SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 001-07155
R.H. DONNELLEY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-2740040
- ---------------------- -----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
One Manhattanville Road, Purchase N.Y. 10577
- ----------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title of Class Shares Outstanding at May 3, 1999
-------------- ---------------------------------
Common Stock, par value $1 per share 33,833,327
Commission file number 333-59287
R.H. DONNELLEY INC. *
---------------------
(Exact name of registrant as specified in its charter)
Delaware 36-2467635
------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
One Manhattanville Road, Purchase N.Y. 10577
- --------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code (914) 933-6400
[FN]
* R.H. Donnelley Inc. is a wholly owned subsidiary of R.H. Donnelley
Corporation which became subject to the filing requirements of Section 15(d) on
October 1, 1998. As of May 3, 1999, 100 shares of R.H. Donnelley Inc. common
stock, no par value, were outstanding.
</FN>
R.H. DONNELLEY CORPORATION
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
- ------------------------------
Item 1. Financial Statements
Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998 3
Consolidated Balance Sheets at March 31, 1999
and December 31, 1998 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 15
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 18
R.H. Donnelley Corporation and Subsidiary
Consolidated Statements of Operations (Unaudited)
Three months ended
March 31,
------------------
(amounts in thousands, except per share data) 1999 1998
Revenues............................................. $ 31,659 $ 24,344
Expenses:
Operating expenses................................. 25,467 17,610
General and administrative......................... 8,879 5,914
Provision for bad debts............................ 1,408 1,264
Depreciation and amortization...................... 4,789 4,953
------ ------
Total expenses................................... 40,543 29,741
Income from partnerships and related fees............ 27,487 25,642
------ ------
Operating income................................. 18,603 20,245
Interest expense, net................................ 9,716 --
------ ------
Income before income taxes...................... 8,887 20,245
Provision for income taxes........................... 3,572 8,098
------ ------
Net income................................... $ 5,315 $ 12,147
====== ======
Earnings per share:
Basic........................................ $ 0.16 $ 0.36
Diluted...................................... $ 0.15 $ 0.35
Shares used in computing earnings per share:
Basic........................................ 33,984 34,210
Diluted...................................... 34,330 34,489
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
R.H. Donnelley Corporation and Subsidiary
Consolidated Balance Sheets (Unaudited)
March 31, December 31,
(amounts in thousands, except share and per share data) 1999 1998
--------- ------------
Assets
Current Assets
Cash and cash equivalents.......................... $ 5,763 $ 2,302
Accounts receivable
Billed........................................ 2,321 6,941
Unbilled...................................... 61,668 73,817
Other......................................... 3,942 8,712
Allowance for doubtful accounts............... (6,792) (5,298)
------ ------
Total accounts receivable, net............. 61,139 84,172
Deferred contract costs............................ 13,169 6,401
Other current assets............................... 4,462 4,278
------ ------
Total current assets....................... 84,533 97,153
Property and equipment, net........................ 19,318 21,077
Computer software, net............................. 31,151 33,523
Partnership investments and related receivables ... 212,524 216,482
Other non-current assets........................... 21,319 22,891
------- -------
Total Assets............................... $ 368,845 $ 391,126
======= =======
Liabilities and Shareholders' Deficit
Current Liabilities
Accounts payable................................... $ 2,618 $ 1,654
Accrued and other current liabilities.............. 68,469 69,485
Current portion of long-term debt.................. 5,063 4,125
------ ------
Total current liabilities.................. 76,150 75,264
Long-term debt..................................... 445,750 464,500
Deferred income taxes.............................. 50,303 50,909
Postretirement and postemployment benefits......... 9,622 9,648
Other liabilities.................................. 9,700 12,415
Commitments and contingencies
Shareholders' Deficit
Preferred stock, par value $1 per share,
authorized - 10,000,000 shares,
outstanding - none............................ -- --
Common stock, par value $1 per share,
authorized - 400,000,000 shares;
issued - 51,621,894 shares for 1999 and 1998.. 51,622 51,622
Additional paid in capital......................... 1,261 274
Retained deficit................................... (250,119) (255,434)
Treasury stock, at cost, 17,789,254 shares for 1999
And 17,419,739 shares for 1998................ (25,444) (18,072)
-------- -------
Total shareholders' deficit................ (222,680) (221,610)
-------- --------
Total Liabilities and Shareholders' Deficit $ 368,845 $ 391,126
======= =======
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
R.H. Donnelley Corporation and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
Three months ended
March 31,
---------------------
(amounts in thousands) 1999 1998
Cash Flows from Operating Activities:
Net income......................................... $ 5,315 $ 12,147
Reconciliation of net income to net cash provided
by operating activities:
Depreciation and amortization................. 4,789 4,953
Deferred income taxes......................... (606) --
Amortization of deferred financing costs...... 287 --
Provision for doubtful accounts............... 1,408 1,264
Cash received in excess of income from
partnerships and related receivables....... 5,257 1,617
Decrease in accounts receivable............... 21,625 27,303
Increase in deferred contract costs........... (6,768) (9,701)
(Increase) decrease in other assets........... (43) 148
Increase (decrease) in accounts payable, accrued
and other current liabilities.............. 315 (8,940)
Decrease in other liabilities................. (2,741) (1,386)
------ ------
Net cash provided by operating activities.. 28,838 27,405
Cash Flows from Investing Activities:
Additions to property and equipment................ (379) (651)
Additions to computer software..................... (786) (1,834)
------ ------
Net cash used in investing activities...... (1,165) (2,485)
Cash Flows from Financing Activities:
Repayment of debt.................................. (17,812) --
Purchase of treasury stock......................... (7,474) --
Proceeds from exercise of stock options............ 1,074 --
Net distributions to Old D&B....................... -- (24,935)
------ -------
Net cash used in financing activities...... (24,212) (24,935)
Increase (decrease) in cash and cash equivalents... 3,461 (15)
Cash and cash equivalents, beginning of year....... 2,302 32
------ -------
Cash and cash equivalents, end of period........... $ 5,763 $ 17
====== ========
Supplemental cash flow information:
- -----------------------------------
Interest paid...................................... $ 12,095 N/A
=======
Income taxes paid.................................. $ 1,251 N/A
=======
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
R.H. Donnelley Corporation and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
(amounts in thousands)
1. Background and Basis of Presentation
Prior to July 1, 1998, R.H. Donnelley Corporation (the 'Company')
operated as part of The Dun & Bradstreet Corporation ('Old D&B'). In December
1997, the Board of Directors of Old D&B approved in principle a plan to
separate into two publicly traded companies - the Company and The New Dun &
Bradstreet Corporation ('New D&B'). The distribution ('Distribution') was the
method by which Old D&B distributed to its shareholders shares of New D&B
common stock. On July 1, 1998, as part of the Distribution, Old D&B
distributed to its shareholders shares of New D&B stock. In connection with
the Distribution, Old D&B changed its name to R.H. Donnelley Corporation.
Since the Distribution, the Company's only operating subsidiary has been R.H.
Donnelley Inc. ('Donnelley') and, on a consolidated basis, the financial
statements of the Company and Donnelley are substantially identical.
The financial statements at March 31, 1998 and for the three months then
ended, represent the financial position, results of operations and cash flows of
the Company as if it were a separate entity. The financial statements include
allocations of certain Old D&B expenses, assets and liabilities related to the
Company's businesses. Management believes these allocations are reasonable;
however, the costs of these services are not necessarily indicative of the
costs that would have been incurred if the Company had performed or provided
these functions as a separate entity.
The interim financial statements have been prepared in accordance with
the instructions to Form 10-Q and should be read in conjunction with the
financial statements and related notes included in the Company's Form 10-K for
the year ended December 31, 1998. The results of interim periods are not
necessarily indicative of results for the full year or any subsequent period.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of financial position,
results of operations and cash flows at the dates and for the periods presented
have been included. Certain 1998 amounts have been restated to conform to the
1999 presentation.
2. Reconciliation of Shares Used in Computing Earnings Per Share
The table below provides a reconciliation of basic weighted average
shares outstanding to diluted weighted average shares outstanding for each
period presented. The conversion of dilutive shares has no impact on operating
results.
Three months
ended March 31,
---------------
1999 1998
---- ----
Weighted average shares outstanding - basic ............ 33,984 34,210
Effect of potentially dilutive stock options ........... 346 279
------ ------
Weighted average number of shares - diluted ............ 34,330 34,489
====== ======
3. Long-term debt
Long-term debt at March 31, 1999 consisted of the following:
Senior subordinated 9.125% Notes........................ $ 150,000
Senior secured term facilities.......................... 298,313
Senior revolving credit facility........................ 2,500
-------
Total.............................................. 450,813
Less current portion.................................... 5,063
-------
Net long-term debt................................. $ 445,750
=======
All long-term debt was incurred in connection with the Distribution.
Accordingly, no long-term debt was outstanding at March 31, 1998.
The committed bank facilities consist of an aggregate $300,000 Senior
Secured Term Facilities ('Term Facilities') and a $100,000 Senior Revolving
Credit Facility (the 'Revolver'). These facilities bear interest at a floating
rate based on a spread over London interbank offered rate (LIBOR) or the
greater of either the Prime rate or the Fed Funds rate plus 50 basis points,
at the election of the Company. The facilities contain covenants that, among
other things, restrict the Company's and Donnelley's ability to engage in
mergers, consolidations and asset sales, incur additional indebtedness and
liens and require that certain financial ratios be maintained. At March 31,
1999, there was $300,813 of outstanding debt under the Term Facilities and
Revolver at a weighted average interest rate of 7.3% per annum. Available
borrowing capacity under the Revolver was $97,500 at March 31, 1999.
4. Treasury Stock Activity
During the three months ended March 31, 1999, the Company repurchased
472 shares at a cost of $7,474.
5. Litigation
In April 1999, Sandy Goldberg, Dellwood Publishing, Inc. and Rockland
Yellow Pages initiated a lawsuit against Donnelley and Bell Atlantic in the
United States District Court of 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. The complaint alleges that the
defendants disseminated false information concerning the Rockland Yellow Pages,
which has resulted in damages to the Rockland Yellow Pages. The plaintiffs
are alleging a variety of claims including RICO violations, antitrust
violations and Lanham Act violations. They are seeking damages in excess of
$30 million, which amount the plaintiffs are seeking to have trebled under the
antitrust laws. In addition, the plaintiffs are also seeking punitive damages
in an unspecified amount. Management intends to mount a vigorous defense of
the Company in this matter. At this preliminary stage in the proceedings,
management is unable to predict the outcome of this matter but believes that
the resolution of the action will not have a material adverse effect on the
Company's financial position or results of operations.
Certain tax planning strategies entered into by Old D&B are currently
subject to review by tax authorities. The Internal Revenue Service (the 'IRS')
is currently reviewing Old D&B's utilization of certain capital losses during
1989 and 1990. While the IRS has not issued a formal assessment with respect to
these transactions, the IRS has assessed other companies that had entered into
similar types of transactions. IMS Health Incorporated ('IMS') and Nielsen
Media Research, Inc. ('NMR'), both of which are former subsidiaries of Old D&B,
are each jointly and severally liable to pay 50%, and Old D&B is liable for the
remaining 50% of any payments for taxes and accrued interest arising from this
matter and certain other potential tax liabilities after Old D&B pays the first
$137 million. As a result of the form of the Distribution, the Company is the
legal entity and the taxpayer referred to herein as Old D&B. However, New D&B,
pursuant to the terms of the Distribution Agreement and the Tax Allocation
Agreement, executed in connection with the Distribution, has assumed and will
indemnify the Company and Donnelley against any payments to be made by the
Company or Donnelley in respect of any tax liability that may be assessed and
any related costs and expenses including ongoing legal fees. Accordingly,
management believes that such tax liabilities and related costs and expenses
will have no material impact on the Company's consolidated financial position.
Management further believes that New D&B, IMS and NMR have sufficient financial
resources to satisfy all such liabilities and to reimburse the Company for all
costs and expenses incurred.
In July 1996, Information Resources, Inc. ('IRI') filed a complaint in
the United States district court for the Southern district of New York, naming
as defendants Old D&B, ACNielsen Company, and IMS International Inc. ('the IRI
Action'). The complaint alleges, among other things, various violations of the
antitrust laws and seeks damages in excess of $350 million, which IRI is
seeking to have trebled under the antitrust laws. IRI also seeks punitive
damages of an unspecified amount. Under the Distribution Agreement, New D&B
will assume the defense and indemnify the Company and Donnelley against any
payments to be made by the Company or Donnelley with respect to the IRI Action,
including any related legal fees and expenses.
Other than the matters described above, the Company is also subject to
proceedings, lawsuits and other claims in the ordinary course of business. In
the opinion of management, the outcome of such current legal proceedings,
claims and litigation will not materially affect the Company's financial
position, results of operations or cash flows.
6. DonTech Partnership
The following is summarized combined financial information of the
DonTech Partnership:
Three months
ended March 31,
---------------
1999 1998
---- ----
Gross revenues.......................................... $20,206 $91,542
Income from operations.................................. 5,363 58,556
Net income.............................................. 5,580 58,556
The decrease in gross revenues, income from operations and net income in
1999 compared to 1998 is due to the change in the structure of the partnership,
which occurred in August 1997. Prior to this change, DonTech published various
directories, solicited advertising, and manufactured and delivered various
directories in Illinois and northwest Indiana. Since the change, DonTech
performs the advertising sales function for the directories and earns a
commission, while an operating unit of Ameritech serves as the publisher. The
Company has a 50% interest in the profits of DonTech and also receives revenue
participation income, which is tied to advertising sales, from an operating
unit of Ameritech. This revenue participation income is not shown in the above
table. The Company's income and related fees from DonTech was $20,839 and
$20,010 for the three months ended March 31, 1999 and 1998, respectively. Due
to the change in the partnership structure and the timing of revenue
recognition, the amounts in the table for 1998 do not correspond to the income
from partnerships and related fees recognized in the financial statements. For
the three months ended March 31, 1999, income and related fees is comprised of
the Company's share of the net income above, plus revenue participation income
of $18,827 less other reconciling items.
7. Business Segments
The Company provides advertising sales and marketing services of yellow
pages and other directory products under long-term sales agency agreements and
joint venture partnerships with operating units of major telephone companies
and through its own independent operations. The Company also provides
publishing and production services for yellow pages directories. The Company's
reportable operating segments are Directory Advertising Services, DonTech
Partnership and Directory Publishing Services. The DonTech Partnership is
viewed as a separate reportable operating segment since, among other factors,
the employees of DonTech, including officers and managers, are not employees of
the Company. Essentially, all operations are conducted in the United States.
Management evaluates the performance of the operating segments and
allocates resources to them based on operating income and other factors.
Operating income for the reportable segments (except DonTech) includes those
costs directly incurred by each operation plus an allocation of certain shared
operating and general and administrative expenses based on estimated business
usage. Interest expense, income tax expense and non-operating income and
expenses are not allocated to the reportable segments. The operating loss
under the Other column represents general and administrative expenses and other
activities not allocated to the reportable segments. Total assets included in
the Other column represent those assets not allocated to the reportable
segments, such as cash and cash equivalents, prepaid and deferred expenses and
corporate property and equipment.
Selected financial results for the three month period ended March 31,
1999 and 1998 and total assets at March 31, 1999 and 1998 are as follows:
Three month period ended March 31, 1999
Directory Directory
Advertising DonTech Publishing Consolidated
Services Partnership Services (2) Other Totals
-------- ----------- ------------ ----- ------
Advertising sales (1)
Calendar cycle......$ 98,313 $ 78,147 -- -- $176,460
Publication cycle... 69,874 134,847 -- -- 204,721
Revenues.............. 23,850 -- $ 7,809 -- 31,659
Income from partnerships
and related fees.... 6,648 20,839 -- -- 27,487
EBITDA (3)............ 8,322 20,839 262 $(6,031) 23,392
Depreciation and
amortization....... 1,627 -- 1,648 1,514 4,789
Operating income (loss) 6,695 20,839 (1,386) (7,545) 18,603
Total assets......... 115,906 185,719 20,533 46,687 368,845
Three month period ended March 31, 1998
Directory Directory
Advertising DonTech Publishing Consolidated
Services Partnership Services (2) Other Totals
-------- ----------- ------------ ----- ------
Advertising sales (1)
Calendar cycle $ 71,586 $ 75,100 -- -- $146,686
Publication cycle... 64,915 129,213 -- -- 194,128
Revenues.............. 16,668 -- $ 7,676 -- 24,344
Income from partnerships
and related fees.... 5,632 20,010 -- -- 25,642
EBITDA (3)............ 6,939 20,010 1,292 $(3,043) 25,198
Depreciation and
amoritization....... 1,395 -- 1,619 1,939 4,953
Operating income (loss) 5,544 20,010 (327) (4,982) 20,245
Total assets.......... 111,288 194,206 23,544 30,136 359,174
<FN>
(1) Advertising sales represents the billing value of advertisements sold by
the Company and DonTech. Management reviews the performance of the operating
segments on, among other things, the advertising sales generated on a calendar
cycle and a publication cycle basis. Calendar cycle advertising sales
represent the billing value of advertisements sold stated on the same basis for
which revenue is recognized in the consolidated financial statements (that is,
when a sales contract is signed where the Company acts as a sales agent and
when a directory is published where the Company acts as the publisher).
Advertising sales on a publication cycle basis represent the billing value of
advertisements sold based on when a directory is published, regardless of the
Company's role and the recognition of revenue in the consolidated financial
statements.
(2) Directory Publishing Services revenues do not include intracompany
revenues of $243 and $198 for the three months ended March 31, 1999 and 1998,
respectively.
(3) EBITDA represents earnings before interest, taxes and depreciation and
amortization. EBITDA is not a measurement of operating performance computed in
accordance with generally accepted accounting principles and should not be
considered as a substitute for operating income or net income prepared in
conformity with generally accepted accounting principles. In addition, EBITDA
may not be comparable to similarly titled measures of other companies.
</FN>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The matters discussed in this Form 10-Q of R.H. Donnelley Corporation (the
'Company') and R.H. Donnelley Inc. ('Donnelley') contain forward looking
statements subject to the safe harbor created by the Private Securities
Litigation Reform Act of 1995. Where applicable, the words 'believe,'
'expect,' 'anticipate,' 'should,' 'planned,' 'estimated,' 'potential,' 'goal,'
'outlook,' and similar expressions, as they relate to the Company, Donnelley or
its management, have been used to identify such forward looking statements.
These statements and all other forward looking statements reflect the Company's
and Donnelley's current beliefs and specific assumptions with respect to future
business decisions and are based on information currently available.
Accordingly, the statements are subject to significant risks, uncertainties and
contingencies which could cause the Company's and Donnelley's actual operating
results, performance or business prospects to differ from those expressed in, or
implied by, these statements. Such risks, uncertainties and contingencies
include the following: (1) loss of market share through competition; (2)
uncertainties caused by the consolidation of the telecommunications industry;
(3) introduction of competing products or technologies by other companies; (4)
complexity and uncertainty regarding the development of new high technology
products; (5) pricing pressures from competitors and/or customers; (6) changes
in the yellow pages industry and markets; (7) the Company's inability to
complete the implementation of its Year 2000 plans on a timely basis; and (8) a
sustained economic downturn in the United States.
The Company
Except where otherwise indicated, the terms 'Company,' 'we' and 'our'
refer to R.H. Donnelley Corporation and its only wholly owned subsidiary R.H.
Donnelley Inc. ('Donnelley'). We have no other operations other than through
this subsidiary; therefore, on a consolidated basis, our financial statements
and the financial statements of Donnelley are substantially identical.
We provide advertising sales and marketing services for yellow pages and
other directory products under long-term sales agency agreements and joint
venture partnerships with operating units of major telephone companies as well
as through our own independent operation. We are a sales agent in New York
State for an operating unit of Bell Atlantic and in Florida for an operating
unit of Sprint. We also serve as a sales agent and publisher for the CenDon
partnership ('CenDon'), a 50/50 partnership with an operating unit of Sprint
that was formed to publish directories in Florida, Nevada, Virginia and North
Carolina. We also publish our own independent yellow pages directory in the
Cincinnati area. Due to their similarities, we aggregate these businesses in
our Directory Advertising Services segment.
We are also a 50% partner in the DonTech Partnership ('DonTech'), a
partnership with an operating unit of Ameritech, which acts as the exclusive
sales agent for yellow pages directories published by Ameritech in Illinois and
northwest Indiana. In addition to receiving 50% of the profits of DonTech, we
receive direct fees ('Revenue Participation') from an operating unit of
Ameritech, which are tied to advertising sales. While DonTech provides
advertising sales of yellow pages and other directory products, the partnership
is considered a separate operating segment since, among other things, the
employees of DonTech, including officers and managers, are not our employees.
We also provide pre-press publishing services for yellow pages
directories, including advertisement creation, sales contract management,
listing database management, sales reporting and commissions, pagination,
billing services and imaging, to independent yellow pages publishers and
certain existing customers under separately negotiated contracts. This
business is classified as Directory Publishing Services.
Factors Affecting Comparability
Prior to July 1, 1998, we operated as part of The Dun & Bradstreet
Corporation ('Old D&B'). In December 1997, the Board of Directors of Old D&B
approved in principle a plan to separate into two publicly traded companies -
the Company and The New Dun & Bradstreet Corporation ('New D&B'). The
distribution ('Distribution') was the method by which Old D&B distributed to
its shareholders shares of New D&B common stock. On July 1, 1998, as part of
the Distribution, Old D&B distributed to its shareholders shares of New D&B
stock. In connection with the Distribution, Old D&B changed its name to R.H.
Donnelley Corporation.
The financial statements at March 31, 1998 and for the three months then
ended, reflect our financial position, results of operations and cash flows as
if we were a separate entity. The financial statements include allocations of
certain Old D&B general and administrative expenses and corporate assets and
liabilities related to our business. Management believes these allocations are
reasonable; however, these costs and allocations are not necessarily indicative
of the costs that would have been incurred had we performed or provided these
functions as a separate entity. For example, we estimate that general and
administrative expenses would have been approximately $2.2 million higher than
the amounts allocated during the first quarter of 1998. Additionally, in
connection with the Distribution, we issued Debt (as defined below; see -
'Liquidity and Capital Resources') and estimate that additional interest
expense of $10.7 million would have been incurred in the first quarter of 1998
assuming the Debt was outstanding as of the beginning of 1998.
Three Months Ended March 31, 1999 Compared with Three Months Ended March 31,
1998
Advertising sales represents the billing value of advertisements sold by
the Company and DonTech in a given calendar year (calendar cycle sales). These
sales are recognized on the same basis on which revenues are recognized (that
is, when a customer signs a sales contract where we are a sales agent or when
the directory is published where we are the publisher). Calendar cycle sales in
the first quarter of 1999 increased 20.3% to $176.5 million compared to $146.7
million in the first quarter 1998. Advertising sales for each segment are as
follows:
1999 1998 Change
---- ---- ---------------
Directory Advertising Services $ 98.3 $ 71.6 $26.7 37.3%
DonTech 78.2 75.1 3.1 4.1%
----- ----- ----
Total $176.5 $146.7 $29.8 20.3%
====== ===== ====
The increase in Directory Advertising Services sales is primarily due to
timing of sales for various Bell Atlantic directories compared to last year and
sales from our recent entry into Bell Atlantic's Buffalo and North Country
markets. In May 1998, we were appointed the exclusive sales agent by Bell
Atlantic to service these markets.
Management believes that an additional measurement of sales performance is
the publication cycle method. This method calculates sales on the basis of the
annual value of a directory according to its publication date regardless of
when the advertising for that directory was sold. If a directory publication
date changes from one year to the next, the prior year publication date is
adjusted to conform to the present year to maintain comparability. For the
first quarter 1999, publication cycle sales increased 5.5% to $204.7 million
compared to $194.1 million for the first quarter 1998. Advertising sales for
each segment is as follows:
1999 1998 Change
---- ---- ---------------
Directory Advertising Services $ 69.9 $ 64.9 $ 5.0 7.7%
DonTech 134.8 129.2 5.6 4.3%
------ ----- ----
Total $204.7 $194.1 $10.6 5.5%
====== ===== ====
The increase in Directory Advertising Services sales is partially due to
directories for the Buffalo and North Country markets that were published for
the first time since we were appointed Bell Atlantic's sales agent in that
region. Accordingly, there were no comparable sales during the first quarter of
1998. In addition, strong sales performance in Bell Atlantic's Westchester
county and Albany directories, which published in the quarter, also contributed
to the increase. DonTech advertising sales increased due to strong growth in
the Chicago directories.
Revenues from Directory Advertising Services consist of sales commissions
from our sales agency agreements and the billing value of advertisements sold
from our independent operation. Revenues from Directory Publishing Services
consist of pre-press publishing services for yellow pages directories provided
to independent yellow pages publishers and certain existing customers under
separately negotiated contracts. Revenues for the first quarter of 1999 were
$31.7 million, an increase of $7.4 million over the first quarter of 1998.
Revenues by segment are as follows:
1999 1998 Change
---- ---- ---------------
Directory Advertising Services $23.9 $16.6 $7.3 44.0%
Directory Publishing Services 7.8 7.7 0.1 1.3%
---- ---- ---
Total $31.7 $24.3 $7.4 30.5%
==== ==== ===
The increase in Directory Advertising Services revenues is primarily due to
higher sales agency commissions revenue from the increase in calendar sales
mentioned above.
Operating expenses of $25.5 million were $7.9 million higher compared to
the first quarter 1998, principally due to an increase in salesperson
commissions and information technology related expenses. The higher
salesperson commissions is related to the increase in advertising sales. The
increase in information technology related expenses is attributable to timing.
General and administrative costs of $8.9 million were $3.0 million higher
than the first quarter of 1998. This increase is mainly due to higher costs
associated with being a stand-alone company and costs associated with the joint
venture with China Unicom (see - 'Liquidity and Capital Resources').
Income from partnerships and related fees was $27.5 million for the
quarter, an increase of $1.8 million over the prior year quarter. Income from
DonTech, including Revenue Participation, was $0.8 million higher than last
year and income from CenDon was $1.0 million higher than last year, both due to
higher sales.
Operating income of $18.6 million was $1.6 million lower than the first
quarter 1998. Operating income (loss) by segment is as follows:
1999 1998 Change
---- ---- ---------------
Directory Advertising Services $ 6.7 $ 5.5 $ 1.2 21.8%
DonTech 20.8 20.0 0.8 4.0%
Directory Publishing Services (1.4) (0.3) (1.1) N/M
Other (7.5) (5.0) (2.5) (50.0)%
---- ---- ----
Total $18.6 $20.2 $(1.6) (7.9)%
==== ==== ====
Operating income for Directory Advertising Services increased over last
year primarily due to the higher revenues in Bell Atlantic which were partially
offset by a corresponding increase in salesperson commissions. Directory
Publishing Services' operating income decreased primarily due to an increase in
information technology related expenses referred to above. Other operating
loss represents corporate and general overhead costs that are not allocated to
the business segments. The increase is due to higher costs associated with
being a stand-alone company.
Interest expense of $9.7 million in the first quarter 1999 represents the
interest on the Debt. The Debt was issued in connection with the Distribution
and was not outstanding during the first quarter 1998.
Net income for the first quarter 1999 was $5.3 million, or $0.15 per
diluted share compared to $12.1 million, or $0.35 per diluted share in 1998.
As previously stated, we believe that the first quarter 1998 results are not
comparable to the current operations as they do not include certain general and
administrative expenses and interest expense that were incurred as a result of
the separation from Old D&B. If the first quarter 1998 results are adjusted to
(i) include the estimated additional general and administrative expenses
associated with being a stand-alone company and (ii) assume the Debt was
outstanding as of the beginning of 1998, we estimate that operating income for
the first quarter 1998 would have been $18.0 million and net income would have
been $4.4 million or $0.13 per diluted share.
Liquidity And Capital Resources
In connection with the Distribution, Donnelley borrowed $300 million under
its Senior Secured Term Facilities ('Term Facilities') and issued $150 million
of Senior Subordinated Notes (the 'Notes'). Donnelley also borrowed $50
million against its $100 million Senior Revolving Credit Facility (the
'Revolver', together with the Term Facilities, the 'Credit Agreement'). The
net proceeds from these initial borrowings (the 'Debt'), were dividended to Old
D&B and distributed to New D&B in connection with the Distribution. The Term
Facilities mature between June 2004 and December 2006, and require quarterly
principal repayments. The Notes mature in 2008 and pay interest semi-annually
in June and December at the annual rate of 9.125%. The Credit Agreement and
the Indenture governing the Notes each contain various financial and other
restrictive covenants, including restrictions on indebtedness, capital
expenditures and commitments. At April 30, 1999, we had total available
borrowing capacity of $97.0 million under the Revolver.
In 1998, we entered into a joint venture with China United
Telecommunications Corporation ('China Unicom') to publish yellow pages
directories and to offer Internet directory services in the People's Republic of
China. Under the terms of the joint venture agreement, we will invest cash of
approximately $15.6 million to acquire a 15% equity interest in the joint
venture. As of April 30, 1999, we have invested $1.3 million and anticipate
making additional contributions totaling $14.3 million over the next two to
three years. We anticipate contributing approximately $8.0 million during the
second quarter 1999, $3.8 million in 2000 and $2.5 million in 2001. These
payments will be funded from cash flows from operations or from borrowings
under the Revolver.
We believe that cash from operations and available debt capacity under the
Revolver, will be sufficient to fund our operations and meet our anticipated
investment, capital expenditures and debt service requirements for the
foreseeable future.
Cash Flow
Net cash provided by operations was $28.8 million through March 31, 1999
compared to $27.4 million through March 31, 1998. Net income declined in the
first quarter 1999 mainly due to an increase in expenses, principally interest
and general and administrative expenses, as a result of the Company's
separation from Old D&B. In addition, cash generated by accounts receivable
was lower in 1999, mainly due to higher sales for various Bell Atlantic
directories during the first quarter 1999 as compared to 1998, which will be
collected in later periods. These declines were offset by the timing of
partnership cash receipts and changes in liabilities. The change in accounts
payable, accrued and other liabilities in the first quarter 1998 resulted in a
use of cash of $10.3 million compared to a use of $2.4 million in the first
quarter of 1999. The decrease in the use of cash was attributable to the
payment in 1998 for liabilities associated with a business sold in December
1997 and higher accounts payable and accrued taxes at March 31, 1999.
Net cash used in investing activities during the first quarter 1999 was
$1.2 million compared to $2.5 million through the first quarter 1998. The
decrease in capital spending in 1999 is primarily attributable to lower
spending on computer software. We currently have no material commitments for
investment spending, other than the China joint venture mentioned above.
Net cash used in financing activities was $24.2 million through March 31,
1999 compared to $24.9 million through March 31, 1998. The 1998 amount
represents amounts distributed to Old D&B. Prior to July 1, 1998, all cash
deposits were transferred to Old D&B on a daily basis and Old D&B funded our
disbursement bank accounts as required. In the first quarter of 1999, cash of
$17.8 million was used to repay debt and $7.5 million was used to repurchase
stock, which was offset, in part, by proceeds of $1.1 million from the exercise
of employee stock options.
Year 2000 Issue
The Year 2000 ('Y2K') issue is the result of computer programs being
written using two digits rather than four digits to define the applicable year.
Computer programs that have date sensitive software may recognize a date using
'00' as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions.
As part of our Y2K compliance program, all of our installed computer
systems and software products have been assessed for Y2K problems. We replaced
our financial systems (General Ledger, Accounts Payable, and Fixed Assets) with
systems that use programs from Oracle Corporation, which have been tested and
certified to be Y2K compliant. For all remaining systems, software programs
are being modified or replaced. We are requesting assurances from all software
vendors from which we have purchased or licensed software, or from which we may
purchase or license software, that such software will correctly process all
date information at all times. Additionally, all modifications to existing
software, or new software installed is subjected to our internal Y2K compliance
program described below. Through continued modifications to existing software
and conversions to new software, we believe that we will be able to mitigate
our exposure to the Y2K issue before 2000. However, if continued modifications
and conversions are not made, or not completed on a timely basis, the Y2K issue
could have a material adverse effect on our operating results and financial
condition.
We have divided our Y2K compliance program into five major phases - (1)
the assessment of all computer systems and software products (collectively the
'Computer Systems') for Y2K compliance, (2) the remediation (i.e. conversion or
modification) of each Computer System to be Y2K compliant, (3) the testing of
the remediation to confirm that such remediation has not adversely impacted the
operation of the Computer Systems, and that it can process dates correctly, (4)
the implementation of the remediated Computer Systems into production and (5)
certification of the remediation for Y2K compliance. The percentage of
completion of each phase at the end of April 1999 is shown in the table below:
Assessment......... 100%
Remediation........ 100%
Testing............ 98%
Implementation..... 96%
Certification...... 75%
We have been in the process of preparing six remaining applications for
certification. The certification testing for some of these applications has
been started and all six applications are expected to be certified by July 31,
1999.
In addition, it is possible that certain computer systems or software
products with which our computer systems, software, databases or other
technology interface or are integrated with may not accept input of, store,
manipulate and output dates in the year 2000 or thereafter without error or
interruption. We have conducted a review of our computer systems to attempt to
identify ways in which the systems could be affected by interface- or
integration-related problems in correctly processing date information. We are
communicating with those third parties with which we maintain business
relationships to monitor and evaluate their progress in identifying and
addressing their Y2K issues and assessing the potential impact, if any, to us.
Currently, nothing has come to our attention that would indicate that the Y2K
compliance efforts of a major third party would have a material adverse effect
on our results of operations and financial condition. However, there can be no
assurance that we will identify all interface- or integration-related or third
party-related problems in advance of their occurrence, or that we will be able
to successfully remedy problems that are discovered. The expenses of our
efforts to identify and address such problems, or the expenses and liabilities
to which we may become subject to as a result of such problems, could have a
material adverse effect on our results of operations and financial condition.
We expect to have our Y2K compliance program substantially completed
during the third quarter. We continually assess the risk of non-compliance of
our systems and the systems of major third parties and are currently in the
process of developing contingency plans and alternative arrangements for
circumstances outside our direct control.
Through April 30, 1999, we have spent approximately $4.4 million
addressing the Y2K issues and estimate that we will spend an additional $0.9
million during 1999. These costs will be funded through cash flows from
operations.
Market Risk Sensitive Instruments
We are exposed to interest rate risk through our Credit Agreement where we
borrow at prevailing short-term variable rates. In order to manage our
exposure to fluctuations in interest rates, we have entered into interest rate
swap agreements which allow us to raise funds at floating rates and effectively
swap them into fixed rates that are lower than those available if fixed rate
borrowings were made directly. These derivative financial instruments are
viewed as risk management tools and are entered into for hedging purposes
only. We do not use derivative financial instruments for trading or
speculative purposes. There has been no change in the $175 million outstanding
notional amount of interest rate swaps since December 31, 1998 and the
unrealized fair value of the swaps was a loss of $1.3 million at March 31, 1999.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The requirements of this Item are discussed in Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the discussion of legal proceedings found in the
Annual Report on Form 10-K for the year ended December 31, 1998. New D&B has
assumed the defense of the matters discussed therein and to the best of
management's knowledge, there have been no material changes in the status of
the proceedings referenced therein.
In April 1999, Sandy Goldberg, Dellwood Publishing, Inc. and Rockland
Yellow Pages initiated a lawsuit against Donnelley and Bell Atlantic in the
United States District Court of 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. The complaint alleges that the
defendants disseminated false information concerning the Rockland Yellow Pages,
which has resulted in damages to the Rockland Yellow Pages. The plaintiffs
are alleging a variety of claims including RICO violations, antitrust
violations and Lanham Act violations. They are seeking damages in excess of
$30 million, which amount the plaintiffs are seeking to have trebled under the
antitrust laws. In addition, the plaintiffs are also seeking punitive damages
in an unspecified amount. Management intends to mount a vigorous defense of
the Company in this matter. At this preliminary stage in the proceedings,
management is unable to predict the outcome of this matter, but believes that
the resolution of the action will not have a material adverse effect on the
Company's financial position or results of operations.
The Company is also involved in certain legal proceedings incidental to
the normal conduct of its business. Although there can be no assurances,
management believes that the outcome of such legal proceedings will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Document
* 3.1 Certificate of Incorporation of the Company
* 3.2 By-laws of the Company
3.3 Certificate of Incorporation of Donnelley
(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 Donnelley (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)
4.1 Indenture dated as of June 5, 1998 between
Donnelley, as Issuer, the Company, as Guarantor,
and the Bank of New York, as Trustee, with respect
to the 9 1/8% Senior Subordinated Notes due 2008
(incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-4, filed with the
Securities and Exchange Commission on July 17,
1998, Registration No. 333-59287)
4.2 Form of the 9 1/8% Senior Subordinated Notes due
2008 (included in Exhibit 4.1)
4.3 Company Guarantee (included in Exhibit 4.1)
4.4 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, Registration No.
001-07155)
* 10.1 First Amendment to the Credit Agreement, dated as
of March 4, 1999, among the Company, Donnelley, The
Chase Manhattan Bank, as Administrative Agent and
the Lenders party thereto
* 10.2 1991 Key Employees' Stock Option Plan, as amended
and restated
* 27.1 Financial Data Schedule of the Company
* 27.2 Financial Data Schedule of Donnelley
- --------------------------
<FN>
* filed herewith
</FN>
(b) Reports on Form 8-K:
None
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
R.H. DONNELLEY CORPORATION
Date: May 14, 1999 By:
-------------------------------
Philip C. Danford
Senior Vice President and Chief Financial Officer
Date: May 14, 1999 By:
-------------------------------
William C. Drexler
Vice President and Controller
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
R.H. DONNELLEY INC.
Date: May 14, 1999 By:
-------------------------------
Philip C. Danford
Senior Vice President and Chief Financial Officer
Date: May 14, 1999 By:
-------------------------------
William C. Drexler
Vice President and Controller