R.H. Donnelley 1998 Annual Report

Notes to Consolidated Financial Statements

13. 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 by the Company since, among other factors, the employees of DonTech, including officers and managers, are not employees of the Company. Essentially, all the Company's operations are conducted in the United States.

The Company evaluates the performance of its 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 business unit 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 operating segments.

Information for each operating segment for the years ended December 31, 1998, 1997 and 1996 are presented below, (click here or on small image to view).

(1) Advertising sales represent the billing value of advertisements sold by the Company and DonTech. Management reviews the performance of its 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 is a sales agent and when a directory is published where the Company is 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) Reconciling items represent publishing services revenue charged to internal businesses based on costs incurred. These revenues are eliminated in the consolidated financial statements. (3) EBITDA represents earnings before interest, taxes and depreciation and amortization.

The Directory Advertising Services segment information above includes data relating to the P-East and P-West businesses sold in 1997 and 1996, respectively. The amounts related to these businesses are as follows:

The operating loss under the Other column represents general and administrative expenses and other activities not allocated to the business units. Total assets included in the Other column represent those assets not allocated to the business units, such as cash and cash equivalents, prepaid expenses, deferred financing costs and property and equipment.

The Company has two major customers within the Directory Advertising Services segment from which it derives a significant portion of its total revenues. Revenues from one of these major customers were 50% of total revenues in 1998, 36% in 1997 and 36% in 1996. Revenues from the other major customer were 25% of total revenues in 1998, 16% in 1997 and 13% in 1996.

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