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 September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-07155
R.H. DONNELLEY CORPORATION
- -------------------------------------------------------------------------------
(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 November 12, 1998
- ------------------------------- ---------------------------------------
Common Stock, par value $1 per share 34,198,780
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 October 31, 1998, 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 and
Nine Months Ended September 30, 1998 and 1997 3
Consolidated Balance Sheets at September 30, 1998 and
December 31, 1997 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submissions of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 16
R.H. Donnelley Corporation and Subsidiary
Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
Amounts in thousands, except per share data 1998 1997 1998 1997
Revenues $53,391 $62,728 $115,740 $143,392
Expenses:
Operating Expenses 23,634 28,966 42,990 61,133
General and Administrative 28,293 28,852 64,274 74,559
Depreciation and Amortization 4,854 5,460 14,710 16,490
------- ------- ------- -------
Total Expenses 56,781 63,278 121,974 152,182
Income from Partnerships and
Related Fees 46,445 47,375 108,669 63,114
Operating Income 43,055 46,825 102,435 54,324
Interest Expense, net 10,356 -- 13,371 --
Income before Provision for Income Taxes 32,699 46,825 89,064 54,324
Provision for Income Taxes 13,080 18,730 35,626 21,730
------- ------- ------- -------
Net Income $19,619 $28,095 $53,438 $32,594
======= ======= ======= =======
Net Income Per Share of Common Stock:
Basic $0.57 $0.82 $1.56 $0.95
Diluted $0.57 $0.82 $1.55 $0.95
Shares Used in Computing Earnings Per Share:
Basic 34,223 34,100 34,249 34,179
Diluted 34,443 34,348 34,491 34,367
Cash Dividends Paid Per Share $0.175 -- $0.175 --
====== ====== ====== ======
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
R.H. Donnelley Corporation and Subsidiary
Consolidated Balance Sheets (Unaudited)
September 30, December 31,
1998 1997
Amounts in thousands, except share data
Assets
Current Assets
Cash and Cash Equivalents $10,204 $32
Accounts Receivable
Billed 3,238 5,208
Unbilled 63,747 78,010
Other 10,286 4,562
Allowance for Doubtful Accounts (5,258) (4,014)
-------- -------
Total Accounts Receivable, net 72,013 83,766
Deferred Contract Costs 11,429 6,944
Other Current Assets 2,278 388
-------- -------
Total Current Assets 95,924 91,130
Non-Current Assets
Partnership Investments and Related Receivables 241,050 218,620
Property and Equipment, net 22,383 25,460
Computer Software, net 35,768 37,546
Other Non-Current Assets 19,148 9,530
-------- -------
Total Assets $414,273 $382,286
======== =========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts Payable $3,153 $1,395
Accrued and Other Current Liabilities 69,479 58,070
Current Portion of Long-Term Debt 3,188 --
-------- -------
Total Current Liabilities 75,820 59,465
Long-Term Debt 483,750 --
Deferred Income Taxes 39,394 34,456
Postretirement and Postemployment Benefits 13,451 12,920
Other Liabilities 13,462 16,770
-------- -------
Total Liabilities 625,877 123,611
Shareholders' Equity
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 1998 and 51,967,421
shares for 1997 51,622 51,967
Additional Paid In Capital 248 --
Retained (Deficit) Earnings (245,399) 224,562
Treasury Stock, at cost, 17,423,114 shares for
1998 and 17,853,652 shares for 1997 (18,075) (17,854)
-------- -------
Total Shareholders' Equity (211,604) 258,675
-------- -------
Total Liabilities and Shareholders' Equity $414,273 $382,286
======== ========
<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)
Nine Months Ended
September 30,
Amounts in thousands 1998 1997
Cash Flows from Operating Activities:
Net Income $53,438 $32,594
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 14,710 16,490
Amortization of Deferred Financing Costs 499 --
Provision for Doubtful Accounts 6,397 10,453
Cash Received (Less Than) in Excess of Income
from Partnerships and Related Receivables (22,430) 33,144
Decrease in Accounts Receivable 5,356 43,780
Increase in Deferred Contract Costs (4,485) (25,253)
Increase in Other Assets (1,990) (841)
Increase (Decrease) in Accounts Payable, Accrued
and Other Current Liabilities 14,240 (3,112)
Increase in Other Long-Term Liabilities 2,161 2,450
Other, net 37 (139)
------- -------
Net Cash Provided by Operating Activities 67,933 109,566
Cash Flows from Investing Activities:
Additions to Property and Equipment (4,177) (8,748)
Additions to Computer Software (6,788) (5,506)
------- -------
Net Cash Used in Investing Activities (10,965) (14,254)
Cash Flows from Financing Activities:
Net Proceeds from Long-Term Borrowings 489,983 --
Repayment of Debt (13,062) --
Net Distributions to D&B (517,137) (95,308)
Purchase of Treasury Stock (1,017) --
Payment of Dividend (6,028) --
Other, net 465 --
------- -------
Net Cash Used in Financing Activities (46,796) (95,308)
Increase in Cash and Cash Equivalents 10,172 4
Cash and Cash Equivalents, at Beginning of Year 32 60
------- -------
Cash and Cash Equivalents, at End of Period $10,204 $64
======= =======
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
R.H. DONNELLEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Background and Basis of Presentation
On December 17, 1997, the Board of Directors of The Dun & Bradstreet
Corporation (`D&B') approved in principle a plan to separate into two publicly-
traded companies - R.H. Donnelley Corporation (the `Company') and The New Dun &
Bradstreet Corporation (`New D&B'). The distribution (`Distribution') was the
method by which D&B distributed to its stockholders shares of New D&B common
stock, which represent a continuing interest in the D&B businesses now conducted
by New D&B. On July 1, 1998, as part of the Distribution, D&B distributed to
its stockholders shares of New D&B stock. Shares of D&B common stock held by
D&B stockholders represent a continuing ownership interest in the Company. In
connection with the Distribution, D&B changed its name to R.H. Donnelley
Corporation and D&B common stock has become the Company's common stock (the
`Common Stock'). After the Distribution, the Company's only operating
subsidiary is R.H. Donnelley Inc. (`Donnelley'). Therefore, on a consolidated
basis, the financial statements of the Company and Donnelley are substantially
identical. The financial statements of the Company have been restated to
reflect the recapitalization.
The financial statements reflect 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 D&B corporate headquarters
assets, liabilities and expenses relating to the Company's businesses that were
transferred from D&B on June 30, 1998. Management believes these allocations
are reasonable. However, the costs of these services and benefit charges 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.
These 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 of the Company for the year ended December 31,
1997. Certain 1997 amounts have been restated to conform to the 1998
presentation. 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.
2. Reconciliation of Shares Used in Computing Earnings Per Share
As required by SFAS No. 128, the Company has provided a reconciliation of
basic weighted average shares outstanding to diluted weighted average shares
outstanding during the period in the table below. The conversion of dilutive
shares has no impact on operating results.
Three months Nine Months
ended September 30, ended September 30,
------------------ -------------------
1998 1997 1998 1997
---- ---- ---- ----
(in thousands)
Weighted average number of shares- basic 34,223 34,100 34,249 34,179
Effect of potentially dilutive stock options 220 248 242 188
----- ------- ------ ------
Weighted average number of shares -diluted 34,443 34,348 34,491 34,367
====== ====== ====== ======
3. Commitment
On June 5, 1998, Donnelley entered into a credit agreement with the Chase
Manhattan Bank, as Administrative Agent and the Lenders party thereto (the
`Credit Agreement'). Under the terms of the Credit Agreement, Donnelley
obtained a Senior Revolving Credit Facility of $100 million (the `Revolver') and
Senior Secured Term Facilities in the aggregate amount of $300 million, of which
Donnelley initially borrowed $350 million. The Revolver expires on June 4, 2004
at which time all outstanding borrowings are due. The Senior Secured Term
Facilities mature between June 4, 2004 and December 5, 2006. Donnelley also
issued $150 million of Senior Subordinated Notes. These Notes pay interest
semi-annually at the annual rate of 9.125% and are due in 2008. The net
proceeds of the $500 million were dividended to D&B (and distributed to New
D&B in connection with the Distribution), but repayment of such indebtedness
remains an obligation of Donnelley, and is guaranteed by the Company. At
September 30, 1998, Donnelley had outstanding borrowings under the Credit
Agreement of $336.9 million at a weighted average interest rate of 7.43% per
annum.
To reduce the impact of changes in interest rates on its floating rate long-
term debt under the Credit Agreement, Donnelley entered into three interest rate
swap agreements, expiring 2001 - 2003, having an aggregate notional principal
amount of $175 million. These agreements effectively change the interest rate
on $175 million of floating rate borrowing to fixed rates. The differential is
accrued as interest rates change and is recorded to interest expense. The
notional amount of the swap agreements is used to measure interest to be paid or
received and does not represent the amount of exposure to credit loss.
Donnelley is exposed to credit risk in the event the counterparty does not pay
the interest owed under the interest rate swap agreements; however, Donnelley
does not anticipate nonperformance by the counterparty.
4. Litigation
On July 29, 1996, Information Resources, Inc. (`IRI') filed a complaint in
the United States District Court for the Southern District of New York, naming
as defendants D&B, A.C. Nielsen Company and IMS International Inc. (the `IRI
Action'). New D&B has assumed and will indemnify the Company against any
payments to be made by the Company in respect to the IRI Action under the 1996
Distribution Agreement between D&B, Cognizant and ACNielsen, under the Indemnity
and Joint Defense Agreement or otherwise, including any ongoing legal fees and
expenses related thereto.
In the normal course of business, the Company is subject to proceedings,
lawsuits and other claims. In the opinion of management, the outcome of such
current legal proceedings, claims and litigation will not materially affect the
Company's financial position or results of operations on an annual basis.
5. DonTech Partnerships
In 1991, Donnelley formed a general partnership with an affiliate of
Ameritech Corporation (`Ameritech'), the DonTech Partnership (`DonTech I').
Prior to August 1997, DonTech I solicited advertising, published and delivered
various directories in Illinois and Northwest Indiana. During August 1997,
Donnelley signed a series of agreements with Ameritech changing the structure of
the existing partnership. A new partnership was formed (`DonTech') which was
appointed the exclusive sales agent, in perpetuity, for yellow page directories
that will now be published by Ameritech in Illinois and Northwest Indiana.
The following is summarized combined financial information of the DonTech
Partnerships:
Three months Nine Months
ended September 30, ended September 30,
1998 1997 1998 1997
(in thousands)
Gross Revenues $69,469 $130,470 $247,684 $355,669
Gross Profit 35,321 64,255 159,877 174,314
Income Before Taxes 28,982 55,215 141,567 151,636
6. Subsequent Events
On October 27, 1998, the Company announced that the Board of Directors
authorized the Company to repurchase up to $20 million of its common stock. The
shares may be purchased from time to time over a two year period in the open
market depending on market conditions, in accordance with guidelines established
by the Securities and Exchange Commission.
Also on October 27, 1998, the Board of Directors declared a dividend of
$0.175 per share payable on December 10, 1998 to holders of record on November
20, 1998.
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 that involve risks and uncertainties including risks associated with
developments in the telecommunications industry, including the ongoing
consolidation of telecommunications providers, trends towards alternatives to
print advertising, risks associated with addressing the Year 2000 issues,
including risks related to estimating costs of remediation and predicting the
readiness of third party customers and vendors, and other risks detailed from
time to time in the Company's and Donnelley's filings with the Securities and
Exchange Commission. These statements reflect the Company'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 actual operating results, performance or business prospects to differ
from those expressed in, or implied by, these statements.
FINANCIAL REVIEW
On December 17, 1997, the Board of Directors of The Dun & Bradstreet
Corporation (`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 D&B
distributed to its stockholders shares of New D&B common stock, which represent
a continuing interest in the D&B businesses now conducted by New D&B. On July
1, 1998, as part of the Distribution, D&B distributed to its stockholders shares
of New D&B stock. Shares of D&B common stock held by D&B stockholders represent
a continuing ownership interest in the Company. In connection with the
Distribution, D&B changed its name to R.H. Donnelley Corporation and D&B common
stock has become the Company's common stock (the `Common Stock'). After the
Distribution, the Company's only operating subsidiary is Donnelley.
Certain events and transactions occurred during 1997 which impact the
comparability of the three and nine month results for 1997 and 1998. In August
1997, Donnelley signed a series of agreements with an affiliate of Ameritech
(`Ameritech') changing the structure of the existing DonTech partnership
(`DonTech I'). A new partnership was formed (`DonTech') and was appointed the
exclusive sales agent, in perpetuity, for yellow page directories that are now
published by Ameritech in Illinois and Northwest Indiana (the `DonTech
Restructuring'). Prior to the DonTech Restructuring, DonTech I was the
publisher of annual yellow page directories for Ameritech and recognized
revenues and costs when related directories were published. Under the new
structure, DonTech now recognizes revenues and costs when a customer signs an
advertising sales contract. The total sales in any given year should be
comparable regardless of whether they are recognized when a directory publishes
or when an advertising sales contract is signed. Therefore, the effect of the
DonTech Restructuring should not, on an annual basis, result in materially
different financial results than during 1997. Also, in August 1997, the
Company's contract with Cincinnati Bell expired and in December 1997, the
Company sold its Proprietary-East business (`P-East'). Finally, changes in
scheduling of directory publication dates and sales campaigns for both DonTech
and Bell Atlantic make quarterly comparisons difficult over the time period.
Three Months Ended September 30, 1998 Compared with Three Months Ended September
30, 1997
Gross advertising sales is the billing value of advertisements sold by the
Company, including DonTech. Gross advertising sales figures set forth below are
presented on the same basis on which revenue is recognized (that is, when a
customer signs a sales contract where the Company is a sales agent or when the
directory is published where the Company is the publisher). Gross advertising
sales in the third quarter of 1998 were $300.1 million compared to $200.8
million for the third quarter 1997. Excluding P-East gross advertising sales of
$20.3 million, gross advertising sales increased $119.6 million from $180.5
million in 1997. This increase is primarily due to the DonTech Restructuring, a
shift in the scheduling of certain sales campaigns in the Bell Atlantic region
and the publication of the Company's inaugural annual directory from its
Cincinnati proprietary operations.
On a publication cycle basis (that is, reflecting sales when a directory is
published, regardless of the Company's role), gross advertising sales were
$182.7 million compared to $188.5 million in 1997. Excluding P-East sales of
$20.3 million, publication cycle sales for the quarter were up $14.5 million
compared to the third quarter 1997 amount of $168.2 million. The increase is
primarily attributable to the publication of the Company's inaugural annual
directory from its Cincinnati proprietary operations and higher sales from the
Company's partnerships, particularly from strong growth in the Las Vegas area.
These increases were partially offset by lower sales in Bell Atlantic
directories, primarily in the New York City area.
Revenues are derived from commissions related to advertising sales and from
publishing services provided by the Company, but do not include revenues
generated by sales of advertising by the DonTech partnership. Revenues for the
third quarter of 1998 were $53.4 million as compared to $62.7 million in the
third quarter of 1997. Excluding revenues of the former P-East business of
$23.2 million, revenues were up $13.9 million compared to $39.5 million for the
third quarter of 1997. This increase is primarily due to the publication of the
Company's inaugural directory in Cincinnati and higher publishing revenues
principally due to publishing services which the Company began providing to an
independent yellow pages publisher in 1998 under a long-term agreement.
Partnership income and related fees of $46.4 million was essentially
unchanged from the prior year quarter. Under the terms of the DonTech
Restructuring, the Company receives 50% of the profits generated by the
partnership and receives direct fees from Ameritech which are tied to
advertising sales generated by the partnership. The Company also receives 50%
of the profits generated by the CenDon partnership, a partnership between
Donnelley and an affiliate of Sprint.
Operating and general and administrative expenses were $51.9 million
compared to $57.8 million in the third quarter of 1997. Excluding expenses for
P-East of $19.0 million, expenses were $13.1 million higher than the third
quarter of 1997 amount of $38.8 million. This increase is primarily due to the
expenses related to the publication of the Company's Cincinnati proprietary
directory, increased publishing costs related to the contract with an
independent yellow pages publisher and higher general and administrative
expenses related to being an independent public company after the separation
from D&B.
As a result of the above factors, operating income was $43.1 million as
compared to $46.8 million in the third quarter of 1997. Excluding P-East
operating income of $4.1 million, operating income was essentially unchanged
from the third quarter of 1997 amount of $42.7 million.
Interest expense of $10.4 million in the third quarter of 1998 represents
the interest on the Debt (as defined below; see ` - Liquidity and Capital
Resources').
Nine Months Ended September 30, 1998 Compared with Nine Months Ended September
30, 1997
Gross advertising sales through September 30, 1998 was $701.7 million
compared to $502.8 million for the comparable period of 1997. Excluding gross
advertising sales for P-East of $38.9 million, gross advertising sales increased
by $237.8 million, which was primarily due to the DonTech Restructuring.
Increases due to scheduling shifts for certain sales campaigns in the Bell
Atlantic region were offset by the impact of the expiration of the Cincinnati
Bell contract in 1997.
On a publication cycle basis, gross advertising sales for 1998 were $641.1
million, compared to $709.3 million for 1997. Excluding gross advertising sales
for P-East of $38.9 million, gross advertising sales decreased $29.3 million
from $670.4 million in 1997. This decrease is primarily related to the
expiration of the Cincinnati Bell contract partially offset by gross advertising
sales from the Company's Cincinnati proprietary directory and strong growth at
DonTech and in Sprint's Las Vegas business.
Revenues through September 30, 1998 were $115.7 million compared to $143.4
million through September 30, 1997. Excluding revenues from the former P-East
business of $37.7 million, revenues were $10.0 million higher than the 1997
amount of $105.7 million. The increase is primarily due to higher publishing
revenues from publishing services which the Company began providing to an
independent yellow pages publisher in 1998 and the shift in the scheduling of
certain sales campaigns in the Company's Bell Atlantic markets. The Company
anticipates that this increase from the Bell Atlantic markets will reverse
itself in the fourth quarter and that for the full year, revenues will be
essentially flat as compared to 1997.
Partnership income and related fees of $108.7 million increased by $45.6
million from $63.1 million in 1997 primarily due to the DonTech Restructuring.
The effect of the DonTech Restructuring is expected to reverse itself in the
fourth quarter.
Operating and general and administrative expenses for the nine months ended
September 30, 1998 were $107.3 million compared to $135.7 million in 1997.
Excluding P-East expenses of $34.2 million, operating and general and
administrative expenses increased $5.8 million from the 1997 amount of $101.5
million. This increase is primarily due to higher expenses related to the
publication of the Company's proprietary Cincinnati directory, higher publishing
costs related to the contract with an independent yellow pages publisher and
higher information technology spending, principally the result of timing.
As a result of the above factors, operating income for 1998 was $102.4
million compared to $54.3 million for 1997. Excluding P-East operating income
of $4.2 million, operating income increased $52.3 million compared to $50.1
million in 1997.
Interest expense of $13.4 million through September 30, 1998 represents the
interest on the Debt incurred in connection with the Distribution.
Liquidity And Capital Resources
On June 5, 1998, Donnelley entered into a credit agreement with the Chase
Manhattan Bank, as Administrative Agent, and the Lenders party thereto (the
`Credit Agreement'). Under the terms of the Credit Agreement, Donnelley
obtained a Senior Revolving Credit Facility of $100 million (the `Revolver') and
Senior Secured Term Facilities in the aggregate amount of $300 million, of which
Donnelley initially borrowed $350 million. The Revolver expires on June 4, 2004
at which time all outstanding borrowings are due. The Senior Secured Term
Facilities mature between June 4, 2004 and December 5, 2006. In addition,
Donnelley issued $150 million of Senior Subordinated Notes (the `Notes'). These
Notes pay interest semi-annually at the annual rate of 9.125%, and are due in
2008. The net proceeds of the $500 million (the `Debt') were dividended to D&B
(and distributed to New D&B in connection with the Distribution), but repayment
of such indebtedness remains an obligation of Donnelley, and is guaranteed by
the Company. The Credit Agreement and the Indenture governing the Notes each
contain various financial and other restrictions, including restrictions on
indebtedness, capital expenditures and commitments. At September 30, 1998, the
Company had $336.9 million of outstanding debt under the Credit Agreement
at a weighted average interest rate of 7.43% per annum.
To reduce the impact of changes in interest rates on its floating rate long-
term debt under the Credit Agreement, Donnelley subsequently entered into three
interest rate swap agreements having a total notional principal amount of $175
million. These agreements effectively change the interest rate on $175 million
of floating rate borrowing to fixed rates. The interest rate swap agreements
have terms of 3 - 5 years. The notional amount of the swap agreements is used
to measure interest to be paid or received and does not represent the amount of
exposure to credit loss. Donnelley is exposed to credit risk in the event of
nonperformance by the other party to the interest rate swap agreements.
However, Donnelley does not anticipate nonperformance by the counterparty.
Cash Flow
Net cash provided by operations was $67.9 million through September 30, 1998
compared to $109.6 million through September 30, 1997. Cash flow from
operations decreased $27.9 million excluding cash provided by operations through
September 30, 1997 from the P-East business of $13.8 million. This decrease is
primarily attributable to significantly higher income from partnerships in
excess of cash received, higher taxes paid of $11.2 million and cash provided in
1997 from the Cincinnati Bell relationship of $5.1 million. Cash received from
partnerships through September 30, 1998 was $10.0 million less than cash
received from partnerships through September 30, 1997, and income from
partnerships for the 1998 period was $45.0 million higher than income from
partnerships for the 1997 period. The increase in partnership income is related
to the DonTech Restructuring, and on an annual basis, the income and cash
received from partnerships should be comparable to 1997.
Net cash used in investing activities was $11.0 million through September
30, 1998 compared to $14.3 million through September 30, 1997. The higher
capital spending in 1997 is primarily attributable to purchases of computer
equipment and furniture and fixtures in connection with the relocation of the
Corporate office and the expansion of the Raleigh, N.C. office. Currently, the
Company has no material commitments for capital spending.
Net cash used in financing activities was $46.8 million through September
30, 1998 compared to $95.3 million through September 30, 1997. Prior to July 1,
1998, all cash deposits were transferred to D&B on a daily basis and D&B funded
Donnelley's disbursement bank accounts as required. The net amounts transferred
to D&B were $517.1 million in 1998 and $95.3 million through September 30, 1997.
In connection with the Distribution, the Company received $490.0 million from
the issuance of the Debt which was dividended to D&B and distributed to New D&B.
Additionally, cash was used in 1998 to repay debt ($13.1 million), to repurchase
common stock under Donnelley's systematic stock repurchase plan ($1.0 million)
and to pay a dividend to shareholders ($6.0 million).
On October 27, 1998, the Company announced its decision to institute a stock
repurchase program and to eliminate the quarterly dividend after the payment of
the 1998 fourth quarter dividend payable on December 10, 1998. Under the terms
of the stock repurchase program, the Company is authorized to buy back up to $20
million of its common stock over a two year period.
The Company believes that cash generation, together with available debt
capacity under the Revolver will be sufficient to permit the Company to fund its
cash requirements, including its operating expenses, anticipated capital
expenditures and its debt service requirements, for the foreseeable future.
Year 2000 Issue
The Year 2000 (`Y2K') issue is the result of computer programs being written
using two digits rather than four 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 its Y2K compliance program, all of the Company's installed
computer systems and software products have been assessed for Y2K problems and
the Company anticipates that these computer systems and software products will
be fully Y2K compliant. The Company is currently in the process of replacing
its financial systems (General Ledger, Accounts Receivable, and Fixed Assets)
with systems that use programs from Oracle Corporation. The Company anticipates
that all financial systems will be tested, certified and implemented by the
first quarter of 1999. For all remaining systems, software programs are being
modified or replaced. The Company is requesting assurances from all software
vendors from which it has purchased or licensed software, or from which it may
purchase or license software, that such software will correctly process all date
information at all times. Through continued modifications to existing software
and the conversions to new software, the Company believes that it will be able
to mitigate its 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 the Company's operating
results and financial condition.
The Company's Y2K compliance program is divided 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, (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 as of October 1998
is shown in the table below:
October 1998
Assessment 100%
Remediation 96%
Testing 70%
Implementation 70%
Certification 36%
The Company expects to be substantially completed with each phase of its
program by year-end and to have its Y2K compliance program completed by the
first quarter of 1999. The Company has targeted this date to provide itself
additional time in case of any unanticipated delays or in the event any
complications arise. The Company has spent approximately $3.4 million
addressing the Y2K issues and estimates that it will spend an additional $0.8
million in 1998 and approximately $1.1 million in 1999. These costs will be
funded through cash flows from operations.
In addition, it is possible that certain computer systems or software
products with which the Company's 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. The Company has conducted a review of its computer systems to
attempt to identify ways in which its systems could be affected by interface- or
integration-related problems in correctly processing date information. The
Company is also querying those third-parties with which it maintains business
relationships as to their progress in identifying and addressing their Y2K
issues. Detailed evaluations of the major third parties have been initiated and
contingency plans will be developed if necessary. There can be no assurance
that the Company will identify all interface- or integration- related or third
party related problems in advance of their occurrence, or that the Company will
be able to successfully remedy problems that are discovered. The expenses of
the Company's efforts to identify and address such problems, or the expenses and
liabilities to which the Company may become subject to as a result of such
problems, could have a material adverse effect on its results of operations and
financial condition.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the discussion of legal proceedings found in the
Information Statement attached as Exhibit 99.1 to the Company's Current Report
on Form 8-K filed on June 30, 1998. New D&B has assumed the defense of the
matter discussed therein and to the best of the Company's knowledge there have
been no material changes in the status of the proceedings referenced therein.
The Company is involved in certain legal proceedings incidental to the
normal conduct of its business. The Company does not believe that any
liabilities relating to such legal proceedings to which it is a party are
likely to be, individually or in the aggregate, material to its consolidated
financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of Stockholders of R.H. Donnelley Corporation was held on
August 24, 1998. At the meeting, the stockholders acted upon a proposal to
amend the Company's Restated Certificate of Incorporation to effect a one-for-
five reverse split of the Company's Common Stock. The result of the voting on
this matter was as follows:
Votes For Votes Against Votes Abstained
113,564,841 32,860,165 244,099
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Document
3.1 Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 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)
3.2 By-laws of the Company (incorporated by reference to Exhibit
3.2 to the Registration Statement on Form S-4, filed with
the Securities and Exchange Commission on July 17, 1998,
Registration No. 333-59287)
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 Exchange and Registration Rights Agreement dated as of June
5, 1998, among the Company, Donnelley, and Goldman, Sachs &
Co. and Chase Securities Inc., as Initial Purchasers
(incorporated by reference to Exhibit 4.4 to the Registration
Statement on Form S-4, filed with the Securities and Exchange
Commission on July 17, 1998, Registration No. 333-59287)
4.5 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 Employment Agreement dated as of September 28, 1998 between
the Company and Frank R. Noonan.
10.2 Employment Agreement dated as of September 28, 1998 between
the Company and Philip C. Danford.
10.3 Employment Agreement dated as of September 28, 1998 between
the Company and Alexander R. Marasco.
10.4 Employment Agreement dated as of September 28, 1998 between
the Company and David C. Swanson.
10.5 Employment Agreement dated as of September 28, 1998 between
the Company and Frederick J. Groser.
27.1 Financial Data Schedule of the Company
27.2 Financial Data Schedule of Donnelley
(b) Reports on Form 8-K:
A report on Form 8-K was filed July 17, 1998 under Item 5-Other Events to
report on the Company's decision to (i) convene a special meeting of
stockholders to approve a one-for-five reverse stock split, (ii) commence a
systematic stock repurchase program to offset shares issued under the Company's
employee and director compensation plans and (iii) issue a quarterly dividend.
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: November 13, 1998 By: PHILIP C. DANFORD
-----------------------------------------------
Philip C. Danford
Senior Vice President and Chief Financial Officer
Date: November 13, 1998 By: ANNA M. PATRUNO
-------------------------------------------------
Anna M. Patruno
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: November 13, 1998 By: PHILIP C. DANFORD
--------------------------------------------------
Philip C. Danford
Senior Vice President and Chief Financial Officer
Date: November 13, 1998 By: ANNA M. PATRUNO
--------------------------------------------------
Anna M. Patruno
Vice President and Controller