UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2007
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number 001-07155
R.H. DONNELLEY CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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13-2740040
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.)
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1001 Winstead Drive, Cary, N.C.
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27513
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(Address of principal executive offices)
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(Zip Code)
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(919) 297-1600
(Registrants telephone number, including area code)
N/A
(Former Name, Former Address and Former
Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 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
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
þ
Accelerated filer
o
Non-accelerated filer
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
Indicate the number of shares outstanding of the issuers classes of common stock, as of the latest
practicable date:
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Title of class
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Shares Outstanding at October 15, 2007
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Common Stock, par value $1 per share
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71,271,594
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R.H. DONNELLEY CORPORATION
INDEX TO FORM 10-Q
Beginning with the Quarterly Report on Form 10-Q (the Form 10-Q) for the period ended June 30,
2007, R.H. Donnelley Corporation has modified its periodic reporting as compared to previously
filed Quarterly Reports. Although this Form 10-Q contains all information required by applicable
rules and regulations, it does not repeat certain information contained in the Annual Report on
Form 10-K for the fiscal year ended December 31, 2006 (the Form 10-K). As a result, this Form
10-Q should be read together with the Form 10-K.
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
R.H. Donnelley Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
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September 30,
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December 31,
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(in thousands, except share and per share data)
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2007
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2006
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Assets
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Current Assets
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Cash and cash equivalents
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$
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19,042
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$
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156,249
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Accounts receivable
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Billed
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246,112
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248,334
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Unbilled
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835,067
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842,869
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Allowance for doubtful accounts and sales claims
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(44,121
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)
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(42,952
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)
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Net accounts receivable
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1,037,058
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1,048,251
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Deferred directory costs
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198,350
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211,822
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Short-term deferred income taxes, net
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61,766
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Prepaid expenses and other current assets
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99,764
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115,903
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Total current assets
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1,415,980
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1,532,225
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Fixed assets and computer software, net
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184,273
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159,362
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Other non-current assets
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125,317
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141,619
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Intangible assets, net
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11,269,967
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11,477,996
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Goodwill
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3,110,295
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2,836,266
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Total Assets
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$
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16,105,832
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$
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16,147,468
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Liabilities and Shareholders Equity
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Current Liabilities
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Accounts payable and accrued liabilities
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$
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180,790
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$
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169,490
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Accrued interest
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145,510
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179,419
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Deferred directory revenue
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1,167,677
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1,197,796
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Short-term deferred income taxes, net
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79,882
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Current portion of long-term debt
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454,191
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382,631
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Total current liabilities
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1,948,168
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2,009,218
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Long-term debt
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9,746,729
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10,020,521
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Deferred income taxes, net
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2,295,006
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2,099,102
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Other non-current liabilities
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188,840
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197,871
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Total liabilities
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14,178,743
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14,326,712
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Commitments and contingencies
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Shareholders Equity
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Common stock, par value $1 per share, 400,000,000 shares authorized, 88,169,275
shares issued
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88,169
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88,169
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Additional paid-in capital
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2,391,969
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2,341,009
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Accumulated deficit
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(373,402
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)
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(437,496
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)
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Treasury stock, at cost, 16,912,367 shares at September 30, 2007 and 17,704,558
shares at December 31, 2006
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(160,678
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)
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(161,470
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)
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Accumulated other comprehensive loss
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(18,969
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(9,456
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)
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Total shareholders equity
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1,927,089
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1,820,756
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Total Liabilities and Shareholders Equity
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$
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16,105,832
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$
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16,147,468
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The accompanying notes are an integral part of the condensed consolidated financial statements.
3
R.H. Donnelley Corporation and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)
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Three months ended
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Nine months ended
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September 30,
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September 30,
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(in thousands, except per share data)
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2007
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2006
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2007
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2006
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Net revenue
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$
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669,939
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$
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524,191
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$
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1,999,332
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$
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1,277,020
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Expenses
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Cost of revenue (exclusive of depreciation and
amortization shown separately below)
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286,574
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260,047
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866,206
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673,236
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General and administrative expenses
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34,326
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34,497
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104,770
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114,511
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Depreciation and amortization
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111,569
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85,060
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323,748
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233,225
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Total expenses
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432,469
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379,604
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1,294,724
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1,020,972
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Operating income
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237,470
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144,587
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704,608
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256,048
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Interest expense, net
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(201,103
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)
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(201,768
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)
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(601,740
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)
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(557,657
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)
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Income (loss) before income taxes
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36,367
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(57,181
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)
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102,868
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(301,609
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)
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(Provision) benefit for income taxes
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(18,242
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)
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21,796
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(43,871
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)
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114,679
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Net income (loss)
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18,125
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(35,385
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)
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58,997
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(186,930
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)
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Preferred dividend
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(1,974
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)
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Gain on repurchase of redeemable convertible
preferred stock
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31,195
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Income (loss) available to common shareholders
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$
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18,125
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$
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(35,385
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)
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$
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58,997
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$
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(157,709
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)
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Earnings (loss) per share:
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Basic
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$
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0.25
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$
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(0.51
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)
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$
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0.83
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$
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(2.42
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)
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Diluted
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$
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0.25
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$
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(0.51
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)
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$
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0.82
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$
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(2.42
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)
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Shares used in computing earnings (loss) per share:
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Basic
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71,170
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|
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69,961
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70,833
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65,141
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Diluted
|
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72,177
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69,961
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71,926
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65,141
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Comprehensive Income (Loss)
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|
|
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Net income (loss)
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$
|
18,125
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|
|
$
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(35,385
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)
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$
|
58,997
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|
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$
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(186,930
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)
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Unrealized loss on interest rate swaps, net of tax
|
|
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(10,242
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)
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(21,597
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)
|
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(10,622
|
)
|
|
|
(9,106
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)
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Benefit plans adjustment, net of tax
|
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|
371
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|
|
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1,109
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|
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Comprehensive income (loss)
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$
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8,254
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$
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(56,982
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)
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$
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49,484
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$
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(196,036
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)
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The accompanying notes are an integral part of the condensed consolidated financial statements.
4
R.H. Donnelley Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
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Nine months ended
|
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September 30,
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(in thousands)
|
|
2007
|
|
2006
|
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Cash Flows from Operating Activities
|
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Net income (loss)
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$
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58,997
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$
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(186,930
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)
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Reconciliation of net income (loss) to net cash provided by
operating activities:
|
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Depreciation and amortization
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323,748
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233,225
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Deferred income tax provision (benefit)
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36,648
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(114,679
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)
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Provision for bad debts
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61,121
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|
|
|
47,884
|
|
Stock based compensation expense
|
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|
30,013
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|
|
|
35,621
|
|
Other non-cash charges
|
|
|
37,930
|
|
|
|
23,381
|
|
Changes in assets and liabilities, net of effects from acquisitions:
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|
|
|
|
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(Increase) in accounts receivable
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|
|
(49,647
|
)
|
|
|
(31,317
|
)
|
Decrease (increase) in other assets
|
|
|
34,629
|
|
|
|
(32,291
|
)
|
(Decrease) in accounts payable and accrued liabilities
|
|
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(41,406
|
)
|
|
|
(198
|
)
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(Decrease) increase in deferred directory revenue
|
|
|
(30,813
|
)
|
|
|
581,271
|
|
Increase in other non-current liabilities
|
|
|
9,114
|
|
|
|
10,451
|
|
|
|
|
Net cash provided by operating activities
|
|
|
470,334
|
|
|
|
566,418
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Additions to fixed assets and computer software
|
|
|
(61,819
|
)
|
|
|
(41,897
|
)
|
Acquisitions, net of cash received
|
|
|
(328,937
|
)
|
|
|
(1,901,426
|
)
|
Equity investment
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(393,256
|
)
|
|
|
(1,943,323
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of debt, net of costs
|
|
|
323,656
|
|
|
|
2,514,381
|
|
Revolver borrowings
|
|
|
570,650
|
|
|
|
639,400
|
|
Revolver repayments
|
|
|
(566,050
|
)
|
|
|
(600,900
|
)
|
Repurchase of redeemable convertible preferred stock and
redemption of preferred stock purchase rights
|
|
|
|
|
|
|
(336,819
|
)
|
Credit facilities repayments and note repurchases
|
|
|
(562,286
|
)
|
|
|
(714,327
|
)
|
Proceeds from issuance of common stock
|
|
|
9,000
|
|
|
|
|
|
Decrease in checks not yet presented for payment
|
|
|
(1,996
|
)
|
|
|
(3,212
|
)
|
Proceeds from employee stock option exercises
|
|
|
12,741
|
|
|
|
23,643
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(214,285
|
)
|
|
|
1,522,166
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(137,207
|
)
|
|
|
145,261
|
|
Cash and cash equivalents, beginning of year
|
|
|
156,249
|
|
|
|
7,793
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
19,042
|
|
|
$
|
153,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information:
|
|
|
|
|
|
|
|
|
Cash paid:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
587,376
|
|
|
$
|
492,561
|
|
|
|
|
Income taxes, net
|
|
$
|
1,951
|
|
|
$
|
321
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
R.H. Donnelley Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(tabular amounts in thousands, except share and per share data)
1. Business and Basis of Presentation
The interim condensed consolidated financial statements of R.H. Donnelley Corporation and its
direct and indirect wholly-owned subsidiaries (the Company, RHD, we, us and our) have
been prepared in accordance with the instructions to Quarterly Report on Form 10-Q and should be
read in conjunction with the financial statements and related notes included in our Annual Report
on Form 10-K for the year ended December 31, 2006 (2006 10-K). The interim condensed consolidated
financial statements include the accounts of RHD and its direct and indirect wholly-owned
subsidiaries. All intercompany transactions and balances have been eliminated. Amounts presented
for the nine months ended September 30, 2006 include eight months of results from the Dex Media
Business (defined in Note 3, Acquisitions), which was acquired on January 31, 2006. 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 adjustments)
considered necessary for a fair statement of financial position, results of operations and cash
flows at the dates and for the periods presented have been included.
We are one of the nations largest Yellow Pages and online local commercial search companies, based
on revenue. We publish and distribute advertiser content utilizing three of the most highly
recognizable brands in the industry, Qwest, Embarq (formerly known as Sprint) and AT&T (formerly
known as SBC). During 2006, we published and distributed more than 80 million print directories
and our print and online solutions helped more than 600,000 national and local businesses in 28
states reach consumers who were actively seeking to purchase products and services. Some of our
markets include Albuquerque, Denver, Las Vegas, Orlando, and Phoenix.
Significant Business Developments
On August 23, 2007,
we acquired Business.com, Inc. (Business.com), a leading business search
engine and directory and performance based advertising network, for a
disclosed amount of $345.0 million (the
Business.com Acquisition). The purchase price determined
in accordance with generally accepted accounting principles
(GAAP) is $334.2 million and excludes certain items
such as the value of unvested equity awards. The purpose of the Business.com Acquisition was to expand our existing
interactive portfolio by adding leading Internet advertising talent and technology, to strengthen
RHDs position in the expanding local commercial search market and to develop an online performance
based advertising network. Business.com also provides the established business-to-business online
properties of Business.com, Work.com and the Business.com Advertising Network. We expect to adopt
the Business.com technology platform to serve our existing advertiser base at our DexKnows.com
Internet Yellow Pages site. Business.com now operates as a direct, wholly-owned subsidiary of RHD.
The results of Business.com have been included in our consolidated results commencing August 23,
2007. See Note 3, Acquisitions, and Note 6, Credit Facilities, for a further description of the
Business.com Acquisition and related financing. In conjunction with the Business.com Acquisition,
the founder and Chief Executive Officer of Business.com, Jacob Winebaum, has been appointed
President of RHDs Interactive Division.
On October 2, 2007, we issued $1.0 billion aggregate principal amount of 8.875% Series A-4 Senior
Notes due 2017 (Series A-4 Notes). Proceeds from this issuance were (a) used to repay a $328
million RHD credit facility (RHD Credit Facility) used to fund the Business.com Acquisition, (b)
contributed to R.H. Donnelley Inc. (RHDI) in order to provide funding for the tender offer and
consent solicitation of RHDIs $600 million aggregate principal amount 10.875% Senior Subordinated
Notes due 2012 (Senior Subordinated Notes) and (c) used to pay related fees and expenses and for
other general corporate purposes. On October 17, 2007, we issued an additional $500 million of our
Series A-4 Notes. Proceeds from this issuance were transferred to certain subsidiaries in order to
repay portions of the term loans outstanding under the existing Dex Media East and RHDI credit
facilities and pay related fees and expenses.
In October 2007, under the terms and conditions of a tender offer and consent solicitation to
purchase RHDIs $600 million Senior Subordinated Notes that RHDI commenced on September 18, 2007,
$599.9 million, or 99.9%, of the outstanding Senior Subordinated
Notes were repurchased.
6
On October 24, 2007, we replaced the existing Dex Media East credit facility with a new Dex Media
East credit facility. The proceeds from the new Dex Media East credit facility were used to repay
the remaining term loans under the existing Dex Media East credit
facility and are available to provide funding
for the redemption of Dex Media Easts outstanding 9.875% senior notes due 2009 and outstanding
12.125% senior subordinated notes due 2012, which is expected to occur on November 26, 2007.
See Note 12, Subsequent Events, for additional information regarding these financing and other
related transactions.
2. Summary of Significant Accounting Policies
Intangible Assets and Goodwill
In connection with the Companys prior business combinations, certain long-term intangible assets
were identified in accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations
(SFAS No. 141) and recorded at their estimated fair values. In accordance
with SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142), the fair values of the
identifiable intangible assets are being amortized over their estimated useful lives in a manner
that best reflects the economic benefit derived from such assets. Goodwill is not amortized but is
subject to impairment testing on an annual basis. Amortization expense was $98.9 million and $73.4
million for the three months ended September 30, 2007 and 2006, respectively, and $285.9 million
and $199.8 million for the nine months ended September 30, 2007 and 2006, respectively.
Amortization of the local customer relationships associated with the Dex Media Merger commenced
during the first quarter of 2007.
During the three months ended September 30, 2007, $274.1 million has been accounted for as goodwill
resulting from the Business.com Acquisition. Subsequent information could come to our attention
that may require us to revise the purchase price allocation associated with the Business.com
Acquisition. During January 2007, we recorded adjustments to goodwill totaling $1.6 million
associated with the Dex Media Merger that primarily related to deferred income taxes. During the
three months ended September 30, 2007, we re-occupied the remaining portion of our leased
facilities in Chicago, Illinois, which we vacated in conjunction with the 2005 Restructuring
Actions (defined in Note 5, Restructuring Charges). As a result, we have reversed the remaining
amount of our reserve related to these leased facilities at September 30, 2007 of $1.8 million,
with a corresponding offset to goodwill. No impairment losses were recorded related to our
intangible assets and goodwill during the three and nine months ended September 30, 2007 and 2006,
respectively.
Interest Expense and Deferred Financing Costs
Certain costs associated with the issuance of debt instruments are capitalized and included in
other non-current assets on the condensed consolidated balance sheets. These costs are amortized to
interest expense over the terms of the related debt agreements. The bond outstanding method is
used to amortize deferred financing costs relating to debt instruments with respect to which we
make accelerated principal payments. Other deferred financing costs are amortized using the
effective interest method. Amortization of deferred financing costs included in interest expense
was $6.0 million and $5.6 million for the three months ended September 30, 2007 and 2006,
respectively, and $18.1 million and $16.2 million for the nine months ended September 30, 2007 and
2006, respectively. Apart from business combinations, it is the Companys policy to recognize
losses incurred in conjunction with debt extinguishments as a component of interest expense. In
conjunction with the Dex Media Merger and as a result of purchase accounting required under
GAAP, we recorded Dex Medias debt at its fair value
on January 31, 2006. We recognize an offset to interest expense in each period subsequent to the
Dex Media Merger for the amortization of the corresponding fair value adjustment over the life of
the respective debt. The offset to interest expense was $7.9 million and $8.8 million for the three
months ended September 30, 2007 and 2006, respectively, and $23.2 million and $24.0 million for the
nine months ended September 30, 2007 and 2006, respectively.
Advertising Expenses
We recognize advertising expenses as incurred. These expenses include public relations, media,
on-line advertising and other promotional and sponsorship costs. Total advertising expense was
$18.5 million and $7.4 million for the three months ended September 30, 2007 and 2006,
respectively, and $35.5 million and $22.4 million for the nine months ended September 30, 2007 and
2006, respectively.
7
Concentration of Credit Risk
Approximately 85% of our directory advertising revenue is derived from the sale of advertising to
local small- and medium-sized businesses. Most new advertisers and advertisers desiring to expand
their advertising programs are subject to a credit review. While we do not believe that extending
credit to our local advertisers will have a material adverse effect on our results of operations or
financial condition, no assurances can be given. We do not require collateral from our
advertisers, although we do charge interest to advertisers that do not pay by specified due dates.
The remaining approximately 15% of our directory advertising revenue is derived from the sale of
advertising to national or large regional chains. Substantially all of the revenue derived through
national accounts is serviced through certified marketing representatives (CMRs) from which we
accept orders. We receive payment for the value of advertising placed in our directories, net of
the CMRs commission, directly from the CMR. While we are still exposed to credit risk, the amount
of losses from these accounts has been historically less than the local accounts as the
advertisers, and in some cases the CMRs, tend to be larger companies with greater financial
resources than local advertisers.
At September 30, 2007, we had interest rate swap agreements with major financial institutions with
a notional value of $2.5 billion. We are exposed to credit risk in the event that one or more of
the counterparties to the agreements does not, or cannot, meet their obligation. The notional
amount is used to measure interest to be paid or received and does not represent the amount of
exposure to credit loss. Any loss would be limited to the amount that would have been received
over the remaining life of the swap agreement. The counterparties to the swap agreements are major
financial institutions with credit ratings of A or higher. We do not currently foresee a material
credit risk associated with these swap agreements; however, no assurances can be given.
Earnings (Loss) Per Share
For the three and nine months ended September 30, 2007 and three months ended September 30, 2006,
we accounted for earnings (loss) per share (EPS) in accordance with SFAS No. 128,
Earnings Per
Share
(SFAS No. 128)
.
For the nine months ended September 30, 2006 (through January 27, 2006, the
closing date of the GS Repurchase, which is defined in Note 4, Redeemable Preferred Stock and
Warrants), we accounted for EPS in accordance with Emerging Issues Task Force (EITF) No. 03-6,
Participating Securities and the Two-Class Method under FASB Statement 128
(EITF 03-6), which
established standards regarding the computation of EPS by companies that have issued securities
other than common stock that contractually entitle the holder to participate in dividends and
earnings of the company. EITF 03-6 requires earnings available to common shareholders for the
period, after deduction of preferred stock dividends, to be allocated between the common and
preferred stockholders based on their respective rights to receive dividends. Basic EPS is then
calculated by dividing loss allocable to common shareholders by the weighted average number of
shares outstanding. EITF 03-6 does not require the presentation of basic and diluted EPS for
securities other than common stock. Therefore, the following EPS amounts only pertain to our common
stock.
Under the guidance of SFAS No. 128, diluted EPS is calculated by dividing loss allocable to common
shareholders by the weighted average common shares outstanding plus dilutive potential common
stock. Potential common stock includes stock options, stock appreciation rights (SARs),
restricted stock and warrants, the dilutive effect of which is calculated using the treasury stock
method, and prior to the GS Repurchase, our Preferred Stock (as defined in Note 4), the dilutive
effect of which was calculated using the if-converted method.
8
The calculation of basic and diluted EPS for the three and nine months ended September 30, 2007 and
2006 is presented below.
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Three months ended
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Nine months ended
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September 30,
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September 30,
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2007
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2006
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2007
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2006
|
|
Basic EPS
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|
Income (loss) available to common shareholders
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$
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18,125
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|
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$
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(35,385
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)
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$
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58,997
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$
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(157,709
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)
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Amount allocable to common shareholders
(1)
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|
100
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%
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|
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100
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%
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|
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100
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%
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|
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100
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%
|
|
|
|
Income (loss) allocable to common shareholders
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18,125
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(35,385
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)
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58,997
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(157,709
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)
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Weighted average common shares outstanding
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71,170
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69,961
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70,833
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65,141
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Basic earnings (loss) per share
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$
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0.25
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$
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(0.51
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)
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$
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0.83
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$
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(2.42
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)
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Diluted EPS
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Income (loss) available to common shareholders
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$
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18,125
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|
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$
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(35,385
|
)
|
|
$
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58,997
|
|
|
$
|
(157,709
|
)
|
Amount allocable to common shareholders
(1)
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|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
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%
|
|
|
100
|
%
|
|
|
|
Income (loss) allocable to common shareholders
|
|
|
18,125
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|
|
|
(35,385
|
)
|
|
|
58,997
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|
|
|
(157,709
|
)
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Weighted average common shares outstanding
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|
|
71,170
|
|
|
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69,961
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|
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70,833
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65,141
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Dilutive effect of stock awards and warrants
(2)
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1,007
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1,093
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Dilutive
effect of Preferred Stock assuming conversion
(2)
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Weighted average diluted shares outstanding
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72,177
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69,961
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71,926
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65,141
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Diluted earnings (loss) per share
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$
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0.25
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$
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(0.51
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)
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$
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0.82
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|
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$
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(2.42
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)
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|
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(1)
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In computing EPS using the two-class method, we have not allocated the net loss reported for
the nine months ended September 30, 2006 between common and preferred shareholders since
preferred shareholders had no contractual obligation to share in the net loss.
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(2)
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Due to the loss allocable to common shareholders reported for the three and nine months ended
September 30, 2006, the effect of all stock-based awards, warrants and the assumed conversion
of the Preferred Stock were anti-dilutive and therefore are not included in the calculation of
diluted EPS. For the three months ended September 30, 2007 and 2006, 2.7 million and 2.5
million shares, respectively, of stock-based awards had exercise prices that exceeded the
average market price of the Companys common stock for the respective period. For the nine
months ended September 30, 2007 and 2006, 1.1 million and 2.4 million shares, respectively, of
stock-based awards had exercise prices that exceeded the average market price of the Companys
common stock for the respective period. For the nine months ended September 30, 2006, the
assumed conversion of the Preferred Stock into 0.5 million shares of common stock was
anti-dilutive and therefore not included in the calculation of diluted EPS.
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Stock-Based Awards
We account for stock-based compensation under SFAS No. 123 (R),
Share-Based Payment
(SFAS No. 123
(R)). The Company recorded stock-based compensation expense related to stock-based awards granted
under our various employee and non-employee stock incentive plans of $8.5 million and $9.9 million
for the three months ended September 30, 2007 and 2006, respectively, and $30.0 million and $35.6
million for the nine months ended September 30, 2007 and 2006, respectively.
On February 27, 2007, the Company granted 1.1 million SARs to certain employees, including
executive officers, in conjunction with its annual grant of stock incentive awards. These SARs,
which are settled in our common stock, were granted at a grant price of $74.31 per share, which was
equal to the market value of the Companys common stock on the grant date, and vest ratably over
three years. In accordance with SFAS No. 123 (R), we recognized non-cash compensation expense
related to these SARs of $1.4 million and $9.8 million for the three and nine months ended
September 30, 2007, respectively, which includes $6.5 million related to non-substantive vesting
for the nine months ended September 30, 2007.
As a result of the Business.com Acquisition, 4.2 million outstanding Business.com equity awards
were converted into 0.2 million RHD equity awards on August 23, 2007. For the three and nine months
ended September 30, 2007, we recognized non-cash compensation expense related to these converted
equity awards of $1.6 million.
9
Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and
certain expenses and the disclosure of contingent assets and liabilities. Actual results could
differ materially from those estimates and assumptions. Estimates and assumptions are used in the
determination of sales allowances, allowances for doubtful accounts, depreciation and amortization,
employee benefit plans, restructuring reserves, and certain assumptions pertaining to our
stock-based awards, among others.
New Accounting Pronouncements
We have reviewed accounting pronouncements that were issued as of September 30, 2007, which the
Company has not yet adopted, and do not believe that these pronouncements will have a material
impact on our financial position or operating results.
3. Acquisitions
On August 23, 2007,
we acquired Business.com, a leading business search
engine and directory and performance based advertising network, for a
disclosed amount of $345.0 million. The purchase price determined
in accordance with GAAP is $334.2 million and excludes certain items
such as the value of unvested equity awards. The purpose of the Business.com
Acquisition was to expand our existing interactive portfolio by adding leading Internet advertising
talent and technology, to strengthen RHDs position in the expanding local commercial search market
and to develop an online performance based advertising network. Business.com also provides the
established business-to-business online properties of Business.com, Work.com and the Business.com
Advertising Network. We expect to adopt the Business.com technology platform to serve our existing
advertiser base at our DexKnows.com Internet Yellow Pages site. Business.com now operates as a
direct, wholly-owned subsidiary of RHD. The results of Business.com have been included in our
consolidated results commencing August 23, 2007. In conjunction with the Business.com Acquisition,
the founder and Chief Executive Officer of Business.com, Jacob Winebaum, has been appointed
President of RHDs Interactive Division. Under the terms of a
related Stock Purchase Agreement, dated as of
July 27, 2007, on August 23, 2007, Mr. Winebaum purchased from RHD 148,372 shares of RHD common
stock for approximately $9.0 million.
The Business.com Acquisition has been accounted for as a purchase business combination. In
connection with the Business.com Acquisition, we identified and recorded certain intangible assets
at their estimated fair value, including (1) advertiser relationships and third party contracts,
(2) technology and network platforms and (3) trade names and trademarks. These intangible assets
are being amortized over remaining useful lives ranging from 3 to 10 years under the straight-line
method, with the exception of the advertiser relationships and network platform intangible assets,
which are amortized under the income forecast method. During the three months ended September 30,
2007, $274.1 million has been accounted for as goodwill resulting from the Business.com
Acquisition. Subsequent information could come to our attention that may require us to revise the
purchase price allocation associated with the Business.com Acquisition.
On January 31, 2006, we acquired Dex Media, Inc. (Dex Media) for an equity purchase price of
$4.1 billion (the Dex Media Merger). Pursuant to the Agreement and Plan of Merger, dated
October 3, 2005 (Merger Agreement), each issued and outstanding share of Dex Media common stock
was converted into $12.30 in cash and 0.24154 of a share of RHD common stock, resulting in an
aggregate cash value of $1.9 billion and aggregate stock value of $2.2 billion, based on
36,547,381 newly issued shares of RHD common stock valued at $61.82 per share. The $61.82 share
price used to value the common shares issued in the Dex Media Merger was based on the average
closing price of RHDs common stock for the two business days before and after the announcement
of the Dex Media Merger on October 3, 2005, in accordance with EITF 95-19, Determination of the
Measurement Date for the Market Price of Securities Issued in a Purchase Business Combination.
Additionally, we assumed Dex Medias outstanding indebtedness on January 31, 2006 with a fair
value of $5.5 billion. The total allocable purchase price also includes transaction costs of
$26.7 million that were directly related to the Dex Media Merger, severance and related costs for
certain Dex Media employees of $17.7 million and Dex Media vested equity awards outstanding as of
January 31, 2006 with an estimated fair value of $77.4 million, for a total aggregate purchase
price of $9.8 billion.
10
The acquired business of Dex Media and its subsidiaries (Dex Media Business) operates through
Dex Media, Inc., one of RHDs direct, wholly-owned subsidiaries. The results of the Dex Media
Business have been included in the Companys operating results commencing February 1, 2006. To
finance the Dex Media Merger, we issued $660 million 6.875% Senior Discount Notes due January 15,
2013 for gross proceeds of $600.5 million and $1,210 million 8.875% Senior Notes due January 15,
2016 to pay the cash portion of the purchase price to the Dex Media stockholders.
Under purchase accounting rules, we did not assume or record the deferred revenue balance
associated with directories published by Dex Media of $114.0 million at January 31, 2006. These
amounts represented revenue that would have been recognized subsequent to the Dex Media Merger
under the deferral and amortization method in the absence of purchase accounting. Accordingly, we
did not and will not record revenue associated with directories that were published prior to the
Dex Media Merger, as well as directories that were published in the month the Dex Media Merger was
completed. Although the deferred revenue balances associated with directories that were published
prior to the Dex Media Merger were eliminated, we retained all the rights associated with the
collection of amounts due under and contractual obligations under the advertising contracts
executed prior to the Dex Media Merger. As a result, the billed and unbilled accounts receivable
balances acquired in the Dex Media Merger became assets of the Company. Also under purchase
accounting rules, we did not assume or record the deferred directory costs totaling $205.1 million
related to those directories that were published prior to the Dex Media Merger as well as
directories that published in the month the Dex Media Merger was completed. These costs
represented cost of revenue that would have been recognized subsequent to the Dex Media Merger
under the deferral and amortization method in the absence of purchase accounting.
The following unaudited condensed pro forma information has been prepared in accordance with SFAS
No. 141 for the nine months ended September 30, 2006 and assumes the Dex Media Merger (and related
GS Repurchase defined below) and related financing occurred on January 1, 2006. The following
unaudited condensed pro forma information does not purport to represent what the Companys results
of operations would actually have been if the Dex Media Merger (and related GS Repurchase) had in
fact occurred on January 1, 2006 and is not necessarily representative of results of operations for
any future period. The following unaudited condensed pro forma information for the nine months
ended September 30, 2006 does not eliminate the adverse impact of purchase accounting relating to
the Dex Media Merger.
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|
|
Nine months ended
|
|
|
September 30, 2006
|
Net revenue
|
|
$
|
1,416.9
|
|
Operating income
|
|
|
283.6
|
|
Net loss
|
|
|
(225.2
|
)
|
Diluted loss per share
|
|
$
|
(3.17
|
)
|
On September 6, 2006, we acquired (the Local Launch Acquisition) Local Launch, Inc. (Local
Launch). Local Launch is a leading local search products, platform and fulfillment provider that
enables resellers to sell Internet advertising solutions to local advertisers. Local Launch
specializes in search through publishing, distribution, directory and organic marketing solutions.
The purpose of the Local Launch Acquisition was to support the expansion of our current local
search engine marketing (SEM) and search engine optimization (SEO) offerings and provide new,
innovative solutions to enhance our local SEM and SEO capabilities. The results of the Local Launch
business are included in our consolidated results commencing September 6, 2006. The Local Launch
business now operates as a direct wholly-owned subsidiary of RHD.
4. Redeemable Preferred Stock and Warrants
In a series of transactions related to a prior acquisition, in November 2002 and January 2003 we
issued through a private placement 200,604 shares of 8% convertible cumulative preferred stock
(Preferred Stock) and warrants to purchase 1.65 million shares of our common stock to investment
partnerships affiliated with The Goldman Sachs Group, Inc. (the GS Funds) for gross proceeds of
$200 million.
11
In connection with each issuance of our Preferred Stock and each subsequent quarterly dividend date
through September 30, 2005, a beneficial conversion feature (BCF) was recorded because the fair
value of the underlying common stock at the time of issuance was greater than the conversion price
of the Preferred Stock. The BCF was treated as a deemed dividend because the Preferred Stock was
convertible into common stock immediately after issuance. Commencing October 3, 2005, the Preferred
Stock was no longer convertible into common stock, and consequently, we no longer recognized any
BCF after that date.
On January 14, 2005, we repurchased 100,303 shares of our outstanding Preferred Stock from the GS
Funds for $277.2 million in cash. On January 27, 2006, in conjunction with the Dex Media Merger, we
repurchased the remaining 100,301 shares of our outstanding Preferred Stock from the GS Funds for
$336.1 million in cash, including accrued cash dividends and interest (the GS Repurchase)
pursuant to the terms of a Stock Purchase and Support Agreement (the Stock Purchase Agreement)
dated October 3, 2005. Subsequent to the GS Repurchase, we have no outstanding shares of Preferred
Stock.
Based on the terms of the Stock Purchase Agreement, the recorded value of the Preferred Stock was
accreted to its redemption value of $336.1 million at January 27, 2006. The accretion to redemption
value of $2.0 million (which represented accrued dividends and interest) for the nine months ended
September 30, 2006 was recorded as an increase to loss available to common shareholders on the
condensed consolidated statement of operations. In conjunction with the GS Repurchase, we also
reversed the previously recorded BCF related to these shares and recorded a decrease to loss
available to common shareholders of $31.2 million on the condensed consolidated statement of
operations for the nine months ended September 30, 2006.
On May 30, 2006, RHD redeemed the outstanding preferred stock purchase rights issued pursuant to
the Companys stockholder rights plan at a redemption price of one cent per right for a total
redemption payment of $0.7 million. This payment was recorded as a charge to retained earnings in
2006.
On November 2, 2006, we repurchased all outstanding warrants to purchase 1.65 million shares of our
common stock from the GS Funds for an aggregate purchase price of approximately $53.1 million. As a
result, the value of these warrants was removed from shareholders equity on our consolidated
balance sheet at December 31, 2006.
5. Restructuring Charges
The tables below highlight the activity in our restructuring reserves for the three and nine months
ended September 30, 2007.
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2003
|
|
2005
|
|
2006
|
|
|
|
|
Restructuring
|
|
Restructuring
|
|
Restructuring
|
|
|
Three months ended September 30, 2007
|
|
Actions
|
|
Actions
|
|
Actions
|
|
Total
|
|
Balance at June 30, 2007
|
|
$
|
877
|
|
|
$
|
1,837
|
|
|
$
|
5,104
|
|
|
$
|
7,818
|
|
Payments
|
|
|
(47
|
)
|
|
|
(29
|
)
|
|
|
(727
|
)
|
|
|
(803
|
)
|
Reserve reversal credited to goodwill
|
|
|
|
|
|
|
(1,808
|
)
|
|
|
|
|
|
|
(1,808
|
)
|
|
|
|
Balance at September 30, 2007
|
|
$
|
830
|
|
|
$
|
|
|
|
$
|
4,377
|
|
|
$
|
5,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2005
|
|
2006
|
|
|
|
|
Restructuring
|
|
Restructuring
|
|
Restructuring
|
|
|
Nine months ended September 30, 2007
|
|
Actions
|
|
Actions
|
|
Actions
|
|
Total
|
|
Balance at December 31, 2006
|
|
$
|
971
|
|
|
$
|
1,943
|
|
|
$
|
7,615
|
|
|
$
|
10,529
|
|
Additions to reserve charged to goodwill
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
96
|
|
Payments
|
|
|
(141
|
)
|
|
|
(135
|
)
|
|
|
(3,334
|
)
|
|
|
(3,610
|
)
|
Reserve reversal credited to goodwill
|
|
|
|
|
|
|
(1,808
|
)
|
|
|
|
|
|
|
(1,808
|
)
|
|
|
|
Balance at September 30, 2007
|
|
$
|
830
|
|
|
$
|
|
|
|
$
|
4,377
|
|
|
$
|
5,207
|
|
|
|
|
12
As a result of the Dex Media Merger and integration of the Dex Media Business, approximately 120
employees were affected by a restructuring plan, of which 110 were terminated and 10 were relocated
to our corporate headquarters in Cary, North Carolina. Additionally, we vacated certain of our
leased Dex Media facilities in Colorado, Minnesota, Nebraska and Oregon. The costs associated with
these actions are shown in the table above under the caption 2006 Restructuring Actions. We
estimated the costs associated with terminated employees, including Dex Media executive officers,
and abandonment of certain of our leased facilities, net of estimated sublease income, to be
approximately $18.9 million and such costs were charged to goodwill during 2006. During January
2007, we finalized our estimate of costs associated with terminated employees and recognized a
charge to goodwill of $0.1 million. Payments made with respect to severance relating to the 2006
Restructuring Actions during the three months ended September 30, 2007 and 2006 totaled $0.2
million and $3.2 million, respectively. Payments made with respect to severance relating to the
2006 Restructuring Actions during the nine months ended September 30, 2007 and 2006 totaled $1.6
million and $3.8 million, respectively. Payments of $0.5 million and $1.7 million were made with
respect to the vacated leased Dex Media facilities during the three and nine months ended September
30, 2007, respectively. No payments were made with respect to the vacated leased Dex Media
facilities during the three and nine months ended September 30, 2006. The remaining lease payments
for these facilities will be made through 2016.
During the three months ended September 30, 2007, we re-occupied the remaining portion of our
leased facilities in Chicago, Illinois, which we vacated in conjunction with the 2005 Restructuring
Actions. As a result, we have reversed the remaining amount of our reserve related to these leased
facilities at September 30, 2007 of $1.8 million, with a corresponding offset to goodwill.
6. Credit Facilities
RHD
To finance the Business.com Acquisition and related fees and expenses, on August 23, 2007, RHD
entered into a $328.0 million credit facility, with a scheduled maturity date of December 31, 2011.
As of September 30, 2007, the outstanding balance under the RHD Credit Facility totaled $328.0
million. The weighted average interest rate under the RHD Credit Facility was 8.75% at September
30, 2007. On October 2, 2007, the RHD Credit Facility was paid in full from the proceeds of our
Series A-4 Notes. See Note 12, Subsequent Events, for additional information.
RHDI
As of September 30, 2007, the outstanding balances of Term Loans A-4, D-1, and D-2 under RHDIs
senior secured credit facility, as amended and restated (RHDI Credit Facility) totaled $1,781.6
million, comprised of $94.8 million, $333.4 million and $1,353.4 million, respectively, and $29.5
million was outstanding under the $175.0 million Revolving Credit Facility (the RHDI Revolver)
(with an additional $0.3 million utilized under a standby letter of credit). The weighted average
interest rate of outstanding debt under the RHDI Credit Facility was 6.97% and 6.86% at September
30, 2007 and December 31, 2006, respectively. On October 17, 2007, a portion of the Term Loans A-4,
D-1, and D-2 were repaid from certain proceeds of our Series A-4 Notes that we contributed to RHDI.
See Note 12, Subsequent Events, for additional information.
Dex Media East
As of September 30, 2007, the outstanding balances of the tranche A and tranche B term loans under
the Dex Media East credit facility totaled $496.2 million, comprised of $142.9 million and $353.3
million, respectively, and $33.0 million was outstanding under the $100.0 million revolving loan
commitments (Dex Media East Revolver) (with an additional $3.0 million utilized under standby
letters of credit). The weighted average interest rate of outstanding debt under the Dex Media East
credit facility was 7.0% and 6.85% at September 30, 2007 and December 31, 2006, respectively. On
October 17, 2007, a portion of the tranche A and tranche B term loans were repaid from certain
proceeds of our Series A-4 Notes that were transferred to Dex Media East. On October 24, 2007, the
existing Dex Media East credit facility was paid in full from the proceeds of the new Dex Media
East credit facility. See Note 12, Subsequent Events, for additional information.
13
Dex Media West
As of September 30, 2007, the outstanding balances of the tranche A, tranche B-1, and tranche B-2
term loans under the Dex Media West credit facility totaled $1,131.0 million, comprised of $177.8
million, $328.9 million, and $624.3 million, respectively, and $25.0 million was outstanding under
the $100.0 million revolving loan commitments (Dex Media West Revolver). The weighted average
interest rate of outstanding debt under the Dex Media West credit facility was 7.03% and 6.83% at
September 30, 2007 and December 31, 2006, respectively.
7. Income Taxes
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes: An Interpretation of FASB Statement No. 109
(FIN No.
48). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an
entitys financial statements in accordance with SFAS No. 109. FIN No. 48 prescribes a recognition
threshold and measurement principles for the financial statement recognition and measurement of tax
positions taken or expected to be taken on a tax return. Under FIN No. 48, the impact of an
uncertain income tax position on an income tax return must be recognized at the largest amount that
is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain
income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
Additionally, FIN No. 48 provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosures and transition requirements. This
interpretation is effective for fiscal years beginning after December 15, 2006 and as such, we
adopted FIN No. 48 on January 1, 2007.
As a result of implementing FIN No. 48, we recognized an increase of $160.1 million in the
liability for unrecognized tax benefits as of January 1, 2007. The increase in the liability
included a reduction in deferred tax liabilities of $165.2 million and a decrease in accumulated
deficit of $5.1 million.
As of January 1, 2007 and September 30, 2007, and after the impact of recognizing the increase in
the liability for unrecognized tax benefits, our unrecognized tax benefits total $174.1 million and
$11.7 million, respectively, which includes accrued interest (discussed below). Included in the
balance of unrecognized benefits at January 1, 2007 and September 30, 2007 are $5.6 million and
$7.7 million, respectively, of tax benefits that, if recognized, would favorably affect the
effective tax rate.
Our policy is to recognize accrued interest and penalties related to unrecognized tax benefits in
income tax expense. As of January 1, 2007 and September 30, 2007, we have accrued $3.6 million and
$3.2 million, respectively, related to interest and have not accrued any amount for tax penalties.
In July 2007, we effectively settled all issues under consideration with the Internal Revenue
Service (IRS) related to its audit for taxable years 2003 and 2004. As a result of the
settlement, the unrecognized tax benefits associated with our uncertain Federal tax positions
decreased by $167.0 million during the three and nine months ended September 30, 2007. As a result
of the IRS settlement, we recognized additional interest expense of $1.4 million and $0.9 million
related to the taxable years 2004 and 2005, respectively. The recognition of this interest expense
within our tax provision has increased our effective tax rate for the three and nine months ended
September 30, 2007. The unrecognized tax benefits impacted by the IRS audit primarily related to
items for which the ultimate deductibility was highly certain but for which there was uncertainty
regarding the timing of such deductibility.
It is reasonably possible that the amount of unrecognized tax benefits disclosed above could
decrease within the next twelve months. We are currently under audit in New York for taxable years
2000 through 2003 and North Carolina for taxable years 2003 through 2006. During the three months
ended September 30, 2007, we recorded an increase in the liability for unrecognized tax benefits of
$3.4 million. If the New York and North Carolina audits
are resolved within the next twelve months, the total amount of unrecognized tax benefits reported
above could decrease by approximately $11.5 million. The unrecognized tax benefits related to the
New York and North Carolina audits relate to apportionment and allocation of income among our legal
entities.
As noted above, in July 2007, we effectively settled the IRSs federal tax audit for the taxable
years 2003 and 2004. Therefore, tax years 2005 and 2006 are still subject to examination by the
IRS. In addition, certain state tax returns are under examination by various regulatory
authorities, including New York and North Carolina. Our state tax return years are open to
examination for an average of three years. However, certain jurisdictions remain open to
examination longer than three years due to the existence of net operating loss carryforwards.
14
8. Benefit Plans
In accordance with SFAS No. 132,
Employers Disclosures About Pensions and Other Postretirement
Benefits (Revised 2003),
the following table provides the components of net periodic benefit cost
for the three and nine months ended September 30, 2007 and 2006. Information presented below for
the three and nine months ended September 30, 2006 includes combined amounts for the legacy RHD
benefit plans for the three and nine months ended September 30, 2006 and the acquired Dex Media
benefit plans for the three and eight months ended September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Three Months
|
|
Nine Months
|
|
|
Ended September 30,
|
|
Ended September 30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
Service cost
|
|
$
|
3,645
|
|
|
$
|
3,339
|
|
|
$
|
10,936
|
|
|
$
|
9,668
|
|
Interest cost
|
|
|
4,429
|
|
|
|
4,372
|
|
|
|
13,288
|
|
|
|
12,258
|
|
Expected return on plan assets
|
|
|
(4,830
|
)
|
|
|
(4,908
|
)
|
|
|
(14,490
|
)
|
|
|
(14,295
|
)
|
Amortization of prior service cost
|
|
|
41
|
|
|
|
33
|
|
|
|
507
|
|
|
|
117
|
|
Amortization of net loss
|
|
|
353
|
|
|
|
468
|
|
|
|
674
|
|
|
|
1,386
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
3,638
|
|
|
$
|
3,304
|
|
|
$
|
10,915
|
|
|
$
|
9,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits
|
|
|
Three Months
|
|
Nine Months
|
|
|
Ended September 30,
|
|
Ended September 30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
Service cost
|
|
$
|
492
|
|
|
$
|
725
|
|
|
$
|
1,476
|
|
|
$
|
1,996
|
|
Interest cost
|
|
|
1,331
|
|
|
|
1,239
|
|
|
|
3,993
|
|
|
|
3,408
|
|
Amortization of prior service cost
|
|
|
201
|
|
|
|
203
|
|
|
|
604
|
|
|
|
646
|
|
Amortization of net loss
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
156
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
2,024
|
|
|
$
|
2,232
|
|
|
$
|
6,073
|
|
|
$
|
6,206
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2007, the Company made contributions of $11.1
million and $14.6 million, respectively, to its pension plans. During the three and nine months
ended September 30, 2007, the Company made contributions of $0.8 million and $2.9 million,
respectively, to its postretirement plans. The Company expects to make total contributions of
approximately $16.7 million and $5.5 million to its pension plans and postretirement plans,
respectively, in 2007.
9. Business Segments
Management reviews and analyzes its business of publishing yellow pages directories and related
local commercial search as one operating segment.
10. Legal Proceedings
We are involved in various legal proceedings arising in the ordinary course of our business, as
well as certain litigation and tax matters. In many of these matters, plaintiffs allege that they
have suffered damages from errors or omissions of improper listings contained in directories
published by us. We periodically assess our liabilities and contingencies in connection with these
matters based upon the latest information available to us. For those matters where it is probable
that we have incurred a loss and the loss or range of loss can be reasonably estimated, we record
reserves in our condensed consolidated financial statements. In other instances, we are unable to
make a reasonable estimate of any liability because of the uncertainties related to both the
probable outcome and amount or range of loss. As additional information becomes available, we
adjust our assessment and estimates of such liabilities accordingly.
15
The Company is exposed to potential defamation and breach of privacy claims arising from our
publication of directories and our methods of collecting, processing and using advertiser and
telephone subscriber data. If such data were determined to be inaccurate or if data stored by us
were improperly accessed and disseminated by us or by unauthorized persons, the subjects of our
data and users of the data we collect and publish could submit claims against the Company. Although
to date we have not experienced any material claims relating to defamation or breach of privacy, we
may be party to such proceedings in the future that could have a material adverse effect on our
business.
Based on our review of the latest information available, we believe our ultimate liability in
connection with pending or threatened legal proceedings will not have a material adverse effect on
our results of operations, cash flows or financial position. No material amounts have been accrued
in our condensed consolidated financial statements with respect to any of such matters.
In July 2007, The Dun & Bradstreet Corporation (D&B) advised us that it would not appeal the IRS
determination of deficiencies with respect to the remaining Legacy Tax Matter (as defined in the
2006 10-K) and that amounts on deposit with the IRS were more than sufficient to fund such
deficiencies. Accordingly, all Legacy Tax Matters have now been resolved.
11. Guarantees
RHDI is a direct wholly-owned subsidiary of the Company and the issuer of the Senior Notes and
Senior Subordinated Notes. In October 2007, under the terms and conditions of a tender offer and
consent solicitation to purchase RHDIs $600 million Senior Subordinated Notes that RHDI commenced
on September 18, 2007, $599.9 million, or 99.9%, of the outstanding Senior Subordinated Notes were
purchased. See Note 12, Subsequent Events, for additional information.
The Company and the direct and indirect 100% owned subsidiaries of RHDI jointly and severally,
fully and unconditionally, guarantee these debt instruments.
RHDs debt instruments are not guaranteed by any of its subsidiaries. At September 30, 2007,
RHDIs direct wholly-owned subsidiaries were R.H. Donnelley Publishing &
Advertising, Inc., R.H. Donnelley APIL, Inc., DonTech Holdings, LLC, The DonTech II Partnership,
R.H. Donnelley Publishing & Advertising of Illinois Holdings, LLC, R.H. Donnelley Publishing &
Advertising of Illinois Partnership and Get Digital Smart.com Inc. Dex Media, Local Launch and
Business.com are direct wholly-owned subsidiaries of the Company and do not guarantee any debt
instruments of RHD or RHDI. In addition, the Company, RHDI, Local
Launch and Business.com do not
guarantee any debt instruments of Dex Media or its direct or indirect wholly-owned subsidiaries.
The financial results of Dex Media and its subsidiaries and of Local Launch are presented in the
tables below under the heading Non-Guarantor Subsidiaries. The financial results of Business.com
from and after August 23, 2007 are presented in the tables below as of and for the three and nine
months ended September 30, 2007 under the heading Non-Guarantor Subsidiaries.
The following condensed consolidating financial information should be read in conjunction with the
condensed consolidated financial statements of the Company.
In general, substantially all of the net assets of the Company and its subsidiaries are restricted
from being paid as dividends to any third party, and our subsidiaries are restricted from paying
dividends, loans or advances to R.H. Donnelley Corporation, with very limited exceptions under the
terms of our debt agreements.
16
R.H. Donnelley Corporation
Condensed Consolidating Balance Sheet
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R.H. Donnelley
|
|
R.H.
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Consolidated
|
|
|
Corporation
|
|
Donnelley Inc.
|
|
Guarantor
|
|
Guarantor
|
|
|
|
|
|
R.H. Donnelley
|
|
|
(Parent)
|
|
(Issuer)
|
|
Subsidiaries
|
|
Subsidiaries
|
|
Eliminations
|
|
Corporation
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,386
|
|
|
$
|
612
|
|
|
$
|
3,531
|
|
|
$
|
10,513
|
|
|
$
|
|
|
|
$
|
19,042
|
|
Accounts receivable, net
|
|
|
|
|
|
|
|
|
|
|
422,488
|
|
|
|
614,570
|
|
|
|
|
|
|
|
1,037,058
|
|
Deferred directory costs
|
|
|
|
|
|
|
|
|
|
|
77,333
|
|
|
|
121,017
|
|
|
|
|
|
|
|
198,350
|
|
Short-term deferred income taxes, net
|
|
|
|
|
|
|
|
|
|
|
82,538
|
|
|
|
48,749
|
|
|
|
(69,521
|
)
|
|
|
61,766
|
|
Prepaid expenses and other current
assets
|
|
|
3,854
|
|
|
|
16,099
|
|
|
|
25,708
|
|
|
|
54,103
|
|
|
|
|
|
|
|
99,764
|
|
|
|
|
Total current assets
|
|
|
8,240
|
|
|
|
16,711
|
|
|
|
611,598
|
|
|
|
848,952
|
|
|
|
(69,521
|
)
|
|
|
1,415,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
4,910,100
|
|
|
|
1,719,665
|
|
|
|
|
|
|
|
|
|
|
|
(6,629,765
|
)
|
|
|
|
|
Fixed assets and computer software,
net
|
|
|
10,176
|
|
|
|
87,105
|
|
|
|
7,973
|
|
|
|
79,019
|
|
|
|
|
|
|
|
184,273
|
|
Other non-current assets
|
|
|
171,326
|
|
|
|
199,133
|
|
|
|
724
|
|
|
|
19,144
|
|
|
|
(265,010
|
)
|
|
|
125,317
|
|
Intercompany notes receivable
|
|
|
|
|
|
|
1,705,556
|
|
|
|
(1,705,556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
2,695,819
|
|
|
|
8,574,148
|
|
|
|
|
|
|
|
11,269,967
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
313,753
|
|
|
|
2,796,542
|
|
|
|
|
|
|
|
3,110,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
5,099,842
|
|
|
$
|
3,728,170
|
|
|
$
|
1,924,311
|
|
|
$
|
12,317,805
|
|
|
$
|
(6,964,296
|
)
|
|
$
|
16,105,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
9,346
|
|
|
$
|
42,715
|
|
|
$
|
30,427
|
|
|
$
|
95,286
|
|
|
$
|
3,016
|
|
|
$
|
180,790
|
|
Accrued interest
|
|
|
41,589
|
|
|
|
26,725
|
|
|
|
|
|
|
|
77,196
|
|
|
|
|
|
|
|
145,510
|
|
Deferred directory revenue
|
|
|
|
|
|
|
|
|
|
|
430,799
|
|
|
|
736,878
|
|
|
|
|
|
|
|
1,167,677
|
|
Short-term deferred income taxes, net
|
|
|
9,796
|
|
|
|
59,725
|
|
|
|
|
|
|
|
|
|
|
|
(69,521
|
)
|
|
|
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
77,326
|
|
|
|
|
|
|
|
376,865
|
|
|
|
|
|
|
|
454,191
|
|
|
|
|
Total current liabilities
|
|
|
60,731
|
|
|
|
206,491
|
|
|
|
461,226
|
|
|
|
1,286,225
|
|
|
|
(66,505
|
)
|
|
|
1,948,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany, net
|
|
|
310,042
|
|
|
|
348,543
|
|
|
|
(673,799
|
)
|
|
|
66,046
|
|
|
|
(50,832
|
)
|
|
|
|
|
Long-term debt
|
|
|
2,787,878
|
|
|
|
2,341,686
|
|
|
|
|
|
|
|
4,617,165
|
|
|
|
|
|
|
|
9,746,729
|
|
Deferred income taxes, net
|
|
|
2,115
|
|
|
|
|
|
|
|
399,093
|
|
|
|
2,095,735
|
|
|
|
(201,937
|
)
|
|
|
2,295,006
|
|
Other long-term liabilities
|
|
|
11,987
|
|
|
|
49,163
|
|
|
|
18,126
|
|
|
|
124,821
|
|
|
|
(15,257
|
)
|
|
|
188,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
1,927,089
|
|
|
|
782,287
|
|
|
|
1,719,665
|
|
|
|
4,127,813
|
|
|
|
(6,629,765
|
)
|
|
|
1,927,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders
Equity
|
|
$
|
5,099,842
|
|
|
$
|
3,728,170
|
|
|
$
|
1,924,311
|
|
|
$
|
12,317,805
|
|
|
$
|
(6,964,296
|
)
|
|
$
|
16,105,832
|
|
|
|
|
17
R.H. Donnelley Corporation
Condensed Consolidating Balance Sheet
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R.H. Donnelley
|
|
R.H.
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Consolidated
|
|
|
Corporation
|
|
Donnelley Inc.
|
|
Guarantor
|
|
Guarantor
|
|
|
|
|
|
R.H. Donnelley
|
|
|
(Parent)
|
|
(Issuer)
|
|
Subsidiaries
|
|
Subsidiaries
|
|
Eliminations
|
|
Corporation
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
122,565
|
|
|
$
|
1,606
|
|
|
$
|
3,299
|
|
|
$
|
28,779
|
|
|
$
|
|
|
|
$
|
156,249
|
|
Accounts receivable, net
|
|
|
|
|
|
|
|
|
|
|
441,962
|
|
|
|
606,289
|
|
|
|
|
|
|
|
1,048,251
|
|
Deferred directory costs
|
|
|
|
|
|
|
|
|
|
|
67,204
|
|
|
|
144,618
|
|
|
|
|
|
|
|
211,822
|
|
Prepaid expenses and other
current assets
|
|
|
9,485
|
|
|
|
22,908
|
|
|
|
27,109
|
|
|
|
76,159
|
|
|
|
(19,758
|
)
|
|
|
115,903
|
|
|
|
|
Total current assets
|
|
|
132,050
|
|
|
|
24,514
|
|
|
|
539,574
|
|
|
|
855,845
|
|
|
|
(19,758
|
)
|
|
|
1,532,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
4,507,776
|
|
|
|
1,620,213
|
|
|
|
|
|
|
|
|
|
|
|
(6,127,989
|
)
|
|
|
|
|
Fixed assets and computer
software, net
|
|
|
7,258
|
|
|
|
80,949
|
|
|
|
7,127
|
|
|
|
64,028
|
|
|
|
|
|
|
|
159,362
|
|
Other non-current assets
|
|
|
148,066
|
|
|
|
74,485
|
|
|
|
2,212
|
|
|
|
19,705
|
|
|
|
(102,849
|
)
|
|
|
141,619
|
|
Intercompany notes receivable
|
|
|
|
|
|
|
2,102,997
|
|
|
|
(2,102,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
2,755,624
|
|
|
|
8,722,372
|
|
|
|
|
|
|
|
11,477,996
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
315,560
|
|
|
|
2,520,706
|
|
|
|
|
|
|
|
2,836,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
4,795,150
|
|
|
$
|
3,903,158
|
|
|
$
|
1,517,100
|
|
|
$
|
12,182,656
|
|
|
$
|
(6,250,596
|
)
|
|
$
|
16,147,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
8,483
|
|
|
$
|
35,668
|
|
|
$
|
36,942
|
|
|
$
|
88,397
|
|
|
$
|
|
|
|
$
|
169,490
|
|
Accrued interest
|
|
|
90,971
|
|
|
|
11,950
|
|
|
|
|
|
|
|
76,498
|
|
|
|
|
|
|
|
179,419
|
|
Deferred directory revenue
|
|
|
|
|
|
|
|
|
|
|
439,100
|
|
|
|
758,696
|
|
|
|
|
|
|
|
1,197,796
|
|
Short-term deferred income
taxes, net
|
|
|
|
|
|
|
52,036
|
|
|
|
48,907
|
|
|
|
|
|
|
|
(21,061
|
)
|
|
|
79,882
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
112,200
|
|
|
|
|
|
|
|
270,431
|
|
|
|
|
|
|
|
382,631
|
|
|
|
|
Total current liabilities
|
|
|
99,454
|
|
|
|
211,854
|
|
|
|
524,949
|
|
|
|
1,194,022
|
|
|
|
(21,061
|
)
|
|
|
2,009,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany, net
|
|
|
413,098
|
|
|
|
421,302
|
|
|
|
(858,320
|
)
|
|
|
10,986
|
|
|
|
12,934
|
|
|
|
|
|
Long-term debt
|
|
|
2,451,873
|
|
|
|
2,442,269
|
|
|
|
|
|
|
|
5,126,379
|
|
|
|
|
|
|
|
10,020,521
|
|
Deferred income taxes, net
|
|
|
|
|
|
|
113
|
|
|
|
204,320
|
|
|
|
1,994,636
|
|
|
|
(99,967
|
)
|
|
|
2,099,102
|
|
Other long-term liabilities
|
|
|
9,969
|
|
|
|
52,366
|
|
|
|
25,938
|
|
|
|
124,111
|
|
|
|
(14,513
|
)
|
|
|
197,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
1,820,756
|
|
|
|
775,254
|
|
|
|
1,620,213
|
|
|
|
3,732,522
|
|
|
|
(6,127,989
|
)
|
|
|
1,820,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity
|
|
$
|
4,795,150
|
|
|
$
|
3,903,158
|
|
|
$
|
1,517,100
|
|
|
$
|
12,182,656
|
|
|
$
|
(6,250,596
|
)
|
|
$
|
16,147,468
|
|
|
|
|
18
R.H. Donnelley Corporation
Condensed Consolidating Statement of Operations
For the Three months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R.H. Donnelley
|
|
R.H. Donnelley
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
Corporation
|
|
Inc.
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
R.H. Donnelley
|
|
|
|
|
|
|
(Parent)
|
|
(Issuer)
|
Subsidiaries
|
|
|
Subsidiaries
|
|
Eliminations
|
|
Corporation
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
254,759
|
|
|
$
|
419,518
|
|
|
$
|
(4,338
|
)
|
|
$
|
669,939
|
|
|
|
|
|
Expenses
|
|
|
4,418
|
|
|
|
20,556
|
|
|
|
128,447
|
|
|
|
283,052
|
|
|
|
(4,004
|
)
|
|
|
432,469
|
|
|
|
|
|
Partnership and equity income
|
|
|
50,800
|
|
|
|
52,706
|
|
|
|
|
|
|
|
|
|
|
|
(103,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
46,382
|
|
|
|
32,150
|
|
|
|
126,312
|
|
|
|
136,466
|
|
|
|
(103,840
|
)
|
|
|
237,470
|
|
|
|
|
|
Interest expense, net
|
|
|
(56,676
|
)
|
|
|
(6,236
|
)
|
|
|
(41,980
|
)
|
|
|
(96,211
|
)
|
|
|
|
|
|
|
(201,103
|
)
|
|
|
|
|
Other (loss)
|
|
|
|
|
|
|
|
|
|
|
(289
|
)
|
|
|
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes
|
|
|
(10,294
|
)
|
|
|
25,914
|
|
|
|
84,043
|
|
|
|
40,255
|
|
|
|
(103,551
|
)
|
|
|
36,367
|
|
|
|
|
|
(Provision) benefit for
income taxes
|
|
|
28,419
|
|
|
|
2,757
|
|
|
|
(31,337
|
)
|
|
|
(18,126
|
)
|
|
|
45
|
|
|
|
(18,242
|
)
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,125
|
|
|
$
|
28,671
|
|
|
$
|
52,706
|
|
|
$
|
22,129
|
|
|
$
|
(103,506
|
)
|
|
$
|
18,125
|
|
|
|
|
|
|
|
|
R.H. Donnelley Corporation
Condensed Consolidating Statement of Operations
For the Three months ended September 30, 2006
|
|
|
|
R.H. Donnelley
|
|
R.H. Donnelley
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
Corporation
|
|
Inc.
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
R.H. Donnelley
|
|
|
|
|
|
|
(Parent)
|
|
(Issuer)
|
Subsidiaries
|
|
|
Subsidiaries
|
|
Eliminations
|
|
Corporation
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
258,315
|
|
|
$
|
265,876
|
|
|
$
|
|
|
|
$
|
524,191
|
|
|
|
|
|
Expenses
|
|
|
738
|
|
|
|
15,538
|
|
|
|
123,009
|
|
|
|
240,662
|
|
|
|
(343
|
)
|
|
|
379,604
|
|
|
|
|
|
Partnership and equity income
|
|
|
(1,919
|
)
|
|
|
55,883
|
|
|
|
|
|
|
|
|
|
|
|
(53,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(2,657
|
)
|
|
|
40,345
|
|
|
|
135,306
|
|
|
|
25,214
|
|
|
|
(53,621
|
)
|
|
|
144,587
|
|
|
|
|
|
Interest expense, net
|
|
|
(51,818
|
)
|
|
|
(400
|
)
|
|
|
(48,702
|
)
|
|
|
(100,848
|
)
|
|
|
|
|
|
|
(201,768
|
)
|
|
|
|
|
Other (loss)
|
|
|
|
|
|
|
|
|
|
|
(285
|
)
|
|
|
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income
taxes
|
|
|
(54,475
|
)
|
|
|
39,945
|
|
|
|
86,319
|
|
|
|
(75,634
|
)
|
|
|
(53,336
|
)
|
|
|
(57,181
|
)
|
|
|
|
|
Benefit (provision) for
income taxes
|
|
|
19,090
|
|
|
|
4,294
|
|
|
|
(30,436
|
)
|
|
|
29,476
|
|
|
|
(628
|
)
|
|
|
21,796
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(35,385
|
)
|
|
$
|
44,239
|
|
|
$
|
55,883
|
|
|
$
|
(46,158
|
)
|
|
$
|
(53,964
|
)
|
|
$
|
(35,385
|
)
|
|
|
|
|
|
|
|
R.H. Donnelley Corporation
Condensed Consolidating Statement of Operations
For the Nine months ended September 30, 2007
|
|
|
|
R.H. Donnelley
|
|
R.H. Donnelley
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
Corporation
|
|
Inc.
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
R.H. Donnelley
|
|
|
|
|
|
|
(Parent)
|
|
(Issuer)
|
Subsidiaries
|
|
|
Subsidiaries
|
|
Eliminations
|
|
Corporation
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
770,735
|
|
|
$
|
1,235,968
|
|
|
$
|
(7,371
|
)
|
|
$
|
1,999,332
|
|
|
|
|
|
Expenses
|
|
|
11,227
|
|
|
|
56,869
|
|
|
|
400,767
|
|
|
|
832,535
|
|
|
|
(6,674
|
)
|
|
|
1,294,724
|
|
|
|
|
|
Partnership and equity income
|
|
|
160,852
|
|
|
|
152,534
|
|
|
|
|
|
|
|
|
|
|
|
(313,386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
149,625
|
|
|
|
95,665
|
|
|
|
369,968
|
|
|
|
403,433
|
|
|
|
(314,083
|
)
|
|
|
704,608
|
|
|
|
|
|
Interest expense, net
|
|
|
(163,210
|
)
|
|
|
(19,593
|
)
|
|
|
(124,840
|
)
|
|
|
(294,097
|
)
|
|
|
|
|
|
|
(601,740
|
)
|
|
|
|
|
Other (loss)
|
|
|
|
|
|
|
|
|
|
|
(741
|
)
|
|
|
|
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes
|
|
|
(13,585
|
)
|
|
|
76,072
|
|
|
|
244,387
|
|
|
|
109,336
|
|
|
|
(313,342
|
)
|
|
|
102,868
|
|
|
|
|
|
(Provision) benefit for
income taxes
|
|
|
72,582
|
|
|
|
21,628
|
|
|
|
(91,853
|
)
|
|
|
(46,184
|
)
|
|
|
(44
|
)
|
|
|
(43,871
|
)
|
|
|
|
|
|
|
|
Net income
|
|
$
|
58,997
|
|
|
$
|
97,700
|
|
|
$
|
152,534
|
|
|
$
|
63,152
|
|
|
$
|
(313,386
|
)
|
|
$
|
58,997
|
|
|
|
|
|
|
|
|
19
R.H. Donnelley Corporation
Condensed Consolidating Statement of Operations
For the Nine months ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R.H. Donnelley
|
|
R.H. Donnelley
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Consolidated
|
|
|
Corporation
|
|
Inc.
|
|
Guarantor
|
|
Guarantor
|
|
|
|
|
|
R.H. Donnelley
|
|
|
(Parent)
|
|
(Issuer)
|
|
Subsidiaries
|
|
Subsidiaries
|
|
Eliminations
|
|
Corporation
|
|
|
|
Net revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
778,155
|
|
|
$
|
498,865
|
|
|
$
|
|
|
|
$
|
1,277,020
|
|
Expenses
|
|
|
3,965
|
|
|
|
56,894
|
|
|
|
369,018
|
|
|
|
593,197
|
|
|
|
(2,102
|
)
|
|
|
1,020,972
|
|
Partnership and equity income
|
|
|
(93,530
|
)
|
|
|
186,019
|
|
|
|
|
|
|
|
|
|
|
|
(92,489
|
)
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(97,495
|
)
|
|
|
129,125
|
|
|
|
409,137
|
|
|
|
(94,332
|
)
|
|
|
(90,387
|
)
|
|
|
256,048
|
|
Interest expense, net
|
|
|
(142,812
|
)
|
|
|
(29,860
|
)
|
|
|
(116,605
|
)
|
|
|
(268,380
|
)
|
|
|
|
|
|
|
(557,657
|
)
|
Other (loss)
|
|
|
|
|
|
|
|
|
|
|
(935
|
)
|
|
|
|
|
|
|
935
|
|
|
|
|
|
|
|
|
(Loss) income before income
taxes
|
|
|
(240,307
|
)
|
|
|
99,265
|
|
|
|
291,597
|
|
|
|
(362,712
|
)
|
|
|
(89,452
|
)
|
|
|
(301,609
|
)
|
Benefit (provision) for
income taxes
|
|
|
53,377
|
|
|
|
28,767
|
|
|
|
(105,578
|
)
|
|
|
141,150
|
|
|
|
(3,037
|
)
|
|
|
114,679
|
|
|
|
|
Net (loss) income
|
|
|
(186,930
|
)
|
|
|
128,032
|
|
|
|
186,019
|
|
|
|
(221,562
|
)
|
|
|
(92,489
|
)
|
|
|
(186,930
|
)
|
Preferred dividend
|
|
|
(1,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,974
|
)
|
Gain on repurchase of
preferred stock
|
|
|
31,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,195
|
|
|
|
|
(Loss) income available to
common shareholders
|
|
$
|
(157,709
|
)
|
|
$
|
128,032
|
|
|
$
|
186,019
|
|
|
$
|
(221,562
|
)
|
|
$
|
(92,489
|
)
|
|
$
|
(157,709
|
)
|
|
|
|
R.H. Donnelley Corporation
Condensed Consolidating Statement of Cash Flows
For the Nine months ended September 30, 2007
|
|
|
|
R.H. Donnelley
|
|
R.H. Donnelley
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Consolidated
|
|
|
Corporation
|
|
Inc.
|
|
Guarantor
|
|
Guarantor
|
|
|
|
|
|
R.H. Donnelley
|
|
|
(Parent)
|
|
(Issuer)
|
|
Subsidiaries
|
|
Subsidiaries
|
|
Eliminations
|
|
Corporation
|
|
|
|
Cash flow from operating activities
|
|
$
|
(217,839
|
)
|
|
$
|
252,865
|
|
|
$
|
(2,693
|
)
|
|
$
|
432,091
|
|
|
$
|
5,910
|
|
|
$
|
470,334
|
|
Cash flow from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to fixed assets and
computer software
|
|
|
(2,919
|
)
|
|
|
(21,595
|
)
|
|
|
(2,155
|
)
|
|
|
(35,150
|
)
|
|
|
|
|
|
|
(61,819
|
)
|
Acquisitions, net of cash
received
|
|
|
(334,260
|
)
|
|
|
|
|
|
|
|
|
|
|
5,323
|
|
|
|
|
|
|
|
(328,937
|
)
|
Equity investment
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,500
|
)
|
|
|
|
Net cash flow used in investing
activities
|
|
|
(339,679
|
)
|
|
|
(21,595
|
)
|
|
|
(2,155
|
)
|
|
|
(29,827
|
)
|
|
|
|
|
|
|
(393,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt,
net of costs
|
|
|
323,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
323,656
|
|
Revolver borrowings
|
|
|
|
|
|
|
283,850
|
|
|
|
|
|
|
|
286,800
|
|
|
|
|
|
|
|
570,650
|
|
Revolver repayments
|
|
|
|
|
|
|
(309,750
|
)
|
|
|
|
|
|
|
(256,300
|
)
|
|
|
|
|
|
|
(566,050
|
)
|
Credit facilities repayments and
note repurchases
|
|
|
|
|
|
|
(109,557
|
)
|
|
|
|
|
|
|
(452,729
|
)
|
|
|
|
|
|
|
(562,286
|
)
|
Proceeds from issuance of common
stock
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,000
|
|
Increase (decrease) in book
overdrafts
|
|
|
(336
|
)
|
|
|
(1,663
|
)
|
|
|
(1,696
|
)
|
|
|
1,699
|
|
|
|
|
|
|
|
(1,996
|
)
|
Proceeds from employee stock
option exercises
|
|
|
12,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,741
|
|
Excess tax benefit from employee
stock option exercises
|
|
|
|
|
|
|
5,910
|
|
|
|
|
|
|
|
|
|
|
|
(5,910
|
)
|
|
|
|
|
Intercompany Debt
|
|
|
|
|
|
|
(56,776
|
)
|
|
|
56,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends to Parent
|
|
|
94,278
|
|
|
|
(44,278
|
)
|
|
|
(50,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow used in financing
activities
|
|
|
439,339
|
|
|
|
(232,264
|
)
|
|
|
5,080
|
|
|
|
(420,530
|
)
|
|
|
(5,910
|
)
|
|
|
(214,285
|
)
|
|
|
|
Change in cash
|
|
|
(118,179
|
)
|
|
|
(994
|
)
|
|
|
232
|
|
|
|
(18,266
|
)
|
|
|
|
|
|
|
(137,207
|
)
|
Cash at beginning of year
|
|
|
122,565
|
|
|
|
1,606
|
|
|
|
3,299
|
|
|
|
28,779
|
|
|
|
|
|
|
|
156,249
|
|
|
|
|
Cash at end of period
|
|
$
|
4,386
|
|
|
$
|
612
|
|
|
$
|
3,531
|
|
|
$
|
10,513
|
|
|
$
|
|
|
|
$
|
19,042
|
|
|
|
|
20
R.H. Donnelley Corporation
Condensed Consolidating Statement of Cash Flows
For the Nine months ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R.H.
|
|
R.H.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Donnelley
|
|
Donnelley
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
Corporation
|
|
Inc.
|
|
Guarantor
|
|
Guarantor
|
|
|
|
|
|
R.H. Donnelley
|
|
|
|
|
|
|
(Parent)
|
|
(Issuer)
|
|
Subsidiaries
|
|
Subsidiaries
|
|
Eliminations
|
|
Corporation
|
|
|
|
|
|
|
|
Cash flow from operations
|
|
$
|
8,430
|
|
|
$
|
161,768
|
|
|
$
|
66,437
|
|
|
$
|
301,374
|
|
|
$
|
28,409
|
|
|
$
|
566,418
|
|
|
|
|
|
Cash flow from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to
fixed assets and computer software
|
|
|
(923
|
)
|
|
|
(25,808
|
)
|
|
|
(1,358
|
)
|
|
|
(13,808
|
)
|
|
|
|
|
|
|
(41,897
|
)
|
|
|
|
|
Acquisitions, net of cash received
|
|
|
(1,768,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(132,839
|
)
|
|
|
(1,901,426
|
)
|
|
|
|
|
|
|
|
Net cash flow used in investing
activities
|
|
|
(1,769,510
|
)
|
|
|
(25,808
|
)
|
|
|
(1,358
|
)
|
|
|
(13,808
|
)
|
|
|
(132,839
|
)
|
|
|
(1,943,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt,
net of costs
|
|
|
2,079,005
|
|
|
|
(1,397
|
)
|
|
|
|
|
|
|
443,181
|
|
|
|
(6,408
|
)
|
|
|
2,514,381
|
|
|
|
|
|
Revolver borrowings
|
|
|
|
|
|
|
185,600
|
|
|
|
|
|
|
|
453,800
|
|
|
|
|
|
|
|
639,400
|
|
|
|
|
|
Revolver repayments
|
|
|
|
|
|
|
(172,200
|
)
|
|
|
|
|
|
|
(428,700
|
)
|
|
|
|
|
|
|
(600,900
|
)
|
|
|
|
|
Repurchase of redeemable
convertible preferred stock
|
|
|
(336,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(336,819
|
)
|
|
|
|
|
Credit
facilities repayments and note repurchases
|
|
|
|
|
|
|
(215,580
|
)
|
|
|
|
|
|
|
(501,663
|
)
|
|
|
2,916
|
|
|
|
(714,327
|
)
|
|
|
|
|
(Decrease) increase in checks not
yet presented for payment
|
|
|
219
|
|
|
|
518
|
|
|
|
(323
|
)
|
|
|
(3,626
|
)
|
|
|
|
|
|
|
(3,212
|
)
|
|
|
|
|
Proceeds from employee stock option
exercises
|
|
|
23,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,643
|
|
|
|
|
|
Dividends to Parent
|
|
|
137,745
|
|
|
|
65,000
|
|
|
|
(65,000
|
)
|
|
|
(265,745
|
)
|
|
|
128,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow provided by (used in)
financing activities
|
|
|
1,903,793
|
|
|
|
(138,059
|
)
|
|
|
(65,323
|
)
|
|
|
(302,753
|
)
|
|
|
124,508
|
|
|
|
1,522,166
|
|
|
|
|
|
|
|
|
Change in cash
|
|
|
142,713
|
|
|
|
(2,099
|
)
|
|
|
(244
|
)
|
|
|
(15,187
|
)
|
|
|
20,078
|
|
|
|
145,261
|
|
|
|
|
|
Cash at beginning of year
|
|
|
830
|
|
|
|
2,703
|
|
|
|
4,260
|
|
|
|
20,078
|
|
|
|
(20,078
|
)
|
|
|
7,793
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
143,543
|
|
|
$
|
604
|
|
|
$
|
4,016
|
|
|
$
|
4,891
|
|
|
$
|
|
|
|
$
|
153,054
|
|
|
|
|
|
|
|
|
12. Subsequent Events
On October 2, 2007, we issued $1.0 billion of Series A-4 Notes. Proceeds from the Series A-4 Notes
were (a) used to repay the $328 million RHD Credit Facility used to fund the Business.com
Acquisition, (b) contributed to RHDI in order to provide funding for the tender offer and consent
solicitation of RHDIs $600 million Senior Subordinated Notes and (c) used to pay related fees and
expenses and for other general corporate purposes. On October 17, 2007, we issued an additional
$500 million of Series A-4 Notes. Proceeds from this issuance were transferred to certain
subsidiaries in order to repay portions of the term loans outstanding under the existing Dex Media
East and RHDI credit facilities and pay related fees and expenses.
Interest on the Series A-4 Notes is payable semi-annually on April 15 and October 15 of each year,
commencing on April 15, 2008. The Series A-4 Notes are senior unsecured obligations of RHD, senior
in right of payment to all of RHDs existing and future senior subordinated debt and future
subordinated obligations and rank equally with any of RHDs existing and future senior unsecured
debt. The Series A-4 Notes are effectively subordinated to RHDs secured debt, including RHDs
guarantee of borrowings under the RHDI Credit Facility and are structurally subordinated to any
existing or future liabilities (including trade payables) of our direct and indirect subsidiaries.
The Series A-4 Notes were issued to certain institutional investors in an offering exempt from
registration requirements under the Securities Act of 1933. Under the terms of a registration
rights agreement, the Company has agreed to file a registration statement for the Series A-4 Notes
within 210 days subsequent to the initial closing.
In October 2007, under the terms and conditions of a tender offer and consent solicitation to
purchase RHDIs $600 million Senior Subordinated Notes that RHDI commenced on September 18, 2007,
$599.9 million, or 99.9%, of the outstanding Senior Subordinated
Notes were repurchased.
21
The tender offer and repayment of the RHD Credit Facility will be accounted for as extinguishments
of debt resulting in a loss charged to interest expense during the three months ending December 31,
2007. RHDI expects to redeem the remaining outstanding Senior Subordinated Notes. December 15,
2007 is the first date upon which such redemption may occur pursuant to the terms of that
indenture. This statement shall not constitute a notice of redemption under that indenture, and
such notice, if made, will only be made in accordance with the applicable provisions of that
indenture.
On October 17, 2007, $300.0 million of the term loans outstanding under the Dex Media East credit
facility and $191.0 million of the term loans outstanding under the RHDI credit facility were
repaid from the proceeds of the Series A-4 Notes issued on October 17, 2007. The partial repayment
of the term loans outstanding under these credit facilities will be accounted for as
extinguishments of debt resulting in a loss charged to interest expense during the three months
ending December 31, 2007.
On October 24, 2007, we replaced the existing Dex Media East credit facility with a new Dex Media
East credit facility. The new Dex Media East credit facility consists of a $700.0 million
aggregate principal amount tranche A term loan facility with a six-year term, a $400.0
million aggregate principal amount tranche B term loan facility with a seven-year
term, a $100.0 million aggregate principal amount revolving loan facility and a $200.0 million
aggregate principal amount uncommitted incremental facility, in which
Dex Media East would have the right, subject to obtaining commitments
for such incremental loans, on
one or more occasions to increase the tranche A term loan, tranche B term loan or the revolving
loan facility by such amount. The tranche A term loan may be
borrowed in a single drawing on any date (the Drawdown
Date) on or prior to December 4, 2007. The tranche B
term loan may be borrowed in two drawings: once on the closing date
and a second on the Drawdown Date. The new credit facility is secured by pledges of similar assets and
has similar covenants and events of default as the existing Dex Media East credit facility. The
proceeds from the new credit facility were used to repay the remaining term loans under the
existing Dex Media East credit facility and the delayed draw term
loans are available to provide funding for the redemption of Dex Media
Easts outstanding 9.875% senior notes due 2009 and outstanding 12.125% senior subordinated notes
due 2012, which is expected to occur on November 26, 2007. The repayment of the remaining term
loans outstanding under the existing Dex Media East credit facility
and redemption of Dex Media
Easts outstanding 9.875% senior notes and outstanding 12.125% senior subordinated notes will be
accounted for as extinguishments of debt resulting in a loss charged to interest expense during the
three months ending December 31, 2007.
22
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
Certain statements contained in this Quarterly Report on Form 10-Q regarding our future operating
results, performance, business plans or prospects and any other statements not constituting
historical fact are forward-looking statements subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. Where possible, words such as believe, expect,
anticipate, should, will, would, planned, estimated, potential, goal, outlook,
could, and similar expressions, are used to identify such forward-looking statements. All
forward-looking statements reflect only our current beliefs and assumptions with respect to our
future results, business plans and prospects, and are based solely on information currently
available to us. Accordingly, these statements are subject to significant risks and uncertainties
and our actual results, business plans and prospects could differ significantly from those
expressed in, or implied by, these statements. We caution readers not to place undue reliance on,
and we undertake no obligation to update, other than imposed by law, any forward-looking
statements. Such risks, uncertainties and contingencies include, but are not limited to,
statements about the continuing benefits of the merger between R.H. Donnelley Corporation (RHD)
and Dex Media, Inc. (Dex Media) (the Dex Media Merger), including future financial and
operating results, RHDs plans, objectives, expectations and intentions and other statements that
are not historical facts. The following factors, among others, could cause actual results to differ
from those set forth in the forward-looking statements: (1) the risk that the legacy Dex Media and
RHD businesses will not continue to be integrated successfully; (2) the risk that the expected
strategic advantages and remaining cost savings from the Dex Media Merger may not be fully realized
or may take longer to realize than expected; (3) disruption from the Dex Media Merger making it
more difficult to maintain relationships with customers, employees or suppliers; and (4) general
economic conditions and consumer sentiment in our markets. Additional risks and uncertainties are
described in detail in Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended
December 31, 2006 (2006 10-K). Unless otherwise indicated, the terms Company, we, us and
our refer to R.H. Donnelley Corporation and its direct and indirect wholly-owned subsidiaries.
Corporate Overview
We are one of the nations largest Yellow Pages and online local commercial search companies, based
on revenue. We publish and distribute advertiser content utilizing three of the most highly
recognizable brands in the industry, Qwest, Embarq (formerly known as Sprint) and AT&T (formerly
known as SBC). Our triple-play integrated marketing solutions assist advertisers by attracting
large volumes of ready-to-buy consumers through the combination of our print directories, Internet
Yellow Pages (IYP) and search engine marketing (SEM) and search engine optimization (SEO)
services.
As previously announced, we are utilizing a new Dex market brand for all of our print and online
products across our entire footprint. As part of this branding strategy, we also announced
DexKnows.com
®
as our new uniform resource locator (URL) across our entire footprint
that will upgrade our existing online sites over the remainder of 2007 and into 2008. This
initiative was undertaken as IYP is a cornerstone of our triple play strategy and this platform
will make our rich, accurate content available on a single search site. We will continue to
leverage the recognizable Embarq and AT&T brands on our print products in those respective markets
while also creating a single look and feel for both print and online products by highlighting the
Dex name. Within the Qwest markets, the Dex brand has tremendous name recognition and DexKnows.com
is the leader in online local search. The DexKnows.com site leverages this success and adds
enhanced capabilities, new features and an intuitive interface. In the AT&T and Embarq markets, we
will convert the existing online sites in stages over the remainder of 2007 and into 2008.
23
Significant Business Developments
On August 23, 2007,
we acquired Business.com, Inc. (Business.com), a leading business search
engine and directory and performance based advertising network, for a
disclosed amount of $345.0 million (the
Business.com Acquisition). The purchase price determined
in accordance with generally accepted accounting principles
(GAAP) is $334.2 million and excludes certain items
such as the value of unvested equity awards. The purpose of the Business.com Acquisition was to expand our existing
interactive portfolio by adding leading Internet advertising talent and technology, to strengthen
RHDs position in the expanding local commercial search market and to develop an online performance
based advertising network. Business.com also provides the established business-to-business online
properties of Business.com, Work.com and the Business.com Advertising Network. The Business.com
Advertising Network serves advertising on non-proprietary websites and shares advertiser revenue
with third-party sites for qualified clicks each time a visitor clicks on our advertisers
listings. This network provides a way for media buyers of all types to coordinate advertising
campaigns across various sites in an efficient manner. The Business.com and Work.com properties
attract an audience of business decision makers. Business.com enhances the revenues from these
properties through the use of its performance based advertising (PBA) platform. Advertisers bid
on a cost-per click basis against other advertisers for priority placement within search results.
The Business.com PBA platform provides for flexible advertising provisioning and bid management
capabilities. We expect to adopt the Business.com technology platform to serve our existing
advertiser base at our DexKnows.com Internet Yellow Pages site. Business.com now operates as a
direct, wholly-owned subsidiary of RHD. The results of Business.com have been included in our
consolidated results commencing August 23, 2007. In conjunction with the Business.com Acquisition,
the founder and Chief Executive Officer of Business.com, Jacob Winebaum, has been appointed
President of RHDs Interactive Division. Under the terms of a
related Stock Purchase Agreement, dated as of
July 27, 2007, on August 23, 2007, Mr. Winebaum purchased from RHD 148,372 shares of RHD common
stock for approximately $9.0 million.
The Business.com Acquisition has been accounted for as a purchase business combination. In
connection with the Business.com Acquisition, we identified and recorded certain intangible assets
at their estimated fair value, including (1) advertiser relationships and third party contracts,
(2) technology and network platforms and (3) trade names and trademarks. These intangible assets
are being amortized over remaining useful lives ranging from 3 to 10 years under the straight-line
method, with the exception of the advertiser relationships and network platform intangible assets,
which are amortized under the income forecast method. During the three months ended September 30,
2007, $274.1 million has been accounted for as goodwill relating to the Business.com Acquisition.
Subsequent information could come to our attention that may require us to revise the purchase price
allocation associated with the Business.com Acquisition.
On October 2, 2007, we issued $1.0 billion aggregate principal amount of 8.875% Series A-4 Senior
Notes due 2017 (Series A-4 Notes). Proceeds from the Series A-4 Notes were (a) used to repay a
$328 million RHD credit facility (RHD Credit Facility) used to fund the Busisness.com
Acquisition, (b) contributed to R.H. Donnelley Inc. (RHDI) in order to provide the funding for
the tender offer and consent solicitation of RHDIs $600 million aggregate principal amount 10.875%
Senior Subordinated Notes due 2012 (Senior Subordinated Notes) and (c) used to pay related fees
and expenses and for other general corporate purposes. On October 17, 2007, we issued an additional
$500 million of our Series A-4 Notes. Proceeds from the October 17, 2007 Series A-4 Notes issuance
were transferred to certain subsidiaries in order to repay portions of the term loans outstanding
under the existing Dex Media East and RHDI credit facilities and pay related fees and expenses.
In October 2007, under the terms and conditions of a tender offer and consent solicitation to
purchase RHDIs $600 million Senior Subordinated Notes that RHDI commenced on September 18, 2007,
$599.9 million, or 99.9%, of the outstanding Senior Subordinated
Notes were repurchased.
On October 24, 2007, we replaced the existing Dex Media East credit facility with a new Dex Media
East credit facility. The proceeds from the new Dex Media East credit facility were used to repay
the remaining term loans under the existing Dex Media East credit
facility and are available to provide funding
for the redemption of Dex Media Easts outstanding 9.875% senior notes due 2009 and outstanding
12.125% senior subordinated notes due 2012, which is expected to occur on November 26, 2007.
See Item 1, Financial Statements (Unaudited) Note 12, Subsequent Events, for additional
information regarding these financing and other related transactions.
Segment Reporting
Management reviews and analyzes its business of publishing yellow pages directories and related
local commercial search as one operating segment.
New Accounting Pronouncements
We have reviewed accounting pronouncements that were issued as of September 30, 2007, which the
Company has not yet adopted, and do not believe that the pronouncements will have a material impact
on our financial position or operating results.
24
RESULTS OF OPERATIONS
Three and nine months ended September 30, 2007 and 2006
Factors Affecting Comparability
Acquisitions
As a result of the Dex Media Merger and our acquisition of the directory publishing business of
AT&T Inc. (AT&T Directory Acquisition), the related financings and associated purchase
accounting, our 2007 results reported in accordance with GAAP are not comparable to our 2006 reported GAAP results. GAAP results presented for the nine
months ended September 30, 2006 include only eight months of results from the Dex Media business,
which was acquired on January 31, 2006. Under the deferral and amortization method of revenue
recognition, the billable value of directories published is recognized as revenue in subsequent
reporting periods. However, purchase accounting precluded us from recognizing directory revenue
and certain expenses associated with directories that published prior to the Dex Media Merger,
including all directories published in the month the Dex Media Merger was completed. Thus, our
reported 2007 and 2006 GAAP results are not comparable and our 2006 results are not indicative of
our underlying operating and financial performance. Accordingly, management is presenting adjusted
and adjusted pro forma information for the three and nine months ended September 30, 2006,
respectively, that, among other things, eliminates the purchase accounting impact on revenue and
certain expenses related to the Dex Media Merger, and for the nine months ended September 30, 2006,
assumes the Dex Media Merger occurred at the beginning of 2006. Management believes that the
presentation of this adjusted and adjusted pro forma information will help financial statement
users better and more easily compare current period underlying operating results against what the
combined company performance would more likely have been in the comparable prior period. All of
the adjusted and adjusted pro forma amounts disclosed under the caption Adjusted and Adjusted Pro
Forma Amounts and Other Non-GAAP Measures below or elsewhere are non-GAAP measures, which are
reconciled to the most comparable GAAP measures under that caption below. While the adjusted and
adjusted pro forma results exclude the effects of purchase accounting, and certain other
non-recurring items, to better reflect underlying operating results in the respective periods,
because of differences between RHD and Dex Media and their respective accounting policies, the 2007
GAAP results and 2006 adjusted and adjusted pro forma results are not strictly comparable and
should not be treated as such.
Other
Activities
Our operating results in 2007 have been and will be impacted by investments in our triple play
strategy, focusing on our online products and services, and our directory publishing business with
new product introductions in our Qwest, Embarq and AT&T markets. These investments include
launching our new Dex market brand and our new URL, DexKnows.com, across our entire footprint, the
introduction of plus companion directories in our Embarq and AT&T markets, as well as associated
marketing and advertising campaigns, employee training associated with new product introductions,
and consolidation of our IT platform.
GAAP Reported Results
Net Revenue
The components of our net revenue for the three and nine months ended September 30, 2007 and 2006
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
|
(amounts in millions)
|
|
2007
|
|
2006
|
|
$ Change
|
|
2007
|
|
2006
|
|
$ Change
|
|
|
|
|
|
|
|
Gross directory advertising
revenue
|
|
$
|
675.9
|
|
|
$
|
528.2
|
|
|
$
|
147.7
|
|
|
$
|
2,015.3
|
|
|
$
|
1,282.4
|
|
|
$
|
732.9
|
|
|
|
|
|
Sales claims and allowances
|
|
|
(12.8
|
)
|
|
|
(13.3
|
)
|
|
|
0.5
|
|
|
|
(44.3
|
)
|
|
|
(28.6
|
)
|
|
|
(15.7
|
)
|
|
|
|
|
|
|
|
Net directory advertising revenue
|
|
|
663.1
|
|
|
|
514.9
|
|
|
|
148.2
|
|
|
|
1,971.0
|
|
|
|
1,253.8
|
|
|
|
717.2
|
|
|
|
|
|
Other revenue
|
|
|
6.8
|
|
|
|
9.3
|
|
|
|
(2.5
|
)
|
|
|
28.3
|
|
|
|
23.2
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
669.9
|
|
|
$
|
524.2
|
|
|
$
|
145.7
|
|
|
$
|
1,999.3
|
|
|
$
|
1,277.0
|
|
|
$
|
722.3
|
|
|
|
|
|
|
|
|
25
Our directory advertising revenue is earned primarily from the sale of advertising in yellow pages
directories we publish, net of sales claims and allowances. Directory advertising revenue also
includes revenue for those Internet-based advertising products that are bundled with print
advertising, including certain IYP products, and Internet-based advertising products not bundled
with print advertising, such as our SEM and SEO services. Directory advertising revenue is affected
by several factors, including changes in the quantity and size of advertisements sold, defectors
and new advertisers, as well as the proportion of premium advertisements sold, changes in the
pricing of advertising, changes in the quantity and mix of advertising purchased per account and
the introduction of additional products that generate incremental revenue. Revenue with respect to
print advertising, and Internet-based advertising products that are bundled with print advertising,
is recognized under the deferral and amortization method, whereby revenue is initially deferred
when a directory is published and recognized ratably over the directorys life, which is typically
12 months. Revenue with respect to Internet-based services that are not bundled with print
advertising, such as SEM and SEO services, is recognized as delivered or fulfilled.
Total net revenue for the three and nine months ended September 30, 2007 was $669.9 million and
$1,999.3 million, respectively, representing an increase of $145.7 million and $722.3 million,
respectively, from total net revenue reported for the three and nine months ended September 30,
2006 of $524.2 million and $1,277.0 million, respectively. The increase in total net revenue for
the three months ended September 30, 2007 is primarily due to the effects of purchase accounting
associated with the Dex Media Merger in 2006 described below. The increase in total net revenue for
the nine months ended September 30, 2007 is primarily due to recognizing a full period of results
from the acquired Dex Media business, absent any adverse impact from purchase accounting associated
with the Dex Media Merger, as opposed to recognizing only eight months of results from the Dex
Media business during the nine months ended September 30, 2006 and the related purchase accounting
impact during that period. Total net revenue for the three and nine months ended September 30, 2007
includes $407.8 million and $1,219.4 million, respectively, of net revenue from directories
acquired in the Dex Media Merger (Qwest directories), compared to $266.5 million and $501.9
million for the three and nine months ended September 30, 2006, respectively. Due to purchase
accounting, net directory revenue for the three and nine months ended September 30, 2006 excluded
the amortization of advertising revenue for Qwest directories published before February 2006 under
the deferral and amortization method totaling $141.6 million and $602.0 million, respectively,
which would have been reported in the period absent purchase accounting. Purchase accounting
related to the Dex Media Merger has no impact on reported revenue in 2007.
The increase in total net revenue for the three and nine months ended September 30, 2007 is also
due to new product introductions, including online products and services, in our Qwest, Embarq and
AT&T markets, incremental revenue from Business.com and Local Launch, increases in national
directory revenue in our Qwest markets and increased internet-based
revenue in our Qwest, Embarq
and AT&T markets. These increases are partially offset by declines in renewal business in certain of our
Qwest and Embarq markets, declines in sales productivity related to systems modernization and
weaker housing trends in certain of our Embarq markets, and declines in some of our AT&T markets
during the first quarter of 2007 due to re-alignment of the coverage areas of our publications to
better reflect shopping patterns and weaker national directory revenue across the AT&T footprint.
Other revenue for the three and nine months ended September 30, 2007 totaled $6.8 million and $28.3
million, respectively, representing a decrease of $2.5 million from other revenue of $9.3 million
reported for the three months ended September 30, 2006 and an increase of $5.1 million from other
revenue of $23.2 million reported for the nine months ended September 30, 2006. Other revenue
includes barter revenue, late fees received on outstanding customer balances, commissions earned on
sales contracts with respect to advertising placed into other publishers directories, and sales of
directories and certain other advertising-related products. The decrease in other revenue for the
three months ended September 30, 2007 is primarily due to other
advertising-related products. The increase in other revenue for the nine months ended September 30,
2007 is primarily a result of recognizing a full period of results from the Dex Media business, as
opposed to recognizing only eight months of results from the Dex Media business during the nine
months ended September 30, 2006, partially offset by other
advertising-related products.
26
Advertising sales is a statistical measure and consists of sales of advertising in print
directories distributed during the period and Internet-based products and services with respect to
which such advertising first appeared publicly during the period. It is important to distinguish
advertising sales from net revenue, which is recognized under the deferral and amortization method.
Advertising sales for the three and nine months ended September 30, 2007 were $541.6 million and
$2,045.2 million, respectively, and were $547.7 million and $2,038.9 million for the three and nine
months ended September 30, 2006, respectively. Advertising sales for all periods presented above
assumes the Business.com Acquisition occurred on January 1, 2006, and for the nine months ended
September 30, 2006 assumes the Dex Media Merger occurred on January 1, 2006. The $6.1 million
decrease in advertising sales for the three months ended September 30, 2007 is a result of declines
in local print advertising sales in certain of our Qwest, Embarq and AT&T markets mainly driven by
unfavorable economic conditions, partially offset by increases in Business.com advertising sales
and IYP and SEM advertising sales in certain of our markets. The $6.3 million increase in advertising
sales for the nine months ended September 30, 2007 is a result of increases in Business.com
advertising sales and IYP and SEM advertising sales in certain of our markets, partially offset by
declines in local print advertising sales in certain of our Qwest, Embarq and AT&T markets, mainly
driven by unfavorable economic conditions. Revenue with respect to print advertising, and
Internet-based advertising products that are bundled with print advertising, is recognized under
the deferral and amortization method, whereby revenue is initially deferred when a directory is
published and recognized ratably over the directorys life, which is typically 12 months. Revenue
with respect to Internet-based services that are not bundled with print advertising, such as SEM
and SEO services, is recognized as delivered or fulfilled.
Expenses
The components of our total expenses for the three and nine months ended September 30, 2007 and
2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
|
(amounts in millions)
|
|
2007
|
|
2006
|
|
$ Change
|
|
2007
|
|
2006
|
|
$ Change
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
286.6
|
|
|
$
|
260.0
|
|
|
$
|
26.6
|
|
|
$
|
866.2
|
|
|
$
|
673.2
|
|
|
$
|
193.0
|
|
|
|
|
|
General and administrative expenses
|
|
|
34.3
|
|
|
|
34.5
|
|
|
|
(0.2
|
)
|
|
|
104.8
|
|
|
|
114.5
|
|
|
|
(9.7
|
)
|
|
|
|
|
Depreciation and amortization
|
|
|
111.5
|
|
|
|
85.1
|
|
|
|
26.4
|
|
|
|
323.7
|
|
|
|
233.2
|
|
|
|
90.5
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
432.4
|
|
|
$
|
379.6
|
|
|
$
|
52.8
|
|
|
$
|
1,294.7
|
|
|
$
|
1,020.9
|
|
|
$
|
273.8
|
|
|
|
|
|
|
|
|
Substantially all expenses are derived from our directory publishing business and Internet-based
advertising products and services. Certain costs directly related to the selling and production of
directories are initially deferred and recognized ratably over the life of the directory. These
costs are specifically identifiable to a particular directory and include sales commissions and
print, paper and initial distribution costs. Sales commissions include commissions paid to
employees for sales to local advertisers and to certified marketing representatives (CMRs), which
act as our channel to national advertisers. All other expenses, such as sales person salaries,
sales manager compensation, sales office occupancy, publishing and information technology services,
are not specifically identifiable to a particular directory and are recognized as incurred. Our
costs recognized in a reporting period consist of: (i) costs incurred in that period and fully
recognized in that period; (ii) costs incurred in a prior period, a portion of which is amortized
and recognized in the current period; and (iii) costs incurred in the current period, a portion of
which is amortized and recognized in the current period and the balance of which is deferred until
future periods. Consequently, there will be a difference between costs recognized in any given
period and costs incurred in the given period, which may be significant. All deferred costs
related to the sale and production of directories are recognized ratably over the life of each
directory under the deferral and amortization method of accounting, with cost recognition
commencing in the month of directory distribution.
27
Cost of Revenue
Total cost of revenue for the three and nine months ended September 30, 2007 was $286.6 million and
$866.2 million, respectively, compared to $260.0 million and $673.2 million reported for the three
and nine months ended September 30, 2006, respectively. The primary components of the respective
$26.6 million and $193.0 million increase in cost of revenue are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Nine Months
|
|
|
Ended
|
|
Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2007
|
|
2007
|
(amounts in millions)
|
|
$ Change
|
|
$ Change
|
|
Expenses related to the Dex Media business excluded from the three
and nine months ended September 30, 2006 due to purchase accounting
from the Dex Media Merger
|
|
$
|
38.3
|
|
|
$
|
208.6
|
|
Increased internet production and distribution costs
|
|
|
11.1
|
|
|
|
24.3
|
|
Increased advertising and branding expenses
|
|
|
11.1
|
|
|
|
13.1
|
|
Increased print, paper and distribution costs
|
|
|
4.0
|
|
|
|
12.2
|
|
(Decrease) increase in information technology (IT) expenses
|
|
|
(4.6
|
)
|
|
|
8.5
|
|
Decreased barter expense
|
|
|
(2.6
|
)
|
|
|
(7.1
|
)
|
Decreased cost uplift expense
|
|
|
(31.1
|
)
|
|
|
(54.0
|
)
|
All other, net
|
|
|
0.4
|
|
|
|
(12.6
|
)
|
|
|
|
Total increase in cost of
revenue for the three and nine
months ended September 30, 2007
|
|
$
|
26.6
|
|
|
$
|
193.0
|
|
|
|
|
Cost of revenue for the three months ended September 30, 2007 increased $26.6 million compared to
the three months ended September 30, 2006 partially due to the effects of purchase accounting
associated with the Dex Media Merger in 2006. Cost of revenue for the nine months ended September
30, 2007 increased $193.0 million compared to the nine months ended September 30, 2006 primarily
due to the effects of purchase accounting associated with the Dex Media Merger in 2006, as well as
recognizing a full period of results from the acquired Dex Media business.
Similar to the deferral and amortization method of revenue recognition, certain costs directly
related to the selling and production of our directories are initially deferred when incurred and
recognized ratably over the life of a directory. As a result of purchase accounting required by
GAAP, deferred commissions, print and delivery costs totaling $38.3 million and $208.6 million,
were not reported during the three and nine months ended September 30, 2006, respectively, related
to directories that published prior to the Dex Media Merger. Directory expenses incurred during
the three and nine months ended September 30, 2006 include the amortization of deferred directory
costs relating to Qwest directories published beginning in February 2006.
During the three months ended September 30, 2007, we incurred $11.1 million of additional expenses
related to internet production and distribution due to investment in our triple play strategy,
compared to the three months ended September 30, 2006. During the nine months ended September 30,
2007, we incurred $24.3 million of additional expenses related to internet production and
distribution due to recognizing a full period of results from the acquired Dex Media business, as
well as investment in our triple play strategy, compared to the nine months ended September 30,
2006. This investment focuses on enhancing our online products and services (IYP, SEM and SEO).
During the three and nine months ended September 30, 2007, we incurred $11.1 million and $13.1
million, respectively, of additional advertising and branding expenses in connection with our
triple play strategy, compared to the three and nine months ended September 30, 2006. These
advertising and branding costs were incurred to promote the Dex brand name for all of our print and
online products across our entire footprint as well as the use of DexKnows.com as our new URL
across our entire footprint.
During the three and nine months ended September 30, 2007, we incurred $4.0 million and $12.2
million, respectively, of additional print, paper and distribution costs, compared to the three and
nine months ended September 30, 2006, due to new print products, including the introduction of
companion directories in our Embarq and AT&T markets. Companion directories are a small format
directory that serves as a complement to the core directory, with replicated advertising from the
core directory available for an additional charge.
28
During the three months ended September 30, 2007, IT expenses declined $4.6 million compared to the
three months ended September 30, 2006, due to cost savings resulting from lower rates associated
with a new IT contract, which became effective in July 2007. During the nine months ended September
30, 2007, we incurred approximately $8.5 million of additional IT expenses compared to the nine
months ended September 30, 2006, due to recognizing a full period of results from the acquired Dex
Media business, as well as costs to achieve synergies which include enhancements and technical
support of multiple production systems as we continue implementing our integration plan to a
consolidated IT platform. This increase is partially offset by cost savings resulting from lower
rates associated with the new IT contract.
During the three and nine months ended September 30, 2007, barter expenses declined $2.6 million
and $7.1 million, respectively, compared to the three and nine months ended September 30, 2006, due
to declines in barter activity in our Qwest markets.
As a result of purchase accounting required by GAAP, we recorded the deferred directory costs
related to directories that were scheduled to publish subsequent to the Dex Media Merger and the
AT&T Directory Acquisition at their fair value, determined as (a) the estimated billable value of
the published directory less (b) the expected costs to complete the directories, plus (c) a normal
profit margin. We refer to this purchase accounting entry as cost uplift. The fair value of
these costs was determined to be $157.7 million and $81.3 million for the Dex Media Merger and AT&T
Directory Acquisition, respectively. These costs are amortized as cost of revenue over the terms
of the applicable directories and such amortization totaled $3.3 million and $27.9 million,
respectively, for the three and nine months ended September 30, 2007 relating to the Dex Media
Merger compared to $34.4 million and $81.9 million, respectively, for the three and nine months
ended September 30, 2006 relating to the Dex Media Merger and AT&T Directory Acquisition. This
represents a decrease in cost uplift expense of $31.1 million and $54.0 million, respectively, for
the three and nine months ended September 30, 2007. Approximately $1.0 million of cost uplift
expense remains unamortized at September 30, 2007, which will be fully expensed during the three
months ending December 31, 2007.
Changes in the All other category primarily relate to a decrease in print delivery management costs
due to synergies resulting from the Dex Media Merger, a decrease in non-cash stock-based
compensation expense, and achieving economies of scale in other areas subsequent to the Dex Media
Merger, partially offset by an increase in sales training costs associated with new product
introductions, including online products and services.
General and Administrative Expenses
General and administrative (G&A) expenses for the three and nine months ended September 30, 2007
were $34.3 million and $104.8 million, respectively, compared to $34.5 million and $114.5 million
for the three and nine months ended September 30, 2006, respectively. The primary components of the
respective $0.2 million and $9.7 million decrease in G&A expenses are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Nine Months
|
|
|
Ended
|
|
Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2007
|
|
2007
|
(amounts in millions)
|
|
$ Change
|
|
$ Change
|
|
Decreased general corporate expenses
|
|
$
|
|
|
|
$
|
(4.4
|
)
|
All other, net
|
|
|
(0.2
|
)
|
|
|
(5.3
|
)
|
|
|
|
Total decrease in
G&A expenses for
the three and nine
months ended
September 30, 2007
|
|
$
|
(0.2
|
)
|
|
$
|
(9.7
|
)
|
|
|
|
G&A expenses for the nine months ended September 30, 2007 included reductions in general corporate
expenses of $4.4 million from the nine months ended September 30, 2006, primarily relating to
achieving economies of scale subsequent to the Dex Media Merger, as well as Company-wide expense
reduction efforts.
Changes in the All other category primarily relate to a decrease in non-cash stock-based
compensation expense for the three and nine months ended September 30, 2007, partially offset by an
increase in billing, credit and collection expenses for the three and nine months ended September
30, 2007.
29
Depreciation and Amortization
Depreciation and amortization (D&A) expense for the three and nine months ended September 30,
2007 was $111.5 million and $323.7 million, respectively, compared to $85.1 million and $233.2
million for the three and nine months ended September 30, 2006, respectively. Amortization of
intangible assets was $98.9 million and $285.9 million for the three and nine months ended
September 30, 2007, respectively, compared to $73.4 million and $199.8 million for the three and
nine months ended September 30, 2006, respectively. The increase in amortization expense for the
three months ended September 30, 2007 is primarily due to amortizing the local customer
relationships intangible asset acquired in the Dex Media Merger beginning in the first quarter of
2007 and amortization of intangible assets acquired in the Business.com Acquisition. The increase
in amortization expense for the nine months ended September 30, 2007 is due to recognizing a full
period of amortization related to intangible assets acquired in the Dex Media Merger, amortizing
the local customer relationships intangible asset acquired in the Dex Media Merger beginning in the
first quarter of 2007 and amortization of intangible assets acquired in the Business.com
Acquisition.
Depreciation of fixed assets and amortization of computer software was $12.6 million
and $37.8 million for the three and nine months ended September 30, 2007, respectively, compared to
$11.7 million and $33.4 million for the three and nine months ended September 30, 2006,
respectively. The increase in depreciation expense for the three months ended September 30, 2007
was primarily due to fixed asset additions related to computer software. The increase in
depreciation expense for the nine months ended September 30, 2007 was primarily due to recognizing
a full period of depreciation related to fixed assets acquired in the Dex Media Merger as well as
fixed asset additions related to computer software.
Operating Income
Operating income for the three and nine months ended September 30, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
(amounts in millions)
|
|
2007
|
|
2006
|
|
$ Change
|
|
2007
|
|
2006
|
|
$ Change
|
|
|
|
Total
|
|
$
|
237.5
|
|
|
$
|
144.6
|
|
|
$
|
92.9
|
|
|
$
|
704.6
|
|
|
$
|
256.1
|
|
|
$
|
448.5
|
|
|
|
|
Operating income for the three and nine months ended September 30, 2007 of $237.5 million and
$704.6 million, respectively, increased by $92.9 million and $448.5 million, respectively, from
operating income of $144.6 million and $256.1 million for the three and nine months ended September
30, 2006, respectively. The increase in operating income for the three and nine months ended
September 30, 2007 is due to the revenue and expense trends described above.
Interest Expense, Net
Net interest expense for the three and nine months ended September 30, 2007 was $201.1 million and
$601.7 million, respectively, compared to $201.8 million and $557.7 million for the three and nine
months ended September 30, 2006, respectively. The decrease in net interest expense of $0.7 million
for the three months ended September 30, 2007 when compared to the prior corresponding period, is
primarily due to lower outstanding debt during the period due to debt repayments, partially offset
by interest expense associated with the RHD Credit Facility entered into on August 23, 2007 to
finance the Business.com Acquisition. The increase in net interest expense of $44.0 million for the
nine months ended September 30, 2007 when compared to the prior corresponding period, is primarily
due to recognizing a full period of interest expense related to the outstanding debt associated
with the Dex Media Merger and GS Repurchase (defined below) and debt acquired in the Dex Media
Merger, as well as interest expense associated with the RHD Credit Facility. This increase is
partially offset by lower outstanding debt during the nine months ended September 30, 2007 due to
debt repayments. See Liquidity and Capital Resources for further detail regarding our debt
obligations. Net interest expense for the three and nine months ended September 30, 2007 includes
$6.0 million and $18.1 million, respectively, of non-cash amortization of deferred financing costs,
compared to $5.6 and $16.2 million, respectively, of non-cash amortization of deferred financing
costs for the three and nine months ended September 30, 2006.
30
In conjunction with the Dex Media Merger and as a result of purchase accounting required under
GAAP, we recorded Dex Medias debt at its fair value on January 31, 2006. We recognize an offset to
interest expense each period for the amortization of the corresponding fair value adjustment over
the life of the respective debt. The offset to interest expense was $7.9 million and $23.2 million
for the three and nine months ended September 30, 2007, respectively, and $8.8 million and $24.0
million for the three and nine months ended September 30, 2006, respectively.
Income Taxes
The effective tax rate on income before income taxes of 50.2% and 42.6% for the three and nine
months ended September 30, 2007, respectively, compares to 38.0% on loss before income taxes for
the three and nine months ended September 30, 2006. As a result of the IRS settlement in July 2007,
we recognized additional interest expense of $1.4 million and $0.9 million related to the taxable
years 2004 and 2005, respectively. The effective tax rate for the three and nine months ended
September 30, 2007 is reflective of this interest expense as well as changes in estimates for state
and local tax and additions to our liability for unrecognized tax benefits.
Net Income (Loss), Loss Available to Common Shareholders and Earnings (Loss) Per Share
Net income for the three and nine months ended September 30, 2007 was $18.1 million and $59.0
million, respectively, compared to a net loss of $(35.4) million and $(186.9) million for the three
and nine months ended September 30, 2006, respectively. Net income for the three months ended
September 30, 2007 as compared to the net loss reported for the three months ended September 30,
2006 is primarily due to the absence of any adverse impact from purchase accounting associated with
the Dex Media Merger during the three months ended September 30, 2007. Net income for the nine
months ended September 30, 2007 as compared to the net loss reported for the nine months ended
September 30, 2006 is primarily due to recognizing a full period of results from the acquired Dex
Media business, absent any adverse impact from purchase accounting associated with the Dex Media
Merger. Net income for the three months ended September 30, 2007 was negatively impacted by
increased D&A and net income for the nine months ended September 30, 2007 was negatively impacted
by increased interest expense and D&A as described above.
On January 27, 2006, we repurchased the remaining 100,301 shares of our outstanding 8% convertible
cumulative preferred stock (Preferred Stock) from investment partnerships affiliated with The
Goldman Sachs Group, Inc. (the GS Funds) for $336.1 million in cash, including accrued cash
dividends and interest (the GS Repurchase). Based on the terms of the stock purchase agreement,
the recorded value of the Preferred Stock was accreted to its redemption value of $336.1million at
January 27, 2006. The accretion to redemption value of $2.0 million (which represented accrued
dividends and interest) was recorded as an increase to loss available to common shareholders on the
condensed consolidated statement of operations for the nine months ended September 30, 2006. In
conjunction with the GS Repurchase, we also reversed the previously recorded beneficial conversion
feature (BCF) related to these shares and recorded a decrease to loss available to common
shareholders of $31.2 million on the condensed consolidated statement of operations for the nine
months ended September 30, 2006.
The resulting loss available to common shareholders was $(157.7) million for the nine months ended
September 30, 2006.
For the three and nine months ended September 30, 2007 and three months ended September 30, 2006,
we accounted for earnings per share (EPS) in accordance with SFAS No. 128,
Earnings Per Share
(SFAS No. 128)
.
For the nine months ended September 30, 2006 (through January 27, 2006, the
closing date of the GS Repurchase), we accounted for EPS in accordance with Emerging Issues Task
Force (EITF) No. 03-6,
Participating Securities and the Two-Class Method under FASB Statement 128
(EITF 03-6), which established standards regarding the computation of EPS by companies that have
issued securities other than common stock that contractually entitle the holder to participate in
dividends and earnings of the company. EITF 03-6 requires earnings available to common
shareholders for the period, after deduction of preferred stock dividends, to be allocated between
the common and preferred stockholders based on their respective rights to receive dividends. Basic
EPS is then calculated by dividing loss allocable to common shareholders by the weighted average
number of shares outstanding. EITF 03-6 does not require the presentation of basic and diluted EPS
for securities other than common stock. Therefore, the following EPS amounts only pertain to our
common stock.
31
Under the guidance of SFAS No. 128, diluted EPS is calculated by dividing loss allocable to common
shareholders by the weighted average common shares outstanding plus dilutive potential common
stock. Potential common stock includes stock options, stock appreciation rights (SARs),
restricted stock and warrants, the dilutive effect of which is calculated using the treasury stock
method, and prior to the GS Repurchase, our Preferred Stock, the dilutive effect of which was
calculated using the if-converted method.
See Note 2, Summary of Significant Accounting Policies, in Part 1 Item 1 of this Quarterly
Report on Form 10-Q for further details and computations of the basic and diluted EPS amounts. For
the three and nine months ended September 30, 2007, basic EPS was $0.25 and $0.83, respectively,
compared to basic EPS of $(0.51) and $(2.42) for the three and nine months ended September 30,
2006, respectively. For the three and nine months ended September 30, 2007, diluted EPS was $0.25
and $0.82, respectively, compared to diluted EPS of $(0.51) and $(2.42) for the three and nine
months ended September 30, 2006, respectively. Because there was a reported net loss and net loss
available to common shareholders for the three and nine months ended September 30, 2006, the
calculation of diluted EPS was anti-dilutive compared to basic EPS. Diluted EPS cannot be greater
than basic EPS (or less of a loss). Therefore, reported basic EPS and diluted EPS for the three
and nine months ended September 30, 2006 were the same.
32
Factors Affecting Comparability
Our operating results in 2007 have been and will be impacted by investments in our triple play
strategy, focusing on our online products and services, and our directory publishing business with
new product introductions in our Qwest, Embarq and AT&T markets. These investments include
launching our new Dex market brand and our new URL, DexKnows.com, across our entire footprint, the
introduction of plus companion directories in our Embarq and AT&T markets, as well as associated
marketing and advertising campaigns, employee training associated with new product introductions,
and consolidation of our IT platform.
Adjusted and Adjusted Pro Forma Amounts and Other Non-GAAP Measures
As a result of the Dex Media Merger and AT&T Directory Acquisition, the related financings and
associated purchase accounting, our 2007 results reported in accordance with GAAP are not
comparable to our 2006 reported GAAP results. GAAP results presented for the nine months ended
September 30, 2006 include only eight months of results from the Dex Media business, which was
acquired on January 31, 2006. Under the deferral and amortization method of revenue recognition,
the billable value of directories published is recognized as revenue in subsequent reporting
periods. However, purchase accounting precluded us from recognizing directory revenue and certain
expenses associated with directories that published prior to the Dex Media Merger, including all
directories published in the month the Dex Media Merger was completed. Thus, our reported 2007 and
2006 GAAP results are not comparable and our 2006 results are not indicative of our underlying
operating and financial performance. Accordingly, management is presenting adjusted and adjusted
pro forma information for the three and nine months ended September 30, 2006, respectively, that,
among other things, eliminates the purchase accounting impact on revenue and certain expenses
related to the Dex Media Merger, and for the nine months ended September 30, 2006, assumes the Dex
Media Merger occurred at the beginning of 2006. Management believes that the presentation of this
adjusted and adjusted pro forma information will help financial statement users better and more
easily compare current period underlying operating results against what the combined company
performance would more likely have been in the comparable prior period. All of the adjusted and
adjusted pro forma amounts disclosed below or elsewhere are non-GAAP measures, which are reconciled
to the most comparable GAAP measures below. While the adjusted and adjusted pro forma results
exclude the effects of purchase accounting, and certain other non-recurring items, to better
reflect underlying operating results in the respective periods, because of differences between RHD
and Dex Media and their respective accounting policies, the 2007 GAAP results and 2006 adjusted and
adjusted pro forma results are not strictly comparable and should not be treated as such.
2007 Reported GAAP Operating Income Compared to 2006 Adjusted and Adjusted Pro Forma Operating
Income
The components of 2007 reported GAAP operating income and 2006 adjusted and adjusted pro forma
operating income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
September 30, 2007
|
|
Three months ended September 30, 2006
|
|
|
|
|
|
Reported
|
|
Reported
|
|
|
|
|
|
|
(amounts in millions)
|
|
GAAP
|
|
GAAP
|
|
Adjustments
|
|
Adjusted
|
|
$Change
|
|
Net revenue
|
|
$
|
669.9
|
|
|
$
|
524.2
|
|
|
$
|
141.6
|
(1)
|
|
$
|
665.8
|
|
|
$
|
4.1
|
|
Cost of
revenue
|
|
|
286.6
|
|
|
|
260.0
|
|
|
|
3.9
|
(2)
|
|
|
263.9
|
|
|
|
22.7
|
|
General and
administrative expenses
|
|
|
34.3
|
|
|
|
34.5
|
|
|
|
|
|
|
|
34.5
|
|
|
|
(0.2
|
)
|
D&A
|
|
|
111.5
|
|
|
|
85.1
|
|
|
|
|
|
|
|
85.1
|
|
|
|
26.4
|
|
|
|
|
Operating income
|
|
$
|
237.5
|
|
|
$
|
144.6
|
|
|
$
|
137.7
|
|
|
$
|
282.3
|
|
|
$
|
(44.8
|
)
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
September 30, 2007
|
|
Nine months ended September 30, 2006
|
|
|
|
|
|
Reported
|
|
Reported
|
|
|
|
|
|
|
(amounts in millions)
|
|
GAAP
|
|
GAAP
|
|
Adjustments
|
|
Adjusted
|
|
$Change
|
|
Net revenue
|
|
$
|
1,999.3
|
|
|
$
|
1,277.0
|
|
|
$
|
741.9
|
|
|
$
|
2,018.9
|
|
|
$
|
(19.6
|
)
|
Cost of
revenue
|
|
|
866.2
|
|
|
|
673.2
|
|
|
|
128.8
|
(2)
|
|
|
802.0
|
|
|
|
64.2
|
|
General and
administrative expenses
|
|
|
104.8
|
|
|
|
114.5
|
|
|
|
|
|
|
|
114.5
|
|
|
|
(9.7
|
)
|
D&A
|
|
|
323.7
|
|
|
|
233.2
|
|
|
|
20.5
|
(3)
|
|
|
253.7
|
|
|
|
70.0
|
|
|
|
|
Operating income
|
|
$
|
704.6
|
|
|
$
|
256.1
|
|
|
$
|
592.6
|
|
|
$
|
848.7
|
|
|
$
|
(144.1
|
)
|
|
|
|
|
|
|
(1)
|
|
Represents all deferred revenue for directories that published prior to the Dex Media Merger,
which would have been recognized during the period absent purchase accounting required under
GAAP. Adjustments for the nine months ended September 30, 2006 also include GAAP revenue for
January 2006 as reported by Dex Media.
|
|
(2)
|
|
Represents (a) certain deferred expenses for directories that published prior to the Dex
Media Merger, which would have been recognized during the period absent purchase accounting
required under GAAP, (b) for the nine months ended September 30, 2006, GAAP expenses for
January 2006 as reported by Dex Media, (c) for the nine months ended September 30, 2006,
exclusion of transaction expenses reported by Dex Media in January 2006 directly related to
the Dex Media Merger and (d) the exclusion of cost uplift recorded under purchase accounting
associated with the Dex Media Merger and the AT&T Directory Acquisition for the three and nine
months ended September 30, 2006.
|
|
(3)
|
|
Represents the additional amortization expense related to the identifiable intangible assets
acquired in the Dex Media Merger over their estimated useful lives, assuming the Dex Media
Merger was consummated on January 1, 2006.
|
2007 Reported GAAP Net Revenue Compared to 2006 Adjusted and Adjusted Pro Forma Net Revenue
The components of 2007 reported GAAP net revenue and 2006 adjusted and adjusted pro forma net
revenue are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
September 30, 2007
|
|
Three months ended September 30, 2006
|
|
|
|
|
|
|
|
Reported
|
|
Reported
|
|
|
|
|
|
|
(amounts in millions)
|
|
GAAP
|
|
GAAP
|
|
Adjustments
|
|
Adjusted
|
|
$Change
|
|
Gross directory advertising revenue
|
|
$
|
675.9
|
|
|
$
|
528.2
|
|
|
$
|
146.0
|
(1)
|
|
$
|
674.2
|
|
|
$
|
1.7
|
|
Sales claims and allowances
|
|
|
(12.8
|
)
|
|
|
(13.3
|
)
|
|
|
(7.0
|
)
(1)
|
|
|
(20.3
|
)
|
|
|
7.5
|
|
|
|
|
Net directory advertising revenue
|
|
|
663.1
|
|
|
|
514.9
|
|
|
|
139.0
|
|
|
|
653.9
|
|
|
|
9.2
|
|
Other revenue
|
|
|
6.8
|
|
|
|
9.3
|
|
|
|
2.6
|
(2)
|
|
|
11.9
|
|
|
|
(5.1
|
)
|
|
|
|
Net revenue
|
|
$
|
669.9
|
|
|
$
|
524.2
|
|
|
$
|
141.6
|
|
|
$
|
665.8
|
|
|
$
|
4.1
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
September 30, 2007
|
|
Nine months ended September 30, 2006
|
|
|
|
|
|
|
|
Reported
|
|
Reported
|
|
|
|
|
|
|
(amounts in millions)
|
|
GAAP
|
|
GAAP
|
|
Adjustments
|
|
Adjusted
|
|
$Change
|
|
Gross directory advertising revenue
|
|
$
|
2,015.3
|
|
|
$
|
1,282.4
|
|
|
$
|
750.3
|
(1)
|
|
$
|
2,032.7
|
|
|
$
|
(17.4
|
)
|
Sales claims and allowances
|
|
|
(44.3
|
)
|
|
|
(28.6
|
)
|
|
|
(21.5
|
)
(1)
|
|
|
(50.1
|
)
|
|
|
5.8
|
|
|
|
|
Net directory advertising revenue
|
|
|
1,971.0
|
|
|
|
1,253.8
|
|
|
|
728.8
|
|
|
|
1,982.6
|
|
|
|
(11.6
|
)
|
Other revenue
|
|
|
28.3
|
|
|
|
23.2
|
|
|
|
13.1
|
(2)
|
|
|
36.3
|
|
|
|
(8.0
|
)
|
|
|
|
Net revenue
|
|
$
|
1,999.3
|
|
|
$
|
1,277.0
|
|
|
$
|
741.9
|
|
|
$
|
2,018.9
|
|
|
$
|
(19.6
|
)
|
|
|
|
|
|
|
(1)
|
|
Represents gross directory advertising revenue and sales claims and allowances for
directories that published prior to the Dex Media Merger, which would have been recognized
during the period absent purchase accounting required under GAAP. Adjustments for the nine
months ended September 30, 2006 also include GAAP results for January 2006 as reported by
Dex Media.
|
|
(2)
|
|
Other revenue includes barter revenue, late fees paid on outstanding customer balances,
commissions earned on sales contracts with respect to advertising placed into other
publishers directories, sales of directories and certain other print and internet
products.
|
Reported GAAP net revenue for the three and nine months ended September 30, 2007 was $669.9 million
and $1,999.3 million, respectively, representing an increase of $4.1 million from adjusted net
revenue of $665.8 million for the three months ended September 30, 2006 and a decrease of $19.6
million from adjusted pro forma net revenue of $2,018.9 million for the nine months ended September
30, 2006. Under the deferral and amortization method of revenue recognition, revenue from directory
advertising sales is initially deferred when a directory is published and recognized ratably over
the life of the directory, which is typically 12 months. Reported GAAP net revenue for the three
months ended September 30, 2007 increased from adjusted net revenue for the three months ended
September 30, 2006 primarily due to amortization of revenue from new product introductions,
including online products and services, in our Qwest, Embarq and AT&T markets, and incremental
revenue from Business.com and Local Launch, partially offset by declines in renewal business due to
weaker housing trends and unfavorable economic conditions in some of our Qwest and Embarq markets.
Reported GAAP net revenue for the nine months ended September 30, 2007 decreased from adjusted pro
forma net revenue for the nine months ended September 30, 2006 primarily due to declines in some of
our AT&T markets during the first quarter of 2007 due to rescoping and consolidation of products,
declines in renewal business due to weaker housing trends and unfavorable economic conditions in
some of our Qwest and Embarq markets, partially offset by the amortization of revenue from new
product introductions, including online products and services, in our Qwest, Embarq and AT&T
markets, and incremental revenue from Business.com and Local Launch.
35
2007 Reported GAAP Expenses Compared to 2006 Adjusted and Adjusted Pro Forma Expenses
Reported
GAAP cost of revenue for the three and nine months ended
September 30, 2007 of $286.6 million and
$866.2 million, respectively, increased by $22.7 million
and $64.2 million from adjusted and adjusted pro forma cost of
revenue of $263.9 million and $802.0 million for the three
and nine months ended September 30, 2006, respectively. Reported
GAAP G&A expenses for the three and nine months ended
September 30, 2007 of $34.3 million
and $104.8 million, respectively, decreased by $0.2 million
and $9.7 million from adjusted and adjusted pro forma G&A
expenses of $34.5 million and $114.5 million for the three and nine months ended September 30,
2006, respectively. The primary
components of the respective $22.5 million and
$54.5 million net increase in GAAP cost of revenue and G&A
expenses for the three and nine months ended September 30, 2007 are shown below:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Nine Months
|
|
|
Ended
|
|
Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2007
|
|
2007
|
(amounts in millions)
|
|
$ Change
|
|
$ Change
|
|
Cost uplift expense
|
|
$
|
3.3
|
|
|
$
|
27.9
|
|
Increased internet production and distribution costs
|
|
|
11.1
|
|
|
|
20.9
|
|
Increased advertising and branding expenses
|
|
|
11.1
|
|
|
|
13.1
|
|
Increased print, paper and distribution costs
|
|
|
4.0
|
|
|
|
12.2
|
|
(Decrease) increase in information technology (IT) expenses
|
|
|
(4.6
|
)
|
|
|
3.7
|
|
Decreased barter expense
|
|
|
(2.6
|
)
|
|
|
(7.1
|
)
|
Decreased general corporate expenses
|
|
|
|
|
|
|
(8.8
|
)
|
All other, net
|
|
|
0.2
|
|
|
|
(7.4
|
)
|
|
|
|
Total increase in 2007 reported GAAP cost of revenue and G&A
expenses compared to 2006 adjusted and adjusted pro forma
cost of revenue and G&A expenses
|
|
$
|
22.5
|
|
|
$
|
54.5
|
|
|
|
|
The
increase in reported GAAP cost of revenue from adjusted and adjusted pro forma
cost of revenue is due primarily to cost uplift expense related to the Dex Media
Merger of $3.3 million and $27.9 million, which has been reported in GAAP cost of revenue for the
three and nine months ended September 30, 2007, respectively. Although reported GAAP cost of
revenue for the three and nine months ended September 30, 2006 included $34.4 million and $81.9
million, respectively, of cost uplift expense related to the Dex Media Merger and AT&T Directory
Acquisition, adjusted and adjusted pro forma cost of revenue for the three and nine months ended
September 30, 2006 excluded this cost uplift expense, as noted above.
Reported GAAP internet production and distribution costs for the three and nine months ended
September 30, 2007 increased $11.1 million and $20.9 million, respectively, from adjusted and
adjusted pro forma internet production and distribution costs for the three and nine months ended
September 30, 2006 due to investment in our triple play strategy. This investment focuses on
enhancing our online products and services (IYP, SEM and SEO). Adjusted pro forma internet
production and distribution costs for the nine months ended September 30, 2006 includes expenses
for January 2006 as reported by Dex Media.
During the three and nine months ended September 30, 2007, we incurred $11.1 million and $13.1
million, respectively, of additional advertising and branding expenses in connection with our
triple play strategy compared to the three and nine months ended September 30, 2006. These
advertising and branding costs were incurred to promote the Dex brand name for all of our print and
online products across our entire footprint as well as the use of DexKnows.com as our new URL
across our entire footprint.
During the three and nine months ended September 30, 2007, we incurred $4.0 million and $12.2
million, respectively, of additional print, paper and distribution costs, compared to the three and
nine months ended September 30, 2006, due to new print products, including the introduction of
companion directories in our Embarq and AT&T markets.
36
During the three months ended September 30, 2007, GAAP IT expenses declined $4.6 million compared
to adjusted IT expenses for the three months ended September 30, 2006, due to cost savings
resulting from lower rates associated with a new IT contract, which became effective in July 2007.
During the nine months ended September 30, 2007, we incurred approximately $3.7 million of
additional GAAP IT expenses compared to adjusted pro forma IT expenses for the nine months ended
September 30, 2006, due to recognizing a full period of results from the acquired Dex Media
business, as well as costs to achieve synergies which include enhancements and technical support of
multiple production systems as we continue implementing our integration plan to a consolidated IT
platform. This increase is partially offset by cost savings resulting from lower rates associated
with the new IT contract. Adjusted pro forma IT expenses for the nine months ended September 30,
2006 includes expenses for January 2006 as reported by Dex Media.
During the three and nine months ended September 30, 2007, barter expenses declined $2.6 million
and $7.1 million, respectively, compared to the three and nine months ended September 30, 2006, due
to declines in barter activity in our Qwest markets.
Reported
GAAP G&A expenses for the nine months ended September 30,
2007 were $8.8 million lower than adjusted pro forma G&A
expenses for the nine months ended September 30, 2006, due to
reductions in general corporate expenses, primarily relating to achieving economies of scale subsequent to the Dex Media
Merger, as well as Company-wide expense reduction efforts.
Changes in the All other category primarily relate to a decrease in non-cash stock-based
compensation expense for the three and nine months ended September 30, 2007, partially offset by an
increase in sales training costs associated with new product introductions, including online
products and services.
Reported GAAP D&A expense for the three and nine months ended September 30, 2007 was $111.5 million
and $323.7 million, respectively. Adjusted and adjusted pro forma D&A for the three and nine months
ended September 30, 2006 was $85.1 million and $253.7 million, respectively. Adjusted pro forma D&A
for the nine months ended September 30, 2006 includes incremental D&A as if the Dex Media Merger
had occurred on January 1, 2006. The increase in reported GAAP D&A for the three and nine months
ended September 30, 2007 of $26.4 million and $70.0 million, respectively, from adjusted and
adjusted pro forma D&A for the three and nine months ended September 30, 2006 is primarily related
to amortizing the local customer relationships intangible asset acquired in the Dex Media Merger
beginning in the first quarter of 2007 and amortization of intangible assets acquired in the
Business.com Acquisition.
2007 Reported GAAP Operating Income Compared to 2006 Adjusted and Adjusted Pro Forma Operating
Income
Reported GAAP operating income for the three and nine months ended September 30, 2007 was $237.5
million and $704.6 million, respectively, representing a decrease of $44.8 million and $144.1
million, respectively, from adjusted and adjusted pro forma operating income of $282.3 million and
$848.7 million for the three and nine months ended September 30, 2006, respectively, reflecting the
variances between revenues and expenses from period to period described above.
37
LIQUIDITY AND CAPITAL RESOURCES
Long-term debt of the Company at September 30, 2007 and December 31, 2006, including fair value
adjustments required by GAAP as a result of the Dex Media Merger, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
December 31, 2006
|
|
|
|
RHD
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
$
|
328,000
|
|
|
$
|
|
|
6.875% Senior Notes due 2013
|
|
|
300,000
|
|
|
|
300,000
|
|
6.875% Series A-1 Senior Discount Notes due 2013
|
|
|
338,157
|
|
|
|
335,401
|
|
6.875% Series A-2 Senior Discount Notes due 2013
|
|
|
611,721
|
|
|
|
606,472
|
|
8.875% Series A-3 Senior Notes due 2016
|
|
|
1,210,000
|
|
|
|
1,210,000
|
|
R.H. Donnelley Inc. (RHDI)
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,811,078
|
|
|
|
1,946,535
|
|
8.875% Senior Notes due 2010
|
|
|
7,934
|
|
|
|
7,934
|
|
10.875% Senior Subordinated Notes due 2012
|
|
|
600,000
|
|
|
|
600,000
|
|
Dex Media, Inc.
|
|
|
|
|
|
|
|
|
8% Senior Notes due 2013
|
|
|
512,499
|
|
|
|
513,663
|
|
9% Senior Discount Notes due 2013
|
|
|
704,695
|
|
|
|
663,153
|
|
Dex Media East
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
529,237
|
|
|
|
656,571
|
|
9.875% Senior Notes due 2009
|
|
|
470,299
|
|
|
|
476,677
|
|
12.125% Senior Subordinated Notes due 2012
|
|
|
385,435
|
|
|
|
390,314
|
|
Dex Media West
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,156,022
|
|
|
|
1,450,917
|
|
8.5% Senior Notes due 2010
|
|
|
399,897
|
|
|
|
403,260
|
|
5.875% Senior Notes due 2011
|
|
|
8,777
|
|
|
|
8,786
|
|
9.875% Senior Subordinated Notes due 2013
|
|
|
827,169
|
|
|
|
833,469
|
|
|
|
|
Total RHD Consolidated
|
|
|
10,200,920
|
|
|
|
10,403,152
|
|
Less current portion
|
|
|
454,191
|
|
|
|
382,631
|
|
|
|
|
Long-term debt
|
|
$
|
9,746,729
|
|
|
$
|
10,020,521
|
|
|
|
|
Credit Facilities
RHD
To finance the Business.com Acquisition and related fees and expenses, on August 23, 2007, RHD
entered into a $328.0 million credit facility (RHD Credit Facility), with a scheduled maturity
date of December 31, 2011. As of September 30, 2007, the outstanding balance under the RHD Credit
Facility totaled $328.0 million. The weighted average interest rate under the RHD Credit Facility
was 8.75% at September 30, 2007. On October 2, 2007, the RHD Credit Facility was paid in full from
the proceeds of our Series A-4 Notes.
RHDI
As of September 30, 2007, the outstanding balances of Term Loans A-4, D-1, and D-2 under RHDIs
senior secured credit facility, as amended and restated (RHDI Credit Facility) totaled $1,781.6
million, comprised of $94.8 million, $333.4 million and $1,353.4 million, respectively, and $29.5
million was outstanding under the $175.0 million Revolving Credit Facility (the RHDI Revolver)
(with an additional $0.3 million utilized under a standby letter of credit). The weighted average
interest rate of outstanding debt under the RHDI Credit Facility was 6.97% and 6.86% at September
30, 2007 and December 31, 2006, respectively. On October 17, 2007, a portion of the Term Loans A-4,
D-1, and D-2 were repaid from certain proceeds of our Series A-4 Notes that we contributed to RHDI.
See Refinancings, for additional information.
38
Dex Media East
As of September 30, 2007, the outstanding balances of the tranche A and tranche B term loans under
the Dex Media East credit facility totaled $496.2 million, comprised of $142.9 million and $353.3
million, respectively, and $33.0 million was outstanding under the $100.0 million revolving loan
commitments (Dex Media East Revolver) (with an additional $3.0 million utilized under standby
letters of credit). The weighted average interest rate of outstanding debt under the Dex Media East
credit facility was 7.0% and 6.85% at September 30, 2007 and December 31, 2006, respectively. On
October 17, 2007, a portion of the tranche A and tranche B term loans were repaid from certain
proceeds of our Series A-4 Notes that were transferred to Dex Media East. On October 24, 2007, the
existing Dex Media East credit facility was paid in full from the proceeds of the new Dex Media
East credit facility. See Refinancings, for additional information.
Dex Media West
As of September 30, 2007, the outstanding balances of the tranche A, tranche B-1, and tranche B-2
term loans under the Dex Media West credit facility totaled $1,131.0 million, comprised of $177.8
million, $328.9 million, and $624.3 million, respectively, and $25.0 million was outstanding under
the $100.0 million revolving loan commitments (Dex Media West Revolver). The weighted average
interest rate of outstanding debt under the Dex Media West credit facility was 7.03% and 6.83% at
September 30, 2007 and December 31, 2006, respectively.
Refinancings
On October 2, 2007 we issued $1.0 billion of Series A-4 Notes. Proceeds from the Series A-4 Notes
were (a) used to repay the $328 million RHD Credit Facility used to fund the Business.com
Acquisition, (b) contributed to RHDI in order to provide funding for the tender offer and consent
solicitation of RHDIs $600 million Senior Subordinated Notes and (c) used to pay related fees and
expenses and for other general corporate purposes. On October 17, 2007, we issued an additional
$500 million of Series A-4 Notes. Proceeds from this issuance were transferred to certain
subsidiaries in order to repay portions of the term loans outstanding under the existing Dex Media
East and RHDI credit facilities and pay related fees and expenses.
Interest on the Series A-4 Notes is payable semi-annually on April 15 and October 15 of each year,
commencing on April 15, 2008. The Series A-4 Notes are senior unsecured obligations of RHD, senior
in right of payment to all of RHDs existing and future senior subordinated debt and future
subordinated obligations and rank equally with any of RHDs existing and future senior unsecured
debt. The Series A-4 Notes are effectively subordinated to RHDs secured debt, including RHDs
guarantee of borrowings under the RHDI Credit Facility and are structurally subordinated to any
existing or future liabilities (including trade payables) of our direct and indirect subsidiaries.
The Series A-4 Notes were issued to certain institutional investors in an offering exempt from
registration requirements under the Securities Act of 1933. Under the terms of a registration
rights agreement, the Company has agreed to file a registration statement for the Series A-4 Notes
within 210 days subsequent to the initial closing.
In October 2007, under the terms and conditions of a tender offer and consent solicitation to
purchase RHDIs $600 million Senior Subordinated Notes that RHDI commenced on September 18, 2007,
$599.9 million, or 99.9%, of the outstanding Senior Subordinated
Notes were repurchased.
The tender offer and repayment of the RHD Credit Facility will be accounted for as extinguishments
of debt resulting in a loss charged to interest expense during the three months ending December 31,
2007. RHDI expects to redeem the remaining outstanding Senior Subordinated Notes. December 15,
2007 is the first date upon which such redemption may occur pursuant to the terms of that
indenture. This statement shall not constitute a notice of redemption under that indenture, and
such notice, if made, will only be made in accordance with the applicable provisions of that
indenture.
On October 17, 2007, $300.0 million of the term loans outstanding under the Dex Media East credit
facility and $191.0 million of the term loans outstanding under the RHDI credit facility were
repaid from the proceeds of the Series A-4 Notes issued on October 17, 2007. The partial repayment
of the term loans outstanding under these credit facilities will be accounted for as
extinguishments of debt resulting in a loss charged to interest expense during the three months
ending December 31, 2007.
39
On October 24, 2007, we replaced the existing Dex Media East credit facility with a new Dex Media
East credit facility. The new Dex Media East credit facility consists of a $700.0 million
aggregate principal amount tranche A term loan facility with a six-year term, a $400.0
million aggregate principal amount tranche B term loan facility with a seven-year
term, a $100.0 million aggregate principal amount revolving loan facility and a $200.0 million
aggregate principal amount uncommitted incremental facility, in which
Dex Media East would have the right, subject to obtaining commitments
for such incremental loans, on
one or more occasions to increase the tranche A term loan, tranche B term loan or the revolving
loan facility by such amount. The tranche A term loan may be
borrowed in a single drawing on any date (the Drawdown
Date) on or prior to December 4, 2007. The tranche B
term loan may be borrowed in two drawings: once on the closing date
and a second on the Drawdown Date. The new credit facility is secured by pledges of similar assets and
has similar covenants and events of default as the existing Dex Media East credit facility. The
proceeds from the new credit facility were used to repay the remaining term loans under the
existing Dex Media East credit facility and the delayed draw term
loans are available to provide funding for the redemption of Dex Media
Easts outstanding 9.875% senior notes due 2009 and outstanding 12.125% senior subordinated notes
due 2012, which is expected to occur on November 26, 2007. The repayment of the remaining term
loans outstanding under the existing Dex Media East credit facility
and redemption of Dex Media
Easts outstanding 9.875% senior notes and outstanding 12.125% senior subordinated notes will be
accounted for as extinguishments of debt resulting in a loss charged to interest expense during the
three months ending December 31, 2007.
The purpose of these transactions was to refinance certain debt obligations with debt yielding more
favorable interest rates and to simplify and provide for more flexibility within our operating and
capital structure.
See Item 1, Financial Statements (Unaudited) Note 12, Subsequent Events, for additional
information regarding these financing and other related transactions.
As a result of the Dex Media Merger and in accordance with Statement of Financial Accounting
Standards (SFAS) No. 141,
Business Combinations
(SFAS No. 141), we were required to record Dex
Medias outstanding debt at its fair value as of the date of the Dex Media Merger, and as such, a
fair value adjustment was established at January 31, 2006. This fair value adjustment is amortized
as a reduction of interest expense over the remaining term of the respective debt agreements using
the effective interest method and does not impact future scheduled interest or principal payments.
Amortization of the fair value adjustment included as a reduction of interest expense was $7.9
million and $23.2 million for the three and nine months ended September 30, 2007, respectively, and
$8.8 million and $24.0 million for the three and nine months ended September 30, 2006,
respectively. A total premium of $222.3 million was recorded upon consummation of the Dex Media
Merger, of which $172.7 million remains unamortized at September 30, 2007. The following table
illustrates the book value and fair value of Dex Medias outstanding debt as of January 31, 2006,
the initial fair value adjustment at January 31, 2006 and the unamortized fair value adjustment at
September 30, 2007:
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|
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|
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|
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Initial Fair
|
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Unamortized
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Value
|
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Fair Value
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Book Value at
|
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Fair Value at
|
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Adjustment at
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Adjustment at
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|
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January 31,
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January 31,
|
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January 31,
|
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September 30,
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(amounts in millions)
|
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2006
|
|
2006
|
|
2006
|
|
2007
|
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Dex Media Credit Facilities
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$
|
1,950.1
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|
|
$
|
1,950.1
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|
|
$
|
|
|
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$
|
|
|
Dex Media, Inc. 8% Senior Notes
|
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500.0
|
|
|
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515.0
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|
|
|
15.0
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|
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12.5
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Dex Media, Inc. 9% Senior Discount Notes
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598.8
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|
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616.0
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17.2
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15.0
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Dex Media East 9.875% Senior Notes
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450.0
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484.3
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34.3
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20.5
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Dex Media East 12.125% Senior Subordinated Notes
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341.3
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395.9
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54.6
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44.2
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Dex Media West 8.5% Senior Notes
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385.0
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407.1
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22.1
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14.9
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Dex Media West 5.875% Senior Notes
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300.0
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300.1
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0.1
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0.1
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Dex Media West 9.875% Senior Subordinated Notes
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761.8
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|
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840.8
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79.0
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65.5
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|
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Total Dex Media Outstanding Debt at January 31, 2006
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$
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5,287.0
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$
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5,509.3
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$
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222.3
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$
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172.7
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40
Our primary source of liquidity will continue to be cash flow generated from operations as well as
available borrowing capacity under the revolver portions of the Companys credit facilities. We
expect that our primary liquidity requirements will be to fund operations and service the Companys
indebtedness. Our ability to meet our debt service requirements will be dependent on our ability
to generate sufficient cash from operations and incur additional borrowings under the Companys
credit facilities. Our primary sources of cash flow will consist mainly of cash receipts from the
sale of advertising in our yellow pages and from our online products and services and can be
impacted by, among other factors, general economic conditions, competition from other yellow pages
directory publishers and other alternative products, consumer confidence and the level of demand
for our advertising products and services. We believe that cash flows from operations, along with
borrowing capacity under the revolver portions of the Companys credit facilities, will be adequate
to fund our operations and capital expenditures and to meet our debt service requirements for at
least the next 12 to 24 months. However, we make no assurances that our business will generate
sufficient cash flow from operations or that sufficient borrowing will be available under the
revolver portions of the Companys credit facilities to enable us to fund our operations, capital
expenditures and meet all debt service requirements, pursue all of our strategic initiatives, or
for other purposes.
Primarily as a result of our business combinations and Preferred Stock repurchase transactions, we
have a significant amount of debt. Aggregate outstanding debt as of September 30, 2007 was $10.2
billion (including fair value adjustments required by GAAP as a result of the Dex Media Merger).
During the three and nine months ended September 30, 2007, we made scheduled principal payments of
$65.2 million and $208.3 million, respectively, and prepaid an additional $150.0 million and $354.0
million, respectively, in principal under the Companys credit facilities, which resulted in total
credit facility repayments of $215.2 million and $562.3 million, respectively, excluding revolver
payments. During the three and nine months ended September 30, 2007, we made revolver payments of
$175.5 million and $566.1 million, respectively, offset by revolver borrowings of $209.0 million
and $570.7 million, respectively, resulting in a net increase of $33.5 million and $4.6 million,
respectively, of the revolver portions under the Companys credit facilities.
For the three and nine months ended September 30, 2007, we made aggregate cash interest payments of
$213.7 million and $587.4 million, respectively. At September 30, 2007, we had $19.0 million of
cash and cash equivalents before checks not yet presented for payment of $16.5 million, and
combined available borrowings under our revolvers of
$284.2 million. In connection with the aforementioned
refinancings, we received approximately $50.0 million for
general corporate purposes. During the three and nine
months ended September 30, 2007, we periodically utilized our revolvers as a financing resource to
balance the timing of our periodic payments and our prepayments made under our credit facilities
and interest payments on our and our subsidiaries senior notes and senior subordinated notes with
the timing of cash receipts from operations. Our present intention is to repay borrowings under all
revolvers in a timely manner and keep any outstanding amounts to a minimum.
Cash provided by operating activities was $470.3 million for the nine months ended September 30,
2007. Key contributors to operating cash flow include the following:
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$59.0 million in net income.
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$489.4 million of net non-cash charges primarily consisting of $323.7 million of
depreciation and amortization, $61.1 million in bad debt provision, $30.0 million of
stock-based compensation expense, $37.9 million in other non-cash charges, primarily
related to the amortization of deferred financing costs and amortization of the fair
value adjustments required by GAAP as a result of the Dex Media Merger, and $36.7
million in deferred income taxes.
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$80.4 million net use of cash from an increase in accounts receivable of $49.6
million and a decrease in deferred directory revenue of $30.8 million. The change in
deferred revenue and accounts receivable are analyzed together given the fact that when
a directory is published, the annual billable value of that directory is initially
deferred and unbilled accounts receivable are established. Each month thereafter,
typically one twelfth of the billing value is recognized as revenue and billed to
customers.
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$34.6 million net source of cash from a decrease in other assets, consisting of a
$22.6 million decrease in prepaid expenses and a $12.0 million decrease in other current
and non-current assets, primarily relating to deferred commissions, print, paper and
delivery costs and changes in the fair value of the Companys interest rate swap
agreements.
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41
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$41.4 million net use of cash from a decrease in accounts payable and accrued
liabilities, primarily reflecting an $11.9 million decrease in accrued liabilities,
which include accrued salaries and related bonuses and accrued income taxes, and a $33.9
million decrease in accrued interest payable on outstanding debt, offset by a $4.4
million increase in trade accounts payable.
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$9.1 million increase in other non-current liabilities, including pension and
postretirement long-term liabilities.
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Cash used by investing activities for the nine months ended September 30, 2007 was $393.3 million
and includes the following:
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$61.8 million used to purchase fixed assets, primarily computer equipment, software
and leasehold improvements.
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$328.9 million of net cash payments to acquire Business.com.
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$2.5 million used to fund an equity investment.
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Cash used by financing activities for the nine months ended September 30, 2007 was $214.3 million
and includes the following:
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$1,128.4 million in principal payments on debt borrowed under each of the credit
facilities. Of this amount, $208.3 million represents scheduled principal payments,
$354.0 million represents principal payments made on an accelerated basis, at our
option, from available cash flow generated from operations and $566.1 million represents
principal payments on the revolvers.
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$323.7 million source associated with borrowings under the RHD Credit Facility, which
was used to fund the Business.com Acquisition, net of costs.
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$570.7 million source in borrowings under the revolvers.
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$9.0 million source from the issuance of common stock in connection with the
Business.com Acquisition.
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$12.7 million in proceeds from the exercise of employee stock options.
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$2.0 million used in the decreased balance of checks not yet presented for payment.
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Cash provided by operating activities was $566.4 million for the nine months ended September 30,
2006. Key contributors to operating cash flow include the following:
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$186.9 million in net loss.
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$225.4 million of net non-cash charges primarily consisting of $233.2 million of
depreciation and amortization, $47.9 million in bad debt provision, $35.6 million of
stock-based compensation expense and $23.4 million in other non-cash charges, offset by
a $114.7 million change in deferred taxes.
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$550.0 million net source of cash from a $581.3 million increase in deferred
directory revenue, offset by an increase in accounts receivable of $31.3 million. The
change in deferred revenue and accounts receivable are analyzed together given the fact
that when a directory is published, the annual billable value of that directory is
initially deferred and unbilled accounts receivable are established. Each month
thereafter, typically one twelfth of the billing value is recognized as revenue and
billed to customers. Additionally, under purchase accounting rules, deferred revenue
was not recorded on directories that were published prior to the Dex Media Merger,
however we retained all of the rights associated with the collection of amounts due
under the advertising contracts executed prior to the Dex Media Merger.
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42
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|
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$32.3 million net use of cash from an increase in other assets, consisting of a $43.5
million increase in prepaid expenses, primarily relating to deferred directory costs
associated with directories not yet published, offset by an $11.2 million decrease in
other current and non-current assets, primarily relating to changes in the fair value of
the Companys interest rate swap agreements.
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$0.2 million net use of cash from a decrease in accounts payable and accrued
liabilities, primarily reflecting a $38.2 million decrease in accrued liabilities,
including accrued salaries and related bonuses, and a $1.0 million decrease in trade
accounts payable, offset by a $39.0 million increase in accrued interest payable on
outstanding debt.
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$10.4 million increase in other non-current liabilities, including pension and
postretirement long-term liabilities.
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Cash used by investing activities for the nine months ended September 30, 2006 was $1,943.3 million
and includes the following:
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$41.9 million used to purchase fixed assets, primarily computer equipment, software
and leasehold improvements.
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$1,901.4 million in cash payments primarily in connection with the Dex Media Merger,
including merger fees net of cash received from Dex Media.
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Cash provided by financing activities for the nine months ended September 30, 2006 was $1,522.2
million and includes the following:
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$2,514.4 million in net borrowings, consisting of $2,142.5 million related to the
Series A-2 Senior Discount Notes and Series A-3 Senior Notes, which were used to fund
the cash portion of the Dex Media Merger, and Series A-1 Senior Discount Notes, which
were used to fund the GS Repurchase. Net borrowings also consist of $444.2 million of
the Dex Media West tranche B-1 term loan, $150.0 million of which was used to fund the
cash portion of the Dex Media Merger and $294.2 million of which was used to fund the
purchase of the 5.875% Dex Media West Senior Notes, 9.875% Dex Media West Senior
Subordinated Notes and 9% Dex Media, Inc. Senior Discount Notes in conjunction with
change of control offers. These borrowings were net of financing costs of $72.3 million.
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|
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$1,315.2 million in principal payments on debt borrowed under each of the credit
facilities. Of this amount, $212.4 million represents scheduled principal payments,
$210.0 million represents principal payments made on an accelerated basis, at our
option, from excess cash flow generated from operations, $291.9 represents Dex Media
senior notes put back to the Company for repurchase and $600.9 million represents
principal payments on each of the revolvers.
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$336.8 million used to repurchase the remaining 100,301 shares of our Preferred Stock
in January 2006 and to redeem preferred stock purchase rights under our stockholder
rights plan in May 2006.
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$639.4 million source in borrowings under the revolvers.
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$23.6 million in proceeds from the exercise of employee stock options.
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$3.2 million in the decreased balance of checks not yet presented for payment.
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43
Contractual Obligations
Upon adoption of Financial Accounting Standards Board (FASB) Interpretation No. 48,
Accounting
for Uncertainty in Income Taxes: An Interpretation of FASB Statement No. 109
(FIN No. 48), our
unrecognized tax benefits as of January 1, 2007 and September 30, 2007 total $174.1 million and
$11.7 million, respectively.
In July 2007, we effectively settled all issues under consideration with the Internal Revenue
Service (IRS) related to its audit for taxable years 2003 and 2004. As a result of the
settlement, the unrecognized tax benefits associated with our uncertain Federal tax positions
decreased by $167.0 million during the three and nine months ended September 30, 2007. The
unrecognized tax benefits impacted by the IRS audit primarily related to items for which the
ultimate deductibility was highly certain but for which there was uncertainty regarding the timing
of such deductibility.
It is reasonably possible that the amount of unrecognized tax benefits disclosed above could
decrease within the next twelve months. We are currently under audit in New York for taxable years
2000 through 2003 and North Carolina for taxable years 2003 through 2006. If the New York and North
Carolina audits are resolved within the next twelve months, the total amount of unrecognized tax
benefits reported above could decrease by approximately $11.5 million. The unrecognized tax
benefits related to the New York and North Carolina audits relate to apportionment and allocation
of income among our legal entities.
In connection with our software system modernization and on-going support services related to the
Amdocs software system, on September 14, 2007, we entered into an Information Technology License
and Services Agreement with Amdocs (Amdocs Agreement). Under the terms and conditions of the
Amdocs Agreement, we are obligated to pay Amdocs approximately $138.3 million over the five year
term of the agreement.
44
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk and Risk Management
The RHDI credit facility and the Dex Media West and Dex Media East credit facilities bear interest
at variable rates and, accordingly, our earnings and cash flow are affected by changes in interest
rates. The RHDI credit facility requires that we maintain hedge agreements to provide either a
fixed interest rate or interest rate protection on at least 50% of RHDIs total outstanding debt.
The Dex Media East and Dex Media West credit facilities require that we maintain hedge agreements
to provide a fixed rate on at least 33% of their respective indebtedness.
The Company has entered into interest rate swaps that effectively convert approximately $2.5
billion or 66% of the Companys variable rate debt to fixed rate debt as of September 30, 2007. At
September 30, 2007, approximately 38% of our total debt outstanding consists of variable rate debt,
excluding the effect of our interest rate swaps. Including the effect of our interest rate swaps,
total fixed rate debt comprised approximately 87% of our total debt portfolio as of September 30,
2007. The interest rate swaps mature at varying dates from November 2007 through September 2009.
Under the terms of the agreements, the Company receives variable interest based on three-month
LIBOR and pays a weighted average fixed rate of 4.7%. The weighted average variable rate received
on our interest rate swaps was 5.59% for the nine months ended September 30, 2007. These periodic
payments and receipts are recorded as interest expense.
We use derivative financial instruments for hedging purposes only and not for trading or
speculative purposes.
By using derivative financial instruments to hedge exposures to changes in interest rates, the
Company exposes itself to credit risk and market risk. Credit risk is the possible failure of the
counterparty to perform under the terms of the derivative contract. When the fair value of a
derivative contract is positive, the counterparty owes the Company, which creates credit risk for
the Company. When the fair value of a derivative contract is negative, the Company owes the
counterparty and, therefore, it is not subject to credit risk. The Company minimizes the credit
risk in derivative financial instruments by entering into transactions with major financial
institutions with credit ratings of A or higher.
Market risk is the adverse effect on the value of a financial instrument that results from a change
in interest rates. The market risk associated with interest-rate contracts is managed by
establishing and monitoring parameters that limit the types and degree of market risk that may be
undertaken.
Interest rate swaps with a notional value of $2.4 billion (of the total $2.5 billion in interest
rate swaps) have been designated as cash flow hedges to hedge three-month LIBOR-based interest
payments on $2.4 billion of bank debt. As of September 30, 2007, these respective interest rate
swaps provided an effective hedge of the three-month LIBOR-based interest payments on $2.4 billion
of bank debt.
Certain interest rate swaps acquired as a result of the Dex Media Merger with a notional amount of
$425 million were not designated as cash flow hedges. During the fourth quarter of 2006, $300
million of these interest rate swaps were settled and at September 30, 2007, $125 million remain
undesignated. For the three and nine months ended September 30, 2007, the Company recorded
additional interest expense of $0.5 million and $1.1 million, respectively, as a result of the
change in fair value of the acquired undesignated interest rate swaps. For the three and nine
months ended September 30, 2006, the Company recorded additional interest expense of $2.7 million
and $3.1 million, respectively, as a result of the change in fair value of the acquired
undesignated interest rate swaps. During May 2006, the Company entered into $1.0 billion notional
value of interest rate swaps, which were not designated as hedging instruments until July 2006. The
Company recorded changes in the fair value of these interest rate swaps as a reduction to interest
expense of $3.1 million and $4.4 million during the three and nine months ended September 30, 2006,
respectively.
45
Market Risk Sensitive Instruments
The Company utilizes a combination of fixed-rate and variable-rate debt to finance its operations.
The variable-rate debt exposes the Company to variability in interest payments due to changes in
interest rates. Management believes that it is prudent to mitigate the interest rate risk on a
portion of its variable-rate borrowings. To satisfy this objective, the Company has entered into
fixed interest rate swap agreements to manage fluctuations in cash flows resulting from changes in
interest rates on variable-rate debt. Certain interest rate swap agreements have been designated as
cash flow hedges. In accordance with the provisions of SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities
(SFAS No. 133)
,
as amended by SFAS No. 138,
Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FAS 133
and SFAS No.
149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities
, the swaps are
recorded at fair value. On a quarterly basis, the fair values of the swaps are determined based on
quoted market prices and, assuming effectiveness, the differences between the fair value and the
book value of the swaps are recognized in accumulated other comprehensive loss, a component of
shareholders equity. The swaps and the hedged item (three-month LIBOR-based interest payments on
$2.4 billion of bank debt) have been designed so that the critical terms (interest reset dates,
duration and index) coincide. Assuming the critical terms continue to coincide, the cash flows from
the swaps will exactly offset the cash flows of the hedged item and no ineffectiveness will exist.
For derivative instruments that are not designated or do not qualify as hedged transactions, the
initial fair value, if any, and any subsequent gains or losses on the change in the fair value are
reported in earnings as a component of interest expense.
Item 4.
Controls and Procedures
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(a)
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Evaluation of Disclosure Controls and Procedures.
Based on their
evaluation, as of the end of the period covered by this Quarterly
Report on Form 10-Q, of the effectiveness of the Companys disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) the principal executive
officer and principal financial officer of the Company have each
concluded that such disclosure controls and procedures are effective
and sufficient to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commissions rules and forms.
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(b)
|
|
Changes in Internal Control Over Financial Reporting.
There have not
been any changes in the Companys internal control over financial
reporting that occurred during the Companys most recent fiscal
quarter that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial
reporting.
|
46
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various legal proceedings arising in the ordinary course of our business, as
well as certain litigation and tax matters. In many of these matters, plaintiffs allege that they
have suffered damages from errors or omissions of improper listings contained in directories
published by us. We periodically assess our liabilities and contingencies in connection with these
matters based upon the latest information available to us. For those matters where it is probable
that we have incurred a loss and the loss or range of loss can be reasonably estimated, we record
reserves in our condensed consolidated financial statements. In other instances, we are unable to
make a reasonable estimate of any liability because of the uncertainties related to both the
probable outcome and amount or range of loss. As additional information becomes available, we
adjust our assessment and estimates of such liabilities accordingly.
The Company is exposed to potential defamation and breach of privacy claims arising from our
publication of directories and our methods of collecting, processing and using advertiser and
telephone subscriber data. If such data were determined to be inaccurate or if data stored by us
were improperly accessed and disseminated by us or by unauthorized persons, the subjects of our
data and users of the data we collect and publish could submit claims against the Company. Although
to date we have not experienced any material claims relating to defamation or breach of privacy, we
may be party to such proceedings in the future that could have a material adverse effect on our
business.
Based on our review of the latest information available, we believe our ultimate liability in
connection with pending or threatened legal proceedings will not have a material adverse effect on
our results of operations, cash flows or financial position. No material amounts have been accrued
in our condensed consolidated financial statements with respect to any of such matters.
In July 2007, The Dun & Bradstreet Corporation (D&B) advised us that it would not appeal the IRS
determination of deficiencies with respect to the remaining Legacy Tax Matter (as defined in the
2006 10-K) and that amounts on deposit with the IRS were more than sufficient to fund such
deficiencies. Accordingly, all Legacy Tax Matters have now been resolved.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In conjunction with the Business.com Acquisition, the founder and Chief Executive Officer of
Business.com, Jacob Winebaum, has been appointed President of RHDs Interactive Division. Under the
terms of a related Stock Purchase Agreement, dated as of July 27, 2007, on August 23, 2007, Mr. Winebaum
purchased from RHD 148,372 shares of RHD common stock for approximately $9.0 million. These
securities were offered and sold to Mr. Winebaum in a private transaction under Section 4(2) of the
Securities Act of 1933 (the Act), and have not been registered under the Act, are subject to
certain contractual transfer restrictions, and may not be offered, sold, transferred, pledged or
otherwise disposed of except pursuant to an effective registration statement under the Act or an
exemption from registration under such Act.
47
Item 6.
Exhibits
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|
|
Exhibit No.
|
|
Document
|
4.1
|
|
Indenture, dated October 2, 2007, between R.H. Donnelly Corporation and
The Bank of New York, as trustee, relating to R.H. Donnelley
Corporations 8.875% Series A-4 Senior Notes due 2017 (incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K, filed with
the Securities and Exchange Commission on October 5, 2007, Commission
file No. 001-07155).
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|
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|
4.2
|
|
Form of 8.875% Series A-4 Senior Notes due 2017, included in Exhibit 4.1.
|
|
|
|
4.3
|
|
Fourth Supplemental Indenture, dated as of October 2, 2007, by and among
R.H. Donnelley Inc., as issuer, R.H. Donnelley Corporation, as
guarantor, the subsidiary guarantors named therein, as guarantors, and
The Bank of New York, as trustee (incorporated by reference to Exhibit
4.1 to the Current Report on Form 8-K, filed with the Securities and
Exchange Commission on October 5, 2007, Commission file No. 001-07155).
|
|
|
|
10.1
|
|
Credit Agreement, dated as of August 23, 2007, among R.H. Donnelley
Corporation, as borrower, JPMorgan Chase Bank, N.A., as administrative
agent, and the several banks and other financial institutions from time
to time party thereto (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K, filed with the Securities and Exchange
Commission on August 28, 2007, Commission File No. 001-07155). This
agreement is no longer in effect.
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10.2
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Registration Rights Agreement, dated October 2, 2007, by and between
R.H. Donnelley Corporation and the initial purchasers identified therein
(incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K, filed with the Securities and Exchange Commission on October 5,
2007, Commission file No. 001-07155).
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10.3
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Registration Rights Agreement, dated October 17, 2007, by and between
R.H. Donnelley Corporation and the initial purchasers identified therein
(incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K, filed with the Securities and Exchange Commission on October 17,
2007, Commission file No. 001-07155).
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10.4
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Credit Agreement, dated as of
October 24, 2007, by and among Dex Media East LLC, as borrower,
Dex Media East, Inc., Dex Media, Inc., JPMorgan Chase Bank, N.A., as
administrative agent and collateral agent, and the several banks and
other financial institutions or entities from time to time party
thereto (incorporated by reference to Exhibit 10.1 to Dex Media
East LLCs Current Report on Form 8-K, filed with the
Securities and Exchange Commission on October 26, 2007,
Commission File No. 333-102395).
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10.5
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Guarantee and Collateral Agreement,
dated as of October 24, 2007, by and among Dex Media East LLC,
Dex Media East Inc., the subsidiary guarantor a party thereto and
JPMorgan Chase Bank, NA, as Collateral Agent (incorporated by reference
to Exhibit 10.2 to Dex Media
East LLCs Current Report on Form 8-K, filed with the
Securities and Exchange Commission on October 26, 2007,
Commission File No. 333-102395).
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10.6
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Pledge Agreement, dated as of
October 24, 2007, by and between Dex Media, Inc. and JPMorgan
Chase Bank, NA, as Collateral Agent (incorporated by reference to
Exhibit 10.3 to Dex Media East LLCs Current Report on Form 8-K, filed with the
Securities and Exchange Commission on October 26, 2007,
Commission File No. 333-102395).
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31.1*
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Certification of Quarterly Report on Form 10-Q for the period ended
September 30, 2007 by David C. Swanson, Chairman and Chief Executive
Officer of R.H. Donnelley Corporation under Section 302 of the
Sarbanes-Oxley Act
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31.2*
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Certification of Quarterly Report on Form 10-Q for the period ended
September 30, 2007 by Steven M. Blondy, Executive Vice President and
Chief Financial Officer of R.H. Donnelley Corporation under Section 302
of the Sarbanes-Oxley Act
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32.1*
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Certification of Quarterly Report on Form 10-Q for the period ended
September 30, 2007 under Section 906 of the Sarbanes-Oxley Act by David
C. Swanson, Chairman and Chief Executive Officer, and Steven M. Blondy,
Executive Vice President and Chief Financial Officer, for R.H. Donnelley
Corporation
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48
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.
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R.H. DONNELLEY CORPORATION
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Date: October 26, 2007
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By:
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/s/ Steven M. Blondy
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Steven M. Blondy
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
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/s/ Karen E. Palczuk
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Karen E. Palczuk
Interim Controller and Assistant Vice President -Process and
Performance Management
(Interim Principal Accounting Officer)
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49
Exhibit Index
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Exhibit No.
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Document
|
4.1
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Indenture, dated October 2, 2007, between R.H. Donnelly Corporation and
The Bank of New York, as trustee, relating to R.H. Donnelley
Corporations 8.875% Series A-4 Senior Notes due 2017 (incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K, filed with
the Securities and Exchange Commission on October 5, 2007, Commission
file No. 001-07155).
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4.2
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Form of 8.875% Series A-4 Senior Notes due 2017, included in Exhibit 4.1.
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4.3
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Fourth Supplemental Indenture, dated as of October 2, 2007, by and among
R.H. Donnelley Inc., as issuer, R.H. Donnelley Corporation, as
guarantor, the subsidiary guarantors named therein, as guarantors, and
The Bank of New York, as trustee (incorporated by reference to Exhibit
4.1 to the Current Report on Form 8-K, filed with the Securities and
Exchange Commission on October 5, 2007, Commission file No. 001-07155).
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10.1
|
|
Credit Agreement, dated as of August 23, 2007, among R.H. Donnelley
Corporation, as borrower, JPMorgan Chase Bank, N.A., as administrative
agent, and the several banks and other financial institutions from time
to time party thereto (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K, filed with the Securities and Exchange
Commission on August 28, 2007, Commission File No. 001-07155). This
agreement is no longer in effect.
|
|
|
|
10.2
|
|
Registration Rights Agreement, dated October 2, 2007, by and between
R.H. Donnelley Corporation and the initial purchasers identified therein
(incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K, filed with the Securities and Exchange Commission on October 5,
2007, Commission file No. 001-07155).
|
|
|
|
10.3
|
|
Registration Rights Agreement, dated October 17, 2007, by and between
R.H. Donnelley Corporation and the initial purchasers identified therein
(incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K, filed with the Securities and Exchange Commission on October 17,
2007, Commission file No. 001-07155).
|
|
|
|
10.4
|
|
Credit Agreement, dated as of
October 24, 2007, by and among Dex Media East LLC, as borrower,
Dex Media East, Inc., Dex Media, Inc., JPMorgan Chase Bank, N.A., as
administrative agent and collateral agent, and the several banks and
other financial institutions or entities from time to time party
thereto (incorporated by reference to Exhibit 10.1 to Dex Media
East LLCs Current Report on Form 8-K, filed with the
Securities and Exchange Commission on October 26, 2007,
Commission File No. 333-102395).
|
|
|
|
10.5
|
|
Guarantee and Collateral Agreement,
dated as of October 24, 2007, by and among Dex Media East LLC,
Dex Media East Inc., the subsidiary guarantor a party thereto and
JPMorgan Chase Bank, NA, as Collateral Agent (incorporated by reference
to Exhibit 10.2 to Dex Media
East LLCs Current Report on Form 8-K, filed with the
Securities and Exchange Commission on October 26, 2007,
Commission File No. 333-102395).
|
|
|
|
10.6
|
|
Pledge Agreement, dated as of
October 24, 2007, by and between Dex Media, Inc. and JPMorgan
Chase Bank, NA, as Collateral Agent (incorporated by reference to
Exhibit 10.3 to Dex Media East LLCs Current Report on Form 8-K, filed with the
Securities and Exchange Commission on October 26, 2007,
Commission File No. 333-102395).
|
|
|
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31.1*
|
|
Certification of Quarterly Report on Form 10-Q for the period ended
September 30, 2007 by David C. Swanson, Chairman and Chief Executive
Officer of R.H. Donnelley Corporation under Section 302 of the
Sarbanes-Oxley Act
|
|
|
|
31.2*
|
|
Certification of Quarterly Report on Form 10-Q for the period ended
September 30, 2007 by Steven M. Blondy, Executive Vice President and
Chief Financial Officer of R.H. Donnelley Corporation under Section 302
of the Sarbanes-Oxley Act
|
|
|
|
32.1*
|
|
Certification of Quarterly Report on Form 10-Q for the period ended
September 30, 2007 under Section 906 of the Sarbanes-Oxley Act by David
C. Swanson, Chairman and Chief Executive Officer, and Steven M. Blondy,
Executive Vice President and Chief Financial Officer, for R.H. Donnelley
Corporation
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50
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