlement agreement
is executed. The pending settlement requires that the complaint for a refund
be withdrawn and that D&B make an additional payment to the IRS. We understand
that D&B expects that the net impact to D&Bs cash flow to settle this matter
could be up to $14.0 million (tax, interest, and penalties, net of associated
tax benefits), and that such payments will be made in 2004. 57




---



##### 



Royalty Expense Deductions  1993  1997 (Tentative Settlement Pending) In the second quarter of 2003, D&B received (on our behalf) a proposed notice
of deficiency from the IRS with respect to a partnership transaction entered
into in 1993. Specifically, the IRS is proposing 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 of approximately $5.0 million
in pending tax refunds and that the additional tax liability with respect to
the disallowance of the 1995 and 1996 royalty expense deductions could be up to
approximately $45.0 million (tax, interest and penalties, net of associated tax
benefits). In addition, and also in the second quarter of 2003, D&B received from the IRS
on behalf of the partnership associated with the above transaction a notice of
proposed partnership adjustment challenging the tax treatment of certain
royalty payments received by the partnership in which D&B was a partner. In
that notice, the IRS is seeking to reallocate certain partnership income to
D&B. In January and April 2004, D&B received additional IRS notices (similar
to those received in the second quarter of 2003) associated with D&Bs
remaining interest in the partnership transaction (as described above) for the
three months in 1997 for which the entities were partners. The additional tax
liability with respect to D&Bs share of this income for the notices received
in the second quarter of 2003 and January and April 2004 could be up to $22.3
million (tax, interest and penalties, net of associated tax benefits). We
understand that D&B believes that these positions regarding the partnership are
inconsistent with the IRS position with respect to the same royalty expense
deductions described above. This $22.3 million additional liability would be
in addition to the $45.0 million of additional liability related to royalty
expense deductions discussed in the previous paragraph. As noted above, we understand that D&B recently reached a basis for
settlement regarding the disallowance of the 1995 and 1996 royalty expense
deductions. The agreement is tentative and non-binding until a definitive
settlement agreement is executed. The agreement would eliminate the
inconsistent positions described above. We understand that D&B expects that
the net impact to D&Bs cash flow with respect to the agreement could be up to
$37.0 million (tax, interest, and penalties, net of associated tax benefits),
and that such payments will be made in 2004. We also understand that D&B
continues to discuss with IRS Appeals the 1993, 1994, and 1997 royalty expense
deductions, described above, which amounts represent $6.5 million (tax,
interest, and penalties, net of associated tax benefits). Amortization Expense Deductions  1997  2004 In the fourth quarter of 2003, D&B received (on our behalf) IRS notices of
proposed adjustment with respect to a partnership transaction entered into in
1997. In addition, D&B received, on behalf of the partnership, various IRS
materials further explaining the examining agents position with respect to the
activities of the partnership in 1997 and 1998. In April 2004, D&B received (on our behalf) proposed notices of deficiency from
the IRS, proposing adjustments with respect to the same partnership transaction
entered into in 1997 described above. The adjustments proposed in the April
notice 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 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 $55.7
million (tax, interest and penalties, net of associated 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 58




---



##### 



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 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 $138.8 million (tax, interest and penalties, net
of associated tax benefits), which would be in addition to the $55.7 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, attempting to resolve these matters at the Appeals phase
before proceeding to litigation, if necessary. If D&B were to challenge, at any
time, any of these IRS positions for years 1997 and 1998 in U.S. District Court
or the U.S. Court of Federal Claims, rather than in U.S. Tax Court, the
disputed amounts for each applicable year would need to be paid in advance for
the Court to have jurisdiction over the case. Conclusion As a result of our assessment of our exposure in these matters relating to our
prior relationship with D&B and its former affiliates, especially in light of
our indemnity arrangements with D&B and Moodys (and the VNU Parties with
respect to the IRI matter), and their respective financial resources, borrowing
capacity and, in the case of 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. 
 Item 4. Submission of Matters to a Vote of Security Holders Our Annual Meeting of Stockholders (Meeting) was held in Cary, N.C. on May 5,
2004. At the Meeting, the Companys stockholders elected each of the three
Class II directors nominated for election by the Board of Directors to serve a
three-year term as follows: VotesName
    
    Votes For
    
    WithheldKenneth G. Campbell
    
    
    37,104,526
    
    
    
    428,167Carol J. Parry
    
    
    37,032,877
    
    
    
    499,816Barry Lawson Williams
    
    
    37,019,374
    
    
    
    513,319
 The Board of Directors now comprises nine members consisting of three classes
of three directors each. The other members of our Board of Directors (David
C. Swanson, Nancy E. Cooper, Robert R. Gheewalla, Robert Kamerschen, Terrence
M. OToole and David M. Veit ) were not subject to re-election by
stockholders this year and continue in office. 59




---



##### 



At the Meeting, the Companys stockholders also ratified the appointment of
PricewaterhouseCoopers LLP (PwC) to serve as the Companys independent
accountants for 2004 as follows: Votes For
    
    Votes Against
    
    AbstentionsRatification of the appointment of PwC
    
    
    37,146,834
    
    
    
    341,472
    
    
    
    44,387
 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
    
    
    16,558,779
    
    
    
    16,419,820
    
    
    
    4,554,094
 With respect to the stockholder proposal, abstentions include broker non-votes,
and for the election of directors proposal, abstentions are included under
votes withheld. 60




---



##### 



Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit No.
    
    Document2.1
    
    Stock Purchase Agreement, dated as of September 21, 2002, by
and among the Company, Sprint Corporation and Centel
Directories LLC (incorporated by reference to Exhibit 2.1 to
the Current Report on Form 8-K, filed with the Securities and
Exchange Commission on October 1, 2002, Commission File No.
001-07155). The Company agrees to furnish supplementally a
copy of any omitted schedules to the Securities and Exchange
Commission upon request.2.2
    
    Supplemental Agreement to Stock Purchase Agreement, dated as
of December 31, 2002, by and among the Company, Sprint
Corporation and Centel Directories LLC (incorporated by
reference to Exhibit 2.2 to the Current Report on Form 8-K,
filed with the Securities and Exchange Commission on January
17, 2003, Commission File No. 001-07155). The Company agrees
to furnish supplementally a copy of any omitted schedules to
the Commission upon request.2.3
    
    Preferred Stock and Warrant Purchase Agreement, dated as of
September 21, 2002, among R.H. Donnelley Corporation and
investment partnerships affiliated with The Goldman Sachs
Group, Inc. (incorporated by reference to Exhibit 2.2 to the
Current Report on Form 8-K, filed with the Securities and
Exchange Commission on October 1, 2002, Commission File No.
001-07155)2.4
    
    Purchase Agreement dated as of July 28, 2004 by and among R.H.
Donnelley Corporation, Ameritech Corporation and Ameritech
Publishing, Inc. (incorporated by reference to Exhibit 2.1 to
the Current Report on Form 8-K filed with the SEC on August 2,
2004, Commission File No. 001-07155)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)3.6
    
    Certificate of Designations of Series B-1 Convertible
Cumulative Preferred Stock of R.H. Donnelley Corporation
(incorporated by reference to Exhibit 3.1 to the Current
Report Form 8-K, filed with the Securities and Exchange
Commission on December 3, 2002, Commission File No. 001-07155)
 61




---



##### 



Exhibit No.
    
    Document4.1
    
    Indenture, dated as of June 5, 1998, among R.H. Donnelley Inc., as Issuer,
the Company, as Guarantor, and the Bank of New York, as Trustee, with respect
to the 9 1/8% Senior Subordinated Notes due 2008 (incorporated by reference to
Exhibit 4.1 to the Registration Statement on Form S-4, filed with the
Securities and Exchange Commission on July 17, 1998, Registration No.
333-59287)4.2
    
    Form of the 9 1/8% Senior Subordinated Notes due 2008 (included in Exhibit 4.1)4.3
    
    Company Guarantee (included in Exhibit 4.1)4.4
    
    First Supplemental Indenture, dated as of November 25, 2002, among R.H.
Donnelley Inc., as Issuer, and the Company, R.H. Donnelley Acquisitions,
Inc., R.H. Donnelley APIL, Inc., R.H. Donnelley CD, Inc. and Get Digital
Smart.com, Inc., as Guarantors, and The Bank of New York, as Trustee, with
respect to the 9 1/8% Senior Subordinated Notes due 2008 (incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K, filed with the
Securities and Exchange Commission on November 25, 2002, Commission File No.
001-07155)4.5
    
    Second Supplemental Indenture, dated as of December 20, 2002, among R.H.
Donnelley Inc., as Issuer, and the Company, R.H. Donnelley Acquisitions,
Inc., R.H. Donnelley Acquisitions II, Inc., R.H. Donnelley APIL, Inc., R.H.
Donnelley CD, Inc. and Get Digital Smart.com, Inc., as Guarantors, and The
Bank of New York, as Trustee, with respect to the 9 1/8% Senior Subordinated
Notes due 2008 (incorporated by reference to Exhibit 4.1 to the Current
Report on Form 8-K, filed with the Securities and Exchange Commission on
December 20, 2002, Commission File No. 001-07155)4.6
    
    Third Supplemental Indenture, dated as of December 20, 2002 (operative as of
January 3, 2003), among R.H. Donnelley Inc., as Issuer, and the Company, R.H.
Donnelley Acquisitions, Inc., R.H. Donnelley Acquisitions II, Inc., R.H.
Donnelley APIL, Inc., R.H. Donnelley CD, Inc. and Get Digital Smart.com,
Inc., as Guarantors, and The Bank of New York, as Trustee, with respect to
the 9 1/8% Senior Subordinated Notes due 2008 (incorporated by reference to
Exhibit 4.1 to the Current Report on Form 8-K, filed with the Securities and
Exchange Commission on January 6, 2003, Commission File No. 001-07155)4.7
    
    Rights Agreement, dated as of October 27, 1998, between R.H. Donnelley
Corporation and First Chicago Trust Company (incorporated by reference to
Exhibit 4 to the Registration Statement on Form 8-A, filed with the
Securities and Exchange Commission on November 5, 1998, Commission File No.
001-07155)4.8
    
    Amendment No. 1 to Rights Agreement, dated as of February 26, 2001, by and
among R.H. Donnelley Corporation, First Chicago Trust Company of New York (as
initial Rights Agent) and The Bank of New York (as successor Rights Agent)
(incorporated by reference to Exhibit 4.5 to the Annual Report on Form 10-K
for the year ended December 31, 2000, filed with the Securities and Exchange
Commission on March 28, 2001, Commission File No. 001-07155)4.9
    
    Amendment No. 2 to Rights Agreement, dated as of September 21, 2002, between
the Company and The Bank of New York, as successor Rights Agent (incorporated
by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed with the
Securities and Exchange Commission on October 1, 2002, Commission File No.
001-07155)
 62




---



##### 



Exhibit No.
    
    Document4.10
    
    Form of Warrant Agreement, dated as of November 25, 2002, between the
Company and investment partnerships affiliated with The Goldman Sachs
Group, Inc. (incorporated by reference to Exhibit 4.1 to the Current Report
on Form 8-K, filed with the Securities and Exchange Commission on January
17, 2003, Commission File No. 001-07155)4.11
    
    Form of Warrant Agreement, dated January 3, 2003, between the Company and
investment partnerships affiliated with The Goldman Sachs Group, Inc.
(incorporated by reference to Exhibit 4.2 to the Current Report on Form
8-K, filed with the Securities and Exchange Commission on January 17, 2003,
Commission File No. 001-07155)4.12
    
    Registration Rights Agreement, dated as of November 25, 2002, among the
Company and investment partnerships affiliated with The Goldman Sachs
Group, Inc. (incorporated by reference to Exhibit 10.2 to the Current
Report on Form 8-K, filed with the Securities and Exchange Commission on
December 3, 2002, Commission File No. 001-07155)4.13
    
    Indenture dated as of December 3, 2002 between R.H. Donnelley Inc. (as
successor to R.H. Donnelley Finance Corporation I), as Issuer, and The Bank
of New York, as Trustee, with respect to the 8 7/8% Senior Notes due 2010
(incorporated by reference to Exhibit 4.13 to the Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 20, 2003,
Commission File No. 001-07155)4.14
    
    Supplemental Indenture dated as of January 3, 2003 among R.H. Donnelley
Inc., as Issuer, the Company and the other guarantors signatory thereto, as
Guarantors, and The Bank of New York, as Trustee, with respect to the 8 7/8%
Senior Notes due 2010 (incorporated by reference to Exhibit 4.14 to the
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 20, 2003, Commission File No. 001-07155)4.15
    
    Form of 8 7/8% Senior Notes due 2010 (included in Exhibit 4.13)4.16
    
    Guarantees relating to the 8 7/8% Senior Notes due 2010 (incorporated by
reference to Exhibit 4.16 to the Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 20, 2003, Commission File No.
001-07155)4.17
    
    Indenture dated as of December 3, 2002 between R.H. Donnelley Inc. (as
successor to R.H. Donnelley Finance Corporation I), as Issuer, and The Bank
of New York, as Trustee, with respect to the 10 7/8% Senior Subordinated
Notes due 2012 (incorporated by reference to Exhibit 4.17 to the Annual
Report on Form 10-K filed with the Securities and Exchange Commission on
March 20, 2003, Commission File No. 001-07155)4.18
    
    Supplemental Indenture dated as of January 3, 2003 among R.H. Donnelley
Inc., as Issuer, the Company and the other guarantors signatory thereto, as
Guarantors, and The Bank of New York, as Trustee, with respect to the
10 7/8% Senior Subordinated Notes due 2012 (incorporated by reference to
Exhibit 4.18 to the Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 20, 2003, Commission File No. 001-07155)4.19
    
    Form of 10 7/8% Senior Subordinated Notes due 2012 (included in Exhibit 4.17)4.20
    
    Guarantees relating to the 10 7/8% Senior Subordinated Notes due 2012
(incorporated by reference to Exhibit 4.20 to the Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 20, 2003,
Commission File No. 001-07155)
 63




---



##### 



Exhibit No.
    
    Document4.21
    
    Second Supplemental Indenture dated as of January 9, 2004 among R.H.
Donnelley Inc., as Issuer, the Company and other guarantors signatory
thereto, as Guarantors, and The Bank of New York, as Trustee, with respect
to the 10 7/8% Senior Subordinated Notes due 2012 (incorporated by
reference to Exhibit 4.21 to the Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 12, 2004, Commission File No.
001-07155)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 June 30, 1998, Commission File No.
001-07155)10.2
    
    Form of Tax Allocation Agreement between the Company (f/k/a The Dun &
Bradstreet Corporation) and The New Dun & Bradstreet Corporation
(incorporated by reference to Exhibit 99.3 to the Current Report on Form
8-K of the Company (f/k/a The Dun & Bradstreet Corporation), filed with the
Securities and Exchange Commission on June 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.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)10.8
    
    Exclusive Sales Agency Agreement, effective August 19, 1997, between APIL
Partners Partnership and DonTech II (incorporated by reference to Exhibit
10.13 to Amendment No. 1 to the Registration Statement on Form S-4, filed
with the Securities and Exchange Commission on August 7, 1998, Registration
No. 333-59287)
 64




---



##### 



Exhibit No.
    
    Document10.9
    
    Agreement for Publishing Services, dated as of January 1, 2002
between Ameritech Publishing Inc. and R.H. Donnelley Inc. (certain
portions of this exhibit have been omitted and filed separately
with the Securities and Exchange Commission pursuant to an
Application for an Order Granting Confidential Treatment)
(incorporated by reference to Exhibit 10.13 to the Companys
Quarterly Report on Form 10-Q for the three months ended March 31,
2002, filed with the Securities and Exchange Commission on May 10,
2002, Commission File No. 001-07155)10.10
    
    Limited Liability Company Agreement of CenDon, L.L.C. dated April
27, 2000 between R.H. Donnelley Inc. and Centel Directory Company
(certain portions of this exhibit have been omitted and filed
separately with the Securities and Exchange Commission pursuant to
an Application for an Order Granting Confidential Treatment)
(incorporated by reference to Exhibit 10.14 to the Companys
Quarterly Report on Form 10-Q for the three months ended June 30,
2002, filed with the Securities and Exchange Commission on August
14, 2002, Commission File No. 001-07155)10.11
    
    Sales Agency Agreement dated as of April 27, 2000 among R.H.
Donnelley Inc., Centel Directory Company and CenDon, L.L.C.
(incorporated by reference to Exhibit 10.15 to the Companys
Quarterly Report on Form 10-Q for the three months ended June 30,
2002, filed with the Securities and Exchange Commission on August
14, 2002, Commission File No. 001-07155)10.12
    
    Agreement for Publishing Services dated as of April 27, 2000
between R.H. Donnelley and CenDon, L.L.C. (certain portions of this
exhibit have been omitted and filed separately with the Securities
and Exchange Commission pursuant to an Application for an Order
Granting Confidential Treatment) (incorporated by reference to
Exhibit 10.16 to the Companys Quarterly Report on Form 10-Q for
the three months ended June 30, 2002, filed with the Securities and
Exchange Commission on August 14, 2002, Commission File No.
001-07155)10.13^
    
    Key Employees Performance Unit Plan, as amended and restated
(incorporated by reference to Exhibit 10.15 to Amendment No. 3 to
the Registration Statement on Form S-4, filed with the Securities
and Exchange Commission on September 28, 1998, Registration No.
333-59287)10.14^
    
    1991 Key Employees Stock Option Plan, as amended and restated
through April 25, 2000 (incorporated by reference to Exhibit 10.17
to the Companys Quarterly Report on Form 10-Q for the three months
ended September 30, 2000, filed with the Securities and Exchange
Commission on November 13, 2000, Commission File No. 001-07155)10.15^
    
    Amended and Restated 1998 Directors Stock Plan (incorporated by
reference to Exhibit 10.18 to the Companys Annual Report on Form
10-K for the year ended December 31, 1999, filed with the
Securities and Exchange Commission on March 27, 2000, Commission
File No. 001-07155)10.16^
    
    Pension Benefit Equalization Plan (incorporated by reference to
Exhibit 10.16 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2001, filed with the Securities and
Exchange Commission on March 27, 2002, Commission File No.
001-07155)
 65




---



##### 



Exhibit No.
    
    Document10.17^
    
    2001 Stock Award and Incentive Plan (incorporated by reference to
Exhibit 10.17 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2001, filed with the Securities and
Exchange Commission on March 27, 2002, Commission File No.
001-07155)10.18^
    
    Form of Non-Qualified Stock Option Agreement (incorporated by
reference to Exhibit 99.02 to Registration Statement on Form S-8,
filed with the Securities and Exchange Commission on July 25, 2001,
Registration No. 333-65822)10.19^
    
    Form of Annual Incentive Program Award (incorporated by reference
to Exhibit 99.03 to the Registration Statement on Form S-8, filed
with the Securities and Exchange Commission on July 25, 2001,
Registration No. 333-65822)10.20^
    
    Form of Performance Unit Program Award (incorporated by reference
to Exhibit 99.04 to the Registration Statement on Form S-8, filed
with the Securities and Exchange Commission on July 25, 2001,
Registration No. 333-65822)10.21^
    
    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)10.22^
    
    Employment Agreement effective as of May 1, 2002 between the
Company and David C. Swanson (incorporated by reference to Exhibit
10.29 to the Companys Quarterly Report on Form 10-Q for the three
months ended June 30, 2002, filed with the Securities and Exchange
Commission on August 14, 2002, Commission File No. 001-07155)10.23^
    
    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)10.24^
    
    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)10.25^
    
    Separation Agreement and Release dated as of July 25, 2003 between
the Company and Frank M. Colarusso (incorporated by reference to
Exhibit 10.39 to the Companys Quarterly Report on Form 10-Q for
the three month period ended June 30, 2003, filed with the
Securities and Exchange Commission on August 13, 2003, Commission
File No. 001-07155)10.26^
    
    Employment Agreement dated as of September 26, 2000 between the
Company and William C. Drexler (incorporated by reference to
Exhibit 10.35 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2000, filed with the Securities and
Exchange Commission on March 28, 2001, Commission File No.
001-07155)10.27^
    
    Amendment No. 1 to Employment Agreement dated as of February 27,
2001 between the Company and William C. Drexler (incorporated by
reference to Exhibit 10.36 to the Companys Annual Report on Form
10-K for the year ended December 31, 2000, filed with the
Securities and Exchange Commission on March 28, 2001, Commission
File No. 001-07155)
 66




---



##### 



Exhibit No.
    
    Document10.28^
    
    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)10.29^
    
    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)10.30
    
    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)10.31
    
    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)10.32
    
    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 June 30,
2003, filed with the Securities and Exchange Commission on August
13, 2003, Commission File No. 001-07155)10.33
    
    Directory Services License Agreement, dated as of January 3, 2003,
by and among R.H. Donnelley Publishing & Advertising, Inc. (f/k/a
Sprint Publishing & Advertising, Inc.), CenDon L.L.C., R.H.
Donnelley Directory Company (f/k/a Centel Directory Company),
Sprint Corporation, Sprint Directory Trademark Company, LLC and the
Sprint Local Telecommunications Division (incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K, filed with the
Securities and Exchange Commission on January 17, 2003, Commission
File No. 001-07155)10.34
    
    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)10.35
    
    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)10.36
    
    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)
 67




---



##### 



Exhibit No.
    
    Document10.37
    
    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)10.38
    
    Credit Agreement, dated as of December 6, 2002, among the Company,
R.H. Donnelley Inc., R.H. Donnelley Finance Corporation II
(subsequently merged with and into R.H. Donnelley Inc.), the several
lenders from time to time party thereto, Bear Stearns Corporate
Lending Inc. and Citicorp North America, Inc., as joint syndication
agents, BNP Paribas and Fleet National Bank, as joint documentation
agents, Deutsche Bank Trust Company Americas, as administrative
agent, and Deutsche Bank Securities Inc., Salomon Smith Barney Inc.
and Bear, Stearns & Co. Inc., as joint lead arrangers and joint
bookrunners (incorporated by reference to Exhibit 10.10 to the
Current Report on Form 8-K, filed with the Securities and Exchange
Commission on January 17, 2003, Commission File No. 001-07155)10.39
    
    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
bookrunners, 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)21
    
    Subsidiaries of the Company (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)31.1*
    
    Certification of Quarterly Report on Form 10-Q for the period ended
June 30, 2004 by David C. Swanson, Chief Executive Officer under
Section 302 of the Sarbanes-Oxley Act31.2*
    
    Certification of Quarterly Report on Form 10-Q for the period ended
June 30, 2004 by Steven M. Blondy, Senior Vice President and Chief
Financial Officer under Section 302 of the Sarbanes-Oxley Act31.3*
    
    Certification of Quarterly Report on Form 10-Q for the period ended
June 30, 2004 by David C. Swanson, Chief Executive Officer for R.H.
Donnelley Inc. under Section 302 of the Sarbanes-Oxley Act31.4*
    
    Certification of Quarterly Report on Form 10-Q for the period ended
June 30, 2004 by Steven M. Blondy, Senior Vice President and Chief
Financial Officer for R.H. Donnelley Inc. under Section 302 of the
Sarbanes-Oxley Act32.1*
    
    Certification of Quarterly Report
on Form 10-Q for the period ended June 30, 2004 under Section 906 of the Sarbanes-Oxley Act by David
C. Swanson, Chief Executive Officer, and Steven M. Blondy, Senior
Vice President and Chief Financial Officer, for R.H. Donnelley
Corporation
 68




---



##### 



Exhibit No.
    
    Document32.2*
    
    Certification of Quarterly Report on Form 10-Q for the period ended
June 30, 2004 under Section 906 of the Sarbanes-Oxley Act by David
C. Swanson, Chief Executive Officer, and Steven M. Blondy, Senior
Vice President and Chief Financial Officer, for R.H. Donnelley Inc.
   * Filed herewith^ Management contract or compensatory plan (b) Reports on Form 8-K: On April 27, 2004, the Company furnished a Current Report on Form 8-K
disclosing under Item 12 certain financial results of the Company for the three
months ended March 31, 2004 and attached a copy of its related press release as
Exhibit 99.1. On June 8, 2004, the Company furnished a Current Report on Form 8-K disclosing
under Item 9 that certain members of senior management of the Company were
scheduled to make a presentation at a media industry conference and that
management intended to make a slide presentation. The company attached a copy
of the slide presentation as Exhibit 99.1 On July 28, 2004, the Company furnished a Current Report on Form 8-K disclosing
under Item 12 certain financial results of the Company for the three months and
six months ended June 30, 2004 and attached a copy of its related press release
as Exhibit 99.1. On July 29, 2004, the Company furnished a Current Report on Form 8-K disclosing
under Item 9 that management had posted a slide presentation on its website in
connection with the Companys public announcement that it had entered into a
definitive agreement to purchase SBC Communications Inc.s directory publishing
business in Illinois and Northwest Indiana. The Company attached a copy of the
slide presentation as Exhibit 99.1. On August 2, 2004, the Company filed a Current Report on Form 8-K disclosing
under Item 5 that it had entered into a definitive agreement to purchase SBC
Communications Inc.s directory publishing business in Illinois and Northwest
Indiana. A copy of the definitive purchase agreement was attached as Exhibit
99.1. On August 3, 2004, the Company furnished a Current Report on Form 8-K
disclosing under Item 9 that management was scheduled to make certain
presentations in connection with the syndication of its senior credit facility
amendment relating to the financing of the purchase price of its recently
announced acquisition of the directory publishing business of SBC
Communications Inc. in Illinois and Northwest Indiana. A copy of certain
slides describing the material provisions of the proposed amendment were
attached as Exhibit 99.1. 69




---



##### 



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: August 9, 2004
    By:
    /s/ Steven M. BlondySteven M. BlondySenior Vice President and Chief Financial Officer
(Principal Financial Officer) Date: August 9, 2004
    By:
    /s/
Thomas D. DOrazioThomas D. DOrazioVice President and Controller
(Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. R.H. DONNELLEY INC.Date: August 9, 2004
    By:
    /s/ Steven M. BlondySteven M. BlondySenior Vice President and Chief Financial Officer
(Principal Financial Officer) Date: August 9, 2004
    By:
    /s/
Thomas D. DOrazioThomas D. DOrazioVice President and Controller
(Principal Accounting Officer) 70




---



##### 



Exhibit Index Exhibit No.
    
    Document10.3*
    
    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.31.1*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended June 30, 2004 by David C. Swanson, Chief Executive
Officer under Section 302 of the Sarbanes-Oxley Act31.2*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended June 30, 2004 by Steven M. Blondy, Senior Vice President
and Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act31.3*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended June 30, 2004 by David C. Swanson, Chief Executive
Officer for R.H. Donnelley Inc. under Section 302 of the
Sarbanes-Oxley Act31.4*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended June 30, 2004 by Steven M. Blondy, Senior Vice President
and Chief Financial Officer for R.H. Donnelley Inc. under
Section 302 of the Sarbanes-Oxley Act32.1*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended June 30, 2004 under Section 906 of the Sarbanes-Oxley
Act by David C. Swanson, Chief Executive Officer, and Steven
M. Blondy, Senior Vice President and Chief Financial Officer,
for R.H. Donnelley Corporation32.2*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended June 30, 2004 under Section 906 of the Sarbanes-Oxley
Act by David C. Swanson, Chief Executive Officer, and Steven
M. Blondy, Senior Vice President and Chief Financial Officer,
for R.H. Donnelley Inc.
   *
    
    Filed herewith 71