##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549
 FORM 10-K (Mark one) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the fiscal year ended December 31, 2003 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from ____________________________ to ___________________________ Commission file number 001-07155 R.H. DONNELLEY CORPORATION  Delaware
    
    13-2740040(State of Incorporation)
    
    (IRS Employer Identification No.)One Manhattanville Road, Purchase, N.Y.
    
    10577(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants telephone number, including area code
    
    (914) 933-6400
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Class
    
    Name of Exchange on Which RegisteredCommon Stock, par value $1 per share
    
    New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act: None 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. þ
    

Yes            No   o
 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark if the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2 of the Act). þ
    

Yes            No   o
 (continued)




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##### 



The aggregate market value at June 30, 2003, the last day of our most recently
completed second quarter, of shares of the Registrants common stock (based
upon the closing price per share of $36.47 of such stock on The New York Stock
Exchange on such date) held by non-affiliates of the Registrant was
approximately $1,115,526,000. At June 30, 2003, there were 30,725,980
outstanding shares of the Registrants common stock, not including any shares
of common stock beneficially owned by The Goldman Sachs Group, Inc.
The aggregate market value at March 8, 2004 of
shares of the Registrants common stock (based upon the closing price per share
of $43.81 of such stock on The New York Stock Exchange on such date) held by
non-affiliates of the Registrant was approximately $1,354,360,900. For purposes of
both of these calculations, only those shares held by directors and executive
officers of the Registrant and shares beneficially owned by The Goldman Sachs
Group, Inc. have been excluded as held by affiliates. Such exclusion should
not be deemed a determination or an admission by the Registrant that such
individuals or entities are, in fact, affiliates of the Registrant. At March
8, 2004, there were 31,053,015 outstanding shares of the Registrants common
stock, not including any shares of common stock beneficially owned by The
Goldman Sachs Group, Inc. Commission file number 333-59287 R.H. DONNELLEY INC. *  Delaware
    
    36-2467635(State of Incorporation)
    
    (IRS Employer Identification No.)One Manhattanville Road, Purchase, N.Y.
    
    10577(Address of Principal Executive Offices)
    
    (Zip Code)Registrants telephone
number, including area code
    
    (914) 933-6400
  *
    
    R.H. Donnelley Inc. is a wholly owned subsidiary of R.H. Donnelley
Corporation. R.H. Donnelley Inc. meets the conditions set forth in General
Instructions I 1(a) and (b) of Form 10-K 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 Notes were redeemed in full on February 6,
2004. In addition, R.H. Donnelley Inc. is the obligor of 8 7/8% Senior Notes
due 2010 and 10 7/8% Senior Subordinated Notes due 2012 and is now subject to
the filing requirements of Section 15(d) as a result of such notes. As of
March 8, 2004, 100 shares of R.H. Donnelley Inc. common stock, no par value,
were outstanding. Documents Incorporated By Reference Part IIIItem 10
    
    Directors and Executive Officers of the
Registrant
    
    Information
responsive to this
Item can be found
under the captions
Board of
Directors and
Section 16(a)
Beneficial
Ownership Reporting
Compliance in the
Companys Proxy
Statement to be
filed with the
Commission prior to
March 31, 2004.Item 11
    
    Executive Compensation
    
    Information
responsive to this
Item can be found
under the caption
Director and
Executive
Compensation in
the Companys Proxy
Statement to be
filed with the
Commission prior to
March 31, 2004.Item 12
    
    Security Ownership of Certain
Beneficial Owners and Management and
Related Stockholder Matters
    
    Information
responsive to this
Item can be found
under the caption
Security Ownership
of Certain
Beneficial Owners
and Management in
the Companys Proxy
Statement to be
filed with the
Commission prior to
March 31, 2004.Item 13
    
    Certain Relationships and Related
Transactions
    
    Information
responsive to this
Item can be found
under the caption
Director and
Executive
Compensation 
Compensation
Committee
Interlocks and
Insider
Participation;
Certain
Relationships and
Related Party
Transactions in
the Companys Proxy
Statement to be
filed with the
Commission prior to
March 31, 2004.Item 14
    
    Principal Accountant Fees and Services
    
    Information
responsive to this
Item can be found
under the caption
Board of
Directors-Committees
of the Board of
Directors-Audit and
Finance Committee
and Report of the
Audit and Finance
Committee-Fees in the
Companys Proxy
Statement to be
filed with the
Commission prior to
March 31, 2004.
 2




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##### 



PART I  ITEM 1.
    BUSINESS Except where otherwise indicated, the terms Company, Donnelley, RHD,
we, us and our refer to R.H. Donnelley Corporation and its direct and
indirect wholly owned subsidiaries. R.H. Donnelley Inc. is our wholly owned
direct subsidiary. Our executive offices are presently located at One
Manhattanville Road, Purchase, New York 10577 and our telephone number is (914)
933-6400. We expect to relocate our executive offices to North Carolina during
the first half of 2004. At that time, our address will be 1001 Winstead Drive,
Cary, North Carolina 27513, and our telephone number will be (800) 497-6329.
Our Internet website address is www.rhd.com. We make available free of charge
on our website our annual, quarterly and current reports, including amendments
to such reports, as soon as practicable after we electronically file such
material with, or furnish such material to, the United States Securities and
Exchange Commission (SEC). Our filings can also be obtained from the SEC
website at www.sec.gov or by calling toll free the SEC Office of Public
Reference at (800) 942-8090. However, the information found on our website or
the SEC website is not part of this annual report. Corporate Overview We are the sixth largest directory publisher in the United States based on
revenue. We have been in the yellow pages business in various capacities for
over 100 years. We now publish 260 Sprint-branded, revenue-generating yellow
pages directories in 18 states and have a total circulation of approximately 18
million, serving approximately 160,000 local and 4,000 national advertisers.
Through The DonTech II Partnership (DonTech), our partnership with an
affiliate of SBC Communications Inc. (SBC), we sell advertising for an
additional 129 SBC-branded directories in Illinois and northwest Indiana with a
total circulation of approximately 10 million, serving approximately 100,000
local advertisers. Many local advertisers rely on the yellow pages directories
as their primary or sole method of advertising. On January 3, 2003, we acquired all the outstanding common stock of the various
entities comprising Sprint Publishing and Advertising (SPA), Sprint
Corporations (Sprint) directory publishing business. See SPA Acquisition
below for a further description of the acquisition. The acquisition transformed
Donnelley from a sales agent and pre-press vendor into a leading publisher of
yellow pages directories. Prior to the SPA acquisition, we were one of the
largest independent sales agents and pre-press vendors for yellow pages
advertising in the United States. Commencing in 2003, our operating and financial results reflect our yellow
pages publishing business, rather than our former business as a sales agent and
pre-press vendor for yellow pages advertising on behalf of other publishers,
including SPA. As a publisher, we report the full value of advertising sales
and certain direct costs under the deferral and amortization method. As a
sales agent and pre-press vendor for yellow pages advertising, in 2001 and 2002
our revenue reflected sales commissions and pre-press fees from, or other
transactions with, our business partners, including SPA, and our
expenses were charged to earnings as incurred. DonTech remained
unchanged following the SPA acquisition, and our financial presentation of
DonTech is consistent for all periods presented in this annual report. In addition, in the first quarter of 2003, we revised our historical segment
reporting to reflect the change in our business that resulted from the SPA
acquisition and to reflect the way management now reviews and analyzes the
business. Our reportable operating segments are now Donnelley and DonTech. The
Donnelley segment includes the revenue from our 260 Sprint-branded yellow pages
directories and 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. See
Note 14 to the Companys audited consolidated financial statements included in
Item 8 of this annual report and Managements Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 of this annual report
for more information regarding the Companys segments. SPA Acquisition On January 3, 2003, we completed the acquisition of SPA by purchasing the stock
of two subsidiaries of Sprint, DirectoriesAmerica, Inc. and Centel Directory
Company (Centel), for $2.23 billion in cash. See Managements Discussion and
Analysis of Financial Condition and Results of Operations in Item 7 of this
annual report for more information regarding the financing for, and financial
implications of, the SPA acquisition. 3




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##### 



In connection with the acquisition of SPA, we entered into a directory services
license agreement, a trademark license agreement and a non-competition
agreement (collectively, Directory Services Agreements) with Sprint. The
directory services license agreement gives us the exclusive right to produce,
publish and distribute directories for Sprint in the markets in 18 states where
Sprint provided local telephone service at the time of the transaction. The
trademark license agreement gives us the exclusive right to use certain Sprint
trademarks, including the Sprint diamond logo, in those markets. The
non-competition agreement prohibits Sprint in those markets from selling local
directory advertising or producing, publishing and distributing print
directories, with certain limited exceptions. These agreements are all
interrelated and each has an initial term of 50 years, subject to earlier
termination under specified circumstances. The acquisition was accounted for as a purchase business combination. 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 have been included in our
consolidated results from and after January 3, 2003. Products and Services We have two principal directory types: a core directory and a community
directory. Core directories generally cover large population areas, whereas
community directories typically cover a sub-section of the areas addressed by a
core directory. For example, in Lee County, Florida, we publish one core
directory and four community directories, Sanibel-Captiva Island, South Fort
Myers, Cape Coral/North Fort Myers and Lehigh Acres, that together cover the
majority of the core Lee County directory, but not the entire market. Most core
directories contain yellow pages, white pages and specialty sections, such as
area information, guides and government pages. Community directories also
consist of yellow pages, white pages and specialty sections. The table below details our principal revenue-generating product offerings. Principal Products Type
    
    DescriptionStylized listings for white and
yellow pages
    
    Listings appearing in-column consist of name, address and
telephone number and are available in a variety of type
styles and limited colorTrade items
    
    Advertising space, designed to promote brand name of product
or service, placed alphabetically within the column listings
of the yellow pagesSpace items
    
    Advertising space sold in 1/2 inch increments appearing
alphabetically within the column listings of the yellow
pagesDisplay ads
    
    Advertising placed within a heading by size and then by
seniority  our ad sizes range from a quarter column to a
double full pageColor
    
    Various levels of color including spot-four color, enhanced
color, process photo and hi-impact are available for display
productsWhite pages logos
    
    Listings allowing space for illustrative art workBestredyp.com
    
    Internet (on-line) yellow pages and city guide available in
targeted markets with electronic look and feel version of
related print directory and typical Internet search engine
view
 In addition to these principal products, we offer a broad range of specialty
products that advertisers use to differentiate and enhance their display of
information. The table below is an overview of the main revenue-generating
specialty products that we offer: 4




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Specialty Products Type
    
    DescriptionCover products
    
    Advertising sold on the bottom-half of the front
cover, the inside front cover, the inside back cover
and the outside back coverTabs
    
    Full page advertising bound into the directory, offering
front and back space printed on card stock with a tab
protrusion or die-cut indented tabRide-alongs
    
    Advertisements placed with the directory delivery bagBlow-in cards
    
    Loose postcard-like products inserted into directoriesGuides (Internet, golf, menu, etc.)
    
    Sections in the directories on a specific interest area
with feature information and banner advertising
 Internet-based directory and electronic products We recently began offering an Internet-based directory service, bestredyp.com,
to our advertisers in targeted markets and plan to continue to expand this
offering. Historically, SPA did not offer advertisers any significant Internet
platform. Bestredyp.com provides a city portal with information about the
targeted market, along with electronic versions of the white and yellow pages
directories. We provide users a dual purpose interface that allows them to view
the directory information in either a typical Internet search engine view or
the look and feel view that emulates the appearance of our print directories.
We currently view our Internet-based directory product as a complement to our
print directory product rather than as a stand-alone business. We utilize our
existing sales force and customer relationships to enable us to provide the
directory content in a digital format. Our electronic products focus on a
local experience by offering rich local content to consumers, which requires
little incremental effort by our sales force to gather. We also utilize a low
cost production platform. In DonTech markets, their sales force currently offers
the SBC Smart Pages Internet product and a Chicago city guide product. We believe that increased usage of Internet-based directories will continue to
support overall usage in the United States directory advertising industry. We
intend to continue to explore new means to deliver our advertisers content to
consumers. Business Cycle Overview Our directories generally have a 12-month directory cycle period, except Las
Vegas, which has two six-month directory cycles. A publication cycle generally
spans 15 to 20 months from the beginning of the sales cycle to the end of a
directorys life and is comprised of several stages. The marketing stage is
generally completed before the end of the first month. The sales stage picks up
at the completion of the marketing stage and generally runs through the
following five months. The sales stage closes approximately 70 days prior to
publication. Production and printing is the next stage, usually lasting an
additional two months. Finally, distribution generally occurs over the final
month. Customer service and billing and collections stages are provided after
distribution of a directory and throughout the directory cycle. Sales Sales are conducted on the local level through premise representatives,
telephone representatives and letter renewals, and, on the national level,
through national account managers who sell primarily to Certified Marketing
Representatives (CMRs) serving national advertisers. We distinguish between
national advertisers, which advertise in 20 or more directories and span three
or more states with at least two different publishers, and local advertisers,
which are primarily small-and medium-sized businesses located within our
markets. In general, advertising from the local channel continues to represent
the majority of our revenue, accounting for approximately 85% of directory
advertising revenue, while approximately 15% is derived from the national
channel. 5




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Local Sales Organization Our local sales channel is segmented into three sales sub-channels: premise
sales, telephone sales and letter renewal. Premise sales representatives
conduct sales calls at customers business locations and typically handle
higher dollar and more complex accounts. Telephone sales representatives handle
lower dollar value accounts and conduct their sales over the phone. Letter renewal is used to contact very low dollar value customers
that have renewed their account for the same product for several years. National Sales Organization Our national sales channel is managed through our national sales department,
which seeks to increase national directory revenues by developing and
maintaining favorable relationships with CMRs and national advertisers. CMRs
have historically been the national media buyers of yellow pages advertising
for national advertisers. During 2003, we began acting as a CMR ourselves
directly placing certain national advertising. National account managers are
the primary point of contact for all communication and business dealings
between RHD and CMRs. National account managers and national sales
representatives are accountable for overall national revenue objectives. Pre-press and Information Technology Management Services Pre-press services include canvass and assignment preparation, graphics and ad
composition, contract processing, database management and pagination. We
provide comprehensive tools and information to effectively conduct sales and
marketing planning, sales management, sales compensation and customer service
activities. Our information management and pre-press publishing systems are
located primarily in facilities in Morrisville, North Carolina, with additional
services provided in facilities located in Bristol, Tennessee and in Dunmore,
Pennsylvania. In addition, prior to closure during 2003, certain pre-press
publishing services were provided from a facility located in Blountville,
Tennessee. Printing and Distribution All directories are printed through our long-standing relationship with
printing vendor R.R. Donnelley & Sons Company (R.R. Donnelley). We currently
have two contracts for the printing of our directories with R.R. Donnelley that
expire in December 2005 and December 2007. Although we share a common heritage,
no other common ownership or business relationship exists between R.R.
Donnelley and us. Printing is one of our largest cost items accounting for
approximately 10% of our total operating and general and administrative
expenses. The delivery of directories is facilitated through several outsourcing
relationships. Delivery methods utilized to distribute directories to
consumers are selected based on factors such as cost, quality, geography and
market need. Primary delivery methods include United States Postal Service and
hand delivery. Occasionally we may use United Parcel Service or other types of
expedited delivery methods. Frequently a combination of these methods is
required to meet the needs of the marketplace. DonTech Overview DonTech sells advertising for 129 SBC-branded directories in Illinois and
northwest Indiana with a combined circulation of approximately 10 million in
2003. These directories provide advertising for approximately 100,000 local
advertisers. These directories also provide advertising for national
advertisers, although DonTech plays no role with respect to the sale of
national advertising, which is performed by SBC itself. Our relationship with SBC DonTech is our 50/50 perpetual partnership with an affiliate of SBC, which
remained unchanged as a result of our acquisition of SPA. Our relationship
with telephone companies presently owned by SBC began in 1908. Since then, we
have maintained a variety of contractual relationships with these telephone
companies regarding directory publication and advertising sales. Under the
current partnership arrangements, DonTech is the exclusive sales agent in
perpetuity for the 129 yellow pages directories published by SBC in Illinois
and northwest Indiana. DonTech provides local advertising sales services for
these directories and earns a commission from SBC. Under our agreements with
SBC, we have a 50% interest in the net profits of DonTech and also receive
revenue participation 6




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income directly from SBC. The amount of revenue participation income we earn is
based on a percentage of DonTech advertising sales. Revenue participation
income comprises approximately 80% to 85% of our total income related to
DonTech and is paid directly to us through an affiliate of SBC. We account for our investment in DonTech under the equity method and record all
our income from DonTech as partnership income. DonTech is considered a separate
operating segment because, among other things, it has its own Board of
Directors and the employees of DonTech, including its officers and managers,
are not our employees. DonTechs Board of Directors consists of six members.
Each partner appoints two members, one voting and one advisory, and the CEO and
CFO of DonTech are non-voting members. In general, most major decisions are
required to be made at the DonTech Board of Directors level and require the
affirmative vote of both our and SBCs voting directors. The revenue participation agreement between us and APIL Partners (an SBC
affiliate to whom Donnelley transferred its membership interest in the
publisher in exchange for the grant of the revenue participation interests)
provides that we are entitled to a payment similar to a royalty. This interest
is equal to DonTechs specified gross advertising sales, subject to allowances for claims
(capped at 2.4%) and doubtful accounts (capped at 3.7%), less the DonTech
partnership commissions of 27.0%, all multiplied by 35.9%. The exclusive sales agency agreement between APIL Partners and DonTech
establishes that DonTech enjoys exclusive agency status to solicit and sell
local advertising for SBCs directories in Illinois and northwest Indiana. The DonTech partnership agreement and related SBC contractual arrangements have
perpetual terms. These arrangements only terminate upon the occurrence of
certain enumerated events, including, without limitation, the unremedied
breaches of certain material provisions thereof, the mutual agreement of the
parties, the bankruptcy of a partner or parent or a change in control of a
partner (excluding a change in control of the ultimate parent company of the
partner), acquisition by one partner of the others partnership interest, a
transfer of a partners interest in violation of the transfer provisions
contained in the partnership agreement, or a decision by the Board to dissolve
that would require agreement of our representatives on the Board. In addition,
under applicable law, the contractual arrangements potentially may not remain
in effect in perpetuity. In the event that APIL Partners breaches its
obligations under the revenue participation agreement, we have the right to
reacquire our interest in the publishing entity for a nominal amount. We also provide certain pre-press publishing services to SBC under a separate
publishing services agreement that extends through 2008, and billing and
information technology support services under separate agreements that extend
through 2005 and 2008, respectively. Historical Overview of Donnelley Prior to the SPA acquisition, we were one of the largest independent sales
agents and pre-press vendors for yellow pages advertising in the United States.
In that capacity, we sold advertising for more than 170 yellow pages
directories with a total circulation of over 15 million. We sold yellow pages
advertising either directly through our own sales force on behalf of SPA, or
indirectly through DonTech. We also provided pre-press publishing services for
approximately 227 yellow pages directories, including all of the directories
for which Donnelley and DonTech sold advertising as well as for an independent
publisher for whom our services ended in the first quarter of 2003. DonTech
remained unchanged following the SPA acquisition, and our financial
presentation of DonTech is consistent for all periods presented in this annual
report. Prior to the acquisition of SPA, Donnelley sold yellow pages advertising in
certain markets in Florida, Nevada, North Carolina and Virginia under
contractual agreements with affiliates of Sprint. The agreements governing the
relationships allowed Sprint to gain the benefits of Donnelleys long-term
presence in these markets, its yellow pages advertising sales and pre-press
publishing expertise, its established infrastructure and its
performance-focused, non-union employees. Donnelley benefited from its
agreements with Sprint, as Sprint is the major incumbent telephone company in
those Florida, Nevada, North Carolina and Virginia markets and one of two major
incumbent telephone companies in the greater Orlando market. See our annual
report on Form 10-K for the year ended December 31, 2002 for further details
regarding our historical relationship with Sprint, SPAs operations prior to
the acquisition and our prior segment reporting. 7




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Competition Yellow Pages Advertising Sales The United States directory advertising industry is highly competitive.
Approximately 90% of total United States directory advertising sales are
attributable to Regional Bell Operating Company (RBOC) directory publishers
that typically publish directories where they offer local phone service. In
addition, more than 240 independent publishers operating in the United States
compete with those RBOC publishers. In nearly all markets, we compete with one
or more yellow pages directory publishers, which are predominantly independent
publishers. In some markets, we compete on a limited basis with RBOC directory
publishers in adjacent markets. One of these publishers, Verizon Information
Services, the directory business affiliated with Verizon Communications, Inc.,
has begun to publish directories and offer local Internet directory services in
markets beyond where Verizon Communications offers local phone service,
including certain markets where we publish directories. Effectively, Verizon
Information Services is competing as an independent publisher in those markets.
While no other RBOC publisher has announced similar plans, no assurance can be
given that other RBOC publishers will not do so in the future. Many of these
RBOC publishers are larger than us and have greater financial resources than we
have. No assurances can be given that we will be able to compete effectively
with these other publishers for advertising sales or acquisitions in the
future. We also compete for advertising sales with other media, including newspapers,
magazines, radio, direct mail, the Internet and television. Additionally,
advances in technology have brought new participants, new products and new
channels to the industry, including increasing use of electronic delivery of
traditional directory information (e.g., Yahoo Yellow Pages) and electronic
search engines/services (e.g., Google) as an advertising medium. Many of these
competitors are larger than us and have greater financial resources than we
have. In addition, the Telecommunications Act of 1996 opened local telephone markets
to increased competition, which may adversely impact the market position of
telephone utilities, including Sprint and SBC. In addition, Federal
Communication Commission rules regarding local number portability, advances in
communications technology (such as wireless devices and voice over Internet
protocol) and demographic factors (potential shifts in younger generations away
from wireline telephone communications towards wireless or other communications
technologies) may further erode the market position of telephone utilities,
including Sprint and SBC. As a result, no assurances can be given that Sprint
or SBC will remain the primary local telephone service provider in their local
service areas. If Sprint were no longer the primary local telephone service
provider in any particular local service area, our license to be the exclusive
publisher for Sprint in its markets and to use the Sprint brand name on our
directories in those markets may not be as valuable as we presently anticipate,
and we may not realize some of the anticipated benefits under our commercial
arrangements with Sprint. If SBC were no longer the primary local telephone
service provider in any DonTech service areas, our income from the DonTech
relationship could be adversely affected. Internet From 1997 to 2000, overall references to print yellow pages directories in the
United States declined; however, overall references to print yellow pages
directories have remained stable over the past three years. We believe the past decline
was primarily a result of demographic shifts among consumers,
particularly the increase of households in which English was not the
primary language spoken. We also believe that the past decline was
attributable to increased usage of Internet-based directory products, particularly in
business-to-business and retail categories, as well as the proliferation of
very large retail stores for which consumers and businesses may not reference the yellow
pages. The yellow pages directory advertising
business is subject to changes arising
from developments in technology, including information distribution methods and
users technological preferences. The use of the Internet by consumers as a
means to transact commerce may result in new technologies being developed and
services being provided that could compete with our traditional
products and services. Our growth and future financial performance may
depend on our ability to develop and market new products and services and
create new distribution channels, while enhancing existing products, services
and distribution channels, to incorporate the latest technological advances and
accommodate changing user preferences, including the use of the
Internet. Raw Materials Our principal raw material is paper. It is one of our largest cost items
accounting for approximately 5% to 7% of our total operating and general and
administrative expenses. We currently purchase our paper from one vendor under
a contract that expires in December 2006. The price of the paper was set at
inception of the contract and increases at various dates during the term of the
agreement. Should the market price of the paper drop below the set 8




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prices, both parties are obligated to negotiate in good faith a lower paper
price. We are subject to delays in receiving this principal raw material.
Further, changes in the supply of, or demand for, paper could affect delivery
times and market prices. Intellectual Property We own and control confidential information as well as a number of trade
secrets, trademarks, service marks, trade names, copyrights and other
intellectual property rights that, in the aggregate, are of material
importance to our business. We believe that the Donnelley name and related
names, marks and logos are, in the aggregate, material to our business. We are
licensed to use certain technology and other intellectual property rights owned
and controlled by others, and, similarly, other companies are licensed to use
certain technology and other intellectual property rights owned and controlled
by us. We have the exclusive license to produce, publish and distribute
directories for Sprint in SPAs current markets as well as the exclusive
license to use Sprints brand, including Sprints diamond logo, on directories
in SPAs current markets, and we acquired the Best Red Yellow Pages® tagline
and the look and feel trademarks presently used by SPA. Although we do not
consider any individual trademark or other intellectual property to be material
to our operations, we believe that, taken as a whole, the licenses we acquired
in conjunction with the SPA acquisition are material to our business. We
consider our trademarks, service marks, databases, software and other
intellectual property to be proprietary, and we rely on a combination of
copyright, trademark, trade secret, non-disclosure and contract safeguards for
protection. We also benefit from the use of both the phrase yellow pages and
the walking fingers logo, which we believe to be in the public domain in the
United States. Employees As of December 31, 2003, we had approximately 1,300 full-time employees. This
number does not include approximately 580 employees of DonTech, who are not
employees of Donnelley. None of our employees (or DonTechs) are subject to
collective bargaining agreements, and we consider relations with our employees
to be good. Executive Officers of the Registrant The following table sets forth information concerning the individuals who serve
as executive officers of the Company as of March 8, 2004. Name
    
    Age
    
    Position(s)David C. Swanson
    
    
    49
    
    
    Chairman of the Board and Chief Executive OfficerPeter J. McDonald
    
    
    53
    
    
    Senior Vice President and President of
Donnelley MediaSteven M. Blondy
    
    
    44
    
    
    Senior Vice President and Chief Financial OfficerJenny L. Apker
    
    
    46
    
    
    Vice President and TreasurerGeorge F. Bednarz
    
    
    50
    
    
    Vice President, Publishing, Information Technology and
Corporate PlanningRobert J. Bush
    
    
    38
    
    
    Vice President, General Counsel and Corporate SecretaryThomas D. DOrazio
    
    
    45
    
    
    Vice President and Controller Elect*William C. Drexler
    
    
    50
    
    
    Vice President and Controller*William M. Hammack
    
    
    55
    
    
    Vice President  Strategy and Business DevelopmentDebra M. Ryan
    
    
    52
    
    
    Vice President  Human Resources
  *
    
    Effective April 1, 2004, Mr. DOrazio will replace Mr. Drexler as our Vice
President and Controller. Mr. Drexler will be leaving the Company to pursue
other opportunities. The executive officers serve at the pleasure of the Board of Directors. We
have been advised that there are no family relationships among any of the
officers listed, and there is no arrangement or understanding among any of them
and any other persons pursuant to which they were elected as an officer. 9




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##### 



David C. Swansonhas been Chief Executive Officer of Donnelley since May 2002
and Chairman of the Board since December 2002. He was first elected to the
Board in December 2001. He served as President and Chief Operating Officer from
December 2000 until May 2002. Prior to that, Mr. Swanson served as President of
Donnelley Directory Services from March 1999. Mr. Swanson joined Donnelley as
an Account Executive and held increasingly senior management positions over the
next 15 years. In 1995, he became Executive Vice President of Sales and in 1997
was named Executive Vice President and General Manager of Proprietary
Operations. In 1998, he was named Executive Vice President of Corporate
Strategy in conjunction with the spin-off from The Dun & Bradstreet Corporation
(D&B). Peter J. McDonaldhas served as Senior Vice President and President of
Donnelley Media since September 2002. Mr. McDonald was a director of RHD
between May 2001 and September 2002. Previously, Mr. McDonald served as
President and Chief Executive Officer of SBC Directory Operations, a publisher
of yellow pages directories, from October 1999 to April 2000. He was President
and Chief Executive Officer of Ameritech Publishings yellow pages business
from 1994 to 1999, when Ameritech was acquired by SBC. Mr. McDonald was
President and Chief Executive Officer of DonTech from 1993 to 1994. Prior to
that time, he served in a variety of sales positions at Donnelley, after
beginning his career at National Telephone Directory Corporation. He is also a
past vice chairman of the Yellow Pages Integrated Marketing Association (then
known as Yellow Pages Publishers Association). Steven M. Blondyhas served as Senior Vice President and Chief Financial
Officer since March 2002. Prior to joining Donnelley, Mr. Blondy served as
Senior Vice President  Corporate Development for Young & Rubicam, Inc., a
global marketing and communications company, from 1998 to 2000. Mr. Blondy
served as Executive Vice President and Chief Financial Officer for Poppe Tyson,
a leading Internet and integrated marketing communications agency, from 1996 to
1997. Mr. Blondy served as Chief Financial Officer for Grundy Worldwide, an
independent producer of television programs in Europe and Australia, from 1994
to 1995. Prior to that, he spent 12 years in the investment banking industry
with Chase Manhattan Bank and Merrill Lynch. Jenny L. Apkerhas served as Vice President and Treasurer of Donnelley since
May 2003. Prior to that, she was Assistant Treasurer at Allied Waste
Industries, a waste services company in the United States, since 1998. Before
joining Allied Waste Industries, Ms. Apker was Vice President at First
Interstate Bank of Arizona, a banking institution that was subsequently
acquired by Wells Fargo. Prior to joining First Interstate Bank of Arizona, Ms.
Apker spent 11 years at Greyhound Financial Corporation, a financial services
company. George F. Bednarzhas
served as Vice President, Publishing, Information
Technology and Corporate Planning, since January 2003 and Vice President,
Publishing and Information Technology, from April 2001. Previously, he served
as Vice President and General Manager  Publishing from 1999. Mr. Bednarz
joined us in November 1995 to lead the start-up implementation of Donnelleys
Morrisville, North Carolina Publishing and Information Center. Prior to joining
us, Mr. Bednarz spent 19 years at D&B, where he held executive positions of
increasing responsibility in various functions. Robert J. Bushhas served as General Counsel since January 2001. Since 2000,
Mr. Bush served as Vice President and Corporate Secretary, having joined
Donnelley in October 1999 as Assistant Vice President and Assistant General
Counsel. Prior to joining us, Mr. Bush was Assistant General Counsel and
Assistant Secretary at MIM Corporation, a pharmacy benefit management company,
from 1998 to 1999, and an Associate at the New York offices of the law firm of
Jones, Day, Reavis & Pogue (now known as Jones Day) from August 1993 to May
1998. Thomas D. DOraziohas served as Vice President and Controller Elect of
Donnelley since January 2004 and will assume the full duties of that position
effective April 1, 2004. Prior to that, Mr. DOrazio served as Vice President
and Corporate Controller at Pillowtex Corporation, a manufacturer of home
textile products, since 2001. Pillowtex filed a voluntary petition for
reorganization under the United States bankruptcy laws on July 30, 2003.
Before joining Pillowtex, Mr. DOrazio was Corporate Controller at Glatfelter,
a global manufacturer of specialty paper and engineered products, from 1998 and
prior to that held several roles in finance organizations at textile companies.
Through 1991, Mr. DOrazio spent three years at the Financial Accounting
Standards Board. William C. Drexlerhas served as Vice President and Controller of Donnelley
since June 1999. Prior to that, Mr. Drexler served as Assistant Vice President
of Finance since 1996. Mr. Drexler joined us in 1992 as Director of Accounting
Operations. In 1995, he was named Director of Financial Planning for publishing
and information services. Prior to joining Donnelley, Mr. Drexler held
financial management positions of increasing responsibility with a number of
manufacturing firms. Mr. Drexler will leave the Company during 2004. 10




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##### 



William M. Hammackhas served as Vice President  Strategy and Business
Development since February 2004. Previously, Mr. Hammack was CEO of
YPsolutions, an Internet software company he founded from 2001. Prior to that, Mr.
Hammack spent two decades as an independent directory publisher. He is a past
Chairman of the Association of Directory Publishers, the independent directory
industrys largest trade group. Debra M. Ryanhas served as Vice President  Human Resources since January
2002. Prior to that, Ms. Ryan served as Vice President  Human Resources for
R.H. Donnelley Inc. since 1994. Ms. Ryan joined Donnelley in 1973 as a sales
representative and has held several management positions with increasing
responsibility in the sales organization.  ITEM 2.
    PROPERTIES We currently conduct our pre-press publishing and graphics operations from one
owned and two leased facilities with non-cancelable lease terms expiring at
various dates through 2005. Our pre-press publishing facility is located in a
leased 55,000 square foot building in Morrisville, North Carolina. We have
graphics operations in an owned 25,000 square foot facility in Bristol,
Tennessee and in a leased 20,000 square foot building in Dunmore, Pennsylvania.
In connection with our headquarters relocation to North Carolina, we have
entered into a lease for approximately 73,000 square feet expiring in 2015. The
lease for our current headquarters in Purchase, New York is for 35,000 square
feet and extends through 2011, but we have the option to cancel the lease in
2006 for a nominal fee. Once we vacate the space, we intend to assign or sublet
this lease, subject to market conditions. We also lease 33,000 square feet of
office space in Overland Park, Kansas that extends into 2009 for sales and
certain administrative functions. We also lease space for local sales offices,
which are typically fairly small and have relatively short terms.DonTech
directly leases its own sales offices and corporate headquarters. We believe that our facilities are adequate for their current use and our
present operations.  ITEM 3.
    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. 11




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Rockland Yellow Pages In 1999, Sandy Goldberg, Dellwood Publishing, Inc. and Rockland Yellow Pages
initiated a lawsuit against the Company and Bell Atlantic Corporation in the
United States District Court for the Southern District of New York. The
Rockland Yellow Pages is a proprietary directory that competes against a Bell
Atlantic directory in the same region, for which we served as Bell Atlantics
advertising sales agent through June 30, 2000. The complaint alleged that the
defendants disseminated false information concerning the Rockland Yellow Pages,
which resulted in damages to the Rockland Yellow Pages. In May 2001, the
District Court dismissed substantially all of plaintiffs claims, and in August
2001, the remaining claims were either withdrawn by the plaintiffs or dismissed
by the District Court. The plaintiffs then filed a complaint against the same
defendants in New York State Supreme Court, in Rockland County, alleging
virtually the same state law tort claim previously dismissed by the District
Court and seeking unspecified damages. In October 2001, defendants filed a
motion to dismiss this complaint. On May 5, 2002, the Court granted defendants
motion to dismiss the complaint. Plaintiffs filed an appeal of this dismissal.
On April 10, 2003, the Appellate Division heard oral arguments on the appeal,
and on April 28, 2003, the Appellate Division dismissed all but one count of
the complaint, which count alleges immaterial compensatory damages with respect
to only one advertiser. Accordingly, we presently do not believe that the final
outcome of this matter will have a material adverse effect on our results of
operations or financial condition. We will no longer report on this matter. Information Resources, Inc. In 1996, Information Resources, Inc. (IRI) filed a complaint in the United
States District Court for the Southern District of New York, naming as
defendants the Company, as successor of D&B, ACNielsen and IMS, 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 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 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. In connection with the 1996 Distribution, Cognizant (now NMR), ACNielsen and
D&B 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: 12




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
    
    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 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. In 2001, ACNielsen was acquired by VNU N.V. (VNU). We understand that VNU
has assumed ACNielsens liabilities under the JDA. 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 to share equally (50% each) these 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. Discovery in the lawsuit is ongoing, and although the court originally set a
trial date for September 2004, the court rescinded that date in January 2004,
and there is currently no trial date set. 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 (and hence we cannot estimate the ACN
Maximum Amount and the portion of any judgment to be paid by VNU and
ACNielsen under the JDA). Nonetheless, while we cannot assure you as to the
outcome of this 13




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##### 



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. 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, 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  1997-2003, 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. 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. 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 $349.3 million while IMS (on
behalf of itself and NMR) paid approximately $212.3 million. We understand that
this payment was made under dispute in order to stop additional interest from
accruing, that D&B is contesting the IRSs formal assessment and would also
contest the assessment of amounts, if any, in excess of the amounts paid, and
that D&B has filed a complaint for a refund in the United States District
Court. This case is expected to go to trial in 2005. 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) an IRS examination
report 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 $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 $44.1 million (tax, interest and
penalties, net of associated tax benefits). In addition, and also in the second quarter of 2003, D&B received on behalf of
the partnership associated with the above transaction an IRS examination report
challenging the tax treatment of certain royalty payments received by the
partnership in which D&B was a partner. In that report, the IRS is seeking to
reallocate certain partnership income to D&B. In January 2004, D&B received
additional IRS Notices (similar to those received in the second 14




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##### 



quarter of 2003) reflecting an additional tax liability of $1.6 million (tax,
interest, and penalties, net of associated tax benefits) 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 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 $44.1 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 and Royalty Expense Deductions  1997-2003 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. 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 $52 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 $2.5 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 million (tax, interest and penalties, net of
associated tax benefits). This $137 million would be in addition to the $52
million noted above related to the amortization expense deduction. 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. 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. 15




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Coastal Termite and Pest Control In 2001, Marnan Group, Inc., doing business as Coastal Termite and Pest Control
(Coastal), filed a complaint in the United States District Court for the
Middle District of Florida against SPA. The complaint, as amended, alleged
that SPA breached certain directory advertising contracts between 1996 and
1999, fraudulently induced Coastal to enter into another directory advertising
contract and tortiously interfered with Coastals business relationships with
its customers. Coastal was seeking damages for lost contract benefits, lost
profits and diminution of business value in an unspecified amount, including
pre-judgment interest. In October 2003, the parties settled this dispute for
an amount less than the $0.5 million reserved in the Companys financial
statements in connection with the SPA acquisition. We will no longer report on
this matter. 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 No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
2003. 16




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PART II  ITEM 5.
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Companys common stock trades on the New York Stock Exchange under the
symbol RHD. The table below indicates the high and low sales price of the
Companys common stock for each quarter of the last two years. 2003
    
    2002High
    
    Low
    
    High
    
    Low1st Quarter
    
    $
    32.22
    
    
    $
    28.72
    
    
    $
    30.96
    
    
    $
    26.602nd Quarter
    
    $
    38.60
    
    
    $
    28.86
    
    
    $
    32.10
    
    
    $
    27.303rd Quarter
    
    $
    41.40
    
    
    $
    35.60
    
    
    $
    27.91
    
    
    $
    22.024th Quarter
    
    $
    43.20
    
    
    $
    37.56
    
    
    $
    29.92
    
    
    $
    24.19
 On March 8, 2004, there
were approximately 6,722 holders of record of the
Companys common stock. On March 8, 2004, the closing market price of the
common stock was $43.81. We have not paid any common dividends during the last
two years and do not expect to pay common dividends in the foreseeable future.
Our redeemable convertible cumulative preferred stock (Preferred Stock) earns
a cumulative dividend of 8%, compounded quarterly. Without the consent of the
holders of the Preferred Stock, we cannot pay Preferred Stock dividends in cash
until October 2005; therefore, the dividend will accrete through September
2005. Beginning in October 2005, we may pay the Preferred Stock dividend in
cash, subject to financial covenants under our Credit Facility, or, at our
option, we may allow it to accrete. The stock purchase agreement with respect
to the Preferred Stock and our various debt instruments contain various
financial restrictions that place limitations on our ability to pay dividends
in the future (see Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and Capital Resources for
additional information regarding these instruments and agreements and relevant
limitations thereunder). The following table sets forth securities outstanding under existing equity
compensation plans, as well as securities remaining available for future
issuance under those plans, in each case as of December 31, 2003. Equity Compensation Plan Information (c)Number of securities(a)
    
    
    
    
    
    remaining available forNumber of securities
    
    (b)
    
    future issuance underto be issued upon
    
    Weighted-average
    
    equity compensationexercise of
    
    exercise price of
    
    plans (excludingoutstanding options,
    
    outstanding options,
    
    securities reflected inPlan category
    
    and rights
    
    warrants and rights
    
    in column (a))Equity
compensation plans approved by security holders(1)
    
    
    2,286,866
    
    
    $
    26.85
    
    
    
    1,609,009Equity compensation plans not
approved by security holders:1991 Key Employees Stock
Option Plan(2)
    
    
    982,232
    
    
    $
    16.81
    
    
    
    01998 Key Employees
Performance Unit Plan(3)
    
    
    69,809
    
    
    $
    35.03
    
    
    
    01998 Directors Stock Plan(4)
    
    
    19,650
    
    
    $
    17.32
    
    
    
    01998 Partner Share Plan(5)
    
    
    17,550
    
    
    $
    15.31
    
    
    
    02001 Partner Share Plan(6)
    
    
    38,114
    
    
    $
    26.45
    
    
    
    0Total
    
    
    3,414,221
    
    
    $
    24.01
    
    
    
    1,609,009
 17




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(1)
    
    This reflects securities covered by our 2001 Stock Award and Incentive
Plan (2001 Plan), which was adopted and approved by our shareholders at
our 2001 Annual Meeting of Stockholders.(2)
    
    This reflects options still outstanding under our 1991 Key Employees
Stock Option Plan (1991 Plan). This plan was originally a D&B plan that
was carried over at the time of the Spin-off from D&B. The 2001 Plan
replaced the 1991 Plan and all shares available for grant under the 1991
Plan became available for grant under the 2001 Plan upon its approval by
stockholders; provided, however, all options then outstanding remained
subject to the terms and conditions of the 1991 Plan.(3)
    
    This reflects the performance shares
(PERS) still outstanding under our
1998 Key Employees Performance Unit Plan (PUP Plan). Upon completion of
the respective performance period, a dollar amount of the award is
determined for each recipient based on the Companys actual financial
performance against economic profit and earnings per share goals. The
dollar amount is then converted into a number of PERS
by dividing the dollar amount of the award by the Companys stock price
(calculated as the average of the high and low prices of the Companys
common stock on the ten trading days subsequent to delivery of the Companys
respective audited consolidated financial statements to the Compensation and
Benefits Committee of the Companys Board of Directors) at that time. The
above computation is based on a stock price of $35.03, which reflects the
weighted average of (a) the price of $28.04 at which outstanding awards were
converted under the 1999 PERS grant, and (b) $39.93 (the average market price
of the companys common stock as of December 31, 2003) for awards to be
converted in March 2004 under the 2001 PERS grant. The 2001 Plan replaced the PUP
Plan and all shares available for grant under the PUP Plan became available
for grant under the 2001 Plan upon its approval by stockholders; provided,
however, all awards then outstanding remained subject to the terms and
conditions of the PUP Plan.(4)
    
    This reflects shares and options still outstanding under our 1998
Directors Stock Plan (1998 Director Plan). The 2001 Plan replaced the
1998 Director Plan and all shares available for grant under the 1998
Director Plan became available for grant under the 2001 Director Plan upon
its approval by stockholders; provided, however, all shares and options then
outstanding remained subject to the terms and conditions of the 1998
Director Plan.(5)
    
    This reflects options still outstanding under our 1998 Partner Share
Plan (1998 PS Plan), which was a broad-based plan covering lower level
employees not eligible for grants under the 1991 Plan. The Plan only
authorized 262,000 shares for grant at its inception and only 17,550 shares
remain outstanding. The 2001 Plan replaced the 1998 PS Plan and all shares
available for grant under the 1998 PS Plan became available for grant under
the 2001 Plan upon its approval by stockholders; provided, however, all
shares and options then outstanding remained subject to the terms and
conditions of the 1998 PS Plan.(6)
    
    This reflects options still outstanding under our 2001 Partner Share
Plan (2001 PS Plan), which was a broad-based plan covering lower level
employees whose grants were made prior to shareholder approval of the 2001
Plan. The Plan only authorized 124,750 shares for grant at its inception
and only 38,114 remain outstanding. The 2001 Plan replaced this Plan and
all shares available for grant under this 2001 PS Plan became available for
grant under the 2001 Plan upon its approval by stockholders; provided,
however, all shares and options then outstanding remained subject to the
terms and conditions of the original 2001 PS Plan. 18




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ITEM 6.
    SELECTED FINANCIAL DATA The following selected financial data are derived from our audited consolidated
financial statements. The information set forth below should be read in
conjunction with the audited consolidated financial statements and related
notes in Item 8 and with Managements Discussion and Analysis of Financial
Condition and Results of Operations in
Item 7. Years Ended December 31,(in thousands, except per share data)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Statement of Operations Data (1)Net revenue
    
    $
    256,445
    
    
    $
    75,406
    
    
    $
    80,253
    
    
    $
    141,287
    
    
    $
    181,905Partnership income
    
    
    114,052
    
    
    
    136,873
    
    
    
    139,964
    
    
    
    147,693
    
    
    
    139,181Operating income
    
    
    92,526
    
    
    
    145,982
    
    
    
    111,472
    
    
    
    147,375
    
    
    
    129,906Net (loss) income
    
    
    (49,953
    )
    
    
    67,177
    
    
    
    49,815
    
    
    
    124,758
    
    
    
    55,151Preferred dividend
    
    
    58,397
    
    
    
    24,702
    
    
    
    
    
    
    
    
    
    
    
    (Loss) income available to common
shareholders
    
    
    (108,350
    )
    
    
    42,475
    
    
    
    49,815
    
    
    
    124,758
    
    
    
    55,151(Loss) Earnings Per ShareBasic
    
    $
    (3.53
    )
    
    $
    1.42
    
    
    $
    1.65
    
    
    $
    3.91
    
    
    $
    1.64Diluted
    
    $
    (3.53
    )
    
    $
    1.40
    
    
    $
    1.61
    
    
    $
    3.83
    
    
    $
    1.61Shares Used in Computing (Loss)
Earnings Per ShareBasic
    
    
    30,683
    
    
    
    29,643
    
    
    
    30,207
    
    
    
    31,947
    
    
    
    33,676Diluted
    
    
    30,683
    
    
    
    30,298
    
    
    
    30,976
    
    
    
    32,594
    
    
    
    34,159Balance Sheet Data(1)Total assets
    
    $
    2,538,734
    
    
    $
    2,223,375
    (2)
    
    $
    295,981
    
    
    $
    365,284
    
    
    $
    395,406Long-term debt
    
    
    2,042,547
    
    
    
    2,075,470
    (2)
    
    
    283,904
    
    
    
    347,526
    
    
    
    435,000Redeemable convertible preferred
stock
    
    
    198,223
    
    
    
    63,459
    
    
    
    
    
    
    
    
    
    
    
    Shareholders deficit
    
    
    (56,245
    )
    
    
    (30,600
    )
    
    
    (111,313
    )
    
    
    (108,510
    )
    
    
    (192,811
    )
   (1)
    
    Financial data for the year ended December 31, 2003 include the results
of the former SPA business from and after January 3, 2003. Net revenue, net
loss and loss available to common shareholders reflect purchase accounting
adjustments that precluded the recognition of revenue and certain expenses
associated with directories published by SPA prior to the acquisition,
including all January 2003 published directories. See Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations
for further discussion of these items.(2)
    
    In connection with the SPA acquisition, we incurred a significant
amount of debt. To take advantage of favorable market conditions and to
ensure the timely consummation of the SPA acquisition, we issued Preferred
Stock in November 2002 and borrowed funds under certain debt instruments in
December 2002. Therefore, our cash and debt balances were unusually high at
December 31, 2002 as compared to prior periods. 19




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ITEM 7.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS This Item should be read in conjunction with the audited consolidated financial
statements and notes thereto that are included in Item 8. Unless otherwise
indicated, the terms Company, Donnelley, RHD, we, us and our refer
to R.H. Donnelley Corporation and its direct and indirect wholly owned
subsidiaries. Corporate Overview We are the sixth largest directory publisher in the United States based on
revenue. We have been in the yellow pages business in various capacities for
over 100 years. We now publish 260 Sprint-branded, revenue-generating yellow
pages directories in 18 states and have a total circulation of approximately 18
million, serving approximately 160,000 local and 4,000 national advertisers.
Through The DonTech II Partnership (DonTech), our partnership with an
affiliate of SBC Communications Inc. (SBC), we sell advertising for an
additional 129 SBC-branded directories in Illinois and northwest Indiana with a
total circulation of approximately 10 million, serving approximately 100,000
local advertisers. Many local advertisers rely on the yellow pages directories
as their primary or sole method of advertising. On January 3, 2003, we acquired all the outstanding common stock of the various
entities comprising Sprint Publishing and Advertising (SPA), Sprint
Corporations (Sprint) directory publishing business. See SPA Acquisition
below for a further description of the acquisition. The acquisition transformed
Donnelley from a sales agent and pre-press vendor into a leading publisher of
yellow pages directories. Prior to the SPA acquisition, we were one of the
largest independent sales agents and pre-press vendors for yellow pages
advertising in the United States. Commencing in 2003, our operating and financial results reflect our yellow
pages publishing business, rather than our former business as a sales agent and
pre-press vendor for yellow pages advertising on behalf of other publishers,
including SPA. As a publisher, we report the full value of advertising sales
and certain direct costs under the deferral and amortization method. As a
sales agent and pre-press vendor for yellow pages advertising, in 2001 and 2002
our revenue reflected sales commissions and pre-press fees from, or other
transactions with, our business partners, including SPA, and our
expenses were charged to earnings as incurred. DonTech remained
unchanged following the SPA acquisition, and our financial presentation of
DonTech is consistent for all periods presented in this annual report. Forward-Looking Information Certain statements contained in this Annual Report on Form 10-K regarding
Donnelleys future operating results, performance, business plans or prospects
and any other statements not constituting historical fact are forward-looking
statements subject to the safe harbor created by the Private Securities
Litigation Reform Act of 1995. Where possible, words such as believe,
expect, anticipate, should, will, would, planned, estimates,
potential, goal, outlook, may, predicts, could, or the negative of
those words and other comparable expressions, are used to identify such
forward-looking statements. Actual events or results may differ materially.
In evaluating those statements, you should specially consider various factors,
including the risks and uncertainties discussed below. Those factors may cause
our actual results to differ materially from any of RHDs forward-looking
statements. All forward-looking statements attributable to us or a person on
our behalf are expressly qualified in their entirety by this cautionary
statement. 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. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity or
performance. These forward-looking statements are made as of the date of this
annual report and, except as required under the federal securities laws and the
rules and regulations of the SEC, we assume no obligation to update or revise
them or to provide reasons why actual results may differ. 20




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Such risks, uncertainties and contingencies include, without limitation, the
following: (1) Our ability to meet substantial debt service obligations We have a substantial amount of debt and significant debt service obligations
in 2004 and thereafter. As of December 31, 2003, we had total outstanding debt
of $2,092.1 million. See Liquidity and Capital Resources below for further
details regarding our debt obligations and instruments. As a result of our
significant amount of debt and debt service obligations, we face increasing
risks associated with, but not limited to, the following:  
    
    our ability to obtain additional financing in excess of the
borrowing capacity under our $125 million Revolving Credit Facility
(the Revolver) on satisfactory terms to fund working capital
requirements, capital expenditures, acquisitions, investments, debt
service requirements and other general corporate requirements is
limited;  
    
    we are more vulnerable to general economic downturns, competition
and industry conditions, which could place us at a competitive
disadvantage compared to our competitors that are less leveraged;  
    
    we face increased exposure to rising interest rates as a portion of
our debt is at variable interest rates;  
    
    we have reduced availability of cash flow to fund working capital
requirements, capital expenditures, acquisitions, investments and other
general corporate requirements because a substantial portion of our
cash flow will be needed to service our debt obligations; and  
    
    we have limited flexibility in planning for, or reacting to,
changes in our business and the industry in which we operate. Our ability to pay principal and interest on our debt obligations will depend
upon our future operating performance and our ability to refinance debt. If we
are unable to service our debt and fund our business, we may be forced to
reduce or delay capital expenditures, seek additional debt financing or equity
capital, restructure or refinance our debt or sell assets. We cannot assure you
that we would be able to obtain additional financing, refinance existing debt
or sell assets on satisfactory terms or at all. (2) Restrictive covenants under our debt and Preferred Stock agreements The indentures governing our 8 7/8% Senior Notes (Senior Notes) due 2010 and
10 7/8% Senior Subordinated Notes (Subordinated Notes) due 2012
(collectively, the Notes) and our Senior Secured Credit Facility, as amended
(Credit Facility), include a number of significant restrictive covenants.
See Liquidity and Capital Resources below for further details regarding our
debt instruments. These covenants could adversely affect us by limiting our
ability to plan for or react to market conditions or to meet our capital needs.
These covenants, among other things, restrict our ability and the ability of
our subsidiaries to:  
    
    incur additional debt;
    
    pay dividends on our equity interests or repurchase equity interests;
    
    make certain investments;
    
    enter into certain types of transactions with affiliates;
    
    limit dividends or other payments by our restricted subsidiaries to us;
    
    use assets as security in other transactions; and
    
    sell certain assets or merge with or into other companies. In addition, the Credit Facility includes other and more restrictive covenants
and prohibits us from prepaying the Notes while borrowings under the Credit
Facility are outstanding. The Credit Facility also requires us to maintain
certain financial ratios and meet other financial tests. The failure to comply
with these covenants could result in an event of default, which, if not cured
or waived, could require us to repay these borrowings before their scheduled
due date. If we were unable to make this repayment or otherwise refinance
these borrowings, the lenders under the Credit Facility could foreclose on our
assets, substantially all of which have been subjected to security interests in
favor of the lenders under the Credit Facility. In addition, these lenders
could elect to declare all amounts borrowed under the Credit Facility, together
with accrued interest, to be due and payable, which, in some instances, would
be an event of default under the indentures governing the Notes. If we were
unable to refinance these borrowings on favorable terms, our results of
operations and financial condition could be adversely impacted by increased
costs and less favorable terms, including rates and covenants. Any future
refinancing of the Credit Facility is likely to contain similar restrictive
covenants. 21




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Furthermore, the terms of the purchase agreement with respect to our
redeemable, convertible, cumulative preferred stock (Preferred Stock), among
other things, restricts our ability and the ability of our subsidiaries to:  
    
    incur additional debt;
    
    enter into major corporate transactions;
    
    pay dividends on shares of our common stock or repurchase shares of our common stock;  
    
    enter into certain types of transactions with affiliates; and  
    
    sell or acquire certain assets. Our failure to comply with these terms would result in a breach of this
agreement, which could have a material adverse effect on our business. In
addition, without the consent of the holders of our Preferred Stock, we cannot
issue shares of common stock for 18 months following the SPA acquisition, which
could adversely affect our liquidity (see  Liquidity and Capital Resources
for a further description of the Preferred Stock). (3) Usage of print yellow pages directories and changes in technology From 1997 to 2000, overall references to print yellow pages directories in the
United States declined; however, overall references to print yellow pages
directories have remained stable over the past three years. We believe the past decline
was primarily a result of demographic shifts among consumers,
particularly the increase of households in which English was not the
primary language spoken. We also believe that the past decline was
attributable to increased usage of Internet-based directory products, particularly in
business-to-business and retail categories, as well as the proliferation of
very large retail stores for which consumers and businesses may not reference the yellow
pages. Any declines in usage could:  
    
    impair our ability to maintain or increase advertising prices;  
    
    cause businesses that purchase advertising in our yellow pages directories
to reduce or discontinue those purchases; and  
    
    discourage businesses that do not purchase advertising in our yellow pages
directories from doing so. Any of the factors that may contribute to a
decline in usage of our print
directories, or a combination of them, could impair our revenues and have a
material adverse effect on our business. The yellow pages directory advertising
business is subject to changes arising
from developments in technology, including information distribution methods and
users technological preferences. The use of the Internet by consumers as a
means to transact commerce may result in new technologies being developed and
services being provided that could compete with our products and services. As
a result of these factors, our growth and future financial performance may
depend on our ability to develop and market new products and services and
create new distribution channels, while enhancing existing products, services
and distribution channels, to incorporate the latest technological advances and
accommodate changing user preferences, including the use of the
Internet. We cannot assure you that we will be able to provide
services over the Internet successfully or that we will be able to
compete successfully with other Internet-based directory services. In
addition, if we fail to anticipate or respond adequately to changes
in technology and user preferences or are unable to finance the
capital expenditures necessary to respond to such changes, our results of
operations or financial condition could be materially adversely affected. (4) SBCs or DonTechs actions could adversely impact our business DonTech is Donnelleys 50/50 perpetual partnership with an affiliate of SBC.
Donnelley and DonTech have a variety of perpetual contractual relationships
with SBC. Pursuant to the partnership agreement and the other existing
contractual arrangements, DonTech is the exclusive sales agent in perpetuity
for the 129 yellow pages directories published by SBC in Illinois and northwest
Indiana. Donnelleys income with respect to DonTech is comprised of two
components: our 50% interest in the net profits of DonTech and revenue
participation income received from an affiliate of SBC. Our partnership income
related to DonTech is expected to represent approximately 30% to 35% of our
total operating income. As the exclusive sales agent for local advertising, DonTech is responsible for
the management of its sales force, including compensation, recruiting and
training and other sales-related matters. As the publisher, SBC has
responsibility for and control over all other matters, including, without
limitation, product development, national advertising, print and distribution,
pricing, scheduling, marketing and advertising, billing, collections, credit
and customer service. While we believe that DonTech and its economic interests
are generally aligned with those of 22




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SBC with respect to SBCs yellow pages directory operations, SBC could
implement policies and decisions (in which DonTech or we would likely have
little or no participation or influence) and/or perform its obligations in a
manner that could have a material adverse effect on our results of operations
or financial condition and, potentially, on our relationship with SBC. We
cannot assure you that any such policies or decisions would not have a material
adverse effect on our results of operations, financial condition or our
relationship with SBC. We also maintain a large receivable balance from SBC,
which was $93.5 million as of December 31, 2003, and any liquidity difficulties
that SBC may experience could materially impact our results of operations or
financial condition and liquidity. The DonTech partnership agreement and related SBC contractual arrangements have
perpetual terms. These arrangements only terminate upon the occurrence of
certain enumerated events, including, without limitation, the unremedied
breaches of certain material provisions thereof, the mutual agreement of the
parties, the bankruptcy of a partner or parent or a change in control of a
partner (excluding a change in control of the ultimate parent company of the
partner). In addition, under applicable law, the contractual arrangements
potentially may not remain in effect in perpetuity. We cannot assure you that
the DonTech relationship will remain in full force and effect into perpetuity,
without material modification or at all, that DonTech and SBC will perform all
of their respective material obligations (particularly payment obligations)
under these agreements or that SBC will not seek to terminate these
arrangements. In the event any such party seeks to terminate these contractual
arrangements, the other party may dispute such attempted termination and, in
such case, a court or arbitrator may be required to determine the
appropriateness of any such attempted termination, and we cannot assure you as
to the outcome of any such proceeding. Any such termination or material
modification of the agreements or failure by SBC or DonTech to perform their
respective material obligations would have a material adverse effect on our
financial condition and results of operations. (5) Competition The United States directory advertising industry is highly competitive.
Approximately 90% of total United States directory advertising sales are
attributable to Regional Bell Operating Company (RBOC) directory publishers
that typically publish directories where they offer local phone service. In
addition, more than 240 independent publishers operating in the United States
compete with those RBOC publishers. In nearly all markets, we compete with one
or more yellow pages directory publishers, which are predominantly independent
publishers. In some markets, we compete on a limited basis with RBOC directory
publishers in adjacent markets. One of these publishers, Verizon Information
Services, the directory business affiliated with Verizon Communications, Inc.,
has begun to publish directories and offer local Internet directory services in
markets beyond where Verizon Communications offers local phone service,
including certain markets where we publish directories. Effectively, Verizon
Information Services is competing as an independent publisher in those markets.
While no other RBOC publisher has announced similar plans, no assurance can be
given that other RBOC publishers will not do so in the future. Many of these
RBOC publishers are larger than us and have greater financial resources than we
have. No assurances can be given that we will be able to compete effectively
with these other publishers for advertising sales or acquisitions in the
future. We also compete for advertising sales with other media, including newspapers,
magazines, radio, direct mail, the Internet and television. Additionally,
advances in technology have brought new participants, new products and new
channels to the industry, including increasing use of electronic delivery of
traditional directory information (e.g., Yahoo Yellow Pages) and electronic
search engines/services (e.g., Google) as an advertising medium. We cannot
assure you that we will be able to compete successfully in responding to any
such developments. Many of these competitors are larger than us and have
greater financial resources than we have. In addition, the Telecommunications Act of 1996 opened local telephone markets
to increased competition, which may adversely impact the market position of the
telephone utilities, including Sprint and SBC. In addition, Federal
Communication Commission rules regarding local number portability, advances in
communications technology (such as wireless devices and voice over Internet
protocol) and demographic factors (potential shifts in younger generations away
from wireline telephone communications towards wireless or other communications
technologies) may further erode the market position of telephone utilities,
including Sprint and SBC. As a result, we cannot assure you that Sprint or SBC
will remain the primary local telephone service provider in its local service
areas. If Sprint were no longer the primary local telephone service provider
in any particular local service area, our license to be the exclusive publisher
in its markets and to use the Sprint brand name on our directories in those
markets may not be as valuable as we presently anticipate, and we may not
realize some of the anticipated benefits under our commercial arrangements with
Sprint. If SBC were no longer the primary local telephone 23




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##### 



service provider in any DonTech service area, the financial results we
recognize from DonTech could be adversely affected. (6) Reliance on, and extension of credit to, small- and medium-sized
businesses Approximately 85% of our directory advertising revenue is derived from selling
advertising to small- and medium-sized businesses. In the ordinary course of
our yellow pages publishing business, we extend credit to these advertisers for
advertising purchases. Small- and medium-sized businesses, however, tend to
have fewer financial resources and higher failure rates than large businesses.
The proliferation of very large retail stores may continue to harm small- and
medium-sized businesses. We believe these limitations are significant
contributing factors to having advertisers in any given year not renew their
advertising in the following year. In addition, full or partial collection of
delinquent accounts can take an extended period of time. Consequently, we
could be adversely affected by our dependence on and our extension of credit to
small- and medium-sized businesses. (7) Dependence on third party providers of printing, distribution and
delivery services We depend on third parties for the printing and distribution of our
directories. We are a party to two contracts with R.R. Donnelley for the
printing of our directories. Printing is one of our largest costs items
accounting for approximately 10% of our total operating and general
and administrative expenses. Although these contracts do not expire until December
2005 and December 2007, because of the large print volume and specialized
binding of directories, there are a limited number of companies capable of
servicing our printing needs. Accordingly, the inability or unwillingness of
R.R. Donnelley to provide printing services to us on acceptable terms or at all
could have a material adverse effect on our business. No common ownership or
other business affiliation exists between R.R. Donnelley and us. We are a party to contracts with two companies for the distribution of our
directories. Although these contracts are scheduled to expire in February 2007,
either vendor may terminate its contract with us upon 120 days written notice.
There are a limited number of companies capable of servicing our delivery
needs. Accordingly, the inability or unwillingness of our current vendors to
provide delivery services to us on acceptable terms or at all could have a
material adverse effect on our business. (8) General economic factors Our business results could be adversely affected by a prolonged national or
regional economic recession. We derive substantially all of our revenue from
the sale of advertising in directories. Typically, our advertising revenues, as
well as those of yellow pages publishers in general, do not fluctuate widely
with economic cycles. However, a prolonged national or regional economic
recession could have a material adverse effect on our business, results of
operations or financial condition. As a result, we may experience lower than
expected revenues for our business in the future. In addition, any residual economic effects of, and uncertainties regarding:  
    
    the terrorist attacks that occurred on September 11, 2001;  
    
    the general possibility, express threat or future occurrence of
similar terrorist or other related disruptive events; and  
    
    the United States involvement in military conflict  (9) Fluctuations in the price and availability of paper Our principal raw material is paper. We currently have one contract for the
purchasing of paper. This agreement is effective through December 31, 2006 and
can be terminated by either party if a material breach of the agreement occurs
and is not cured by the breaching party within 30 days of written notice. The
price of the paper was set at 24




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inception and increases at various dates during the term of the agreement.
Should the market price of the paper drop below the set prices, both parties
are obligated to negotiate in good faith a lower paper price. We are subject to
delays in receiving this principal raw material. Further, changes in the
supply of, or demand for, paper could affect market prices or delivery times.
Paper is one of our largest cost items accounting for approximately 5% to 7%
of our total operating and general and administrative expenses. We cannot
assure you that we will have available necessary raw materials at reasonable
prices or that any increases in paper costs would not have a material adverse
effect on our business, results of operations or financial condition. (10) The sale of advertising to national accounts is coordinated by third
parties that we do not control Approximately 15% of our directory advertising revenues are derived from the
sale of advertising to national or large regional companies, such as rental car
companies, automobile repair shops and pizza delivery businesses, each of whom
generally purchases advertising in several of our directories. Substantially
all of the revenue derived from national accounts is serviced through Certified
Marketing Representatives (CMRs) with whom we contract. CMRs are independent
third parties that act as agents for national companies and design their
advertisements, arrange for the placement of those advertisements in
directories and provide billing services. As a result, our relationships with
these national advertisers depend significantly on the performance of these
third party CMRs whom we do not control. Although we believe that our
relationships with these CMRs have been mutually beneficial, if some or all of
the CMRs with whom we have established relationships were unable or unwilling
to provide services to us on acceptable terms or at all, such inability or
unwillingness could materially adversely affect our business. During 2003, we
began acting as a CMR directly placing certain national advertising. No
assurance can be given that such development will not adversely impact our
relationships with CMRs or expose us to possible legal claims from CMRs. We
are also subject to credit risk with CMRs with whom we contract. (11) Turnover among our sales force or key management Our ability to achieve our business plan depends to a significant extent on our
ability to identify, hire, train and retain qualified sales personnel in each
of the regions in which we operate. We expend a significant amount of
resources and management time on identifying and training our account
executives. Our ability to attract and retain qualified sales personnel
depends on numerous factors, including some outside of our control, such as
conditions in the local employment markets in which we operate. A decrease in
the number of account executives could adversely affect our results of
operations, financial condition and liquidity, as well as our ability to
service our debt. Furthermore, we depend on the continued services of key personnel, including
our experienced senior management team as well as our regional sales management
personnel. Although we believe that we could replace our senior management
team and other key employees within a reasonable time period should the need
arise, the loss of these key personnel could have a material adverse effect on
our business. (12) The loss of important intellectual property rights Some trademarks such as the Sprint and Donnelley brand names and other
intellectual property rights are important to our business. We rely upon a
combination of copyright and trademark laws as well as contractual
arrangements, including licensing agreements, particularly with respect to
Sprint markets, to establish and protect our intellectual property rights. We
are required from time to time to bring lawsuits against third parties to
protect our intellectual property rights. Similarly, from time to time, we are
party to proceedings whereby third parties challenge our rights. We cannot be
sure that any lawsuits or other actions brought by us will be successful or
that we will not be found to infringe the intellectual property rights of third
parties. Although we are not aware of any material infringements of any
trademark rights that are significant to our business, any lawsuits, regardless
of their outcome, could result in substantial costs and diversion of resources
and could have a material adverse effect on our business, financial condition
or results of operations. In addition, we only have rights to use the Sprint
name and diamond logo in certain markets. The loss of important intellectual
property rights such as trademarks could have a material adverse effect upon
our business, financial condition and results of operations. (13) Impact of bankruptcy proceedings against Sprint or its affiliates during
the term of the commercial
arrangements Contract rights under the directory services license agreement, trademark
license agreement and non-competition agreement with Sprint and its affiliates
constitute a substantial portion of our commercial arrangements with Sprint and
its affiliates. Pursuant to these commercial arrangements, we are the
exclusive directory publisher for Sprint in 25




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##### 



the markets where Sprint provided telephone service at the time of the
agreements. If a bankruptcy case were to be commenced by or against Sprint, it
is possible that all or part of the directory services license agreement and/or
non-competition agreement could be considered an executory contract and could
therefore be subject to rejection by Sprint or a trustee appointed in a
bankruptcy case pursuant to Section 365 or Section 1123 of the United States
Bankruptcy Code. If one or more of these agreements were rejected, the applicable agreement may
not be specifically enforceable, in which case we would have only an unsecured
claim for damages against Sprint for the breach of contract resulting from the
rejection. If the directory services license agreement were rejected, we
would, among other things, no longer be entitled to be Sprints exclusive
publisher of telephone directories in the affected markets. We could also lose
our right to enforce the provisions of the agreement under which we have the
right to license trademarks of successor local exchange carriers in the Sprint
markets. If the non-competition agreement were rejected and specific
enforcement were not available, Sprint would, among other things, no longer be
precluded from publishing print telephone directories or selling local
directory advertising in the applicable restricted markets. In connection with the SPA acquisition, Sprint created a bankruptcy remote
special purpose vehicle in the form of a limited liability company and
contributed and assigned the trademarks being licensed to us under the
trademark license agreement to this limited liability company. The operating
agreements of this limited liability company require, among other things, that
the board of managers of this entity include one independent manager that is
unaffiliated with Sprint. The consent of this independent manager is required
for the entity to take certain actions, including, among other things,
commencement of a bankruptcy proceeding. Because the trademarks were
contributed to this limited liability company, our rights under the trademark
license agreement are not subject to rejection in the event of a bankruptcy
proceeding involving Sprint unless there is also a bankruptcy proceeding
involving this limited liability company. Although we believe that the
likelihood of this entity being the subject of a bankruptcy proceeding is
limited by this structure and the governing provisions of the operating
agreement, if the trademark license agreement were rejected in a bankruptcy
proceeding, we would lose the right to use the Sprint brand name for the former
SPA directories we now publish in those markets. We cannot assure you that any loss of rights under certain of these
arrangements with Sprint and its affiliates would not have a material adverse
effect on our financial condition or results of operations. (14) Our inability to enforce the non-competition agreement with Sprint In connection with the SPA acquisition, Sprint entered into a non-competition
agreement with us. The non-competition agreement prohibits Sprint in the
markets where Sprint provided local telephone service at the time of the
transaction from selling local directory advertising or producing, publishing
and distributing print directories, with certain limited exceptions. However,
under state and federal law, a covenant not to compete is only enforceable:  
    
    to the extent it is necessary to protect a legitimate business interest of the party seeking enforcement;  
    
    if it does not unreasonably restrain the party against whom enforcement is sought; and  
    
    if it is not contrary to the public interest. Enforceability of a non-competition covenant is determined by a court based on
all of the facts and circumstances of the specific case at the time enforcement
is sought. For this reason, it is not possible for us to predict whether, or
to what extent, a court will enforce Sprints covenants not to compete against
us during the term of the non-competition agreement. If a court were to
determine that the non-competition agreement is unenforceable, Sprint could
compete directly against us in the directory publishing business in the
previously restricted markets. We cannot assure you that our inability to
enforce the non-competition agreement with Sprint would not have a material
adverse effect on our financial condition or results of operations. SPA Acquisition On January 3, 2003, we completed the acquisition of SPA for $2.23 billion in
cash, including post-acquisition working capital adjustments. To finance the
acquisition, we entered into a new $1,525 million Credit Facility, consisting
of a $500 million Term Loan A, a $900 million Term Loan B and a $125 million
Revolver. We also issued $325 million 8 7/8% Senior Notes and $600 million 10
7/8% Senior Subordinated Notes. Additionally, we issued $200 million of
Preferred Stock and warrants to purchase 1,650,000 shares of our common stock
to partnerships affiliated with The Goldman Sachs Group, Inc. (collectively,
the GS Funds). 26




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##### 



To take advantage of favorable market conditions and to ensure the timely
consummation of the SPA acquisition, we issued the Notes and borrowed the Term
Loan B in December 2002. The total gross proceeds of $1,825 million were
deposited and held in escrow pending the SPA acquisition closing. We issued
$70 million of Preferred Stock and warrants to purchase 577,500 shares of our
common stock, with an exercise price of $26.28 per share in November 2002 to
the GS Funds. At the closing of the SPA acquisition, we issued an additional
$130 million of Preferred Stock and warrants to purchase 1,072,500 shares of
our common stock, with an exercise price of $28.62 per share to the GS Funds.
Additionally, we borrowed the Term Loan A and $10 million under the Revolver on
the closing date. In connection with the transaction, we entered into a directory services
license agreement, a trademark license agreement and a non-competition
agreement with Sprint. The directory services license agreement gives us the
exclusive right to produce, publish and distribute directories for Sprint in
the markets where Sprint provided local telephone service. The trademark
license agreement gives us the exclusive right to use certain Sprint
trademarks, including the Sprint diamond logo, in those markets. The
non-competition agreement prohibits Sprint in those markets from selling local
directory advertising or producing, publishing and distributing print
directories, with certain limited exceptions. These agreements are all
interrelated and each has initial terms of 50 years, subject to earlier
termination under specified circumstances. Prior to the acquisition, we provided sales agency and pre-press publishing
services to SPA and received a priority distribution from CenDon LLC, a
partnership between us and Centel Directory Company (Centel) (an affiliate of
Sprint). Accordingly, at December 31, 2002, we had an aggregate receivable of
$43.3 million for commissions, pre-press publishing fees and priority
distribution income from SPA. As a result of the acquisition, these
receivables became part of the purchase price. Also, other long-term
liabilities at December 31, 2002 included an amount due to Sprint of $7.0
million, which we paid in cash at the closing. 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 former SPA business are included in our
consolidated results from and after January 3, 2003. The allocation of the purchase price to the fair value of assets acquired and
liabilities assumed is shown in the table below. The purchase price allocation
below reflects the initial allocation and subsequent purchase price adjustments
made in 2003. 27




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##### 



(amounts in millions)Calculation of allocable purchase price:Cash
    
    
    
    
    
    $
    2,229.8Allocable transaction costs
    
    
    
    
    
    
    17.6Total allocable purchase price
    
    
    
    
    
    $
    2,247.4Allocation of purchase price:Directory Services Agreements
    
    
    
    
    
    
    1,625.0Customer relationships
    
    
    
    
    
    
    260.0Trade names
    
    
    
    
    
    
    30.0SPA net
assets acquired
    
    $
    81.5Fair value adjustments:Reverse pre-acquisition deferred revenue
    
    
    315.9Reverse deferred allowance for doubtful accounts and sales claims
included in SPAs opening deferred revenue
    
    
    (22.8
    )Reverse deferred directory costs associated with
directories published pre-acquisition
    
    
    (89.5
    )Eliminate SPA historical deferred tax and goodwill
    
    
    (43.5
    )Other
    
    
    (23.8
    )Fair value
of tangible net assets acquired
    
    
    
    
    
    
    217.8Goodwill
    
    
    
    
    
    
    97.0Total cash purchase price
    
    
    
    
    
    $
    2,229.8Allocable
transaction costs
    
    
    
    
    
    
    17.6Total
allocable purchase price
    
    
    
    
    
    $
    2,247.4
 Segment Reporting We revised our historical segment reporting in the first quarter of 2003 to
reflect the change in the business that resulted from the SPA acquisition and
to reflect the way management now reviews and analyzes the business. Our
reportable operating segments are now Donnelley and DonTech. The Donnelley
segment includes the revenue from our 260 Sprint-branded yellow pages
directories and our pre-press publishing services, and all operating and
administrative expenses. The DonTech segment includes revenue participation
income and our 50% interest in the net profits of DonTech. 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. 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 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 the total annual income related to DonTech. Total income from
DonTech accounted for 73%, 90% and 115% of total operating income before
depreciation and amortization for the years ended December 28




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31, 2003, 2002 and 2001, respectively. 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. Prospectively, because of the acquisition, DonTech income is expected to
represent approximately 30% to 35% of our total operating income. As income
from DonTech accounts for a significant portion of our operating income, a
material decline in the advertising sales of DonTech would likely have a
material adverse effect on our results of operations and financial condition.
We also provide certain pre-press publishing services for those SBC directories
for which DonTech sells advertising, the income from which is included in our
Donnelley segment as described above. 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 8 of this annual 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 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-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. 29




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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 sooner 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 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 impacted by approximately
$3.0 million. Each of these critical accounting estimates pertains only to the Donnelley
segment, as further described in Note 14 to the consolidated financial
statements included in Item 8 of this annual 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 May 2003, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity(SFAS 150).
This statement established standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The statement was effective July 1, 2003. Our Preferred Stock
represents a financial instrument with characteristics of both liabilities and
equity. We have applied the provisions of SFAS 150 and determined that the
classification and measurement of our Preferred Stock is appropriate. In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities(FIN 46). In general, a variable interest entity
is a corporation, partnership, trust or any other legal structure used for
business 30




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purposes that either (a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. The consolidation requirements of FIN 46 apply immediately to variable
interest entities created after January 31, 2003. We adopted the provisions of
FIN 46 effective February 1, 2003 and such adoption did not have a material
impact on our consolidated financial statements because we currently have no
variable interest entities. In December 2003, the FASB issued FIN 46R with
respect to variable interest entities created before January 31,
2003, which, among other things, revised the implementation date to the first fiscal year or
interim period ending after March 15, 2004, with the exception of Special
Purpose Entities (SPE). The consolidation requirements apply to all SPEs in
the first fiscal year or interim period ending after December 15, 2003. We
adopted the provisions of FIN 46R effective December 2003 and such adoption did
not have a material impact on our consolidated financial statements because we
currently have no SPEs. In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities(SFAS 149). SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS 133. SFAS 149 is
effective for contracts and hedging relationships entered into or modified
after June 30, 2003. We adopted the provisions of SFAS 149 effective June 30,
2003 and such adoption did not have a material impact on our consolidated
financial statements. In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure
(SFAS 148). SFAS 148 amends the transition provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123), for entities that voluntarily change to the fair value method of
accounting for stock-based employee compensation. We do not currently intend to
change our accounting to the fair value method. SFAS 148 also amends the
disclosure provisions of SFAS 123 to require prominent disclosure about the
effects on reported net income of an entitys accounting policy decisions with
respect to stock-based employee compensation and amends APB Opinion No. 28,
Interim Financial Reporting(APB 28), to require disclosures about such
effects in interim financial information. We adopted the disclosure provisions
of SFAS 148 in the first quarter of 2003. On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act introduces
prescription drug care benefits under Medicare and also allows for certain
sponsors of postretirement benefit plans with a drug benefit to receive a
non-taxable federal subsidy if certain criteria are met. In response to the
passage of this legislation, on January 12, 2004, the FASB issued FASB Staff
Position (FSP) No. FAS 106-1, Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.
The FSP permits employers that sponsor postretirement benefit plans that
provide prescription drug benefits to retirees to make a one-time election to
defer accounting for any effects of the Act. In accordance with the FSP,
Donnelley has elected to defer accounting for any effects of the Act and
accordingly, any measures of the accumulated postretirement benefit obligation
or net periodic postretirement benefit cost in the financial statements and as
disclosed in Note 11  Benefits Plans do not reflect the effects of the Act on
Donnelleys plans. Authoritative guidance on the accounting for the federal
subsidy is currently being considered by the FASB that, when issued, could
require us to change previously reported information. In December 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 132 (revised 2003), Employers Disclosures about Pensions and
Other Postretirement Benefits.SFAS No. 132 (revised 2003) amends the
disclosure requirements of SFAS 132 to require more complete information about
pension and postretirement benefits. It does not change the measurement or
recognition of those plans required by SFAS No. 87, Employers Accounting for
Pensions, SFAS No. 88, Employers Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits, and SFAS No.
106, Employers Accounting for Postretirement Benefits Other Than Pensions. We
adopted the disclosure provisions of SFAS No. 132 (revised 2003) as of December
31, 2003. 31




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RESULTS OF OPERATIONS Year Ended December 31, 2003 compared to the Year Ended December 31, 2002 Factors Affecting Comparability SPA Acquisition Because of the SPA acquisition, the related financing and associated
accounting, our 2003 results prepared in accordance with GAAP are not
comparable to our 2002 GAAP results previously reported. 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 2003 GAAP results
compared to the reported 2002 GAAP results, we are also providing a comparison
of 2003 adjusted results, which, among other things, exclude the effect of
purchase accounting on deferred revenue and certain expenses, to 2002 adjusted
pro forma results, which assumes the acquisition occurred on January 1, 2002.
For a detailed discussion of 2003 adjusted revenue and certain expenses versus
2002 adjusted pro forma revenue and certain expenses, which are more comparable
to each other, as well as a detailed discussion of advertising sales, which
drive revenue, see  Adjusted and Pro Forma Amounts and Other Non-GAAP
Measures below. Relocation and Integration Charges Our 2003 expenses include severance
and move-related charges of $7.3 million
relating to the relocation of our corporate offices to Cary, North
Carolina and $7.6 million for the consolidation of our post-acquisition publishing and
technology operations, sales offices and administrative staff. Restructuring and Special Charge Results for 2002 include a
net benefit of $6.4 million from the reversal of
remaining restructuring reserves recorded in 2001, as these restructuring
actions were completed during 2002. Additionally, results for 2002 include a
$2.0 million impairment charge for the write-off of our remaining investment in
ChinaBig.com Limited (ChinaBig). See Results of Operations  Year Ended
December 31, 2002 as compared to the Year Ended December 31, 2001 below for a
further description of these amounts. Net Revenue The components of our net
revenue in 2003 and 2002 were as follows: (amounts in millions)
    
    2003
    
    2002
    
    $ ChangeDirectory advertising
revenue
    
    $
    233.1
    
    
    $
    
    
    
    $
    233.1Advertising sales
commission revenue
    
    
    
    
    
    
    43.1
    
    
    
    (43.1
    )Sales allowances
    
    
    (2.3
    )
    
    
    (0.4
    )
    
    
    (1.9
    )Net directory revenue
    
    
    230.8
    
    
    
    42.7
    
    
    
    188.1Pre-press publishing fees
    
    
    20.6
    
    
    
    31.1
    
    
    
    (10.5
    )Other revenue
    
    
    5.0
    
    
    
    1.6
    
    
    
    3.4Total
    
    $
    256.4
    
    
    $
    75.4
    
    
    $
    181.0
 Revenue is derived entirely from our Donnelley segment since DonTech is
accounted for under the equity method. Subsequent to the acquisition of SPA,
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 2003 was
$256.4 million as compared to $75.4 million in 2002. The increase in total
net revenue in 2003 is a result of the SPA acquisition. From the date of the
acquisition on January 3, 2003, our revenue was earned primarily from the sale
of advertising 32




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##### 



in yellow pages directories we published in 2003, totaling $230.8 million, net
of sales allowances. As a result of the acquisition, we became the publisher
of 260 Sprint-branded directories. As the publisher, we earn the entire value
of the sales contract with the advertiser, subject to an allowance for sales
claims. Prior to the acquisition, we were a sales agent and earned only a
commission on the advertising sales contract that was recognized when the
advertiser signed the contract and we earned this revenue on 44 directories as
opposed to the 260 directories we now publish. During 2002, our net revenue
represented only the commissions we earned as a sales agent on advertising
sales made on behalf of SPA totaling $42.7 million, net of allowances for
sales claims. Revenue from pre-press publishing services was $20.6 million in 2003 as
compared to $31.1 million in 2002. The decrease of $10.5 million is primarily
due to the consolidation of SPAs operating results with ours beginning in 2003
and the expiration of a contract with a third party directory publisher that
ceased outsourcing its pre-press publishing services to us in the first
quarter of 2003. During 2002, we earned $7.0 million in fees for pre-press
services provided to SPA and earned $7.3 million from that third party
pre-press publishing contract that expired. We continued to provide
transition services to the third party publisher through March 2003 and
recognized $3.0 million of revenue in 2003. Other revenue in 2003 and 2002
included fees for sales-related computer application services rendered to
DonTech on behalf of SBC. As a result of the SPA acquisition in 2003, we
also began recording revenue for late fees paid on outstanding customer
balances, sales of directories and fees from telephone companies for publishing
of information pages. These activities account for the difference in other
revenue between 2003 and 2002. Expenses The components of our total
expenses for 2003 and 2002 were as follows: (amounts in millions)
    
    2003
    
    2002
    
    $ ChangeOperating expenses
    
    $
    164.2
    
    
    $
    48.0
    
    
    $
    116.2G&A expenses
    
    
    48.0
    
    
    
    12.0
    
    
    
    36.0D&A expense
    
    
    65.8
    
    
    
    6.3
    
    
    
    59.5Total
    
    $
    278.0
    
    
    $
    66.3
    
    
    $
    211.7
 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 2003 were $164.2 million as compared to $48.0
million in 2002. The increase in operating expenses is primarily a result of
the operating expenses of the SPA business, that we acquired. The 2003 operating expenses include our results as a
publisher of 260 directories, whereas 2002 expenses include those expenses
incurred in our prior role as a sales agent for 44 directories. The expenses
we incur as a publisher of directories are significantly greater than the
expenses that we incurred as a sales agent. However, 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 expenses in 2003 do not
include certain expenses associated with those directories. Therefore, our
operating expenses prospectively will be higher than they were in 2003. In
addition, our direct sales costs in 2003 were $45.9 million
higher than in 2002 due to an increase in the
number of sales offices, size of our local sales force and our national sales
operations. As a publisher, we also now incur costs related to the printing and
distribution of directories, purchasing of paper, and marketing, advertising
and customer service that we did not incur when we were a sales agent in 2002. 2003
expenses for these functions were $36.3 million higher than in
2002. Publishing and
information technology expenses in 2003 were $22.4 million
higher than in 2002 due to the production of the
additional SPA directories related to the acquisition and the
larger workforce. In addition, 2003  expenses include $7.6 million of costs related to
the consolidation of our publishing and technology operations, sales offices
and administrative staff. Bad debt expense in 2003 was lower than in 2002
principally due to better than
expected collections as a result of significant process improvements
in billings and collections, partially offset by bad debt expense
recognized as a publisher. 33




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##### 



General and Administrative Expenses General and administrative (G&A) expenses in 2003 were $48.0 million as
compared to $12.0 million in 2002. The increase in general and administrative
expenses is primarily attributable to incremental costs related to the former
SPA business of $13.6 million, costs relating to the relocation of our
corporate offices to Cary, North Carolina of $7.3 million and the higher
corporate costs for the larger organization of $8.5 million due to higher
insurance premiums, compensation and governance. General and
administrative expenses in 2002 reflect a net benefit of $6.4 million from the
reversal of remaining restructuring reserves initially recorded in 2001. See
Results of Operations  Year Ended December 31, 2002 as compared to the Year
Ended December 31, 2001 below for a further description of these prior year
amounts. Depreciation and Amortization Depreciation and amortization (D&A) in 2003 was $65.8 million as compared to
$6.3 million in 2002. The increase in 2003 is primarily a result of the
amortization, totaling $50.0 million, of the intangible assets acquired in the
SPA acquisition. In 2002, Donnelley did not have significant intangible assets
and therefore did not incur significant amortization expense. Depreciation of
fixed assets and amortization of computer software was $15.8 million in 2003
and $6.3 million in 2002. This increase is due to the depreciation associated
with the depreciable assets acquired in the SPA acquisition. Partnership Income Partnership income in 2003 includes our 50% share of the net income of DonTech
(accounted for under the equity method) and revenue participation income from
SBC. 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 in 2002 also included a priority distribution on our
membership interest in CenDon, LLC (CenDon). As a result of the SPA
acquisition, we acquired the remaining membership interests in CenDon and
accordingly, become the sole owner of CenDon. We no longer receive priority
distribution income; rather results from CenDon have been included in our
Consolidated Statements of Operations. Partnership income was $114.1 million in
2003 as compared to $136.9 million in 2002, of which $117.1 million was from
DonTech and $19.8 million was priority distribution income from CenDon, which
at the time was a part of our DAS segment. The decrease in partnership income
from DonTech was due to a slow economic recovery, stagnant job growth and
a competitive local media environment in the Chicagoland markets. Operating Income Operating income by segment
for the years ended December 31, 2003 and 2002 was
as follows: 2003
    
    2002(amounts in millions)Donnelley
    
    $
    (21.6
    )
    
    $
    28.9DonTech
    
    
    114.1
    
    
    
    117.1Total
    
    $
    92.5
    
    
    $
    146.0
 Reported operating income in 2003 of $92.5 million decreased $53.5 million as
compared to operating income of $146.0 million in 2002. The decline in
operating income was due largely to higher operating and G&A expenses as
mentioned above as well as higher D&A expense due to amortization of
intangible assets resulting from the SPA acquisition. Operating income also
declined due to the decline in income from DonTech of $3 million. 34




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##### 



Interest Expense, Net Net interest expense in 2003 was $180.0 million compared to $33.5 million in
2002. Interest expense in 2003 was significantly higher as a result of the
substantial debt incurred in connection with the SPA acquisition. See
"-Liquidity and Capital Resources for a further description of our debt
obligations and the provisions of the related debt instruments. Interest
expense for 2003 includes $15.0 million of non-cash amortization of deferred
financing costs, consisting of $2.4 million in deferred costs that were
expensed in connection with pre-acquisition debt that was extinguished in 2003
and $12.6 million of amortized deferred costs related to our current
outstanding debt, of which $3.1 million related to accelerated principal
payments in 2003. Net interest expense in 2002 of $33.5 million included $12.7 million of
interest incurred on $1,825 million in debt raised in contemplation of the SPA
acquisition. Excluding this amount, interest expense was $20.8 million
reflective of our outstanding pre-acquisition debt during 2002. Other Income (Expense), Net Other income in 2003 represents a $1.5 million gain on hedging activities. At
December 31, 2002, our $75 million notional value interest rate swap did not
qualify for hedge accounting treatment due to the then-pending repayment of
existing variable rate debt in connection with the SPA acquisition. In December
2002, a charge of $1.5 million was recorded to reclassify 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, a gain of $1.5 million was recognized in
earnings in 2003 at the time the swap matured. Other expense in 2002 consists
of the $1.5 million charge related to the interest rate swap agreement, net of
a $1.0 million reversal of remaining reserves related to the disposition of
businesses in 2000. See Item 7A, Qualitative and Quantitative Disclosures
About Market Risk for additional information about our interest rate swap
agreements. (Benefit) Provision for Income Taxes The 2003 tax benefit is based on an effective tax rate of 41.8% and results
from the tax benefit generated in 2003 attributable to a net operating loss of
approximately $176 million related to tax deductions in connection with the
acquisition of the SPA business. The 2003 effective tax rate reflects
an increase in the state and local tax rate as a result of the acquisition of SPA, combined
with the favorable settlement in 2003 of certain prior year state and local tax
audits. The 2002 tax provision is based on an effective tax rate of 40.0%, which was
adversely impacted by the ChinaBig investment impairment charge that was not
deductible against income for tax purposes. This charge represents a capital
loss, which can only be offset against capital gains. This charge also gave
rise to a deferred tax asset that can only be realized by offsetting future
capital gains. Given our current business portfolio and projections of future
results, we believe that the probability of generating future capital gains to
realize this asset is remote. Accordingly, a valuation allowance for the
deferred tax asset relating to the ChinaBig investment was established. Net (Loss) Income, (Loss) Income Available to Common Shareholders and (Loss)
Earnings Per Share The net loss in 2003 was $50.0 million as compared to net income of $67.2
million in 2002. Our operating results for 2003 reflect lower operating income
as described previously and higher interest expense and D&A as a result of the
SPA acquisition. The dividend on the Preferred
Stock increases the net loss or reduces net income, resulting in (loss) income
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 ($24.05),
the fair value of the warrants issued with the Preferred Stock (weighted
average of $11.08 per warrant based on the Black-Scholes model and exercise
prices of $26.28 for the warrants issued in November 2002 and $28.62 for the
warrants issued in January 2003), and the fair market value of the common stock
on January 3, 2003, the date the Preferred Stock was issued ($29.92). 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 2003 and 2002 of $58.4
million and $24.7 million, respectively, consisted of the stated 8% dividend of
$16.5 million and $0.5 million, respectively, and a 35




---



##### 



BCF of $41.9 million and $24.2 million, respectively. The resulting (loss)
income available to common shareholders was ($108.3) million and $42.5 million
in 2003 and 2002, respectively. Basic earnings per common share (EPS) are generally calculated by dividing
income available to common shareholders by the weighted average number of
common shares outstanding. However, because our Preferred Stock contains
certain participation rights, EITF Topic D-95, Effect of Participating
Securities on the Computation of Basic Earnings Per Share (Topic D-95),
requires that the dilutive effect of those securities be included in the
weighted average number of shares outstanding. Furthermore, Topic D-95
requires that the dilutive effect to be included in basic EPS may be calculated
using either the if-converted method or the two-class method. However, the
dilutive effect of the Preferred Stock cannot be less than that which would
result from the application of the two-class method. We have elected to use
the if-converted method in calculating basic EPS. However, during 2003, we
have reported EPS calculated using the two-class method because it has been
less than EPS calculated using the if-converted method. Diluted EPS equals
income available to common shareholders divided by the weighted average common
shares outstanding plus common share equivalents. Common share equivalents
include stock options and warrants, the dilutive effect of which is calculated
using the treasury stock method, and Preferred Stock, the potential dilutive
effect of which is calculated using the if-converted method. The calculation
of basic and diluted EPS for 2003 and 2002 is presented below: Year ended
    
    Year ended(In thousands, except per share data)
    
    December 31, 2003
    
    December 31, 2002Basic EPS  If  Converted Method(Loss) income available to common shareholders
    
    $
    (108,350
    )
    
    $
    42,475Preferred Stock dividend
    
    
    58,397
    
    
    
    24,702Net (loss) income
    
    $
    (49,953
    )
    
    $
    67,177Weighted average common shares outstanding
    
    
    30,683
    
    
    
    29,643Weighted average common shares assuming conversion
of Preferred Stock
    
    
    8,761
    
    
    
    281
    (1)Weighted average common equivalent shares assuming
conversion of Preferred Stock
    
    
    39,444
    
    
    
    29,924Basic
(loss) earnings per share  if  converted method
    
    $
    (1.27
    )
    
    $
    2.24Basic EPS  Two-Class Method(Loss) income available to common shareholders
    
    $
    (108,350
    )
    
    $
    42,475Amount allocable to common shares(2)
    
    
    78
    %
    
    
    99
    %Rights to undistributed (loss) income
    
    
    (84,513
    )
    
    
    42,050Weighted average common shares outstanding
    
    
    30,683
    
    
    
    29,643Basic (loss) earnings per share  two-class
method(3)
    
    $
    (3.53
    )
    
    $
    1.42Diluted EPS(Loss) income available to common shareholders
    
    $
    (108,350
    )
    
    $
    42,475Weighted average common shares outstanding
    
    
    30,683
    
    
    
    29,643Dilutive effect of stock options(4)
    
    
    
    
    
    
    655Dilutive effect of Preferred Stock assuming
conversion(3)
    
    
    
    
    
    
    Weighted average diluted shares outstanding
    
    
    30,683
    
    
    
    30,298Diluted (loss) earnings per share
    
    $
    (3.53
    )
    
    $
    1.40
 (1) At December 31, 2002, the Preferred Stock was convertible into
2,933,888 shares of common stock. However, since $70 million of the Preferred
Stock was issued in November 2002, the number of common share equivalents
included in the EPS calculation has been weighted for the actual time the
Preferred Stock was outstanding during the year. 36




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##### 



(2) 30,683 / (30,683 + 8,761) for the year ended December 31, 2003 and 29,643
/ (29,643 + 281) for the year ended December 31, 2002. (3) Basic EPS calculated under the two-class method was a loss of $2.75 for
the year ended December 31, 2003. However, where there is a net loss in a
period, the application of the two-class method is anti-dilutive.
Accordingly, reported basic EPS are calculated as loss available to common
shareholders divided by the weighted average basic shares outstanding. (4) The effect of stock options in 2003 and the assumed conversion of the
Preferred Stock in 2003 and 2002 were anti-dilutive and therefore are not
included in the calculation of diluted EPS. Adjusted and Pro Forma Amounts and Other Non-GAAP Measures As a result of the SPA acquisition, our 2003 results prepared in accordance
with GAAP are not comparable to our 2002 reported GAAP results. Under our
deferral and amortization revenue recognition method, certain directories
published in 2002 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, including all January 2003 published directories.
Accordingly, our reported 2003 GAAP results are not indicative of our
underlying operations and financial performance. Accordingly, management is
presenting adjusted results for 2003 that, among other things, eliminate the
purchase accounting impact on revenue and certain expenses and adjusted pro
forma information for 2002 that assumes the acquisition and related financing
occurred on January 1, 2002. Management believes that the presentation of
this adjusted and adjusted pro forma information will help readers better and
more easily compare current period underlying operating results against what
the combined company performance would likely have been in the comparable
prior period. All of the following adjusted and pro forma amounts are
non-GAAP measures, which are reconciled to the most comparable GAAP measures
below. GAAPReported
    
    Adjustments
    
    Adjusted(amounts in millions)Year Ended December 31, 2003Net revenue
    
    $
    256.4
    
    
    $
    315.9
    (1)
    
    $
    572.3Expenses, other than
depreciation and
amortization
    
    
    212.2
    
    
    
    63.3
    (2)
    
    
    275.5Depreciation and amortization
    
    
    65.8
    
    
    
    
    
    
    
    65.8Partnership income
    
    
    114.1
    
    
    
    
    
    
    
    114.1Operating income
    
    
    92.5
    
    
    
    252.6
    
    
    
    345.1
 GAAP
    
    
    
    
    
    Adjusted ProReported
    
    Adjustments
    
    Forma(amounts in millions)Year Ended December 31, 2002Net revenue
    
    $
    75.4
    
    
    $
    495.9
    (3)
    
    $
    571.3Expenses, other than
depreciation and
amortization
    
    
    60.0
    
    
    
    221.3
    (4)
    
    
    281.3Depreciation and amortization
    
    
    6.3
    
    
    
    58.5
    (5)
    
    
    64.8Partnership income
    
    
    136.9
    
    
    
    (19.8
    )(6)
    
    
    117.1Operating income
    
    
    146.0
    
    
    
    196.3
    
    
    
    342.3
 (1) Represents revenue for directories that published prior to the
acquisition, including all January 2003 published directories, that 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, including all January 2003 published directories, that 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 Donnelley. 37




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##### 



(3) Represents revenue recognized by SPA in 2002 ($545.7 million) less our
commission revenue and pre-press publishing revenue from SPA included in our
reported GAAP amounts ($49.8 million), which would have been eliminated as
intercompany revenues had the acquisition occurred on January 1, 2002. (4) Represents expenses recognized by SPA in 2002 ($253.3 million) less
commission and pre-press publishing expenses for services provided by us ($44.7
million), which would have been eliminated as intercompany expenses had the
acquisition occurred on January 1, 2002, plus the additional expense ($8.3
million) related to a required purchase accounting adjustment recorded to
increase acquired deferred directory costs to fair value. The adjusted pro
forma amounts also exclude a $6.4 million restructuring reserve reversal and an
investment impairment charge of $2.0 million. (5) Represents depreciation and amortization expense recognized by SPA in 2002
($8.5 million) plus amortization expense for intangible assets acquired in the
acquisition assuming it occurred on January 1, 2002 ($50.0 million). (6) Represents income from CenDon recognized by Donnelley and included in
reported GAAP amounts, which would have been eliminated as intercompany income
had the acquisition occurred on January 1, 2002. 2003 Adjusted Revenue and Expenses Compared to 2002 Adjusted Pro Forma Revenue
and Expenses The components of 2003 adjusted revenue and 2002 adjusted pro forma revenue are
as follows: (amounts in millions)
    
    2003
    
    2002
    
    $ Change
    
    % ChangeGross directory advertising revenue
    
    $
    552.7
    
    
    $
    547.6
    
    
    $
    5.1
    
    
    
    0.9
    %Sales claims and allowances
    
    
    (6.0
    )
    
    
    (6.9
    )
    
    
    0.9
    
    
    
    13.0
    %Net directory advertising revenue
    
    
    546.7
    
    
    
    540.7
    
    
    
    6.0
    
    
    
    1.1
    %Pre-press publishing fees
    
    
    20.6
    
    
    
    24.1
    
    
    
    (3.5
    )
    
    
    14.5
    %Other revenue
    
    
    5.0
    
    
    
    6.5
    
    
    
    1.5
    
    
    
    23.1
    %Net revenue
    
    $
    572.3
    
    
    $
    571.3
    
    
    $
    1.0
    
    
    
    0.2
    %
 Total adjusted net revenue in 2003 was $572.3 million, an increase of $1.0
million or 0.2% from adjusted pro forma net revenue of $571.3 million in
2002. Under the deferral and amortization method of revenue recognition,
revenue from directory advertising sales is initially deferred when a
directory is published and recognized ratably over the life of the directory,
which is typically 12 months. The increase in adjusted gross directory
advertising revenue is a result of higher advertiser renewal rates and solid
performance in two of our major markets, Nevada and southwest Florida, offset
by weaker performance in military markets due to the Iraqi conflict and
generally weak regional economic conditions during much of the year. In
addition, due to the deferral and amortization method, sales growth in
published directories are amortized
to revenue over the life of the directory, which delays recognition of
publication sales as recorded revenue. The reduction in sales claims and
allowances is a result of improved processes between the sales organization
and pre-press services. The decrease in pre-press publishing fees of $3.5
million is a result of the expiration of a third party pre-press publishing
contract for whom we ceased providing services in the first quarter 2003. Adjusted operating and
G&A expenses in 2003 were $275.5 million, down $5.8 million or
2.1% from pro forma operating and G&A expenses of $281.3 million in 2002. 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 adjusted expenses in 2003 is primarily due to lower bad debt
expense of $13.7 million resulting from better than expected
collections due to
certain process improvements; synergy savings
from the combination of the SPA operations with Donnelleys in 2003 of $10.2
million; and lower print, paper and distribution costs of $9.3 million due to
lower paper prices, printing expenses and vendor costs. These decreases
were offset by $8.5 million in increased corporate costs, due to higher
insurance premiums, compensation and governance costs related to the larger
organization, $7.6 million of costs to achieve synergies from the consolidation
of our publishing and technology operations, sales offices and administrative
functions, $7.3 million related to the headquarters relocation and $4.3 million
due to increased advertising in order to bring advertising levels for the
Sprint-branded directories back to historical levels before 2002. 38




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##### 



Adjusted partnership income in 2003 was $114.1 million, a decrease of $3.0
million or 2.6% from adjusted pro forma partnership income in 2002 of $117.1
million. The decrease in partnership income reflects the decrease in income
from DonTech previously discussed. Adjusted operating income in 2003 was $345.1 million, an increase of $2.8
million or 0.8% from adjusted pro forma operating income in 2002 of $342.3
million. 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. Publication sales in 2003 for the Donnelley segment were $548.2 million, up
$6.5 million or 1.2% from pro forma publication sales for the Donnelley
segment of $541.7 million in 2002. The increase in publication sales resulted
from higher advertiser renewal rates and solid performance in two of our
major markets, Nevada and southwest Florida. These results were partially
offset by regional economic weakness, and weaker performance in several
military markets due to troop deployment in connection with the Iraqi
conflict. 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: For the Year EndedDecember 31,2003
    
    2002(amounts in millions)Publication sales  Donnelley segment
    
    $
    548.2
    
    
    $
    541.7Less 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
    
    
    (215.0
    )Less publication sales for those SPA directories not sold
by Donnelley
    
    
    
    
    
    
    (357.0
    )Publication sales reported by Donnelley in 2002
    
    
    
    
    
    
    184.7Less sales contracts executed in prior periods and reported
as calendar sales in prior periods
    
    
    
    
    
    
    (70.0
    )Plus contracts executed during the period to be reported as
publication sales in future periods
    
    
    
    
    
    
    72.1Calendar sales in 2002
    
    
    
    
    
    $
    186.8Net directory advertising revenue on above advertising sales
    
    
    230.8Plus net commission revenue on 2002 calendar sales
    
    
    
    
    
    
    42.7Plus pre-press publishing revenue
    
    
    20.6
    
    
    
    31.1Plus other revenue
    
    
    5.0
    
    
    
    1.6Net
Revenue-GAAP
    
    $
    256.4
    
    
    $
    75.4
 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 39




---



##### 



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. Income from DonTech consisted of the following: Years Ended December 31,(amounts in millions)
    
    2003
    
    200250% share of DonTech net profits
    
    $
    17.4
    
    
    $
    18.5Revenue participation income
    
    
    96.7
    
    
    
    98.6Total DonTech income
    
    $
    114.1
    
    
    $
    117.1
 DonTech partnership income in 2003 of $114.1 million decreased $3.0 million
or 2.6% from $117.1 million in 2002, mainly due to lower calendar sales.
DonTech calendar sales in 2003 were $394.9 million, 2.0% lower than calendar
sales in 2002 of $402.9 million, as a result of a continued weak economy in
the Midwest during 2003 and competition in the local media market. Our share
of DonTechs net income decreased $1.1 million from $18.5 million to $17.4
million. In addition, revenue participation income received from SBC
decreased $1.9 million or 2.0% to $96.7 million in 2003
from $98.6 million in
2002. Each of these decreases is a direct result of the reduction in
DonTechs calendar sales from which our share of DonTechs net income and
revenue participation 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 underlying sales trends, economic conditions and business
confidence in the DonTech markets than a comparison of partnership income
from DonTech. 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 2003 were $402.4 million, down $15.8
million or 3.8% from 2002 publication sales of $418.2 million. This decrease
is a result of a continued weak economy in the Midwest, stagnant job
growth 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. For the YearEnded December 31,(amounts in millions)
    
    2003
    
    2002DonTech publication sales
    
    $
    402.4
    
    
    $
    418.2Less the value of contracts executed and reported as
calendar sales in prior periods
    
    
    (142.2
    )
    
    
    (157.5
    )Plus the value of contracts executed during the period to be
reported as publication sales in future periods
    
    
    134.7
    
    
    
    142.2DonTech calendar sales
    
    $
    394.9
    
    
    $
    402.9Commission revenue from above calendar sales
    
    $
    99.7
    
    
    $
    101.8Partnership net expenses
    
    
    (65.0
    )
    
    
    (64.8
    )Partnership profit
    
    $
    34.7
    
    
    $
    37.0Donnelleys 50% share of partnership profits
    
    $
    17.4
    
    
    $
    18.5Revenue participation income on above calendar sales
    
    
    96.7
    
    
    
    98.6Total income from DonTech
    
    
    114.1
    
    
    
    117.1Priority distribution income from CenDon
    
    
    
    
    
    
    19.8Partnership income  GAAP
    
    $
    114.1
    
    
    $
    136.9
 40




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##### 



Year Ended December 31, 2002 as compared to the Year Ended December 31, 2001 The Company  Prior to the SPA Acquisition The discussion below relates to the results of the Company for the years ended
December 31, 2002 and 2001. During this period, we were a leading independent
sales agent and pre-press vendor for yellow pages advertising services in the
United States. Our business was organized into two reportable operating
segments: the DonTech Partnership and Directory Advertising Services (DAS).
The DonTech segment was not affected by the SPA acquisition. For a further
description of the DonTech segment, see  Segment Reporting above. Historical Directory Advertising Services Within our DAS segment, we sold yellow pages advertising for affiliated
entities of Sprint and performed pre-press publishing services for yellow pages
directories. We were the exclusive sales agent in the greater Orlando, Florida
market (Central Florida) for an operating unit of Sprint and the exclusive
sales agent in Nevada, Florida, Virginia and North Carolina for CenDon, a joint
venture with Centel, a subsidiary of Sprint. Other Sprint affiliates sold
yellow pages advertising in other markets in these states. We received sales
commissions on all advertising sold for Sprint and CenDon and a priority
distribution on our membership interest in CenDon. The amount of priority
distribution earned was based on a percentage of CenDon advertising sales. A
material decline in advertising sales in these markets could have had a
material adverse effect on our results of operations and financial condition. The DAS segment also included pre-press publishing services provided to SBC and
Sprint for their respective yellow pages directories for which we sold
advertising under separately negotiated contracts. The agreement with SBC
extends through 2008. Prior to the SPA acquisition, our agreement with Sprint
was scheduled to expire in 2003. We also provided pre-press publishing
services to an unaffiliated third party under an agreement that expired at the
end of 2002 to whom we provided transition services of $3.0 million in 2003.
Revenue from our pre-press publishing services operation accounted for
approximately 42% and 43% of total consolidated revenue in 2002 and 2001,
respectively. DAS also included all information technology costs. Factors Affecting Comparability ChinaBig Investment and Impairment Charge We have a 9% interest in ChinaBig, which publishes yellow pages directories and
offers Internet directory services in the Peoples Republic of China. In
November 2001, we received an independent third party valuation of ChinaBigs
current business plan, capital needs and outlook for profitability and cash
flow. This report was commissioned by ChinaBig. The valuation was conducted in
connection with a proposed equity financing. The results of the valuation
provided a range of possible estimated fair values for ChinaBig, all of which
implied that the fair value of this investment was substantially lower than the
carrying value of $13.4 million. Accordingly, an impairment charge of $11.4
million was recorded in 2001 to write this investment down to an amount that we
believed was the best estimate of the current fair value of the investment at
that time. After reviewing ChinaBigs 2002 operating results, we determined
that sufficient evidence did not exist to support the carrying value of this
investment and that the probability of realizing any value from this investment
in the foreseeable future was remote. Accordingly, in 2002 an additional
impairment charge of $2.0 million was recorded to write-off the remaining book
value of the investment. Restructuring and Special Charge In 2001, a restructuring and special charge of $18.6 million was recorded in
connection with executive management employment transition arrangements and the
expiration of a pre-press publishing contract, which was expected to result in
the elimination of approximately 100 positions during 2002. The charge
included:  
    
    $9.9 million associated with executive management transition
arrangements, including severance, accrued pension benefits and other
related costs;  
    
    $3.3 million for other employee severance and related costs;  
    
    $4.4 million for idle leased space in the Morrisville publishing
facility and planned relocation of the corporate headquarters due to
excess capacity; and  
    
    $1.0 million for professional fees and the write-off of assets no
longer considered useable. 41




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##### 





As a result of the SPA acquisition, we determined that certain costs originally
anticipated in the restructuring charge would not be incurred. Specifically,
idle leased space in the Morrisville publishing facility would subsequently be
utilized, planned severance and other related costs would be significantly less
and the corporate headquarters was not expected at that time to be relocated.
Accordingly, income of $6.4 million was recognized in 2002 from the reversal of
$6.7 million of the original reserve, partially offset by a charge of $0.3
million for additional costs paid in connection with the executive management
transition.

Net Revenue

During 2002 and 2001, revenue was derived entirely from our DAS segment. As a
sales agent for Sprint, we earned commission revenue based on the annual
billing value of advertisements sold for Sprint directories in the period
(Sprint calendar sales). Sales commission revenue was recorded net of an
estimate for potential claims allowances. We also earned revenue from
providing pre-press publishing services.

The amount of commission revenue recognized was directly correlated to Sprint
calendar sales recorded during each period. We managed the sale of advertising
on a directory-by-directory basis and organized each directory into a sales
campaign. A typical sales campaign lasts two to five months and ends
approximately two months before a directory is scheduled to be published.
Therefore, 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 could have caused sales commission
revenue in the period to be materially different from the prior comparative
period. The components of our net revenue for 2002 and 2001 are as follows:

(amounts in millions)
    
    2002
    
    2001
    
    $ Change
    
    % ChangeCommission revenue
    
    $
    43.1
    
    
    $
    42.7
    
    
    $
    0.4
    
    
    
    0.9
    %Sales allowances
    
    
    (0.4
    )
    
    
    1.1
    
    
    
    (1.5
    )
    
    
    n/mNet commission revenue
    
    
    42.7
    
    
    
    43.8
    
    
    
    (1.1
    )
    
    
    (2.5
    )Pre-press publishing fees
    
    
    31.1
    
    
    
    32.9
    
    
    
    (1.8
    )
    
    
    (5.5
    )Other revenue
    
    
    1.6
    
    
    
    3.5
    
    
    
    (1.9
    )
    
    
    (54.2
    )Total
    
    $
    75.4
    
    
    $
    80.2
    
    
    $
    (4.8
    )
    
    
    (6.0
    )%


Net revenue in 2002 was $75.4 million as compared to $80.2 million in 2001. Net
commission revenue decreased $1.1 million in 2002 compared to 2001 primarily
due to the reversal of $1.4 million of sales claims allowances in 2001. Fees
from pre-press publishing services declined $1.8 million primarily due to a
reduction in volumes resulting from the expiration of a pre-press publishing
contract in December 2002. Other revenue in 2002 and 2001 included fees for
billing services provided to SBC and sales-related computer application
services provided to DonTech.

Calendar Advertising Sales

Commission revenue, priority distribution income from Sprint, and revenue
participation income from SBC are directly correlated to the value of
advertising sales made during the period. The table below sets forth the value
of advertising that we sold on behalf of Sprint and that DonTech sold on behalf
of SBC during the periods noted. DonTech manages its selling process in a
manner similar to how we manage our selling process. Accordingly, the annual
billing value of advertisements sold for SBC directories in the period
(DonTech calendar sales) can vary from one period to the next due to changes
in the beginning and ending dates of a sales campaign and the actual sales
recorded at any point during the campaign. See below for a reconciliation of
calendar sales, a non-GAAP measure, to net revenue, the most comparable GAAP
measure with respect to DAS results, and partnership income, the most
comparable GAAP measure with respect to DonTech results.

Calendar advertising sales by segment for 2002 and 2001 were as follows:



(amounts in millions)
    
    2002
    
    2001
    
    $ Change
    
    % ChangeDonTech
    
    $
    402.9
    
    
    $
    422.6
    
    
    $
    (19.7
    )
    
    
    (4.7
    )%DAS
    
    
    186.8
    
    
    
    185.3
    
    
    
    1.5
    
    
    
    0.8Total
    
    $
    589.7
    
    
    $
    607.9
    
    
    $
    (18.2
    )
    
    
    (3.0
    )% 42




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##### 





Calendar sales in 2002 were $589.7 million as compared to $607.9 million in
2001. DonTech calendar sales declined 4.7% in 2002. The decline in 2002
DonTech calendar sales reflected continued advertiser uncertainty from weak
economic conditions, competition and changes in the servicing of sales
campaigns to call on customers closer to the time when directories publish.
DAS calendar sales increased slightly during 2002 compared to 2001 as we began
to see signs that these markets may be trending back towards historical growth
levels. Publication Advertising Sales During 2001 and 2002, management also reviewed and analyzed the value of
advertising sales on behalf of Sprint and by DonTech on behalf of SBC in
directories that published during the period. We compared publication sales
for the period against publication sales for the same directories published in
the prior year period (a same store sales type metric). We believed that a
comparison of publication sales from one period to another gave an indication
of underlying sales growth in directories as this metric removed the timing
factors associated with a sales campaign. However, publication sales did not
have a direct correlation to our reported revenue or profitability in the
indicated period because calendar sales drive revenue and profitability and
occur prior to publication dates. See below for a reconciliation of
publication sales, a non-GAAP measure, to net revenue, the most comparable GAAP
measure with respect to DAS results, and partnership income, the most
comparable GAAP measure with respect to DonTech results. Publication advertising sales by segment for 2002 and 2001 were as follows: (amounts in millions)
    
    2002
    
    2001
    
    $ Change
    
    % ChangeDonTech
    
    $
    418.2
    
    
    $
    434.0
    
    
    $
    (15.8
    )
    
    
    (3.6
    )%DAS
    
    
    184.7
    
    
    
    193.5
    
    
    
    (8.8
    )
    
    
    (4.5
    )Total
    
    $
    602.9
    
    
    $
    627.5
    
    
    $
    (24.6
    )
    
    
    (3.9
    )%
 Publication sales in 2002 were $602.9 million as compared to $627.5 million in
2001. For 2002, publication sales at DonTech declined 3.6% and publication
sales at DAS declined 4.5% compared to 2001. These declines were due to
difficult economic conditions, reduced spending by advertisers and uncertainty
and caution in the small business market following the events of September 11,
2001. Two of our largest sales campaigns, Sprints Las Vegas and SBCs Chicago
Consumer directories, were in their peak selling period immediately after
September 11th. Both these directories published in early 2002 with the
advertising sales value of the 2002 publications being substantially below the
value of the 2001 publications. However, since our revenue and profitability
were driven by calendar sales, the shortfall in the 2002 Las Vegas and Chicago
Consumer directories was reflected in our 2001 results and did not directly
impact our revenue or profitability in 2002. Reconciliation of Advertising Sales to Net Revenue reported in accordance with
GAAP Both calendar advertising sales and publication sales are non-GAAP financial
measures. The most comparable GAAP measure for DAS calendar sales and
publication sales is net revenue. As previously described, our net revenue and
priority distribution income reported in 2001 and 2002 in accordance with GAAP
were directly correlated to DAS calendar sales. Publication sales on the other
hand give an indication of the underlying growth in directories but had no
direct correlation to our reported net revenue or priority distribution income.
Below is a reconciliation of DAS advertising sales to net revenue and DAS
calendar sales to partnership income. (amounts in millions)
    
    2002
    
    2001DAS publication sales (from table above)
    
    $
    184.7
    
    
    $
    193.5Less the value of contracts executed and reported as
calendar sales in prior periods
    
    
    (70.0
    )
    
    
    (76.8
    )Plus the value of contracts executed during the period to
be reported as publication sales in future periods
    
    
    72.1
    
    
    
    68.6DAS calendar sales (from table above)
    
    $
    186.8
    
    
    $
    185.3Commission revenue, net on above calendar sales
    
    $
    42.7
    
    
    $
    43.8Pre-press publishing revenue
    
    
    31.1
    
    
    
    32.9Other revenue
    
    
    1.6
    
    
    
    3.5Total net revenue  GAAP
    
    $
    75.4
    
    
    $
    80.2
 43




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##### 



The most comparable GAAP measure for DonTech calendar sales and publication
sales is partnership income. As previously described, the revenue participation
income received from SBC and Donnelleys share of DonTech profits are directly
correlated to DonTech calendar sales. Publication sales on the other hand give
an indication of the underlying growth in directories but have no direct
correlation to our reported partnership income. Below is a reconciliation of
DonTech publication sales to DonTech calendar sales to partnership income. (amounts in millions)
    
    2002
    
    2001DonTech publication sales (from table above)
    
    $
    418.2
    
    
    $
    434.0Less the value of contracts executed and reported as
calendar sales in prior periods
    
    
    (157.5
    )
    
    
    (197.2
    )Plus the value of contracts executed during the period
to be reported as publication sales in future
periods
    
    
    142.2
    
    
    
    185.8DonTech calendar sales (from table above)
    
    $
    402.9
    
    
    $
    422.6Commission revenue on above calendar sales reported by
DonTech
    
    $
    101.8
    
    
    $
    106.8DonTech net expenses
    
    
    (64.8
    )
    
    
    (68.2
    )DonTech net profit
    
    $
    37.0
    
    
    $
    38.6Donnelleys 50% share of DonTech profits
    
    $
    18.5
    
    
    $
    19.3Revenue participation income received from SBC
    
    
    98.6
    
    
    
    103.1Priority distribution income from CenDon
    
    
    19.8
    
    
    
    17.6Total
partnership income  GAAP
    
    $
    136.9
    
    
    $
    140.0
 Expenses Expenses for 2002 and 2001 were as follows: (amounts in millions)
    
    2002
    
    2001
    
    $ Change
    
    % ChangeOperating expenses
    
    $
    48.0
    
    
    $
    51.3
    
    
    $
    (3.3
    )
    
    
    (6.4
    )%General and administrative expenses
    
    
    12.0
    
    
    
    46.6
    
    
    
    (34.6
    )
    
    
    (74.2
    )Depreciation and amortization expenses
    
    
    6.3
    
    
    
    10.8
    
    
    
    (4.5
    )
    
    
    (41.7
    )Total
    
    $
    66.3
    
    
    $
    108.7
    
    
    $
    (42.4
    )
    
    
    (39.0
    )%
 Operating expenses in 2002 were $48.0 million as compared to $51.3 million in
2001. The decrease in 2002 operating expenses compared to 2001 was primarily
due to a favorable settlement of $1.1 million for CenDon Partnership advertiser
receivables (the CenDon settlement) and reduced headcount through attrition
in our Morrisville facility. In 2002, we settled CenDon Partnership accounts
receivable issues for approximately $2.1 million less than the amount reserved
in our financial statements to cover potential losses. The remaining $1.0
million benefit was recognized as partnership income. We established reserves
for these receivable issues over time as we became aware of relevant facts and
circumstances. While we were a party to the CenDon Partnership, the reserves
established were offset against partnership income. Subsequent to further
CenDon restructuring, the reserves established were charged to expense.
Accordingly, the reversal of the reserves established was recorded to the same
accounts to which the original reserve was recorded. G&A expenses were $12.0 million in 2002 as compared to $46.6 million in 2001.
G&A expenses in 2001 include a restructuring and special charge of $18.6
million and an investment impairment charge of $11.4 million. G&A expenses in
2002 include a net reversal of the previously recognized restructuring and special
charges of $6.4 million and an additional investment impairment charge of $2.0
million. See Factors Affecting Comparability  Restructuring and Special
Charge and ChinaBig Investment and Impairment Charge for a discussion of these
amounts. Excluding these items, G&A expense in 2002 was $16.4 million compared
to $16.6 million in 2001. G&A benefited in 2002 from lower salary and benefit
costs due to the executive management transition, but these savings were offset
by $1.2 million of expenses incurred in connection with the SPA acquisition.
The majority of acquisition related expenses were capitalized as part of the
acquisition. Depreciation and amortization expense was $6.3 million as compared to $10.8
million in 2002 and 2001, respectively. Depreciation and amortization expense
had been steadily declining through 2002 as a result of reduced capital
spending, including software development, the write-off of assets from the
disposition of 44




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##### 



businesses and significant software development costs incurred in our
Morrisville pre-press publishing operation in 1995 and 1996 becoming fully
amortized during 2001. Partnership Income During 2001 and 2002, partnership income included our 50% share of the net
income of DonTech, revenue participation income from SBC and the priority
distribution on our membership interest in CenDon. Partnership income was as
follows: (amounts in millions)
    
    2002
    
    2001
    
    $ Change
    
    % ChangeDonTech
    
    $
    117.1
    
    
    $
    122.4
    
    
    $
    (5.3
    )
    
    
    (4.3
    )%CenDon
    
    
    19.8
    
    
    
    17.6
    
    
    
    2.2
    
    
    
    12.5Total
    
    $
    136.9
    
    
    $
    140.0
    
    
    $
    (3.1
    )
    
    
    (2.2
    )%
 Partnership income in 2002 was $136.9 million as compared to $140.0 million in
2001. Partnership income from DonTech decreased $5.3 million in 2002 primarily
due to the decline in DonTech calendar sales of 4.7% during that year. As
previously stated, DonTech calendar sales have declined due to a weakening
economy, low consumer confidence in certain markets and competition. Partnership income from CenDon increased $2.2 million in 2002 partially due to
the increase in calendar sales coupled with an increase in the priority
distribution rate in 2002 from 12.9% to 13.2%. Partnership income for 2002
also included a $1.0 million benefit from the CenDon settlement. Operating Income Operating income from DonTech includes our 50% share of the net profits of
DonTech and revenue participation income from SBC. Operating income from DAS
included the results of, and those costs directly incurred by, each constituent
business unit, less an allocation of certain shared expenses based on estimated
business usage. General and Corporate represents overhead and administrative
costs that were not allocated to the DAS business units. Operating income by
segment for 2002 and 2001 was as follows: (amounts in millions)
    
    2002
    
    2001
    
    $ Change
    
    % ChangeDonTech
    
    $
    117.1
    
    
    $
    122.4
    
    
    $
    (5.3
    )
    
    
    (4.3
    )%DAS
    
    
    38.2
    
    
    
    32.9
    
    
    
    5.3
    
    
    
    16.1General and Corporate
    
    
    (13.7
    )
    
    
    (13.8
    )
    
    
    0.1
    
    
    
    0.7Segment Operating Income
    
    
    141.6
    
    
    
    141.5
    
    
    
    0.1
    
    
    
    (0.0
    )Restructuring and special
charge
    
    
    6.4
    
    
    
    (18.6
    )
    
    
    25.0
    
    
    
    n/mInvestment impairment charge
    
    
    (2.0
    )
    
    
    (11.4
    )
    
    
    9.4
    
    
    
    n/mTotal
    
    $
    146.0
    
    
    $
    111.5
    
    
    $
    34.5
    
    
    
    30.9
    %
 Operating income in 2002 was $146.0 million as compared to $111.5 million in
2001. Operating income from DonTech decreased $5.3 million in 2002 and $1.6
million in 2001. See Partnership Income above for further details of the
decrease in DonTech operating income. Operating income from DAS increased $5.3 million in 2002 compared to 2001 due
to higher sales at Sprint, the contractual increase in the priority
distribution rate and the benefit from the CenDon settlement. This increase
was partially offset by a reversal of $1.4 million of sales claims allowances
in 2001. DAS operating income also benefited from lower software amortization
expense as the significant amount of investment in software development made at
the Morrisville publishing facility in 1995 and 1996 was fully amortized during
2001. General and Corporate costs in 2002 were consistent with 2001 as lower salary
and benefit costs from the executive management transition in 2002 were offset
by $1.2 million of costs related to the acquisition of SPA. Interest and Taxes Net interest expense was
$33.5 million as compared to $25.6 million in 2002 and
2001, respectively. Interest expense for 2002 included $12.7 million of
interest incurred on the $1,825 million of proceeds from Term Loan B and the 45




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##### 



Notes that were held in escrow in December 2002 in anticipation of the SPA
acquisition. Interest expense, excluding the interest on the funds in escrow,
was $20.8 million, $4.8 million lower than 2001 due to lower outstanding
borrowings and lower interest rates. Interest income in 2002 of $2.0 million
included $1.5 million of income on the funds held in escrow. Interest expense
in 2002 and 2001 benefited from prepayments of $65 million of debt in 2001 and
$90 million of debt in 2000. The effective tax rate for 2002 and 2001 was 40.0% and 41.9%, respectively, and
was adversely impacted by the ChinaBig investment impairment charges that were
not deductible against income for tax purposes. These charges represented
capital losses and can only be offset against capital gains. These charges
also gave rise to a deferred tax asset that can only be realized by offsetting
future capital gains. Given our then current business portfolio and
projections of future results, we believed that the probability of generating
future capital gains to realize this asset was remote. Accordingly, a
valuation allowance for the deferred tax asset relating to the ChinaBig
investment was established. Other (Expense) Income Other (expense) income in 2002 consisted of a $1.5 million charge related to
our interest rate swap and a $1.0 million reversal of remaining reserves
related to the disposition of businesses in 2000. As a result of the then-pending repayment of existing variable rate debt in
connection with the SPA acquisition, our interest rate swap no longer qualified
for hedge accounting treatment at December 31, 2002. Accordingly, a charge of
$1.5 million, previously recognized in accumulated other comprehensive loss on
the balance sheet, was taken against earnings in 2002. The calculation of the gain recorded in 2000 for the disposition of businesses
included certain reserves established in connection with the termination of the
certain agreements with Bell Atlantic. These reserves were based on the best
information available to us at the time of the transaction. At December 31,
2002, we believed that sufficient time had elapsed since the transaction and
that no additional costs would be incurred. Accordingly, remaining reserves of
$1.0 million were reversed into income in 2002. Net Income and Income Available to Common Shareholders Net income was $67.2 million as compared to $49.8 million in 2002 and 2001,
respectively. The dividend on the Preferred Stock, whether paid in cash or
allowed to accrue, reduces net income, resulting in net income available to
common shareholders. For 2002, net income was reduced by a Preferred Stock
dividend of $24.7 million to derive income available to common shareholders of
$42.5 million. The amount of the Preferred Stock dividend includes the stated 8% dividend of
$0.5 million (pro rata for the period outstanding) and a deemed dividend for a
beneficial conversion feature of $24.2 million. The BCF is a function of the
conversion price of the Preferred Stock ($24.05), the fair value of the
warrants ($5.3 million based on the Black Scholes model and an exercise price
of $26.28) and the fair market value of the underlying common stock on the date
of issuance ($29.92). The full amount of the BCF is treated as a deemed
dividend in 2002 as the Preferred Stock was convertible into common stock
immediately after issuance. An additional BCF of $38.2 million resulted from
the issuance of 130,000 additional shares of Preferred Stock to the GS Funds in
January 2003, which was recorded as a deemed dividend in the first quarter
2003. Earnings Per Share Basic earnings per common share are generally calculated by dividing income
available to common shareholders by the weighted average number of common
shares outstanding. However, because the Preferred Stock contains certain
participation rights, Topic D-95 requires that the dilutive effect of those
securities be included in the weighted average number of shares outstanding.
Furthermore, Topic D-95 requires that the dilutive effect included in basic EPS
may be calculated using either the if-converted method or the two-class method.
However, the dilutive effect of the Preferred Stock cannot be less than that
which would result from the application of the two-class method. Diluted EPS are calculated by dividing net income by the weighted average
common shares outstanding plus common share equivalents. Common share
equivalents include stock options and warrants, the dilutive effect of 46




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##### 



which is calculated using the treasury stock method, and Preferred Stock, the
potential dilutive effect of which is calculated using the if-converted method. The calculation of EPS for the year ended 2002 is as follows: (in thousands, except per share data)Basic EPS  If-Converted MethodIncome available to common shareholders
    
    $
    42,475Preferred Stock dividend
    
    
    24,702Net income
    
    $
    67,177Weighted average common shares outstanding
    
    
    29,643Weighted average common equivalent shares assuming
conversion of Preferred Stock(1)
    
    
    281Weighted
average common shares outstanding and common stock equivalents
    
    
    29,924Basic earnings per share  if-converted method
    
    $
    2.24
 (in thousands, except per share data)Basic EPS  Two-Class MethodIncome available to common shareholders and common
equivalent
    
    $
    42,475Amount allocable to common shares(2)
    
    
    99
    %Rights to undistributed earnings
    
    $
    42,051Weighted average common shares outstanding
    
    
    29,643Basic earnings per share  two-class method
    
    $
    1.42
 47




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##### 



Diluted EPSIncome available to common shareholders
    
    $
    42,475Weighted average common shares outstanding
    
    
    29,643Dilutive effect of stock options
    
    
    655Dilutive
effect of preferred stock assuming conversion(3)
    
    
    Weighted average common and common equivalent shares
outstanding
    
    
    30,298Diluted EPS
    
    $
    1.40
 (1) At December 31, 2002, the Preferred Stock was convertible into 2,933,888
shares of common stock. However, since $70 million of the Preferred Stock was
issued in November 2002, the number of common share equivalents included in the
EPS calculation has been weighted for the actual time the Preferred Stock was
outstanding during the year. (2) 29,643 / (29,643 + 281) (3) The conversion of the Preferred Stock was not reflected in the calculation of
diluted EPS because the effect was anti-dilutive. For the year ended December 31, 2001, basic earnings per share was calculated
by dividing net income by the weighted average common shares outstanding during
the year, and diluted earnings per share was calculated by dividing net income
by the weighted average common shares outstanding plus potentially dilutive
common shares, primarily stock options, calculated using the treasury stock
method. The calculation of EPS for
the year ended December 31, 2001 is as follows: (in thousands, except per share data)Income available to common shareholders
    
    $
    49,815Weighted average common shares outstanding
    
    
    30,207Dilutive effect of stock options
    
    
    769Weighted average common and common equivalent
shares outstanding
    
    
    30,976Earnings per shareBasic
    
    $
    1.65Diluted
    
    $
    1.61
 48




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##### 



LIQUIDITY AND CAPITAL RESOURCES In connection with the SPA acquisition, we entered into a new $1,525 million
Credit Facility, consisting of a $500 million Term Loan A, a $900 million Term
Loan B and a $125 million Revolver; issued $325 million 8
7/8% Senior Notes,
and $600 million 10 7/8% Senior Subordinated Notes; and issued $200 million of
Preferred Stock to the GS Funds. These funds were used to acquire SPA, pay
transaction costs, repurchase a portion of the existing 9 1/8% Senior
Subordinated Notes due 2008 (Pre-acquisition Notes) pursuant to a tender
offer and repay former term facilities. To take advantage of favorable market
conditions and to ensure the timely consummation of the SPA acquisition, in
December 2002, we incurred debt under and received gross proceeds of the Term
Loan B and the Notes. The total gross proceeds of $1,825 million were
deposited and held in escrow pending the closing of the SPA acquisition.
Additionally, in November 2002, we issued 70,000 shares of Preferred Stock and
warrants to purchase 577,500 shares of our common stock to the GS
Funds for gross proceeds of $70 million. On January 3, 2003, we borrowed an additional $510 million consisting of $500
million Term Loan A proceeds and $10 million under the Revolver. We also
received the proceeds of $1,825 million held in escrow and issued to the GS
Funds the remaining $130 million of Preferred Stock and warrants to purchase
1,072,500 shares of our common stock. These proceeds were used to acquire the
common stock of SPA, repay existing debt and pay transaction costs. The sources and uses of funds in connection with the acquisition are summarized
as follows: (amounts in millions)Sources:Proceeds from the Credit Facility
    
    $
    1,410.0Proceeds from the Notes
    
    
    925.0Proceeds from the sale of convertible preferred stock and
warrants
    
    
    200.0
    (1)Available cash
    
    
    47.8Total sources
    
    $
    2,582.8Uses:Purchase price
    
    $
    2,229.8Payment of CenDon obligations
    
    
    14.0Repay existing debt, including accrued interest
    
    
    244.2Fees and expenses
    
    
    94.8Total uses
    
    $
    2,582.8
 (1) Calculated prior to the application of a 1% closing payment and other
fees. On December 8, 2003, we amended our Credit Facility, to accomplish the
following objectives:  
    
    obtain more favorable pricing on our variable rate debt;  
    
    adjust non-financial covenants to make them less restrictive for corporate operating flexibility;  
    
    obtain the cash resources and the consent for us to redeem the
remaining outstanding Pre-acquisition Notes; and  
    
    obtain 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. The amendment to our Credit Facility created a new Term Loan A-2, replacing
the initial Term Loan A and created a new Term Loan B-2 replacing the initial Term
Loan B. In connection with the amendment, we borrowed an additional $32 million
under the Term Loan B-2. These proceeds were used to redeem the balance of the
Pre-acquisition Notes and pay transaction costs, including a prepayment premium
of $8.9 million representing 1% of the Term Loan B balance outstanding on the
date of the amendment. The amendment to the Credit Facility was accounted for
as a modification of the underlying debt instruments. The weighted average
interest rate of outstanding debt under the Credit Facility was 3.9% at
December 31, 2003 and under the former term facilities was 6.7% during 2002. As amended, our Credit Facility bears interest, at our option at either: 49




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
    
    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 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 Term
Loans A-2 and B-2; or  
    
    LIBOR rate plus a 3.50% margin on the Revolver and a 2.25% margin
on Term Loans A-2 and B-2. We may elect interest periods of 1, 2, 3, 6,
9 or 12 months for LIBOR borrowings. The Credit Facility, as amended, and the indentures governing the Notes contain
usual and customary negative covenants that, among other things, place
limitations on our ability to (i) incur additional indebtedness, including
capital leases and liens; (ii) pay dividends and repurchase our capital stock;
(iii) enter into mergers, consolidations, acquisitions, asset dispositions and
sale-leaseback transactions; (iv) make capital expenditures; and (v) issue
capital stock of our subsidiaries. The Credit Facility also contains financial
covenants relating to maximum consolidated leverage, minimum interest coverage,
minimum fixed charge coverage and maximum senior secured leverage as defined
therein. The Revolver and Term Loan A-2 mature in December 2008, and Term Loan
B-2 matures in June 2010. Substantially all of our assets, including the
capital stock of our subsidiaries, are pledged to secure our obligations under
the Credit Facility. On January 3, 2003, in connection with a tender offer and exit consent
solicitation, $128.8 million of the Pre-acquisition Notes were repurchased. We
borrowed an initial $1,410 million under the Credit Facility contingent upon
our repurchase of the entire $150 million aggregate principal amount of the
Pre-acquisition Notes. Any proceeds that were not used to repurchase the
Pre-acquisition Notes were required to be repaid to the lenders under the
Credit Facility. Accordingly, $21.2 million, representing the amount of
Pre-acquisition Notes that remained outstanding following the tender offer and
exit consent solicitation, was repaid to the lenders under the Credit Facility
shortly after the consummation of the acquisition. On February 6, 2004,
utilizing the proceeds from Term Loan B-2, we redeemed the remaining aggregate
principal amount of the Pre-acquisition Notes, totaling $21.2 million at a
redemption price of 104.563% of the principal amount thereof, plus accrued and
unpaid interest. A loss of approximately $1.2 million will be recorded in the
first quarter of 2004 consisting of the premium over par value paid at
redemption of $1.0 million, plus the write-off of $0.2 million of deferred
financing costs. The Preferred Stock is convertible at any time at a price of $24.05. The
cumulative dividend of 8% is compounded quarterly. Only with the consent of a
majority of the holders of the convertible preferred stock may we pay any
dividends in cash prior to October 1, 2005. Subsequent to October 1, 2005,
dividends on the Preferred Stock may be paid in cash, subject to any
limitations under the Credit Facility, or allowed to accrue, at our option. The
Credit Facility may significantly limit our ability to pay the dividends on the
Preferred Stock in cash. The warrants issued in November 2002 have an exercise
price of $26.28, and the warrants issued in January 2003 have an exercise price
of $28.62. These warrants can be exercised at any time before they expire on
January 3, 2008. We intend to issue treasury stock to satisfy conversion of the
Preferred Sock and exercise of warrants. 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 GS Funds in the event of a change in control (as defined). At December 31,
2003, the redemption value of the Preferred Stock was
$217.0 million and it was
convertible into 9,022,798 shares of common stock. As a result of the SPA acquisition, we have a significant amount of debt, and
our debt service requirements are significantly higher than in prior years.
Aggregate outstanding debt as of December 31, 2003 was $2,092.1 million. Term
Loans A-2 and B-2 require quarterly principal and interest payments through
their maturity and the Notes require semi-annual interest payments. During the
year ended December 31, 2003, we made scheduled principal payments of $49.4
million and prepaid an additional $193.5 million in principal under our Credit
Facility. 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. For the year ended December 31, 2003, we had aggregate
cash interest payments of $167.7 million. At December 31, 2003, we had $7.7 million of cash and cash equivalents before
checks not yet presented for payment of $6.7 million, and available borrowings
under the Revolver of $125.0 million. During 2003, we periodically utilized
the Revolver as a financing resource to balance the timing of our periodic and
accelerated payments made under the Credit Facility and interest payments on
the Notes with the timing of cash receipts from 50




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##### 



operations. Our present intention is to repay borrowings on the Revolver in a
timely manner and keep any outstanding amounts to a minimum. 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 to enable us
to fund our operations, capital expenditures and meet all debt service
requirements, or for other purposes. Cash provided by operating activities in 2003 was $248.6 million, an increase
of $198.6 million over cash provided by operating activities of $50.0 million in the prior year.
The increase is primarily a result of the SPA acquisition. As a publisher of over 260
revenue-generating directories, our cash flows from operating
activities have significantly increased in 2003. Key contributors to cash flows from operating
activities in 2003 include the following:  
    
    $293.9 million from a decrease in accounts receivable and an
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, one-twelfth of the billing value is recognized
as revenue and billed to customers. In connection with the SPA
acquisition, while we did not record the unrecognized revenue for
directories published prior to the acquisition and during January
2003 due to purchase accounting, we did acquire the associated
unbilled receivables and the rights to bill and collect these
receivables, which totaled approximately $250 million. Other
components adding to generating cash flows include lower bad debts
and sales claims, as well as improvements in the collection of past
due balances.  
    
    $10.2 million increase in cash received from
partnerships in excess of recorded
partnership income representing a source of cash. Partnership income
and cash received in 2003 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. Partially offsetting these sources of cash was the following uses of cash:  
    
    $32.0 million increase in other assets, primarily comprised of
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 2003 was $377.9 million and consists of
the following:  
    
    $2,259.6 million in cash payments to acquire SPA and pay
transaction costs. (See the table detailing the sources and uses of
funds in connection with the SPA acquisition presented above). 51




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##### 




    
    $1,894.3 million decrease in restricted cash that was recorded at
December 31, 2002. This amount is comprised of funds that we raised in
the last quarter of 2002 that were placed in escrow pending the SPA
acquisition. Of this amount, $900 million was raised from Term Loan B
under the Credit Facility, $925 million was raised from the Notes and
$69.3 in net proceeds was raised from the issuance of our Preferred
Stock to the GS Funds.  
    
    $12.6 million was used to purchase fixed assets, primarily
computer equipment and computer software. Cash provided by financing activities in 2003 was $129.3 million and includes
the following:  
    
    $461.3 million in net borrowings under the $500 million Term
Loan A under the Credit Facility on January 3, 2003. The other funds
raised under the Credit Facility to finance the SPA acquisition and
re-finance existing debt were received in December 2002 and held in
escrow until January 3, 2003.  
    
    $125.7 million in net proceeds from the issuance of our
Preferred Stock with a stated value of $130 million and related
warrants to the GS Funds on January 3, 2003. The GS Funds invested a
total stated amount of $200 million in connection with the SPA
acquisition. The initial investment of $70 million was made in
November 2002.  
    
    $243.0 million in principal payments on pre-acquisition debt.
Proceeds from our Credit Facility, Notes and Preferred Stock were
used in January 2003 to repay $114.2 million in variable rate bank
debt and redeem $128.8 of the Pre-acquisition Notes pursuant to a
tender offer.  
    
    $312.4 million in principal payments on debt borrowed under the
Credit Facility. Of this amount, $49.4 million represents scheduled
quarterly payments and $193.5 million represents principal payments
made on an accelerated basis, at our option, from excess cash flow
generated from operations.  
    
    $69.6 million in borrowings under the Revolver.  
    
    $21.4 million in proceeds from the exercise of employee stock options. The Contractual Obligations table presented below sets forth our annual
commitments as of December 31, 2003 for principal payments on our debt, as well as other cash
obligations for the next five years and thereafter. The debt repayments as
presented in this table include only the scheduled principal payments under our
current debt agreements and do not include any anticipated prepayments or
interest charges. Payment due by period (amounts in millions)
    
    
    
    
    
    Less than 1
    
    1-3
    
    4-5
    
    After 5Contractual Obligations
    
    Total
    
    Year
    
    Years
    
    Years
    
    YearsLong-Term Debt(1)
    
    $
    2,092.1
    
    
    $
    49.6
    
    
    $
    99.1
    
    
    $
    140.7
    
    
    $
    1,802.7Operating Leases(2)
    
    
    35.8
    
    
    
    5.2
    
    
    
    7.2
    
    
    
    7.9
    
    
    
    15.5Unconditional Purchase
Obligations(3)
    
    
    43.2
    
    
    
    13.9
    
    
    
    29.3
    
    
    
    
    
    
    
    Other Long-Term
Liabilities(4)
    
    
    38.7
    
    
    
    0.5
    
    
    
    1.1
    
    
    
    1.2
    
    
    
    35.9Total Contractual
Obligations
    
    $
    2,209.8
    
    
    $
    69.2
    
    
    $
    136.7
    
    
    $
    149.8
    
    
    $
    1,854.1
 (1) Included in long-term debt are amounts owed under our Credit Facility, the
Notes and the Pre-acquisition Notes. The Pre-acquisition Notes were redeemed
in full on February 6, 2004. These borrowings are further explained in Note 6
to our consolidated financial statements included in Item 8 in this annual
report. (2) We enter into operating leases in the normal course of business.
Substantially all lease agreements have fixed payment terms based on the
passage of time. Some lease agreements provide us with renewal or early
termination 52




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##### 



options. Our future operating lease obligations would change if we exercised
these renewal or early termination options and if we entered into additional
operating lease agreements. The amounts in the table assume we do not exercise
any such renewal or early termination options. See Note 12 to our consolidated
financial statements included in Item 8 of this annual report. (3) We have an unconditional purchase obligation with one vendor regarding the
purchase of paper that extends through the end of 2006. Our purchase
obligations are based on annual minimum quantities at pre-established pricing.
Amounts in the table above reflect such pricing and minimum quantities under
this contract. Should the market price of the paper drop below the
pre-established pricing, our vendor is obligated to negotiate with us a lower
paper price. Any quantities used above the contractual minimums would increase
our payment obligations. We have no contractual obligations beyond 2006. (4) We have a defined benefit plan covering substantially all employees. Our
funding policy is to contribute an amount at least equal to the minimum legal
funding requirement. No contributions were required in the three-year period
ended December 31, 2003. Based on past performance and the uncertainty of the
dollar amounts to be paid, if any, we have excluded such amounts from the above
table. We have an unfunded postretirement plan that provides certain healthcare
and life insurance benefits to those full-time employees who reach retirement
age while working for the Company. Those expected future benefit payments,
including administrative expenses, net of employee contributions, are
included in the table above. 53




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##### 



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 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 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. Based on the initial terms of the swap agreements, the annual cost of these
swap arrangements will be approximately $5.2 million. The actual cost of the
swaps will depend on the variable rate payments received. Assuming an 1/8%
increase in the interest rate associated with the borrowings under the Credit
Facility (after giving effect to the interest rate swaps), interest expense
would increase $0.9 million on an annual basis. After the effect of the
interest rate swap agreements discussed above, total fixed rate debt comprises
approximately 65% of our total debt portfolio as of December 31, 2003. 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. A discussion
of our accounting policies and further disclosure relating to these financial
instruments is included in Note 2 to our audited consolidated financial
statements for the year ended December 31, 2003, which are included in Item 8
in this annual report. 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 FAS 138, the
swaps are recorded at fair value. On a quarterly basis, the fair value of the
swaps will be determined based on quoted market prices and, assuming
effectiveness, the difference between the fair value and the book value of the
swaps will be 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. Pre-Acquisition Interest Rate Risk and Risk Management We were exposed to interest rate risk through our prior credit facility, under
which we borrowed at prevailing short-term rates. We had an outstanding
interest rate swap agreement with a notional principal amount of $75 million,
whereby we paid a fixed rate of 5.9% and received floating rate payments based
on three month LIBOR rates. For 2002, the weighted average rate received was
1.1%. This swap agreement expired in June 2003. Due to the pending repayment of
variable rate debt under our prior credit agreement in conjunction with the SPA
acquisition, at December 31, 2002, the interest rate swap no longer qualified
for hedge accounting treatment. As a result, we recognized a charge of $1.5
million in 2002 to record the swap at its fair market value. We recognized a
corresponding gain in 2003 of $1.5 million as the swap matured in June 2003 and
the fair value declined to zero. 54




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS PageR.H.
DONNELLEY CORPORATION AND SUBSIDIARIESReport of Independent Auditors
    
    
    56Consolidated Balance Sheets at December 31, 2003 and 2002
    
    
    57Consolidated Statements of Operations for the three years ended December 31, 2003
    
    
    58Consolidated Statements of Cash Flows for the three years ended December 31, 2003
    
    
    59Consolidated Statement of Changes in Shareholders Deficit for the three years ended December 31, 2003
    
    
    60Notes to Consolidated Financial Statements
    
    
    61DONTECHReport of Independent Auditors
    
    
    94Balance Sheets at December 31, 2003 and 2002
    
    
    95Statements of Partners Capital for the three years ended December 31, 2003
    
    
    96Statements of Operations for the three years ended December 31, 2003
    
    
    97Statements of Cash Flows for the three years ended December 31, 2003
    
    
    98Notes to Financial Statements
    
    
    99
 55




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##### 



REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders
of R.H. Donnelley Corporation: In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders deficit and cash flows
present fairly, in all material respects, the financial position of R.H.
Donnelley Corporation and its subsidiaries (the Company) at December 31, 2003
and 2002, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Companys management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. /s/ PRICEWATERHOUSECOOPERS LLP New York, New York
February 16, 2004 56




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##### 



R.H. DONNELLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31,(in thousands, except share and per share data)
    
    2003
    
    2002AssetsCurrent AssetsCash and cash equivalents
    
    $
    7,722
    
    
    $
    7,787Restricted cash
    
    
    
    
    
    
    1,928,700Total cash, cash equivalents and restricted cash
    
    
    7,722
    
    
    
    1,936,487Accounts receivableBilled
    
    
    49,203
    
    
    
    Unbilled
    
    
    173,734
    
    
    
    Commissions receivable
    
    
    
    
    
    
    31,978Allowance for doubtful accounts and sales claims
    
    
    (11,956
    )
    
    
    (4,772
    )Net accounts receivable
    
    
    210,981
    
    
    
    27,206Deferred directory costs
    
    
    37,907
    
    
    
    Other current assets
    
    
    27,981
    
    
    
    4,981Total current assets
    
    
    284,591
    
    
    
    1,968,674Fixed assets
and computer software, net
    
    
    20,624
    
    
    
    12,008Partnership investment
    
    
    175,729
    
    
    
    202,236Other non-current assets
    
    
    95,583
    
    
    
    40,457Intangible assets, net
    
    
    1,865,167
    
    
    
    Goodwill
    
    
    97,040
    
    
    
    Total Assets
    
    $
    2,538,734
    
    
    $
    2,223,375Liabilities, Redeemable Convertible Preferred Stock and Shareholders DeficitCurrent LiabilitiesAccounts payable and accrued liabilities
    
    $
    33,502
    
    
    $
    20,261Deferred directory revenue
    
    
    216,525
    
    
    
    Current portion of long-term debt
    
    
    49,586
    
    
    
    13,780Total current liabilities
    
    
    299,613
    
    
    
    34,041Long-term debt
    
    
    2,042,547
    
    
    
    2,075,470Deferred
income taxes, net
    
    
    33,629
    
    
    
    60,783Other non-current liabilities
    
    
    20,967
    
    
    
    20,222Total liabilities
    
    
    2,396,756
    
    
    
    2,190,516Commitments and contingenciesRedeemable convertible preferred stock (liquidation preference of
$216,998 for 2003 and $70,544 for 2002)
    
    
    198,223
    
    
    
    63,459Shareholders DeficitCommon stock, par value $1 per share, authorized 
400,000,000 shares; issued  51,621,894 shares
    
    
    51,622
    
    
    
    51,622Additional paid-in capital
    
    
    137,401
    
    
    
    63,913Unamortized restricted stock
    
    
    (531
    )
    
    
    (327
    )Warrants outstanding
    
    
    13,758
    
    
    
    5,330(Accumulated deficit) retained earnings
    
    
    (94,745
    )
    
    
    13,605Treasury stock, at cost, 20,589,520 shares for 2003 and 21,900,818 shares for 2002
    
    
    (163,741
    )
    
    
    (164,743
    )Accumulated other comprehensive loss
    
    
    (9
    )
    
    
    Total shareholders deficit
    
    
    (56,245
    )
    
    
    (30,600
    )Total Liabilities, Redeemable Convertible Preferred Stock
and Shareholders Deficit
    
    $
    2,538,734
    
    
    $
    2,223,375
 The accompanying notes are
an integral part of the consolidated financial statements. 57




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##### 



R.H. DONNELLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31,(in thousands, except per share data)
    
    2003
    
    2002
    
    2001Gross revenue
    
    $
    258,790
    
    
    $
    75,809
    
    
    $
    79,227Sales allowances
    
    
    (2,345
    )
    
    
    (403
    )
    
    
    1,026Net revenue
    
    
    256,445
    
    
    
    75,406
    
    
    
    80,253ExpensesOperating expenses
    
    
    164,211
    
    
    
    48,021
    
    
    
    51,347General and administrative expenses
    
    
    47,981
    
    
    
    12,027
    
    
    
    46,631Depreciation and amortization
    
    
    65,779
    
    
    
    6,249
    
    
    
    10,767Total expenses
    
    
    277,971
    
    
    
    66,297
    
    
    
    108,745Partnership income
    
    
    114,052
    
    
    
    136,873
    
    
    
    139,964Operating income
    
    
    92,526
    
    
    
    145,982
    
    
    
    111,472Interest expense, net
    
    
    (180,020
    )
    
    
    (33,548
    )
    
    
    (25,648
    )Other income (expense), net
    
    
    1,523
    
    
    
    (451
    )
    
    
    (Loss) income before income taxes
    
    
    (85,971
    )
    
    
    111,983
    
    
    
    85,824(Benefit) provision for income taxes
    
    
    (36,018
    )
    
    
    44,806
    
    
    
    36,009Net (loss) income
    
    
    (49,953
    )
    
    
    67,177
    
    
    
    49,815Preferred dividend
    
    
    58,397
    
    
    
    24,702
    
    
    
    (Loss) income available to common shareholders
    
    $
    (108,350
    )
    
    $
    42,475
    
    
    $
    49,815(Loss) earnings per shareBasic
    
    $
    (3.53
    )
    
    $
    1.42
    
    
    $
    1.65Diluted
    
    $
    (3.53
    )
    
    $
    1.40
    
    
    $
    1.61Shares used in computing earnings (loss) per shareBasic
    
    
    30,683
    
    
    
    29,643
    
    
    
    30,207Diluted
    
    
    30,683
    
    
    
    30,298
    
    
    
    30,976Comprehensive (Loss) Income(Loss) income available to common shareholders
    
    $
    (108,350
    )
    
    $
    42,475
    
    
    $
    49,815Unrealized loss on interest rate swaps, net of tax
    
    
    (9
    )
    
    
    
    
    
    
    (2,330
    )Comprehensive (loss) income
    
    $
    (108,359
    )
    
    $
    42,475
    
    
    $
    47,485
 The accompanying notes are
an integral part of the consolidated financial statements. 58




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##### 



R.H. DONNELLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31,(in thousands)
    
    2003
    
    2002
    
    2001Cash Flows from Operating ActivitiesNet (loss) income
    
    $
    (49,953
    )
    
    $
    67,177
    
    
    $
    49,815Reconciliation of net (loss) income to net cash provided by
operating activities:Depreciation and amortization
    
    
    65,779
    
    
    
    6,249
    
    
    
    10,767Deferred income tax
    
    
    (40,230
    )
    
    
    8,151
    
    
    
    (8,281
    )(Benefit from) provision for bad debts
    
    
    (1,517
    )
    
    
    2,897
    
    
    
    2,978Other non-cash charges
    
    
    6,408
    
    
    
    1,746
    
    
    
    2,481Restructuring and special (benefit) charge
    
    
    
    
    
    
    (6,694
    )
    
    
    18,556Investment impairment charge
    
    
    
    
    
    
    2,000
    
    
    
    11,432Gain on disposition of businesses, net of tax
    
    
    
    
    
    
    (659
    )
    
    
    (Gain) loss on hedging activities
    
    
    (1,523
    )
    
    
    1,523
    
    
    
    Changes in assets and liabilities, net of effects from acquisition:Cash in excess of partnership income
    
    
    10,240
    
    
    
    6,754
    
    
    
    11,893Decrease (increase) in accounts receivable
    
    
    77,381
    
    
    
    (5,052
    )
    
    
    292(Increase) decrease in other assets
    
    
    (31,950
    )
    
    
    (13,855
    )
    
    
    263Decrease in accounts payable and accrued liabilities
    
    
    (11,868
    )
    
    
    (19,014
    )
    
    
    (14,982
    )Increase in deferred directory revenue
    
    
    216,525
    
    
    
    
    
    
    
    Increase (decrease) in other non-current liabilities
    
    
    9,305
    
    
    
    (1,268
    )
    
    
    1,640Net cash provided by operating activities
    
    
    248,597
    
    
    
    49,955
    
    
    
    86,854Cash Flows from Investing ActivitiesAdditions to fixed assets and computer software
    
    
    (12,581
    )
    
    
    (3,743
    )
    
    
    (4,550
    )Increase in restricted cash
    
    
    
    
    
    
    (1,928,700
    )
    
    
    Decrease in restricted cash  release of funds from escrow,
net of costs and other
    
    
    1,894,300
    
    
    
    
    
    
    
    Acquisition of SPA, net of cash received
    
    
    (2,259,633
    )Investment in ChinaBig.com Limited
    
    
    
    
    
    
    
    
    
    
    (1,550
    )Net cash used in investing activities
    
    
    (377,914
    )
    
    
    (1,932,443
    )
    
    
    (6,100
    )Cash Flows from Financing ActivitiesProceeds from the issuance of debt, net of costs
    
    
    461,307
    
    
    
    1,865,000
    
    
    
    Proceeds from the issuance of Redeemable Convertible Preferred
Stock and warrants, net of costs
    
    
    125,683
    
    
    
    69,300
    
    
    
    Pre-acquisition debt refinanced with proceeds from new debt
    
    
    (243,005
    )
    
    
    
    
    
    
    Increase in checks not yet presented for payment
    
    
    6,708
    
    
    
    
    
    
    
    Additional borrowings under the Credit Facility
    
    
    69,569
    
    
    
    
    
    
    
    Credit Facility debt repayments
    
    
    (312,436
    )
    
    
    (62,500
    )
    
    
    (65,000
    )Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (63,981
    )Proceeds from employee stock option exercises
    
    
    21,426
    
    
    
    3,754
    
    
    
    7,511Net cash provided by (used in) financing activities
    
    
    129,252
    
    
    
    1,875,554
    
    
    
    (121,470
    )Decrease in cash and cash equivalents
    
    
    (65
    )
    
    
    (6,934
    )
    
    
    (40,716
    )Cash and cash equivalents, beginning of year
    
    
    7,787
    
    
    
    14,721
    
    
    
    55,437Cash and cash equivalents, end of year
    
    $
    7,722
    
    
    $
    7,787
    
    
    $
    14,721Supplemental InformationCash interest paid
    
    $
    167,718
    
    
    $
    27,627
    
    
    $
    24,552Income taxes paid
    
    
    
    
    
    $
    38,940
    
    
    $
    39,608
 The accompanying notes are
an integral part of the consolidated financial statements. 59




---



##### 



R.H. DONNELLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS DEFICIT (AccumulatedCommon Stock and
    
    
    
    
    
    Unamortized
    
    Deficit)
    
    
    
    
    
    Accumulated OtherAdditional
    
    Warrants
    
    Restricted
    
    Retained
    
    Treasury
    
    Comprehensive
    
    Total Shareholders'(in thousands)
    
    Paid-in Capital
    
    Outstanding
    
    Stock
    
    Earnings
    
    Stock
    
    (Loss) Income
    
    DeficitBalance, December 31, 2000
    
    $
    70,237
    
    
    
    
    
    
    $
    (232
    )
    
    $
    (78,685
    )
    
    $
    (99,830
    )
    
    
    
    
    
    $
    (108,510
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,815
    
    
    
    
    
    
    
    
    
    
    
    49,815Employee stock option exercises,
including tax benefit
    
    
    11,101
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    585
    
    
    
    
    
    
    
    11,686Restricted stock issued
    
    
    292
    
    
    
    
    
    
    
    (297
    )
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    Stock issued for employee bonus plans
    
    
    1,408
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    1,498Compensatory stock options
    
    
    627
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    627Restricted stock amortization
    
    
    
    
    
    
    
    
    
    
    193
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    193Stock acquired for treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64,292
    )
    
    
    
    
    
    
    (64,292
    )Unrealized loss on interest rate swaps,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (2,330
    )
    
    
    (2,330
    )Balance, December 31, 2001
    
    
    83,665
    
    
    
    
    
    
    
    (336
    )
    
    
    (28,870
    )
    
    
    (163,442
    )
    
    
    (2,330
    )
    
    
    (111,313
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,177
    
    
    
    
    
    
    
    
    
    
    
    67,177Preferred dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,702
    )
    
    
    
    
    
    
    
    
    
    
    (24,702
    )Employee stock option exercises,
including tax benefit
    
    
    4,925
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    260
    
    
    
    
    
    
    
    5,185Restricted stock issued
    
    
    216
    
    
    
    
    
    
    
    (221
    )
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    Stock issued for employee bonus plans
    
    
    2,328
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    106
    
    
    
    
    
    
    
    2,434Compensatory stock options
    
    
    243
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    243Restricted stock amortization
    
    
    
    
    
    
    
    
    
    
    230
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    230Stock acquired for treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,672
    )
    
    
    
    
    
    
    (1,672
    )Beneficial conversion feature from
issuance
of Preferred Stock
    
    
    24,158
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,158Issuance of warrants
    
    
    
    
    
    $
    5,330
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,330Unrealized gain on interest rate swaps,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,330
    
    
    
    2,330Balance, December 31, 2002
    
    
    115,535
    
    
    
    5,330
    
    
    
    (327
    )
    
    
    13,605
    
    
    
    (164,743
    )
    
    
    
    
    
    
    (30,600
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49,953
    )
    
    
    
    
    
    
    
    
    
    
    (49,953
    )Preferred dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58,397
    )
    
    
    
    
    
    
    
    
    
    
    (58,397
    )Employee stock option exercises,
including tax benefit
    
    
    27,947
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,284
    
    
    
    
    
    
    
    29,231Restricted stock issued
    
    
    528
    
    
    
    
    
    
    
    (533
    )
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    Stock issued for employee bonus plans
    
    
    1,083
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    1,115Compensatory stock options
    
    
    1,987
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,987Restricted stock amortization
    
    
    
    
    
    
    
    
    
    
    329
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    329Stock acquired for treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (319
    )
    
    
    
    
    
    
    (319
    )Beneficial conversion feature from
issuance
of Preferred Stock
    
    
    41,943
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,943Issuance of warrants
    
    
    
    
    
    
    8,428
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,428Unrealized loss on interest rate swaps,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    (9
    )Balance, December 31, 2003
    
    $
    189,023
    
    
    $
    13,758
    
    
    $
    (531
    )
    
    $
    (94,745
    )
    
    $
    (163,741
    )
    
    $
    (9
    )
    
    $
    (56,245
    )
 The accompanying notes are an integral part of the consolidated financial
statements. 60




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##### 



R.H. DONNELLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share data, unless otherwise noted) 1.     Business and Presentation The consolidated financial statements include the accounts of R.H. Donnelley
Corporation and its direct and indirect wholly owned subsidiaries (the
Company, RHD, we, us and our). All intercompany transactions and
balances have been eliminated. See Equity Method of Accounting below for a
discussion of unconsolidated operations. We are a leading yellow pages directory publisher in the United States.
Currently, we publish 260 Sprint-branded yellow pages directories in 18 states
and have a total circulation of approximately 18 million, serving approximately
160,000 local and 4,000 national advertisers. Through The DonTech II
Partnership (DonTech), our partnership with an affiliate of SBC
Communications Inc. (SBC), we sell advertising for an additional 129
SBC-branded directories 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 common stock of the various
entities comprising Sprint Publishing and Advertising (SPA), Sprint
Corporations (Sprint) directory publishing business. The acquisition
transformed Donnelley from a sales agent and pre-press vendor into a leading
publisher of yellow pages directories. Prior to the SPA acquisition, we were
one of the largest independent sales agents and pre-press vendors for yellow
pages advertising in the United States. See Note 3, Acquisition of Sprint
Publishing and Advertising below for a further description of the acquisition. 2.       Summary of Significant Accounting Policies 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. For the years ended December 31, 2002 and 2001, we earned sales commission
revenue from the sale of advertising on behalf of SPA and fees for pre-press
publishing services. As a sales agent for SPA, we recognized sales commission
revenue, net of an allowance for sales claims, at the time an advertising
contract was executed with a customer. Revenue from pre-press publishing
services was recognized as services were performed. Deferred Directory Costs. Costs directly related to the selling and
production of our directories are initially deferred when incurred and
recognized ratably over the life of a directory, which is typically 12 months.
These costs include sales commissions and print, paper and initial distribution
costs. 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-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, 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 statements of operations. Partnership income also includes
revenue participation income from SBC. Revenue participation 61




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##### 



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. During the years ended December
31, 2002 and 2001, partnership income also included the priority distribution
income on our membership interest in CenDon, LLC (CenDon). In connection
with the SPA acquisition, we became the sole owner of CenDon. The operating
results of CenDon subsequent to the SPA acquisition are included in our
consolidated results of operations. Cash and Cash Equivalents.Cash equivalents include liquid investments with a
maturity of less than three months at their time of acquisition. At December
31, 2002, cash of $1,928,700 was restricted and was used in 2003 to finance the
SPA acquisition. The Company places its investments with high quality
financial institutions. At times, such investments may be in excess of
federally insured limits. Accounts Receivable.As of December 31, 2003, accounts receivable consist of
balances from our advertising customers. Advertisers typically enter into a
twelve-month contract for their advertising. Most advertisers are billed a pro
rata amount of their contract value on a monthly basis. Billed receivables
represent the amount that has been billed to advertisers. Unbilled receivables
represent contractually owed amounts for published directories that have yet to
be billed to advertisers. Billed receivables are recorded net of an allowance
for doubtful accounts and sales claims, estimated based on historical
experience on a directory-by-directory basis. We increase or decrease this
estimate as information or circumstances indicate that the
estimate may no longer adequately represent the amount of bad debts and sales
claims we may incur. As of December 31, 2002, accounts receivable consisted of sales commissions
earned from the sale of advertising. Receivables for sales commissions were
billed to the publisher upon directory publication and collected in accordance
with contractual provisions. An allowance for doubtful accounts and sales
claims was provided based on expected collectibility of the receivables. Fixed Assets and Computer Software.Fixed assets and computer software are
recorded at cost. Depreciation and amortization is provided over the estimated
useful lives of the assets using the straight-line method. Estimated useful
lives are 30 years for the building, five years for machinery and equipment,
ten years for furniture and fixtures, three to five years for computer
equipment and five years for computer software. Leasehold improvements are
amortized on a straight-line basis over the shorter of the term of the lease or
the estimated useful life of the improvement. Fixed assets and computer
software at December 31, 2003 and 2002 consisted of the following: 2003
    
    2002Computer software
    
    $
    104,423
    
    
    $
    65,349Computer equipment
    
    
    44,286
    
    
    
    39,958Machinery and equipment
    
    
    8,398
    
    
    
    3,863Furniture and fixtures
    
    
    9,560
    
    
    
    4,967Leasehold improvements
    
    
    4,406
    
    
    
    3,824Building
    
    
    1,333
    
    
    
    Total cost
    
    
    172,406
    
    
    
    117,961Less accumulated depreciation and amortization
    
    
    (151,782
    )
    
    
    (105,953
    )Net fixed assets and computer software
    
    $
    20,624
    
    
    $
    12,008
 Depreciation and amortization expense on fixed assets and computer software for
the years ended December 31, 2003, 2002 and 2001 was as follows: 2003
    
    2002
    
    2001Depreciation of fixed assets
    
    $
    3,285
    
    
    $
    2,823
    
    
    $
    3,803Amortization of computer software
    
    
    12,661
    
    
    
    3,426
    
    
    
    6,964Total depreciation and amortization on
fixed assets and computer
software
    
    $
    15,946
    
    
    $
    6,249
    
    
    $
    10,767
 62




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##### 



Identifiable 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 for
the year ended December 31, 2003 was $49,833. Amortization expense for these
intangible assets for each of the five succeeding years is estimated to be
approximately $50,000. The acquired long-term intangible assets and their
respective book values at December 31, 2003 are shown in the table below. Directory
    
    Local
    
    NationalServices
    
    customer
    
    CMR
    
    TradeAgreements
    
    relationships
    
    relationships
    
    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
    
    
    (32,500
    )
    
    
    (13,333
    )
    
    
    (2,000
    )
    
    
    (2,000
    )
    
    
    (49,833
    )Net intangible assets
    
    $
    1,592,500
    
    
    $
    186,667
    
    
    $
    58,000
    
    
    $
    28,000
    
    
    $
    1,865,167
 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 or producing, publishing and
distributing print directories, with certain limited exceptions. The fair
value of these agreements was determined based on the present value of
estimated future cash flows and is being amortized using the straight-line
method over 50 years. The fair value of local and national customer relationships was determined
based on the present value of estimated future cash flows and historical
attrition rates and is being amortized under an accelerated method that assumes
the value derived from customer relationships is greater in the earlier years
and steadily declines over time. The weighted average useful life of these
relationships is 18 years. The fair value of acquired trade names was determined based on the relief from
royalty method, which values the trade names based on the estimated amount
that a company would have to pay in an arms length transaction to use these
trade names. These assets are being amortized using the straight-line method
over 15 years. The excess of the purchase price for SPA over the net tangible and identified
intangible assets acquired was recorded as goodwill. In accordance with SFAS
142, Goodwill and Other Intangible Assets, goodwill is not amortized, but is
subject to impairment testing. We tested goodwill for impairment and concluded
that the goodwill amount of $97,040 at December 31, 2003 was not impaired. The
goodwill resulting from the SPA acquisition was assigned to the Donnelley
segment (see Note 14 for further segment information). 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 make accelerated principal payments. Other deferred financing
costs are amortized using the straight-line method. Amortization of deferred
financing costs included in interest expense was $15,023, $1,273 and $957 in
2003, 2002, and 2001, respectively. Advertising Expense.We recognize advertising expense as incurred. These
expenses include public relations, media, on-line advertising and other
promotional and sponsorship costs. Total advertising expenses were $8,797 in
2003. Prior to the SPA acquisition, advertising costs were not significant. 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 twelve-month
advertising sales contracts and typically make monthly payments over the term
of the contract. Some advertisers prepay the full amount or a portion of the
contract value. 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 63




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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 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 Certified Marketing Representatives (CMRs) with which we contract.
CMRs are independent third parties that act as agents for national companies.
The CMRs are responsible for billing the national customers for their
advertising. We receive payment for the value of advertising placed in our
directory, net of the CMRs commission, directly from the CMR. While we are
still exposed to credit risk, the amount of losses from these accounts have
historically been less than the local accounts as the advertisers, and in some
cases, the CMRs tend to be larger companies with greater financial resources
than the local advertisers. We maintain a significant receivable balance with SBC for revenue participation
and pre-press publishing services fees. The revenue participation receivable
is subject to adjustment, based on collections by SBC from individual
advertisers; however, the adjustment is limited based on contractual
provisions. The receivable is recorded at net realizable value. We do not
currently foresee a material credit risk associated with this receivable,
although there can be no assurance that full payment will be received on a
timely basis. At December 31, 2003, we had interest rate swap agreements with major financial
institutions with a notional value of $405,000. We are exposed to credit risk
in the event that one or more of the counterparties to the agreements does not,
or cannot, meet their obligation. The notional amount is used to measure
interest to be paid or received and does not represent the amount of exposure
to credit loss. The loss would be limited to the amount that would have been
received, if any, over the remaining life of the swap agreement. The
counterparties to the swap agreements are major financial institutions with
credit ratings of A or higher. We do not currently foresee a material credit
risk associated with these swap agreements; however, no assurances can be
given. Pension and Other Postretirement BenefitsPension and other postretirement
benefits represent estimated amounts to be paid to employees in the future.
The accounting for benefits reflects the recognition of these benefit costs
over the employees approximate service period based on the terms of the plan
and the investment and funding decisions made. The determination of the
benefit obligation and the net periodic pension and other postretirement
benefit costs requires management to make assumptions regarding the discount
rate, return on retirement plan assets, increase in future compensation and
healthcare cost trends. Changes in these assumptions can have a significant
impact on the projected benefit obligation, funding requirement and net
periodic benefit cost. The assumed discount rate is the rate at which the
pension benefits could be settled. We use the rates on Aa corporate bonds as a
basis for determining our discount rate assumption. The expected long-term
rate of return on plan assets is based on the mix of assets held by the plan
and the expected long-term rates of return within each asset class. The
anticipated trend of future healthcare costs is based on historical experience
and external factors. See Note 11 for further information regarding our
benefit plans. Effective January 1, 2003, we reduced our rate of return on plan assets from
9.75% to 8.25%. As a result of low investment returns over the last few years,
as well as our outlook for the long term, particularly for equity securities,
we determined that the prior assumed rate of return of 9.75% no longer
reflected our best estimate of future long-term returns. Based on the current
investment environment and the pension plans asset allocation, we determined
that a long-term rate of return of 8.25% better reflected our expectations for
future long-term returns. 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 $405,000 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 64




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2.52%. The swaps mature in October 2005 and March 2007. The weighted average
rate received was 1.2% in 2003. These periodic payments and receipts are
recorded as part of interest expense. The interest rate swaps have been designated as cash flow hedges to hedge
three-month LIBOR-based interest payments on $405,000 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 year ended
December 31, 2003, our interest rate swaps provided an effective hedge of the
three-month LIBOR-based interest payments on $405,000 of bank debt and no
ineffectiveness was included in earnings. At December 31, 2002, we had an interest rate swap agreement with a notional
value of $75,000 and at December 31, 2001, we had interest rate swaps with a
combined notional value of $125,000. We made fixed-rate payments of 5.9% and
received variable-rate payments based on three-month LIBOR rates. The weighted
average rate received was 1.1% in 2002 and 3.0% in 2001. These periodic
payments and receipts were recorded as part of interest expense. As a result of the pending SPA acquisition and contemplated repayment of
existing variable rate debt, the $75,000 notional value interest rate swap did
not qualify for hedge accounting treatment at December 31, 2002, and thus, the
unrecognized fair market value of the swap, previously recognized in
accumulated other comprehensive loss on the balance sheet, was charged to
earnings. Accordingly, a charge of $1,523 was included in other expense, net
for the year ended December 31, 2002. Because the swap was held to maturity, a
corresponding gain was recognized during 2003. Income Taxes.We account for income taxes under the liability method in
accordance with SFAS 109, Accounting for Income Taxes. Deferred tax
liabilities or assets reflect temporary differences between amounts of assets
and liabilities for financial and tax reporting. Such amounts are adjusted, as
appropriate, to reflect changes in tax rates expected to be in effect when the
temporary differences reverse. A valuation allowance is established to offset
any deferred tax assets if, based upon the available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized. See Note 10 for more information regarding our (benefit) provision
for income taxes. Earnings per Share.Basic earnings per common share (EPS) are generally
calculated by dividing income available to common shareholders by the weighted
average number of common shares outstanding. However, because the outstanding
Preferred Stock contains certain participation rights, EITF Topic D-95, Effect
of Participating Securities on the Computation of Basic Earnings Per Share
(Topic D-95), requires that the dilutive effect of those securities be
included in the weighted average number of shares outstanding. Furthermore,
Topic D-95 requires that the dilutive effect to be included in basic EPS may be
calculated using either the if-converted method or the two-class method.
However, the dilutive effect of the Preferred Stock cannot be less than that
which would result from the application of the two-class method. We have
elected to use the if-converted method in calculating basic EPS; however,
during 2003 we have reported EPS calculated using the two-class method because
it has been less than EPS calculated using the if-converted method. Diluted EPS are calculated by dividing income available to common shareholders
by the weighted average common shares outstanding plus common share
equivalents. Common stock equivalents include 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 2003 and
2002 is presented below. Year
    
    YearEnded
    
    EndedDecember 31,
    
    December 31,2003
    
    2002(table shares in thousands)Basic EPS  If - Converted Method(Loss) income available to common shareholders
    
    $
    (108,350
    )
    
    $
    42,475Preferred Stock dividend
    
    
    58,397
    
    
    
    24,702Net (loss) income
    
    $
    (49,953
    )
    
    $
    67,177Weighted average common shares outstanding
    
    
    30,683
    
    
    
    29,643Weighted average common equivalent shares assuming
conversion of Preferred Stock
    
    
    8,761
    
    
    
    281
    (1)39,444
    
    
    
    29,924Basic (loss) earnings per share  if - converted method
    
    $
    (1.27
    )
    
    $
    2.24
 65




---



##### 



(1) At December 31, 2002, the Preferred Stock was convertible into 2,933,888
shares of common stock. However, since the $70,000 of Preferred Stock
was issued in November 2002, the number of common share equivalents included in
the 2002 EPS calculation has been weighted for the actual time the Preferred
Stock was outstanding during the year. Year
    
    YearEnded
    
    EndedDecember 31,
    
    December 31,2003
    
    2002(all shares in thousands)Basic EPS  Two - Class Method(Loss) income available to common shareholders
    
    $
    (108,350
    )
    
    $
    42,475Amount allocable to common shares(2)
    
    
    78
    %
    
    
    99
    %Rights to undistributed (loss) income
    
    $
    (84,513
    )
    
    $
    42,050Weighted average common shares outstanding
    
    
    30,683
    
    
    
    29,643Basic (loss) earnings per share  two-class
method(3)
    
    $
    (3.53
    )
    
    $
    1.42Diluted EPS(Loss) income available to common shareholders
    
    $
    (108,350
    )
    
    $
    42,475Weighted average common shares outstanding
    
    
    30,683
    
    
    
    29,643Dilutive effect of stock options (4)
    
    
    
    
    
    
    655Dilutive effect of Preferred Stock assuming
conversion (4)
    
    
    
    
    
    
    Weighted average common and common equivalent shares
outstanding
    
    
    30,683
    
    
    
    30,298Diluted (loss) earnings per share
    
    $
    (3.53
    )
    
    $
    1.40
 (2)30,683 / (30,683 + 8,761) for the year ended December 31, 2003 and
29,643 / (29,643 + 281) for the year ended December 31, 2002. (3) Basic EPS calculated under the two-class method was a loss of $2.75 for
the year ended December 31, 2003. However, when there is a net loss in a
period, the application of the two-class method is anti-dilutive. Accordingly,
reported basic EPS are calculated as loss available to common shareholders
divided by the weighted average basic shares outstanding. (4) The effect of stock options in 2003 and the assumed conversion of the
Preferred Stock in 2002 and 2003 were anti-dilutive and therefore are not
included in the calculation of diluted EPS. For the year ended December 31, 2001, basic EPS are calculated by dividing net
income by the weighted average common shares outstanding during the year, and
diluted EPS are calculated by dividing net income by the weighted average
common shares outstanding plus potentially dilutive common shares, primarily
stock options. 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. The following table reflects the pro forma net (loss) income and (loss)
earnings per share assuming we applied the fair value method of SFAS No. 123,
Accounting for Stock-Based Compensation. The pro forma disclosures shown are
not necessarily representative of the effects on net (loss) income and (loss)
earnings per share in future years. 66




---



##### 



2003
    
    2002
    
    2001Net (loss) income, as reported
    
    $
    (49,953
    )
    
    $
    67,177
    
    
    $
    49,815Add: Stock based compensation expense included in
reported net (loss) income, net of related tax effects
    
    
    1,162
    
    
    
    144
    
    
    
    364Less: Stock based compensation expense that would have
been included in the determination of net (loss) income
if the fair value method had been applied to all
awards, net of related tax effects
    
    
    (4,828
    )
    
    
    (2,688
    )
    
    
    (2,558
    )Pro forma net (loss) income
    
    
    (53,619
    )
    
    
    64,633
    
    
    
    47,621Preferred dividend
    
    
    58,397
    
    
    
    24,702
    
    
    
    Pro forma (loss) income available to common shareholders
    
    $
    (112,016
    )
    
    $
    39,931
    
    
    $
    47,621Basic (loss) earnings per shareAs reported
    
    $
    (3.53
    )
    
    $
    1.42
    
    
    $
    1.65Pro forma
    
    $
    (3.65
    )
    
    $
    1.33
    
    
    $
    1.58Diluted (loss) earnings per shareAs reported
    
    $
    (3.53
    )
    
    $
    1.40
    
    
    $
    1.61Pro forma
    
    $
    (3.65
    )
    
    $
    1.32
    
    
    $
    1.54
 The weighted average fair value of stock options ($9.21 in 2003, $8.29 in 2002
and $8.81 in 2001) was estimated on the grant date using the Black-Scholes
option-pricing model with the following assumptions: 2003
    
    2002
    
    2001Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    35
    %
    
    
    35
    %
    
    
    35
    %Risk-free interest rate
    
    
    2.6
    %
    
    
    3.1
    %
    
    
    4.8
    %Expected holding period
    
    4 years
    
    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. Reclassifications.Certain prior year amounts have been reclassified to
conform to the current years presentation. These reclassifications had no
impact on previously reported results of operations or shareholders deficit. New Accounting Pronouncements.In May 2003, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity(SFAS 150). This statement established standards for
the classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. The statement was effective
July 1, 2003. Our redeemable convertible preferred stock represents a financial
instrument with characteristics of both liabilities and equity. We have applied
the provisions of SFAS 150 and determined that the classification and
measurement of our redeemable convertible preferred stock is appropriate. In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities(FIN 46). In general, a variable interest entity
is a corporation, partnership, trust or any other legal structure used for
business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the investors do not have the characteristics of a controlling 67




---



##### 



financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. We adopted the
provisions of FIN 46 effective February 1, 2003 and such adoption did not have
a material impact on our consolidated financial statements because we currently
have no variable interest entities. In December 2003, the FASB issued FIN 46R
with respect to variable interest entities created before January 31, 2003,
which, among other things, revised the implementation date to the first fiscal
year or interim period ending after March 15, 2004, with the exception of
Special Purpose Entities (SPE). The consolidation requirements apply to all
SPEs in the first fiscal year or interim period ending after December 15, 2003.
We adopted the provisions of FIN 46R effective December 2003 and such adoption
did not have a material impact on our consolidated financial statements because
we currently have no SPEs. In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities(SFAS 149). SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS 133. SFAS 149 is
effective for contracts and hedging relationships entered into or modified
after June 30, 2003. We adopted the provisions of SFAS 149 effective June 30,
2003 and such adoption did not have a material impact on our consolidated
financial statements. In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure
(SFAS 148). SFAS 148 amends the transition provisions of Statement of
Financial Accounting Standards SFAS No.123, Accounting for Stock-Based
Compensation(SFAS 123), for entities that voluntarily change to the fair
value method of accounting for stock-based employee compensation. We do not
currently intend to change our accounting to the fair value method. SFAS 148
also amends the disclosure provisions of SFAS 123 to require prominent
disclosure about the effects on reported net income of an entitys accounting
policy decisions with respect to stock-based employee compensation and amends
APB Opinion No. 28, Interim Financial Reporting(APB 28), to require
disclosures about such effects in interim financial information. We adopted the
disclosure provisions of SFAS 148 in the first quarter of 2003. On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act introduces
prescription drug care benefits under Medicare and also allows for certain
sponsors of postretirement benefit plans with a drug benefit to receive a
non-taxable federal subsidy if certain criteria are met. In response to the
passage of this legislation, on January 12, 2004, the FASB issued FASB Staff
Position (FSP) No. FAS 106-1, Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.
The FSP permits employers that sponsor postretirement benefit plans that
provide prescription drug benefits to retirees to make a one-time election to
defer accounting for any effects of the Act. In accordance with the FSP,
Donnelley has elected to defer accounting for any effects of the Act and
accordingly, any measures of the accumulated postretirement benefit obligation
or net periodic postretirement benefit cost in the financial statements and as
disclosed in Note 11 - Benefits Plans do not reflect the effects of the Act on
Donnelleys plans. Authoritative guidance on the accounting for the federal
subsidy is currently being considered by the FASB that, when issued, could
require us to change previously reported information. In December 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 132 (revised 2003), Employers Disclosures about Pensions and Other
Postretirement Benefits. SFAS No. 132 (revised 2003) amends the disclosure
requirements of SFAS 132 to require more complete information about pension and
postretirement benefits. It does not change the measurement or recognition of
those plans required by SFAS No. 87, Employers Accounting for Pensions, SFAS
No. 88, Employers Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, and SFAS No. 106,
Employers Accounting for Postretirement Benefits Other Than Pensions. We
adopted the disclosure provisions of SFAS No. 132 (revised 2003) as of December
31, 2003. 68




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##### 



3.       Acquisition of Sprint Publishing and Advertising On January 3, 2003, we acquired SPA for $2,229,763. We are now the publisher
of 260 revenue-generating, Sprint-branded yellow pages directories in 18
states. Prior to the acquisition, we provided sales agency and pre-press
publishing services for 44 of these directories in four states. The
acquisition transformed the Company from a sales agent and pre-press vendor
into a leading publisher of yellow pages directories. The results of the SPA
business are included in our consolidated results from and after January 3,
2003, the acquisition closing date. SPA is now being operated as R.H.
Donnelley Publishing & Advertising, Inc. (RHDPA), an indirect, wholly owned
subsidiary of the Company. The acquisition was accounted for as a purchase business combination in
accordance with SFAS 141, Business Combinations. The sources and uses of funds in connection with the acquisition are summarized
below. See Notes 6 and 8 for information regarding the financing for the SPA
acquisition. Sources:Proceeds from the Credit Facility
    
    $
    1,410,000Proceeds from the Notes
    
    
    925,000Proceeds from the sale of convertible preferred stock and
warrants
    
    
    200,000
    (1)Available cash
    
    
    47,718Total sources
    
    $
    2,582,718Uses:Purchase price
    
    $
    2,229,763Payment of CenDon obligations
    
    
    14,000Repay existing debt, including accrued interest
    
    
    244,166Fees and expenses
    
    
    94,789Total uses
    
    $
    2,582,718
 (1)Calculated prior to the application of a 1% closing payment and other
fees. The allocation of the cash purchase price to the fair value of net assets
acquired is summarized below. Acquired intangible asset  Directory Services Agreements.
    
    $
    1,625,000Acquired intangible asset  Customer relationships
    
    
    260,000Acquired intangible asset  Trademarks
    
    
    30,000Acquired tangible net assets
    
    
    217,723Goodwill
    
    
    97,040Total allocation of cash purchase price
    
    $
    2,229,763
 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. At December 31, 2002, Donnelley had a net receivable from SPA of
$27,888. As a result of the acquisition, this net receivable became an
intercompany item and was included as part of the purchase price. Commercial agreements between Sprint and us include a directory services
license agreement, a trademark license agreement and a non-competition
agreement (collectively Directory Services Agreements). The directory
services license agreement gives us the exclusive right to produce, publish and
distribute directories for Sprint in the markets where Sprint provided local
telephone service at the time of the agreement. The trademark license agreement
gives us the exclusive right to use certain specified Sprint trademarks,
including the Sprint diamond logo, in those markets, and the non-competition
agreement prohibits Sprint in those markets from selling local directory
advertising or producing, publishing and distributing print directories, with
certain limited exceptions. These agreements are all interrelated and each has
an initial term of 50 years, subject to earlier termination under specified
circumstances. The fair value assigned to these agreements of $1,625,000 was
based on the present value of estimated future cash flows. We also acquired
the established local and national customer relationships of SPA. 69




---



##### 



The value of these relationships was determined based on the present value of
estimated future cash flows and an analysis of historical attrition rates. A
value of $200,000 was assigned to the local customer relationships and a value
of $60,000 was assigned to the national customer relationships. Finally, we
also acquired certain trade names historically used in the SPA directory
business. A value of $30,000 was assigned to the trade names 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. The excess of the purchase price over the fair value
of the assets acquired and liabilities assumed was recognized as goodwill. In accordance with SFAS 142, Goodwill and Other Intangible Assets, the fair
value of the identifiable intangible assets will be 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. Under purchase accounting rules, we did not assume the deferred revenue balance
of SPA at January 3, 2003 of $315,911. This amount represented revenue that
would have been recognized subsequent to the acquisition under the deferral and amortization
recognition 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 Donnelley. 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. 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. A summarized condensed balance sheet of the Company at January 3, 2003 is
presented below. Liabilities, Redeemable Convertible PreferredAssets
    
    
    
    
    
    Stock and Shareholders' EquityCash and cash equivalents
    
    $
    7,697
    
    
    Current liabilities
    
    $
    47,147Accounts receivable, net
    
    
    287,713
    
    
    Current portion long-term debt
    
    
    58,668Other current assets
    
    
    21,139Current assets
    
    
    316,549
    
    
    Current liabilities
    
    
    105,816Fixed assets, net
    
    
    23,988
    
    
    Long-term debt
    
    
    2,297,577Partnership investment
    
    
    185,969
    
    
    Other non-current liabilities..
    
    
    75,709Deferred financing costs
    
    
    75,670
    
    
    Total liabilities
    
    
    2,479,102Other non-current assets
    
    
    24,483Intangible assets
    
    
    1,915,000
    
    
    Redeemable convertible preferred stock
    
    
    143,553Goodwill
    
    
    97,040Shareholders' equity
    
    
    16,045Total Liabilities, Redeemable ConvertibleTotal assets
    
    $
    2,638,699
    
    
    Preferred Stock and Shareholders' Equity
    
    $
    2,638,699
 Summarized unaudited condensed pro forma information for the year ended
December 31, 2002 assuming the SPA acquisition occurred on January 1, 2002 is
presented below. The following unaudited pro forma information does not purport
to represent what the combined entitys results of operations would actually
have been if the transaction had in fact occurred on January 1, 2002 and is not
necessarily representative of results of operations for any future period. Net revenue
    
    $
    571,282Operating income
    
    
    346,779Net income
    
    
    99,283Preferred dividend
    
    
    78,860Income available to common shareholders
    
    
    20,423
 70




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##### 



4.       Restructuring and Special Charge As a result of the SPA acquisition, we have consolidated publishing and
technology operations, sales offices and administrative
personnel and are relocating the headquarters functions in
Overland Park, Kansas and Purchase, New York to Cary, North Carolina during
2004 (collectively the 2003 Restructuring Actions). Approximately 140 people
were affected by the shutdown of the Tennessee publishing facility and have
been included in the restructuring reserve. In addition, approximately 140
people will be 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 are expected to be
relocating with the Company. In 2003, $2,878 was charged
to goodwill representing the closure of the pre-press
publishing facility operated by SPA and severance paid to certain SPA
executives who were terminated immediately upon the closing of the acquisition.
The reserve for the pre-press publishing facility was $2,181 and represents
the remaining lease payments, net of estimated sub-lease
income. These payments will be made through
2012. The severance for SPA executives of $697 has been paid in full. In 2003, $9,531 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 $3,213 were made during 2003 and the remaining costs will be paid
in 2004 and 2005. In 2001, we recognized a restructuring and special charge of $18,556 consisting
of a special charge of $9,937 in connection with a transition in executive
management and a restructuring charge of $8,619 in connection with the
expiration of a pre-press publishing contract in December 2002. As a result of
the pending SPA acquisition during late 2002, management determined that
certain costs originally anticipated in the restructuring charge would not be
incurred. Specifically, the idle leased space in the Morrisville publishing
facility would be utilized, planned severance and other related costs would be
significantly less and we believed at that time, the corporate headquarters
would not be relocated. Accordingly, $6,694 of the original charge was
reversed during 2002. During 2003, these restructuring actions were completed,
resulting in payments of $1,162 and the remaining balance of $513 was reversed
and included in income. The table below shows the activity in our restructuring reserves during 2001,
2002 and 2003. 2001
    
    2003Restructuring
    
    RestructuringActions
    
    Actions
    
    TotalRestructuring and special charge
    
    $
    18,556
    
    
    
    
    
    
    $
    18,556Reclass of related liabilities
    
    
    2,735
    
    
    
    
    
    
    
    2,735Balance at December 31, 2001
    
    
    21,291
    
    
    
    
    
    
    
    21,291Payments applied against reserve
    
    
    (13,211
    )
    
    
    
    
    
    
    (13,211
    )Payments charged to expense
    
    
    289
    
    
    
    
    
    
    
    289Reserve reversal
    
    
    (6,694
    )
    
    
    
    
    
    
    (6,694
    )Balance at December 31, 2002
    
    
    1,675
    
    
    
    
    
    
    
    1,675Additions to reserve charged to goodwill
    
    
    
    
    
    $
    2,878
    
    
    
    2,878Additions to reserve charged to earnings
    
    
    
    
    
    
    9,531
    
    
    
    9,531Payments
    
    
    (1,162
    )
    
    
    (3,910
    )
    
    
    (5,072
    )Reserve reversal
    
    
    (513
    )
    
    
    
    
    
    
    (513
    )Balance at December 31, 2003
    
    $
    
    
    
    $
    8,499
    
    
    $
    8,499
 5.       Investment Impairment Charges We have a 9% interest in ChinaBig.com Limited (ChinaBig), which publishes
yellow pages directories and offers Internet directory services in the Peoples
Republic of China. In 2001, an independent third party valuation of ChinaBigs
current business plan, capital needs and outlook for profitability and cash
flow, prepared in connection with a proposed equity financing by ChinaBig,
indicated that the carrying value of our investment was permanently impaired.
As a result of this valuation, we recorded an impairment charge of $11,432 in
2001. Further, in 2002, 71




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##### 



ChinaBig did not achieve its sales objective or generate sufficient operating
cash flows to fund operations and meet its obligations and needed to obtain
shareholder loans to make up the cash shortfall. As a result, management
believed that sufficient doubt existed as to ChinaBigs ability to raise
sufficient cash either through operations or additional investments and that
this investment would not provide any value in the foreseeable future.
Accordingly, during 2002 an additional impairment charge of $2,000 was
recognized to write-off the remaining book value of this investment. These
investment impairment charges have been included in general and administrative
expenses on the Consolidated Statements of Operations. 6.       Long-Term Debt, Credit Facilities and Notes Long-term debt at December 31, 2003 and 2002, consisted of the following: 2003
    
    2002Credit Facility
    
    $
    1,145,888
    
    
    $
    900,0008 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 due 2008
    
    
    21,245
    
    
    
    150,000Former Term Facilities
    
    
    
    
    
    
    114,250Total
    
    
    2,092,133
    
    
    
    2,089,250Less current portion
    
    
    49,586
    
    
    
    13,780Long-term debt
    
    $
    2,042,547
    
    
    $
    2,075,470
 In connection with the SPA
acquisition, in
late 2002 we entered into a $1,525,000 Credit Facility (Credit Facility),
consisting of a $500,000 Term Loan A, a $900,000 Term Loan B and a $125,000
Revolving Credit Facility (the Revolver), and issued $325,000 8 7/8% Senior
Notes (Senior Notes) and $600,000 10 7/8% Subordinated Notes (Subordinated
Notes, and collectively with the Senior Notes, the Notes). At December 31,
2003, the fair values of Senior Notes and the Subordinated Notes were $365,625
and $711,750, respectively. We also issued $200,000 of 8% redeemable
convertible cumulative preferred stock (Preferred Stock) and warrants to
purchase 1,650,000 shares of our Common Stock to partnerships affiliated with
the Goldman Sachs Group, Inc. (collectively, the GS Funds). These funds were
used to acquire SPA, pay transaction costs, repurchase a portion of the
existing 9 1/8% Senior Subordinated Notes due 2008 (Pre-acquisition Notes)
pursuant to a tender offer, and repay the former term facilities. On December 8, 2003, we amended our Credit Facility, to accomplish the
following objectives:  
    
    obtain more favorable pricing on our variable rate debt;
    
    adjust non-financial covenants to make them less restrictive for corporate operating flexibility;
    
    obtain the cash resources and the consent for us to redeem the
remaining outstanding Pre-acquisition Notes; and
    
    obtain 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 existing Notes and redemption of equity,
subject to certain limitations. The amendment to our Credit Facility created a new Term Loan A-2, replacing the
initial Term Loan A and created a new Term Loan B-2 replacing the initial Term
Loan B. In connection with the amendment, we borrowed an additional $32,000
under the Term Loan B-2. These proceeds were used to redeem the balance of the
Pre-acquisition Notes and pay transaction costs, including a prepayment premium
of $8,930 representing 1% of the balance of Term Loan B outstanding on the date
of the amendment. The weighted average interest rate of outstanding debt under
the Credit Facility was 3.9% at December 31, 2003 and under the former term
facilities was 6.7% during 2002. The amendment to the Credit Facility was
accounted for as a modification of the underlying debt instruments. As amended, 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 72




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##### 



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 3.50% 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 Credit Facility, as amended, and the indentures governing the Notes contain
usual and customary negative covenants that, among other things, place
limitations on our ability to (i) incur additional indebtedness, including
capital leases and liens; (ii) pay dividends and repurchase our capital stock;
(iii) enter into mergers, consolidations, acquisitions, asset dispositions and
sale-leaseback transactions; (iv) make capital expenditures; and (v) issue
capital stock of our subsidiaries. The Credit Facility also contains financial
covenants relating to maximum consolidated leverage, minimum interest coverage,
minimum fixed charge coverage and maximum senior secured leverage as defined
therein. 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 secure our obligations under
the Credit Facility. On January 3, 2003, we repurchased through a tender offer and exit consent
solicitation $128,800 of the Pre-acquisition Notes. We borrowed an initial
$1,410,000 under the Credit Facility contingent upon our repurchase of the
entire $150,000 aggregate principal amount of the Pre-acquisition Notes. Any
proceeds that were not used to repurchase the Pre-acquisition Notes were
required to be repaid to the lenders under the Credit Facility. Accordingly,
$21,200, representing the amount of Pre-acquisition Notes that remained
outstanding following the tender offer and exit consent solicitation, was
repaid to the lenders under the Credit Facility shortly after the consummation
of the SPA acquisition. On February 6, 2004, utilizing the proceeds from Term
Loan B-2, we redeemed the remaining aggregate principal amount of the
Pre-acquisition Notes. See Note 18, Subsequent Events. Prior to redemption,
interest was paid on the Pre-acquisition Notes on a semi-annual basis. As of December 31, 2003, there were no borrowings under the Revolver. Interest
is paid on the Notes semi-annually on June 15 and December 15, commencing June
15, 2003. The Senior Notes mature in 2010 and are redeemable at our option
beginning in 2006 at the following prices: Redemption Year
    
    Price2006
    
    
    104.438
    %2007
    
    
    102.219
    %2008 and thereafter
    
    
    100
    %
 The Senior Subordinated Notes mature in 2012 and are redeemable at our option
beginning in 2007 at the following prices: Redemption Year
    
    Price2007
    
    
    105.438
    %2008
    
    
    103.625
    %2009
    
    
    101.813
    %2010 and thereafter
    
    
    100
    %
 On January 3, 2003, we repaid the former term facilities consisting of $74,250
outstanding balances under committed bank facilities and $40,000 outstanding
under our then-existing $100,000 revolving credit facility. The former term
facilities bore interest at floating rates based on a spread over LIBOR or the
greater of either the Prime rate or the Fed Funds rate plus 50 basis points, at
our election. Aggregate maturities of long-term debt at December 31, 2003 were: 2004
    
    $
    49,5862005
    
    
    49,5862006
    
    
    49,5862007
    
    
    59,7112008
    
    
    80,956Thereafter.
    
    
    1,802,708Total
    
    $
    2,092,133
 73




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##### 



7.       Partnership Investment DonTech.DonTech acts as the exclusive sales agent for yellow pages
directories published by SBC in Illinois and northwest Indiana. Income from
DonTech consists of 50% of the net profits of DonTech and revenue participation
income received directly from SBC, which is based on the value of advertising
sales. Income from DonTech consisted of the following: Years Ended December 31,2003
    
    2002
    
    200150% share of DonTech net profits
    
    $
    17,347
    
    
    $
    18,480
    
    
    $
    19,313Revenue participation income
    
    
    96,705
    
    
    
    98,666
    
    
    
    103,106Total DonTech income
    
    $
    114,052
    
    
    $
    117,146
    
    
    $
    122,419
 Summarized financial information of DonTech is shown in the table below. These
results are not consolidated in our financial statements. Years Ended December 31,2003
    
    2002
    
    2001Net revenues
    
    $
    99,711
    
    
    $
    101,792
    
    
    $
    106,849Operating income
    
    $
    33,526
    
    
    $
    35,230
    
    
    $
    37,435Net income
    
    $
    34,694
    
    
    $
    36,959
    
    
    $
    38,626
 Total assets of DonTech were $117,506 at December 31, 2003. Our investment in
DonTech, including the revenue participation receivable from SBC, was $175,729
and $185,969 at December 31, 2003 and 2002, respectively. CenDon.Through 2002, we were the exclusive sales agent in certain markets in
Nevada, Florida, Virginia and North Carolina for CenDon, a joint venture with
Centel Directory Company (Centel), a subsidiary of Sprint. Income from
CenDon consisted of a priority distribution based on a percentage of CenDon
advertising sales. Income from CenDon was $19,727 and $17,545 in 2002 and
2001, respectively. In connection with the SPA acquisition, we became the sole
owner of CenDon. The operating results of CenDon subsequent to the SPA
acquisition are included in our consolidated results of operations. 74




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##### 



8.       Redeemable Preferred Stock and Warrants We have 10,000,000 shares of preferred stock authorized for issuance. At
December 31, 2003 and 2002, we had 200,604 and 70,000 shares of Preferred Stock
outstanding, respectively. On January 3, 2003, we issued through a private placement 130,000 shares of
Preferred Stock and warrants to purchase 1,072,500 shares of our common stock
to the GS Funds for gross proceeds of $130,000. In November 2002, we issued
through a private placement 70,000 shares of Series B-1 Preferred Stock and
warrants to purchase 577,500 shares of our common stock to the GS Funds, for
aggregate gross consideration of $70,000. On January 3, 2003, the 70,000
shares of Series B-1 Preferred Stock automatically converted into 70,604 shares
of Preferred Stock. 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 dividend will accrue. After October 1, 2005, we may pay the Preferred
Stock dividend in cash, subject to any limitations under our Credit Facility,
or allow it to 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 GS Funds in the event of a change in
control (as defined). At December 31, 2003, the redemption value of the
Preferred Stock was $216,998 and it was convertible into 9,022,798 shares of
common stock. The net proceeds received from the issuance of Preferred Stock in January 2003
and November 2002 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. The
fair value of the warrants of $12.18 on January 3, 2003 and $10.43 in November
2002 was determined based on the Black-Scholes model, with the following
assumptions: Dividend yield
    
    
    0
    %Expected volatility
    
    
    35
    %Risk-free interest rate
    
    
    3.0
    %Expected holding period
    
    5 years
 In connection with each 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 in 2003 and 2002 of $58,397 and
$24,702, respectively, consisted of the stated 8% dividend of $16,454 and $544,
respectively, and a BCF of $41,943 and $24,158, respectively. 9.       Stock Option Plans We maintain a shareholder approved stock option plan whereby certain employees
and non-employee directors are eligible to receive stock options, stock
appreciation rights, limited stock appreciation rights in tandem with stock
options and deferred stock. Options are typically granted at the fair market
value of our common stock at the date of the grant. We follow APB No. 25, and
related interpretations in accounting for our stock option plan, and,
accordingly, we typically do not recognize compensation expense related to the
issuance of stock options. The options expire not more than ten years from the
grant date and the Board determines termination, vesting and other relevant
provisions at the date of the grant. We have yet to grant any stock
appreciation rights or limited stock appreciation rights. Non-employee directors receive options to purchase 1,500 shares and an award of
1,500 deferred shares upon election to the Board. Non-employee directors also
receive, on an annual basis, options to purchase 1,500 shares and an award of
1,500 deferred shares. Non-employee directors may also elect to receive
additional options in lieu of all or a portion of their annual cash retainer
fee. 75




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##### 



Changes in options outstanding under our stock option plan for the last three
years were as follows: WeightedAverageExercise PriceShares
    
    Per ShareOptions outstanding, December 31, 2000
    
    
    2,898,585
    
    
    $
    14.35Granted
    
    
    539,084
    
    
    
    25.23Exercised
    
    
    (585,913
    )
    
    
    12.82Canceled or expired
    
    
    (222,402
    )
    
    
    17.22Options outstanding, December 31, 2001
    
    
    2,629,354
    
    
    
    16.70Granted
    
    
    1,925,995
    
    
    
    26.01Exercised
    
    
    (255,386
    )
    
    
    14.70Canceled or expired
    
    
    (17,342
    )
    
    
    24.82Options outstanding, December 31, 2002
    
    
    4,282,621
    
    
    
    20.97Granted
    
    
    484,676
    
    
    
    30.54Exercised
    
    
    (1,278,643
    )
    
    
    16.76Canceled or expired
    
    
    (144,242
    )
    
    
    25.28Options outstanding, December 31, 2003
    
    
    3,344,412
    
    
    $
    23.78Available for future grants at December 31, 2003
    
    
    1,609,009
 The following table summarizes information about stock options outstanding and
exercisable at December 31, 2003: Stock Options Outstanding
    
    Stock Options ExercisableWeightedAverage
    
    
    
    
    
    
    
    
    
    WeightedRemaining
    
    
    
    
    
    
    
    
    
    AverageContractual
    
    Weighted
    
    
    
    
    
    ExerciseRange of
    
    
    
    
    
    Life
    
    Average Exercise
    
    
    
    
    
    Price PerExercise Prices
    
    Shares
    
    (in years)
    
    Price Per Share
    
    Shares
    
    Share9.99 - 14.75
    
    
    260,302
    
    
    
    3.3
    
    
    $
    12.98
    
    
    
    260,302
    
    
    $
    12.9815.22 - 19.41
    
    
    560,269
    
    
    
    5.0
    
    
    $
    15.74
    
    
    
    536,786
    
    
    $
    15.7024.75 - 25.54
    
    
    1,676,861
    
    
    
    6.0
    
    
    $
    25.45
    
    
    
    512,126
    
    
    $
    25.3226.45 - 29.59
    
    
    442,555
    
    
    
    5.4
    
    
    $
    27.74
    
    
    
    215,979
    
    
    $
    27.1830.11 - 39.21
    
    
    404,425
    
    
    
    6.1
    
    
    $
    30.62
    
    
    
    1,000
    
    
    $
    30.113,344,412
    
    
    
    5.5
    
    
    $
    23.78
    
    
    
    1,526,193
    
    
    $
    20.10
 At December 31, 2002, there were 4,282,621 options outstanding at a weighted
average exercise price per share of $20.97 and 1,564,657 options exercisable at
a weighted average exercise price per share of $15.18. At December 31, 2001,
there were 2,629,354 options outstanding at a weighted average exercise price
per share of $16.70 and 1,350,153 options exercisable at a weighted average
exercise price per share of $14.02. The options granted in 2002 included a grant of 1,486,000 options (Founders
Grant) to certain employees, including senior management, in connection with
the SPA acquisition. These options were granted in October 2002 with a strike
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 strike price. Accordingly,
these options were accounted for as compensatory options and resulted in a
charge of $1,705 in 2003. The sale of Preferred Stock in connection with the SPA acquisition triggered a
change in control under the terms of the Companys stock option plans.
Accordingly, all options granted through the end of 2002, with the exception of
the Founders Grant options and options held by senior management (who waived
the change in control provisions), became fully vested. 76




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##### 



10.       Income Taxes Provision (benefit) for income taxes consisted of: 2003
    
    2002
    
    2001Current provision (benefit)U.S. Federal
    
    $
    4,768
    
    
    $
    31,545
    
    
    $
    39,977State and local
    
    
    (556
    )
    
    
    5,110
    
    
    
    4,313Total current provision
    
    
    4,212
    
    
    
    36,655
    
    
    
    44,290Deferred (benefit) provisionU.S. Federal
    
    
    (31,722
    )
    
    
    6,915
    
    
    
    (7,233
    )State and local
    
    
    (8,508
    )
    
    
    1,236
    
    
    
    (1,048
    )Total deferred (benefit) provision
    
    
    (40,230
    )
    
    
    8,151
    
    
    
    (8,281
    )(Benefit) provision for income taxes
    
    $
    (36,018
    )
    
    $
    44,806
    
    
    $
    36,009
 The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and our effective tax rate. 2003
    
    2002
    
    2001Statutory U.S. Federal tax rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State and local taxes, net of U.S. Federal tax benefit
    
    
    6.8
    
    
    
    3.6
    
    
    
    2.5Non-deductible expense
    
    
    
    
    
    
    1.4
    
    
    
    4.4Effective tax rate
    
    
    41.8
    %
    
    
    40.0
    %
    
    
    41.9
    %
 Deferred tax assets and liabilities consisted of the following at December 31,
2003 and 2002: 2003
    
    2002Deferred tax assetsReorganization and restructuring costs
    
    $
    3,245
    
    
    $
    774Bad debts
    
    
    3,869
    
    
    
    1,837Postretirement benefits
    
    
    2,267
    
    
    
    2,246Capital loss carryforward
    
    
    5,738
    
    
    
    6,094Net operating loss carryforwards
    
    
    71,101
    
    
    
    Other
    
    
    9,283
    
    
    
    1,450Total deferred taxes
    
    
    95,503
    
    
    
    12,401Valuation allowance
    
    
    (5,738
    )
    
    
    (6,094
    )Net deferred tax assets
    
    
    89,765
    
    
    
    6,307Deferred tax liabilitiesEquity investment
    
    
    52,399
    
    
    
    56,216Pension
    
    
    7,652
    
    
    
    8,556Depreciation and amortization
    
    
    48,712
    
    
    
    2,318Other
    
    
    1,555
    
    
    
    Total deferred tax liabilities
    
    
    110,318
    
    
    
    67,090Net deferred tax liability
    
    $
    20,553
    
    
    $
    60,783
 The 2003 tax benefit is based on an effective tax rate of 41.8% and results
from the tax benefit generated in 2003 attributable to a net operating loss of
approximately $176,000 related to tax deductions in connection with the SPA
acquisition. The federal net operating loss carryforward will begin to expire
in 2023, and the state net operating loss carryforwards will begin to expire in
2008. The 2003 effective tax rate reflects an increase in the state and local tax
rate as a result of the acquisition of SPA, combined with the favorable
settlement in 2003 of certain prior year state and local tax audits. The 2002 and 2001 tax provision is based on an effective tax rate of 40.0% and
41.9%, respectively, and was adversely impacted by the ChinaBig investment
impairment charges of $2,000 and $11,432 in 2002 and 2001, respectively. In
2002 and 2001, a valuation allowance was established for the deferred tax asset
generated by the write-down of the ChinaBig investment. The write-down of this
investment was treated as a capital loss for income 77




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##### 



tax purposes, which can only be offset against capital gains. We do not
believe that future capital gains will be generated to offset against this
capital loss. Accordingly, a valuation allowance was established for the total
amount of the ChinaBig investment. However, with regard to the other deferred
tax assets, we believe that we will obtain the full benefit of such assets
based on an assessment of the Companys anticipated profitability during the
years the deferred tax assets are expected to become tax deductions. 11.       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 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 also had an additional
unfunded non-qualified defined benefit plan, the Supplemental Executive Benefit
Plan (SEBP), which was discontinued at the end of 2001. 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). Contributions under this plan were $1,142, $724 and $776 for the
years ended December 31, 2003, 2002 and 2001, respectively. 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. A summary of the funded status of the benefit plans at December 31, 2003 and
2002 was as follows: Retirement Plans
    
    Postretirement Plan2003
    
    2002
    
    2003
    
    2002Change in benefit obligationBenefit obligation, beginning of period
    
    $
    57,862
    
    
    $
    50,660
    
    
    $
    5,840
    
    
    $
    5,270Service cost
    
    
    3,246
    
    
    
    1,414
    
    
    
    490
    
    
    
    140Interest cost
    
    
    3,671
    
    
    
    3,726
    
    
    
    490
    
    
    
    370Plan participant contributions
    
    
    
    
    
    
    
    
    
    
    120
    
    
    
    70Amendments
    
    
    (14
    )
    
    
    9
    
    
    
    2,830
    
    
    
    Actuarial loss
    
    
    4,161
    
    
    
    4,960
    
    
    
    2,220
    
    
    
    280Benefits paid
    
    
    (3,208
    )
    
    
    (2,907
    )
    
    
    (700
    )
    
    
    (290
    )Benefit obligation, end of period
    
    $
    65,718
    
    
    $
    57,862
    
    
    $
    11,290
    
    
    $
    5,840Change in plan assetsFair value of plan assets, beginning of period
    
    $
    56,108
    
    
    $
    63,762
    
    
    $
    
    
    
    $
    Return on plan assets
    
    
    11,895
    
    
    
    (4,818
    )
    
    
    
    
    
    
    Employer contributions
    
    
    3
    
    
    
    71
    
    
    
    580
    
    
    
    220Plan participant contributions
    
    
    
    
    
    
    
    
    
    
    120
    
    
    
    70Benefits paid
    
    
    (3,208
    )
    
    
    (2,907
    )
    
    
    (700
    )
    
    
    (290
    )Fair value of plan assets, end of period
    
    $
    64,798
    
    
    $
    56,108
    
    
    $
    
    
    
    $
    Funded status of plans
    
    $
    (920
    )
    
    $
    (1,754
    )
    
    $
    (11,290
    )
    
    $
    (5,840
    )Unrecognized net loss
    
    
    20,965
    
    
    
    22,789
    
    
    
    2,440
    
    
    
    320Unrecognized prior service costs
    
    
    1,069
    
    
    
    1,191
    
    
    
    2,600
    
    
    
    (300
    )Net amount recognized
    
    $
    21,114
    
    
    $
    22,226
    
    
    $
    (6,250
    )
    
    $
    (5,820
    )
 78




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##### 



Net amounts recognized in the consolidated balance sheets at December 31, 2003
and 2002 were as follows: Retirement Plans
    
    Postretirement Plan2003
    
    2002
    
    2003
    
    2002Other non-current assets
    
    $
    21,704
    
    
    $
    22,748
    
    
    $
    
    
    
    $
    Other non-current liabilities
    
    
    (590
    )
    
    
    (522
    )
    
    
    (6,250
    )
    
    
    (5,820
    )Net amount recognized
    
    $
    21,114
    
    
    $
    22,226
    
    
    $
    (6,250
    )
    
    $
    (5,820
    )
 The accumulated benefit obligation for all defined benefit pension plans was
$61,143 and $53,299 at December 31, 2003 and 2002, respectively. The projected benefit obligation and accumulated benefit obligation for the
unfunded PBEP at December 31, 2003 and 2002 was as follows: 2003
    
    2002Projected benefit obligation
    
    $
    678
    
    
    $
    800Accumulated benefit obligation
    
    
    529
    
    
    
    247
 The net periodic benefit expense (income) of the retirement plans for the years
ended December 31, 2003, 2002 and 2001 was as follows: 2003
    
    2002
    
    2001Service cost
    
    $
    3,246
    
    
    $
    1,414
    
    
    $
    1,876Interest cost
    
    
    3,671
    
    
    
    3,726
    
    
    
    3,777Expected return on plan assets
    
    
    (5,910
    )
    
    
    (6,952
    )
    
    
    (6,690
    )Unrecognized prior service cost
    
    
    108
    
    
    
    145
    
    
    
    210Net periodic benefit expense (income)
    
    $
    1,115
    
    
    $
    (1,667
    )
    
    $
    (827
    )
 Additionally, a charge of $4,823 was recognized in 2001 for special benefits,
the settlement of a portion of the liability under the PBEP and the curtailment
of the SEBP in connection with the executive management transition
arrangements. These costs were included as part of the restructuring and
special charge. The following assumptions were used in determining the benefit obligations for
the retirement plans and postretirement plan: 2003
    
    2002
    
    2001Weighted average discount rate
    
    
    6.00
    %
    
    
    6.50
    %
    
    
    7.25
    %Rate of increase in future compensation
    
    
    3.66
    %
    
    
    3.66
    %
    
    
    4.41
    %
 The following assumptions were used in determining the net periodic benefit
expense (income) for the retirement plans: 2003
    
    2002
    
    2001Weighted average discount rate
    
    
    6.50
    %
    
    
    7.25
    %
    
    
    7.50
    %Rate of increase in future compensation
    
    
    3.66
    %
    
    
    4.41
    %
    
    
    4.66
    %Expected return on plan assets
    
    
    8.25
    %
    
    
    9.75
    %
    
    
    9.75
    %
 The weighted average discount
rate used to determine the net periodic expense for the
postretirement plan was 6.5%, 7.25% and 7.50% for 2003, 2002 and
2001, respectively. For 2004, we will use a rate of 8.25% as the expected long-term rate of return
assumption on plan assets for the retirement plans. This assumption is based on
the plans present target asset allocation of 65% equity securities and 35%
debt securities. It reflects long-term capital market return forecasts for the
asset classes employed, assumed excess returns from active management within
each asset class, the portion of plan assets that are actively managed, and
periodic rebalancing back to target allocations. Current market factors such
as inflation and interest rates are 79




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##### 



evaluated before the long-term capital market assumptions are determined.
Although we review our expected long-term rate of return assumption annually,
our plan performance in any one particular year does not, by itself,
significantly influence our evaluation. Our assumption is generally not
revised unless there is a fundamental change in one of the factors upon which
it is based, such as the target asset allocation or long-term capital market
return forecasts. The net periodic benefit expense of the postretirement plan for the years ended
December 31, 2003, 2002 and 2001 was as follows: 2003
    
    2002
    
    2001Service cost
    
    $
    490
    
    
    $
    140
    
    
    $
    120Interest cost
    
    
    490
    
    
    
    370
    
    
    
    360Amortization of unrecognized prior service
credit
    
    
    (70
    )
    
    
    (70
    )
    
    
    (70
    )Amortization of unrecognized net loss
    
    
    100
    
    
    
    
    
    
    
    Net periodic benefit expense
    
    $
    1,010
    
    
    $
    440
    
    
    $
    410
 The following table reflects assumed healthcare cost trend rates. 2003
    
    2002Healthcare cost trend rate assumed for next year
    
    
    9.5
    %
    
    
    10.0
    %Rate to which the cost trend rate is assumed to decline
    
    
    5.0
    %
    
    
    5.0
    %Number of years that it takes to reach the ultimate
trend rate
    
    
    10
    
    
    
    9
 Assumed healthcare cost trend rates have a significant effect on the amounts
reported for healthcare plans. A one-percentage-point change in assumed
healthcare cost trend rates would have the following effects: One
    
    OnePercentage-
    
    Percentage-Point Increase
    
    Point DecreaseEffect on total of service and interest costs
    
    $
    30
    
    
    $
    (30
    )Effect on postretirement benefit obligation
    
    
    1,490
    
    
    
    (1,300
    )
 The pension plan weighted-average asset allocation at December 31, 2003 and
2002, by assets category, are as follows: Plan Assets at December 31,2003
    
    2002Equity securities
    
    
    67
    %
    
    
    62
    %Debt securities
    
    
    33
    %
    
    
    38
    %Total
    
    
    100
    %
    
    
    100
    %
 A total return investment approach in which a mix of equity and debt
investments are used to maximize the long-term return on plan assets at a
prudent level of risk. The plans target asset allocation is presently 65%
equity securities and 35% debt securities. The target allocation is controlled
by periodic rebalancing back to target. Plan assets are invested using a
combination of active and passive (indexed) investment strategies. The plans equity securities are diversified across U.S. and non-U.S. stocks.
The plans debt securities are diversified principally among securities issued
or guaranteed by the United States government or its agencies, mortgage-backed
securities, including collateralized mortgage obligations, investment-grade
corporate debt obligations and dollar-denominated obligations issued in the
U.S. and by non-U.S. banks and corporations. Investment risk is controlled through diversification among asset classes,
managers and securities. Risk is further controlled at the investment manager
level by requiring active managers to follow formal written investment
guidelines. Investment results are measured and monitored on an ongoing basis,
and quarterly investment reviews are conducted. The plans active United
States investment manager is prohibited from investing plan assets in 80




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##### 



equity or debt securities issued or guaranteed by RHD. However, the plan may
hold Donnelley stock if it is part of a total United States equity market index
fund in which the plan invests. We do not expect to make significant contributions to the retirement and
postretirement benefit plans in 2004. 12.       Commitments We lease office facilities and equipment under operating leases with
non-cancelable lease terms expiring at various dates through 2015. Rent and
lease expense for 2003, 2002 and 2001 was $10,171, $3,090 and $3,534,
respectively. The future non-cancelable minimum rental payments applicable to
operating leases at December 31, 2003 are: 2004
    
    $
    5,1692005
    
    
    3,8102006
    
    
    3,4452007
    
    
    3,9112008
    
    
    3,973Thereafter
    
    
    15,492Total
    
    $
    35,800
 We have entered into a long-term purchase agreement for paper used in the
publishing of our directories. The purchase commitment for the paper is with
one supplier and is estimated, based on minimum required quantities, to
aggregate approximately $43,260 through 2006. Minimum purchases
required under this agreement are $13,920 in 2004, $14,220 in 2005 and $15,120 in 2006. 13.       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. 81




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##### 



Rockland Yellow Pages In 1999, Sandy Goldberg, Dellwood Publishing, Inc. and Rockland Yellow Pages
initiated a lawsuit against the Company and Bell Atlantic Corporation in the
United States District Court for the Southern District of New York. The
Rockland Yellow Pages is a proprietary directory that competes against a Bell
Atlantic directory in the same region, for which we served as Bell Atlantics
advertising sales agent through June 30, 2000. The complaint alleged that the
defendants disseminated false information concerning the Rockland Yellow Pages,
which resulted in damages to the Rockland Yellow Pages. In May 2001, the
District Court dismissed substantially all of plaintiffs claims, and in August
2001, the remaining claims were either withdrawn by the plaintiffs or dismissed
by the District Court. The plaintiffs then filed a complaint against the same
defendants in New York State Supreme Court, in Rockland County, alleging
virtually the same state law tort claim previously dismissed by the District
Court and seeking unspecified damages. In October 2001, defendants filed a
motion to dismiss this complaint. On May 5, 2002, the Court granted defendants
motion to dismiss the complaint. Plaintiffs filed an appeal of this dismissal.
On April 10, 2003, the Appellate Division heard oral arguments on the appeal,
and on April 28, 2003, the Appellate Division dismissed all but one count of
the complaint, which count alleges immaterial compensatory damages with respect
to only one advertiser. Accordingly, we presently do not believe that the final
outcome of this matter will have a material adverse effect on our results of
operations or financial condition. Information Resources, Inc. In 1996, Information Resources, Inc. (IRI) filed a complaint in the United
States District Court for the Southern District of New York, naming as
defendants the Company, as successor of D&B, ACNielsen and IMS, 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 $350,000, which amount
IRI sought to treble under antitrust laws. IRI has since revised its
allegation of damages to exceed $650,000, which IRI also seeks to treble. 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. In connection with the 1996 Distribution, Cognizant (now NMR), ACNielsen and
D&B 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. 82




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##### 



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 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. In 2001, ACNielsen was acquired by VNU N.V. (VNU). We understand that VNU has
assumed ACNielsens liabilities under the JDA. 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 $125,000. 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 itsef, 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 to share equally (50% each) these 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. Discovery in the lawsuit is ongoing, and although the court originally set a
trial date for September 2004, the court rescinded that date in January 2004,
and there is currently no trial date set. 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 83




---



##### 



(and hence we cannot estimate the ACN Maximum Amount and the portion of any
judgment to be paid by VNU and ACNielsen under the JDA). 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. 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, and D&B and Moodys are jointly and severally liable for, and
must pay the other half, of any payments over $137,000 for taxes, accrued
interest and other amounts resulting from unfavorable IRS rulings on the
matters summarized below (other than the matter summarized below under 
Amortization and Royalty Expense Deductions  1997-2003, for which D&B and
Moodys, jointly and severally, are solely responsible). D&B, on our behalf,
was contractually obligated to pay, and did pay, the first $137,000 of tax
liability in connection with the matter summarized below as  Utilization of
Capital Losses  1989-1990. Under the 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. 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. 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 $561,600 of tax and
interest due. In 2000, D&B paid the IRS $349,300 while IMS (on behalf of itself
and NMR) paid approximately $212,300. We understand that this payment was made
under dispute in order to stop additional interest from accruing, that D&B is
contesting the IRSs formal assessment and would also contest the assessment of
amounts, if any, in excess of the amounts paid, and that D&B has filed a
complaint for a refund in the United States District Court. This case is
expected to go to trial in 2005. 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) an IRS examination
report 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 $5,000 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 $44,100 (tax, interest and penalties,
net of associated tax benefits). 84




---



##### 



In addition, and also in the second quarter of 2003, D&B received on behalf of
the partnership associated with the above transaction an IRS examination report
challenging the tax treatment of certain royalty payments received by the
partnership in which D&B was a partner. In that report, the IRS is seeking to
reallocate certain partnership income to D&B. In January 2004, D&B received
additional IRS Notices (similar to those received in the second quarter of
2003) reflecting an additional tax liability of $1,600 (tax, interest, and
penalties, net of associated tax benefits) 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 2004 could be up to $21,900 (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 $21,900 additional liability would be in addition to the
$44,100 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 and Royalty Expense Deductions  1997-2003 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. 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 $52,000 (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 $2,500 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 $137,000 (tax, interest and penalties, net of
associated tax benefits). This $137,000 would be in addition to the $52,000
noted above related to the amortization expense deduction. 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. 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 85




---



##### 



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. Coastal Termite and Pest Control In 2001, Marnan Group, Inc., doing business as Coastal Termite and Pest Control
(Coastal), filed a complaint in the U.S. District Court for the Middle
District of Florida against SPA. The complaint, as amended, alleged that SPA
breached certain directory advertising contracts between 1996 and 1999,
fraudulently induced Coastal to enter into another directory advertising
contract and tortiously interfered with Coastals business relationships with
its customers. Coastal was seeking damages for lost contract benefits, lost
profits and diminution of business value in an unspecified amount, including
pre-judgment interest. In October 2003, the parties settled this dispute for
an amount less than the $500 reserved in the Companys financial statements in
connection with the SPA acquisition. 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. 14.       Business Segments We revised our historical segment reporting in the first quarter of 2003 to
reflect the change in the business that resulted from the SPA acquisition and
to reflect the way management now reviews and analyzes the business. Our
reportable operating segments are Donnelley and DonTech. Donnelley includes
the revenue from our 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 the ability to satisfy our significant debt service
requirements. Segment information for 2002 and 2001 has been adjusted to be
comparable to the 2003 presentation. We also evaluate the performance of Donnelley and DonTech based on advertising
sales. Advertising sales are a critical measure of performance that we review
and play an important role in our decision to allocate financial resources
between our segments. Segment information for the years ended December 31, 2003, 2002 and 2001 is
presented below: Consolidated2003
    
    Donnelley
    
    DonTech
    
    TotalsNet revenue
    
    $
    256,445
    
    
    $
    
    
    
    $
    256,445Operating (loss) income
    
    
    (21,526
    )
    
    
    114,052
    
    
    
    92,526Depreciation and amortization
    
    
    65,779
    
    
    
    
    
    
    
    65,779EBITDA(1)
    
    
    45,776
    
    
    
    114,052
    
    
    
    159,828Total assets
    
    
    2,363,005
    
    
    
    175,729
    
    
    
    2,538,734
 Consolidated2002
    
    Donnelley
    
    DonTech
    
    TotalsNet revenue
    
    $
    75,406
    
    
    $
    
    
    
    $
    75,406Operating income
    
    
    28,836
    
    
    
    117,146
    
    
    
    145,982Depreciation and amortization
    
    
    6,249
    
    
    
    
    
    
    
    6,249EBITDA(1)
    
    
    34,634
    
    
    
    117,146
    
    
    
    151,780Total assets
    
    
    2,037,406
    
    
    
    185,969
    
    
    
    2,223,375
 86




---



##### 



Consolidated2001
    
    Donnelley
    
    DonTech
    
    TotalsNet revenue
    
    $
    80,253
    
    
    $
    
    
    
    $
    80,253Operating (loss) income
    
    
    (10,947
    )
    
    
    122,419
    
    
    
    111,472Depreciation and amortization
    
    
    10,767
    
    
    
    
    
    
    
    10,767EBITDA(1)
    
    
    (180
    )
    
    
    122,419
    
    
    
    122,239Total assets
    
    
    102,171
    
    
    
    193,810
    
    
    
    295,981
 (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 (loss) income, the most comparable GAAP
measure, below. The most comparable GAAP measure for EBITDA is net income. The reconciliation
of net (loss) income to EBITDA is presented below. 2003
    
    2002
    
    2001Net (loss) income
    
    $
    (49,953
    )
    
    $
    67,177
    
    
    $
    49,815+ tax (benefit) expense
    
    
    (36,018
    )
    
    
    44,806
    
    
    
    36,009+ interest expense, net
    
    
    180,020
    
    
    
    33,548
    
    
    
    25,648+ depreciation and amortization
    
    
    65,779
    
    
    
    6,249
    
    
    
    10,767EBITDA
    
    $
    159,828
    
    
    $
    151,780
    
    
    $
    122,239
 15.       Guarantees R.H. Donnelley Inc. is a direct wholly owned subsidiary of the Company and the
issuer of the Pre-acquisition Notes, which were redeemed in full in February 6,
2004, and 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
December 31, 2003, 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. At December 31, 2002, R.H. Donnelley Inc.s direct wholly owned subsidiaries
were R.H. Donnelley APIL, Inc., R.H. Donnelley CD, Inc., R.H. Donnelley
Acquisitions II, Inc. and Get Digital Smart.com Inc. R.H. Donnelley
Acquisitions II, Inc. is a wholly owned subsidiary of R.H. Donnelley APIL, Inc.
R.H. Donnelley Finance Corporation I and II, subsidiary borrowers established
in connection with the financing for the SPA acquisition, were non-guarantor
subsidiaries at December 31, 2002. Subject to the technical default that was
subsequently cured, there were no non-guarantor subsidiaries for the year ended
December 31, 2001. The following consolidating condensed financial statements
should be read in conjunction with the consolidated financial statements of the
Company. As of December 31, 2003,
R.H. Donnelley Corporation has issued 200,604 shares of its Preferred
Stock. See Note  8. Redeemable Preferred Stock and Warrants for
further description of the terms of the Preferred Stock and the
related dividend requirements. See Note 13. 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. Dividends
received for the payment of income taxes were $0, $38,940 and $39,608
for the years 2003, 2002 and 2001, respectively. Dividends for other
items in any of these years were not significant. 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, Credit Facilities and Notes for a further
description of our debt instruments. 87




---



##### 



R.H. Donnelley Corporation
Consolidated Condensed Balance Sheet
December 31, 2003 R.H.Donnelley
    
    R.H.
    
    R.H. Donnelley
    
    
    
    
    
    
    
    
    
    ConsolidatedCorp.
    
    Donnelley Inc.
    
    Publishing &
    
    Guarantor
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    Advertising
    
    subsidiaries
    
    Eliminations
    
    CorporationAssetsCash and cash equivalents
    
    
    
    
    
    $
    6,900
    
    
    $
    801
    
    
    $
    21
    
    
    
    
    
    
    $
    7,722Accounts receivable, net
    
    
    
    
    
    
    
    
    
    
    210,981
    
    
    
    
    
    
    
    
    
    
    
    210,981Deferred costs
    
    
    
    
    
    
    
    
    
    
    37,907
    
    
    
    
    
    
    
    
    
    
    
    37,907Other current assets
    
    
    
    
    
    
    12,696
    
    
    
    15,285
    
    
    
    
    
    
    
    
    
    
    
    27,981Total current assets
    
    
    
    
    
    
    19,596
    
    
    
    264,974
    
    
    
    21
    
    
    
    
    
    
    
    284,591Investment in subsidiaries
    
    $
    141,978
    
    
    
    2,362,171
    
    
    
    (2,124,955
    )
    
    
    4,250,311
    
    
    $
    (4,453,776
    )
    
    
    175,729Fixed assets, net
    
    
    
    
    
    
    17,201
    
    
    
    3,424
    
    
    
    
    
    
    
    (1
    )
    
    
    20,624Other assets
    
    
    
    
    
    
    95,583
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95,583Intangible assets
    
    
    
    
    
    
    
    
    
    
    1,865,167
    
    
    
    
    
    
    
    
    
    
    
    1,865,167Goodwill
    
    
    
    
    
    
    
    
    
    
    97,040
    
    
    
    
    
    
    
    
    
    
    
    97,040Total assets
    
    $
    141,978
    
    
    $
    2,494,551
    
    
    $
    105,650
    
    
    $
    4,250,332
    
    
    $
    (4,453,777
    )
    
    $
    2,538,734Liabilities, Preferred Stock
and Shareholders DeficitAccrued liabilities
    
    
    
    
    
    $
    119,155
    
    
    $
    19,292
    
    
    
    
    
    
    $
    (104,945
    )
    
    $
    33,502Deferred revenue
    
    
    
    
    
    
    
    
    
    
    216,525
    
    
    
    
    
    
    
    
    
    
    
    216,525Current portion LTD
    
    
    
    
    
    
    49,586
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,586Total current liabilities
    
    
    
    
    
    
    168,741
    
    
    
    235,817
    
    
    
    
    
    
    
    (104,945
    )
    
    
    299,613Long-term debt
    
    
    
    
    
    
    2,042,547
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,042,547Deferred tax
    
    
    
    
    
    
    (22,739
    )
    
    
    (50,480
    )
    
    $
    106,848
    
    
    
    
    
    
    
    33,629Other long-term liabilities
    
    
    
    
    
    
    20,940
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    20,967Redeemable convertible
preferred stock
    
    $
    198,223
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198,223Shareholders (deficit) equity
    
    
    (56,245
    )
    
    
    285,062
    
    
    
    (79,714
    )
    
    
    4,143,484
    
    
    
    (4,348,832
    )
    
    
    (56,245
    )Total liabilities, preferred
stock and shareholders
(deficit) equity
    
    $
    141,978
    
    
    $
    2,494,551
    
    
    $
    105,650
    
    
    $
    4,250,332
    
    
    $
    (4,453,777
    )
    
    $
    2,538,734
 88




---



##### 



R.H. Donnelley Corporation
Consolidated Condensed Balance Sheet
December 31, 2002 R.H.Donnelley
    
    R.H.
    
    
    
    
    
    
    
    
    
    
    
    
    
    ConsolidatedCorp.
    
    Donnelley Inc.
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    subsidiaries
    
    subsidiaries
    
    Eliminations
    
    CorporationAssetsCash and cash equivalents
    
    
    
    
    
    $
    7,745
    
    
    $
    42
    
    
    
    
    
    
    
    
    
    
    $
    7,787Restricted cash
    
    
    
    
    
    
    103,700
    
    
    
    
    
    
    $
    1,825,000
    
    
    
    
    
    
    
    1,928,700Other current assets
    
    
    
    
    
    
    29,563
    
    
    
    1,038
    
    
    
    1,586
    
    
    
    
    
    
    
    32,187Investment in subsidiaries
    
    $
    32,859
    
    
    
    305,509
    
    
    
    124,047
    
    
    
    
    
    
    $
    (260,179
    )
    
    
    202,236Fixed assets, net
    
    
    
    
    
    
    12,008
    
    
    
    3
    
    
    
    
    
    
    
    (3
    )
    
    
    12,008Other assets
    
    
    
    
    
    
    40,457
    
    
    
    99,990
    
    
    
    
    
    
    
    (99,990
    )
    
    
    40,457Total assets
    
    $
    32,859
    
    
    $
    498,982
    
    
    $
    225,120
    
    
    $
    1,826,586
    
    
    $
    (360,172
    )
    
    $
    2,223,375Liabilities, Preferred Stock
and Shareholders DeficitCurrent liabilities
    
    
    
    
    
    $
    124,874
    
    
    $
    2,943
    
    
    $
    6,214
    
    
    $
    (99,990
    )
    
    $
    34,041Long-term debt
    
    
    
    
    
    
    250,470
    
    
    
    
    
    
    
    1,825,000
    
    
    
    
    
    
    
    2,075,470Other long-term liabilities
    
    
    
    
    
    
    81,005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,005Redeemable convertible
preferred stock
    
    $
    63,459
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,459Shareholders (deficit) equity
    
    
    (30,600
    )
    
    
    42,633
    
    
    
    222,177
    
    
    
    (4,628
    )
    
    
    (260,182
    )
    
    
    (30,600
    )Total liabilities, preferred
stock and shareholders
(deficit) equity
    
    $
    32,859
    
    
    $
    498,982
    
    
    $
    225,120
    
    
    $
    1,826,586
    
    
    $
    (360,172
    )
    
    $
    2,223,375
 89




---



##### 



R.H. Donnelley Corporation
Consolidated Condensed Statement of Operations
For the Year Ended December 31, 2003 R.H.Donnelley
    
    R.H.
    
    R.H. Donnelley
    
    
    
    
    
    
    
    
    
    ConsolidatedCorp.
    
    Donnelley Inc.
    
    Publishing &
    
    Guarantor
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    Advertising
    
    subsidiaries
    
    Eliminations
    
    CorporationNet revenue
    
    
    
    
    
    $
    22,198
    
    
    $
    234,247
    
    
    
    
    
    
    
    
    
    
    $
    256,445Expenses
    
    
    
    
    
    
    72,294
    
    
    
    205,056
    
    
    $
    621
    
    
    
    
    
    
    
    277,971Partnership and equity income
    
    $
    (49,953
    )
    
    
    106,606
    
    
    
    
    
    
    
    222,992
    
    
    $
    (165,593
    )
    
    
    114,052Operating (loss) income
    
    
    (49,953
    )
    
    
    56,510
    
    
    
    29,191
    
    
    
    222,371
    
    
    
    (165,593
    )
    
    
    92,526Interest (expense) income
    
    
    
    
    
    
    (187,149
    )
    
    
    (191,531
    )
    
    
    198,660
    
    
    
    
    
    
    
    (180,020
    )Other income
    
    
    
    
    
    
    1,523
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,523Pre-tax (loss) income
    
    
    (49,953
    )
    
    
    (129,116
    )
    
    
    (162,340
    )
    
    
    421,031
    
    
    
    (165,593
    )
    
    
    (85,971
    )Income tax (expense) benefit
    
    
    
    
    
    
    (79,163
    )
    
    
    (63,699
    )
    
    
    106,844
    
    
    
    
    
    
    
    (36,018
    )Net (loss) income
    
    
    (49,953
    )
    
    
    (49,953
    )
    
    
    (98,641
    )
    
    
    314,187
    
    
    
    (165,593
    )
    
    
    (49,953
    )Dividend on Preferred Stock
    
    
    58,397
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,397(Loss) income available to
common shareholders
    
    $
    (108,350
    )
    
    $
    (49,953
    )
    
    $
    (98,641
    )
    
    $
    314,187
    
    
    $
    (165,593
    )
    
    $
    (108,350
    )
 R.H. Donnelley Corporation
Consolidated Condensed Statement of Operations
For the Year Ended December 31, 2002 R.H.Donnelley
    
    R.H.
    
    
    
    
    
    
    
    
    
    
    
    
    
    ConsolidatedCorp.
    
    Donnelley Inc.
    
    Guarantor
    
    Non-guarantor
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    subsidiaries
    
    subsidiaries
    
    Eliminations
    
    CorporationNet revenue
    
    
    
    
    
    $
    75,406
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    75,406Expenses
    
    
    
    
    
    
    65,990
    
    
    $
    307
    
    
    
    
    
    
    
    
    
    
    
    66,297Partnership and equity income
    
    $
    67,177
    
    
    
    85,378
    
    
    
    121,669
    
    
    
    
    
    
    $
    (137,351
    )
    
    
    136,873Operating income
    
    
    67,177
    
    
    
    94,794
    
    
    
    121,362
    
    
    
    
    
    
    
    (137,351
    )
    
    
    145,982Interest (expense) income
    
    
    
    
    
    
    (29,521
    )
    
    
    7,129
    
    
    $
    (11,156
    )
    
    
    
    
    
    
    (33,548
    )Other expense
    
    
    
    
    
    
    (451
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (451
    )Pre-tax income (loss)
    
    
    67,177
    
    
    
    64,822
    
    
    
    128,491
    
    
    
    (11,156
    )
    
    
    (137,351
    )
    
    
    111,983Income tax benefit (expense)
    
    
    
    
    
    
    2,355
    
    
    
    (47,161
    )
    
    
    
    
    
    
    
    
    
    
    (44,806
    )Net income (loss)
    
    
    67,177
    
    
    
    67,177
    
    
    
    81,330
    
    
    
    (11,156
    )
    
    
    (137,351
    )
    
    
    67,177Dividend on Preferred Stock
    
    
    24,702
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,702Income (loss) available to
common shareholders
    
    $
    42,475
    
    
    $
    67,177
    
    
    $
    81,330
    
    
    $
    (11,156
    )
    
    $
    (137,351
    )
    
    $
    42,475
 R.H. Donnelley Corporation
Consolidated Condensed Statement of Operations
For the Year Ended December 31, 2001 R.H.Donnelley
    
    R.H.
    
    
    
    
    
    
    
    
    
    ConsolidatedCorp.
    
    Donnelley Inc.
    
    Guarantor
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    subsidiaries
    
    Eliminations
    
    CorporationNet revenue
    
    
    
    
    
    $
    80,253
    
    
    
    
    
    
    
    
    
    
    $
    80,253Expenses
    
    
    
    
    
    
    108,616
    
    
    $
    129
    
    
    
    
    
    
    
    108,745Partnership and equity income
    
    $
    4,579
    
    
    
    99,055
    
    
    
    120,944
    
    
    $
    (84,614
    )
    
    
    139,964Operating income
    
    
    4,579
    
    
    
    70,692
    
    
    
    120,815
    
    
    
    (84,614
    )
    
    
    111,472Interest (expense) income
    
    
    
    
    
    
    (32,777
    )
    
    
    7,129
    
    
    
    
    
    
    
    (25,648
    )Pre-tax income
    
    
    4,579
    
    
    
    37,915
    
    
    
    127,944
    
    
    
    (84,614
    )
    
    
    85,824Income tax (expense) benefit
    
    
    
    
    
    
    (33,336
    )
    
    
    (46,792
    )
    
    
    44,119
    
    
    
    (36,009
    )Net income
    
    $
    4,579
    
    
    $
    4,579
    
    
    $
    81,152
    
    
    $
    (40,495
    )
    
    $
    49,815
 90




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##### 



R.H. Donnelley Corporation
Consolidated Condensed Statement of Cash Flows
For the Year Ended December 31, 2003 R.H.Donnelley
    
    R.H.
    
    R.H. Donnelley
    
    
    
    
    
    ConsolidatedCorp.
    
    Donnelley Inc.
    
    Publishing &
    
    Guarantor
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    Advertising
    
    subsidiaries
    
    CorporationCash flow from operations
    
    
    
    
    
    $
    (136,482
    )
    
    $
    (31,100
    )
    
    $
    416,179
    
    
    $
    248,597Cash flow from investing activities
    
    $
    (125,683
    )
    
    
    (219,175
    )
    
    
    (33,056
    )
    
    
    
    
    
    
    (377,914
    )Cash flow from financing activities
    
    
    125,683
    
    
    
    354,812
    
    
    
    64,957
    
    
    
    (416,200
    )
    
    
    129,252Change in cash
    
    
    
    
    
    
    (845
    )
    
    
    801
    
    
    
    (21
    )
    
    
    (65
    )Cash at beginning of period
    
    
    
    
    
    
    7,745
    
    
    
    
    
    
    
    42
    
    
    
    7,787Cash at end of period
    
    $
    
    
    
    $
    6,900
    
    
    $
    801
    
    
    $
    21
    
    
    $
    7,722
 R.H. Donnelley Corporation
Consolidated Condensed Statement of Cash Flows
For the Year Ended December 31, 2002 R.H.Donnelley
    
    R.H.
    
    R.H. Donnelley
    
    
    
    
    
    
    
    
    
    ConsolidatedCorp.
    
    Donnelley Inc.
    
    Publishing &
    
    Guarantor
    
    
    
    
    
    R.H. Donnelley(Parent)
    
    (Issuer)
    
    Advertising
    
    subsidiaries
    
    Eliminations
    
    CorporationCash flow from operations
    
    
    
    
    
    $
    14,342
    
    
    $
    40,554
    
    
    $
    (4,941
    )
    
    
    
    
    
    $
    49,955Cash flow from investing activities
    
    $
    (69,300
    )
    
    
    (107,443
    )
    
    
    
    
    
    
    (1,825,000
    )
    
    $
    69,300
    
    
    
    (1,932,443
    )Cash flow from financing activities
    
    
    69,300
    
    
    
    86,179
    
    
    
    (40,566
    )
    
    
    1,829,941
    
    
    
    (69,300
    )
    
    
    1,875,554Change in cash
    
    
    
    
    
    
    (6,922
    )
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    (6,934
    )Cash at beginning of period
    
    
    
    
    
    
    14,667
    
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    14,721Cash at end of period
    
    $
    
    
    
    $
    7,745
    
    
    $
    42
    
    
    $
    
    
    
    $
    
    
    
    $
    7,787
 R.H. Donnelley Corporation
Consolidated Condensed Statement of Cash Flows
For the Year Ended December 31, 2001 R.H.Donnelley
    
    
    
    
    
    ConsolidatedCorp.
    
    Guarantor
    
    R.H. Donnelley(Issuer)
    
    subsidiaries
    
    CorporationCash flow from operations
    
    $
    (30,197
    )
    
    $
    117,051
    
    
    $
    86,854Cash flow from investing activities
    
    
    (6,100
    )
    
    
    
    
    
    
    (6,100
    )Cash flow from financing activities
    
    
    (4,467
    )
    
    
    (117,003
    )
    
    
    (121,470
    )Change in cash
    
    
    (40,764
    )
    
    
    48
    
    
    
    (40,716
    )Cash at beginning of period
    
    
    55,431
    
    
    
    6
    
    
    
    55,437Cash at end of period
    
    $
    14,667
    
    
    $
    54
    
    
    $
    14,721
 91




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##### 



16.       Valuation and Qualifying Accounts Netaddition to
    
    Net additions
    
    
    
    
    
    BalanceBalance at
    
    allowances
    
    Charged To
    
    Write-offs
    
    at EndBeginning
    
    from SPA
    
    Revenue and
    
    and Other
    
    ofof Period
    
    Acquisition
    
    Expense
    
    Deductions
    
    PeriodAllowance for Doubtful Accounts and
Sales ClaimsFor the year ended December 31, 2003
    
    $
    4,772
    
    
    
    31,052
    
    
    
    1,611
    
    
    
    (25,479
    )
    
    $
    11,956For the year ended December 31, 2002
    
    $
    6,339
    
    
    
    
    
    
    
    3,300
    
    
    
    (4,867
    )
    
    $
    4,772For the year ended December 31, 2001
    
    $
    7,355
    
    
    
    
    
    
    
    3,372
    
    
    
    (4,388
    )
    
    $
    6,339Deferred Tax Asset Valuation
AllowanceFor the year ended December 31, 2003
    
    $
    6,094
    
    
    
    
    
    
    
    (356
    )
    
    
    
    
    
    $
    5,738For the year ended December 31, 2002
    
    $
    4,287
    
    
    
    
    
    
    
    1,807
    
    
    
    
    
    
    $
    6,094For the year ended December 31, 2001
    
    $
    
    
    
    
    
    
    
    
    4,287
    
    
    
    
    
    
    $
    4,287
 17.       Quarterly Information (unaudited) Three Months EndedMarch 31
    
    June 30
    
    September 30
    
    December 31
    
    Full Year2003Net revenue(1)
    
    $
    12,419
    
    
    $
    38,634
    
    
    $
    89,309
    
    
    $
    116,083
    
    
    $
    256,445Operating (loss) income(2)
    
    
    (21,918
    )
    
    
    10,464
    
    
    
    50,840
    
    
    
    53,140
    
    
    
    92,526Net (loss) income
    
    
    (41,187
    )
    
    
    (18,911
    )
    
    
    3,903
    
    
    
    6,242
    
    
    
    (49,953
    )Preferred dividend
    
    
    42,154
    
    
    
    5,978
    
    
    
    5,082
    
    
    
    5,183
    
    
    
    58,397(Loss) income available to common
shareholders
    
    
    (83,341
    )
    
    
    (24,889
    )
    
    
    (1,179
    )
    
    
    1,059
    
    
    
    (108,350
    )Basic (loss) earnings per share
    
    $
    (2.76
    )
    
    $
    (0.81
    )
    
    $
    (0.04
    )
    
    $
    0.03
    
    
    $
    (3.53
    )Diluted (loss) earnings per share
    
    $
    (2.76
    )
    
    $
    (0.81
    )
    
    $
    (0.04
    )
    
    $
    0.03
    
    
    $
    (3.53
    )
 Three Months EndedMarch 31
    
    June 30
    
    September 30
    
    December 31
    
    Full Year2002Net revenue
    
    $
    18,828
    
    
    $
    19,894
    
    
    $
    21,376
    
    
    $
    15,308
    
    
    $
    75,406Operating income
    
    
    27,657
    
    
    
    40,393
    
    
    
    45,992
    
    
    
    31,940
    
    
    
    145,982Net income
    
    
    13,182
    
    
    
    21,169
    
    
    
    25,059
    
    
    
    7,767
    
    
    
    67,177Preferred dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,702
    
    
    
    24,702Income (loss) available to common
shareholders
    
    
    13,182
    
    
    
    21,169
    
    
    
    25,059
    
    
    
    (19,935
    )
    
    
    42,475Basic earnings (loss) per share
    
    $
    0.45
    
    
    $
    0.71
    
    
    $
    0.84
    
    
    $
    (0.57
    )
    
    $
    1.42Diluted earnings (loss) per share
    
    $
    0.44
    
    
    $
    0.70
    
    
    $
    0.83
    
    
    $
    (0.57
    )
    
    $
    1.40
 The full year (loss) earnings per share amount may not equal the sum of the
quarters due to weighting of shares. (1) Revenue from the sale of advertising is deferred when a directory is
published and recognized ratably over the life of the directory. Due to
purchase accounting rules, we were not able to recognize any revenue from
directories published by SPA prior to the acquisition or for any directories
published in January 2003. 92




---



##### 



(2) The second, third and fourth quarters of 2003 include restructuring
charges of $3,121, $4,340 and $2,071, respectively, for the closing of
redundant facilities and the relocation of the Companys corporate offices to
Cary, North Carolina. (3) The fourth quarter of 2002 includes a benefit of $6,694 from the reversal
of a restructuring reserve, an investment impairment charge of $2,000, a loss
on hedging activities of $1,523 and a benefit of $1,072 from the reversal of
reserves established in connection with the disposition of the former Bell
Atlantic business. 18.       Subsequent Events On February 6, 2004, utilizing the proceeds from Term Loan B-2, we redeemed the
remaining aggregate principal amount of the Pre-acquisition Notes totaling
$21,245 at a redemption price of 104.563% of the principal amount
thereof, plus accrued and unpaid interest. A loss of $1,228 will be
recorded in the first quarter of 2004 consisting of a premium over par value
paid at redemption of $969, plus the write-off of $259 of unamortized deferred
financing costs. 93




---



##### 



REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Partners of DonTech: In our opinion, the accompanying balance sheets and the related statements of
partners capital, operations and cash flows present fairly, in all material
respects, the financial position of the DonTech II Partnership (DonTech), at
December 31, 2003 and 2002, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of DonTechs
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion. /s/ PRICEWATERHOUSECOOPERS LLP Chicago, Illinois
February 12, 2004 94




---



##### 



DONTECH BALANCE SHEETS December 31,(in thousands)
    
    2003
    
    2002AssetsCurrent AssetsCash and cash equivalents
    
    $
    4,775
    
    
    $
    9,016Commission receivable from related party
    
    
    97,730
    
    
    
    102,358Prepaid expenses
    
    
    560
    
    
    
    843Total current assets
    
    
    103,065
    
    
    
    112,217Fixed assets, net of accumulated depreciation and amortization
    
    
    5,677
    
    
    
    6,036Pension asset
    
    
    7,199
    
    
    
    8,819Other
    
    
    1,565
    
    
    
    1,842Total Assets
    
    $
    117,506
    
    
    $
    128,914Liabilities and Partners CapitalCurrent LiabilitiesAccounts payable
    
    $
    1,752
    
    
    $
    1,602Accrued liabilities
    
    
    9,904
    
    
    
    9,640Distribution payable to partners
    
    
    
    
    
    
    3,600Total current liabilities
    
    
    11,656
    
    
    
    14,842Deferred rent credits
    
    
    1,435
    
    
    
    1,550Total liabilities
    
    
    13,091
    
    
    
    16,392Commitments
and contingencies (Note 6)
Accumulated other comprehensive loss
    
    
    (349
    )
    
    
    Partners capital
    
    
    104,764
    
    
    
    112,522Total liabilities and partners capital
    
    $
    117,506
    
    
    $
    128,914
 The accompanying notes are an integral part of the financial statements. 95




---



##### 



DONTECH STATEMENTS OF PARTNERS CAPITAL The R.H. Donnelley
    
    Ameritech Publishing(in thousands)
    
    Corporation
    
    of Illinois, Inc.
    
    TotalBalance, January 1, 2001
    
    $
    92,492
    
    
    $
    32,695
    
    
    $
    125,187Net income
    
    
    19,313
    
    
    
    19,313
    
    
    
    38,626Distributions to partners
    
    
    (21,700
    )
    
    
    (21,700
    )
    
    
    (43,400
    )Balance, December 31, 2001
    
    
    90,105
    
    
    
    30,308
    
    
    
    120,413Net income
    
    
    18,479
    
    
    
    18,480
    
    
    
    36,959Distributions to partners
    
    
    (22,425
    )
    
    
    (22,425
    )
    
    
    (44,850
    )Balance, December 31, 2002
    
    
    86,159
    
    
    
    26,363
    
    
    
    112,522Net income
    
    
    17,347
    
    
    
    17,347
    
    
    
    34,694Distributions to partners
    
    
    (21,226
    )
    
    
    (21,226
    )
    
    
    (42,452
    )Balance, December 31, 2003
    
    $
    82,280
    
    
    $
    22,484
    
    
    $
    104,764
 The accompanying notes are an integral part of the financial statements. 96




---



##### 



DONTECH STATEMENT OF OPERATIONS Years Ended December 31,(in thousands)
    
    2003
    
    2002
    
    2001Sales commissions, net  related party
    
    $
    99,711
    
    
    $
    101,792
    
    
    $
    106,849ExpensesSelling
    
    
    46,773
    
    
    
    48,016
    
    
    
    48,810Administrative
    
    
    11,832
    
    
    
    10,273
    
    
    
    10,356Occupancy and depreciation
    
    
    6,720
    
    
    
    7,388
    
    
    
    9,058Other
    
    
    860
    
    
    
    885
    
    
    
    1,190Total operating expenses
    
    
    66,185
    
    
    
    66,562
    
    
    
    69,414Operating income
    
    
    33,526
    
    
    
    35,230
    
    
    
    37,435Other income
    
    
    1,168
    
    
    
    1,729
    
    
    
    1,191Net income
    
    
    34,694
    
    
    
    36,959
    
    
    
    38,626Comprehensive (Loss) IncomeMinimum pension liability adjustment
    
    
    (349
    )
    
    
    
    
    
    
    Comprehensive income
    
    $
    34,345
    
    
    $
    36,959
    
    
    $
    38,626
 The accompanying notes are an integral part of the financial statements. 97




---



##### 



DONTECH STATEMENT OF CASH FLOWS Years Ended December 31,(in thousands)
    
    2003
    
    2002
    
    2001Cash Flows from Operating ActivitiesNet income
    
    $
    34,694
    
    
    $
    36,959
    
    
    $
    38,626Adjustments to reconcile net income to net cash
provided by operating activitiesDepreciation and amortization
    
    
    1,603
    
    
    
    1,702
    
    
    
    2,360Loss on disposal of fixed assets
    
    
    205
    
    
    
    26
    
    
    
    Changes in assets and liabilitiesDecrease in commission receivable
    
    
    4,628
    
    
    
    6,117
    
    
    
    2,450Increase (decrease) in prepaid rent expense
    
    
    94
    
    
    
    (743
    )
    
    
    Increase in receivable from landlord
    
    
    
    
    
    
    (450
    )
    
    
    Decrease (increase) in other assets
    
    
    2,086
    
    
    
    1,322
    
    
    
    (115
    )Increase (decrease)in accounts payable
    
    
    150
    
    
    
    29
    
    
    
    (548
    )(Decrease) increase in accrued liabilities
    
    
    (84
    )
    
    
    457
    
    
    
    533(Decrease) increase in deferred rent credits
    
    
    (115
    )
    
    
    1,579
    
    
    
    Net cash provided by operating activities
    
    
    43,261
    
    
    
    46,998
    
    
    
    43,306Cash Flows from Investing ActivitiesPurchases of equipment
    
    
    (1,450
    )
    
    
    (678
    )
    
    
    (1,331
    )Cash Flows from Financing ActivitiesDistributions to partners
    
    
    (42,452
    )
    
    
    (44,850
    )
    
    
    (43,400
    )(Decrease) increase in distribution payable
    
    
    (3,600
    )
    
    
    3,600
    
    
    
    Net cash used in financing activities
    
    
    (46,052
    )
    
    
    (41,250
    )
    
    
    (43,400
    )Net (decrease) increase in cash and cash equivalents
    
    
    (4,241
    )
    
    
    5,070
    
    
    
    (1,425
    )Cash and cash equivalents, beginning of year
    
    
    9,016
    
    
    
    3,946
    
    
    
    5,371Cash and cash equivalents, end of year
    
    $
    4,775
    
    
    $
    9,016
    
    
    $
    3,946
 The accompanying notes are an integral part of the financial statements. 98




---



##### 



DonTech
NOTES TO FINANCIAL STATEMENTS(in thousands)  1.
    Form of Organization and Nature of Business The DonTech II Partnership (DonTech) is a general partnership between Reuben
H. Donnelley, Inc. (formerly known as The Reuben H. Donnelley Corporation)
(R.H. Donnelley), a Delaware corporation, and Ameritech Publishing of
Illinois, Inc. (API/IL), a unit of SBC Communications (SBC). The
partnership was established in August 1997 and was preceded by AM-DON (DonTech
I), a general partnership between the same parties which, as of December 31,
2000, ceased business operations and distributed its remaining assets to its
partners. DonTech is the exclusive sales agent in perpetuity for yellow pages, white
pages and street address directories published by SBC in Illinois and northwest
Indiana. The partnership receives a 27% commission on sales net of provisions
(capped at 6.1% subject to certain exclusions). DonTechs cost structure
includes principally sales, sales operations, office services, finance,
facilities and related overhead. DonTech profits are shared equally between
the partners. During the term of the partnership agreement, neither partner
may compete directly against the business of DonTech without the consent of the
Board of Directors. A Board of Directors (the Board) was appointed to administer the activities
of the partnership. From time to time during the term of the partnership, the
Board may call for additional capital contributions in equal amounts from each
of the partners if, in the opinion of the Board, additional capital is required
for the operation of the partnership.  2.
    Summary of Significant Accounting Policies Cash and Cash Equivalents.Cash and cash equivalents include all highly
liquid investments with an initial maturity date of three months or less. The
carrying value of cash equivalents approximates fair value due to their
short-term nature. Revenue Recognition.Revenue is comprised of sales commissions reflected net
of provisions (capped at 6.1% per annum subject to certain exclusions) and is
recognized upon execution of contracts for the sale of advertising. Greater
than 99% of DonTechs revenue is generated from DonTechs sales agency
agreement with API/IL. Fixed Assets. Fixed assets are recorded at cost and are depreciated on a
straight-line basis over the estimated useful lives of the assets. Upon asset
retirement or other disposition, the cost and the related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
included in the statement of operations. Amounts incurred for repairs and
maintenance are charged to operations. Postretirement Benefits Other than Pensions.DonTech provides postretirement
benefits consisting mainly of life and health insurance to substantially all
employees and their dependents. The accrual method of accounting is utilized
for postretirement healthcare and life insurance benefits. Income Taxes.No provision for income taxes is made as the proportional share
of partnership income is the responsibility of the individual partners. Concentration of Credit Risk.Financial instruments which potentially subject
DonTech to a concentration of credit risk consist principally of commission
receivable. DonTechs commission receivable is due from one of its partners
(SBC). Collateral is not required. Use of 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 and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expense during the
reporting period. Actual results could differ from those estimates. Effects of Recent Accounting Pronouncements.In December 2003, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 132 (revised 2003) Employers Disclosures about Pensions
and Other Postretirement Benefits.SFAS No. 132 (revised 2003) amends the
disclosure requirements of SFAS 132 to require more complete information about
pension and postretirement benefits. It does 99




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##### 



not change the measurement or recognition of those plans required by SFAS No.
87, Employers Accounting for Pensions, SFAS No. 88, Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, and SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions. DonTech has adopted the
disclosure provisions of SFAS No. 132 (revised 2003) as of December 31, 2003. On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act introduces
prescription drug care benefits under Medicare and also allows for certain
sponsors of postretirement benefit plans with a drug benefit to receive a
non-taxable federal subsidy if certain criteria are met. In response to the
passage of this legislation, on January 12, 2004, the FASB issued FASB Staff
Position (FSP) No. FAS 106-1, Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.
The FSP permits employers that sponsor postretirement benefit plans that
provide prescription drug benefits to retirees to make a one-time election to
defer accounting for any effects of the Act. In accordance with the FSP,
DonTech has elected to defer accounting for any effects of the Act and
accordingly, any measures of the accumulated postretirement benefit obligation
or net periodic postretirement benefit cost in the financial statements and as
disclosed in Note 8  Postretirement Benefits Other than Pensions do not
reflect the effects of the Act on DonTechs plan. Authoritative guidance on
the accounting for the federal subsidy is currently being considered by the
FASB that, when issued, could require DonTech to change previously reported
information. In November 2002, the Emerging Issues Task Force (EITF) reached a consensus
on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue
No. 00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 are effective for
fiscal periods beginning after
June 15, 2003. Adoption of EITF Issue No. 00-21 on January 1, 2004 is not
expected to have a material impact on DonTechs results of operations or
financial position. In December 2003, the FASB issued FASB Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin (ARB) 51 (revised December 2003). The primary objectives
of FIN 46 are to provide guidance on the identification of entities for which
control is achieved through means other than through voting rights (variable
interest entities or VIEs) and how to determine when and which business
enterprise should consolidate the VIE. FIN 46 is effective for VIEs created
after December 31, 2003 and is effective for all other VIEs in the first
reporting period beginning after December 15, 2004. The adoption of FIN 46 is
not expected to have a significant effect on DonTechs financial position or
results of operations.  3.
    Fixed Assets Fixed assets consist of the following at December 31: 2003
    
    2002Furniture and fixtures
    
    $
    7,109
    
    
    $
    7,178Computers and software
    
    
    5,913
    
    
    
    16,508Leasehold improvements
    
    
    1,969
    
    
    
    1,96914,991
    
    
    
    25,655Less accumulated depreciation and amortization
    
    
    (9,314
    )
    
    
    (19,619
    )Net fixed assets and computer software
    
    $
    5,677
    
    
    $
    6,036
 Depreciation and amortization expense for the three years ended December 31,
2003, 2002 and 2001 was $1,603, $1,702 and $2,360, respectively. During the
year ended December 31, 2003, DonTech disposed of fixed assets with a cost of
$12,118. The assets disposed had a net book value of $205 resulting in a loss
on disposal which is reflected in the statement of operations. 100




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##### 



4.
    Accrued Liabilities Accrued liabilities consist of the following at December 31: 2003
    
    2002Accrued bonuses, commissions and other employee expenses
    
    $
    5,521
    
    
    $
    4,657Accrued postretirement benefits other than pensions
    
    
    3,718
    
    
    
    3,599Deferred compensation
    
    
    466
    
    
    
    1,350Other accrued liabilities
    
    
    199
    
    
    
    34Total
    
    $
    9,904
    
    
    $
    9,640
  5.
    Related Party Transactions DonTech purchases insurance services from R.H. Donnelley and general ledger and
purchasing services from SBC. Payments made to R.H. Donnelley for insurance
services totaled $837, $510 and $442 in 2003, 2002 and 2001, respectively.
Payment made to SBC for general ledger and purchasing services were
insignificant in each of the three years in the period ended December 31, 2003. DonTech also provides facility space for certain employees of SBC under an
agreement entered into in 1998 (see Note 6).  6.
    Contingencies and Commitments DonTech leases certain office facilities under noncancelable lease
arrangements. Rent expense under these operating leases was approximately
$2,232, $2,254 and $2,223 for 2003, 2002 and 2001, respectively. During 2000, DonTech entered into a sublease agreement with SBC whereby DonTech
received $58, $56 and $54 of sublease rental income from SBC during 2003, 2002
and 2001, respectively. The future minimum lease payments required under noncancelable operating leases
that have initial or remaining lease terms in excess of one year as of December
31, 2003 are as follows: December 31,
2004
    
    $
    4,1682005
    
    
    4,2362006
    
    
    4,2202007
    
    
    3,9302008 and thereafter
    
    
    9,532Total
    
    $
    26,086
 During 2002, DonTech renegotiated the lease for its headquarters facility,
which was originally scheduled to terminate on January 31, 2010. The
renegotiated lease extends the terms of the agreement two additional years
(through January 31, 2012) in exchange for certain cash concessions totaling
$1,579. Cash concessions received in connection with the amended lease have
been recorded as deferred rent credits in the balance sheet and are being
recognized on a straight-line basis as a reduction to rent expense over the
lease term. At December 31, 2003, the long-term deferred credit related to
these concessions was $1,435. In connection with the renegotiation of the
lease, DonTech incurred brokers fees of $669 which have been reflected in the
balance sheet as a non-current other asset as of December 31, 2003. These fees
are being amortized to rent expense over the lease term. In September 1998, DonTech entered into a maintenance service agreement with
Ameritech Advertising Services to provide certain maintenance services
pertaining to telecommunications support, including parts, to DonTech. This
agreement was set to expire in September 2003. In September 2003, DonTech
entered into a new agreement with SBC Global Services for the provision of
these maintenance services. The new agreement has a five-year term expiring in
August 2008. According to the terms of the agreement, DonTechs remaining
obligation as of December 31, 2003 is $617. 101




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##### 



7.
    Employee Retirement and Profit Participation Plans DonTech sponsors a defined benefit pension plan covering substantially all of
its employees (the Principal Plan). 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. Pension costs are determined
using the projected unit credit actuarial cost method. DonTechs funding
policy is to contribute an amount at least equal to the minimum legal funding
requirement. No contributions were required to be made in 2003, 2002 or 2001.
The Principal Plans assets are invested in equity funds and, debt securities
fixed income funds and real estate. DonTech uses a measurement date of
December 31 for the majority of its plan assets. DonTech also has an unfunded non-qualified defined benefit pension plan, the
Pension Benefit Equalization Plan (PBEP), which covers senior executives and
certain key employees. Benefits are based on years of service and compensation
(including compensation not permitted to be taken into account under the
previously mentioned defined benefit pension plan). The following provides a reconciliation of benefit obligations, plan assets,
and the funded status of the Principal Plan and PBEP (the Plans) Retirement Plans2003
    
    2002Change in benefit obligationProjected benefit obligation, beginning of year
    
    $
    29,230
    
    
    $
    26,280Service cost
    
    
    1,208
    
    
    
    1,262Interest cost
    
    
    1,947
    
    
    
    1,903Benefits paid
    
    
    (1,269
    )
    
    
    (975
    )Actuarial loss
    
    
    3,929
    
    
    
    278Effect of plan amendments, assumption changes and
other charges
    
    
    37
    
    
    
    638Plan curtailment
    
    
    
    
    
    
    (156
    )Projected benefit obligation, end of year
    
    $
    35,082
    
    
    $
    29,230Change in plan assetsMarket value of assets, beginning of year
    
    $
    26,899
    
    
    $
    30,026Benefit payments
    
    
    (1,269
    )
    
    
    (975
    )Contributions
    
    
    190
    
    
    
    64Actual return on assets
    
    
    5,965
    
    
    
    (2,216
    )Market value of assets, end of year
    
    $
    31,785
    
    
    $
    26,899Funded status of plans
    
    $
    (3,297
    )
    
    $
    (2,330
    )Unrecognized net loss
    
    
    9,239
    
    
    
    9,750Unrecognized prior service costs
    
    
    619
    
    
    
    781Additional minimum pension liability
    
    
    (441
    )
    
    
    Prepaid pension cost
    
    $
    6,120
    
    
    $
    8,201Prepaid benefit cost
    
    $
    7,199
    
    
    $
    8,819Accrued liability
    
    
    (987
    )
    
    
    (618
    )Accumulated other comprehensive income
    
    
    349
    
    
    
    Net amount recognized
    
    $
    6,120
    
    
    $
    8,201
 The accumulated benefit obligation for the Principal Plan and PBEP was $30,572
and $24,472 at December 31, 2003 and 2002, respectively. Net periodic pension cost for the Plan in 2003, 2002 and 2001 includes the
following components: 102




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##### 



2003
    
    2002
    
    2001Service cost
    
    $
    1,208
    
    
    $
    1,262
    
    
    $
    1,116Interest cost
    
    
    1,947
    
    
    
    1,903
    
    
    
    1,765Expected return on assets
    
    
    (2,180
    )
    
    
    (2,791
    )
    
    
    (3,282
    )Amortization of net gain
    
    
    655
    
    
    
    263
    
    
    
    4Amortization of unrecognized prior
service cost
    
    
    107
    
    
    
    291
    
    
    
    426Adjustment
    
    
    92
    
    
    
    
    
    
    
    Curtailment loss
    
    
    
    
    
    
    58
    
    
    
    Total pension cost
    
    $
    1,829
    
    
    $
    986
    
    
    $
    29
 Assumptions used to determine the benefit obligation are as follows: 2003
    
    2002
    
    2001Discount rate
    
    
    6.00
    %
    
    
    6.50
    %
    
    
    7.25
    %Weighted average compensation increases
    
    
    3.66
    %
    
    
    3.91
    %
    
    
    3.91
    %Expected long-term rate of return
    
    
    8.25
    %
    
    
    9.75
    %
    
    
    10.50
    %
 Assumptions used to determine the net periodic benefit cost are as follows: 2003
    
    2002
    
    2001Discount rate
    
    
    6.50
    %
    
    
    7.25
    %
    
    
    7.50
    %Expected long-term rate of return
    
    
    8.25
    %
    
    
    9.75
    %
    
    
    10.50
    %Weighted average compensation increases
    
    
    3.66
    %
    
    
    3.91
    %
    
    
    3.91
    %
 The Principal Plan participates in a Master Trust along with R.H. Donnelley,
the assets of which are administered by The Northern Trust Company. A total
return investment approach is used to maximize the long-term return on plan
assets at a prudent level of risk. The Principal Plans target asset
allocation is 65% equity securities and 35% debt securities. The target
allocation is controlled by periodic rebalancing back to target. Principal
Plan assets are invested using a combination of active and passive (indexed)
investment strategies. The Principal Plans equity securities are diversified across U.S. and non-U.S.
stocks. The Principal Plans debt securities are diversified principally among
securities issued or guaranteed by the United States government or its
agencies, mortgage-backed securities, including collateralized mortgage
obligations, investment-grade corporate debt obligations and dollar-denominated
obligations issued in the U.S. and by non-U.S. banks and corporations. Investment risk is controlled through diversification among asset classes,
managers and securities. Risk is further controlled at the investment manager
level by requiring active managers to follow formal written investment
guidelines. Investment results are measured and monitored on an ongoing basis,
and quarterly investment reviews are conducted. The Principal Plans U.S.
investment manager is prohibited from investing Principal Plan assets in equity
or debt securities issued or guaranteed by R.H. Donnelley. However, the
Principal Plan may hold R.H. Donnelley stock if it is part of a total U.S.
equity market index fund in which the Principal Plan invests. The weighted-average asset allocation of the Principal Plan at December 31,
2003 and 2002, by asset category are as follows: Plan Assets at December 312003
    
    2002Equity securities
    
    
    67
    %
    
    
    62
    %Debt securities
    
    
    33
    %
    
    
    38
    %Total
    
    
    100
    %
    
    
    100
    %
 103




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##### 



DonTech does not expect to make significant contributions to the Principal Plan
or the PBEP in 2004. For 2004, DonTech will use a rate of 8.25% as the expected long-term rate of
return assumption on plan assets for the Plans. This assumption is based on
the plans target asset allocation of 65% equity securities and 35% debt
securities. It reflects long-term capital market return forecasts for the
asset classes employed, assumed excess returns from active management within
each asset class, the portion of plan assets that are actively managed, and
periodic rebalancing back to target allocations. Current market factors such
as inflation and interest rates are evaluated before the long-term capital
market assumptions are determined. Although DonTech reviews its expected
long-term rate of return assumption annually, DonTechs plan performance in any
one particular year does not, by itself, significantly influence its
evaluation. DonTechs assumption is generally not revised unless there is a
fundamental change in one of the factors upon which it is based, such as the
target asset allocation or long-term capital market return forecasts. Additionally, DonTech offers a defined contribution savings plan (the Profit
Plan) to substantially all employees and contributes fifty cents for each
dollar contributed by a participating employee, up to a maximum of 6% of the
participants compensation including salary, commission and short-term bonus.
DonTech also makes contributions to the Profit Plan contingent upon the
attainment of financial goals set in advance as defined in the Profit Plan
agreement. There were no contributions made based upon the attainment of any
financial goals for any of the periods presented. The matching contributions
made to the plan were $861, $876 and $944 in 2003, 2002 and 2001, respectively.  8.
    Postretirement Benefits Other than Pensions DonTech provides postretirement healthcare and life insurance benefits to
certain retired employees and their dependents. The following provides a reconciliation of benefit obligations, plan assets,
and the funded status of the health and life insurance plans. Change in benefit obligation: Retirement Plans2003
    
    2002Change in benefit obligationBenefit obligation, beginning of year
    
    $
    4,690
    
    
    $
    4,052Service cost
    
    
    134
    
    
    
    157Interest cost
    
    
    299
    
    
    
    286Plan participants contributions
    
    
    59
    
    
    
    47Amendments
    
    
    (264
    )
    
    
    Actuarial gain (loss)
    
    
    434
    
    
    
    390Other
    
    
    8
    
    
    
    Benefits paid
    
    
    (472
    )
    
    
    (242
    )Benefit obligation, end of year
    
    $
    4,888
    
    
    $
    4,690Change in plan assetsMarket value of assets, beginning of year
    
    $
    
    
    
    $
    Employer contributions
    
    
    413
    
    
    
    195Plan participants contributions
    
    
    59
    
    
    
    47Benefits paid
    
    
    (472
    )
    
    
    (242
    )Market value of assets, end of year
    
    $
    
    
    
    $
    
 104




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##### 



Funded status of benefit obligations
    
    $
    4,888
    
    
    $
    4,690Unrecognized actuarial loss
    
    
    (1,404
    )
    
    
    (1,022
    )Unrecognized prior service costs
    
    
    264
    
    
    
    (69
    )Accrued cost
    
    $
    3,748
    
    
    $
    3,599
 Net periodic postretirement benefit costs for 2003, 2002 and 2001 included the
following components: 2003
    
    2002
    
    2001Service cost
    
    $
    134
    
    
    $
    157
    
    
    $
    126Interest expense
    
    
    299
    
    
    
    286
    
    
    
    261Amortization of prior service cost
    
    
    69
    
    
    
    97
    
    
    
    97Amortization of unrecognized loss.
    
    
    53
    
    
    
    23
    
    
    
    1Other
    
    
    8
    
    
    
    
    
    
    
    Total pension cost
    
    $
    563
    
    
    $
    563
    
    
    $
    485
 The discount rate used in determining the benefit obligation as of December 31,
2003 and 2002 was 6.0% and 6.5%, respectively. The assumed healthcare cost
trend rate used in measuring the benefit obligation as of December 31, 2003 and
2002 was 9.5% and 10%, respectively. The rates are assumed to decrease
gradually to 5.0% for 2011 and remain at that level thereafter. Increasing or decreasing the healthcare cost trend rates by one percentage
point would not have had a material effect on the net periodic postretirement
expense for the year ended December 31, 2003. A one percentage point increase
would have increased the benefit obligation at December 31, 2003 by $277. A
one percentage point decrease would have decreased the benefit obligation at
December 31, 2003 by $252. 105




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##### 



ITEM 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES There have been no changes
in, or disagreements with, the Companys independent
auditors for the three-year period ended December 31, 2003.  ITEM 9A.
    CONTROLS AND PROCEDURES  (a)
    
    Evaluation of Disclosure Controls and Procedures.Based on their
evaluation, as of December 31, 2003 , 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, as
amended), the principal executive officer and principal financial
officer of the Company have each concluded that such disclosure
controls and procedures are effective and sufficient to ensure that
information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commissions rules and forms.(b)
    
    Changes in Internal Controls.There have not been any changes in the Companys internal control over
financial reporting that occurred during the Companys most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial
reporting. PART III  ITEM 10.
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information in response to this Item is incorporated herein by reference to the
sections entitled Board of Directors and Other Information  Section 16(a)
Beneficial Ownership Reporting Compliance in the Companys Proxy Statement to
be filed with the Securities and Exchange Commission prior to March 31, 2004,
except that Executive Officers of the Registrant on page 10 of this Report
responds to Item 401(b), (d) and (e) of Regulation S-K with respect to
executive officers.  ITEM 11.
    EXECUTIVE COMPENSATION Information in response to this Item is incorporated herein by reference to the
section entitled Director and Executive Compensation in the Companys Proxy
Statement to be filed prior to March 31, 2004 with the Securities and Exchange
Commission.  ITEM 12.
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS Information in response to this Item is incorporated herein by reference to the
section entitled Security Ownership of Certain Beneficial Owners and
Management in the Companys Proxy Statement to be filed prior to March 31,
2004 with the Securities and Exchange Commission, except that Equity
Compensation Plan Information on page 18 of this Report responds to Item
201(d) of Regulation S-K.  ITEM 13.
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information in response to this Item is incorporated herein by reference to the
section entitled Director and Executive Compensation-Compensation Committee
Interlocks and Insider Participation; Certain Relationships and Related Party
Transactions in the Companys Proxy Statement to be filed prior to March 31,
2004 with the Securities and Exchange Commission. 106




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##### 



ITEM 14.
    PRINCIPAL ACCOUNTANT FEES AND SERVICES Information responsive to this Item is incorporated by reference to the
sections entitled Board of Directors-Committees of the Board of Directors -
Audit and Finance Committee and Report of the Audit and Finance Committee on
Financial Reporting - Fees in the Companys Proxy Statement to be filed prior to
March 31, 2004 with the Securities and Exchange Commission.


PART IV



|         |                                                                 
|-------- | ----------------------------------------------------------------
|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A)(1) and (2)  List
of financial statements and financial statement
schedules

The following consolidated financial statements of the Company are included under Item 8:











The following financial statements for DonTech are included under Item 8:











Financial statement schedules
for the Company have not been prepared because the required
information has been included in the Companys consolidated
financial statements, included in
Item 8 of this Annual Report.

(B) Reports onForm 8-K:

On October 29, 2003, the Company furnished a Current Report on Form 8-K
disclosing under Item 12 certain financial results of the Company for the three
and nine months ended September 30, 2003 and attached a copy of its related
press release as Exhibit 99.1.

On November 20, 2003, the Company furnished a Current Report on Form 8-K
disclosing under Item 9 that on November 20, 2003 certain members of senior
management of the Company were scheduled to make a presentation to investors
and securities analysts at the New York Stock Exchange. During its
presentation at that conference, management intended to present a slide
presentation. The Company attached a copy of the slide presentation as Exhibit
99.1.

On November 20, 2003, the Company furnished a Current Report on Form 8-K
disclosing under Item 9 that on November 20, 2003 certain members of senior
management of the Company were scheduled to make a presentation to investors
and securities analysts at the New York Stock Exchange. During its
presentation at that conference, management intended to present a slide
presentation. This slide presentation was in addition to the slide
presentation furnished on a separate Current Report on Form 8-K also furnished
on November 20, 2003. The Company attached a copy of the slide presentation 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.

107



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##### 



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. 108




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##### 



(C) 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)4.1
    
    Indenture, dated as of June 5, 1998, among R.H. Donnelley
Inc., as Issuer, the Company, as Guarantor, and the Bank of
New York, as Trustee, with respect to the 91/8% Senior
Subordinated Notes due 2008 (incorporated by reference to
Exhibit 4.1 to the Registration Statement on Form S-4, filed
with the Securities and Exchange Commission on July 17, 1998,
Registration No. 333-59287)
 109




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##### 



Exhibit No.
    
    Document4.2
    
    Form of the 91/8% Senior Subordinated Notes due 2008 (included in Exhibit 4.1)4.3
    
    Company Guarantee (included in Exhibit 4.1)4.4
    
    First Supplemental Indenture, dated as of November 25, 2002, among R.H.
Donnelley Inc., as Issuer, and the Company, R.H. Donnelley Acquisitions,
Inc., R.H. Donnelley APIL, Inc., R.H. Donnelley CD, Inc. and Get Digital
Smart.com, Inc., as Guarantors, and The Bank of New York, as Trustee, with
respect to the 91/8% Senior Subordinated Notes due 2008 (incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K, filed with the
Securities and Exchange Commission on November 25, 2002, Commission File No.
001-07155)4.5
    
    Second Supplemental Indenture, dated as of December 20, 2002, among R.H.
Donnelley Inc., as Issuer, and the Company, R.H. Donnelley Acquisitions,
Inc., R.H. Donnelley Acquisitions II, Inc., R.H. Donnelley APIL, Inc., R.H.
Donnelley CD, Inc. and Get Digital Smart.com, Inc., as Guarantors, and The
Bank of New York, as Trustee, with respect to the 91/8% Senior Subordinated
Notes due 2008 (incorporated by reference to Exhibit 4.1 to the Current
Report on Form 8-K, filed with the Securities and Exchange Commission on
December 20, 2002, Commission File No. 001-07155)4.6
    
    Third Supplemental Indenture, dated as of December 20, 2002 (operative as of
January 3, 2003), among R.H. Donnelley Inc., as Issuer, and the Company, R.H.
Donnelley Acquisitions, Inc., R.H. Donnelley Acquisitions II, Inc., R.H.
Donnelley APIL, Inc., R.H. Donnelley CD, Inc. and Get Digital Smart.com,
Inc., as Guarantors, and The Bank of New York, as Trustee, with respect to
the 91/8% Senior Subordinated Notes due 2008 (incorporated by reference to
Exhibit 4.1 to the Current Report on Form 8-K, filed with the Securities and
Exchange Commission on January 6, 2003, Commission File No. 001-07155)4.7
    
    Rights Agreement, dated as of October 27, 1998, between R.H. Donnelley
Corporation and First Chicago Trust Company (incorporated by reference to
Exhibit 4 to the Registration Statement on Form 8-A, filed with the
Securities and Exchange Commission on November 5, 1998, Commission File No.
001-07155)4.8
    
    Amendment No. 1 to Rights Agreement, dated as of February 26, 2001, by and
among R.H. Donnelley Corporation, First Chicago Trust Company of New York (as
initial Rights Agent) and The Bank of New York (as successor Rights Agent)
(incorporated by reference to Exhibit 4.5 to the Annual Report on Form 10-K
for the year ended December 31, 2000, filed with the Securities and Exchange
Commission on March 28, 2001, Commission File No. 001-07155)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)4.10
    
    Form of Warrant Agreement, dated as of November 25, 2002, between the Company
and investment partnerships affiliated with The Goldman Sachs Group, Inc.
(incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K,
filed with the Securities and Exchange Commission on January 17, 2003,
Commission File No. 001-07155)4.11
    
    Form of Warrant Agreement, dated January 3, 2003, between the Company and
investment partnerships affiliated with The Goldman Sachs Group, Inc.
(incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K,
filed with the Securities and Exchange Commission on January 17, 2003,
Commission File No. 001-07155)
 110




---



##### 



Exhibit No.
    
    Document4.12
    
    Registration Rights Agreement, dated as of November 25, 2002, among the
Company and investment partnerships affiliated with The Goldman Sachs
Group, Inc. (incorporated by reference to Exhibit 10.2 to the Current
Report on Form 8-K, filed with the Securities and Exchange Commission on
December 3, 2002, Commission File No. 001-07155)4.13
    
    Indenture dated as of December 3, 2002 between R.H. Donnelley Inc. (as
successor to R.H. Donnelley Finance Corporation I), as Issuer, and The Bank
of New York, as Trustee, with respect to the 87/8% Senior Notes due 2010
(incorporated by reference to Exhibit 4.13 to the Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 20, 2003,
Commission File No. 001-07155)4.14
    
    Supplemental Indenture dated as of January 3, 2003 among R.H. Donnelley
Inc., as Issuer, the Company and the other guarantors signatory thereto, as
Guarantors, and The Bank of New York, as Trustee, with respect to the 87/8%
Senior Notes due 2010 (incorporated by reference to Exhibit 4.14 to the
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 20, 2003, Commission File No. 001-07155)4.15
    
    Form of 87/8% Senior Notes due 2010 (included in Exhibit 4.13)4.16
    
    Guarantees relating to the 87/8% Senior Notes due 2010 (incorporated by
reference to Exhibit 4.16 to the Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 20, 2003, Commission File No.
001-07155)4.17
    
    Indenture dated as of December 3, 2002 between R.H. Donnelley Inc. (as
successor to R.H. Donnelley Finance Corporation I), as Issuer, and The Bank
of New York, as Trustee, with respect to the 107/8% Senior Subordinated
Notes due 2012 (incorporated by reference to Exhibit 4.17 to the Annual
Report on Form 10-K filed with the Securities and Exchange Commission on
March 20, 2003, Commission File No. 001-07155)4.18
    
    Supplemental Indenture dated as of January 3, 2003 among R.H. Donnelley
Inc., as Issuer, the Company and the other guarantors signatory thereto, as
Guarantors, and The Bank of New York, as Trustee, with respect to the
107/8% Senior Subordinated Notes due 2012 (incorporated by reference to
Exhibit 4.18 to the Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 20, 2003, Commission File No. 001-07155)4.19
    
    Form of 107/8% Senior Subordinated Notes due 2012 (included in Exhibit 4.17)4.20
    
    Guarantees relating to the 107/8% Senior Subordinated Notes due 2012
(incorporated by reference to Exhibit 4.20 to the Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 20, 2003,
Commission File No. 001-07155)4.21*
    
    Second Supplemental Indenture dated as of January ___, 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 201210.1
    
    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)
 111




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##### 



Exhibit No.
    
    Document10.2
    
    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.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)10.8
    
    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)
 112




---



##### 



Exhibit No.
    
    Document10.11
    
    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)10.17^
    
    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)
 113




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##### 



Exhibit No.
    
    Document10.22^
    
    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)10.28^
    
    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)
 114




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##### 



Exhibit No.
    
    Document10.32
    
    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)10.36
    
    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 10.10to the Current Report on Form 8-K, filed with the Securities
and Exchange Commission on January 17, 2003, Commission File
No. 001-07155)
 115




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##### 



Exhibit No.
    
    Document10.38
    
    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 Company23*
    
    Consent of Independent Accountants31.1*
    
    Certification of Annual Report on Form 10-K for the year ended
December 31, 2003 under Section 302 of the Sarbanes-Oxley Act
by David C. Swanson, Chief Executive Officer31.2*
    
    Certification of Annual Report on Form 10-K for the year ended
December 31, 2003 by Steven M. Blondy, Senior Vice President
and Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act31.3*
    
    Certification of Annual Report on Form 10-K for the year ended
December 31, 2003 by David C. Swanson, Chief Executive Officer
for R.H. Donnelley Inc. under Section 302 of the
Sarbanes-Oxley Act31.4*
    
    Certification of Annual Report on Form 10-K for the year ended
December 31, 2003 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 Annual Report on
Form 10-K for the year ended
December 31, 2003 under Section 906 of the Sarbanes-Oxley Act
by David C. Swanson, Chief Executive Officer, and Steve M.
Blondy, Senior Vice President and Chief Financial Officer, for
R.H. Donnelley Corporation32.2*
    
    Certification of Annual Report on
Form 10-K for the year ended
December 31, 2003 under Section 906 of the Sarbanes-Oxley Act
by David C. Swanson, Chief Executive Officer, and Steve M.
Blondy, Senior Vice President and Chief Financial Officer, for
R.H. Donnelley Inc.
  *
    
    Filed herewith  ^
    
    Management contract or compensatory plan 116




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##### 



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
12th day of March 2004. R.H. Donnelley CorporationBy:
    /s/ David C. SwansonDavid C. Swanson,Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been duly signed by the following persons in the
capacities and on the date indicated. /s/ David C. Swanson
(David C. Swanson)
    
    Chairman and Chief Executive
Officer and Director
(Principal Executive Officer)
    
    March 12, 2004/s/ Steven M. Blondy
(Steven M. Blondy)
    
    Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
    
    March 12, 2004/s/ William C. Drexler
(William C. Drexler)
    
    Vice President and Controller
(Principal Accounting Officer)
    
    March 12, 2004/s/ Kenneth G. Campbell
(Kenneth G. Campbell)
    
    Director
    
    March 12, 2004/s/ Nancy E. Cooper
(Nancy E. Cooper)
    
    Director
    
    March 12, 2004/s/ Robert R. Gheewalla
(Robert R. Gheewalla)
    
    Director
    
    March 12, 2004/s/ Robert Kamerschen
(Robert Kamerschen)
    
    Director
    
    March 12, 2004/s/ Terence M. OToole
(Terence M. OToole)
    
    Director
    
    March 12, 2004/s/ Carol J. Parry
(Carol J. Parry)
    
    Director
    
    March 12, 2004/s/ David M. Veit
(David M. Veit)
    
    Director
    
    March 12, 2004/s/ Barry Lawson Williams
(Barry Lawson Williams)
    
    Director
    
    March 12, 2004
 117




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##### 



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
12th day of March, 2004. R.H. Donnelley Inc. By:
    /s/ David C. SwansonDavid C. Swanson,Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been duly signed by the following persons in the
capacities and on the date indicated. /s/ David C. Swanson)
(David C. Swanson)
    
    Director, President and
Chief Executive Officer
(Principal Executive Officer)
    
    March 12, 2004/s/ Steven M. Blondy
(Steven M. Blondy)
    
    Director, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
    
    March 12, 2004/s/ William C. Drexler
(William C. Drexler)
    
    Vice President and Controller
(Principal Accounting Officer)
    
    March 12, 2004/s/ Robert J. Bush
(Robert J. Bush)
    
    (Director)
    
    March 12, 2004
 118