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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark one) (X)
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004 OR (   )
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to Commission file number 001-07155 R.H. DONNELLEY CORPORATION 
  Delaware
    
    13-2740040(State of Incorporation)
    
    (I.R.S. Employer Identification No.)1001 Winstead Drive, Cary, N.C.
    
    27513(Address of principal executive offices)
    
    (Zip Code)
 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No (   ) Indicate by check mark whether registrant is an accelerated filer Yes (X) No (   ) Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: Title of Class
    
    Shares Outstanding at May 1, 2004Common Stock, par value $1 per share
    
    31,194,213
 Commission file number 333-59287 R.H. DONNELLEY INC. * 
  Delaware
    
    36-2467635(State of Incorporation)
    
    (I.R.S. Employer Identification No.)1001 Winstead Drive, Cary, N.C.
    
    27513(Address of principal executive offices)
    
    (Zip Code)
 Registrants 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




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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 now subject to the filing requirements of Section 15(d) as a result of such
notes. As of May 1, 2004, 100 shares of R.H. Donnelley Inc. common stock, no
par value, were outstanding. 2




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R.H. DONNELLEY CORPORATION INDEX TO FORM 10-Q PAGEPART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets at March 31, 2004 and December 31, 2003
    
    
    4Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2004 and 2003
    
    
    5Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003
    
    
    6Consolidated Statement of Changes in Shareholders Deficit for the three months ended March 31, 2004
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    28Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    44Item 4. Controls and Procedures
    
    
    44PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    45Item 4. Submission of Matters to a Vote of Security Holders
    
    
    50Item 6. Exhibits and Reports on Form 8-K
    
    
    51SIGNATURES
    
    
    60
 3




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R.H. Donnelley Corporation and Subsidiaries Consolidated Balance Sheets (Unaudited)
 March 31,
    
    December 31,(in thousands, except share and per share data)
    
    2004
    
    2003AssetsCurrent AssetsCash and cash equivalents
    
    $
    9,271
    
    
    $
    7,722Accounts receivableBilled
    
    
    44,166
    
    
    
    49,203Unbilled
    
    
    188,635
    
    
    
    173,734Allowance for doubtful accounts and sales claims
    
    
    (10,854
    )
    
    
    (11,956
    )Net accounts receivable
    
    
    221,947
    
    
    
    210,981Deferred directory costs
    
    
    41,741
    
    
    
    37,907Other current assets
    
    
    19,022
    
    
    
    27,981Total current assets
    
    
    291,981
    
    
    
    284,591Fixed assets and computer software, net
    
    
    21,578
    
    
    
    20,624Partnership investment
    
    
    167,634
    
    
    
    175,729Other non-current assets
    
    
    91,447
    
    
    
    95,583Intangible assets, net
    
    
    1,852,709
    
    
    
    1,865,167Goodwill
    
    
    97,040
    
    
    
    97,040Total Assets
    
    $
    2,522,389
    
    
    $
    2,538,734Liabilities, Redeemable Convertible Preferred
Stock and Shareholders DeficitCurrent LiabilitiesAccounts payable and accrued liabilities
    
    $
    23,915
    
    
    $
    25,791Accrued interest
    
    
    30,820
    
    
    
    7,711Deferred directory revenue
    
    
    229,991
    
    
    
    216,525Current portion of long-term debt
    
    
    39,101
    
    
    
    49,586Total current liabilities
    
    
    323,827
    
    
    
    299,613Long-term debt
    
    
    1,964,441
    
    
    
    2,042,547Deferred income taxes, net
    
    
    36,447
    
    
    
    33,629Other non-current liabilities
    
    
    26,110
    
    
    
    20,967Total liabilities
    
    
    2,350,825
    
    
    
    2,396,756Commitments and contingenciesRedeemable convertible preferred stock (liquidation preference of $221,338 at
March 31, 2004 and $216,998 at December 31, 2003)
    
    
    202,563
    
    
    
    198,223Shareholders DeficitCommon stock, par value $1 par value, 400,000,000 shares authorized,
51,621,894 shares issued
    
    
    51,622
    
    
    
    51,622Additional paid-in capital
    
    
    142,493
    
    
    
    137,401Unamortized restricted stock
    
    
    (443
    )
    
    
    (531
    )Warrants outstanding
    
    
    13,758
    
    
    
    13,758Accumulated deficit
    
    
    (71,937
    )
    
    
    (94,745
    )Treasury stock, at cost, 20,437,958 shares at March 31, 2004 and 20,589,520 shares
at December 31, 2003
    
    
    (163,776
    )
    
    
    (163,741
    )Accumulated other comprehensive loss
    
    
    (2,716
    )
    
    
    (9
    )Total shareholders deficit
    
    
    (30,999
    )
    
    
    (56,245
    )Total Liabilities, Redeemable Convertible Preferred
Stock and Shareholders Deficit
    
    $
    2,522,389
    
    
    $
    2,538,734
 The accompanying notes are an integral part of the consolidated financial statements. 4




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R.H. Donnelley Corporation and Subsidiaries Consolidated Statements of Operations and Comprehensive Income (Loss)(Unaudited)
 Three months endedMarch 31,(in thousands, except per share data)
    
    2004
    
    2003Net revenue
    
    $
    143,807
    
    
    $
    12,419ExpensesOperating expenses
    
    
    53,849
    
    
    
    31,932General and administrative expenses
    
    
    12,725
    
    
    
    10,010Depreciation and amortization
    
    
    14,392
    
    
    
    16,028Total expenses
    
    
    80,966
    
    
    
    57,970Partnership income
    
    
    23,897
    
    
    
    23,633Operating income (loss)
    
    
    86,738
    
    
    
    (21,918
    )Interest expense, net
    
    
    (40,300
    )
    
    
    (48,675
    )Other income
    
    
    
    
    
    
    799Income (loss) before income taxes
    
    
    46,438
    
    
    
    (69,794
    )Provision (benefit) for income taxes
    
    
    18,343
    
    
    
    (28,607
    )Net income (loss)
    
    
    28,095
    
    
    
    (41,187
    )Preferred dividend
    
    
    5,287
    
    
    
    42,154Income (loss) available to common shareholders
    
    $
    22,808
    
    
    $
    (83,341
    )Earnings (loss) per shareBasic
    
    $
    0.57
    
    
    $
    (2.76
    )Diluted
    
    $
    0.54
    
    
    $
    (2.76
    )Shares used in computing earnings (loss) per shareBasic
    
    
    31,059
    
    
    
    30,241Diluted
    
    
    32,295
    
    
    
    30,241Comprehensive Income (Loss)Income (loss) available to common shareholders
    
    $
    22,808
    
    
    $
    (83,341
    )Unrealized
loss on interest rate swaps, net of tax
    
    
    (2,707
    )
    
    
    Comprehensive income (loss)
    
    $
    20,101
    
    
    $
    (83,341
    )
 The accompanying notes are an integral part of the consolidated financial statements. 5




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R.H. Donnelley Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)
 Three months endedMarch 31(amounts in thousands)
    
    2004
    
    2003Cash Flows from Operating ActivitiesNet income (loss)
    
    $
    28,095
    
    
    $
    (41,187
    )Reconciliation of net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    14,392
    
    
    
    16,028Deferred income taxes
    
    
    18,343
    
    
    
    (28,607
    )Provision for bad debts
    
    
    3,180
    
    
    
    146Other non-cash charges
    
    
    4,013
    
    
    
    4,669Changes in assets and liabilities, net of effects from acquisition:Cash in excess of partnership income
    
    
    8,095
    
    
    
    11,290(Increase) decrease in accounts receivable
    
    
    (14,145
    )
    
    
    58,559Increase in other assets
    
    
    (3,673
    )
    
    
    (11,107
    )Increase in accounts payable and accrued liabilities
    
    
    21,753
    
    
    
    14,225Increase in deferred directory revenue
    
    
    13,466
    
    
    
    64,223Increase in other non-current liabilities
    
    
    1,107
    
    
    
    570Net cash provided by operating activities
    
    
    94,626
    
    
    
    88,809Cash Flows from Investing ActivitiesAdditions to fixed assets and computer software
    
    
    (2,847
    )
    
    
    (2,510
    )Acquisition of SPA, net of cash received
    
    
    
    
    
    
    (2,243,345
    )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
    
    
    (2,847
    )
    
    
    (351,555
    )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
    
    
    (88,591
    )
    
    
    (89,667
    )Decrease in checks not yet presented for payment
    
    
    (4,233
    )
    
    
    Proceeds from employee stock option exercises
    
    
    2,594
    
    
    
    12,844Net cash (used in) provided by financing activities
    
    
    (90,230
    )
    
    
    267,162Increase in cash and cash equivalents
    
    
    1,549
    
    
    
    4,416Cash and cash equivalents, beginning of year
    
    
    7,722
    
    
    
    7,787Cash and cash equivalents, end of period
    
    $
    9,271
    
    
    $
    12,203Supplemental Information:Cash paid (received):Interest
    
    $
    13,296
    
    
    $
    18,783Income taxes, net
    
    $
    (11,916
    )
    
    $
    
 The accompanying notes are an integral part of the consolidated financial statements. 6




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R.H. Donnelley Corporation and Subsidiaries Consolidated Statement of Changes in Shareholders Deficit (Unaudited)
Three months ended March 31, 2004
 AccumulatedCommon Stock
    
    
    
    
    
    Unamortized
    
    
    
    
    
    
    
    
    
    Other
    
    Totaland Additional
    
    Warrants
    
    Restricted
    
    Accumulated
    
    
    
    
    
    Comprehensive
    
    Shareholders(in thousands)
    
    Paid-in Capital
    
    Outstanding
    
    Stock
    
    Deficit
    
    Treasury Stock
    
    Loss
    
    DeficitBalance, December 31, 2003
    
    $
    189,023
    
    
    $
    13,758
    
    
    $
    (531
    )
    
    $
    (94,745
    )
    
    $
    (163,741
    )
    
    $
    (9
    )
    
    $
    (56,245
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,095
    
    
    
    
    
    
    
    
    
    
    
    28,095Preferred dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,287
    )
    
    
    
    
    
    
    
    
    
    
    (5,287
    )Employee stock option exercises,
including tax benefit
    
    
    2,566
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    235
    
    
    
    
    
    
    
    2,801Stock issued for employee bonus plans
    
    
    1,264
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    1,303Restricted stock amortization
    
    
    
    
    
    
    
    
    
    
    88
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88Stock acquired for treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (309
    )
    
    
    
    
    
    
    (309
    )Additional compensatory stock issued in
Founders grant
    
    
    315
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    315Beneficial conversion feature from
issuance of Preferred Stock
    
    
    947
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    947Unrealized loss on interest rate swaps,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,707
    )
    
    
    (2,707
    )Balance, March 31, 2004
    
    $
    194,115
    
    
    $
    13,758
    
    
    $
    (443
    )
    
    $
    (71,937
    )
    
    $
    (163,776
    )
    
    $
    (2,716
    )
    
    $
    (30,999
    )
 The accompanying notes are an integral part of the consolidated financial statements. 7




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R.H. Donnelley Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited)  (tabular amounts in thousands, except per share data)
 1. Businesses 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 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 is now operated 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. 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. Equity Method Accounting.DonTech is a 50/50 perpetual partnership in which
we and an operating unit of SBC are the partners. DonTech is a separate legal
entity that provides its services with its own employees and a stand- 8




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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 (calendar sales) is executed 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. 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.
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. 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 $3.4 million and $4.0 million for the
three months ended March 31, 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 $1.9 million
for the three months ended March 31, 2004 and 2003. Concentration of Credit Risk.Approximately 85% of our directory advertising
revenue is derived from the sale of advertising to local small- and
medium-sized businesses. These advertisers typically enter into 12-month
advertising sales contracts and make monthly payments over the term of the
contract. Some advertisers prepay the full amount or a portion of the contract
value. Most new advertisers are subject to a credit review. If the
advertisers qualify, we may extend credit to them for their advertising
purchase. Small- and medium-sized businesses tend to have fewer financial
resources and higher failure rates than large businesses. In addition, full
collection of delinquent accounts can take an extended period of time and
involve significant costs. While we do not believe that extending credit to
our local advertisers will have a material adverse effect on our results of
operations or financial condition, no assurances can be given. We do not
require collateral from our advertisers, although we do charge interest to
advertisers that do not pay within 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 9




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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
March 31, 2004, we had interest rate swap agreements with major financial
institutions with a notional value of $405.0 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 $405.0 million of our variable rate debt to fixed
rate debt, mitigating our exposure to changes in interest rates. Under the
terms of the swap agreements, we receive variable interest based on three-month
LIBOR and pay a weighted average fixed rate of 2.52%. The swaps mature in
October 2005 and March 2007. The weighted average rate received was 1.15%
during the three months ended March 31, 2004. 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 $405.0 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
deficit. Any ineffectiveness is recorded through earnings. For the three
months ended March 31, 2004, our interest rate swaps provided an effective
hedge of the three-month LIBOR-based interest payments on $405.0 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 have adopted the provisions of EITF 03-6 during the first quarter
of 2004. EITF 03-6 requires earnings available to common shareholders for the
period, after deduction of preferred stock dividends, to be allocated between
the common and preferred shareholders based on their respective rights to
receive dividends. Basic EPS is then calculated by dividing income (loss)
allocable to common shareholders by the weighted average number of shares
outstanding. EITF 03-6 does not require the presentation of basic and diluted
EPS for securities other than common stock; therefore, the following EPS
amounts only pertain to our common stock. Under the guidance of EITF 03-6, diluted EPS are calculated by dividing income
(loss) allocable to common shareholders by the weighted average common shares
outstanding plus dilutive potential common stock. Potential common stock
includes stock options and warrants, the dilutive effect of which is calculated
using the treasury stock method, and Preferred Stock, the dilutive effect of
which is calculated using the if-converted method. The calculation of basic
and diluted EPS for the three months ended March 31, 2004 and 2003 is presented
below. 10




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##### 



Basic
EPSTwoClass MethodIncome (loss) available to common shareholders
    
    $
    22,808
    
    
    $
    (83,341
    )Amount allocable to common shareholders(1)
    
    
    77
    %
    
    
    100
    %Income (loss) allocable to common shareholders
    
    
    17,562
    
    
    
    (83,341
    )Weighted average common shares outstanding
    
    
    31,059
    
    
    
    30,241Basic earnings (loss) per sharetwoclass method.
    
    $
    0.57
    
    
    $
    (2.76
    )
  (1)
    
    31,059 / (31,059 + 9,203) for the three months ended March 31, 2004. In
computing basic EPS using the two-class method, we have not allocated the
net loss in the three months ended March 31, 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
    
    $
    22,808
    
    
    $
    (83,341
    )Amount allocable to common shares(1)
    
    
    77
    %
    
    
    100
    %Income (loss) allocable to common shareholders
    
    
    17,562
    
    
    
    (83,341
    )Weighted average common shares outstanding
    
    
    31,059
    
    
    
    30,241Dilutive effect of stock options(2)
    
    
    1,236
    
    
    
    Dilutive effect of Preferred Stock assuming conversion(2)
    
    
    
    
    
    
    Weighted average diluted shares outstanding
    
    
    32,295
    
    
    
    30,241Diluted earnings (loss) per share
    
    $
    0.54
    
    
    $
    (2.76
    )
  (2)
    
    The effect of the stock options in the three months ended March 31, 2003
and the assumed conversion of the Preferred Stock in the three months
ended March 31, 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 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 in October 2002 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 $0.4 million in the three months ended March 31, 2004 and 2003,
respectively. The following table reflects the pro forma net income (loss) and earnings
(loss) per share for the three months ended March 31, 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. 11




---



##### 



2004
    
    2003Net income (loss), as reported
    
    $
    28,095
    
    
    $
    (41,187
    )Add: Stock based compensation expense included in
reported net income (loss), net of related tax effects
    
    
    315
    
    
    
    426Less: 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
    
    
    (1,329
    )
    
    
    (2,686
    )Pro forma net income (loss)
    
    
    27,081
    
    
    
    (43,447
    )Preferred dividend
    
    
    5,287
    
    
    
    42,154Pro forma income (loss) available to common shareholders
    
    $
    21,794
    
    
    $
    (85,601
    )Basic earnings (loss) per shareAs reported
    
    $
    0.57
    
    
    $
    (2.76
    )Pro forma
    
    $
    0.54
    
    
    $
    (2.83
    )Diluted earnings (loss) per shareAs reported
    
    $
    0.54
    
    
    $
    (2.76
    )Pro forma
    
    $
    0.52
    
    
    $
    (2.83
    )
 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
    %
    
    
    2.7
    %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 have adopted the provisions of
EITF 03-6 during the first quarter of 2004. 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. 12




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##### 



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 included 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 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 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. 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 $12.5 million for the three months ended March 31,
2004 and 2003. The acquired long-term intangible assets and their respective
book values at March 31, 2004 are shown in the table below. DirectoryServices
    
    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
    
    
    (40,625
    )
    
    
    (16,666
    )
    
    
    (2,500
    )
    
    
    (2,500
    )
    
    
    (62,291
    )Net intangible assets
    
    $
    1,584,375
    
    
    $
    183,334
    
    
    $
    57,500
    
    
    $
    27,500
    
    
    $
    1,852,709
 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. 13




---



##### 



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 months ended
March 31, 2004 and 2003 consisted of the following: Three Months EndedMarch 31,2004
    
    2003Revenue participation income
    
    $
    20,813
    
    
    $
    20,44750% share of DonTech net income
    
    
    3,084
    
    
    
    3,186Partnership income
    
    $
    23,897
    
    
    $
    23,633
 Summarized financial information of DonTech is shown in the table below. These
results are not consolidated in our financial statements. Three Months EndedMarch 31,2004
    
    2003Net revenue
    
    $
    21,803
    
    
    $
    21,555Operating income
    
    
    6,065
    
    
    
    6,388Net income
    
    
    6,167
    
    
    
    6,372
 Total assets of DonTech were $111.5 million at March 31, 2004 and $117.5
million at December 31, 2003. Our investment in DonTech, including the revenue
participation receivable from SBC, was $167.6 million at March 31, 2004 and
$175.7 million at December 31, 2003. 6. Long-Term Debt Long-term debt at March 31, 2004 and December 31, 2003 consisted of the
following: March 31,
    
    December 31,2004
    
    2003Credit Facility
    
    $
    1,078,542
    
    
    $
    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
    
    
    2,003,542
    
    
    
    2,092,133Less current portion
    
    
    39,101
    
    
    
    49,586Long-term debt
    
    $
    1,964,441
    
    
    $
    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). The Term Loans A-2 and B-2 require
quarterly principal payments. As of March 31, 2004, the outstanding balances of
Term Loan A-2 and Term Loan B-2 were $158.0 million and $920.5 million,
respectively. The Revolver and Term Loan A-2 mature in December 2008, and the
Term Loan B-2 matures in June 2010. Substantially all of our assets, including
the capital 14




---



##### 



stock of our subsidiaries, are pledged to collateralize our
obligations under the Credit Facility. As of March 31, 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 2.50% margin on the Revolver and a 1.50% margin on the Term
Loans A-2 and B-2; and (ii) the Federal Funds Effective Rate (as
defined) plus 1/2 of 1%, plus a 2.50% margin on the Revolver and a
1.50% margin on the Term Loans A-2 and B-2; or
    
    LIBOR rate plus a 3.25% margin on the Revolver and a 2.25% margin
on the 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 months
ended March 31, 2004 was 3.95%. 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 aggregate principal amount of
the 9 1/8% Senior Subordinated Notes due 2008 totaling $21.2 million at a
redemption price of 104.563% of the principal amount thereof, plus accrued and
unpaid interest. In the three months ended March 31, 2004, we recorded
interest expense related to these notes of $1.2 million, consisting of a
premium over par value paid at redemption of $1.0 million, plus the write-off
of $0.2 million of unamortized deferred financing costs. 7. Redeemable Convertible Preferred Stock and Warrants We have 10.0 million shares of preferred stock authorized for issuance. At
March 31, 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 March 31, 2004 and December 31, 2003, the redemption
value of the Preferred Stock was $221.3 million and $217.0 million,
respectively, and at March 31, 2004, the Preferred Stock was convertible into
approximately 9.2 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. In connection with the issuance of our Preferred
Stock and each subsequent quarterly dividend date, a BCF was recorded because
the fair value of the underlying common stock at the time of issuance was
greater than the conversion price of the Preferred Stock. The BCF is treated
as a deemed dividend because the Preferred Stock was convertible into common
stock immediately after issuance. The Preferred Stock dividend for the three
months ended March 31, 2004 and 2003 of $5.3 million and $42.2 million,
respectively, consisted of the stated 8% dividend of $4.3 million and $3.9
million, respectively, and a BCF of $0.9 million and $38.2 million,
respectively. The BCF recorded in the first quarter of 2003 was higher than BCF
amounts recorded in subsequent periods, reflecting the issuance of the
preferred stock and related warrants in January 2003. 15




---



##### 



8. Restructuring Charge As a result of the SPA acquisition, we have consolidated publishing and
technology operations, sales offices and administrative personnel and have
relocated the headquarters functions in Overland Park, Kansas and Purchase, New
York to Cary, North Carolina in the first quarter of 2004. 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. Payments of $1.4 million were made during the
three months ended March 31, 2004 and the remaining costs will be paid in 2004
and 2005. 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 $0.1 million were made during the three months ended March 31, 2004
and the remaining payments will be made through 2012. The table below shows the activity in our restructuring reserve during the
three months ended March 31, 2004. RestructuringReserveBalance at January 1, 2004
    
    $
    8,499Additions to reserve charged to earnings
    
    
    357Payments
    
    
    (1,525
    )Balance at March 31, 2004
    
    $
    7,331
 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 contributed by a participating employee, up to
a maximum of 6% of each participating employees salary (including bonus and
commissions). Other Postretirement Benefits.We have an unfunded postretirement benefit
plan that provides certain healthcare and life insurance benefits to 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 months
ended March 31, 2004 and 2003 was as 16




---



##### 



follows: Pension Benefits
    
    Other Benefits2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    900
    
    
    $
    811
    
    
    $
    113
    
    
    $
    122Interest cost
    
    
    963
    
    
    
    918
    
    
    
    165
    
    
    
    122Expected return on plan assets
    
    
    (1,458
    )
    
    
    (1,477
    )
    
    
    
    
    
    
    Unrecognized prior service cost
    
    
    27
    
    
    
    27
    
    
    
    130
    
    
    
    (17
    )Amortization of unrecognized loss
    
    
    138
    
    
    
    
    
    
    
    32
    
    
    
    25Net periodic benefit expense
    
    $
    570
    
    
    $
    279
    
    
    $
    440
    
    
    $
    252
 We do not expect to make significant cash contributions to the retirement and
postretirement benefit plans in 2004. 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
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 months ended March 31, 2004 and 2003 is as
follows: Three Months Ended March 31, 2004Donnelley
    
    DonTech
    
    TotalNet revenue
    
    $
    143,807
    
    
    $
    
    
    
    $
    143,807Operating income
    
    
    62,841
    
    
    
    23,897
    
    
    
    86,738Depreciation and
amortization
    
    
    14,392
    
    
    
    
    
    
    
    14,392EBITDA(1)
    
    
    77,233
    
    
    
    23,897
    
    
    
    101,130Total assets
    
    
    2,350,961
    
    
    
    167,634
    
    
    
    2,518,595
 Three Months Ended March 31, 2003Donnelley
    
    DonTech
    
    TotalNet revenue
    
    $
    12,419
    
    
    $
    
    
    
    $
    12,419Operating (loss) income
    
    
    (45,551
    )
    
    
    23,633
    
    
    
    (21,918
    )Depreciation and
amortization
    
    
    16,028
    
    
    
    
    
    
    
    16,028EBITDA(1)
    
    
    (28,724
    )
    
    
    23,633
    
    
    
    (5,091
    )Total assets
    
    
    2,373,433
    
    
    
    174,680
    
    
    
    2,548,113
  (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 17




---



##### 



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 March 31,2004
    
    2003Net income (loss)
    
    $
    28,095
    
    
    $
    (41,187
    )+ tax expense (benefit)
    
    
    18,343
    
    
    
    (28,607
    )+ interest expense, net
    
    
    40,300
    
    
    
    48,675+ depreciation and amortization
    
    
    14,392
    
    
    
    16,028EBITDA
    
    $
    101,130
    
    
    $
    (5,091
    )
 11. Litigation We are involved in various legal proceedings arising in the ordinary course of
our business, as well as certain litigation and tax matters described below. We
periodically assess our liabilities and contingencies in connection with these
matters based upon the latest information available to us. For those matters
where it is probable that we have incurred a loss and the loss or range of loss
can be reasonably estimated, we record reserves in our consolidated financial
statements. In other instances, we are unable to make a reasonable estimate of
any liability because of the uncertainties related to both the probable outcome
and amount or range of loss. As additional information becomes available, we
adjust our assessment and estimates of such liabilities accordingly. Based on our review of the latest information available, we believe our
ultimate liability in connection with pending legal proceedings, including the
litigation and tax matters described below, will not have a material adverse
effect on our results of operations, cash flows or financial position, as
described below. 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 noted below, 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. As more fully described
below, VNU N.V., a publicly traded Dutch company (VNU), and its subsidiary
ACNielsen, have exclusive liability for any final judgment or settlement of
this antitrust lawsuit, subject to a cap. The cap is determined based on the
financial ability of VNU and ACNielsen to pay for any judgment or settlement.
Under the contractual agreements described below, amounts in excess of the cap,
if any,
would be shared as follows: 25% for D&B; 25% for Moodys; and the remaining 50%
is shared by IMS and NMR (another subsidiary of VNU). Only if D&B and Moodys
were unable to bear all or a part of their aggregate 50% 18




---



##### 



share of the liability
in excess of the cap, 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. In July 1996, IRI filed a complaint 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 Act. The complaint also alleges a claim of tortious
interference with a contract and a claim of tortious interference with a
prospective business relationship. These claims relate to the acquisition by
defendants of Survey Research Group Limited (SRG). IRI alleges SRG violated
an alleged agreement with IRI when it agreed to be acquired by the defendants
and that the defendants induced SRG to breach that agreement. IRIs antitrust claims allege that the defendants developed and implemented a
plan to undermine IRIs ability to compete within the U.S. and foreign markets
in North America, Latin America, Asia, Europe and Australia/New Zealand through
a series of anti-competitive practices, including: unlawfully tying/bundling
services in the markets in which defendants allegedly had monopoly power with
services in markets in which ACNielsen competed with IRI; entering into
exclusionary contracts with retailers in certain countries to deny IRIs access
to sales data necessary to 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. 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 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 JDA provides that:  
    
    ACNielsen will 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 JDA (the ACN Maximum
Amount); and
    
    D&B and Cognizant will share liability equally for any
amounts in excess of the ACN Maximum Amount. As noted above, ACNielsen is responsible for the IRI Liabilities up to the ACN
Maximum Amount. The JDA 19




---



##### 



provides that ACNielsen initially is to determine the
amount that it will pay at the time of settlement or a final judgment, if any,
in IRIs favor (the ACN Payment). The ACN Payment could be less than the ACN
Maximum Amount. The JDA also provides for D&B and Cognizant to pay IRI 50% of
the difference between the settlement or judgment amount and the ACN Payment.
In exchange, the JDA requires ACNielsen to issue a secured note (the ACN
Note), subject to certain limits and offsets, to each of D&B and Cognizant for
the amount of their payment. The principal amount of each ACN Note issued to
D&B and Cognizant is limited to 50% of the difference between the ACN Maximum
Amount and the ACN Payment and is subject to further limitation that it cannot
exceed 50% of the amount of any proceeds from any recapitalization plan
designed to maximize ACNielsens claims paying ability. The ACN Notes would
become payable upon the completion of any recapitalization plan described in
the next paragraph. The ACN Maximum Amount will be determined by an investment banking firm as the
maximum amount that ACNielsen is able to pay after giving effect to:  
    
    any recapitalization plan submitted by an investment bank that is
designed to maximize the claims-paying ability of ACNielsen without
impairing the investment banking firms ability to deliver a viability
opinion and without requiring stockholder approval; and
    
    payment of interest on the ACN Notes and related fees and expenses. For these purposes, viability means the ability of ACNielsen, after giving
effect to such recapitalization plan, the payment of interest on the ACN Notes,
the payment of related fees and expenses, and the payment of the ACN Maximum
Amount, to:  
    
    pay its debts as they become due; and
    
    finance the current and anticipated operating and capital requirements
of its business, as reconstituted by such recapitalization plan, for
two years from the date any such recapitalization plan is expected to
be implemented. As a result of VNUs acquisition of ACNielsen in 2001, VNU assumed ACNielsens
liabilities under the JDA and pursuant to the JDA will be included with
ACNielsen in the computation of the ACN Maximum Amount. Under the agreements
relating to the Cognizant Distribution, IMS and NMR are each jointly and
severally liable for all Cognizant liabilities under the JDA, although we
understand that amongst themselves they have agreed to share the liability for
these amounts as follows: 75% IMS and 25% NMR up to a maximum of $125.0
million. 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 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 both of them could not
satisfy their joint and several indemnity obligations to us. However, because liability for violations of the antitrust laws is joint and
several and because many of the rights and obligations relating to the JDA are
based on contractual relationships, the inability or failure of any party to
the JDA to fulfill its obligations could result in the other parties, including
us, bearing a greater share of the IRI Liabilities. Joint and several
liability means that even where more than one defendant is determined to have
been responsible for alleged wrongdoing, the plaintiff can collect all or part
of a judgment from any one or more of the responsible defendants. This is true
regardless of any contractual allocation of responsibility or indemnification
provisions, including those described above among VNU, ACNielsen, D&B, IMS,
Moodys, NMR and us. We are unable to predict at this time the outcome of the IRI action or the
financial condition of ACNielsen and 20




---



##### 



VNU at the time of any such outcome.
Accordingly, we cannot estimate the ACN Maximum Amount and the portion of any
judgment to be paid by VNU and ACNielsen under the JDA, and hence cannot assess
whether there is any material excess liability over the ACN Maximum Amount for
which we might be liable. Nonetheless, while we cannot assure you as to the
outcome of this matter, management presently believes that (i) 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 (ii) IMS and NMR in turn have sufficient
financial resources and borrowing capacity to satisfy their 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 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. 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. 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 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, that D&B is contesting the IRSs formal
assessment and would also contest the assessment of amounts, if any, in excess
of the amounts paid, and that D&B has filed a complaint for a refund in the
United States District Court. This case is expected to go to trial in 2005,
unless earlier resolved among the IRS and the parties. We believe that the fact
that D&B and IMS have already paid the IRS a substantial amount of additional
taxes with respect to the contested tax planning strategies significantly
mitigates our risk. 21




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##### 



Royalty Expense Deductions  1993  1997 In the second quarter of 2003, D&B received (on our behalf) a proposed notice
of deficiency from the IRS with respect to a partnership transaction entered
into in 1993. Specifically, the IRS 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 $44.4 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 $21.9
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 $21.9 million additional liability would be
in addition to the $44.4 million of additional liability related to royalty
expense deductions discussed in the previous paragraph. D&B has filed protests relating to these proposed adjustments with the IRS
Office of Appeals. The parties are attempting to resolve these matters at the
Appeals phase before proceeding to litigation, if necessary. If the IRS were
to prevail in its position, D&B would share responsibility for the matter with
Moodys, IMS and NMR, as disclosed above. If D&B were to challenge any of
these IRS positions at any time in a U.S. District Court or the U.S. Court of
Federal Claims, rather than in U.S. Tax Court, the disputed amounts would need
to be paid in advance for the Court to have jurisdiction over the case. 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. The receipt of these notices provides D&B with the
opportunity to appeal the proposed adjustments administratively to the IRS
Office of Appeals. 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 $53.9
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 $2.2 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. Relatedly, the IRS 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 22




---



##### 



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 $137.5 million (tax, interest and penalties, net
of associated tax benefits), which would be in addition to the $53.9 million
noted above related to the amortization expense deduction. We understand that D&B is attempting to resolve these matters with the IRS
before proceeding to IRS Appeals or litigation, if necessary. If D&B were to
challenge any of these IRS positions at any time 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 their respective financial
resources, borrowing capacity and indemnity rights against IMS and NMR (and
ACNielsen and VNU with respect to the IRI matter), and in turn IMS and NMRs
(and ACNielsens and VNUs with respect to the IRI matter) 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. 23




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##### 



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 Senior Notes and Subordinated 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 March 31, 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 March 31, 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 in 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. 24




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##### 



R.H. Donnelley Corporation
Consolidating Condensed Balance Sheet
March 31, 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
    
    
    
    
    
    $
    8,104
    
    
    $
    1,129
    
    
    $
    38
    
    
    
    
    
    
    $
    9,271Accounts receivable, net
    
    
    
    
    
    
    
    
    
    
    221,947
    
    
    
    
    
    
    
    
    
    
    
    221,947Deferred directory costs
    
    
    
    
    
    
    
    
    
    
    41,741
    
    
    
    
    
    
    
    
    
    
    
    41,741Other current assets
    
    
    
    
    
    
    17,610
    
    
    
    1,412
    
    
    
    
    
    
    
    
    
    
    
    19,022Total current assets
    
    
    
    
    
    
    25,714
    
    
    
    266,229
    
    
    
    38
    
    
    
    
    
    
    
    291,981Investment in subsidiaries
    
    $
    171,564
    
    
    
    4,584,982
    
    
    
    (2,124,955
    )
    
    
    87,488
    
    
    $
    (2,551,445
    )
    
    
    167,634Fixed assets, net
    
    
    
    
    
    
    17,360
    
    
    
    4,218
    
    
    
    
    
    
    
    
    
    
    
    21,578Other assets
    
    
    
    
    
    
    91,447
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91,447Intangible assets, net
    
    
    
    
    
    
    
    
    
    
    1,852,709
    
    
    
    
    
    
    
    
    
    
    
    1,852,709Goodwill
    
    
    
    
    
    
    
    
    
    
    97,040
    
    
    
    
    
    
    
    
    
    
    
    97,040Total assets
    
    $
    171,564
    
    
    $
    4,719,503
    
    
    $
    95,241
    
    
    $
    87,526
    
    
    $
    (2,551,445
    )
    
    $
    2,522,389Liabilities, Preferred Stock
and Shareholders DeficitAccrued liabilities
    
    
    
    
    
    $
    125,782
    
    
    $
    39,387
    
    
    $
    7,559
    
    
    $
    (117,993
    )
    
    $
    54,735Deferred directory revenue
    
    
    
    
    
    
    
    
    
    
    229,991
    
    
    
    
    
    
    
    
    
    
    
    229,991Current portion LTD
    
    
    
    
    
    
    39,101
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,101Total current liabilities
    
    
    
    
    
    
    164,883
    
    
    
    269,378
    
    
    
    7,559
    
    
    
    (117,993
    )
    
    
    323,827Long-term debt
    
    
    
    
    
    
    1,964,441
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,964,441Deferred income taxes, net
    
    
    
    
    
    
    51,536
    
    
    
    (63,557
    )
    
    
    35,033
    
    
    
    13,435
    
    
    
    36,447Other long-term liabilities
    
    
    
    
    
    
    26,078
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    26,110Redeemable convertible
preferred stock
    
    $
    202,563
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    202,563Shareholders (deficit) equity
    
    
    (30,999
    )
    
    
    2,512,565
    
    
    
    (110,612
    )
    
    
    44,934
    
    
    
    (2,446,887
    )
    
    
    (30,999
    )Total liabilities, preferred
stock and shareholders equity
    
    $
    171,564
    
    
    $
    4,719,503
    
    
    $
    95,241
    
    
    $
    87,526
    
    
    $
    (2,551,445
    )
    
    $
    2,522,389
 25




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##### 



R.H. Donnelley Corporation
Consolidating Condensed Statement of Operations
For the Three Months Ended March 31, 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
    
    
    
    
    
    $
    5,210
    
    
    $
    138,597
    
    
    
    
    
    
    
    
    
    
    $
    143,807Expenses
    
    
    
    
    
    
    21,587
    
    
    
    59,363
    
    
    $
    16
    
    
    
    
    
    
    
    80,966Partnership income
    
    $
    28,477
    
    
    
    66,209
    
    
    
    
    
    
    
    20,814
    
    
    $
    (91,603
    )
    
    
    23,897Operating income
    
    
    28,477
    
    
    
    49,832
    
    
    
    79,234
    
    
    
    20,798
    
    
    
    (91,603
    )
    
    
    86,738Interest expense
    
    
    
    
    
    
    (40,300
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,300
    )Pre-tax income
    
    
    28,477
    
    
    
    9,532
    
    
    
    79,234
    
    
    
    20,798
    
    
    
    (91,603
    )
    
    
    46,438Income tax expense (benefit)
    
    
    
    
    
    
    18,945
    
    
    
    (29,356
    )
    
    
    (7,549
    )
    
    
    383
    
    
    
    18,343Net income
    
    
    28,477
    
    
    
    28,477
    
    
    
    49,878
    
    
    
    13,249
    
    
    
    (91,986
    )
    
    
    28,095Preferred dividend
    
    
    5,287
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,287Income available to common
shareholders
    
    $
    23,190
    
    
    $
    28,477
    
    
    $
    49,878
    
    
    $
    13,249
    
    
    $
    (91,986
    )
    
    $
    22,808
 R.H. Donnelley Corporation
Consolidating Condensed Statement of Operations
For the Three Months Ended March 31, 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
    
    $
    
    
    
    $
    6,555
    
    
    $
    5,864
    
    
    $
    
    
    
    $
    
    
    
    $
    12,419Expenses
    
    
    
    
    
    
    16,816
    
    
    
    41,119
    
    
    
    35
    
    
    
    
    
    
    
    57,970Partnership (loss) income
    
    
    (41,922
    )
    
    
    (4,347
    )
    
    
    
    
    
    
    51,314
    
    
    
    18,588
    
    
    
    23,633Operating (loss) income
    
    
    (41,922
    )
    
    
    (14,608
    )
    
    
    (35,255
    )
    
    
    51,279
    
    
    
    18,588
    
    
    
    (21,918
    )Interest (expense) income
    
    
    
    
    
    
    (48,675
    )
    
    
    (48,435
    )
    
    
    48,435
    
    
    
    
    
    
    
    (48,675
    )Other income
    
    
    
    
    
    
    799
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    799Pre-tax (loss) income
    
    
    (41,922
    )
    
    
    (62,484
    )
    
    
    (83,690
    )
    
    
    99,714
    
    
    
    18,588
    
    
    
    (69,794
    )Income tax benefit (expense)
    
    
    
    
    
    
    20,562
    
    
    
    32,272
    
    
    
    (24,962
    )
    
    
    735
    
    
    
    28,607Net (loss) income
    
    
    (41,922
    )
    
    
    (41,922
    )
    
    
    (51,418
    )
    
    
    74,752
    
    
    
    19,323
    
    
    
    (41,187
    )Preferred dividend
    
    
    42,154
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,154(Loss) income available
to common shareholders
    
    $
    (84,076
    )
    
    $
    (41,922
    )
    
    $
    (51,418
    )
    
    $
    74,752
    
    
    $
    19,323
    
    
    $
    (83,341
    )
 26




---



##### 



R.H. Donnelley Corporation
Consolidating Condensed Statement of Cash Flows
For the Three Months Ended March 31, 2004 R.H.R.H. Donnelley
    
    Donnelley
    
    R.H. Donnelley
    
    Other
    
    
    
    
    
    ConsolidatedCorp.
    
    Inc.
    
    Publishing &
    
    Guarantor
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    Advertising
    
    Subsidiaries
    
    Eliminations
    
    CorporationCash flow from operations
    
    $
    
    
    
    $
    (13,358
    )
    
    $
    81,971
    
    
    $
    26,767
    
    
    $
    (754
    )
    
    $
    94,626Cash flow from investing activities
    
    
    
    
    
    
    (2,847
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,847
    )Cash flow from financing activities:Debt repayments
    
    
    
    
    
    
    (88,591
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (88,591
    )Intercompany transfers
    
    
    
    
    
    
    107,627
    
    
    
    (81,644
    )
    
    
    (26,737
    )
    
    
    754
    
    
    
    Other
    
    
    
    
    
    
    (1,639
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,639
    )Net cash flow from financing activities
    
    
    
    
    
    
    17,397
    
    
    
    (81,644
    )
    
    
    (26,737
    )
    
    
    754
    
    
    
    (90,230
    )Change in cash
    
    
    
    
    
    
    1,192
    
    
    
    327
    
    
    
    30
    
    
    
    
    
    
    
    1,549Cash at beginning of year
    
    
    
    
    
    
    6,900
    
    
    
    801
    
    
    
    21
    
    
    
    
    
    
    
    7,722Cash at end of period
    
    $
    
    
    
    $
    8,092
    
    
    $
    1,128
    
    
    $
    51
    
    
    $
    
    
    
    $
    9,271
 R.H. Donnelley Corporation
Consolidating Condensed Statement of Cash Flows
For the Three Months Ended March 31, 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
    
    $
    (41,922
    )
    
    $
    (2,245
    )
    
    $
    2,263,674
    
    
    $
    (2,130,698
    )
    
    $
    88,809Cash flow from investing activities
    
    
    
    
    
    
    (335,685
    )
    
    
    (2,243,345
    )
    
    
    2,227,475
    
    
    
    (351,555
    )Cash flow from financing activities
    
    
    41,922
    
    
    
    347,670
    
    
    
    (25,619
    )
    
    
    (96,811
    )
    
    
    267,162Change in cash
    
    
    
    
    
    
    9,740
    
    
    
    (5,290
    )
    
    
    (34
    )
    
    
    4,416Cash at beginning of year
    
    
    
    
    
    
    7,745
    
    
    
    
    
    
    
    42
    
    
    
    7,787Cash at end of period
    
    $
    
    
    
    $
    17,485
    
    
    $
    (5,290
    )
    
    $
    8
    
    
    $
    12,203
 27




---



##### 



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. 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 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 is now operated as
R.H. Donnelley Publishing & Advertising, Inc., an indirect, wholly owned
subsidiary of the Company. 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 an operating unit of SBC.
DonTech acts as the exclusive sales agent for yellow pages directories
published by SBC in Illinois and northwest Indiana and earns a commission from
SBC 28




---



##### 



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 24% of our total operating income before
depreciation and amortization for the three months ended March 31, 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 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 11 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- 29




---



##### 



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, 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 subjected 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 as of 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 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. 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.
Management believes the current assumptions and other considerations used to
estimate these amounts in the Companys consolidated financial statements are
appropriate. 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. 30




---



##### 



EITF 03-6 is effective for interim periods ending on or after June 30, 2004 for
calendar year companies. We have adopted the provisions of EITF 03-6 during the
first quarter of 2004. 31




---



##### 



RESULTS OF OPERATIONS
Three months ended March 31, 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 to each other, as well as a detailed discussion of advertising
sales, which drive revenue, see Adjusted Amounts and Other Non-GAAP Measures
below. Relocation and Integration Charges Our first quarter 2004 expenses include severance, move-related and integration
charges of $2.6 million 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 months ended March 31, 2004 and
2003 were as follows: (amounts in millions)
    
    2004
    
    2003
    
    $ ChangeGross directory advertising revenue
    
    $
    138.8
    
    
    $
    5.3
    
    
    $
    133.5Sales allowances
    
    
    (1.4
    )
    
    
    
    
    
    
    (1.4
    )Net directory advertising revenue
    
    
    137.4
    
    
    
    5.3
    
    
    
    132.1Pre-press publishing fees
    
    
    4.8
    
    
    
    6.1
    
    
    
    (1.3
    )Other revenue
    
    
    1.6
    
    
    
    1.0
    
    
    
    0.6Total
    
    $
    143.8
    
    
    $
    12.4
    
    
    $
    131.4
 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 months ended March 31, 2004 was $143.8 million as
compared to $12.4 million in the same period in the prior year. The increase
in total net revenue in the first quarter of 2004 is primarily a result of
purchase accounting adjustments that adversely impacted first quarter 2003
results as described above. Due to the adjustments, directory revenue for the
three months ended March 31, 2003 includes only the amortization of February
and March 2003 publication sales under the deferral and amortization method
for two months and one month, respectively. Revenue from pre-press publishing services was $4.8 million in the three months
ended March 31, 2004 as compared to $6.1 million in the same period in the
prior year. The decrease of $1.3 million is primarily due to fees 32




---



##### 



earned from a third party pre-press publishing contract for which we ceased providing
services in the first quarter in 2003. There were no comparable revenues earned
in the first quarter 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 three months ended March 31, 2004 and
2003 were as follows: (amounts in millions)
    
    2004
    
    2003
    
    $ ChangeOperating expenses
    
    $
    53.8
    
    
    $
    32.0
    
    
    $
    21.8G&A expenses
    
    
    12.7
    
    
    
    10.0
    
    
    
    2.7D&A expenses
    
    
    14.4
    
    
    
    16.0
    
    
    
    (1.6
    )Total
    
    $
    80.9
    
    
    $
    58.0
    
    
    $
    22.9
 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 months ended March 31, 2004 were $53.8
million as compared to $32.0 million in the same period in the prior year. The
increase in operating expenses in 2004 is primarily a result of the same
purchase accounting adjustments in the 2003 period 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 a directory. Due
to the elimination of SPAs deferred revenue and deferred costs for 2002 and
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 $25.6 million. Due to these
adjustments, directory expenses for the three months ended March 31, 2003
include only the amortization of February and March 2003 deferred directory
costs under the deferral and amortization method for two months and one month,
respectively. Partially offsetting the increase in operating expenses is a
reduction of bad debt expense of $4.1 million resulting from continued
improvements in the collection process. Additionally, publishing and
information technology costs were lower by approximately $3.1 million 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 quarter of 2003.
Lastly, print, paper and distribution costs were lower by $0.6 million in the
first quarter of 2004 as compared to the prior year due to process improvements
implemented following the SPA acquisition. Partially offsetting these lower
expenses were $2.7 million of remaining purchase accounting adjustments
relating to the SPA acquisition recorded in the first quarter of 2004 and an
increase in corporate governance costs of $0.4 million. General and Administrative Expenses General and administrative (G&A) expenses in three months ended March 31,
2004 were $12.7 million as compared to $10.0 million in the same period in the
prior year. Due to the elimination of SPAs deferred revenue and deferred costs
for 2002 and January 2003 directories as required by purchase accounting, our
reported G&A expenses in 2003 did not include certain expenses associated with
those directories totaling $1.0 million. Additionally, the increase in G&A
expenses is primarily attributable to incremental costs of $2.6 million
relating to the relocation of our corporate offices to Cary, North Carolina. Depreciation and Amortization Depreciation and amortization (D&A) for the three months ended March 31, 2004
was $14.4 million as compared 33




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##### 



to $16.0 million in the same period in the prior year. D&A in both the
three-month periods includes $12.5 million of amortization of the intangible
assets acquired in the SPA acquisition. Depreciation of fixed assets and
amortization of computer software was $1.9 million in the three months ended
March 31, 2004 and $3.5 million in the same period in the prior year. This
decrease is due to certain fixed assets and computer software, which 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
$23.9 million for the three months ended March 31, 2004 as compared to $23.6
million in the same period in the prior year. The slight increase in
partnership income from DonTech is primarily due to the increase in calendar
sales in the first quarter of 2004 as compared to the similar period in the
prior year. 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 months ended March 31, 2004 and 2003
was as follows: 2004
    
    2003(amounts in millions)Donnelley
    
    $
    62.8
    
    
    $
    (45.5
    )DonTech
    
    
    23.9
    
    
    
    23.6Total
    
    $
    86.7
    
    
    $
    (21.9
    )
 Reported operating income for the three months ended March 31, 2004 of $86.7
million increased by $108.6 million from the operating loss of $21.9 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 $40.3 million for the three months ended March 31,
2004 as compared to $48.7 million in the same period in the prior year. The
decrease in net interest expense is a result of lower outstanding debt balances
plus 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 write-off of $0.2 million of unamortized deferred
financing costs. Interest expense for the three months ended March 31, 2004
and 2003 includes $3.6 million and $4.0 million of non-cash amortization of
deferred financing costs, respectively. Other Income Other income of $0.8 million for the three months ended March 31, 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. 34




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##### 



Net Income (Loss) and Earnings (Loss) Per Share Net income for the three months ended March 31, 2004 was $28.1 million as
compared to the net loss of $41.2 million for the same period 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. In
connection with the issuance of our Preferred Stock and each subsequent
quarterly dividend date, a BCF was recorded because the fair value of the
underlying common stock at the time of issuance was greater than the conversion
price of the Preferred Stock. The full amount of the BCF is treated as a
deemed dividend because the Preferred Stock was convertible into common stock
immediately after issuance in November 2002 and January 2003. The Preferred
Stock dividend in the first quarter of 2004 and 2003 of $5.3 million and $42.2
million, respectively, consisted of the stated 8% dividend of $4.4 million and
$3.9 million, respectively, and a BCF of $0.9 million and $38.2 million,
respectively. The BCF recorded in the first quarter of 2003 was more
significant than BCF amounts recorded in subsequent periods, reflecting the
issuance of the Preferred Stock and related warrants in January 2003. The
resulting income (loss) available to common shareholders was $22.8 million and
$(83.3) million in the three months ended March 31, 2004 and 2003,
respectively. For
the three months ended March 31, 2004, basic EPS
using the two-class method were $0.57 and diluted EPS were $0.54 per share.
For the three months ended March 31, 2003, basic EPS, calculated under the
two-class method, were a loss of $2.76. Diluted EPS were also a loss of $2.76.
Because there was a reported net loss in the first quarter 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 first quarter 2003 were the same. 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. 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 directories published in January 2003, would have been
recognized as revenue in 2003. However, purchase accounting considerations
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 months
ended March 31, 2003 that, among other things, eliminate the purchase
accounting impact on revenue and certain expenses in order to provide data more
comparable to our results for the three months ended March 31, 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 period, 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. 35




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##### 



Three monthsended March 31,(amounts in millions)
    
    2004
    
    Three months ended March 31, 2003Reported
    
    ReportedGAAP
    
    GAAP
    
    Adjustments
    
    AdjustedNet revenue
    
    $
    143.8
    
    
    $
    12.4
    
    
    $
    131.1
    (1)
    
    $
    143.5Expenses, other than
depreciation and
amortization
    
    
    66.6
    
    
    
    41.9
    
    
    
    26.6
    (2)
    
    
    68.5Depreciation and amortization
    
    
    14.4
    
    
    
    16.0
    
    
    
    
    
    
    
    16.0Partnership income
    
    
    23.9
    
    
    
    23.6
    
    
    
    
    
    
    
    23.6Operating income (loss)
    
    $
    86.7
    
    
    $
    (21.9
    )
    
    $
    104.5
    
    
    $
    82.6
  (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. 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
months ended March 31 are as follows: 2004
    
    2003Reported
    
    Reported
    
    
    
    
    
    2003
    
    
    
    
    
    %(amounts in millions)
    
    GAAP
    
    GAAP
    
    Adjustments
    
    Adjusted
    
    $ Change
    
    ChangeGross directory advertising revenue
    
    $
    138.8
    
    
    $
    5.3
    
    
    $
    132.1
    (1)
    
    $
    137.4
    
    
    $
    1.4
    
    
    
    1.0
    %Sales claims and allowances
    
    
    (1.4
    )
    
    
    
    
    
    
    (1.6
    )(1)
    
    
    (1.6
    )
    
    
    0.2
    
    
    
    12.5Net directory advertising revenue
    
    
    137.4
    
    
    
    5.3
    
    
    
    130.5
    
    
    
    135.8
    
    
    
    1.6
    
    
    
    1.2Pre-press publishing fees
    
    
    4.8
    
    
    
    6.1
    
    
    
    
    
    
    
    6.1
    
    
    
    (1.3
    )
    
    
    (21.3
    )Other revenue
    
    
    1.6
    
    
    
    1.0
    
    
    
    0.6
    (2)
    
    
    1.6
    
    
    
    
    
    
    
    Net revenue
    
    $
    143.8
    
    
    $
    12.4
    
    
    $
    131.1
    
    
    $
    143.5
    
    
    $
    0.3
    
    
    
    0.2
    %
  (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 graphic revenue, 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 March 31, 2004 was $143.8
million, an increase of $0.3 million or 0.2% from adjusted net revenue of
$143.5 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. 36




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##### 



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 quarter, which was partially
offset by weaker performance in national sales and certain smaller Sprint
markets for which directories published in the first quarter. In addition,
due to the 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 as recorded revenue. The decrease in
pre-press publishing fees of $1.3 million is primarily a result of the
expiration of a third party pre-press publishing contract for which we ceased
providing services in first quarter 2003. Operating and G&A expenses in the first quarter of 2004 of $66.6 million
decreased by $1.9 million or 2.8% from adjusted operating and G&A expenses of
$68.5 million in the first quarter of 2003. 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 a directory. The decrease in
expenses in the first quarter of 2004 is primarily due to lower bad debt
expense of $4.1 million resulting from continued process improvements in the
collection process. Additionally, the decrease in expenses in the first
quarter of 2004 is also due to lower publishing and information technology
costs from the elimination of duplicative facilities and operational costs
resulting from integration of the SPA acquisition of approximately $3.1 million
and lower print, paper and distribution costs of $0.6 million due to process
improvements implemented following the SPA acquisition. These decreases were
offset by $2.7 million of remaining purchase accounting adjustments relating to
the SPA acquisition, $2.6 million in increased general and administrative costs
due to the headquarters relocation to Cary, North Carolina and an increase in
corporate governance costs of $0.4 million. Operating income in the three months ended March 31, 2004 was $86.7 million, an
increase of $4.1 million or 5.0% from adjusted operating income in the three
months ended March 31, 2003 of $82.6 million, reflecting the above variances.
Additionally, our 2004 operating results during the first quarter of 2004 have
been adversely impacted by purchase accounting adjustments that preclude us
from recognizing $3.4 million in additional operating income. 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. 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 March 31, 2004 for the Donnelley
segment were $151.3 million, up $3.8 million or 2.6% from publication sales for
the Donnelley segment of $147.5 million in the three months ended March 31,
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 quarter. These results were partially offset by weaker
performance in national sales and certain smaller Sprint markets for which
directories published in the first quarter. 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: 37




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##### 



For the Three MonthsEnded March 31,(amounts in millions)
    
    2004
    
    2003Publication sales-Donnelley segment
    
    $
    151.3
    
    
    $
    147.5Less adjustment for changes in directory
publication dates
    
    
    
    
    
    
    (2.4
    )Less 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
    
    
    (109.8
    )
    
    
    (37.4
    )Plus net revenue reported in the period for 2003
publication sales, excluding publication
sales for
January 2003
    
    
    95.9
    
    
    
    Net directory advertising revenue on above
publication sales
    
    
    137.4
    
    
    
    5.3Plus net revenue that would have been reported
for publication sales made prior to acquisition,
including all January 2003 directories, absent
purchase accounting
    
    
    
    
    
    
    131.1Pre-press publishing revenue
    
    
    4.8
    
    
    
    6.1Other revenue
    
    
    1.6
    
    
    
    1.0Adjusted Net Revenue
    
    $
    143.8
    
    
    $
    143.5Less net revenue that would have been reported
for publication sales made prior to acquisition,
including all January 2003 directories, absent
purchase accounting
    
    
    
    
    
    
    (131.1
    )Net Revenue-GAAP
    
    $
    143.8
    
    
    $
    12.4
 DonTech Advertising Sales  Calendar and Publication Sales Calendar Sales As a sales agent for SBC, DonTech recognizes commission revenue based on the
annual value of a sales contract (calendar sales) in the period the contract is
executed. Management reviews calendar sales for DonTech because this is a
primary driver of our 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. 38




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##### 



Income from DonTech consisted of the following: Three months ended March 31,(amounts in millions)
    
    2004
    
    200350% share of DonTech net profits
    
    $
    3.1
    
    
    $
    3.2Revenue participation income
    
    
    20.8
    
    
    
    20.4Total DonTech income
    
    $
    23.9
    
    
    $
    23.6
 DonTech partnership income in the three months ended March 31, 2004 of $23.9
million increased $0.3 million or 1.3% from $23.6 million in the three months
ended March 31, 2003, mainly due to increased calendar sales in the first
quarter of 2004. DonTech calendar sales in the three months ended March 31,
2004 were $86.4 million, 1.3% higher than calendar sales in the three months
ended March 31, 2003 of $85.3 million. This increase is primarily
attributable to the timing of the value of accounts sold in the first quarter
of 2004 as compared to the first quarter of 2003. Although DonTech generated
higher calendar sales as compared to the prior period, DonTech incurred more
operating expenses in the current period, resulting in lower net income in
the first quarter of 2004 as compared to 2003. Accordingly, our 50% share of
DonTechs profits decreased by $0.1 million from the prior year. Revenue
participation income received from SBC increased $0.4 million or 2.0% from
$20.4 million in 2003 to $20.8 million in 2004. This increase is a direct
result of the increase 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 directories published during the period for which DonTech
sells advertising. Publication sales in the three months ended March 31, 2004
were $84.1 million, down $4.6 million or 5.2% from $88.7 million in the three
months ended March 31, 2004. 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 measures related to DonTech is partnership
income. A reconciliation of publication sales and calendar sales to partnership
income is provided below. Three months endedMarch 31,(amounts in millions)
    
    2004
    
    2003DonTech publication sales
    
    $
    84.1
    
    
    $
    88.7Less the value of contracts executed and
reported as calendar sales in prior periods.
    
    
    (81.8
    )
    
    
    (86.3
    )Plus the value of contracts executed during
the period to be reported as publication
sales in future periods
    
    
    84.1
    
    
    
    82.9DonTech calendar sales in the period
    
    $
    86.4
    
    
    $
    85.3Commission revenue from above calendar sales
    
    $
    21.8
    
    
    $
    21.6Partnership net expenses
    
    
    (15.6
    )
    
    
    (15.2
    )Partnership profit
    
    $
    6.2
    
    
    $
    6.4Donnelleys 50% share of partnership profits
    
    $
    3.1
    
    
    $
    3.2Revenue participation income on above
calendar sales
    
    
    20.8
    
    
    
    20.4Partnership income-GAAP
    
    $
    23.9
    
    
    $
    23.6
 39




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##### 



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). The Term Loans A-2 and B-2 require
quarterly principal payments. As of March 31, 2004, the outstanding balances
of Term Loan A-2 and Term Loan B-2 were $158.0 million and $920.5 million,
respectively. The Revolver and Term Loan A-2 mature in December 2008 and the
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 March 31, 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 2.50% margin on the Revolver and a 1.50% margin on the Term
Loans A-2 and B-2; and (ii) the Federal Funds Effective Rate (as
defined) plus 1/2 of 1%, plus a 2.50% margin on the Revolver and a
1.50% margin on the Term Loans A-2 and B-2; or
    
    LIBOR rate plus a 3.25% margin on the Revolver and a 2.25% margin
on the 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. On February 6, 2004, we 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 three months ending March 31,
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
financing costs. Aggregate outstanding debt as of December 31, 2003 was $2,092.1 million.
During the three months ended March 31, 2004, we made scheduled principal
payments of $10.4 million and prepaid an additional $57.0 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. It is managements present intention to continue
to utilize excess free cash flow to pay down on an accelerated basis our debt
obligations under the Credit Facility. At March 31, 2004, we had $9.3 million of cash and cash equivalents before
checks not yet presented for payment of $2.5 million, and available borrowings
under the Revolver of $125.0 million and $400 million under Term Loan C as
described above. During the three months ended March 31, 2004, no borrowings
were made under the Revolver or the Term Loan C. Our primary source of
liquidity will continue to be cash flows from operations as well as available
borrowing capacity under the Revolver. Our primary liquidity requirement will
be to fund operations and for principal and interest payments on our debt. Our
ability to meet our debt service requirements will depend on our ability to
generate cash flow in the future. Our primary sources of cash flow will consist
mainly of cash receipts from the sale of advertising in our yellow pages
directories and revenue participation payments and other cash distributions
related to DonTech. These sources are directly dependent on the value of yellow
pages advertising sold and can be impacted by, among other factors, general
economic conditions, competition from other yellow pages directory publishers
and other alternative products, consumer confidence and the level of demand for
yellow pages advertising. We believe that cash flows from operations, along
with borrowing capacity under the Revolver, will be adequate to fund our
operations and capital expenditures and to meet our debt service requirements
for at least the next 12 to 24 months. However, we make no assurances that our
business will generate sufficient cash 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 40




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##### 



purposes. Cash flow provided by operating activities was $94.6 million in the first
quarter of 2004. Key contributors to operating cash flow include the
following:  
    
    $68.0 million consisting of $28.1 million in net income plus
$39.9 million of net non-cash charges primarily consisting of $14.4
million of depreciation and amortization, $3.2 million in the bad
debts provision, $4.0 million in other non-cash charges and $18.3 in
deferred taxes.
    
    $21.8 million increase in accounts payable and accrued
liabilities, primarily the $23.0 million increase in accrued interest
payable on outstanding notes due semi-annually on June 15 and
December 15 and the $11.9 million of net income tax refunds, less a
$11.9 million decrease in incentive and other salary accruals and a
$1.2 million decrease in trade accounts payable and accrued expenses.
    
    $14.1 million increase in accounts receivable and a $13.4
million increase in deferred directory revenue. We analyze the
change in deferred revenue and accounts receivable together because
when a directory is published, the annual billing value of that
directory is initially deferred and unbilled accounts receivable are
established. Each month thereafter, typically one-twelfth of the
billing value is recognized as revenue and customers are billed on a
periodic basis.
    
    $8.1 million in cash received from partnerships in excess of
recorded partnership income representing a source of cash.
Partnership income during the three months ended March 31, 2004
consists of our 50% interest in DonTechs net income and the revenue
participation income from SBC. We 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.
    
    $3.7 million increase in other assets primarily deferred
directory costs. Deferred directory costs represent cash payments for
certain costs associated with the publication of directories. Since
deferred directory costs are initially deferred when incurred, the
cash payments are made prior to the expense being recognized. Cash used in investing activities in the first quarter of 2004 was $2.8 million
used to purchase fixed assets, primarily computer equipment and computer
software. Cash used in financing activities in the first quarter of 2004 was $90.2
million and includes the following:  
    
    $67.4 million in principal payments on debt borrowed under the
Credit Facility. Of this amount, $10.4 million represents scheduled
quarterly payments and $57.0 million represents principal payments
made on an accelerated basis, at our option, from excess cash flow
generated from operations.
    
    $21.2 million in principal payments on the remaining 9 1/8% Senior Subordinated Notes.
    
    $4.2 million in the decreased value of checks not yet presented for payment.
    
    $2.6 million in proceeds from the exercise of employee stock options. In its final review of the Companys financial statements in this quarterly
report on Form 10-Q, management identified and corrected an error that appeared
in our press release dated April 27, 2004, which was filed as Exhibit 99.1 to
our Current Report on Form 8-K furnished to the SEC on April 28, 2004. The
error involved the mis-classification on our preliminary consolidated statement of cash
flows between checks not yet presented for payment and accrued liabilities for
the quarter ended March 31, 2004. The result of correcting this error is an
increase in cash provided by operating activities of $6.7 million (to $94.6
million) in the first quarter 2004 and an increase in cash used in financing
activities by the same amount (to $90.2 million) for the same period. 41




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Cash flow provided by operating activities was $88.8 million in the first
quarter of 2003. Key contributors to operating cash flow included the
following:  
    
    $(48.9) million consisting of $(41.1) million in net loss plus
$(7.8) million of net non-cash charges primarily consisting of $16.0
million of depreciation and amortization, $0.1 million in the bad
debts provision, $4.7 million in other non-cash charges and $(28.6)
million in deferred taxes.
    
    $64.2 million increase in deferred revenue due to the
elimination of SPA historical deferred revenue in purchase
accounting. The increase in deferred revenue was offset by the net
loss for the period, which also resulted primarily from the
elimination of SPA historical deferred revenue. If this account were
not eliminated, deferred revenue would have continued to amortize,
resulting in additional income and the increase in deferred revenue
would have been approximately $50 million less.
    
    $58.6 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 receivables 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.
    
    $11.2 million in cash received from partnerships in excess of
recorded partnership income representing a source of cash.
Partnership income during the three months ended March 31, 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 will exceed the income recognized
from the current period. Partially offsetting these sources of cash was the following use of cash:  
    
    $11.1 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 in the first quarter of 2003 was $351.6
million and included the following:  
    
    $2,243.4 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.
    
    $2.5 million used to purchase fixed assets, primarily computer
equipment and computer software. Cash provided by financing activities in the first quarter of 2003 was $267.2
million and included the following:  
    
    $461.3 million in net borrowings under the Credit Facility.
    
    $125.7 million in net proceeds from the issuance of $130 million of Preferred Stock.
    
    $243.0 million in principal payments on pre-acquisition debt,
which consisted of $114.2 million of variable rate bank debt and
$128.8 million of fixed rate bond debt, with borrowings from the
Credit 42




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Facility and proceeds from the Preferred Stock.
    
    $89.7 million in principal payments on acquisition-related
debt in the first quarter of 2003 with the cash flows generated by
operations.
    
    $12.9 million in proceeds from the exercise of employee stock
options. 43




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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. On March 28, 2003, we entered into three interest rate swap agreements with a
total notional value of $255 million. These interest rate swaps effectively
convert $255 million of variable rate debt to fixed rate debt. Under the terms of
these agreements, we receive variable interest based on three-month LIBOR and
pay a fixed rate of 2.85%. The swaps mature on March 28, 2007. On October 9, 2003, we entered into an interest rate swap agreement with a
total notional value of $150 million. This interest rate swap effectively
converts $150 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 1.959%. This swap agreement matures on October 9, 2005. 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 $405
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.  (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. 44




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PART II. OTHER INFORMATION Item 1. Legal Proceedings We are involved in various legal proceedings arising in the ordinary course of
our business, as well as certain litigation and tax matters described below. We
periodically assess our liabilities and contingencies in connection with these
matters based upon the latest information available to us. For those matters
where it is probable that we have incurred a loss and the loss or range of loss
can be reasonably estimated, we record reserves in our consolidated financial
statements. In other instances, we are unable to make a reasonable estimate of
any liability because of the uncertainties related to both the probable outcome
and amount or range of loss. As additional information becomes available, we
adjust our assessment and estimates of such liabilities accordingly. Based on our review of the latest information available, we believe our
ultimate liability in connection with pending legal proceedings, including the
litigation and tax matters described below, will not have a material adverse
effect on our results of operations, cash flows or financial position, as
described below. 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 noted below, 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. As more fully described
below, VNU N.V., a publicly traded Dutch company (VNU), and its subsidiary
ACNielsen, have exclusive liability for any final judgment or settlement of
this antitrust lawsuit, subject to a cap. The cap is determined based on the
financial ability of VNU and ACNielsen to pay for any judgment or settlement.
Under the contractual agreements described below, amounts in excess of the cap,
if any, would be shared as follows: 25% for D&B; 25% for Moodys; and the
remaining 50% is shared by IMS and NMR (another subsidiary of VNU). 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 both of them could not satisfy their joint and several indemnity
obligations to us. In July 1996, IRI filed a complaint 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 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 45




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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 million, which
amount IRI sought to treble under antitrust laws. IRI has since revised its
allegation of damages to exceed $650 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. 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 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 JDA provides that:  
    
    ACNielsen will 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 JDA (the ACN Maximum Amount); and
    
    D&B and Cognizant will share liability equally for any amounts in excess of the ACN Maximum Amount. As noted above, ACNielsen is responsible for the IRI Liabilities up to the ACN
Maximum Amount. The JDA provides that ACNielsen initially is to determine the
amount that it will pay at the time of settlement or a final judgment, if any,
in IRIs favor (the ACN Payment). The ACN Payment could be less than the ACN
Maximum Amount. The JDA also provides for D&B and Cognizant to pay IRI 50% of
the difference between the settlement or judgment amount and the ACN Payment.
In exchange, the JDA requires ACNielsen to issue a secured note (the ACN
Note), subject to certain limits and offsets, to each of D&B and Cognizant for
the amount of their payment. The principal amount of each ACN Note issued to
D&B and Cognizant is limited to 50% of the difference between the ACN Maximum
Amount and the ACN Payment and is subject to further limitation that it cannot
exceed 50% of the amount of any proceeds from any recapitalization plan
designed to maximize ACNielsens claims paying ability. The ACN Notes would
become payable upon the completion of any recapitalization plan described in
the next paragraph. The ACN Maximum Amount will be determined by an investment banking firm as the
maximum amount that ACNielsen is able to pay after giving effect to: 46




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
    
    any recapitalization plan submitted by an investment bank that is
designed to maximize the claims-paying ability of ACNielsen without
impairing the investment banking firms ability to deliver a viability
opinion and without requiring stockholder approval; and
    
    payment of interest on the ACN Notes and related fees and expenses. For these purposes, viability means the ability of ACNielsen, after giving
effect to such recapitalization plan, the payment of interest on the ACN Notes,
the payment of related fees and expenses, and the payment of the ACN Maximum
Amount, to:  
    
    pay its debts as they become due; and
    
    finance the current and anticipated operating and capital requirements
of its business, as reconstituted by such recapitalization plan, for
two years from the date any such recapitalization plan is expected to
be implemented. As a result of VNUs acquisition of ACNielsen in 2001, VNU assumed ACNielsens
liabilities under the JDA and pursuant to the JDA will be included with
ACNielsen in the computation of the ACN Maximum Amount. Under the agreements
relating to the Cognizant Distribution, IMS and NMR are each jointly and
severally liable for all Cognizant liabilities under the JDA, although we
understand that amongst themselves they have agreed to share the liability for
these amounts as follows: 75% IMS and 25% NMR up to a maximum of $125
million. 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 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 both of them could not
satisfy their joint and several indemnity obligations to us. However, because liability for violations of the antitrust laws is joint and
several and because many of the rights and obligations relating to the JDA are
based on contractual relationships, the inability or failure of any party to
the JDA to fulfill its obligations could result in the other parties, including
us, bearing a greater share of the IRI Liabilities. Joint and several
liability means that even where more than one defendant is determined to have
been responsible for alleged wrongdoing, the plaintiff can collect all or part
of a judgment from any one or more of the responsible defendants. This is true
regardless of any contractual allocation of responsibility or indemnification
provisions, including those described above among VNU, ACNielsen, D&B, IMS,
Moodys, NMR and us. We are unable to predict at this time the outcome of the IRI action or the
financial condition of ACNielsen and VNU at the time of any such outcome.
Accordingly, we cannot estimate the ACN Maximum Amount and the portion of any
judgment to be paid by VNU and ACNielsen under the JDA, and hence cannot assess
whether there is any material excess liability over the CAN Maximum Amount for
which we might be liable. Nonetheless, while we cannot assure you as to the
outcome of this matter, management presently believes that (i) 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 (ii) IMS and NMR in turn have sufficient
financial resources and borrowing capacity to satisfy their 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 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. 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 47




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initiatives is summarized below. 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 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
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 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, that D&B is contesting the IRSs formal
assessment and would also contest the assessment of amounts, if any, in excess
of the amounts paid, and that D&B has filed a complaint for a refund in the
United States District Court. This case is expected to go to trial in 2005,
unless earlier resolved among the IRS and the parties. We believe that the fact
that D&B and IMS have already paid the IRS a substantial amount of additional
taxes with respect to the contested tax planning strategies significantly
mitigates our risk. Royalty Expense Deductions  1993  1997 In the second quarter of 2003, D&B received (on our behalf) a proposed notice
of deficiency from the IRS with respect to a partnership transaction entered
into in 1993. Specifically, the IRS 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 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 $44.4 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 48




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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 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
million additional liability would be in addition to the $44.4 million of
additional liability related to royalty expense deductions discussed in the
previous paragraph. D&B has filed protests relating to these proposed adjustments with the IRS
Office of Appeals. The parties are attempting to resolve these matters at the
Appeals phase before proceeding to litigation, if necessary. If the IRS were
to prevail in its position, D&B would share responsibility for the matter with
Moodys, IMS and NMR, as disclosed above. If D&B were to challenge any of
these IRS positions at any time in a U.S. District Court or the U.S. Court of
Federal Claims, rather than in U.S. Tax Court, the disputed amounts would need
to be paid in advance for the Court to have jurisdiction over the case. 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. The receipt of these notices provides D&B with the
opportunity to appeal the proposed adjustments administratively to the IRS
Office of Appeals. 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 $53.9
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 $2.2 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. Relatedly, the IRS 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 $137.5 million (tax, interest and penalties, net
of associated tax benefits),which would be in addition to the $53.9 million
noted above related to the amortization expense deduction. We understand that D&B is attempting to resolve these matters with the IRS
before proceeding to IRS Appeals or litigation, if necessary. If D&B were to
challenge any of these IRS positions at any time 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 49




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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 their respective financial
resources, borrowing capacity and indemnity rights against IMS and NMR (and
ACNielsen and VNU with respect to the IRI matter), and in turn IMS and NMRs
(and ACNielsens and VNUs with respect to the IRI matter) 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. 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. 50




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##### 



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)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)
 51




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##### 



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)
 52




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##### 



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)
 53




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##### 



Exhibit No.
    
    Document4.21
    
    Second Supplemental Indenture dated as of January 9, 2004 among R.H.
Donnelley Inc., as Issuer, the Company and other guarantors signatory
thereto, as Guarantors, and The Bank of New York, as Trustee, with respect to
the 10 7/8% Senior Subordinated Notes due 2012 (incorporated by reference to
Exhibit 4.21 to the Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 12, 2004, Commission File No. 001-07155)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
    
    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)10.4
    
    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)10.5
    
    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)10.6
    
    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)10.7
    
    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)
 54




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##### 



Exhibit No.
    
    Document10.8
    
    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)10.9
    
    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)10.10
    
    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)10.11
    
    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)10.12^
    
    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)10.13^
    
    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)10.14^
    
    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)10.15^
    
    Pension Benefit Equalization Plan (incorporated by reference to Exhibit 10.16
to the Companys Annual Report on Form 10-K for the year ended December 31,
2001, filed with the Securities and Exchange Commission on March 27, 2002,
Commission File No. 001-07155)10.16^
    
    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)
 55




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##### 



Exhibit No.
    
    Document10.17^
    
    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)10.18^
    
    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)10.19^
    
    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)10.20^
    
    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)10.21^
    
    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)10.22^
    
    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)10.23^
    
    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)10.24^
    
    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)10.25^
    
    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)10.26^
    
    Amendment No. 1 to Employment Agreement dated as of February 27, 2001 between
the Company and William C. Drexler (incorporated by reference to Exhibit
10.36 to the Companys Annual Report on Form 10-K for the year ended December
31, 2000, filed with the Securities and Exchange Commission on March 28,
2001, Commission File No. 001-07155)10.27^
    
    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)
 56




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##### 



Exhibit No.
    
    Document10.28^
    
    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)10.29
    
    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)10.30
    
    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)10.31
    
    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)10.32
    
    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)10.33
    
    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)10.34
    
    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)10.35
    
    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)
 57




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##### 



Exhibit No.
    
    Document10.36
    
    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)10.37
    
    Credit Agreement, dated as of December 6, 2002, among the Company, R.H.
Donnelley Inc., R.H. Donnelley Finance Corporation II (subsequently merged
with and into R.H. Donnelley Inc.), the several lenders from time to time
party thereto, Bear Stearns Corporate Lending Inc. and Citicorp North
America, Inc., as joint syndication agents, BNP Paribas and Fleet National
Bank, as joint documentation agents, Deutsche Bank Trust Company Americas, as
administrative agent, and Deutsche Bank Securities Inc., Salomon Smith Barney
Inc. and Bear, Stearns & Co. Inc., as joint lead arrangers and joint
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)10.38
    
    First Amendment, dated as of December 5, 2003, among the Company, R.H.
Donnelley Inc., the financial institutions parties thereto, Deutsche Bank
Securities Inc., Citigroup Global Markets Inc. and Bear, Stearns & Co. Inc.,
as joint lead arrangers and joint 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 March 31,
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 March 31,
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 March 31,
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 March 31,
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 March 31,
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
 58




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##### 



Exhibit No.
    
    Document32.2*
    
    Certification of Quarterly Report on Form 10-Q for the period ended March 31,
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
January 8, 2004, the Company filed a Current Report on Form 8-K disclosing
under Item 5 that it expected to redeem the entire outstanding aggregate
principal amount of $21.2 million of its 9 1/8% Senior Subordinated Notes due
2008 on February 6, 2004. The Company attached a copy of a related press
release as Exhibit 99.1. On February 26, 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 year ended December 31, 2003 and attached a copy of its related
press release as Exhibit 99.1. On February 26, 2004, the Company furnished a Current Report on Form 8-K
disclosing under Item 9 that management intended to discuss certain aspects of
an amendment to the Companys Credit Agreement dated December 8, 2002 during
the investor teleconference scheduled for February 27, 2004. The Company
attached a copy of Amendment No. 1 to the Credit Agreement as Exhibit 99.1. On March 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 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. 59




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##### 



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. R.H. DONNELLEY CORPORATIONMay 7, 2004
    By:
    Date:/s/ Steven M. BlondySteven M. BlondySenior Vice President and Chief Financial Officer
(Principal Financial Officer) May 7, 2004
    By:
    Date:/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.May 7, 2004
    By:
    Date:/s/ Steven M. BlondySteven M. BlondySenior Vice President and Chief Financial Officer
(Principal Financial Officer) May 7, 2004
    By:
    Date:/s/
Thomas D. DOrazioThomas D. DOrazioVice President and Controller
(Principal Accounting Officer) 60




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##### 



Exhibit Index Exhibit No.
    
    Document31.1*
    
    Certification of Quarterly Report on Form 10-Q for the period
ended March 31, 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 March 31, 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 March 31, 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 March 31, 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 March 31, 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 March 31, 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 61