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, 2008
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, a non-accelerated
filer, or a
smaller reporting company.
See the definitions of large accelerated
filer, accelerated
filer
and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
þ
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
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, 2008
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Common Stock, par value $1 per share
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68,806,514
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R.H. DONNELLEY CORPORATION
INDEX TO FORM 10-Q
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
R.H. Donnelley Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
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September 30,
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December 31,
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(in thousands, except share data)
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2008
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2007
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Assets
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Current Assets
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Cash and cash equivalents
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$
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60,789
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$
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46,076
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Accounts receivable
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Billed
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296,549
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258,839
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Unbilled
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791,301
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847,446
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Allowance for doubtful accounts and sales claims
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(52,204
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)
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(42,817
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)
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Net accounts receivable
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1,035,646
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1,063,468
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Deferred directory costs
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175,043
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183,687
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Short-term deferred income taxes, net
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45,216
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47,759
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Prepaid expenses and other current assets
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79,531
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126,201
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Total current assets
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1,396,225
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1,467,191
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Fixed assets and computer software, net
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182,121
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187,680
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Other non-current assets
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179,937
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139,406
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Intangible assets, net
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10,859,121
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11,170,482
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Goodwill
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3,124,334
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Total Assets
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$
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12,617,404
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$
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16,089,093
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Liabilities and Shareholders (Deficit) Equity
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Current Liabilities
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Accounts payable and accrued liabilities
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$
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177,116
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$
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230,693
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Accrued interest
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147,555
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198,828
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Deferred directory revenues
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1,097,666
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1,172,035
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Current portion of long-term debt
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121,269
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177,175
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Total current liabilities
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1,543,606
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1,778,731
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Long-term debt
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9,594,367
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9,998,474
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Deferred income taxes, net
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1,356,231
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2,288,384
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Other non-current liabilities
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192,299
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200,768
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Total liabilities
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12,686,503
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14,266,357
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Commitments and contingencies
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Shareholders (Deficit) Equity
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Common stock, par value $1 per share, authorized - 400,000,000 shares; issued
- 88,169,275
shares at September 30, 2008 and December 31, 2007; outstanding
68,806,499 shares and 68,758,026 shares at September 30, 2008 and December
31, 2007, respectively
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88,169
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88,169
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Additional paid-in capital
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2,425,483
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2,402,181
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Accumulated deficit
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(2,321,472
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)
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(385,540
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)
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Treasury stock, at cost, 19,362,776 shares at September 30, 2008 and 19,411,249
shares at December 31, 2007
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(256,278
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)
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(256,334
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)
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Accumulated other comprehensive loss
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(5,001
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)
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(25,740
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)
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Total shareholders (deficit) equity
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(69,099
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)
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1,822,736
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Total Liabilities and Shareholders (Deficit) Equity
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$
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12,617,404
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$
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16,089,093
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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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2008
|
|
2007
|
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2008
|
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2007
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Net revenues
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$
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647,984
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$
|
671,195
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$
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1,986,387
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$
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1,999,518
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Expenses:
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Production, publication and distribution expenses
(exclusive of depreciation and amortization shown
separately below)
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105,062
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106,860
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317,692
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335,477
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Selling and support expenses
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185,601
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181,751
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547,507
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531,225
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General and administrative expenses
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45,975
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33,545
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110,973
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|
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104,460
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Depreciation and amortization
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|
125,445
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111,569
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363,252
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323,748
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Goodwill impairment
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|
|
|
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3,123,854
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|
|
|
|
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Total expenses
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462,083
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|
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433,725
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4,463,278
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1,294,910
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|
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|
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|
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|
|
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Operating income (loss)
|
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|
185,901
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|
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237,470
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|
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(2,476,891
|
)
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704,608
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|
|
|
|
|
|
|
|
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|
|
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|
|
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Interest expense, net
|
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|
(198,093
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)
|
|
|
(201,103
|
)
|
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(630,352
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)
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|
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(601,740
|
)
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|
|
|
|
|
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|
|
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|
|
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Gain on debt transactions, net
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|
70,224
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|
|
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231,539
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|
|
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|
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|
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Income (loss) before income taxes
|
|
|
58,032
|
|
|
|
36,367
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|
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|
(2,875,704
|
)
|
|
|
102,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision) benefit for income taxes
|
|
|
(31,949
|
)
|
|
|
(18,242
|
)
|
|
|
939,772
|
|
|
|
(43,871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income (loss)
|
|
$
|
26,083
|
|
|
$
|
18,125
|
|
|
$
|
(1,935,932
|
)
|
|
$
|
58,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic
|
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$
|
0.38
|
|
|
$
|
0.25
|
|
|
$
|
(28.15
|
)
|
|
$
|
0.83
|
|
|
|
|
Diluted
|
|
$
|
0.38
|
|
|
$
|
0.25
|
|
|
$
|
(28.15
|
)
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
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|
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|
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Shares used in computing earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic
|
|
|
68,808
|
|
|
|
71,170
|
|
|
|
68,783
|
|
|
|
70,833
|
|
|
|
|
Diluted
|
|
|
68,909
|
|
|
|
72,177
|
|
|
|
68,783
|
|
|
|
71,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
26,083
|
|
|
$
|
18,125
|
|
|
$
|
(1,935,932
|
)
|
|
$
|
58,997
|
|
Unrealized gain (loss) on interest rate swaps, net of tax
|
|
|
(4,422
|
)
|
|
|
(10,242
|
)
|
|
|
19,959
|
|
|
|
(10,622
|
)
|
Benefit plans adjustment, net of tax
|
|
|
266
|
|
|
|
371
|
|
|
|
780
|
|
|
|
1,109
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
21,927
|
|
|
$
|
8,254
|
|
|
$
|
(1,915,193
|
)
|
|
$
|
49,484
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
September 30,
|
(in thousands)
|
|
2008
|
|
2007
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,935,932
|
)
|
|
$
|
58,997
|
|
Reconciliation of net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
3,123,854
|
|
|
|
|
|
Gain on debt transactions, net
|
|
|
(231,539
|
)
|
|
|
|
|
Depreciation and amortization
|
|
|
363,252
|
|
|
|
323,748
|
|
Deferred income tax (benefit) provision
|
|
|
(942,970
|
)
|
|
|
36,648
|
|
Provision for bad debts
|
|
|
102,470
|
|
|
|
61,307
|
|
Stock based compensation expense
|
|
|
23,427
|
|
|
|
30,013
|
|
Interest rate swap ineffectiveness
|
|
|
30,276
|
|
|
|
|
|
Other non-cash items, net
|
|
|
44,312
|
|
|
|
37,930
|
|
Changes in assets and liabilities, net of effects from acquisitions:
|
|
|
|
|
|
|
|
|
(Increase) in accounts receivable
|
|
|
(74,647
|
)
|
|
|
(49,833
|
)
|
Decrease in other assets
|
|
|
49,508
|
|
|
|
34,629
|
|
(Decrease) in accounts payable and accrued liabilities
|
|
|
(99,119
|
)
|
|
|
(41,406
|
)
|
(Decrease) in deferred directory revenues
|
|
|
(74,369
|
)
|
|
|
(30,813
|
)
|
Increase in other non-current liabilities
|
|
|
8,123
|
|
|
|
9,114
|
|
|
|
|
Net cash provided by operating activities
|
|
|
386,646
|
|
|
|
470,334
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Additions to fixed assets and computer software
|
|
|
(47,304
|
)
|
|
|
(61,819
|
)
|
Acquisitions, net of cash received
|
|
|
|
|
|
|
(328,937
|
)
|
Equity investment disposition (investment)
|
|
|
4,318
|
|
|
|
(2,500
|
)
|
|
|
|
Net cash used in investing activities
|
|
|
(42,986
|
)
|
|
|
(393,256
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Additional borrowings under Credit facilities, net of costs
|
|
|
1,018,202
|
|
|
|
|
|
Credit facilities repayments
|
|
|
(1,224,716
|
)
|
|
|
(562,286
|
)
|
Proceeds from issuance of debt, net of costs
|
|
|
|
|
|
|
323,656
|
|
Note repurchases and related costs
|
|
|
(84,682
|
)
|
|
|
|
|
Revolver borrowings
|
|
|
398,100
|
|
|
|
570,650
|
|
Revolver repayments
|
|
|
(422,150
|
)
|
|
|
(566,050
|
)
|
Debt issuance costs in connection with Debt Exchanges
|
|
|
(9,617
|
)
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
9,000
|
|
Repurchase of common stock
|
|
|
(6,112
|
)
|
|
|
|
|
Increase (decrease) in checks not yet presented for payment
|
|
|
1,932
|
|
|
|
(1,996
|
)
|
Proceeds from employee stock option exercises
|
|
|
96
|
|
|
|
12,741
|
|
|
|
|
Net cash used in financing activities
|
|
|
(328,947
|
)
|
|
|
(214,285
|
)
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
14,713
|
|
|
|
(137,207
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
46,076
|
|
|
|
156,249
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
60,789
|
|
|
$
|
19,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information:
|
|
|
|
|
|
|
|
|
Cash paid:
|
|
|
|
|
|
|
|
|
Interest, net
|
|
$
|
584,394
|
|
|
$
|
587,376
|
|
|
|
|
Income taxes, net
|
|
$
|
1,713
|
|
|
$
|
1,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Reduction of debt from Debt Exchanges
|
|
$
|
(172,804
|
)
|
|
$
|
|
|
|
|
|
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, 2007. The interim condensed consolidated financial
statements include the accounts of RHD and its direct and indirect wholly-owned subsidiaries. As of
September 30, 2008, R.H. Donnelley Inc. (RHDI), Dex Media, Inc. (Dex Media) and Business.com,
Inc. (Business.com) were our only direct wholly-owned subsidiaries. Effective January 1, 2008,
Local Launch, Inc. (Local Launch), a former direct wholly-owned subsidiary of RHD, was merged
with and into Business.com. All intercompany transactions and balances have been eliminated. 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 revenues, with 2007 revenues of approximately $2.7 billion. We publish and distribute
advertiser content utilizing our own Dex brand and three of the most highly recognizable brands in
the industry, Qwest, Embarq and AT&T. During 2007, 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. During 2007, we published and distributed print directories in many
of the countrys most attractive markets including Albuquerque, Chicago, Denver, Las Vegas, Orlando
and Phoenix.
Significant Financing Developments
During the three months ended September 30, 2008, we repurchased $165.5 million ($159.9 million
accreted value) of our senior notes and senior discount notes (collectively referred to as the
Notes) for a purchase price of $84.7 million (the September 2008 Debt Repurchases). As a result
of the September 2008 Debt Repurchases, we recognized a gain of $72.4 million during the three
months ended September 30, 2008.
In October 2008, we repurchased $21.5 million of our Notes for a purchase price of $7.4 million
(the October 2008 Debt Repurchases). As a result of the October 2008 Debt Repurchases, we will
recognize a gain of $13.6 million during the fourth quarter of 2008. See Note 11, Subsequent
Events for additional information.
On June 25, 2008, RHDI exchanged $594.2 million ($585.7 million accreted value) of RHDs senior
notes and senior discount notes (collectively referred to as the RHD Notes) for $412.9 million
aggregate principal amount of RHDIs 11.75% Senior Notes due May 15, 2015 (RHDI Senior Notes),
referred hereto as Debt Exchanges. As a result of the Debt Exchanges, we reduced our outstanding
debt by $172.8 million and recognized a gain of $161.3 million during the nine months ended
September 30, 2008.
On June 6, 2008 and in conjunction with the Debt Exchanges, we amended RHDIs senior secured credit
facility (RHDI Credit Facility) in order to, among other things, permit the Debt Exchanges and
provide additional covenant flexibility. In addition, as part of the amendment, RHDI modified
pricing and extended the maturity date of $100.0 million of its revolving credit facility (the
RHDI Revolver) to June 2011. The remaining $75.0 million will mature in December 2009.
On June 6, 2008, we refinanced the Dex Media West credit facility. The new Dex Media West credit
facility consists of a $130.0 million Term Loan A maturing in October 2013, a $950.0 million Term
Loan B maturing in October 2014 and a $90.0 million revolving credit facility maturing in October
2013 (Dex Media West Revolver), except as otherwise noted. For additional information relating to
the maturities under the new Dex Media West credit facility, see Note 5, Long-Term Debt, Credit
Facilities and Notes.
6
During the nine months ended September 30, 2008 we recognized a charge of $2.2 million for the
write-off of unamortized deferred financing costs associated with the refinancing of the former Dex
Media West credit facility and portions of the amended RHDI Credit Facility, which have been
accounted for as extinguishments of debt. For the three and six months ended June 30, 2008, this
charge was included in interest expense on the consolidated statements of operations and
comprehensive income (loss). In order to conform to the current periods presentation, this amount
has been reclassified to gain on debt transactions, net, on the consolidated statements of
operations and comprehensive income (loss) for the three and nine months ended September 30, 2008.
As a result of the September 2008 Debt Repurchases, Debt Exchanges and refinancing activities noted
above, we reduced our outstanding debt by $159.9 million and $332.7 million, respectively, and
recorded a gain of $70.2 million and $231.5 million, respectively, during the three and nine months
ended September 30, 2008.
As a result of the amendment of the RHDI Credit Facility and the refinancing of the former Dex
Media West credit facility on June 6, 2008, the existing interest rate swaps associated with these
two debt arrangements having a notional amount of $1.7 billion at September 30, 2008 are no longer
highly effective in offsetting changes in cash flows. Accordingly, cash flow hedge accounting
treatment under Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for
Derivative Instruments and Hedging Activities
(SFAS No. 133) is no longer permitted. Interest
expense for the nine months ended September 30, 2008 includes a non-cash charge of $42.9 million
resulting from amounts previously charged to accumulated other comprehensive loss related to these
interest rate swaps. Interest expense for the three and nine months ended September 30, 2008
includes a reduction to interest expense of $8.2 million and $12.6 million, respectively, resulting
from the change in the fair value of these interest rate swaps.
Please see Note 2, Summary of Significant Accounting Policies Interest Expense and Deferred
Financing Costs, Summary of Significant Accounting Policies Gain on Debt Transactions, Net and
Note 5, Long-Term Debt, Credit Facilities and Notes for additional information.
Reclassifications
Expenses presented as cost of revenues in our previous filings are now presented as production,
publication and distribution expenses to more appropriately reflect the nature of these costs.
Certain prior period amounts included in the condensed consolidated statement of operations have
been reclassified to conform to the current periods presentation. Selling and support expenses
are now presented as a separate expense category in the condensed consolidated statements of
operations. In prior periods, certain selling and support expenses were included in production,
publication and distribution expenses and others were included in general and administrative
expenses. Additionally, beginning in the fourth quarter of 2007, we began classifying adjustments
for customer claims to sales allowance, which is deducted from gross revenues to determine net
revenues. In prior periods, adjustments for customer claims were included in bad debt expense
under general and administrative expenses. Bad debt expense is now included under selling and
support expenses. Accordingly, we have reclassified adjustments for customer claims and bad debt
expense for the three and nine months ended September 30, 2007 to conform to the current periods
presentation. These reclassifications had no impact on operating income or net income for the
three and nine months ended September 30, 2007. The table below summarizes these reclassifications.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007
|
|
Nine Months Ended September 30, 2007
|
|
|
As
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
Previously
|
|
|
|
|
|
As
|
|
|
Reported
|
|
Reclass
|
|
Reclassified
|
|
Reported
|
|
Reclass
|
|
Reclassified
|
|
Net revenues
|
|
$
|
669,939
|
|
|
$
|
1,256
|
|
|
$
|
671,195
|
|
|
$
|
1,999,332
|
|
|
$
|
186
|
|
|
$
|
1,999,518
|
|
Production,
publication and
distribution
expenses
|
|
|
286,574
|
|
|
|
(179,714
|
)
|
|
|
106,860
|
|
|
|
866,206
|
|
|
|
(530,729
|
)
|
|
|
335,477
|
|
Selling and support
expenses
|
|
|
|
|
|
|
181,751
|
|
|
|
181,751
|
|
|
|
|
|
|
|
531,225
|
|
|
|
531,225
|
|
General and
administrative
expenses
|
|
|
34,326
|
|
|
|
(781
|
)
|
|
|
33,545
|
|
|
|
104,770
|
|
|
|
(310
|
)
|
|
|
104,460
|
|
In addition, certain prior period amounts included in the condensed consolidated statement of cash
flows have been reclassified to conform to the current periods presentation.
7
2. Summary of Significant Accounting Policies
Identifiable Intangible Assets and Goodwill
In connection with the Companys prior business combinations, certain long-term intangible assets
were identified in accordance with 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 or more frequently if we believe indicators of impairment exist. Amortization expense
was $104.0 million and $98.9 million for the three months ended September 30, 2008 and 2007,
respectively, and $311.9 million and $285.9 million for the nine months ended September 30, 2008
and 2007, respectively.
As a result of the decline in the trading value of our debt and equity securities during the first
quarter of 2008 and continuing negative industry and economic trends that have directly affected
our business, we performed impairment tests as of March 31, 2008 of our goodwill, definite-lived
intangible assets and other long-lived assets in accordance with SFAS No. 142 and SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS No. 144), respectively. We
used estimates and assumptions in our impairment evaluations, including, but not limited to,
projected future cash flows, revenue growth and customer attrition rates.
The impairment test of our definite-lived intangible assets and other long-lived assets was
performed by comparing the carrying amount of our intangible assets and other long-lived assets to
the sum of their undiscounted expected future cash flows. In accordance with SFAS No. 144,
impairment exists if the sum of the undiscounted expected future cash flows is less than the
carrying amount of the intangible asset, or its related group of assets, and other long-lived
assets. Our testing results of our definite-lived intangible assets and other long-lived assets
indicated no impairment as of March 31, 2008.
The impairment test for our goodwill involved a two step process. The first step involved comparing
the fair value of the Company with the carrying amount of its assets and liabilities, including
goodwill. The fair value of the Company was determined using a market based approach, which
reflects the market value of its debt and equity securities as of March 31, 2008. As a result of
our testing, we determined that the Companys fair value was less than the carrying amount of its
assets and liabilities, requiring us to proceed with the second step of the goodwill impairment
test. In the second step of the testing process, the impairment loss is determined by comparing the
implied fair value of our goodwill to the recorded amount of goodwill. The implied fair value of
goodwill is derived from a discounted cash flow analysis for the Company using a discount rate that
results in the present value of assets and liabilities equal to the current fair value of the
Companys debt and equity securities. Based upon this analysis, we recognized a non-cash impairment
charge of $2.5 billion during the three months ended March 31, 2008.
Since the trading value of our equity securities further declined in the second quarter of 2008 and
as a result of continuing negative industry and economic trends, we performed additional impairment
tests of our goodwill, definite-lived intangible assets and other long-lived assets as of June 30,
2008. Our testing results of our definite-lived intangible assets and other long-lived assets
indicated no impairment as of June 30, 2008. As a result of these tests, we recognized a non-cash
goodwill impairment charge of $660.2 million during the three months ended June 30, 2008. As a
result of this impairment charge, we have no recorded goodwill at September 30, 2008.
No impairment losses were recorded related to our definite-lived intangible assets and other
long-lived assets during the three and nine months ended September 30, 2008 and 2007. In addition
to the non-cash goodwill impairment charge, we recognized a change in goodwill of $0.5 million
related to the Business.com Acquisition (defined in Note 3, Acquisitions) during the nine months
ended September 30, 2008. No impairment losses were recorded related to our goodwill during the
three and nine months ended September 30, 2007.
If industry and economic conditions in certain of our markets continue to deteriorate, we will be
required to assess the recoverability of our long-lived assets and other intangible assets, which
could result in additional impairment charges.
8
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 $6.2 million and $6.0 million for the three months ended September 30, 2008 and 2007,
respectively, and $20.5 million and $18.1 million for the nine months ended September 30, 2008 and
2007, respectively.
As a result of the ineffective interest rate swaps associated with the amendment of the RHDI Credit
Facility and the refinancing of the former Dex Media West credit facility, interest expense for the
nine months ended September 30, 2008 includes a non-cash charge of $42.9 million resulting from
amounts previously charged to accumulated other comprehensive loss related to these interest rate
swaps. Interest expense for the three and nine months ended September 30, 2008 includes a reduction
to interest expense of $8.2 million and $12.6 million, respectively, resulting from the change in
the fair value of these interest rate swaps. Prospective gains or losses on the change in the fair
value of these interest rate swaps will be reported in earnings as a component of interest expense.
In conjunction with our acquisition of Dex Media on January 31, 2006 (the Dex Media Merger) and
as a result of purchase accounting required under generally accepted accounting principles
(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 $4.5 million and $7.9 million for the three months ended September 30, 2008
and 2007, respectively, and $13.1 million and $23.2 million for the nine months ended September 30,
2008 and 2007, respectively.
Gain on Debt Transactions, Net
During the three months ended September 30, 2008, we repurchased $165.5 million ($159.9 million
accreted value) of our Notes for a purchase price of $84.7 million. As a result of the September
2008 Debt Repurchases, we recognized a gain of $72.4 million during the three months ended
September 30, 2008, consisting of the difference between the accreted value or par value, as
applicable, and purchase price of the Notes, offset by the write-off of unamortized deferred
financing costs of $2.9 million, as noted in the following table:
|
|
|
|
|
Notes Repurchased
|
|
Accreted or Par Value
|
|
|
6.875% Senior Notes due 2013
|
|
$
|
45,529
|
|
6.875% Series A-1 Senior Discount Notes due 2013
|
|
|
12,194
|
|
6.875% Series A-2 Senior Discount Notes due 2013
|
|
|
72,195
|
|
8.875% Series A-3 Senior Notes due 2016
|
|
|
30,000
|
|
|
|
|
|
Total Notes Repurchased
|
|
|
159,918
|
|
Total Purchase Price Including Fees
|
|
|
(84,682
|
)
|
Write-off of unamortized deferred financing costs
|
|
|
(2,856
|
)
|
|
|
|
|
Net gain on September 2008 Debt Repurchases
|
|
$
|
72,380
|
|
|
|
|
|
On June 25, 2008, RHDI exchanged $594.2 million ($585.7 million accreted value) of RHD Notes for
$412.9 million aggregate principal amount of RHDI Senior Notes. The following table presents the
accreted value or par value, as applicable, of the RHD Notes that have been exchanged as well as
the gain recognized on the Debt Exchanges.
9
|
|
|
|
|
RHD Notes Exchanged
|
|
Accreted or Par Value
|
|
6.875% Senior Notes due 2013
|
|
$
|
47,663
|
|
6.875% Series A-1 Senior Discount Notes due 2013
|
|
|
29,185
|
|
6.875% Series A-2 Senior Discount Notes due 2013
|
|
|
93,031
|
|
8.875% Series A-3 Senior Notes due 2016
|
|
|
151,119
|
|
8.875% Series A-4 Senior Notes due 2017
|
|
|
264,677
|
|
|
|
|
|
Total RHD Notes exchanged
|
|
|
585,675
|
|
RHDI Notes Issued
|
|
|
|
|
11.75% Senior Notes due 2015
|
|
|
412,871
|
|
|
|
|
|
Reduction of debt from Debt Exchanges
|
|
|
172,804
|
|
Write-off of unamortized deferred financing costs
|
|
|
(11,489
|
)
|
|
|
|
|
Net gain on Debt Exchanges
|
|
$
|
161,315
|
|
|
|
|
|
During the nine months ended September 30, 2008 we recognized a charge of $2.2 million for the
write-off of unamortized deferred financing costs associated with the refinancing of the former Dex
Media West credit facility and portions of the amended RHDI Credit Facility, which have been
accounted for as extinguishments of debt.
As a result of the September 2008 Debt Repurchases, Debt Exchanges and refinancing activities noted
above, we recorded a gain of $70.2 million and $231.5 million, respectively, during the three and
nine months ended September 30, 2008.
Advertising Expense
We recognize advertising expenses as incurred. These expenses include media, public relations,
promotional and sponsorship costs and on-line advertising. Total advertising expense was $18.2
million and $20.7 million for the three months ended September 30, 2008 and 2007, respectively, and
$48.8 million and $37.7 million for the nine months ended September 30, 2008 and 2007,
respectively. Total advertising expense for the three and nine months ended September 30, 2008
includes $11.7 million and $26.3 million, respectively, of costs associated with traffic purchased
and distributed to multiple advertiser landing pages with no comparable expense for the three and
nine months ended September 30, 2007.
Concentration of Credit Risk
Approximately 85% of our directory advertising revenues are 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 revenues are derived from the sale of
advertising to national or large regional chains. Substantially all of the revenues derived
through national accounts are 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. During the three and nine months ended September 30, 2008, we
experienced adverse bad debt trends attributable to economic challenges in our markets. Our bad
debt expense represented approximately 5.9% and 5.2% of our net revenue, respectively, for the
three and nine months ended September 30, 2008. If these economic challenges in our markets
continue, our bad debt experience and operating results would continue to be adversely impacted in
future periods.
At September 30, 2008, we had interest rate swap agreements with major financial institutions with
a notional amount of $2.5 billion. Interest rate swaps with a notional amount of $850.0 million
have been designated as cash flow hedges and provided an effective hedge of the three-month
LIBOR-based interest payments on $850.0 million of bank debt. 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 AA- or higher. We do not
currently foresee a material credit risk
associated with these swap agreements; however, no assurances can be given.
10
Earnings (Loss) Per Share
We account for earnings (loss) per share (EPS) in accordance with SFAS No. 128,
Earnings Per
Share
(SFAS No. 128)
.
Under the guidance of SFAS No. 128, diluted EPS is calculated by dividing
net income (loss) by the weighted average common shares outstanding plus dilutive potential common
stock. Potential common stock includes stock options, stock appreciation rights (SARs) and
restricted stock, the dilutive effect of which is calculated using the treasury stock method.
The calculation of basic and diluted EPS is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
26,083
|
|
|
$
|
18,125
|
|
|
$
|
(1,935,932
|
)
|
|
$
|
58,997
|
|
Weighted average common shares outstanding
|
|
|
68,808
|
|
|
|
71,170
|
|
|
|
68,783
|
|
|
|
70,833
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.38
|
|
|
$
|
0.25
|
|
|
$
|
(28.15
|
)
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
26,083
|
|
|
$
|
18,125
|
|
|
$
|
(1,935,932
|
)
|
|
$
|
58,997
|
|
Weighted average common shares outstanding
|
|
|
68,808
|
|
|
|
71,170
|
|
|
|
68,783
|
|
|
|
70,833
|
|
Dilutive effect of stock awards
(1)
|
|
|
101
|
|
|
|
1,007
|
|
|
|
|
|
|
|
1,093
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
68,909
|
|
|
|
72,177
|
|
|
|
68,783
|
|
|
|
71,926
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.38
|
|
|
$
|
0.25
|
|
|
$
|
(28.15
|
)
|
|
$
|
0.82
|
|
|
|
|
|
|
|
(1)
|
|
Due to the reported net loss for the nine months ended September 30, 2008, the effect of all
stock-based awards was anti-dilutive and therefore not included in the calculation of diluted
EPS. For the three months ended September 30, 2008 and 2007, 4.4 million and 2.7 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, 2008 and 2007, 1.7 million and 1.1 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.
|
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 $7.1 million and $8.5 million
for the three months ended September 30, 2008 and 2007, respectively, and $23.4 million and $30.0
million for the nine months ended September 30, 2008 and 2007, respectively.
On March 4, 2008, the Company granted 2.2 million stock appreciation rights (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 $7.11
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 $0.3 million and $3.7 million for the three and nine
months ended September 30, 2008, respectively.
In April 2008, the Company increased its estimated forfeiture rate in determining compensation
expense from 5% to 8%. This adjustment was based on a review of historical forfeiture information
and resulted in a reduction to compensation expense of $1.8 million during the nine months ended
September 30, 2008.
11
In March 2008, the Companys Board of Directors approved, subject to shareholder approval, which
was obtained in May 2008, a program under which our current employees were permitted to surrender
certain then outstanding stock options and stock appreciation rights (SARs), with exercise prices
substantially above the then current market price of our common stock, in exchange for new SARs,
with new vesting requirements and an exercise price equal to the market value of our common stock
on the grant date (the Exchange Program). The exercise prices of the outstanding options and SARs
eligible for the Exchange Program ranged from $10.78 to $78.01. Other outstanding stock awards,
including restricted stock units, were not eligible for the Exchange Program.
The Exchange Program was designed to provide eligible employees with an opportunity to exchange
deeply underwater options and SARs for new SARs covering fewer shares, but with an exercise price
based on the current, dramatically lower market price.
The Exchange Program allowed for a separate exchange ratio for each outstanding group of options or
SARs taking into account such factors as the Black-Scholes value of the surrendered awards and the
new SARs to be granted in the Exchange Program, as well as the exercise price and remaining life of
each tranche, and other considerations to ensure that the Exchange Program accomplished its
intended objectives. The weighted average exchange ratio for eligible awards held by senior
management members (as described below) was 1 to 3.8, whereas the weighted average exchange ratio
for eligible awards held by all other eligible employees was 1 to 3.5. These senior management
members are our named executive officers, three other members of our executive committee and our
three general managers of sales. Non-employee directors of the Company were not eligible to
participate in the Exchange Program, nor were former employees holding otherwise eligible options
and SARs.
In connection with the Exchange Program, on July 14, 2008, the Company granted 1.2 million SARs to
certain employees, including certain senior management members, in exchange for 4.6 million
outstanding options and SARs for a total recapture of 3.4 million shares. These SARs, which are
settled in our common stock, were granted at a grant price of $1.69 per share. The SARs granted in
the Exchange Program have a seven-year term and a new three-year vesting schedule, subject to
accelerated vesting upon the occurrence of certain events. Exercisability of the SARs granted to
senior management members is conditioned upon the achievement of the following stock price
appreciation targets, in addition to the three year service-based vesting requirements for all new
SARs: (a) the first vested tranche of new SARs shall not be exercisable until the Companys stock
price equals or exceeds $20 per share; (b) the second vested tranche of new SARs shall not be
exercisable until the Companys stock price equals or exceeds $30 per share; and (c) the third and
final vested tranche of new SARs shall not be exercisable until the Companys stock price equals or
exceeds $40 per share. These share price appreciation conditions will be deemed satisfied if at any
time during the life of the new SARs the average closing price of the Companys common stock during
any ten consecutive trading days equals or exceeds the specified target stock price, provided,
however, that otherwise vested SARs that do not become exercisable prior to their expiration date
due to the failure to achieve these performance conditions shall terminate unexercised. In
addition, these performance conditions for exercisability of the new SARs granted to senior
management members will be deemed satisfied prior to achievement of the respective stock price
appreciation targets upon the occurrence of certain events, including a change of control,
voluntary or involuntary termination, death, disability or retirement. Certain events effectively
accelerate the exercisability of one-third of the total new SARs granted to each senior management
member if any stock appreciation target has yet to have been met at that time.
The Exchange Program has been accounted for as a modification under SFAS No. 123 (R)
.
In
calculating the incremental compensation cost of a modification, the fair value of the modified
award was compared to the fair value of the original award measured immediately before its terms or
conditions were modified. The Company used the Black-Scholes valuation model to determine the fair
value of all original stock awards before modification and the fair value of the modified awards
granted to non-senior management members. The Company utilized the Trinomial valuation model to
determine the fair value of the modified awards granted to senior management members due to the
stock appreciation vesting requirements noted above.
We will recognize an incremental non-cash charge of $0.6 million associated with the Exchange
Program over its three year vesting period, of which $0.1 million was recognized during the three
and nine months ended September 30, 2008.
12
Fair Value of Financial Instruments
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157,
Fair
Value Measurements
(SFAS No. 157), which defines fair value, establishes a framework for
measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. We adopted SFAS No. 157 effective January 1, 2008. The adoption of SFAS No. 157 did
not impact our consolidated financial position and results of operations. In accordance with SFAS
No. 157, the following table represents our assets and liabilities that are measured at fair value
on a recurring basis at September 30, 2008 and the level within the fair value hierarchy in which
the fair value measurements are included.
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
September 30, 2008
|
|
|
Using Significant Other
|
Description
|
|
Observable Inputs (Level 2)
|
|
Derivatives Assets
|
|
$
|
4,834
|
|
Derivatives Liabilities
|
|
$
|
(25,262
|
)
|
In February 2008, the FASB issued Staff Position FAS 157-2,
Effective Date of FASB Statement No.
157
(FSP No. 157-2), which defers the effective date of SFAS No. 157 for non-financial assets and
liabilities, except for items that are recognized or disclosed at fair value on a recurring basis,
to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years.
The Company has elected the deferral option permitted by FSP No. 157-2 for its non-financial assets
and liabilities initially measured at fair value in prior business combinations including
intangible assets and goodwill. We do not expect the adoption of FSP No. 157-2 to have a material
impact on our consolidated financial statements.
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, revenues 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 recoverability of long-lived assets, sales allowances, allowances for doubtful
accounts, depreciation and amortization, employee benefit plans expense, restructuring reserves,
and certain assumptions pertaining to our stock-based awards, among others.
New Accounting Pronouncements
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities
-
an amendment of FASB Statement No. 133
(SFAS No. 161). SFAS No. 161 amends SFAS No.
133 and requires enhanced disclosures of derivative instruments and hedging activities such as the
fair value of derivative instruments and presentation of their gains or losses in tabular format,
as well as disclosures regarding credit risks and strategies and objectives for using derivative
instruments. SFAS No. 161 is effective for fiscal years and interim periods beginning after
November 15, 2008. The Company is currently evaluating the potential impact the adoption of
SFAS No. 161 will have on its consolidated financial statements.
We have reviewed other accounting pronouncements that were issued as of September 30, 2008, 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.
13
3. Acquisitions
On August 23, 2007, we acquired Business.com, a leading business search engine and directory and
performance based advertising network (the Business.com Acquisition). 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.
On January 31, 2006, we acquired Dex Media. 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.
4. Restructuring Charges
The table below highlights the activity in our restructuring reserves for the three and nine months
ended September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2006
|
|
2007
|
|
2008
|
|
|
Three months ended
|
|
Restructuring
|
|
Restructuring
|
|
Restructuring
|
|
Restructuring
|
|
|
September 30, 2008
|
|
Actions
|
|
Actions
|
|
Actions
|
|
Actions
|
|
Total
|
|
Balance at June 30, 2008
|
|
$
|
689
|
|
|
$
|
2,137
|
|
|
$
|
3,560
|
|
|
$
|
3,111
|
|
|
$
|
9,497
|
|
Net increase to reserve
charged to earnings
|
|
|
|
|
|
|
|
|
|
|
76
|
|
|
|
14,329
|
|
|
|
14,405
|
|
Payments
|
|
|
(46
|
)
|
|
|
(619
|
)
|
|
|
(401
|
)
|
|
|
(13,509
|
)
|
|
|
(14,575
|
)
|
|
|
|
Balance at September
30, 2008
|
|
$
|
643
|
|
|
$
|
1,518
|
|
|
$
|
3,235
|
|
|
$
|
3,931
|
|
|
$
|
9,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2006
|
|
2007
|
|
2008
|
|
|
Nine months ended
|
|
Restructuring
|
|
Restructuring
|
|
Restructuring
|
|
Restructuring
|
|
|
September 30, 2008
|
|
Actions
|
|
Actions
|
|
Actions
|
|
Actions
|
|
Total
|
|
Balance at December
31, 2007
|
|
$
|
763
|
|
|
$
|
3,327
|
|
|
$
|
5,542
|
|
|
$
|
|
|
|
$
|
9,632
|
|
Net increase to
reserve charged to
earnings
|
|
|
|
|
|
|
|
|
|
|
324
|
|
|
|
18,920
|
|
|
|
19,244
|
|
Payments
|
|
|
(120
|
)
|
|
|
(1,809
|
)
|
|
|
(2,631
|
)
|
|
|
(14,989
|
)
|
|
|
(19,549
|
)
|
|
|
|
Balance at
September 30, 2008
|
|
$
|
643
|
|
|
$
|
1,518
|
|
|
$
|
3,235
|
|
|
$
|
3,931
|
|
|
$
|
9,327
|
|
|
|
|
During the second quarter of 2008, we initiated a restructuring plan that includes planned
headcount reductions, consolidation of responsibilities and vacating leased facilities (2008
Restructuring Actions). During the three and nine months ended September 30, 2008, we recognized a
restructuring charge to earnings associated with the 2008 Restructuring Actions of $14.3 million
and $18.9 million, respectively, and payments of $13.5 million and $15.0 million, respectively,
which consist primarily of payments for outside consulting services, severance and vacated leased
facilities. We anticipate additional charges to earnings associated with the 2008 Restructuring
Actions during the remainder of 2008.
During the year ended December 31, 2007, we recognized a restructuring charge to earnings of $5.5
million associated with planned headcount reductions and consolidation of responsibilities to be
effectuated during 2008 (2007 Restructuring Actions). During the three and nine months ended
September 30, 2008, we recognized a restructuring charge to earnings of $0.1 million and $0.3
million, respectively, and severance payments of $0.4 million and $2.6 million, respectively,
associated with the 2007 Restructuring Actions.
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. Payments
made with respect to severance during the three months ended September 30, 2008 and 2007 totaled
$0.2 million and $0.2 million, respectively, and $0.4 million and $1.6
14
million, during the nine months ended September 30, 2008 and 2007, respectively. Payments of $0.4
million and $0.5 million were made with respect to the vacated leased Dex Media facilities during
the three months ended September 30, 2008 and 2007, respectively, and $1.4 million and $1.7 million
during the nine months ended September 30, 2008 and 2007, respectively. The remaining lease
payments for these facilities will be made through 2016.
In connection with a prior business combination, a liability was established for vacated leased
facilities, the costs of which are shown in the table above under the caption 2003 Restructuring
Actions. Payments for the three and nine months ended September 30, 2008 reflect lease payments
associated with those facilities. Remaining payments related to the 2003 Restructuring Actions will
be made through 2012.
Restructuring charges that are charged to earnings are included in general and administrative
expenses on the condensed consolidated statements of operations.
5. Long-Term Debt, Credit Facilities and Notes
Long-term debt of the Company at September 30, 2008 and December 31, 2007, including $90.7 million
of fair value adjustments required by GAAP as a result of the Dex Media Merger, consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
RHD
|
|
|
|
|
|
|
|
|
6.875% Senior Notes due 2013
|
|
$
|
206,791
|
|
|
$
|
300,000
|
|
6.875% Series A-1 Senior Discount Notes due 2013
|
|
|
300,845
|
|
|
|
339,222
|
|
6.875% Series A-2 Senior Discount Notes due 2013
|
|
|
453,671
|
|
|
|
613,649
|
|
8.875% Series A-3 Senior Notes due 2016
|
|
|
1,028,839
|
|
|
|
1,210,000
|
|
8.875% Series A-4 Senior Notes due 2017
|
|
|
1,235,260
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
R.H. Donnelley Inc. (RHDI)
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,400,311
|
|
|
|
1,571,536
|
|
11.75% Senior Notes due 2015
|
|
|
412,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dex Media, Inc.
|
|
|
|
|
|
|
|
|
8% Senior Notes due 2013
|
|
|
510,842
|
|
|
|
512,097
|
|
9% Senior Discount Notes due 2013
|
|
|
764,154
|
|
|
|
719,112
|
|
|
|
|
|
|
|
|
|
|
Dex Media East
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,100,000
|
|
|
|
1,106,050
|
|
|
|
|
|
|
|
|
|
|
Dex Media West
|
|
|
|
|
|
|
|
|
New Credit Facility
|
|
|
1,080,000
|
|
|
|
|
|
Former Credit Facility
|
|
|
|
|
|
|
1,071,491
|
|
8.5% Senior Notes due 2010
|
|
|
395,128
|
|
|
|
398,736
|
|
5.875% Senior Notes due 2011
|
|
|
8,765
|
|
|
|
8,774
|
|
9.875% Senior Subordinated Notes due 2013
|
|
|
818,159
|
|
|
|
824,982
|
|
|
|
|
Total RHD Consolidated
|
|
|
9,715,636
|
|
|
|
10,175,649
|
|
Less current portion
|
|
|
121,269
|
|
|
|
177,175
|
|
|
|
|
Long-term debt
|
|
$
|
9,594,367
|
|
|
$
|
9,998,474
|
|
|
|
|
Credit Facilities
At September 30, 2008, total outstanding debt under our credit facilities was $3,580.3 million,
comprised of $1,400.3 million under the RHDI Credit Facility, $1,100.0 million under the Dex Media
East credit facility and $1,080.0 million under the new Dex Media West credit facility.
15
RHDI
On June 6, 2008 and in conjunction with the Debt Exchanges, we amended the RHDI Credit Facility in
order to, among other things, permit the Debt Exchanges and provide additional covenant
flexibility. In addition, as part of the amendment, RHDI modified pricing and extended the maturity
date of $100.0 million of the RHDI Revolver to June 2011. The remaining $75.0 million will mature
in December 2009.
As of September 30, 2008, outstanding balances under the RHDI Credit Facility, totaled $1,400.3
million, comprised of $279.8 million under Term Loan D-1 and $1,120.5 million under Term Loan D-2
and no amount was outstanding under the RHDI Revolver (other than $0.2 million utilized under a
standby letter of credit). All Term Loans require quarterly principal and interest payments. The
RHDI Credit Facility provides for an uncommitted Term Loan C for potential borrowings up to $400.0
million, such proceeds, if borrowed, to be used to fund acquisitions, refinance certain
indebtedness or to make certain restricted payments. As noted above, $75.0 million of the RHDI
Revolver matures in December 2009, while $100.0 million of the RHDI Revolver matures in June 2011,
and Term Loans D-1 and D-2 require accelerated amortization beginning in 2010 through final
maturity in June 2011. The weighted average interest rate of outstanding debt under the RHDI Credit
Facility was 6.83% and 6.50% at September 30, 2008 and December 31, 2007, respectively.
As amended on June 6, 2008, as of September 30, 2008, the RHDI Credit Facility bears interest, at
our option, at either:
|
|
|
The highest of (i) a base rate as determined by the Administrative Agent, Deutsche
Bank Trust Company Americas, (ii) the Federal Funds Effective Rate (as defined) plus 0.50%,
and (iii) 4.0%, in each case, plus a 2.50% margin on the RHDI Revolver and a 2.75% margin
on Term Loan D-1 and Term Loan D-2; or
|
|
|
|
|
The higher of (i) LIBOR rate and (ii) 3.0%, in each case, plus a 3.50% margin on the
RHDI Revolver and a 3.75% margin on Term Loan D-1 and Term Loan D-2. We may elect interest
periods of 1, 2, 3 or 6 months (or 9 or 12 months if, at the time of the borrowing, all
lenders agree to make such term available), for LIBOR borrowings.
|
Effective
October 21, 2008, we obtained a waiver under the RHDI Credit Facility to permit RHDI to make
voluntary prepayments of the Term Loan D-1 and Term Loan D-2 at a
discount to par provided that such discount is acceptable to those
lenders who choose to participate. RHDI is not obligated to make any such
prepayments. See Note 11, Subsequent Events for additional information.
Dex Media East
As of September 30, 2008, outstanding balances under the Dex Media East credit facility totaled
$1,100.0 million, comprised of $700.0 million under Term Loan A and $400.0 million under Term Loan
B and no amount was outstanding under the $100.0 million revolving loan facility (Dex Media East
Revolver) (other than $3.5 million utilized under three standby letters of credit). The Dex Media
East Revolver and Term Loan A will mature in October 2013, and the Term Loan B will mature in
October 2014. The weighted average interest rate of outstanding debt under the Dex Media East
credit facility was 5.03% and 6.87% at September 30, 2008 and December 31, 2007, respectively.
Dex Media West
On June 6, 2008, we refinanced the Dex Media West credit facility. The new Dex Media West credit
facility consists of a $130.0 million Term Loan A maturing in October 2013, a $950.0 million Term
Loan B maturing in October 2014 and the $90.0 million Dex Media West Revolver maturing in October
2013. In the event that more than $25.0 million of Dex Media Wests 9.875% Senior Subordinated
Notes due 2013 (or any refinancing or replacement thereof) are outstanding, the Dex Media West
Revolver, Term Loan A and Term Loan B will mature on the date that is three months prior to the
final maturity of such notes. The new Dex Media West credit facility includes a $400.0 million
uncommitted incremental facility (Incremental Facility) that may be incurred as additional
revolving loans or additional term loans subject to obtaining commitments for such loans. The
Incremental Facility is fully available if used to refinance the Dex Media West 8.5% Senior Notes
due 2010, however is limited to $200.0 million if used for any other purpose. The proceeds from the
new Dex Media West credit facility were used to refinance the former Dex Media West credit facility
and pay related fees and expenses.
16
As of September 30, 2008, outstanding balances under the new Dex Media West credit facility totaled
$1,080.0 million, comprised of $130.0 million under Term Loan A and $950.0 million under Term Loan
B and no amount was outstanding under the Dex Media West Revolver. The weighted average interest
rate of outstanding debt under the new Dex Media West credit facility was 7.38% at September 30,
2008. The weighted average interest rate of outstanding debt under the former Dex Media West credit
facility was 6.51% at December 31, 2007.
As of September 30, 2008, the new Dex Media West credit facility bears interest, at our option, at
either:
|
|
|
The highest of (i) the base rate determined by the Administrative Agent, JP Morgan Chase
Bank, N.A., (ii) the Federal Funds Effective Rate (as defined) plus 0.50%, and (iii) 4.0%,
in each case, plus a 2.75% (or 2.50% if the leverage ratio is less than 3.00 to 1.00)
margin on the Dex Media West Revolver and Term Loan A and a 3.0% margin on Term Loan B; or
|
|
|
|
|
The higher of (i) LIBOR rate and (ii) 3.0% plus a 3.75% (or 3.50% if the leverage ratio
is less than 3.00 to 1.00) margin on the Dex Media West Revolver and Term Loan A and a 4.0%
margin on Term Loan B. We may elect interest periods of 1, 2, 3, or 6 months (or 9 or 12
months if, at the time of the borrowing, all lenders agree to make such term available),
for LIBOR borrowings.
|
Notes
During the three months ended September 30, 2008, we repurchased $165.5 million ($159.9 million
accreted value) of our Notes for a purchase price of $84.7 million. In October 2008, we repurchased
$21.5 million of our Notes for a purchase price of $7.4 million.
On June 25, 2008, RHDI exchanged $594.2 million ($585.7 million accreted value) of the RHD Notes
for $412.9 million of the RHDI Senior Notes, resulting in a reduction of debt of $172.8 million.
Please see Note 2, Summary of Significant Accounting Policies Gain on Debt Transactions, Net
for additional information related to these debt transactions.
Interest on the RHDI Senior Notes is payable semi-annually on May 15
th
and November
15
th
of each year, commencing November 15, 2008. The RHDI Senior Notes are senior
unsecured obligations of RHDI and rank equally with all of RHDIs other senior unsecured
indebtedness. The RHDI Senior Notes are fully and unconditionally guaranteed by RHD and RHDIs
subsidiaries that guarantee the obligations under the RHDI Credit Facility on a general, senior
unsecured basis. The RHDI Senior Notes are effectively subordinated in right of payment to all of
RHDIs existing and future secured debt to the extent of the value of the assets securing such
debt. The RHDI Senior Notes are also structurally subordinated to all existing and future
liabilities (including trade payables) of RHDIs existing and future subsidiaries that do not
guarantee the RHDI Senior Notes. The RHD guarantee with respect to the RHDI Senior Notes is
structurally subordinated to the liabilities of RHDs subsidiaries, other than RHDI and its
subsidiaries that guarantee obligations under the RHDI Senior Notes. Claims with respect to the
RHDI Senior Notes are structurally senior to claims with respect to any outstanding RHD notes.
In July 2008, we registered approximately $1,235.3 million of the 8.875% Series A-4 Senior Notes
due 2017, that were issued on October 2, 2007 and October 17, 2007 by RHD.
6. Income Taxes
The effective tax rate on income (loss) before income taxes of 55.1% and 32.7% for the three and
nine months ended September 30, 2008, respectively, compares to an effective tax rate of 50.2% and
42.6% on income before income taxes for the three and nine months ended September 30, 2007,
respectively. As a result of the non-cash goodwill impairment charge of $3.1 billion recorded
during the nine months ended September 30, 2008, we recognized a decrease in our deferred tax
liability of $1.1 billion, which directly impacted our deferred tax benefit. The change in the
effective tax rate for the nine months ended September 30, 2008 is primarily due to the tax
consequences of the non-cash goodwill impairment charges. The change in the effective tax rate for
the three and nine months ended September 30, 2008 is also attributable to changes in estimates of
state tax apportionment factors that impact our effective state tax rates and an increase in our
valuation allowance related to certain 2008 state tax losses.
17
In September 2008, we effectively settled all issues under consideration with the Department of
Finance for New York City related to its audit for taxable year 2000. As a result of the
settlement, the unrecognized tax benefits associated with our uncertain state tax positions
decreased by $0.9 million during the three and nine months ended September 30, 2008. The decrease
in the unrecognized tax benefits has decreased our effective tax rate for the three and nine months
ended September 30, 2008. The unrecognized tax benefits impacted by the New York City audit
primarily related to allocation of income among our legal entities.
The following table summarizes the significant differences between the U.S. Federal statutory tax
rate and our effective tax rate, which has been applied to the Companys income (loss) before
income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
Statutory U.S. Federal tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local taxes, net of U.S. Federal tax benefit
|
|
|
14.6
|
|
|
|
7.8
|
|
|
|
3.0
|
|
|
|
4.9
|
|
Non-deductible goodwill impairment charge
|
|
|
|
|
|
|
|
|
|
|
(5.1
|
)
|
|
|
|
|
Other non-deductible expenses
|
|
|
1.2
|
|
|
|
0.8
|
|
|
|
|
|
|
|
0.6
|
|
Change in valuation allowance
|
|
|
4.5
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
Other
|
|
|
(0.2
|
)
|
|
|
6.6
|
|
|
|
|
|
|
|
2.1
|
|
|
|
|
Effective tax rate
|
|
|
55.1
|
%
|
|
|
50.2
|
%
|
|
|
32.7
|
%
|
|
|
42.6
|
%
|
|
|
|
7. 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, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Three Months
|
|
Nine Months
|
|
|
Ended September 30,
|
|
Ended September 30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
Service cost
|
|
$
|
2,986
|
|
|
$
|
3,645
|
|
|
$
|
9,722
|
|
|
$
|
10,936
|
|
Interest cost
|
|
|
4,730
|
|
|
|
4,429
|
|
|
|
13,909
|
|
|
|
13,288
|
|
Expected return on plan assets
|
|
|
(4,864
|
)
|
|
|
(4,830
|
)
|
|
|
(15,019
|
)
|
|
|
(14,490
|
)
|
Amortization of prior service cost
|
|
|
47
|
|
|
|
41
|
|
|
|
145
|
|
|
|
507
|
|
Amortization of net loss
|
|
|
205
|
|
|
|
353
|
|
|
|
597
|
|
|
|
674
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
3,104
|
|
|
$
|
3,638
|
|
|
$
|
9,354
|
|
|
$
|
10,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits
|
|
|
Three Months
|
|
Nine Months
|
|
|
Ended September 30,
|
|
Ended September 30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
Service cost
|
|
$
|
471
|
|
|
$
|
492
|
|
|
$
|
1,414
|
|
|
$
|
1,476
|
|
Interest cost
|
|
|
1,484
|
|
|
|
1,331
|
|
|
|
4,452
|
|
|
|
3,993
|
|
Amortization of prior service cost
|
|
|
167
|
|
|
|
201
|
|
|
|
501
|
|
|
|
604
|
|
Amortization of net loss
|
|
|
9
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
2,131
|
|
|
$
|
2,024
|
|
|
$
|
6,394
|
|
|
$
|
6,073
|
|
|
|
|
|
|
During the three months ended September 30, 2008 and 2007, the Company made contributions of $5.9
million and $11.1 million, respectively, to its pension plans. During the nine months ended
September 30, 2008 and 2007, the Company made contributions of $11.5 million and $14.6 million,
respectively, to its pension plans. During the three months ended September 30, 2008 and 2007, the
Company made contributions of $1.4 million and $0.8 million, respectively, to its postretirement
plan. During the nine months ended September 30, 2008 and 2007, the Company made contributions of
$3.2 million and $2.9 million, respectively, to its postretirement plan. We expect to make total
contributions of approximately $15.2 million and $6.8 million to our pension plans and
postretirement plan, respectively, in 2008.
18
On October 21, 2008, the Compensation & Benefits Committee of the Companys Board of Directors
approved the following modifications to the Companys benefit plans:
|
|
|
A comprehensive redesign of the Companys employee retirement savings plans;
|
|
|
|
|
A freeze of the Companys qualified and non-qualified pension plans as they pertain
to non-union employees; and
|
|
|
|
|
A phased in elimination of the Companys postretirement benefit plans for certain health
care and life insurance benefits to certain full-time non-union employees who reach
retirement eligibility while working for the Company.
|
See Note 11, Subsequent Events for additional information regarding these modifications.
8. Business Segments
Management reviews and analyzes its business of providing local commercial search products and
solutions, including publishing yellow pages directories, as one operating segment.
9. 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 in their advertising or improper listings, in each
case, contained in directories published by us.
We are also 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.
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 a liability in
our 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.
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 consolidated financial statements with respect to any such matters.
10. R.H. Donnelley Corporation (Parent Company) Financial Statements
The following condensed Parent Company financial statements should be read in conjunction with the
condensed consolidated financial statements of RHD.
In general, under the terms of our credit facilities, 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 us with very limited
exceptions.
19
R.H. Donnelley Corporation
Condensed Parent Company Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,770
|
|
|
$
|
18,900
|
|
Intercompany, net
|
|
|
304,734
|
|
|
|
279,244
|
|
Short-term deferred income taxes, net.
|
|
|
889
|
|
|
|
|
|
Prepaid and other current assets
|
|
|
1,311
|
|
|
|
8,948
|
|
|
|
|
Total current assets
|
|
|
308,704
|
|
|
|
307,092
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
2,574,063
|
|
|
|
5,231,597
|
|
Fixed assets and computer
software, net
|
|
|
8,423
|
|
|
|
10,462
|
|
Other non-current assets
|
|
|
69,033
|
|
|
|
91,506
|
|
Intercompany note receivable
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,260,223
|
|
|
$
|
5,940,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders (Deficit) Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities.
|
|
$
|
4,247
|
|
|
$
|
14,032
|
|
Accrued interest
|
|
|
83,749
|
|
|
|
123,882
|
|
Current portion of long-term debt
|
|
|
21,500
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
109,496
|
|
|
|
137,914
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
3,203,906
|
|
|
|
3,962,871
|
|
Deferred income taxes, net
|
|
|
5,147
|
|
|
|
5,161
|
|
Other non-current liabilities
|
|
|
10,773
|
|
|
|
11,975
|
|
|
|
|
|
|
|
|
|
|
Shareholders (deficit) equity
|
|
|
(69,099
|
)
|
|
|
1,822,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders (deficit)
equity
|
|
$
|
3,260,223
|
|
|
$
|
5,940,657
|
|
|
|
|
20
R.H. Donnelley Corporation
Condensed Parent Company Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
September 30,
|
|
|
2008
|
|
2007
|
|
|
|
Expenses
|
|
$
|
6,431
|
|
|
$
|
4,414
|
|
Partnership and equity income
|
|
|
60,146
|
|
|
|
97,457
|
|
|
|
|
Operating income
|
|
|
53,715
|
|
|
|
93,043
|
|
Interest expense, net
|
|
|
(68,062
|
)
|
|
|
(56,676
|
)
|
Gain on debt transactions, net
|
|
|
72,379
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
58,032
|
|
|
|
36,367
|
|
Provision for income taxes
|
|
|
(31,949
|
)
|
|
|
(18,242
|
)
|
|
|
|
Net income
|
|
$
|
26,083
|
|
|
$
|
18,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
September 30,
|
|
|
2008
|
|
2007
|
|
|
|
Expenses
|
|
$
|
19,279
|
|
|
$
|
11,179
|
|
Partnership and equity income (loss)
|
|
|
(2,873,423
|
)
|
|
|
277,257
|
|
|
|
|
Operating income (loss)
|
|
|
(2,892,702
|
)
|
|
|
266,078
|
|
Interest expense, net
|
|
|
(230,621
|
)
|
|
|
(163,210
|
)
|
Gain on debt transactions, net
|
|
|
233,694
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(2,889,629
|
)
|
|
|
102,868
|
|
Benefit (provision) for income taxes
|
|
|
953,697
|
|
|
|
(43,871
|
)
|
|
|
|
Net income (loss)
|
|
$
|
(1,935,932
|
)
|
|
$
|
58,997
|
|
|
|
|
R.H. Donnelley Corporation
Condensed Parent Company Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
September 30,
|
|
|
2008
|
|
2007
|
|
|
|
Cash flow from operating activities
|
|
$
|
(248,790
|
)
|
|
$
|
(217,839
|
)
|
Cash flow from investing activitis:
|
|
|
|
|
|
|
|
|
Additions to fixed assets and
computer software
|
|
|
(1,092
|
)
|
|
|
(2,919
|
)
|
Acquisitions, net of cash received
|
|
|
|
|
|
|
(334,260
|
)
|
Equity investment disposition
(investment)
|
|
|
4,318
|
|
|
|
(2,500
|
)
|
|
|
|
Net cash provided by (used in) investing
activities
|
|
|
3,226
|
|
|
|
(339,679
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of debt,
net of costs
|
|
|
(349
|
)
|
|
|
323,656
|
|
Proceeds from the issuance of common
stock
|
|
|
|
|
|
|
9,000
|
|
Increase (decrease) in checks not yet
presented for payment
|
|
|
172
|
|
|
|
(336
|
)
|
Proceeds from employee stock option
exercises
|
|
|
96
|
|
|
|
12,741
|
|
Note repurchases
|
|
|
(84,426
|
)
|
|
|
|
|
Repurchase of common stock
|
|
|
(6,112
|
)
|
|
|
|
|
Excess tax benefits from the exercise
of stock options
|
|
|
(47
|
)
|
|
|
|
|
Dividends from subsidiaries
|
|
|
319,100
|
|
|
|
94,278
|
|
|
|
|
Net cash provided by financing activities
|
|
|
228,434
|
|
|
|
439,339
|
|
|
|
|
Change in cash
|
|
|
(17,130
|
)
|
|
|
(118,179
|
)
|
Cash at beginning of year
|
|
|
18,900
|
|
|
|
122,565
|
|
|
|
|
Cash at end of period
|
|
$
|
1,770
|
|
|
$
|
4,386
|
|
|
|
|
21
11. Subsequent Events
Long-Term Debt, Credit Facilities and Notes
In October 2008, we repurchased $21.5 million of our Notes for a purchase price of $7.4 million. As
a result of the October 2008 Debt Repurchases, we will recognize a gain of $13.6 million during the
fourth quarter of 2008, consisting of the difference between the par value and purchase price of
the Notes, offset by the write-off of unamortized deferred financing costs of $0.4 million, as
noted in the following table:
|
|
|
|
|
Notes Repurchased
|
|
Par Value
|
|
|
8.875% Series A-3 Senior Notes due 2016
|
|
$
|
16,000
|
|
8.875% Series A-4 Senior Notes due 2017
|
|
|
5,500
|
|
|
|
|
|
Total Notes Repurchased
|
|
|
21,500
|
|
Total Purchase Price Including Fees
|
|
|
(7,448
|
)
|
Write-off of unamortized deferred financing costs
|
|
|
(437
|
)
|
|
|
|
|
Net gain on October 2008 Debt Repurchases
|
|
$
|
13,615
|
|
|
|
|
|
Effective
October 21, 2008, we obtained a waiver under the RHDI Credit Facility to permit RHDI to make
voluntary prepayments of the Term Loan D-1 and Term Loan D-2 at a
discount to par provided that such discount is acceptable to those
lenders who choose to participate. Such prepayments may be made for a period of 270 days after the date of the
waiver in an aggregate amount of up to $400.0 million; provided that any such prepayment must be in
an amount not less than $10.0 million. RHDI is not obligated to make any such prepayments.
Employee Retirement Savings and Pension Plans
On October 21, 2008, the Compensation & Benefits Committee of the Companys Board of Directors
approved a comprehensive redesign of the Companys employee retirement savings and pension plans.
Effective January 1, 2009, except as described below, the sole retirement benefit available to all
non-union employees of the Company (other than those employed by Business.com) will be provided
through a single defined contribution plan. This unified 401(k) plan will replace the existing
R.H. Donnelley and Dex Media 401(k) savings plans. Business.com employees will continue to be
eligible to participate in the Business.com 401(k) plan until such time as the Company is able to
efficiently transition them to the new unified 401(k) plan. The Company will continue to maintain
the R.H. Donnelley 401(k) Restoration Plan for those employees with compensation in excess of the
IRS annual limits.
In conjunction with establishing the new unified defined contribution plan, the Company will freeze
the current defined benefit plans covering all non-union employees the R.H. Donnelley Corporation
Retirement Account, the Dex Media, Inc. Pension Plan, and the R.H. Donnelley Pension Benefit
Equalization Plan in each case, effective as of December 31, 2008. In connection with the
freeze, all pension plan benefit accruals for non-union plan participants will cease as of December
31, 2008, however, all plan balances will remain intact and interest credits on participant account
balances, as well as service credits for vesting and retirement eligibility, will continue in
accordance with the terms of the respective plan. In addition, supplemental transition credits
will be provided to certain plan participants nearing retirement who would otherwise lose a portion
of their anticipated pension benefit at age 65 as a result of freezing the current plans. Similar
supplemental transition credits will also be provided to certain plan participants who were
grandfathered under a final average pay formula when the defined benefit plans were converted from
traditional pension plans to cash balance plans.
Additionally, on October 21, 2008, the Compensation Committee of the Companys Board of Directors
approved for eligible non-union employees (i) the elimination of all non-subsidized access to retiree health care and life insurance
benefits effective January 1, 2009, (ii) the elimination of subsidized retiree health care benefits
for any Medicare-eligible retirees effective January 1, 2009 and (iii) the phase out of subsidized
retiree health care benefits over a three-year period beginning January 1, 2009 (effectively
converting subsidized health care benefits coverage to non-subsidized access coverage). With
respect to the phase out of subsidized retiree health care benefits, if an eligible retiree becomes
Medicare-eligible at any point in time during the phase out process noted above, such retiree will
no longer be eligible for subsidized or non-subsidized (depending on the phase out year) retiree
health care coverage.
Management is currently working with its actuaries to determine the accounting impact of these
curtailments, which is anticipated to be recorded in the fourth quarter of 2008.
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 our current beliefs and assumptions with respect to our future
results, business plans and prospects, and are based 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 as imposed by law, any forward-looking statements. Such risks,
uncertainties and contingencies include, but are not limited to, statements about R.H. Donnelley
Corporations (RHD) 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) our ability to generate sufficient cash to service our significant debt levels; (2)
our ability to comply with or obtain modifications or waivers of the financial covenants contained
in our debt agreements, and the potential impact to operations and liquidity as a result of
restrictive covenants in such debt agreements; (3) our ability to refinance our debt on reasonable
terms and conditions as might be necessary from time to time, particularly in light of the recent
instability in the credit markets; (4) increasing LIBOR rates; (5) changes in directory advertising
spend and consumer usage; (6) regulatory and judicial rulings; (7) competition and other economic
conditions; (8) changes in the Companys and the Companys subsidiaries credit ratings; (9) changes
in accounting standards; (10) adverse results from litigation, governmental investigations or tax
related proceedings or audits; (11) the effect of labor strikes, lock-outs and negotiations; (12)
successful integration and realization of the expected benefits of acquisitions; (13) the continued
enforceability of the commercial agreements with Qwest, Embarq and AT&T; (14) our reliance on
third-party vendors for various services; and (15) other events beyond our control that may result
in unexpected adverse operating results. 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, 2007,
our Quarterly Report on Form 10-Q for the three months ended March 31, 2008, our Quarterly Report
on Form 10-Q for the three and six months ended June 30, 2008 and this Quarterly Report on Form
10-Q. 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 revenues, with 2007 revenues of approximately $2.7 billion. We publish and distribute
advertiser content utilizing our own Dex brand and three of the most highly recognizable brands in
the industry, Qwest, Embarq, and AT&T. In 2007, we extended our Dex brand into our AT&T and Embarq
markets to create a unified identity for advertisers and consumers across all of our markets. Our
Dex brand is considered a leader in local search in the Qwest markets, and we expect similar
success in the AT&T and Embarq markets. In each market, we also co-brand our products with the
applicable highly recognizable brands of AT&T, Embarq or Qwest, which further differentiates our
search solutions from others.
Our Triple Play
TM
integrated marketing solutions suite encompasses an increasing number
of tools that consumers use to find the businesses that sell the products and services they need to
manage their lives and businesses: print Yellow Pages directories, our proprietary DexKnows.com
TM
online search site and the rest of the Internet via Dex Search Marketing
®
tools. During 2007, 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. Our approximately 1,600 local marketing consultants work on a daily basis to help bring
these local businesses and consumers together to satisfy their mutual objectives utilizing our
Triple Play products and services.
During 2007, we published and distributed print directories in many of the countrys most
attractive markets including Albuquerque, Chicago, Denver, Las Vegas, Orlando, and Phoenix. Our
print directories provide comprehensive local information to consumers, facilitating their active
search for products and services offered by local merchants.
23
Our online products and services provide merchants with additional methods to connect with
consumers who are actively seeking to purchase products and services using the Internet. These
powerful offerings not only distribute local advertisers content to our proprietary Internet
Yellow Pages (IYP) sites, but extend to other major online search platforms, including
Google
®
and Yahoo!
®
, providing additional qualified leads for our
advertisers. Our local marketing consultants help local businesses create an advertising strategy
and develop a customized media plan that takes full advantage of our traditional media products,
our IYP local search site DexKnows.com, and our Dex Search Network services. The Dex Search Network
Internet marketing services (collectively referred to as Internet Marketing) include online
profile creation for local businesses, broad-based distribution across the Internet through a
network of Internet partners and relationships which host our local business listings and content,
search engine marketing (SEM) and search engine optimization (SEO) services.
This compelling set of Triple Play
TM
products and services, in turn, generates strong
returns for advertisers. This strong advertiser return uniquely positions RHD as a trusted advisor
for marketing support and service in the local markets we serve.
Significant Financing Developments
During the three months ended September 30, 2008, we repurchased $165.5 million ($159.9 million
accreted value) of our senior notes and senior discount notes (collectively referred to as the
Notes) for a purchase price of $84.7 million (the September 2008 Debt Repurchases). As a result
of the September 2008 Debt Repurchases, we recognized a gain of $72.4 million during the three
months ended September 30, 2008, consisting of the difference between the accreted value or par
value, as applicable, and purchase price of the Notes, offset by the write-off of unamortized
deferred financing costs of $2.9 million. The following table presents the accreted value or par
value, as applicable, purchase price and gain recognized on the September 2008 Debt Repurchases
during the three months ended September 30, 2008.
|
|
|
|
|
Notes Repurchased
(amounts in
millions)
|
|
Accreted or Par Value
|
|
|
6.875% Senior Notes due 2013
|
|
$
|
45,529
|
|
6.875% Series A-1 Senior Discount Notes due 2013
|
|
|
12,194
|
|
6.875% Series A-2 Senior Discount Notes due 2013
|
|
|
72,195
|
|
8.875% Series A-3 Senior Notes due 2016
|
|
|
30,000
|
|
|
|
|
|
Total Notes Repurchased
|
|
|
159,918
|
|
Total Purchase Price Including Fees
|
|
|
(84,682
|
)
|
Write-off of unamortized deferred financing costs
|
|
|
(2,856
|
)
|
|
|
|
|
Net gain on September 2008 Debt Repurchases
|
|
$
|
72,380
|
|
|
|
|
|
In October 2008, we repurchased $21.5 million of our Notes for a purchase price of $7.4 million
(the October 2008 Debt Repurchases). As a result of the October 2008 Debt Repurchases, we will
recognize a gain of $13.6 million during the fourth quarter of 2008, consisting of the difference
between the par value and purchase price of the Notes, offset by the write-off of unamortized
deferred financing costs of $0.4 million. The following table presents the par value, purchase
price and gain to be recognized on the October 2008 Debt Repurchases.
|
|
|
|
|
Notes Repurchased
(amounts in
millions)
|
|
Par Value
|
|
|
8.875% Series A-3 Senior Notes due 2016
|
|
$
|
16,000
|
|
8.875% Series A-4 Senior Notes due 2017
|
|
|
5,500
|
|
|
|
|
|
Total Notes Repurchased
|
|
|
21,500
|
|
Total Purchase Price Including Fees
|
|
|
(7,448
|
)
|
Write-off of unamortized deferred financing costs
|
|
|
(437
|
)
|
|
|
|
|
Net gain on October 2008 Debt Repurchases
|
|
$
|
13,615
|
|
|
|
|
|
On June 25, 2008, R.H. Donnelley Inc. (RHDI) exchanged $594.2 million ($585.7 million accreted
value) of RHDs senior notes and senior discount notes (collectively referred to as the RHD
Notes) for $412.9 million aggregate principal amount of RHDIs 11.75% Senior Notes due May 15,
2015 (RHDI Senior Notes), referred hereto as Debt Exchanges. The following table presents the
accreted value or par value, as applicable, of the RHD Notes that have been exchanged as well as
the gain recognized on the Debt Exchanges.
24
|
|
|
|
|
RHD Notes Exchanged
(amounts in
millions)
|
|
Accreted or Par Value
|
|
|
6.875% Senior Notes due 2013
|
|
$
|
47,663
|
|
6.875% Series A-1 Senior Discount Notes due 2013
|
|
|
29,185
|
|
6.875% Series A-2 Senior Discount Notes due 2013
|
|
|
93,031
|
|
8.875% Series A-3 Senior Notes due 2016
|
|
|
151,119
|
|
8.875% Series A-4 Senior Notes due 2017
|
|
|
264,677
|
|
|
|
|
|
Total RHD Notes exchanged
|
|
|
585,675
|
|
RHDI Notes Issued
|
|
|
|
|
11.75% Senior Notes due 2015
|
|
|
412,871
|
|
|
|
|
|
Reduction of debt from Debt Exchanges
|
|
|
172,804
|
|
Write-off of unamortized deferred financing costs
|
|
|
(11,489
|
)
|
|
|
|
|
Net gain on Debt Exchanges
|
|
$
|
161,315
|
|
|
|
|
|
On June 6, 2008 and in conjunction with the Debt Exchanges, we amended RHDIs senior secured credit
facility (RHDI Credit Facility) in order to, among other things, permit the Debt Exchanges and
provide additional covenant flexibility. In addition, as part of the amendment, RHDI modified
pricing and extended the maturity date of $100.0 million of its revolving credit facility (the
RHDI Revolver) to June 2011. The remaining $75.0 million will mature in December 2009.
Effective
October 21, 2008, we obtained a waiver under the RHDI Credit Facility to permit RHDI to make
voluntary prepayments of the Term Loan D-1 and Term Loan D-2 at a
discount to par provided that such discount is acceptable to those
lenders who choose to participate. Such prepayments may be made for a period of 270 days after the date of the
waiver in an aggregate amount of up to $400.0 million; provided that any such prepayment must be in
an amount not less than $10.0 million. RHDI is not obligated to make any such prepayments.
On June 6, 2008, we refinanced the Dex Media West credit facility. The new Dex Media West credit
facility consists of a $130.0 million Term Loan A maturing in October 2013, a $950.0 million Term
Loan B maturing in October 2014 and a $90.0 million revolving credit facility maturing in October
2013 (Dex Media West Revolver). In the event that more than $25.0 million of Dex Media Wests
9.875% Senior Subordinated Notes due 2013 (or any refinancing or replacement thereof) are
outstanding, the Dex Media West Revolver, Term Loan A and Term Loan B will mature on the date that
is three months prior to the final maturity of such notes. The new Dex Media West credit facility
includes a $400.0 million uncommitted incremental facility (Incremental Facility) that may be
incurred as additional revolving loans or additional term loans subject to obtaining commitments
for such loans. The Incremental Facility is fully available if used to refinance the Dex Media West
8.5% Senior Notes due 2010, however is limited to $200.0 million if used for any other purpose.
During the nine months ended September 30, 2008 we recognized a charge of $2.2 million for the
write-off of unamortized deferred financing costs associated with the refinancing of the former Dex
Media West credit facility and portions of the amended RHDI Credit Facility, which have been
accounted for as extinguishments of debt. For the three and six months ended June 30, 2008, this
charge was included in interest expense on the consolidated statements of operations and
comprehensive income (loss). In order to conform to the current periods presentation, this amount
has been reclassified to gain on debt transactions, net, on the consolidated statements of
operations and comprehensive income (loss) for the three and nine months ended September 30, 2008.
As a result of the September 2008 Debt Repurchases, Debt Exchanges and refinancing activities noted
above, we reduced our outstanding debt by $159.9 million and $332.7 million, respectively, and
recorded a gain of $70.2 million and $231.5 million, respectively, during the three and nine months
ended September 30, 2008.
As a result of the amendment of the RHDI Credit Facility and the refinancing of the former Dex
Media West credit facility on June 6, 2008, the existing interest rate swaps associated with these
two debt arrangements having a notional amount of $1.7 billion at September 30, 2008 are no longer
highly effective in offsetting changes in cash flows. Accordingly, cash flow hedge accounting
treatment under Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for
Derivative Instruments and Hedging Activities
(SFAS No. 133) is no longer permitted. Interest
expense for the nine months ended September 30, 2008 includes a non-cash charge of $42.9 million
resulting from amounts previously charged to accumulated other comprehensive loss related to these
interest rate swaps. Interest expense for the three and nine months ended September 30, 2008
includes a reduction to interest expense of $8.2 million and $12.6 million, respectively, resulting
from the change in the fair value of these interest rate swaps.
25
Please see Liquidity and Capital Resources and Item 3. Quantitative and Qualitative Disclosures
About Market Risk below for additional information.
Employee Retirement Savings and Pension Plans
On October 21, 2008, the Compensation & Benefits Committee of the Companys Board of Directors
approved a comprehensive redesign of the Companys employee retirement savings and pension plans.
Effective January 1, 2009, except as described below, the sole retirement benefit available to all
non-union employees of the Company (other than those employed by Business.com) will be provided
through a single defined contribution plan. This unified 401(k) plan will replace the existing
R.H. Donnelley and Dex Media 401(k) savings plans. Business.com employees will continue to be
eligible to participate in the Business.com 401(k) plan until such time as the Company is able to
efficiently transition them to the new unified 401(k) plan. The Company will continue to maintain
the R.H. Donnelley 401(k) Restoration Plan for those employees with compensation in excess of the
IRS annual limits.
In conjunction with establishing the new unified defined contribution plan, the Company will freeze
the current defined benefit plans covering all non-union employees the R.H. Donnelley Corporation
Retirement Account, the Dex Media, Inc. Pension Plan, and the R.H. Donnelley Pension Benefit
Equalization Plan in each case, effective as of December 31, 2008. In connection with the
freeze, all pension plan benefit accruals for non-union plan participants will cease as of December
31, 2008, however, all plan balances will remain intact and interest credits on participant account
balances, as well as service credits for vesting and retirement eligibility, will continue in
accordance with the terms of the respective plan. In addition, supplemental transition credits
will be provided to certain plan participants nearing retirement who would otherwise lose a portion of
their anticipated pension benefit at age 65 as a result of freezing the current plans. Similar
supplemental transition credits will also be provided to certain plan participants who were
grandfathered under a final average pay formula when the defined benefit plans were converted from
traditional pension plans to cash balance plans.
Additionally, on October 21, 2008, the Compensation Committee of the Companys Board of Directors
approved for eligible non-union employees (i) the elimination of all non-subsidized access to retiree health care and life insurance
benefits effective January 1, 2009, (ii) the elimination of subsidized retiree health care benefits
for any Medicare-eligible retirees effective January 1, 2009 and (iii) the phase out of subsidized
retiree health care benefits over a three-year period beginning January 1, 2009 (effectively
converting subsidized health care benefits coverage to non-subsidized access coverage). With
respect to the phase out of subsidized retiree health care benefits, if an eligible retiree becomes
Medicare-eligible at any point in time during the phase out process noted above, such retiree will
no longer be eligible for subsidized or non-subsidized (depending on the phase out year) retiree
health care coverage.
Management is currently working with its actuaries to determine the accounting impact of these
curtailments, which is anticipated to be recorded in the fourth quarter of 2008.
Recent Trends Related to Our Business
We have been experiencing lower advertising sales primarily as a result of declines in recurring
business (both renewal and increases to existing advertisers), mainly driven by weaker economic
trends, reduced consumer confidence and more cautious advertiser spending in our markets. In
addition, we have been experiencing adverse bad debt trends attributable to many of these same
economic challenges in our markets. If these economic challenges in our markets continue, our
advertising sales, bad debt experience and operating results would continue to be adversely
impacted in future periods.
26
In response to these economic challenges facing the Company, we continue to actively manage
expenses and are considering and acting upon a host of initiatives to streamline operations and
contain costs. At the same time, we are committing our sales force to focus on selling the value
provided to local businesses through our Triple Play offering of print yellow pages, internet
yellow pages and online search. In addition, we continue to invest in our future through
initiatives such as systems modernization and consolidation, new print and digital product
introductions and associated employee training. As economic conditions recover in our markets, we
believe these investments will drive future revenue growth, thereby enhancing shareholder value.
We have also experienced a significant decline in our stock price during the latter part of 2007
and throughout 2008. We believe the decline in the stock price primarily reflects the investment
communitys evolving view of (1) local media companies generally and (2) companies with significant
financial leverage, particularly as the national economic outlook further deteriorates and credit
markets are frozen. In that regard, we note that our stock price decline has coincided with a
significant drop in the stock prices of many other local media companies, as well as many companies
with significant leverage, which have been adversely impacted by instability in the credit markets.
As a result of the decline in the trading value of our debt and equity securities, we recorded a
non-cash goodwill impairment charge of $2.5 billion during the first quarter of 2008. Since the
trading value of our equity securities further declined in the second quarter of 2008 and as a
result of continuing negative industry and economic trends, we recognized a non-cash goodwill
impairment charge of $660.2 million during the second quarter of 2008. As a result of these
impairment charges, we have no recorded goodwill at September 30, 2008. These charges were
calculated in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142),
as further described in Results of Operations. These charges had no impact on operating cash
flow, compliance with debt covenants, or managements outlook for the business.
As a result of the credit and liquidity crisis in the United States and throughout the global
financial system, substantial volatility in world capital markets and the banking industry has
occurred. Several large banking and financial institutions have received funding from the federal
government, been granted government loan guarantees, been taken over by federal regulators, merged with
other financial institutions, or have initiated bankruptcy proceedings. These and other events have
had a significant negative impact on financial markets, as well as the overall economy. From an
operational perspective, we have been experiencing lower advertising sales from reduced consumer
confidence and reduced advertising spending in our markets, as well as increased bad debt expense.
From a financing perspective, this unprecedented instability may make it difficult for us to access
the credit market and to obtain financing or refinancing, as the case may be, on satisfactory terms
or at all. In addition, as a result of the global economic instability, our pension plans
investment portfolio has incurred significant volatility and a decline in fair value since December
31, 2007. However, because the values of our pension plans individual investments have and will
fluctuate in response to changing market conditions, the amount of gains or losses that will be
recognized in subsequent periods and the impact on the funded status of the pension plan and future
minimum required contributions, if any, cannot be determined at this time.
Segment Reporting
Management reviews and analyzes its business of providing local commercial search products and
solutions, including publishing yellow pages directories, as one operating segment.
New Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161,
Disclosures
about Derivative Instruments and Hedging Activities
-
an amendment of FASB Statement No. 133
(SFAS
No. 161). SFAS No. 161 amends SFAS No. 133 and requires enhanced disclosures of derivative
instruments and hedging activities such as the fair value of derivative instruments and
presentation of their gains or losses in tabular format, as well as disclosures regarding credit
risks and strategies and objectives for using derivative instruments. SFAS No. 161 is effective for
fiscal years and interim periods beginning after November 15, 2008. The Company is currently
evaluating the potential impact the adoption of SFAS No. 161 will have on its consolidated
financial statements.
We have reviewed other accounting pronouncements that were issued as of September 30, 2008, 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.
27
RESULTS OF OPERATIONS
Three and nine months ended September 30, 2008 and 2007
Factors Affecting Comparability
Reclassifications
Expenses presented as cost of revenues in our previous filings are now presented as production,
publication and distribution expenses to more appropriately reflect the nature of these costs.
Certain prior period amounts included in the condensed consolidated statement of operations have
been reclassified to conform to the current periods presentation. Selling and support expenses
are now presented as a separate expense category in the condensed consolidated statements of
operations. In prior periods, certain selling and support expenses were included in production,
publication and distribution expenses and others were included in general and administrative
expenses. Additionally, beginning in the fourth quarter of 2007, we began classifying adjustments
for customer claims to sales allowance, which is deducted from gross revenues to determine net
revenues. In prior periods, adjustments for customer claims were included in bad debt expense
under general and administrative expenses. Bad debt expense is now included under selling and
support expenses. Accordingly, we have reclassified adjustments for customer claims and bad debt
expense for the three and nine months ended September 30, 2007 to conform to the current periods
presentation. These reclassifications had no impact on operating income or net income for the
three and nine months ended September 30, 2007. The table below summarizes these reclassifications.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2007
|
|
Nine months ended September 30, 2007
|
|
|
As
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
Previously
|
|
|
|
|
|
As
|
(amounts in millions)
|
|
Reported
|
|
Reclass
|
|
Reclassified
|
|
Reported
|
|
Reclass
|
|
Reclassified
|
|
Net revenues
|
|
$
|
669.9
|
|
|
$
|
1.3
|
|
|
$
|
671.2
|
|
|
$
|
1,999.3
|
|
|
$
|
0.2
|
|
|
$
|
1,999.5
|
|
Production,
publication and
distribution
expenses
|
|
|
286.6
|
|
|
|
(179.7
|
)
|
|
|
106.9
|
|
|
|
866.2
|
|
|
|
(530.7
|
)
|
|
|
335.5
|
|
Selling and support
expenses
|
|
|
|
|
|
|
181.7
|
|
|
|
181.7
|
|
|
|
|
|
|
|
531.2
|
|
|
|
531.2
|
|
General and
administrative
expenses
|
|
|
34.3
|
|
|
|
(0.8
|
)
|
|
|
33.5
|
|
|
|
104.8
|
|
|
|
(0.3
|
)
|
|
|
104.5
|
|
Acquisitions
On August 23, 2007, we acquired (the Business.com Acquisition) Business.com, Inc.
(Business.com), a leading business search engine and directory and performance based advertising
network. Business.com now operates as a direct, wholly-owned subsidiary of RHD and the results of
Business.com have been included in our consolidated results commencing August 23, 2007. Therefore,
our consolidated results for the three and nine months ended September 30, 2008 include a full
period of results from Business.com, compared with only two and eight months of results from
Business.com for the three and nine months ended September 30, 2007, respectively.
Impact of Purchase Accounting
As a result of the merger between RHD and Dex Media, Inc. (Dex Media) (the Dex Media Merger)
and associated purchase accounting required by generally accepted accounting principles (GAAP),
we recorded deferred directory costs, such as print, paper, delivery and commissions, related to
directories that were scheduled to publish subsequent to the Dex Media Merger 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. Cost uplift associated with print, paper and delivery costs was
amortized over the terms of the applicable directories to production, publication and distribution
expenses, whereas cost uplift associated with commissions was amortized over the terms of the
applicable directories to selling and support expenses. Cost uplift amortized to production,
publication and distribution expenses and selling and support expenses totaled $1.8 million and
$1.5 million, respectively, for the three months ended September 30, 2007, and $14.6 million and
$13.3 million, respectively, for the nine months ended September 30, 2007, with no comparable
expense for the three and nine months ended September 30, 2008.
28
Net Revenues
The components of our net revenues for the three and nine months ended September 30, 2008 and 2007
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
(amounts in millions)
|
|
2008
|
|
2007
|
|
$ Change
|
|
% Change
|
|
Gross directory advertising
revenues
|
|
$
|
649.5
|
|
|
$
|
675.9
|
|
|
$
|
(26.4
|
)
|
|
|
(3.9
|
)%
|
Sales claims and allowances
|
|
|
(11.1
|
)
|
|
|
(11.6
|
)
|
|
|
0.5
|
|
|
|
4.3
|
|
|
|
|
Net directory advertising revenues
|
|
|
638.4
|
|
|
|
664.3
|
|
|
|
(25.9
|
)
|
|
|
(3.9
|
)
|
Other revenues
|
|
|
9.6
|
|
|
|
6.9
|
|
|
|
2.7
|
|
|
|
39.1
|
|
|
|
|
Total
|
|
$
|
648.0
|
|
|
$
|
671.2
|
|
|
$
|
(23.2
|
)
|
|
|
(3.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
(amounts in millions)
|
|
2008
|
|
2007
|
|
$ Change
|
|
% Change
|
|
Gross directory advertising
revenues
|
|
$
|
1,992.0
|
|
|
$
|
2,015.3
|
|
|
$
|
(23.3
|
)
|
|
|
(1.2
|
)%
|
Sales claims and allowances
|
|
|
(34.2
|
)
|
|
|
(44.1
|
)
|
|
|
9.9
|
|
|
|
22.4
|
|
|
|
|
Net directory advertising revenues
|
|
|
1,957.8
|
|
|
|
1,971.2
|
|
|
|
(13.4
|
)
|
|
|
(0.7
|
)
|
Other revenues
|
|
|
28.6
|
|
|
|
28.3
|
|
|
|
0.3
|
|
|
|
1.1
|
|
|
|
|
Total
|
|
$
|
1,986.4
|
|
|
$
|
1,999.5
|
|
|
$
|
(13.1
|
)
|
|
|
(0.7
|
)%
|
|
|
|
Our directory advertising revenues are earned primarily from the sale of advertising in yellow
pages directories we publish, net of sales claims and allowances. Directory advertising revenues
also include revenues for Internet-based advertising products including online directories such as
DexKnows.com and Business.com, and Internet Marketing services. Directory advertising revenues are
affected by several factors, including changes in the quantity and size of advertisements,
acquisition of new customers, renewal rates of existing customers, premium advertisements sold,
changes in advertisement pricing, the introduction of new products and general economic factors.
Revenues with respect to print advertising and Internet-based advertising products that are sold
with print advertising are recognized under the deferral and amortization method. Revenues related
to our print advertising are initially deferred when a directory is published and recognized
ratably over the directorys life, which is typically 12 months. Revenues with respect to our
Internet-based advertising products that are bundled with print advertising are initially deferred
until the service is delivered or fulfilled and recognized ratably over the life of the contract.
Revenues with respect to Internet-based services that are not sold with print advertising, such as
Internet Marketing services, are recognized as delivered or fulfilled.
As a result of the deferral and amortization method of revenue recognition, recognized gross
directory advertising revenues reflect the amortization of advertising sales consummated in prior
periods as well as advertising sales consummated in the current period. As noted further below,
advertising sales have continued to deteriorate due to the overall economic instability and will
result in lower recognized advertising revenues in future periods because, as noted, such revenues
are recognized ratably over the directorys life.
Gross directory advertising revenues for the three and nine months ended September 30, 2008
decreased $26.4 million, or 3.9%, and $23.3 million, or 1.2%, from the three and nine months ended
September 30, 2007, respectively. The decline in gross directory advertising revenues for the three
and nine months ended September 30, 2008 is primarily due to declines in advertising sales over the
past twelve months, primarily as a result of declines in recurring business, mainly driven by
reduced consumer confidence and more cautious advertiser spending in our markets given our
advertisers perception of the economic health of their respective markets. These declines are
partially offset by a full period of revenues from Business.com, compared with only one month of
revenues for the three months ended September 30, 2007 and eight months of revenues for the nine
months ended September 30, 2008.
29
Sales claims and allowances for the three and nine months ended September 30, 2008 decreased $0.5
million, or 4.3%, and $9.9 million, or 22.4%, from the three and nine months ended September 30,
2007, respectively. The decrease in sales claims and allowances for the three and nine months ended
September 30, 2008 is primarily due to improved quality and lower claims experience in our Qwest
markets of $0.5 million and $11.0 million, respectively.
Other revenues for the three and nine months ended September 30, 2008 increased $2.7 million, or
39.1%, and $0.3 million, or 1.1%, from the three and nine months ended September 30, 2007,
respectively. Other revenues include late fees received on outstanding customer balances, barter
revenues, commissions earned on sales contracts with respect to advertising placed into other
publishers directories, and sales of directories and certain other advertising-related products.
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 revenues, which under GAAP are recognized under the deferral and
amortization method. Advertising sales for the three and nine months ended September 30, 2008 were
$503.6 million and $1,899.8 million, respectively, compared to $549.2 million and $2,045.1 million
for the three and nine months ended September 30, 2007, respectively. Advertising sales for the
three and nine months ended September 30, 2007 include $14.3 million and $41.8 million,
respectively, of advertising sales assuming the Business.com Acquisition occurred on January 1,
2007. The $45.6 million, or 8.3%, and $145.3 million, or 7.1%, decrease in advertising sales for
the three and nine months ended September 30, 2008, respectively, is a result of declines in new
and recurring business, mainly driven by weaker economic trends, reduced consumer confidence and
more cautious advertiser spending in our markets. These declines are partially offset by increases
in Business.com advertising sales. Advertising sales in current periods will be recognized as
gross directory advertising revenues in future periods as a result of the deferral and amortization
method of revenue recognition.
Expenses
The components of our total expenses for the three and nine months ended September 30, 2008 and
2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
(amounts in millions)
|
|
2008
|
|
2007
|
|
$ Change
|
|
% Change
|
|
Production, publication and
distribution expenses
|
|
$
|
105.1
|
|
|
$
|
106.9
|
|
|
$
|
(1.8
|
)
|
|
|
(1.7
|
)%
|
Selling and support expenses
|
|
|
185.6
|
|
|
|
181.7
|
|
|
|
3.9
|
|
|
|
2.1
|
|
General and administrative expenses
|
|
|
46.0
|
|
|
|
33.5
|
|
|
|
12.5
|
|
|
|
37.3
|
|
Depreciation and amortization
|
|
|
125.4
|
|
|
|
111.6
|
|
|
|
13.8
|
|
|
|
12.4
|
|
|
|
|
Total
|
|
$
|
462.1
|
|
|
$
|
433.7
|
|
|
$
|
28.4
|
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
(amounts in millions)
|
|
2008
|
|
2007
|
|
$ Change
|
|
% Change
|
|
Production, publication and
distribution expenses
|
|
$
|
317.7
|
|
|
$
|
335.5
|
|
|
$
|
(17.8
|
)
|
|
|
(5.3
|
)%
|
Selling and support expenses
|
|
|
547.5
|
|
|
|
531.2
|
|
|
|
16.3
|
|
|
|
3.1
|
|
General and administrative expenses
|
|
|
111.0
|
|
|
|
104.5
|
|
|
|
6.5
|
|
|
|
6.2
|
|
Depreciation and amortization
|
|
|
363.2
|
|
|
|
323.7
|
|
|
|
39.5
|
|
|
|
12.2
|
|
Goodwill impairment
|
|
|
3,123.9
|
|
|
|
|
|
|
|
3,123.9
|
|
|
|
100.0
|
|
|
|
|
Total
|
|
$
|
4,463.3
|
|
|
$
|
1,294.9
|
|
|
$
|
3,168.4
|
|
|
|
244.7
|
%
|
|
|
|
30
Our expenses during the three and nine months ended September 30, 2008 and 2007 include costs
associated with our Triple Play strategy, with focus on our online products and services across all
of our markets. These costs relate to the continued launch of our Dex market brand and our uniform
resource locator (URL), DexKnows.com, across our entire footprint, the continued introduction of
plus companion directories in our Embarq and AT&T markets, as well as associated marketing and
advertising campaigns and employee training associated with the modernization and consolidation of
our IT platform. We expect that these expenses will drive future advertising sales and revenue
improvements.
Certain costs directly related to the selling and production of directories are initially deferred
and recognized ratably over the life of the directory under the deferral and amortization method of
accounting, with cost recognition commencing in the month directory distribution is substantially
complete. These costs are specifically identifiable to a particular directory and include sales
commissions and print, paper and initial distribution costs. Sales commissions include amounts
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.
Production, Publication and Distribution Expenses
Total production, publication and distribution expenses for the three and nine months ended
September 30, 2008 were $105.1 million and $317.7 million, respectively, compared to $106.9 million
and $335.5 million for the three and nine months ended September 30, 2007, respectively. The
primary components of the $1.8 million, or 1.7%, and $17.8 million, or 5.3%, decrease in
production, publication and distribution expenses for the three and nine months ended September 30,
2008, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
(amounts in millions)
|
|
September 30, 2008
|
|
September 30, 2008
|
|
|
$ Change
|
|
|
|
Decreased print, paper and distribution costs
|
|
$
|
(8.1
|
)
|
|
$
|
(17.8
|
)
|
Decreased cost uplift expense
|
|
|
(1.8
|
)
|
|
|
(14.6
|
)
|
Increase (decrease) in information technology (IT) expenses
|
|
|
3.5
|
|
|
|
(9.3
|
)
|
Increased internet and distribution costs
|
|
|
3.2
|
|
|
|
20.7
|
|
All other, net
|
|
|
1.4
|
|
|
|
3.2
|
|
|
|
|
Total decrease in production,
publication and distribution
expenses for the three and
nine months ended September
30, 2008
|
|
$
|
(1.8
|
)
|
|
$
|
(17.8
|
)
|
|
|
|
During the three and nine months ended September 30, 2008, print, paper and distribution costs
declined $8.1 million and $17.8 million, respectively, compared to the three and nine months ended
September 30, 2007. This decline is primarily due to improved efficiencies in the display of
advertiser content in our print products, the refinement of our distribution scope across all of
our markets and negotiated price reductions in our print expenses.
Amortization of cost uplift during the three and nine months ended September 30, 2007 totaled $1.8
million and $14.6 million, respectively, with no comparable expense for the three and nine months
ended September 30, 2008.
During the three months ended September 30, 2008, IT expenses increased $3.5 million compared to
the three months ended September 30, 2007, primarily due to vendor credits received during the
three months ended September 30, 2007, which were associated with a new IT contract that became
effective in July 2007. During the nine months ended September 30, 2008, IT expenses declined $9.3
million compared to the nine months ended September 30, 2007, primarily due to a full period of
cost savings resulting from lower rates associated with the new IT contract. This decline is
partially offset by additional spending associated with our IT infrastructure to support our Triple
Play products and services, and enhancements and technical support of multiple production systems
as we continue to integrate to a consolidated IT platform.
31
During the three and nine months ended September 30, 2008, we incurred $3.2 million and $20.7
million, respectively, of additional expenses related to internet and distribution costs due to a
full period of expenses from Business.com, compared with only one month of expenses for the three
months ended September 30, 2007 and eight months of expenses for the nine months ended September
30, 2007, respectively, and increased operations, distribution and clicks costs associated with
increased revenues from our online products and services.
Selling and Support Expenses
Total selling and support expenses for the three and nine months ended September 30, 2008 were
$185.6 million and $547.5 million, respectively, compared to $181.7 million and $531.2 million
reported for the three and nine months ended September 30, 2007, respectively. The primary
components of the $3.9 million, or 2.1%, and $16.3 million, or 3.1%, increase in selling and
support expenses for the three and nine months ended September 30, 2008, respectively, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
Nine months
|
|
|
ended September 30,
|
|
ended September
|
(amounts in millions)
|
|
2008
|
|
30, 2008
|
|
|
$ Change
|
|
|
|
Increased bad debt expense
|
|
$
|
17.2
|
|
|
$
|
41.2
|
|
(Decrease) increase in advertising and branding expenses
|
|
|
(2.5
|
)
|
|
|
11.1
|
|
Decreased commissions and salesperson costs
|
|
|
(6.0
|
)
|
|
|
(14.9
|
)
|
Decreased cost uplift expense
|
|
|
(1.5
|
)
|
|
|
(13.3
|
)
|
Decreased directory publishing support costs
|
|
|
(0.9
|
)
|
|
|
(5.2
|
)
|
All other, net
|
|
|
(2.4
|
)
|
|
|
(2.6
|
)
|
|
|
|
Total increase in selling
and support expenses for
the three and nine months
ended September 30, 2008
|
|
$
|
3.9
|
|
|
$
|
16.3
|
|
|
|
|
During the three and nine months ended September 30, 2008, bad debt expense increased $17.2
million, or 81.3% and $41.2 million, or 67.1%, respectively, compared to the three and nine months
ended September 30, 2007, primarily due to higher bad debt provision rates, deterioration in
accounts receivable aging categories and increased write-offs, resulting from the adverse impact on
our advertisers from the instability of the overall economy and tightening of the credit markets.
If these economic challenges in our markets continue, our bad debt experience may continue to be
adversely impacted in future periods.
Advertising expense for the three and nine months ended September 30, 2008 includes $11.7 million
and $26.3 million, respectively, of costs associated with traffic purchased and distributed to
multiple advertiser landing pages, with no comparable expense for the prior corresponding periods.
Exclusive of the costs associated with purchased traffic, during the three and nine months ended
September 30, 2008, advertising and branding expenses declined $14.2 million and $15.2 million,
respectively, as compared to the three and nine months ended September 30, 2007. This decrease is
primarily due to additional advertising and branding costs incurred in 2007 to promote the Dex
brand name for all 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, 2008, commissions and salesperson costs
decreased $6.0 million and $14.9 million, respectively, compared to the three and nine months ended
September 30, 2007, primarily due to lower advertising sales as well as planned headcount
reductions and consolidation of responsibilities.
Amortization of cost uplift during the three and nine months ended September 30, 2007 totaled $1.5
million and $13.3 million, respectively, with no comparable expense for the three and nine months
ended September 30, 2008.
During the three and nine months ended September 30, 2008, directory publishing support costs
decreased $0.9 million and $5.2 million, respectively, compared to the three and nine months ended
September 30, 2007, primarily due to a reduction in headcount and related expenses resulting from
the consolidation of our publishing and graphics operations.
32
General and Administrative Expenses
General and administrative (G&A) expenses for the three and nine months ended September 30, 2008
were $46.0 million and $111.0 million, respectively, compared to $33.5 million and $104.5 million
for the three and nine months ended September 30, 2007, respectively. The primary components of the
$12.5 million, or 37.3%, and $6.5 million, or 6.2%, increase in G&A expenses for the three and nine
months ended September 30, 2008, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
Nine months
|
|
|
ended September
|
|
ended September
|
(amounts in millions)
|
|
30, 2008
|
|
30, 2008
|
|
|
$ Change
|
Increase in restructuring expenses
|
|
$
|
14.4
|
|
|
$
|
19.2
|
|
Decrease in non-cash stock-based
compensation expense under SFAS No. 123(R)
|
|
|
(2.1
|
)
|
|
|
(8.0
|
)
|
Decrease in IT expenses
|
|
|
(1.5
|
)
|
|
|
(4.1
|
)
|
All other, net
|
|
|
1.7
|
|
|
|
(0.6
|
)
|
|
|
|
Total increase in
G&A expenses for
the three and nine
months ended
September 30, 2008
|
|
$
|
12.5
|
|
|
$
|
6.5
|
|
|
|
|
During the three and nine months ended September 30, 2008, restructuring expenses increased $14.4
million and $19.2 million, respectively, primarily due to outside consulting fees, planned
headcount reductions, consolidation of responsibilities and vacated leased facilities.
During the three and nine months ended September 30, 2008, non-cash stock-based compensation
expense under SFAS No. 123 (R) declined $2.1 million and $8.0 million, respectively, compared to
the three and nine months ended September 30, 2007, primarily due to additional expense related to
vesting of awards granted to retirement or early retirement eligible employees during the three and
nine months ended September 30, 2007. In addition, non-cash stock-based compensation expense
declined during the nine months ended September 30, 2008 due to a credit of $1.8 million associated
with an increase in our forfeiture rate estimate.
During the three and nine months ended September 30, 2008, IT expenses declined $1.5 million and
$4.1 million, respectively, compared to the three and nine months ended September 30, 2007,
primarily due to a full period of cost savings resulting from lower rates associated with an IT
contract that became effective in July 2007. This decline is partially offset by additional
spending associated with our IT infrastructure to support our Triple Play products and services.
Depreciation and Amortization
Depreciation and amortization expense for the three and nine months ended September 30, 2008 was
$125.4 million and $363.2 million, respectively, compared to $111.6 million and $323.7 million for
the three and nine months ended September 30, 2007, respectively. Amortization of intangible assets
was $104.0 million and $311.9 million for the three and nine months ended September 30, 2008,
respectively, compared to $98.9 million and $285.9 million for the three and nine months ended
September 30, 2007, respectively. The increase in amortization expense for the three and nine
months ended September 30, 2008 is primarily due to recognizing an additional $3.2 million and
$13.0 million, respectively, of amortization expense for intangible assets acquired in the
Business.com Acquisition, as compared to one month of amortization expense for the three months
ended September 30, 2007 and eight months of amortization expense for the nine months ended
September 30, 2008. The increase in amortization expense for the nine months ended September 30,
2008 is also due to recognizing a full period of amortization expense related to the local customer
relationships intangible asset acquired in the Dex Media Merger of $7.5 million, which commenced in
February 2007.
33
Depreciation of fixed assets and amortization of computer software was $21.4 million and $51.3
million for the three and nine months ended September 30, 2008, respectively, compared to $12.6
million and $37.8 million for the three and nine months ended September 30, 2007. The increase in
depreciation expense for the three and nine months ended September 30, 2008 was primarily due to
recognizing depreciation expense related to capital projects placed in service during 2007, as well
as accelerated amortization related to software projects that are scheduled to be retired prior to
their initial estimated service life.
Goodwill Impairment
As a result of the decline in the trading value of our debt and equity securities during the first
quarter of 2008 and continuing negative industry and economic trends that have directly affected
our business, we performed impairment tests as of March 31, 2008 of our goodwill, definite-lived
intangible assets and other long-lived assets in accordance with SFAS No. 142 and SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS No. 144), respectively. We
used estimates and assumptions in our impairment evaluations, including, but not limited to,
projected future cash flows, revenue growth and customer attrition rates.
The impairment test of our definite-lived intangible assets and other long-lived assets was
performed by comparing the carrying amount of our intangible assets and other long-lived assets to
the sum of their undiscounted expected future cash flows. In accordance with SFAS No. 144,
impairment exists if the sum of the undiscounted expected future cash flows is less than the
carrying amount of the intangible asset, or its related group of assets, and other long-lived
assets. Our testing results of our definite-lived intangible assets and other long-lived assets
indicated no impairment as of March 31, 2008.
The impairment test for our goodwill involved a two step process. The first step involved comparing
the fair value of the Company with the carrying amount of its assets and liabilities, including
goodwill. The fair value of the Company was determined using a market based approach, which
reflects the market value of its debt and equity securities as of March 31, 2008. As a result of
our testing, we determined that the Companys fair value was less than the carrying amount of its
assets and liabilities, requiring us to proceed with the second step of the goodwill impairment
test. In the second step of the testing process, the impairment loss is determined by comparing the
implied fair value of our goodwill to the recorded amount of goodwill. The implied fair value of
goodwill is derived from a discounted cash flow analysis for the Company using a discount rate that
results in the present value of assets and liabilities equal to the current fair value of the
Companys debt and equity securities. Based upon this analysis, we recognized a non-cash impairment
charge of $2.5 billion during the three months ended March 31, 2008.
Since the trading value of our equity securities further declined in the second quarter of 2008 and
as a result of continuing negative industry and economic trends, we performed additional impairment
tests of our goodwill, definite-lived intangible assets and other long-lived assets as of June 30,
2008. Our testing results of our definite-lived intangible assets and other long-lived assets
indicated no impairment as of June 30, 2008. As a result of these tests, we recognized a non-cash
goodwill impairment charge of $660.2 million during the three months ended June 30, 2008. As a
result of this impairment charge, we have no recorded goodwill at September 30, 2008.
No impairment losses were recorded related to our definite-lived intangible assets and other
long-lived assets during the three and nine months ended September 30, 2008 and 2007. No impairment
losses were recorded related to our goodwill during the three and nine months ended September 30,
2007.
If industry and economic conditions in certain of our markets continue to deteriorate, we will be
required to assess the recoverability of our long-lived assets and other intangible assets, which
could result in additional impairment charges.
Operating Income (Loss)
Operating income (loss) for the three and nine months ended September 30, 2008 and 2007 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
(amounts in millions)
|
|
2008
|
|
2007
|
|
$ Change
|
|
% Change
|
|
Total
|
|
$
|
185.9
|
|
|
$
|
237.5
|
|
|
$
|
(51.6
|
)
|
|
|
(21.7
|
)%
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
(amounts in millions)
|
|
2008
|
|
2007
|
|
$ Change
|
|
% Change
|
|
Total
|
|
$
|
(2,476.9
|
)
|
|
$
|
704.6
|
|
|
$
|
(3,181.5
|
)
|
|
|
(451.5
|
)%
|
|
|
|
Operating income (loss) for the three and nine months ended September 30, 2008 of $185.9 million
and $(2.5) billion, respectively, compares to operating income of $237.5 million and $704.6 million
for the three and nine months ended September 30, 2007, respectively. The decrease in operating
income for the three months ended September 30, 2008 is due to the revenue and expense trends
described above. The change to operating loss for the nine months ended September 30, 2008 from
operating income for the nine months ended September 30, 2007 is primarily due to the non-cash
goodwill impairment charges noted above, as well as the revenue and expense trends described above.
Interest Expense, Net
Net interest expense for the three and nine months ended September 30, 2008 was $198.1 million and
$630.4 million, respectively, and includes $6.2 million and $20.5 million, respectively, of
non-cash amortization of deferred financing costs. Net interest expense for the three and nine
months ended September 30, 2007 was $201.1 million and $601.7 million, respectively, and includes
$6.0 million and $18.1 million, respectively, of non-cash amortization of deferred financing costs.
As a result of the ineffective interest rate swaps associated with the amendment of the RHDI Credit
Facility and the refinancing of the former Dex Media West credit facility, interest expense for the
nine months ended September 30, 2008 includes a non-cash charge of $42.9 million resulting from
amounts previously charged to accumulated other comprehensive loss related to these interest rate
swaps. Interest expense for the three and nine months ended September 30, 2008 includes a reduction
to interest expense of $8.2 million and $12.6 million, respectively, resulting from the change in
the fair value of these interest rate swaps.
The decrease in net interest expense of $3.0 million, or 1.5%, for the three months ended September
30, 2008 is primarily due to lower interest rates associated with the Companys refinancing
transactions conducted during the fourth quarter of 2007, lower interest rates on our variable rate
debt during the period as compared to the prior corresponding period and lower outstanding debt
resulting from debt repaid and debt repurchases. The increase in net interest expense of $28.7
million, or 4.8%, for the nine months ended September 30, 2008 is primarily due to additional
interest expense associated with the ineffective interest rate swaps noted above. This increase is
partially offset by lower interest rates associated with the Companys refinancing transactions
conducted during the fourth quarter of 2007, lower interest rates on our variable rate debt during
the period as compared to the prior corresponding period and lower outstanding debt resulting from
debt repaid and debt repurchases. See Liquidity and Capital Resources for further detail
regarding our debt obligations.
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 $4.5 million and $13.1 million
for the three and nine months ended September 30, 2008, respectively, and $7.9 million and $23.2
million for the three and nine months ended September 30, 2007, respectively. The decline in the
amortization of the fair value adjustment for the three and nine months ended September 30, 2008 is
directly attributable to the Companys refinancing transactions conducted during the fourth quarter
of 2007.
Gain on Debt Transactions, Net
As a result of the September 2008 Debt Repurchases, we recorded a gain of $72.4 million during the
three and nine months ended September 30, 2008, representing the difference between the accreted
value or par value, as applicable, and purchase price of the Notes, offset by the write-off of
unamortized deferred financing costs of $2.9 million.
35
As a result of the Debt Exchanges, we recorded a gain of $172.8 million during the nine months
ended September 30, 2008, representing the difference between the accreted value or par value, as
applicable, of the extinguished RHD Notes and the RHDI Senior Notes. Offsetting this gain is the
write-off of $11.5 million of unamortized deferred financing costs related to the extinguished RHD
Notes, which has been accounted for as an extinguishment of debt.
During the nine months ended September 30, 2008 we recognized a charge of $2.2 million for the
write-off of unamortized deferred financing costs associated with the refinancing of the former Dex
Media West credit facility and portions of the amended RHDI Credit Facility, which have been
accounted for as extinguishments of debt.
As a result of the September 2008 Debt Repurchases, Debt Exchanges and refinancing activities noted
above, we recorded a gain of $70.2 million and $231.5 million, respectively, during the three and
nine months ended September 30, 2008.
Income Taxes
The effective tax rate on income (loss) before income taxes of 55.1% and 32.7% for the three and
nine months ended September 30, 2008, respectively, compares to an effective tax rate of 50.2% and
42.6% on income before income taxes for the three and nine months ended September 30, 2007,
respectively. As a result of the non-cash goodwill impairment charge of $3.1 billion recorded
during the nine months ended September 30, 2008, we recognized a decrease in our deferred tax
liability of $1.1 billion, which directly impacted our deferred tax benefit. The change in the
effective tax rate for the nine months ended September 30, 2008 is primarily due to the tax
consequences of the non-cash goodwill impairment charges. The change in the effective tax rate for
the three and nine months ended September 30, 2008 is also attributable to changes in estimates of
state tax apportionment factors that impact our effective state tax rates and an increase in our
valuation allowance related to certain 2008 state tax losses.
In September 2008, we effectively settled all issues under consideration with the Department of
Finance for New York City related to its audit for taxable year 2000. As a result of the
settlement, the unrecognized tax benefits associated with our uncertain state tax positions
decreased by $0.9 million during the three and nine months ended September 30, 2008. The decrease
in the unrecognized tax benefits has decreased our effective tax rate for the three and nine months
ended September 30, 2008. The unrecognized tax benefits impacted by the New York City audit
primarily related to allocation of income among our legal entities.
Net Income (Loss) and Earnings (Loss) Per Share
Net income (loss) for the three and nine months ended September 30, 2008 of $26.1 million and
$(1.9) billion, respectively, compares to net income of $18.1 million and $59.0 million for the
three and nine months ended September 30, 2007, respectively. The increase in net income for the
three months ended September 30, 2008 is primarily due to the gain recognized on the September 2008
Debt Repurchases as well as the revenue and expense trends described above. The change to net loss
for the nine months ended September 30, 2008 from net income for the nine months ended September
30, 2007 is primarily due to the non-cash goodwill impairment charges noted above as well as the
revenue and expense trends described above, offset by the gain recognized on the September 2008
Debt Repurchases.
We account for earnings (loss) per share (EPS) in accordance with SFAS No. 128,
Earnings Per
Share
(SFAS No. 128)
.
Under the guidance of SFAS No. 128, diluted EPS is calculated by dividing
net income (loss) by the weighted average common shares outstanding plus dilutive potential common
stock. Potential common stock includes stock options, stock appreciation rights (SARs) and
restricted stock, the dilutive effect of which is calculated using the treasury stock 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 months ended September 30, 2008, basic and diluted EPS was $0.38 compared to basic and
diluted EPS of $0.25 for the three months ended September 30, 2007. For the nine months ended
September 30, 2008, basic and diluted EPS was $(28.15), compared to basic and diluted EPS of $0.83
and $0.82 for the nine months ended September 30, 2007, respectively. Due to the fact that there
was a reported net loss for the nine months ended September 30, 2008, the calculation of diluted
EPS was anti-dilutive compared to basic EPS. Diluted EPS cannot be greater (or less of a loss) than
basic EPS. Therefore, reported basic EPS and diluted EPS were the same for the nine months ended
September 30, 2008.
36
LIQUIDITY AND CAPITAL RESOURCES
Long-term debt of the Company at September 30, 2008 and December 31, 2007, including $90.7 million
of fair value adjustments required by GAAP as a result of the Dex Media Merger, consisted of the
following:
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|
|
|
|
|
|
|
|
|
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September 30, 2008
|
|
December 31, 2007
|
|
RHD
|
|
|
|
|
|
|
|
|
6.875% Senior Notes due 2013
|
|
$
|
206,791
|
|
|
$
|
300,000
|
|
6.875% Series A-1 Senior Discount Notes due 2013
|
|
|
300,845
|
|
|
|
339,222
|
|
6.875% Series A-2 Senior Discount Notes due 2013
|
|
|
453,671
|
|
|
|
613,649
|
|
8.875% Series A-3 Senior Notes due 2016
|
|
|
1,028,839
|
|
|
|
1,210,000
|
|
8.875% Series A-4 Senior Notes due 2017
|
|
|
1,235,260
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
R.H. Donnelley Inc. (RHDI)
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,400,311
|
|
|
|
1,571,536
|
|
11.75% Senior Notes due 2015
|
|
|
412,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dex Media, Inc.
|
|
|
|
|
|
|
|
|
8% Senior Notes due 2013
|
|
|
510,842
|
|
|
|
512,097
|
|
9% Senior Discount Notes due 2013
|
|
|
764,154
|
|
|
|
719,112
|
|
|
|
|
|
|
|
|
|
|
Dex Media East
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,100,000
|
|
|
|
1,106,050
|
|
|
|
|
|
|
|
|
|
|
Dex Media West
|
|
|
|
|
|
|
|
|
New Credit Facility
|
|
|
1,080,000
|
|
|
|
|
|
Former Credit Facility
|
|
|
|
|
|
|
1,071,491
|
|
8.5% Senior Notes due 2010
|
|
|
395,128
|
|
|
|
398,736
|
|
5.875% Senior Notes due 2011
|
|
|
8,765
|
|
|
|
8,774
|
|
9.875% Senior Subordinated Notes due 2013
|
|
|
818,159
|
|
|
|
824,982
|
|
|
|
|
Total RHD Consolidated
|
|
|
9,715,636
|
|
|
|
10,175,649
|
|
Less current portion
|
|
|
121,269
|
|
|
|
177,175
|
|
|
|
|
Long-term debt
|
|
$
|
9,594,367
|
|
|
$
|
9,998,474
|
|
|
|
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Credit Facilities
At September 30, 2008, total outstanding debt under our credit facilities was $3,580.3 million,
comprised of $1,400.3 million under the RHDI Credit Facility, $1,100.0 million under the Dex Media
East credit facility and $1,080.0 million under the new Dex Media West credit facility.
RHDI
On June 6, 2008 and in conjunction with the Debt Exchanges, we amended the RHDI Credit Facility in
order to, among other things, permit the Debt Exchanges and provide additional covenant
flexibility. In addition, as part of the amendment, RHDI modified pricing and extended the maturity
date of $100.0 million of the RHDI Revolver to June 2011. The remaining $75.0 million will mature
in December 2009.
As of September 30, 2008, outstanding balances under the RHDI Credit Facility, totaled $1,400.3
million, comprised of $279.8 million under Term Loan D-1 and $1,120.5 million under Term Loan D-2
and no amount was outstanding under the RHDI Revolver (other than $0.2 million utilized under a
standby letter of credit). All Term Loans require quarterly principal and interest payments. The
RHDI Credit Facility provides for an uncommitted Term Loan C for potential borrowings up to $400.0
million, such proceeds, if borrowed, to be used to fund acquisitions, refinance certain
indebtedness or to make certain restricted payments. As noted above, $75.0 million of the RHDI
Revolver matures in December 2009, while $100.0 million of the RHDI Revolver matures in June 2011,
and Term Loans D-1 and D-2 require accelerated amortization beginning in 2010 through final
maturity in June 2011. The weighted average interest rate of outstanding debt under the RHDI Credit
Facility was 6.83% and 6.50% at September 30, 2008 and December 31, 2007, respectively.
37
As amended on June 6, 2008, as of September 30, 2008, the RHDI Credit Facility bears interest, at
our option, at either:
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|
|
The highest of (i) a base rate as determined by the Administrative Agent, Deutsche
Bank Trust Company Americas, (ii) the Federal Funds Effective Rate (as defined) plus 0.50%,
and (iii) 4.0%, in each case, plus a 2.50% margin on the RHDI Revolver and a 2.75% margin
on Term Loan D-1 and Term Loan D-2; or
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|
|
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|
The higher of (i) LIBOR rate and (ii) 3.0%, in each case, plus a 3.50% margin on the
RHDI Revolver and a 3.75% margin on Term Loan D-1 and Term Loan D-2. We may elect interest
periods of 1, 2, 3 or 6 months (or 9 or 12 months if, at the time of the borrowing, all
lenders agree to make such term available), for LIBOR borrowings.
|
Effective
October 21, 2008, we obtained a waiver under the RHDI Credit Facility to permit RHDI to make
voluntary prepayments of the Term Loan D-1 and Term Loan D-2 at a
discount to par provided that such discount is acceptable to those
lenders who choose to participate. Such prepayments may be made for a period of 270 days after the date of the
waiver in an aggregate amount of up to $400.0 million; provided that any such prepayment must be in
an amount not less than $10.0 million. RHDI is not obligated to make any such prepayments.
Dex Media East
As of September 30, 2008, outstanding balances under the Dex Media East credit facility totaled
$1,100.0 million, comprised of $700.0 million under Term Loan A and $400.0 million under Term Loan
B and no amount was outstanding under the $100.0 million revolving loan facility (Dex Media East
Revolver) (other than $3.5 million utilized under three standby letters of credit). The Dex Media
East Revolver and Term Loan A will mature in October 2013, and the Term Loan B will mature in
October 2014. The weighted average interest rate of outstanding debt under the Dex Media East
credit facility was 5.03% and 6.87% at September 30, 2008 and December 31, 2007, respectively.
Dex Media West
On June 6, 2008, we refinanced the Dex Media West credit facility. The new Dex Media West credit
facility consists of a $130.0 million Term Loan A maturing in October 2013, a $950.0 million Term
Loan B maturing in October 2014 and the $90.0 million Dex Media West Revolver maturing in October
2013. In the event that more than $25.0 million of Dex Media Wests 9.875% Senior Subordinated
Notes due 2013 (or any refinancing or replacement thereof) are outstanding, the Dex Media West
Revolver, Term Loan A and Term Loan B will mature on the date that is three months prior to the
final maturity of such notes. The new Dex Media West credit facility includes a $400.0 million
Incremental Facility that may be incurred as additional revolving loans or additional term loans
subject to obtaining commitments for such loans. The Incremental Facility is fully available if
used to refinance the Dex Media West 8.5% Senior Notes due 2010, however is limited to $200.0
million if used for any other purpose. The proceeds from the new Dex Media West credit facility
were used to refinance the former Dex Media West credit facility and pay related fees and expenses.
As of September 30, 2008, outstanding balances under the new Dex Media West credit facility totaled
$1,080.0 million, comprised of $130.0 million under Term Loan A and $950.0 million under Term Loan B
and no amount was outstanding under the Dex Media West Revolver. The weighted average interest rate
of outstanding debt under the new Dex Media West credit facility was 7.38% at September 30, 2008.
The weighted average interest rate of outstanding debt under the former Dex Media West credit
facility was 6.51% at December 31, 2007.
As of September 30, 2008, the new Dex Media West credit facility bears interest, at our option, at
either:
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|
|
The highest of (i) the base rate determined by the Administrative Agent, JP Morgan Chase
Bank, N.A., (ii) the Federal Funds Effective Rate (as defined) plus 0.50%, and (iii) 4.0%,
in each case, plus a 2.75% (or 2.50% if the leverage ratio is less than 3.00 to 1.00)
margin on the Dex Media West Revolver and Term Loan A and a 3.0% margin on Term Loan B; or
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|
|
The higher of (i) LIBOR rate and (ii) 3.0% plus a 3.75% (or 3.50% if the leverage ratio
is less than 3.00 to 1.00) margin on the Dex Media West Revolver and Term Loan A and a 4.0%
margin on Term Loan B. We may elect interest periods of 1, 2, 3, or 6 months (or 9 or 12
months if, at the time of the borrowing, all lenders agree to make such term available),
for LIBOR borrowings.
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38
Notes
During the three months ended September 30, 2008, we repurchased $165.5 million ($159.9 million
accreted value) of our Notes for a purchase price of $84.7 million. In October 2008, we repurchased
$21.5 million of our Notes for a purchase price of $7.4 million.
On June 25, 2008, RHDI exchanged $594.2 million ($585.7 million accreted value) of the RHD Notes
for $412.9 million of the RHDI Senior Notes, resulting in a reduction of debt of $172.8 million.
Interest on the RHDI Senior Notes is payable semi-annually on May 15
th
and November
15
th
of each year, commencing November 15, 2008. The RHDI Senior Notes are senior
unsecured obligations of RHDI and rank equally with all of RHDIs other senior unsecured
indebtedness. The RHDI Senior Notes are fully and unconditionally guaranteed by RHD and RHDIs
subsidiaries that guarantee the obligations under the RHDI Credit Facility on a general, senior
unsecured basis. The RHDI Senior Notes are effectively subordinated in right of payment to all of
RHDIs existing and future secured debt to the extent of the value of the assets securing such
debt. The RHDI Senior Notes are also structurally subordinated to all existing and future
liabilities (including trade payables) of RHDIs existing and future subsidiaries that do not
guarantee the RHDI Senior Notes. The RHD guarantee with respect to the RHDI Senior Notes is
structurally subordinated to the liabilities of RHDs subsidiaries, other than RHDI and its
subsidiaries that guarantee obligations under the RHDI Senior Notes. Claims with respect to the
RHDI Senior Notes are structurally senior to claims with respect to any outstanding RHD notes.
In July 2008, we registered approximately $1,235.3 million of the 8.875% Series A-4 Senior Notes
due 2017, that were issued on October 2, 2007 and October 17, 2007 by RHD.
Debt Refinancings and Repurchases
The purpose of the debt refinancings and repurchases noted above was to reduce near-term mandatory
debt repayments, extend our maturity profile, provide additional covenant flexibility and reduce
debt levels. As a result of the September 2008 Debt Repurchases, Debt Exchanges and refinancing
activities noted above, we reduced our outstanding debt by $159.9 million and $332.7 million,
respectively, and recorded a gain of $70.2 million and $231.5 million, respectively, during the
three and nine months ended September 30, 2008.
The September 2008 Debt Repurchases resulted in a gain of $72.4 million during the three and nine
months ended September 30, 2008, representing the difference between the accreted value or par
value, as applicable, and purchase price of the Notes, offset by the write-off of unamortized
deferred financing costs of $2.9 million.
Certain of the refinancings noted above have been accounted for as extinguishments of debt. The
Debt Exchanges during the nine months ended September 30, 2008 resulted in a gain of approximately
$161.3 million, representing the difference between the accreted value or par value, as applicable,
of the extinguished RHD Notes and RHDI Senior Notes, offset by the write-off of unamortized
deferred financing costs of $11.5 million associated with the extinguished RHD Notes.
In addition, during the nine months ended September 30, 2008 we recognized a charge of $2.2 million
for the write-off of unamortized deferred financing costs associated with the refinancing of the
former Dex Media West credit facility and portions of the amended RHDI Credit Facility, which have
been accounted for as extinguishments of debt.
Impact of Purchase Accounting
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 $4.5
million and $13.1 million for the three and nine months ended September 30, 2008, respectively, and
$7.9 million and $23.2 million for the three and nine months ended September 30, 2007,
respectively. As of September 30, 2008, $90.7 million of the fair value adjustment remains
unamortized as shown in the following table.
39
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Long-Term
|
|
|
|
|
|
|
|
|
|
|
Debt at
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Unamortized
|
|
Long-
|
|
2008
|
|
|
Fair Value
|
|
Term
|
|
Excluding
|
|
|
Adjustment at
|
|
Debt at
|
|
Unamortized
|
|
|
September 30,
|
|
September
|
|
Fair Value
|
(amounts in millions)
|
|
2008
|
|
30, 2008
|
|
Adjustment
|
|
Dex Media, Inc. 8% Senior Notes
|
|
$
|
10.8
|
|
|
$
|
510.8
|
|
|
$
|
500.0
|
|
Dex Media, Inc. 9% Senior Discount Notes
|
|
|
13.2
|
|
|
|
764.2
|
|
|
|
751.0
|
|
Dex Media West 8.5% Senior Notes
|
|
|
10.1
|
|
|
|
395.1
|
|
|
|
385.0
|
|
Dex Media West 5.875% Senior Notes
|
|
|
0.1
|
|
|
|
8.8
|
|
|
|
8.7
|
|
Dex Media West 9.875% Senior Subordinated Notes
|
|
|
56.5
|
|
|
|
818.2
|
|
|
|
761.7
|
|
|
|
|
Total Dex Media Outstanding Debt at January
31, 2006
|
|
$
|
90.7
|
|
|
$
|
2,497.1
|
|
|
$
|
2,406.4
|
|
|
|
|
Impact of Economic Instability on Prospective Pension Funding
As a result of the credit and liquidity crisis in the United States and throughout the global
financial system, substantial volatility in world capital markets and the banking industry has
occurred. This volatility and other events have had a significant negative impact on financial
markets, as well as the overall economy. As a result of the global economic instability, our
pension plans investment portfolio has incurred significant volatility and a decline in fair value
since December 31, 2007. However, because the values of our pension plans individual investments
have and will fluctuate in response to changing market conditions, the amount of gains or losses
that will be recognized in subsequent periods and the impact on the funded status of the pension
plan and future minimum required contributions, if any, cannot be determined at this time.
Liquidity and Cash Flows
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. Subsequent to the refinancing of the former Dex Media
West credit facility with the new Dex Media West credit facility, 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 meet our debt
service requirements for at least the next 15 to 18 months. However, we make no assurances that our
business will generate sufficient cash flow from operations or that sufficient borrowing capacity
will be available under the revolver portions of the Companys credit facilities to enable us to
fund our operations and capital expenditures, meet all debt service requirements, pursue all of our
strategic initiatives, or for other purposes. Furthermore, the unprecedented instability in the
financial markets may make it difficult for us to obtain financing or refinancing, as the case may
be, on satisfactory terms or at all. From time to time we may purchase our equity and/or debt
securities and/or our subsidiaries debt securities through privately negotiated transactions, open
market purchases or otherwise depending on, among other things, the availability of funds,
alternative investments and market conditions. In addition, from time to time we may prepay certain
of our subsidiaries term debt, or portions thereof, depending on, among other things, availability
of funds and market conditions.
Primarily as a result of our business combinations, we have a significant amount of debt.
Aggregate outstanding debt as of September 30, 2008 was $9.7 billion (including fair value
adjustments required by GAAP as a result of the Dex Media Merger). As a result of the September
2008 Debt Repurchases, we reduced our outstanding debt by $159.9 million during the third quarter
of 2008. As a result of the refinancing transactions conducted during the second quarter of 2008
and other debt repayment, we reduced our net debt by $236.5 million during the second quarter of
2008.
40
During the three and nine months ended September 30, 2008, we made scheduled principal payments of
$3.6 million and $38.7 million, respectively, and prepaid an additional $30.0 million and $1,186.0
million, respectively, in principal under our credit facilities, which includes prepayments
associated with the refinancing of the former Dex Media West credit facility, for total credit
facility repayments of $33.6 million and $1,224.7 million, respectively, excluding revolver
payments. During the three and nine months ended September 30, 2008, we made revolver payments of
$26.0 million and $422.1 million, respectively, offset by revolver borrowings of $25.0 million and
$398.1 million, respectively, resulting in a net decrease of $1.0 million and $24.0 million,
respectively, of the revolver portions under the Companys credit facilities.
For the three and nine months ended September 30, 2008, we made aggregate net cash interest
payments of $206.0 million and $584.4 million, respectively. At September 30, 2008, we had $60.8
million of cash and cash equivalents before checks not yet presented for payment of $12.7 million,
and combined available borrowings under our revolvers of $361.3 million. During the three and nine
months ended September 30, 2008, 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 senior notes 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 $386.6 million for the nine months ended September 30,
2008. Key contributors to operating cash flow include the following:
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|
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$(1,935.9) million in net loss, which includes the impact of the non-cash goodwill
impairment charges.
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|
|
|
|
$2,180.9 million of net non-cash items consisting of the non-cash goodwill impairment
charge of $3,123.9 million, offset by $943.0 million in deferred income taxes, which
includes the tax impact of the non-cash goodwill impairment charges.
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|
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$231.5 million net gain on the debt transactions.
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|
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|
$563.7 million of other net non-cash items primarily consisting of $363.2 million of
depreciation and amortization, $102.5 million in bad debt provision, $30.3 million of
net additional interest expense associated with ineffective interest rate swaps, $23.4
million of stock-based compensation expense and $44.3 million in other non-cash items,
primarily consisting of $54.4 million related to the accretion of our discounted debt,
$20.5 million related to the amortization of deferred financing costs, offset by $17.5
million associated with the change in fair value of our interest rate swaps and $13.1
million associated with the amortization of the fair value adjustments required by GAAP
as a result of the Dex Media Merger, which reduced interest expense.
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$149.1 million net use of cash from a decrease in deferred directory revenues of
$74.4 million due to lower advertising sales and an increase in accounts receivable of
$74.7 million due to an increase in days outstanding of customer balances and
deterioration in accounts receivable aging categories, which has been driven by the
extension of the write-off policy in our Qwest markets to conform to the legacy RHD
markets, weaker economic conditions, the transition to in-house billing and collection
services for certain local customers in our Qwest markets that were previously performed
by Qwest on our behalf, as well as publication cycle seasonality. The change in deferred
revenues 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 revenues and billed to
customers.
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$49.5 million net source of cash from a decrease in other assets, consisting of a
$42.7 million decrease in prepaid directory costs resulting from publication seasonality
as well as a $6.8 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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$99.1 million net use of cash from a decrease in accounts payable and accrued
liabilities, primarily reflecting a $47.5 million decrease in trade accounts payable
resulting from timing of invoice processing versus payment thereon, a $51.3 million
decrease in accrued interest payable on outstanding debt and a $0.3 million decrease in
other accrued liabilities.
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41
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$8.1 million increase in other non-current liabilities, including pension and
postretirement long-term liabilities.
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Cash used in investing activities for the nine months ended September 30, 2008 was $43.0 million
and includes the following:
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|
$47.3 million used to purchase fixed assets, primarily computer equipment, software
and leasehold improvements.
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$4.3 million in cash proceeds from the disposition of an equity investment in the
fourth quarter of 2007, which were received in January 2008.
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Cash used in financing activities for the nine months ended September 30, 2008 was $328.9 million
and includes the following:
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$1,018.2 million in proceeds, net of costs, from borrowings under our new Dex Media
West credit facility, which was used to refinance the former Dex Media West credit
facility and pay related fees and expenses.
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$1,224.7 million in principal payments on term loans under our credit facilities and
notes. With regard to our credit facilities, $38.7 million represents scheduled
principal payments and $1,186.0 million represents principal payments made on an
accelerated basis, at our option, from proceeds received with the new Dex Media West
credit facility and from available cash flow generated from operations.
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$398.1 million in borrowings under our revolvers, used primarily to fund temporary
working capital requirements.
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$422.1 million in principal payments on our revolvers.
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$84.7 million associated with the September 2008 Debt Repurchases.
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$9.6 million in fees associated with the issuance of the RHDI Senior Notes, which has
been accounted for as a non-cash financing activity.
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$6.1 million used to repurchase our common stock. This use of cash pertains to common
stock repurchases made during 2007 that settled in January 2008.
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$1.9 million in the increased balance of checks not yet presented for payment.
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$0.1 million in proceeds from the exercise of employee stock options.
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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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|
$489.6 million of net non-cash charges primarily consisting of $323.7 million of
depreciation and amortization, $61.3 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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|
$80.6 million net use of cash from an increase in accounts receivable of $49.8
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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42
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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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$41.4 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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$2.0 million used in the decreased balance of checks not yet presented for payment.
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43
Contractual Obligations
As a result of the Companys recent refinancing activities, the contractual obligations table
presented below sets forth our annual commitments as of September 30, 2008 for principal and
interest payments on our debt. The debt repayments as presented in this table include only the
scheduled principal payments under our current debt agreements and do not include any anticipated
prepayments. The debt repayments also exclude fair value adjustments required under purchase
accounting, as these adjustments do not impact our payment obligations.
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Payment Due by Period
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Less than
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1-3
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3-5
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More than 5
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(amounts in millions)
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Total
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1 Year
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Years
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Years
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Years
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Long-term debt
(1)
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$
|
9,624.9
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$
|
99.8
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$
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2,043.5
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$
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2,266.4
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$
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5,215.2
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Interest on long-term
debt
(2)
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3,926.1
|
|
|
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677.5
|
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1,321.2
|
|
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1,103.8
|
|
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823.6
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|
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Total long-term debt and
related interest contractual
obligations
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$
|
13,551.0
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$
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777.3
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$
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3,364.7
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|
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$
|
3,370.2
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|
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$
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6,038.8
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(1)
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Included in long-term debt are principal amounts owed under our credit facilities
and our senior notes and senior subordinated notes, including the current portion of long-term
debt.
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(2)
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Interest on debt represents cash interest payment obligations assuming all
indebtedness at September 30, 2008 will be paid in accordance with its contractual maturity and
assumes interest rates on variable interest debt as of September 30, 2008 will remain unchanged in
future periods. The weighted average interest rates under the RHDI, Dex Media East and new Dex
Media West Credit Facilities were 6.83%, 5.03% and 7.38%, respectively, at September 30, 2008.
Please refer to Liquidity and Capital Resources for interest rates on our senior notes and our
senior subordinated notes.
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44
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk and Risk Management
The RHDI Credit Facility and the Dex Media East and new Dex Media West 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 new 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 70%, of the Companys variable rate debt to fixed rate debt as of September 30, 2008.
At September 30, 2008, approximately 37% 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 89% of our total debt portfolio as of
September 30, 2008. The interest rate swaps mature at varying dates from August 2008 through March
2013.
Under the terms of the agreements, the Company receives variable interest based on three-month
LIBOR and pays a weighted average fixed rate of 4.4%. The weighted average variable rate received
on our interest rate swaps was 3.0% for the nine months ended September 30, 2008. 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 AA- 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.
As a result of the amendment of the RHDI Credit Facility and the refinancing of the former Dex
Media West credit facility on June 6, 2008, the existing interest rate swaps associated with these
two debt arrangements having a notional amount of $1.7 billion are no longer highly effective in
offsetting changes in cash flows. Accordingly, these interest rate swaps became ineffective on June
6, 2008 and cash flow hedge accounting treatment under Statement of Financial Accounting Standards
(SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities
(SFAS No. 133) is
no longer permitted. Interest expense for the nine months ended September 30, 2008 includes a
non-cash charge of $42.9 million resulting from amounts previously charged to accumulated other
comprehensive loss related to these interest rate swaps. Interest expense for the three and nine
months ended September 30, 2008 includes a reduction to interest expense of $8.2 million and $12.6
million, respectively, resulting from the change in the fair value of these interest rate swaps.
Prospective gains or losses on the change in the fair value of these interest rate swaps will be
reported in earnings as a component of interest expense.
Interest rate swaps with a notional amount of $850.0 million have been designated as cash flow
hedges and provided an effective hedge of the three-month LIBOR-based interest payments on $850.0
million of bank debt.
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
,
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 $850.0 million 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
appropriately and within the time periods specified in the Securities
and Exchange Commissions rules and forms.
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(b)
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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.
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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 in their advertising or improper listings, in each
case, contained in directories published by us.
We are also 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.
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 a liability in
our 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.
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 consolidated financial statements with respect to any such matters.
Item1A. Risk Factors
The four risk factors presented below replace and supersede risk factors numbered 3,5,9 and 10,
respectively, set forth in our Annual Report on Form 10-K for the fiscal year ended December 31,
2007 (2007 Form 10-K). The Company has added risk factor 19, Economic, financial and liquidity
instability, based upon the current credit and liquidity crisis in the United States and
throughout the global financial system. There have been no other material changes to the Companys
risk factors as disclosed in Item 1A, Risk Factors, in our 2007 Form 10-K.
3) Competition
The U.S. directory advertising industry is highly competitive and we operate in our markets with
significant competition. In nearly all markets, we compete with one or more yellow pages directory
publishers, which are predominantly independent publishers, such as Yellow Book, the U.S. business
of Yell Group Ltd., and White Directory Publishing Inc. In the past, many of these independent
publishers were small, undercapitalized companies that had minimal impact on our business.
However, over the past five years, Yellow Book and several other regional competitors have become
far more aggressive and have grown their businesses dramatically, both through acquisition and
expansion into new markets. We compete with Yellow Book in the majority of our markets. In some
markets, we also compete with other incumbent publishers, such as Idearc, the directory business
formerly affiliated with Verizon Communications Inc., and AT&T, including the former Bell South
Publishing and Advertising business recently acquired by AT&T, in overlapping and adjacent markets.
Virtually all independent publishers compete aggressively on price to increase market share. This
may affect our pricing or revenues in the future. Due to the recent economic environment and trends
in our industry, we have experienced a decline in advertising sales during the first nine months of
2008 and we expect this trend to continue throughout 2008 and 2009.
Some of the incumbent and independent publishers with which we compete are larger than we are and
have greater financial resources than we have. Although we may have limited market overlap with
incumbent publishers relative to the size of our overall footprint, we may not be able to compete
effectively with these publishers for advertising sales in these limited markets. In addition,
incumbent and independent publishers may commit more resources to certain markets than we are able
to commit, thus limiting our ability to compete effectively with these publishers in
these areas for advertising sales. Similarly, we may face increased competition from these
companies or others (including private equity firms) for acquisitions in the future.
47
We also compete for advertising sales with other traditional media, including newspapers,
magazines, radio, direct mail, telemarketing, billboards and television. Many of these other
traditional media competitors are larger than we are and have greater financial resources than we
have. We may not be able to compete effectively with these companies for advertising sales or
acquisitions in the future.
The Internet has also emerged as an attractive medium for advertisers. Advances in technology have
brought and likely will continue to bring new competitors, new products and new channels to the
industry, including increasing use of electronic delivery of traditional directory information and
electronic search engines/services. The Yellow Pages directory advertising business is subject to
changes arising from developments in technology, including information distribution methods and
users preferences. The use of the Internet and wireless devices by consumers as a means to
transact commerce results in new technologies being developed and services being provided that
compete with our traditional products and services. National search companies such as Google
and Yahoo! are focusing and placing a high priority on local commercial search initiatives.
Our growth and future financial performance may depend on our ability to develop and market new
products and services and utilize new distribution channels, while enhancing existing products,
services and distribution channels, to incorporate the latest technological advances and
accommodate changing user preferences, including the use of the Internet and wireless devices. We
may not be able to respond successfully to any such developments.
Directory publishers, including us, have increasingly bundled online advertising with their
traditional print offerings in an attempt to increase advertiser value, increase customer retention
and enhance total usage. We compete through our IYP sites with the IYP directories of independent
and other incumbent directory publishers, and with other Internet sites, including those available
through wireless applications that provide classified directory information, such as
YellowPages.com, Switchboard.com, Superpages.com and Citysearch.com, and with search engines and
portals, such as Yahoo!, Google, MSN and others. We may not be able to compete effectively with
these other companies, some of which may have greater resources than we do, for advertising sales
or acquisitions in the future. Our Internet strategy and our business may be adversely affected if
major search engines build local sales forces or otherwise begin to more effectively reach small
local businesses for local commercial search services.
Our ability to provide Internet Marketing solutions to our advertisers is dependent upon
relationships with major Internet search companies. Loss of key relationships or changes in the
level of service provided by these search companies could impact performance of our Internet
Marketing solutions. The success of our relationships with Internet search companies also depends
on the compatibility of our technologies, and we have in the past, and may in the future,
experience difficulties in this regard. Many of these Internet search companies are larger than we
are and have greater financial resources than we have. We may not be able to compete effectively
with these companies for advertising sales or acquisitions in the future, particularly should
Internet based advertising sales become increasingly accessible to small- and medium- sized
businesses. In addition, Internet Marketing services are provided by many other competitors within
the territory we service and our advertisers could choose to work with other providers of these
services or with search engines directly.
Competition from other Yellow Pages publishers, other forms of traditional media and the Internet
may affect our ability to attract and retain advertisers and to increase advertising rates. In
addition, the market position of telephone utilities, including those with which we have
relationships, may be adversely impacted by the Telecommunications Act of 1996, referred to as the
Telecommunications Act, which effectively opened local telephone markets to increased competition.
In addition, Federal Communication Commission rules regarding local number portability, advances in
communications technology (such as wireless devices and voice over Internet protocol) and
demographic factors (such as potential shifts in younger generations away from wire line telephone
communications towards wireless or other communications technologies) may further erode the market
position of telephone utilities, including Qwest, Embarq and AT&T. As a result, it is possible that
Qwest, Embarq and AT&T will not remain the primary local telephone service provider in their local
service areas. If Qwest, Embarq or AT&T were no longer the primary local telephone service provider
in any particular local service area, our license to be the exclusive publisher in that market and
to use the incumbent local exchange carrier (ILEC) brand name on our directories in that market
may not be as valuable as we presently anticipate, and we may not realize some of the existing
benefits under our commercial arrangements with Qwest, Embarq or AT&T.
48
5) Recognition of impairment charges for our intangible assets, other long-lived assets or goodwill
At September 30, 2008, the net carrying value of our intangible assets totaled approximately $10.9
billion. As a result of the impairment charges during the first and second quarter of 2008 noted
below, we have no recorded goodwill at September 30, 2008. Our intangible assets and other
long-lived assets are subject to impairment testing in accordance with SFAS No. 144,
Accounting for
the Impairment or Disposal of Long-lived Assets
. We review the carrying value of our intangible
assets and other long-lived assets for impairment whenever events or circumstances indicate that
their carrying amount may not be recoverable. Significant negative industry or economic trends,
including the market price of our common stock or the fair value of our debt, disruptions to our
business, unexpected significant changes or planned changes in the use of the intangible assets and
other long-lived assets, and mergers and acquisitions could result in an impairment charge for any
of our intangible assets or other long-lived assets.
As a result of the decline in the trading value of our debt and equity securities during the first
quarter of 2008 and continuing negative industry and economic trends that have directly affected
our business, we performed impairment tests as of March 31, 2008 of our goodwill and definite-lived
intangible assets in accordance with SFAS No. 142 and SFAS No. 144, respectively. We used certain
estimates and assumptions in our impairment evaluations, including, but not limited to, projected
future cash flows, revenue growth and customer attrition levels. As a result of this testing, we
recorded a $2.5 billion non-cash, pre-tax charge associated with goodwill impairment in the first
quarter of 2008.
Since the trading value of our equity securities further declined in the second quarter of 2008 and
as a result of continuing negative industry and economic trends, we performed additional impairment
tests of our goodwill, definite-lived intangible assets and other long-lived assets as of June 30,
2008. As a result of these tests, we recognized a non-cash goodwill impairment charge of $660.2
million during the second quarter of 2008.
No impairment losses were recorded related to our definite-lived intangible assets and other
long-lived assets during the three and nine months ended September 30, 2008.
If industry and economic conditions in certain markets continue to deteriorate, we will be required
to assess the recoverability of our long-lived assets and other intangible assets, which could
result in additional impairment charges. Any additional impairment charge related to our
intangible assets or other long-lived assets could have a significant effect on our financial
position and results of operations in the periods recognized.
9) Future changes in directory publishing obligations in Qwest and AT&T markets and other
regulatory matters
Pursuant to our publishing agreement with Qwest, we are required to discharge Qwests regulatory
obligation to publish White Pages directories covering each service territory in the 14 Qwest
states where it provided local telephone service as the incumbent service provider as of November
8, 2002. If the staff of a state public utility commission in a Dex Media state were to impose
additional or changed legal requirements in any of Qwests service territories with respect to this
obligation, we would be obligated to comply with these requirements on behalf of Qwest, even if
such compliance were to increase our publishing costs. Pursuant to the publishing agreement, Qwest
will only be obligated to reimburse us for one half of any material net increase in our costs of
publishing directories that satisfy Qwests publishing obligations (less the amount of any previous
reimbursements) resulting from new governmental legal requirements, and this obligation will expire
on November 7, 2009. Our competitive position relative to competing directory publishers could be
adversely affected if we are not able to recover from Qwest that portion of our increased costs
that Qwest has agreed to reimburse and, moreover, we cannot assure you that we would be able to
increase our revenue to cover any unreimbursed compliance costs.
Pursuant to the directory services license agreement with AT&T, we are required to discharge AT&Ts
regulatory obligation to publish White Pages directories covering each service territory in the
Illinois and Northwest Indiana markets for which we acquired the AT&T Directory Business. If the
staff of a state public utility commission in Illinois or Indiana were to impose additional or
change legal requirements in any of these service territories with respect to this obligation, we
would be obligated to comply with these requirements on behalf of AT&T, even if such compliance
were to increase our publishing costs. Pursuant to the directory services agreement, AT&T will
generally not be obligated to reimburse us for any increase in our costs of publishing directories
that satisfy AT&Ts publishing obligations. Our results of operations relative to competing
directory publishers could be adversely affected if we are not able to increase our revenues to
cover any such compliance costs.
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Our directory services license agreement with Embarq generally provides that Embarq will reimburse
us for material increases in our costs relating to our complying with Embarqs directory publishing
obligations in our Embarq markets.
As the IYP directories industry develops, specific laws relating to the provision of Internet
services and the use of Internet and Internet-related applications may become relevant. Regulation
of the Internet and Internet-related services is itself still developing both formally by, for
instance, statutory regulation, and also less formally by, for instance, industry self regulation.
If our regulatory environment becomes more restrictive, including by increased Internet regulation,
our profitability could decrease.
Our operations, as well as the properties owned and leased for our business, are subject to
stringent laws and regulations relating to environmental protection. The failure to comply with
applicable environmental laws, regulations or permit requirements, or the imposition of liability
related to waste disposal or other matters arising under these laws, could result in civil or
criminal fines, penalties or enforcement actions, third-party claims for property damage and
personal injury or requirements to clean up property or other remedial actions. Some of these laws
provide for strict liability, which can render a party liable for environmental or natural
resource damage without regard to negligence or fault on the part of the party.
In addition, new laws and regulations (including, for example, limiting distribution of print
directories), new interpretations of existing laws and regulations, increased governmental
enforcement or other developments could require us to make additional unforeseen expenditures or
could lead to us suffering declines in revenues. For example, opt out legislation has been
proposed in certain states where we operate that would allow consumers to opt out of the delivery
of print yellow pages. Although to date, this proposed legislation has not been signed into law in
any of the states where we operate, we cannot assure you that similar legislation will not be
passed in the future. If such legislation were to become effective, it could have a material
adverse effect on the usage of our products and, ultimately, our revenues. Depending on the
consistency of the legislation if adopted in multiple jurisdictions, it could materially increase
our operating costs in order to comply. We are adopting voluntary measures to permit consumers to
share with us their preferences with respect to the delivery of our various print and digital
products. If a large number of consumers advise us that they do not desire delivery of our
products, the usage of our products and, ultimately our revenues, could materially decline, which
may have an adverse effect on our financial condition and results of operations.
Many of these laws and regulations are becoming increasingly stringent, and the cost of compliance
with these requirements can be expected to increase over time. To the extent that the costs
associated with meeting any of these requirements are substantial and not adequately provided for,
there could be a material adverse effect on our businesses, financial condition and results of
operations.
10) Reliance on, and extension of credit to, small and medium-sized businesses
Approximately 85% of our directory advertising revenue is derived from selling advertising to small
and medium-sized enterprises (SMEs). In the ordinary course of our yellow pages publishing
business, we extend credit to these advertisers for advertising purchases. SMEs, however, tend to
have fewer financial resources and higher failure rates than large businesses, especially during a
downturn in the general economy. The proliferation of very large retail stores may continue to harm
small- and medium-sized businesses. We believe these limitations are significant contributing
factors to having advertisers in any given year not renew their advertising in the following year.
In addition, full or partial collection of delinquent accounts can take an extended period of time.
Consequently, we could be adversely affected by our dependence on and our extension of credit to
small- and medium-sized businesses. For the year ended December 31, 2007, our bad debt expense
represented approximately 3.0% of our net revenue. For the three and nine months ended September
30, 2008, our bad debt expense represented approximately 5.9% and 5.2% of our net revenue,
respectively. Our bad debt expense could continue to increase given the current state of the credit
market crisis, which may negatively impact SMEs to a greater extent than larger businesses.
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19) Economic, financial and liquidity instability
As a result of the credit and liquidity crisis in the United States and throughout the global
financial system, substantial volatility in world capital markets and the banking industry has
occurred. This volatility and other events have had a significant negative impact on financial
markets, as well as the overall economy. From an operational perspective, we have been
experiencing lower advertising sales from reduced consumer confidence and reduced advertising
spending in our markets, as well as increased bad debt expense. From a financing perspective, this
unprecedented instability may make it difficult for us to access the credit market and to obtain
financing or refinancing, as the case may be, on satisfactory terms or at all. In addition, as a
result of the global economic instability, our pension plans investment portfolio has incurred
significant volatility and a decline in fair value since December 31, 2007. However, because the
values of our pension plans individual investments have and will fluctuate in response to changing
market conditions, the amount of gains or losses that will be recognized in subsequent periods and
the impact on the funded status of the pension plan and future minimum required contributions, if
any, cannot be determined at this time.
51
Item 6.
Exhibits
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Exhibit No.
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Document
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10.1
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Form of New Stock Appreciation Rights Agreement for Senior
Management Members (incorporated by reference to Exhibit 10.1
to the Registrants Form 8-K, filed on July 17, 2008 (SEC No.
001-07155)).
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31.1*
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Certification of Quarterly Report on Form 10-Q for the period
ended September 30, 2008 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, 2008 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, 2008 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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52
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 29, 2008
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By:
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/s/ Steven M. Blondy
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Steven M. Blondy
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Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
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/s/ R. Barry Sauder
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R. Barry Sauder
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Vice President, Corporate Controller and Chief
Accounting Officer
(Principal Accounting Officer)
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53
Exhibit Index
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Exhibit No.
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Document
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10.1
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Form of New Stock Appreciation Rights Agreement for Senior
Management Members (incorporated by reference to Exhibit 10.1 to the
Registrants Form 8-K, filed on July 17, 2008 (SEC No. 001-07155)).
|
|
|
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31.1*
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Certification of Quarterly Report on Form 10-Q for the period ended
September 30, 2008 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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|
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31.2*
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Certification of Quarterly Report on Form 10-Q for the period ended
September 30, 2008 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, 2008 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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54