Thryv Holdings Inc (THRY) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to R. H. Donnelley's fourth quarter full year results investor teleconference. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Copies of R. H. Donnelley's S.E.C. filings may be obtained by contacting the company, its website or the S.E.C. website at WWW.SEC.gov.

This transmission is the property of R. H. Donnelley. Any retransmission or broadcast without the express consent of the company is strictly prohibited. Please note that today's teleconference call is being recorded and transcribed as well as webcast live over the company's website and I would now like to turn the program over to Mr. Frank Colarusso. Sir, you may begin.

Thank you, and good morning, everyone. I'm Frank Colarusso. On the call today are David Swanson, Chairman and Chief Executive Officer, Steven Blondy, Senior Vice President and Chief Financial Officer and Bill Dressler, Vice President and Controller.

Certain statements made today may be forward-looking within the meaning of the Private Securities Litigation Reform Act. We call your attention to yesterday's earnings press release and management's discussion and analysis of financial conditions and results of operations in the company's annual report on Form 10-K for the year ended December 31st, 2001, as well as the company's other periodic filings with the S.E.C. which set forth important factors that could cause actual results to differ materially from those contained in or suggested by any forward-looking statements. With that I'll turn the call over to David Swanson.

Thank you, Frank. Good morning, everyone, and welcome to R. H. Donnelley's fourth quarter investor call.

2002 was really a defining year for RHD that presented us with great opportunity, but was also not without challenges. From an industry perspective we saw the beginnings of a fundamental shift in ownership of [INAUDIBLE] yellow page companies. More broadly, the year was marked by a continued sluggish economy and weak business confidence. Consequently, I'm thrilled to be able to announce today that not only were we successful in closing the significant. Sprint directories business on January 3rd, transforming our company into one of the leading yellow page publishers in the nation, but also that we achieved our 2002 earnings targets despite the tough economy.

On today's call I'll provide a brief review of the quarter's highlights as well as an overview of progress on the [INAUDIBLE]. then Steven Blondy will take us through the company's fourth quarter and full year results in greater detail as well as explain some of our new financial metrics, the impact of purchase accounting and discuss our outlook for 2003. We realize it's a complex release this quarter, and obviously we'll be happy to take your questions following our prepared remarks.

The fourth quarter was a busy one as we arranged our financing for the Sprint directories acquisition, assembled transition teams for both companies to prepare plans for operating as one organization, and we worked hard to continue to reduce costs and improve advertising sales. Operationally, the highlight of the quarter came from directory advertising services. We saw operating income growth of nearly 18%. This was driven primarily by a return to solid sales growth in our legacy Sprint markets and helped along by lower depreciation expense in publishing and IT.

The sales growth numbers reflect some economic improvement in the Florida and Nevada markets where housing starts and business confidence have begun to recover. They also substantiate that we finally worked our way through these credit policy and billing conversion issues that constrained results in that business over the last five quarters. [INAUDIBLE] on the other hand,...

The general outlook and attitude of small business in our Midwest [INAUDIBLE] markets is in stark contrast to our Florida and Nevada experience. Customers there continued to cut back on the number of directories that they advertise in, cancellations due to business failure or non-payment improved but still remained higher than normal, and new business start-ups were also below that [INAUDIBLE] levels. And we continue to deal with the impact of increased competition in Chicago. As a result, we continued our strategy to service only the advertising in directories that are coming up on dead line versus all of the directories where customers might be advertising throughout the year. To illustrate this, for the fourth quarter we serviced about $80 million of standing advertising at DonTech even though we sold about $85 million in advertising in the quarter last year. The remaining $5 million represents ad programs in directories that don't publish until later in 2003. And consequently, will be serviced later in the year. DonTech's calendar seams in the quarter were $80.7 million. So, adjust being for the shift of servicing that's taken place, DonTech actually was more of a flat performance. Throughout the year at DonTech we also took several actions to reduce operating costs. And the impact of those actions were fully realized in the quarter, offsetting the decline in sales and holding operating income flat. With that operational review of the quarter, I'd now like to provide you some color on our progress with the acquisition integration.

For those of you new to our story, on January 3rd we closed the acquisition of Sprint Publishing and advertising representing a significant milestone in our company's history. Building on Donnelley's 116-year heritage in Yellow Pages and our core competencies, the acquisition transforms the company from a contract sales agent and prepress publishing vendor into one of the nation's leading publishers of yellow page directories. Today we're the official phone book in market where Sprint operates as the local telephone provider across 18 states.

We now publish all 260 Sprint-branded yellow page directories with a total circulation of more than 18 million serving approximately 160,000 local and 4,000 national advertisers. To date the Sprint speak gracious has gone very smoothly and we're optimistic this will continue. As a reminder, we know Sprint Publishing well, having partnered with them for 20 years. That long-standing relationship is helping to facilitate an efficient transition and minimize integration issues.

The first step in the integration was preparing and executing the day 1 plans, our first day of operating that business. This entailed moving a thousand employees on the RHD payroll and benefits systems, it entailed insuring the bills continued to get paid, that the billing and collecting on our receivables base would continue uninterrupted and on and on. I'm very pleased and proud to report that things went off without a hitch. This is a credit to the fine work done by our transition teams of employees from both companies.

The second key item was to quickly announce the team that would lead the new combined enterprise. This was completed by the end of the first week and resulted in the elimination of six senior positions where we either had redundancy or we're electing to deploy a more efficient model. Importantly, we have a highly-motivated forward-looking team running this business today under Peter McDonald's leadership.

Our additional integration plans include further consolidated prepress publishing, information technology and corporate functions which will allow us to reduce the combined pre-merger head count total of some 1600 employees by nearly 18%. These head count reductions many take place over an 18-month transition period dictated largely by publishing and information system migration activities.

Cost savings are driven not only by the reduced compensation associated with head count reductions, but also include planned reductions in outside contractor expense, real estate expenses and the elimination of Sprint corporate expenses associated with finance, IT and human resources. These synergies will reduce annual operating expenses by approximately $20 million, and we expect to gentleman chief this run rate by the back half of 2004.

As for the sales and marketing organizations, Peter McDonald and his team have been conducting extensive on-site operational reviews of the sales locations, which will continue through April. These reviews include meeting with management, the sales force and customers as well as reviewing operational process differences between the various offices. The end result will be a comprehensive and consistent set of operating processes based on best practice for that entire organization.

In summary, we're pleased with the progress we've made so far in combining the two organizations and we're extremely excited about Donnelley's future as a leader in the attractive Yellow Pages industry, an industry that weathers recessions well, enjoys stable growth and produces substantial free cash flow. With that, now lit me turn it over to Steve.

Thanks, Dave. While the Sprint deal has certainly required intense management focus, during 2002 we also kept a keen eye on operations, achieving our earnings targets in both Q4 and for the full year, which is satisfying considering poor advertising media markets and the lagging cycle of the Yellow Pages business, particularly following September 11th.

For the fourth quarter 2002, excluding certain items affect comparability with last year, which I'll review in a moment, we reported adjusted operating income of $27.3 million and adjusted earnings per share of 45 cents, both unchanged from last year. We also reported adjusted Q4 net income of $13.8 million, up 2.2% from 13.5 million last year. Our effective tax rate in the quarter was more than offset by lower interest expense, reflecting debt retirement during the year.

For the full year, excluding these items we reported adjusted earnings per share of $2.42, up 3.4% from last year, and at the mid-point of our guidance from last April. Full year adjusted operating income of $141.6 million million was unchanged from last year. Improved DAS operating income if offset a decline at [INAUDIBLE] and adjusted net income for the year was $73.4 million, up 1% from last year, again reflecting a higher tax rate and lower interest expense.

Now, as I mentioned, several items reported in the quarter affect comparability with last year and most significant were the Sprint acquisition financing costs. Taking advantage of favorable debt markets in the fourth quarter, borrowings were ahead of the anticipated January 2003 closing. As you already know, we achieved favorable pricing on our new $1.5 billion bank credit facilities and our $925 million bond deal was considerably oversubscribed.

In the fourth quarter we incurred interest expense of $11.2 million on these borrowings. The bank facilities are LIBOR A $500 million term loan A and a $125 million revolver are both priced at LIBOR plus 350, whim a $900 million term loan B is priced at LIBOR plus 400. The term loan B funded into escrow in early December. At closing we also drew the full term loan A and $10 million of the revolver.

Our bond deal consisted of two [INAUDIBLE] which O funded into escrow in early December, $325 million of eight-year unsecured notes priced at 8 and 7/8ths percent -- in addition to funding the Sprint acquisition, we also tendered for and retired $128 million of our previous $150 million 9 and 1/8ths senior subordinated notes due 2008. At closing we had cash of about $30 millimeter and 2.35 billion of debt. In addition to the new debt, we also issued $200 million of 8% convertible preferred stock to Goldman Sachs PIA in connection with the acquisition to help fortify our equity base.

In the fourth quarter we posed a $24.7 million after-tax charge related to the first $70 million of the preferred, which was issued in November. This non-cash charge was comprised of half a million dollars of preferred dividends plus a one-time non-cash accounting charges of $24.2348, recognizing a beneficial conversion feature of the preferred.

This BCS, as it's known in the accounting trade, is a function of RHD's stock price on the date the preferred was issued, the preferred conversion price plus the fair value of the 575,000 warrants issued with the preferred. We'll record additional BCF of 38.2 million in the first quarter related to the remaining $130 million of preferred issued at the Sprint closing in January. None of the preferred stock charge represents an actual use of cash.

Additional adjustments in 2002 involve a $1.5 million charge relating to early debt retirement and a million dollars of income from releasing the final Bell Atlantic reserves. And finally, we recorded adjustments to reverse 6.4 million of previous restructuring and disposition reserves established in 2000 Antoine that are no longer necessary and to write off the remaining $2 million balance of our China bid investment.

Now, you may recall we took a $18.6 million restructuring charge and wrote down 11.4 million on China big in the fourth quarter of 2001. Following the Sprint deal, the nature of our restructuring plans has changed considerably and the timing is fortuitous. Just as our publishing and IT capacity freed up following the expiration of a third party pre-press contract, we were to absorb the new Sprint volumes with only a modest investment. Together with the consolidation of our headquarters function, this gives us significant visibility on our synergy targets.

Turning now to operating trends in the fourth quarter, calendar sales at DonTech were $80.7 million, down 4.9% from $84.9 million last year. This decline was due to the persistent difficult economic conditions and resulting cautious in the small business markets in addition to the change in servicing that Dave mentioned earlier. Still, fourth quarter operating income from DonTech was unchanged from last year at $24.2 million, reflecting strict cost controls and improved operating efficiencies that drove fewer customer claims. In our legacy Sprint operations we're quite encouraged by fourth quarter calendar sales increasing 7.1% to $34.5 million from 32.2 million last year, reflecting strong sales in Florida and Nevada.

Fourth quarter operating income at DAS, which consisted of the legacy Sprint operations plus pre-press publishing and IT increased 17.9% to 6.6 million from $5.6 million last year. This increase reflects these improving Sprint sales as well as lower depreciation. Fourth quarter general and corporate expenses were $3.5 million, up from 2.6 million last year due primarily to certain acquisition-related costs.

In the fourth quarter the company used $7.7 million of cash flow, including cash flow used in operations of $6.5 millimeter after paying $19.4 million for interest and fees related to the acquisition. Cap ex and software investment in the quarter totalled $1.2 million. For the full year the company generated $50 million of cash flow and this included cash flow generated from operations of 49.9 million after payments of 19.8 million for interest and fees related to the acquisition. Capital expenditures and software investment for the year totalled 3.7 million, and proceeds from option exercises were $3.8 million.

Now I will turn to the new RHD, some accounting mechanics and our 2003 outlook. First let's dispense with the technical accounting. Publication cycle advertising sales or public sales, as we'll refer to it, represent the value of advertising sales in directories that published in the period regardless of when the advertising for the directories was sold. This metric offers the best view of underlying sales growth similar to a same-store sales metric.

Commencing in 2003, we'll disclose publication sales for Sprint directories as our primary sales performance metric. Nevertheless, Donnelley will recognize publishing revenue using the deferral and amortization method. Under this approach, when a directory is published, the public sales value is posted to the bam sheet as a deferred revenue liability.

Likewise, certain direct costs associated with the production of that directory are posted to the balance sheet as an asset called deferred directory costs. These deferred balance sheet accounts are then amortized into the income statement over the typical 12-month life of the directory, generally in line with our billing cycle.

Thus, as the publisher of the 260 Sprint-branded directories, starting in 2003, Donnelley will recognize the full value of advertising sales as revenue rather than only commissions as in prior years. While this will eventually simplify your financial presentation, certain purchase accounting adjustments add complexity for 2003. Under purchase accounting, pre-acquisition deferred revenue of approximately $295 millimeter reflected on sprint's balance sheet at closing will not be recognized in our 2003 results.

Similarly, we won't expense approximately $40 million of Sprint deferred direct [INAUDIBLE] associated with directories published prior to the acquisition closing. We intend to reconcile these amounts to facilitate comparison to 2002 pro forma revenue and expenses in our 2003 10-Q and 10-K filings. Let me assure you none of these items affect collections, receivables or future billings.

Turning now to our 2003 guidance, we continue to expect public sales growth of approximately 1% for the 260 branded directories and EBITDA before purchase accounting adjustments to be approximately $400 million. Because approximately 45% of 2003 PUP sales were already serviced by the time we closed the acquisition, our impact on PUP sales will only start to appear in late 2003. And due to the mechanics of the deferral and amortization revenue method, actions taken today will begin to meaningfully affect report revenue in 2004.

As a result, we expect 2003 revenue adjusted for purchase accounting to be flat. As for DonTech, we'll continue to disclose calendar sales in addition to PUP sales because DonTech as a sales agent [INAUDIBLE] earn commissions [INAUDIBLE] advertising contracts are signed rather than when directories publish. We don't report revenue from DonTech; rather, only our partnership share of DonTech's income and revenue participation income from SBC, which are both based on DonTech's calendar sales.

In 2003 we're optimistic that business conditions in DonTech markets will improve late in the year. However, at present we expect calendar sales for the next couple quarters to be flat. Reflecting the impact of the previously described purchase accounting rules, we expect 2003 consolidated operating income to be approximately $80 million after anticipated depreciation and amortization expense of approximately $65 million.

Adjusted consolidated operating income, excluding the purchase accounting adjustments, is expected to be approximately $335 million, which derives adjusted EBITDA of approximately $400 million. During 2003 we expect after-tax cash flow of approximately $150 million and this anticipates after-cash interest expense of approximately $185 million, cash taxes of approximately $30 million in capital expenditures and software investment of approximately $20 million, and working capital uses of approximately $15 million. Assuming this entire 150 million in cash flow is used for debt repayment, at the end of 2003 debt should be approximately $2.2 billion, or roughly 5.5 times 2003 EBITDA.

Further, we expect 2003 reported EPS to be a loss of approximately $4 per share reflecting the impact of purchase accounting, the BCF and the two-class EPS method. We'll be using the two-class method as described in our press release because our preferred stockholders have the right to participate in common dividends if declared. However, we do not anticipate declaring common dividends nor paying cash dividends on the preferred during 2003.

Adjusted earnings per share, by removing the effects of purchase accounting, the BCF and the two-class method, are expected to be approximately $2.10. This diluted calculation uses our adjusted net income before preferred dividends in the numerator divided by the diluted share count assuming the preferred is converted and the end of money options and warrants accounted for under the Treasury method are in the denominator.

Finally, we expect cash flow per share of approximate will I $4.50 derived merely by adding back expected depreciation and amortization of approximately 65 million plus non-cash book tax expense of approximately 30 million to adjusted net income in the numerator and using the same diluted share count as in the adjusted EPS calculation in the denominator.

At this time we'll ask anyone that has a question to please press star 1 on your touch tone phone. Your line will be place into the a queue. After you hear your name announced, you may then ask your question. If your question has already been asked and you would like to remove yourself from the queue, you may do so by pressing the pounds key on your phone. If you have a question, please press star 1 at this time. First question is from Steve Weiss with Bear Sterns.

Hi, good morning.

Good morning, Steve.

A couple quick questions for you here. First, obviously we seem to be much closer to war than we were back in November when you were on the road. Is there a sense of what the conversation is with the local merchants you're dealing with now? It sounds from your description of the fourth quarter that you're still seeing very much of a regional difference, but you're not seeing really any change it sounds like overall in terms of attitudes given how people approach this products in 12 months kind much issue.

Hi, Steve. It's Dave. A couple things. It's very much market-driven you know? And while everybody is, you know, cautious, I'd say, even in the markets where we're seeing good growth, it's obvious will be in the back of people's minds. But in some of the bigger Florida markets and Las Vegas, for instance, it seems to be not presenting that much of an issue.

On the flip side, again in the Midwest, you know, we feel all of these things seem to be a little bit more [INAUDIBLE] And then we also have some markets, sort of the newly-acquired markets that are actually military base markets, like Fayetteville or Fort Walton Beach, that it's not so much the talk of the war, it's the fact that the populations of those marketplaces shift pretty significantly when these people get shifted out. So, it's a very mixed bag out there as it relates to that.

Okay. Anything new on the competitive landscape to talk about? I mean, you've got competent particulars probably in most markets now. But I know Chicago was the most notable recent impact. Anything to update us on there?

No. You know, that's just working its course through. As we talked about, we think that probably the largest impact of that disruption is behind us, if history holds true. Other than that, nothing sizeable. There's continued activity just throughout the industry as it just shifts do this duopoly mode. But for the most part, a third competitor in the market where we already had a second competitor doesn't seem to have much of an impact.

Can you just update us where your bad debt expense kind of is turning now and where you expect that to go to over the next year?

Yeah. I'll just cover that, Steve. The bad debt trends in the Sprint markets is actually trending quite favorably. And, you know, the -- we don't sort of have the Sprint numbers to publish yet, but it's actually trended actually even more favorably than we had thought it would during 2002 and that's actually a good thing for a number of reasons.

In the DonTech markets, it's actually stabilized, as well and you know with DonTech we have a cap on our exposure to bad debt. But, you know, high bad debt rates combined with strict credit policy means that people that don't pay don't get back in the book. And that affects renewal rates. So, we're actually pleased that the bad debt rates have stabilized at DonTech. So, that's one of the sort of positive signs there.

Steve, to give you a little more color on the DonTech, it's one of the things that we're a little bitten [INAUDIBLE] about in DonTech is that for accounts that were over 120 days past due in DonTech a year ago with some $16 million, and those are the kinds of account that are waiting to get written off, December of '02 it was like down to $6.2 million. Still not as good as we would expect in a normal environment, but significantly better.

Okay. That's helpful. Thanks a lot.

Thank you.

Our next question is from Kevin Ferris from SunTrust Capital.

Just a quick question on your guidance. Two questions. Does your guidance assume any synergies from the Sprint deal? And the other question is on cap ex. The $20 million number, is that somewhat artificially high because it includes some integration costs and what's kind of a normalized cap ex number?

Sure. Well, those questions are kind of interrelated, I guess and the synergies that we're seeing in 2003 are effectively offset by the kind of operating costs associated with achieving those synergies. So, it's really kind of a net wash on the P&L side.

As far as the cap ex numbers go, some of the software development that is associated with some of this IT publishing migration is actually coming sooner than we had talked about previously. And so, the cap ex number that you see there for 2003 represents a somewhat small shift of software expenditures that we had previously thought would be in 2004 moving forward into 2003.

Okay. But is that $20 million a, you know, a decent number to assume every year?

No. These a number that reflects some specific one-time software investments that are associated with, you know, the integration of publishing and IT.

So, a normalized cap ex number would be around what?

I think we've talked about in the past sort of the 10 to 12 million dollar range or something like that.

Okay. Thank you.

Our next question is from Arnie Ersener with CJS Securities.

Hi. Good morning, everybody. Can you give us pro forma numbers, I know you don't have them completed to the satisfaction perhaps of [INAUDIBLE], but can you give us a feel of what the pro forma numbers would have been for 2002?

You know, we've got a set of pro forma numbers that we're still scrubbing. And, you know, they include Sprint numbers that were audited by Ernst & Young and we're just doing a last once over before we put our imprimatur on on it yet. We do plan to file an 8K in the next three weeks. I think it's the 18th or 19th of March and that will have complete pro for mass in there. So, please be patient with us on that one. We want to make sure we get did right.

One question I've been struggling with is you're obviously increasing your guidance from cash EPS. Can you walk us through how you go from A to B to get your cash EPS number versus guidance from a more on two ago?

I'm not sure what guidance we provided a month or two [INAUDIBLE]. I can walk you through the numbers now, though. And I basically read them off to you earlier. Let's see. You know, we start with the $400 million EBITDA number, we've got $185 million of cash taxes, and --

Interest expense, I think.

I'm sorry. Interest expense. $30 million of cash taxes, and the cap ex and working capital numbers. And that gets you this $150 million cash flow. But let's think about this for a second.

The cash earnings per share before the working capital and the cap ex numbers. So, you take that, I think it's 185 is what you end up with before the working capital and cap ex numbers, and then divide that by the fully diluted share counts, assuming conversion of the golden preferred and the diluted effect of options and warrants, I think the denominator is something like 40 million shares, just a little shy of 40 million shares. Does that get you there?

Well, as I say, I think there is a change. I'm trying to understand exactly what change. I think what appears to be happening is you excluded the preferred payments completely.

Oh, you know what? That's actually a good point there, Ernie. I'm glad you raised that. You know, we've got this two-class method that according to GAAP because the preferred stock has the privilege of being able to participate with common share loans as if we declared dividends on the common shares, the accountants tell us that we have to deduct the dividends from the numerator and assume that the shares are converted in the denominator, which, you know, we do that and that's that $4 loss on a book basis that we talked about. It's calculated on that basis.

But, you know, we don't believe that it's likely that the -- you know, the dividends -- this is really not a common presentation for both the dividends to be deducted from the numerator and conversion of the denominator. So, we excluded the dividends from the numerator in our calculation. That may account for the difference.

I've tried to ask what I hope is a simple question. If there's a simple answer, great. If not, maybe we can do it offline. But can you walk us through the treatment. Preferred dividend payment by quarter? I know you're not paying crash. Do you accrue it by quarter? How do you mechanically walk through this and --

It will be accrued on a quarterly basis. It's an 8% and the only difference is that we've got this BCF that goes to the P&L at the time that the preferred is issued. So, approximately 35% of it in the fourth quarter and the remaining 65% of it in the first quarter.

Steve, if we were to take the 4 million of payment that you have to make by quarter and assume, you know, you have to issue additional pick preferred each quarter and kind of build from there, is that the appropriate way to build this?

Yeah, I think so. It's not technically a pick, but the preferred will accrue at that rate if we don't pay it in cash.

My final question, looking back on one little item, in your DASF there was quite a big difference versus my number there and you mentioned lowered appreciation expense. Did you quantify that number, please?

That's actually in the release. The depreciation expense for the year went down from 10.8 million last year -- well, for depreciation and amortization won't down from 10.8 last year to 6.2 this year. You can see that in the schedules.

What was the impact for --

For the quarter it went down by a million dollars, from 2.5 million last year to a million and a half this year.

One last quick question. Higher paper prices, what would be the impact in your view of the coming year?

Paper is about 20 to 25 million dollars in terms of our annual cost structure. And I think for this year I think we're in pretty good shape. I mean, it may be -- we don't buy a lot of paper forward. At least we haven't done that in the past. We potentially have some exposure in the second half of the year, but we don't think it's that big of a deal this year.

Okay. Thank you.

Our next question is from Eric Lee with Deutsche Banc.

A couple questions just so we understand this purchase accounting. Is it save to say basically on the 400 million on ebb the [INAUDIBLE] for '03, before the purchase accounting impact, the reported EBITDA will be 255 million less? Is that the way to think about it?

That's right.

Okay. And I guess in terms of your [INAUDIBLE] guidance, you're looking at pub sales up 1%. I was wondering if you could kinds of break that down for us in terms of your assumptions for kind of number of local advertiser trends balanced by the local advertiser. I imagine the local advertiser trends are down some percent and the RPU is up some percent. So, I was wondering if you could break that down for us?

Well, we haven't provided that information. And I think, you know, clearly the Yellow Pages business, I think similar to the newspaper business, is facing sort of declining numbers of advertisers and, you know, we're working to manage in that environment and try to turn that around. But, you know, the detail that you're asking for is not something that we've disclosed.

Okay. But I guess just directionally is that kind of how you're kind of looking at that guidance for both those metrics?

I'm not sure what your question is then.

I mean just directionally, I mean, it's person pretty safe to assume that you're building a continued kind of decline in number of local advertisers.

For the year, I think that's right.

Okay. Thank you.

Next question is from Todd Morgan with CIBC World Markets.

Good morning. Thank you. A couple of quick questions. You talked about a 6.4 million parks reversal in restructuring charges. Could you talk about what those actions were that you didn't take?

And secondly, kind of another purchase accounting clarification. The, I guess, 295 million in revenues or deferred revenues that you're not going to be carrying over on the balance sheet, those are still flow-through working capital for the year, I'm assuming. And so, you'll still be collecting a good portion of that is the way I'm looking at that. If you could confirm that?

And I guess lastly, if you now talk to a guy who is a couple of quarters in the DonTech environment about not selling as many -- you know, not entering into as big a canvas as you had in previous years, especially selling that revenue later, I any you said last quarter that it was about 10% of the revenues that you didn't go after. Can you talk about your experience as you start to revisit those same customers and start to sell them the title that you hadn't previously sold them, what their response has been?

Okay.

You take the first one and then I'll take the last one.

The $6.4 million reversal of restructuring charge, in the fourth quarter 2001 we had taken a charge to reflect, among other things, a restructuring following the loss of a pre-press -- a third party pre-press contract that we were performing. And we had announced and had plans to have a significant reduction in force in our pre-press publishing activities in Raleigh and in Dunmore. And as a result of the Sprint acquisition, we now have work for those people to do, and so we don't need to have as substantial a reduction in force. There will still be some redundancies that we'll get at this year and so, there's not a complete reversal of the entire charge that was taken last year.

As far as the $295 million balance sheet, you're absolutely right. That is going to continue to flow. We are going to collect that cash. The purchase accounting adjustments really have no impact on cash flow. So, as far as the DonTech servicing date, maybe you want to --

Yeah, Todd, the fact of the matter is those accounts that we didn't -- or not accounts, but the advertising dollars that we didn't call on or we deferred in Q3 and Q4, we haven't started to call back on yet. Those are -- and it's one of the reasons why we did in fact do the shift, because the directories that those ad dollars were in were such a long ways in front of, you know, when we were asking these advertisers to make the decision.

We'll start calling on those really kind of in the march Time frame is when those will start coming around again. The people that we were calling on last October had said, we'll wait, and come back when its's closer to the deadline. So, we'll have something for you probably on the next call.

Okay. Thank you very much.

Before we take the next question, I would like to tell everyone once again, if you have a question, please press star 1 on your touch tone phone. Our next question is from Charlie Park with Finley Park.

A couple of questions. [INAUDIBLE] and 4 billion in debt or is it [INAUDIBLE] about 17 or 18 million?

I'm sorry. I didn't quite get the whole question, Charlie.

Are you hedging your 2.4 billion in debt with this --

What was the second part of the question?

I'll ask the second part later.

Okay. Well, currently remember, 925 million of the debt is fixed rate already.

Yeah.

And the remaining $1.5 billion -- it's actually I think 1.4 billion is drawn, is floating rate. And in terms of our credit facility we are obliged to have fixed 50% of our total debt. And that requires us to fix approximately between 200 and 250 million dollars for this year. And it's a time frame by the end of March. So, we have plans by the end of the first quarter to affect that. You know, we are also studying quite carefully opportunities to fix or to hedge a greater amount of our floating rate debt to take advantage of relatively low interest rate environment.

That seems to make a lot of sense. How much will that cost you?

I'm sorry?

How much will that hedge cost you?

How much will the hedge cost us?

Yeah, if you were to hedge the [inaudible].

I'm sorry. You're saying the $250 million?

No, the 2.4 billion. [inaudible] the balance of the debt, if you [INAUDIBLE] all of that to make sure you weren't caught up by a rising interest rate, how much of the cost would that be to you?

You know, we haven't looked at what it would cost us to hedge all of it because I think our view is that it's prudent for us to keep some of it floating rate because we don't -- you know, we just think that's the right interest rate management strategy to adopt. But, you know, there will be some cost associated with the 250 million. And I think it will depend on how we go about doing it.

By the way, the cost of hedging the minimum required amount is already included in our interest rate assumptions for the outlook [INAUDIBLE], you know, it won't have an incremental impact on our P&L cash flow.

Okay. And second question is, just so I'm clear, [INAUDIBLE] but am I right in thinking that in a couple of years from here you will pay cash on the preferred dividend out, as well?

You know, I think we'll have to evaluate that at the time. I think that, you know, in the -- if the stock price continues to exceed the conversion price, I think we'll probably elect to pay cash once we get our leverage down, you know, and we're all optimistic that that will continue.

Right. But -- so, in that case, your cash interest [INAUDIBLE] by 16 million. But the second [INAUDIBLE] does come down.

That would be true.

Okay. And this two-year period, is there a certain thing about the two years, or why wouldn't you be paying cash next year on the preferred dividend?

Well, we have certain restrictions in our credit agreement which prevent us from paying cash dividends for the first couple of years until we get our leverage down.

Right.

And so, you know, it's just, you know, the credit market has determined. But I think we have -- we intend to get our leverage down quickly, and we've got the cash flow to be able to do that.

All right. Thanks.

Thank you.

Alan Aimo with Senator Capital is next.

A couple of questions. First, why do you have a $15 million working capital investment given flatter sales expectations in 2003?

You know I think that what you got to be careful of is the difference between pub cycle and actual operating activities and the deferred revenue method while the flat revenue would sort of indicate we wouldn't need that kind of working capital, we do have some growth in the underlying business that will require use of cash.

And just to clarify, what do you think that growth is in the underlying business, then?

Well, we've said approximately 1% PUP cycle growth.

I guess I'm still having a hard time understanding why you have a $15 million working capital investment on 1% revenue growth in a company that maybe pro forma is 550 to 600 million revenue. Is there something I'm missing, or are you guys just being conservative?

Well, we're certainly trying to be conservative on it.

Okay. And then, also, could you explain to me why, it seems to me your guidance on free cash flow is a little light frankly, compared to what you presented bond investors with. For example, the pro forma is about five eight leverage you're expecting by the year end. But it would be about [INAUDIBLE] which is I think you were presenting maybe a half turn leverage reduction per year. And you're a little light on that.

And pro forma EBITDA I think was around 406 million. And you're talking 400. And I realize that some of your cap ex is going to be higher than planned, but not that materially. And I was wondering if there's something I'm missing or are you guys just being conservative?

Well, the 406 number I think was a 2002 number, is that right?

Right.

Yeah. And, you know, I think we're just -- look, this is a very large acquisition, and we're going through a complex integration process where we're migrating information systems in publishing. And so, we're just being cautious in terms of promising and want to make sure that we over achieve.

Okay. Thank you.

Our next question is from Adam Weisis with Alexis Capital.

Hi, guys. I was just wondering if you could walk through the assumptions on the cash taxes of 30 million of '03 versus reported taxes, how you kind of get to that?

Yeah, Adam. It's Frank Colarusso. What basically happens is that the amortization that runs through the P&L is not tax deductible. We have our section 330 H 10 election, which is generating a lot of tax benefits for us except the deduction of roughly 135 million.

The amortization that runs through the P&L is roughly 50 or so. That difference tax affected generates roughly a $30 million permanent difference between book in taxes give than what's running through the P&L. and are those the kind of assumptions to go on going forward, as well, or just for '03?

The taxes for the next 15 years.

Next question is from Howard Brierman with Deutsche Assets.

Good morning. I just want to follow up on a previous question with regards to the 295 million of deferred revenue and the cash flow impact. And you'll forgive me, I guess I'm being a little GAAP-challenged here. But I understand that that won't be carried forward, but if I go back to my accounting 101, I would assume that the flip side of the deferred revenue is 291 million in accounts receivable, if I have that right.

So, to go back to the cash flow I am market, even though the deferred revenues go away, do you have a $295 million receivable that you should be collecting in '03 and we should be seeing 295 million in cash flow flowing through in '03, or are you saying that 295 in receivables is something less and we would see something less than in cash flow coming through? And just secondly, maybe you could just reiterate how the 295 affects the $400 million in pro forma or a projected -- the 400 million in EBITDA next year? Is that the 400 million includes the 295 or you're supposed to exclude it?

Right, right, right. You know what, Howard? Please don't feel badly about the accounting. This is really complex stuff and a lot of it is what I would think is a cane. But the 295 represents -- it's both billed and unbilled receivables as of the date of the closing.

So, a lot of the receivables are yet to be billed representing monthly billing to advertisers, you know, that goes throughout the year. So, the advertising in December publications continues to get billed in the second quarter the third quarter, the fourth quarter, until the book comes up for renewal. So, all that 295 represents billing to be collected from advertisers.

And presumably a good collectable receivable?

In fact, the 295 is after having already provided for $122 million in reserves for both bad debt and advertiser claims. So, it's a net number in that respect.

Okay.

What I can tell you about the impact of the 295 on the EBITDA, if you look at our press release, we actually talk about $40 million of expenses.

Right.

And if you take the 40 million and deduct it from the 295, you get 255.

Got it.

Okay. That 255 is already included in the 400 of EBITDA.

Okay. Very good.

Does that help you out?

It clarifies everything. So, then, there is 295 in collectable receivables or 295 million in cash that should come through in 2003?

Absolutely.

Okay. Great. Thank you.

Before we take the next question, I would like to remind everyone once again if you have a question, please press star 1. The next question is from Brian Krug from Waddle and Reed.

Can you bridge the gap for me? If you look at the [INAUDIBLE] 288 of cash flow and then you have on new business 147 of cash flow for 435 of EBITDA, it looks to me like the 400, can you kind of walk me through how you get from 435 to 400, especially when you guys say you expect 1% publication growth?

Good question, Brian. when we do the pro for mass and when we combine the businesses, in fact the reality of the situation, it's not just an accounting issue. Remember, we had been providing services to Sprint for the last 20 years as their partner. We've been a contract sales agent and been doing all the pre-press publishing activities for those directories where we were the sales agent. And as a result of that Sprint was paying us fees and commissions.

Mm-hmm.

And those fees and commissions get eliminated on the consolidation. So, what was income to us was expense to them. So, therein lies the reconciliation.

Okay. What was the amount of the fees, the bottom line number of the fees?

You know what? We didn't actually disclose that separately. But if you go back and look at our commission revenues from Sprint last year and fees, what, 40 million bucks or something like that.

Okay. Well, thank you.

Thanks, Brian.

Mr. Swanson, there are no further questions in queue at this time.

All right. Well, I want to thank everyone again for joining us this morning. And please, if you have any additional questions, contact either Steven Blondy or Frank Colarusso. Have a great day.