R.H. Donnelley 1998 Annual Report

Notes to Consolidated Financial Statements

12. Financial Instruments

The Company's financial instruments consist of cash and cash equivalents, accounts receivables and long-term debt, including current maturities. The carrying amount of cash and cash equivalents and accounts receivables reported in the consolidated balance sheet approximates fair value due to the short-term nature of these instruments.

Long-term debt consists of borrowings under committed bank facilities and the Notes. The carrying amount of the Company's borrowings under the committed bank facilities at December 31, 1998, of $318,625 approximates fair value as these obligations bear interest at floating rates. The carrying amount of the Notes at December 31, 1998, was $150,000 and the fair value was $157,875. Fair value was determined based on quoted market prices of similar debt instruments.

The Company enters into interest rate swap agreements to manage market risk and reduce its exposure to fluctuations in interest rates on its variable rate debt. Interest rate swaps allow the Company to raise funds at floating rates and effectively swap them into fixed rates that are lower than those available to it if fixed-rate borrowings were made directly. These agreements involve the exchange of floating-rate for fixed-rate payments without the exchange of the underlying principal amount. At December 31, 1998, the Company had outstanding interest rate swaps with a notional value of $175,000. The swap contracts expire from June 2001 through June 2003. Fixed-rate payments are at rates ranging from 5.86% to 5.90%. Floating-rate payments received are based on rates tied to prevailing short-term interest rates. At December 31, 1998, the average pay rate of outstanding interest rate swaps was 5.88% and the average receive rate was 5.31%. Periodic payments and receipts under the interest rate swaps are recorded as part of interest expense. If the Company terminates a swap agreement, the gain or loss is amortized over the shorter of the remaining original life of the debt or the swap. At December 31, 1998, the unrealized fair value of the interest rate swaps was a loss of $3,582.

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