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 March 31, 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):
Large accelerated filer
þ
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
(Do not check if a smaller reporting company)
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 May 1, 2008
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Common Stock, par value $1 per share
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68,789,555
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R.H. DONNELLEY CORPORATION
INDEX TO FORM 10-Q
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
R.H. Donnelley Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
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March 31,
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December 31,
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(in thousands, except share data)
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2008
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2007
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Assets
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Current Assets
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Cash and cash equivalents
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$
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29,901
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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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249,981
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258,839
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Unbilled
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892,500
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847,446
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Allowance for doubtful accounts and sales claims
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(43,129
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(42,817
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Net accounts receivable
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1,099,352
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1,063,468
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Deferred directory costs
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193,674
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183,687
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Short-term deferred income taxes, net
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60,989
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47,759
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Prepaid expenses and other current assets
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88,452
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126,201
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Total current assets
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1,472,368
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1,467,191
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Fixed assets and computer software, net
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182,251
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187,680
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Other non-current assets
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137,514
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139,406
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Intangible assets, net
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11,066,523
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11,170,482
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Goodwill
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660,239
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3,124,334
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Total Assets
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$
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13,518,895
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$
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16,089,093
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Liabilities and Shareholders Equity
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Current Liabilities
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Accounts payable and accrued liabilities
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$
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217,451
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$
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230,693
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Accrued interest
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156,900
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198,828
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Deferred directory revenues
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1,198,459
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1,172,035
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Current portion of long-term debt
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186,343
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177,175
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Total current liabilities
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1,759,153
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1,778,731
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Long-term debt
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9,894,503
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9,998,474
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Deferred income taxes, net
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1,471,905
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2,288,384
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Other non-current liabilities
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210,330
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200,768
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Total liabilities
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13,335,891
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14,266,357
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Commitments and contingencies
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Shareholders Equity
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Common stock, par value $1 per share, authorized - 400,000,000 shares;
issued - 88,169,275
shares at March 31, 2008 and December 31, 2007; outstanding -
68,788,331 shares and 68,758,026 shares at March 31, 2008 and December
31, 2007, respectively
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88,169
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88,169
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Additional paid-in capital
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2,412,878
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2,402,181
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Accumulated deficit
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(2,008,651
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(385,540
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Treasury
stock, at cost, 19,380,944 shares at March 31, 2008 and 19,411,249
shares at December 31, 2007
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(256,296
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(256,334
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Accumulated other comprehensive loss
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(53,096
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(25,740
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Total shareholders equity
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183,004
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1,822,736
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Total Liabilities and Shareholders Equity
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$
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13,518,895
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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 (Loss) Income (Unaudited)
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Three months ended
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March 31,
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(in thousands, except per share data)
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2008
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2007
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Net revenues
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$
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674,654
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$
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661,296
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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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109,177
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114,621
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Selling and support expenses
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186,316
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178,236
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General and administrative expenses
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34,889
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37,431
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Depreciation and amortization
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118,263
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103,030
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Goodwill impairment
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2,463,615
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Total expenses
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2,912,260
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433,318
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Operating (loss) income
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(2,237,606
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227,978
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Interest expense, net
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(195,874
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(201,615
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(Loss) income before income taxes
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(2,433,480
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26,363
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Benefit (provision) for income taxes
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810,369
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(10,412
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Net (loss) income
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$
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(1,623,111
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$
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15,951
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(Loss) earnings per share:
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Basic
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$
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(23.60
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$
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0.23
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Diluted
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$
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(23.60
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$
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0.22
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Shares used in computing (loss) earnings per share:
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Basic
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68,778
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70,663
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Diluted
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68,778
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72,003
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Comprehensive (Loss) Income
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Net (loss) income
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$
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(1,623,111
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$
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15,951
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Unrealized loss on interest rate swaps, net of tax
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(27,610
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(5,629
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Benefit plans adjustment, net of tax
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254
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314
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Comprehensive (loss) income
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$
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(1,650,467
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$
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10,636
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The accompanying notes are an integral part of the condensed consolidated financial statements.
4
R.H. Donnelley Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
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Three months ended
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March 31,
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(in thousands)
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2008
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2007
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Cash Flows from Operating Activities
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Net (loss) income
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$
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(1,623,111
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$
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15,951
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Reconciliation of net (loss) income to net cash provided by
operating activities:
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Goodwill impairment
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2,463,615
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Depreciation and amortization
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118,263
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103,030
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Deferred income tax (benefit) provision
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(812,114
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)
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10,207
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Provision for bad debts
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29,782
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21,009
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Stock based compensation expense
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10,816
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13,938
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Other non-cash items, net
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(8,414
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)
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11,383
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Changes in assets and liabilities, net of effects from acquisitions:
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(Increase) in accounts receivable
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(65,666
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)
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(58,054
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)
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Decrease in other assets
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21,622
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31,487
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(Decrease) in accounts payable and accrued liabilities
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(52,918
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)
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(56,453
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)
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Increase in deferred directory revenues
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26,424
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43,086
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(Decrease) increase in other non-current liabilities
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(8,363
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)
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8,168
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Net cash provided by operating activities
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99,936
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143,752
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Cash Flows from Investing Activities
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Additions to fixed assets and computer software
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(10,118
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)
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(13,120
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)
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Equity investment disposition (investment)
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4,318
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(2,500
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)
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Net cash used in investing activities
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(5,800
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)
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(15,620
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Cash Flows from Financing Activities
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Credit facilities repayments and note repurchases
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(91,418
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)
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(193,528
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Revolver borrowings
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215,300
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207,250
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Revolver repayments
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(232,350
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)
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(226,350
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)
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Repurchase of common stock
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(6,112
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)
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Increase (decrease) in checks not yet presented for payment
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4,180
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(6,203
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)
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Proceeds from employee stock option exercises
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89
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9,111
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Net cash used in financing activities
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(110,311
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)
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(209,720
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)
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Decrease in cash and cash equivalents
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(16,175
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)
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(81,588
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)
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Cash and cash equivalents, beginning of year
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46,076
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156,249
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Cash and cash equivalents, end of period
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$
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29,901
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$
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74,661
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Supplemental Information:
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Cash paid:
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Interest
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$
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214,322
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$
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217,221
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Income taxes, net
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$
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551
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$
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142
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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
March 31, 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.
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 months ended March
31, 2007 to conform to the current periods presentation. These reclassifications had no impact on
operating income or net income for the three months ended March 31, 2007. The table below
summarizes these reclassifications.
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Three Months Ended March 31, 2007
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As
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Previously
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As
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Reported
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Reclass
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Reclassified
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Net revenues
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$
|
662,804
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|
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$
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(1,508
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)
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$
|
661,296
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Production, publication and
distribution expenses
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294,170
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(179,549
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)
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114,621
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Selling and support expenses
|
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|
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178,236
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178,236
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General and administrative
expenses
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37,626
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(195
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)
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37,431
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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.
6
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 Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations
(SFAS No. 141) and recorded at their estimated fair values. In accordance
with SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142), the fair values of the
identifiable intangible assets are being amortized over their estimated useful lives in a manner
that best reflects the economic benefit derived from such assets. Goodwill is not amortized but is
subject to impairment testing on an annual basis or more frequently if we believe indicators of
impairment exist. Amortization expense was $104.0 million and $89.8 million for the three months
ended March 31, 2008 and 2007, respectively.
As a result of the decline in the trading value of our debt and equity securities during the three
months ended March 31, 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,
Accounting for
the Impairment or Disposal of Long-Lived Assets
(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.
The impairment test of our definite-lived intangible assets was performed by comparing the carrying
amount of our intangible 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. Our
testing results of our definite-lived intangible assets indicated no impairment as of March 31,
2008. No impairment losses were recorded related to our definite-lived intangible assets during the
three months ended March 31, 2008 and 2007.
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.
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 three months
ended March 31, 2008. No impairment losses were recorded related to our goodwill during the three months ended March 31,
2007.
If the trading value of our debt and equity securities further declines, we will be required to
again assess the fair values of the assets and liabilities of the Company and could conclude that
goodwill and other long-lived assets are further impaired, which would result in additional
impairment charges. In addition, if economic conditions in certain of our markets do not improve,
we will be required to assess the recoverability of other intangible assets, which could result in
additional impairment charges.
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 $5.4 million and $6.8 million for the three months ended March 31, 2008 and 2007, respectively.
Apart from business combinations, it is the Companys policy to recognize losses incurred in
conjunction with debt extinguishments as a component of interest expense. In conjunction with 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
7
corresponding fair value adjustment over the life of the respective debt. The offset to interest
expense was $4.3 million and $7.6 million for the three months ended March 31, 2008 and 2007,
respectively.
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 $16.7
million and $7.6 million for the three months ended March 31, 2008 and 2007, respectively. Total
advertising expense for the three months ended March 31, 2008 includes $8.0 million of costs
associated with traffic purchased and distributed to multiple advertiser landing pages with no
comparable expense for the three months ended March 31, 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. During the three months ended March 31, 2008, we
experienced adverse bad debt trends attributable to economic challenges in our markets. 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.
At March 31, 2008, we had interest rate swap agreements with major financial institutions with a
notional value of $2.7 billion. We are exposed to credit risk in the event that one or more of the
counterparties to the agreements does not, or cannot, meet their obligation. The notional amount
is used to measure interest to be paid or received and does not represent the amount of exposure to
credit loss. Any loss would be limited to the amount that would have been received over the
remaining life of the swap agreement. The counterparties to the swap agreements are major
financial institutions with credit ratings of AA- or higher. We do not currently foresee a
material credit risk associated with these swap agreements; however, no assurances can be given.
(Loss) Earnings Per Share
We account for (loss) earnings 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 (loss) income 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 March 31,
|
|
|
2008
|
|
2007
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,623,111
|
)
|
|
$
|
15,951
|
|
Weighted average common shares outstanding
|
|
|
68,778
|
|
|
|
70,663
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(23.60
|
)
|
|
$
|
0.23
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
2007
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,623,111
|
)
|
|
|
15,951
|
|
Weighted average common shares outstanding
|
|
|
68,778
|
|
|
|
70,663
|
|
Dilutive effect of stock awards
(1)
|
|
|
|
|
|
|
1,340
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
68,778
|
|
|
|
72,003
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(23.60
|
)
|
|
$
|
0.22
|
|
|
|
|
|
|
|
(1)
|
|
Due to the reported net loss for the three months ended March 31, 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 March 31, 2008 and 2007, 6.1 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 $10.8 million and $13.9
million for the three months ended March 31, 2008 and 2007, respectively.
On March 4, 2008, the Company granted 2.2 million SARs to certain employees, including executive
officers, in conjunction with its annual grant of stock incentive awards. These SARs, which are
settled in our common stock, were granted at a grant price of $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 $3.0 million for the three months ended March 31, 2008.
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 March 31, 2008 and the level within the fair value hierarchy in which the
fair value measurements are included.
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
March 31, 2008
|
|
|
Using Significant Other
|
Description
|
|
Observable Inputs (Level 2)
|
|
Derivatives Assets
|
|
$
|
1,703
|
|
Derivatives Liabilities
|
|
$
|
(69,816
|
)
|
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.
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.
9
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,
Accounting for Derivative Instruments and Hedging Activities,
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 March 31, 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.
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 months ended
March 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2006
|
|
2007
|
|
|
|
|
Restructuring
|
|
Restructuring
|
|
Restructuring
|
|
|
|
|
Actions
|
|
Actions
|
|
Actions
|
|
Total
|
|
|
|
Balance at December 31, 2007
|
|
$
|
763
|
|
|
$
|
3,327
|
|
|
$
|
5,542
|
|
|
$
|
9,632
|
|
Additions to reserve charged to earnings
|
|
|
|
|
|
|
|
|
|
|
404
|
|
|
|
404
|
|
Payments
|
|
|
(67
|
)
|
|
|
(581
|
)
|
|
|
(1,229
|
)
|
|
|
(1,877
|
)
|
|
|
|
Balance at March 31, 2008
|
|
$
|
696
|
|
|
$
|
2,746
|
|
|
$
|
4,717
|
|
|
$
|
8,159
|
|
|
|
|
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 months ended March 31,
2008, we recognized a restructuring charge to earnings of $0.4 million associated with the 2007
Restructuring Actions. During the three months ended March 31, 2008, payments of $1.2 million were
made 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 March 31, 2008 and 2007 totaled $0.1
million and $0.8 million, respectively. Payments of $0.5 million and $0.6 million were made with respect to the vacated leased Dex Media facilities during
the three months ended March 31, 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 months ended March 31, 2008 reflect lease payments associated with
those facilities. Remaining payments related to the 2003 Restructuring Actions will be made through
2012.
10
5. Credit Facilities
At March 31, 2008, total outstanding debt under our credit facilities was $3,640.6 million,
comprised of $1,507.6 million under the RHDI credit facility, $1,101.9 million under the Dex Media
East credit facility and $1,031.1 million under the Dex Media West credit facility.
RHDI
As of March 31, 2008, outstanding balances under RHDIs senior secured credit facility, as amended
and restated (RHDI Credit Facility), totaled $1,507.6 million, comprised of $301.2 million under
Term Loan D-1 and $1,206.4 million under Term Loan D-2 and no amount was outstanding under the
$175.0 million revolving credit facility (the RHDI Revolver) (with an additional $0.3 million
utilized under a standby letter of credit). All Term Loans require quarterly principal and interest
payments. The RHDI Credit Facility provides for a new 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. The RHDI Revolver matures in December 2009 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 4.39% and 6.50% at March 31, 2008 and December 31, 2007, respectively.
On May 8, 2008, we announced our intention to amend the RHDI Credit Facility. See Note 11,
Subsequent Events for additional information.
Dex Media East
As of March 31, 2008, outstanding balances under the Dex Media East credit facility totaled
$1,101.9 million, comprised of $700.0 million under Term Loan A and $400.0 million under Term Loan
B and $1.9 million was outstanding under the $100.0 million revolving loan facility (Dex Media
East Revolver) (with an additional $3.0 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 4.75% and 6.87% at March 31, 2008 and December 31, 2007, respectively.
Dex Media West
As of March 31, 2008, outstanding balances under the Dex Media West credit facility totaled
$1,031.1 million, comprised of $135.8 million under Term Loan A, $307.1 million under Term Loan
B-1, and $583.1 million under Term Loan B-2 and $5.1 million was outstanding under the $100.0
million revolving loan facility (Dex Media West Revolver). The Term Loan A and Dex Media West
Revolver will mature in September 2009 and the Term Loan B-1 and Term Loan B-2 will mature in March
2010. The weighted average interest rate of outstanding debt under the Dex Media West credit
facility was 4.49% and 6.51% at March 31, 2008 and December 31, 2007, respectively.
On May 8, 2008, we announced our intention to refinance the Dex Media West credit facility. See
Note 11, Subsequent Events for additional information.
6. Income Taxes
The effective tax rate on loss before income taxes of 33.3% for the three months ended March 31,
2008 compares to an effective tax rate of 39.5% on income before income taxes for the three months
ended March 31, 2007. As a result of the non-cash goodwill impairment charge of $2.5 billion
recorded during the three months ended March 31, 2008, we recognized a decrease in our deferred tax
liability of $825.1 million, which directly impacted our deferred tax benefit. The change in the
effective tax rate for the three months ended March 31, 2008 is primarily due to the tax
consequences of the non-cash goodwill impairment charge. The change in the effective tax rate is
also attributable to the refinancing transactions conducted during the fourth quarter of 2007,
which shifted interest expense to our subsidiaries with lower state income tax rates, and an
increase in our valuation allowance related to certain 2008 state tax losses.
11
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 (loss) income before
income taxes.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
2007
|
|
|
|
Statutory U.S. Federal tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local taxes, net of U.S. Federal tax benefit
|
|
|
3.1
|
|
|
|
3.5
|
|
Non-deductible goodwill impairment charge
|
|
|
(4.7
|
)
|
|
|
|
|
Other non-deductible expenses
|
|
|
|
|
|
|
1.0
|
|
Change in valuation allowance
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
33.3
|
%
|
|
|
39.5
|
%
|
|
|
|
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 months ended March 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
Pension Benefits
|
|
Benefits
|
|
|
Three Months
|
|
Three Months
|
|
|
Ended March 31,
|
|
Ended March 31,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
Service cost
|
|
$
|
3,512
|
|
|
$
|
3,282
|
|
|
$
|
497
|
|
|
$
|
637
|
|
Interest cost
|
|
|
4,586
|
|
|
|
4,533
|
|
|
|
1,393
|
|
|
|
1,377
|
|
Expected return on plan assets
|
|
|
(5,058
|
)
|
|
|
(4,940
|
)
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
49
|
|
|
|
33
|
|
|
|
167
|
|
|
|
430
|
|
Amortization of net loss
|
|
|
196
|
|
|
|
272
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
3,285
|
|
|
$
|
3,180
|
|
|
$
|
2,066
|
|
|
$
|
2,444
|
|
|
|
|
|
|
During the three months ended March 31, 2008, the Company made contributions of $2.0 million to its
pension plans. The Company did not make any contributions to its pension plans during the three
months ended March 31, 2007. During the three months ended March 31, 2008 and 2007, the Company
made contributions of $0.9 million and $1.1 million, respectively, to its postretirement plan. We
expect to make total contributions of approximately $15.8 million and $6.8 million to our pension
plans and postretirement plan, respectively, in 2008.
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.
12
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.
R.H. Donnelley Corporation
Condensed Parent Company Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,637
|
|
|
$
|
18,900
|
|
Intercompany, net
|
|
|
210,422
|
|
|
|
279,244
|
|
Prepaid and other current assets
|
|
|
3,935
|
|
|
|
8,948
|
|
|
|
|
Total current assets
|
|
|
215,994
|
|
|
|
307,092
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
3,663,321
|
|
|
|
5,231,597
|
|
Fixed assets and computer
software, net
|
|
|
9,240
|
|
|
|
10,462
|
|
Other non-current assets
|
|
|
88,600
|
|
|
|
91,506
|
|
Intercompany note receivable
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,277,155
|
|
|
$
|
5,940,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
4,231
|
|
|
$
|
14,032
|
|
Accrued interest
|
|
|
107,543
|
|
|
|
123,882
|
|
|
|
|
Total current liabilities
|
|
|
111,774
|
|
|
|
137,914
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
3,965,649
|
|
|
|
3,962,871
|
|
Deferred income taxes, net
|
|
|
5,331
|
|
|
|
5,161
|
|
Other non-current liabilities
|
|
|
11,397
|
|
|
|
11,975
|
|
|
|
|
Shareholders equity
|
|
|
183,004
|
|
|
|
1,822,736
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
4,277,155
|
|
|
$
|
5,940,657
|
|
|
|
|
13
R.H. Donnelley Corporation
Condensed Parent Company Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
2008
|
|
2007
|
|
|
|
Expenses
|
|
$
|
6,872
|
|
|
$
|
3,024
|
|
Partnership and equity (loss) income
|
|
|
(2,345,035
|
)
|
|
|
82,352
|
|
|
|
|
Operating (loss) income
|
|
|
(2,351,907
|
)
|
|
|
79,328
|
|
Interest expense, net
|
|
|
(81,573
|
)
|
|
|
(52,965
|
)
|
|
|
|
(Loss) income before income taxes
|
|
|
(2,433,480
|
)
|
|
|
26,363
|
|
Benefit (provision) for income taxes
|
|
|
810,369
|
|
|
|
(10,412
|
)
|
|
|
|
Net (loss) income
|
|
$
|
(1,623,111
|
)
|
|
$
|
15,951
|
|
|
|
|
R.H. Donnelley Corporation
Condensed Parent Company Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Cash flow from operating activities
|
|
$
|
(65,372
|
)
|
|
$
|
(107,756
|
)
|
Cash flow from investing activities:
|
|
|
|
|
|
|
|
|
Additions to fixed assets and computer
software
|
|
|
(182
|
)
|
|
|
(2,556
|
)
|
Equity investment disposition (investment)
|
|
|
4,318
|
|
|
|
(2,500
|
)
|
|
|
|
Net cash provided by (used in) investing
activities
|
|
|
4,136
|
|
|
|
(5,056
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
Increase in checks not yet presented for
payment
|
|
|
96
|
|
|
|
232
|
|
Proceeds from employee stock option exercises
|
|
|
89
|
|
|
|
9,111
|
|
Repurchase of common stock
|
|
|
(6,112
|
)
|
|
|
|
|
Dividends from subsidiaries
|
|
|
49,900
|
|
|
|
39,696
|
|
|
|
|
Net cash provided by financing activities
|
|
|
43,973
|
|
|
|
49,039
|
|
|
|
|
Change in cash
|
|
|
(17,263
|
)
|
|
|
(63,773
|
)
|
Cash at beginning of year
|
|
|
18,900
|
|
|
|
122,565
|
|
|
|
|
Cash at end of period
|
|
$
|
1,637
|
|
|
$
|
58,792
|
|
|
|
|
11. Subsequent Events
RHDI
RHD
intends to amend the RHDI Credit Facility in order to, among other
things, provide additional covenant flexibility and extend the maturity date of the RHDI Revolver to June 2011.
Dex Media West
Dex Media West intends to refinance its credit facility. The new Dex Media West credit facility is
presently contemplated to consist of a $140.0 million Term Loan A maturing in October 2013, a
$950.0 million Term Loan B maturing in October 2014 and a $100.0 million revolving credit facility
maturing in October 2013. The new Dex Media West credit facility is presently contemplated to
include a $400.0 million uncommitted incremental facility that may be incurred as additional
revolving loans or additional term loans. The proceeds from the new Dex Media West credit facility
is expected to be used to refinance the existing Dex Media West credit facility and pay related
fees and expenses. We cannot assure you that the covenants and other features of the new
Dex Media West credit facility will be as favorable as the corresponding terms of the current Dex
Media West credit facility.
We expect
to incur additional interest expense in connection with these
refinancings. We cannot assure that any such refinancings will be
completed in a timely manner, without conditions or at all.
14
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
Certain statements contained in this Quarterly Report on Form 10-Q regarding our future operating
results, performance, business plans or prospects and any other statements not constituting
historical fact are forward-looking statements subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. Where possible, words such as believe, expect,
anticipate, should, will, would, planned, estimated, potential, goal, outlook,
could, and similar expressions, are used to identify such forward-looking statements. All
forward-looking statements reflect only our current beliefs and assumptions with respect to our
future results, business plans and prospects, and are based solely on information currently
available to us. Accordingly, these statements are subject to significant risks and uncertainties
and our actual results, business plans and prospects could differ significantly from those
expressed in, or implied by, these statements. We caution readers not to place undue reliance on,
and we undertake no obligation to update, other than imposed by law, any forward-looking
statements. Such risks, uncertainties and contingencies include, but are not limited to,
statements about the continuing benefits of the merger between R.H. Donnelley Corporation (RHD)
and Dex Media, Inc. (Dex Media) (the Dex Media Merger), including future financial and
operating results, RHDs plans, objectives, expectations and intentions and other statements that
are not historical facts. The following factors, among others, could cause actual results to differ
from those set forth in the forward-looking statements: (1) the risk that the legacy Dex Media and
RHD businesses will not continue to be integrated successfully; (2) the risk that the expected
strategic advantages and remaining cost savings from the Dex Media Merger may not be fully realized
or may take longer to realize than expected; (3) disruption from the Dex Media Merger making it
more difficult to maintain relationships with customers, employees or suppliers; (4) our
significant indebtedness and the limitations placed upon us under the related debt agreements; (5)
the risk that the contemplated refinancings might not be completed in a timely manner, without
conditions, or at all; and (6) general economic conditions and consumer sentiment in our markets.
Additional risks and uncertainties are described in detail in Item 1A, Risk Factors of our Annual
Report on Form 10-K for the year ended December 31, 2007. 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 1,900 person sales force 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.
15
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
®
, Yahoo!
®
and MSN
®
, providing additional qualified leads
for our advertisers. Our 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 DexNet Internet Marketing services. The
DexNet 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 products and services, in turn, generates strong returns for
advertisers. This strong advertiser return uniquely positions RHD and its 1,900 person sales force
as trusted advisors for marketing support and service in the local markets we serve.
Recent Trends Related to Our Business
We have experienced a significant decline in our stock price during the latter part of 2007 and
into 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 has become increasingly uncertain. 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.
We also have been experiencing lower advertising sales primarily as a result of declines in
recurring business (renewal and increase to existing advertisers, collectively), mainly driven by
weaker housing trends, reduced consumer confidence and more cautious advertiser spending in our
markets given their perception of the economic health of their respective 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.
In response to these economic challenges facing the Company, we continue to actively manage
expenses and are analyzing 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.
As a result of the significant decline in the market value of the Companys debt and equity
securities, we recorded a non-cash goodwill impairment charge of $2.5 billion during the three
months ended March 31, 2008. This charge was calculated in accordance with SFAS No. 142,
Goodwill
and Other Intangible Assets
(SFAS No. 142), as further described in Results of Operations. The
charge had no impact on operating cash flow, compliance with debt covenants, tax attributes or
managements outlook for the business. We will continue to evaluate the value of our debt and
equity securities in accordance with SFAS No. 142 and SFAS No. 144,
Accounting for the Impairment
or Disposal of Long-Lived Assets
(SFAS No. 144).
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.
16
New Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (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,
Accounting for Derivative Instruments and Hedging Activities,
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 March 31, 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.
17
RESULTS OF OPERATIONS
Three months ended March 31, 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 months ended March
31, 2007 to conform to the current periods presentation. These reclassifications had no impact on
operating income or net income for the three months ended March 31, 2007. The table below
summarizes these reclassifications.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2007
|
|
|
As
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
(amounts in millions)
|
|
Reported
|
|
Reclass
|
|
Reclassified
|
|
Net revenues
|
|
$
|
662.8
|
|
|
$
|
(1.5
|
)
|
|
$
|
661.3
|
|
Production, publication and
distribution expenses
|
|
|
294.2
|
|
|
|
(179.6
|
)
|
|
|
114.6
|
|
Selling and support expenses
|
|
|
|
|
|
|
178.2
|
|
|
|
178.2
|
|
General and administrative
expenses
|
|
|
37.6
|
|
|
|
(0.1
|
)
|
|
|
37.5
|
|
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 months ended March 31, 2008 include the results of
Business.com, with no comparable results for the three months ended March 31, 2007.
Impact of Purchase Accounting
As a result of 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 $8.9 million and $8.1 million, respectively, for the three months ended March 31,
2007, with no comparable expense for the three months ended March 31, 2008.
18
Net Revenues
The components of our net revenues for the three months ended March 31, 2008 and 2007 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(amounts in millions)
|
|
2008
|
|
2007
|
|
$ Change
|
|
% Change
|
|
|
|
Gross directory advertising
revenues
|
|
$
|
676.8
|
|
|
$
|
668.6
|
|
|
$
|
8.2
|
|
|
|
1.2
|
%
|
Sales claims and allowances
|
|
|
(11.8
|
)
|
|
|
(18.2
|
)
|
|
|
6.4
|
|
|
|
35.2
|
|
|
|
|
Net directory advertising revenues
|
|
|
665.0
|
|
|
|
650.4
|
|
|
|
14.6
|
|
|
|
2.2
|
|
Other revenues
|
|
|
9.7
|
|
|
|
10.9
|
|
|
|
(1.2
|
)
|
|
|
(11.0
|
)
|
|
|
|
Total
|
|
$
|
674.7
|
|
|
$
|
661.3
|
|
|
$
|
13.4
|
|
|
|
2.0
|
%
|
|
|
|
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 the advertisement pricing and the introduction of new products. 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, whereby revenues are initially deferred when
a directory is published and recognized ratably over the directorys life, which is typically 12
months. 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.
Gross directory advertising revenues for the three months ended March 31, 2008 increased $8.2
million, or 1.2%, from the three months ended March 31, 2007. The increase in gross directory
advertising revenues for the three months ended March 31, 2008 is primarily due to revenues from
Business.com, with no comparable revenues for the three months ended March 31, 2007. The increase
in gross directory advertising revenues is also attributable to increased revenues from our online
products and services in all of our markets. These increases are partially offset by declines in
print revenues primarily as a result of declines in recurring
business, mainly driven by weaker housing trends, reduced consumer confidence and more cautious
advertiser spending in our markets given their perception of the
economic health of their respective markets.
Sales claims and allowances for the three months ended March 31, 2008 decreased $6.4 million, or
35.2%, from the three months ended March 31, 2007. The decrease in sales claims and allowances for
the three months ended March 31, 2008 is primarily due to improved quality and lower claims
experience in our Qwest markets of $7.2 million.
Other revenues for the three months ended March 31, 2008 decreased $1.2 million, or 11.0%, from the
three months ended March 31, 2007. 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. The decrease in other revenues for the three months ended March 31,
2008 is primarily a result of declines in barter revenues and certain other advertising-related
products in our Qwest markets of $1.0 million.
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 months ended March 31, 2008 were $717.6
million, compared to $754.0 million for the three months ended March 31, 2007. Advertising sales
for the three months ended March 31, 2007 include $13.3 million of advertising sales assuming the
Business.com Acquisition occurred on January 1, 2007. The $36.4 million, or 4.8%, decrease in
advertising sales for the three months ended March 31, 2008 is a result of declines in recurring
business, mainly driven by weaker housing trends, reduced consumer confidence and more cautious
advertiser spending in our markets given their perception of the
economic health of their respective markets. These declines are
partially offset by increases in our new online products and
services and Business.com advertising sales.
19
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, whereby revenues
are initially deferred when a directory is published and recognized ratably over the directorys
life, which is typically 12 months. 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.
Expenses
The components of our total expenses for the three months ended March 31, 2008 and 2007 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(amounts in millions)
|
|
2008
|
|
2007
|
|
$ Change
|
|
% Change
|
|
|
|
Production, publication and
distribution expenses
|
|
$
|
109.2
|
|
|
$
|
114.6
|
|
|
$
|
(5.4
|
)
|
|
|
(4.7
|
)%
|
Selling and support expenses
|
|
|
186.3
|
|
|
|
178.2
|
|
|
|
8.1
|
|
|
|
4.5
|
|
General and administrative expenses
|
|
|
34.9
|
|
|
|
37.5
|
|
|
|
(2.6
|
)
|
|
|
(6.9
|
)
|
Depreciation and amortization
|
|
|
118.3
|
|
|
|
103.0
|
|
|
|
15.3
|
|
|
|
14.9
|
|
Goodwill impairment
|
|
|
2,463.6
|
|
|
|
|
|
|
|
2,463.6
|
|
|
|
100.0
|
|
|
|
|
Total
|
|
$
|
2,912.3
|
|
|
$
|
433.3
|
|
|
$
|
2,479.0
|
|
|
|
572.1
|
%
|
|
|
|
Our expenses during the three months ended March 31, 2008 and 2007 include costs associated with
our Triple Play strategy, with focus on our online products and services, and our directory
publishing business with new product introductions in our Qwest, Embarq and AT&T markets. These
costs relate to the continued launch of our new Dex market brand and our new 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, employee training associated with new product introductions and
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 months ended March 31, 2008
were $109.2 million compared to $114.6 million for the three months ended March 31, 2007. The
primary components of the $5.4 million, or 4.7%, decrease in production, publication and
distribution expenses were as follows:
|
|
|
|
|
(amounts in millions)
|
|
$ Change
|
|
|
Increased internet production and distribution costs
|
|
$
|
8.6
|
|
Decreased cost uplift expense
|
|
|
(8.9
|
)
|
Decreased information technology (IT) expenses
|
|
|
(3.6
|
)
|
Decreased print, paper and distribution costs
|
|
|
(2.9
|
)
|
All other, net
|
|
|
1.4
|
|
|
|
|
|
Total decrease in
production, publication
and distribution expenses
for the three months
ended March 31, 2008
|
|
$
|
(5.4
|
)
|
|
|
|
|
20
During the three months ended March 31, 2008, we incurred $8.6 million of additional expenses
related to internet production and distribution due to additional expenses from Business.com, with
no comparable expenses for the three months ended March 31, 2007, and increased operations,
distribution and clicks costs associated with increased revenues from our online products and
services.
Amortization of cost uplift during the three months ended March 31, 2007 totaled $8.9 million, with
no comparable expense for the three months ended March 31, 2008.
During the three months ended March 31, 2008, IT expenses declined $3.6 million, compared to the
three months ended March 31, 2007, primarily due to 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, and enhancements and technical support of multiple production systems as we continue
to integrate to a consolidated IT platform.
During the three months ended March 31, 2008, print, paper and distribution costs declined $2.9
million, compared to the three months ended March 31, 2007. This decline is primarily due to our
print product optimization program and negotiated price reductions in
our print expenses.
Selling and Support Expenses
Total selling and support expenses for the three months ended March 31, 2008 were $186.3 million,
compared to $178.2 million reported for the three months ended March 31, 2007. The primary
components of the $8.1 million, or 4.5%, increase in selling and support expenses were as follows:
|
|
|
|
|
|
|
|
|
(amounts in millions)
|
|
$ Change
|
|
|
Increased advertising and branding expenses
|
|
$
|
9.1
|
|
Increased bad debt expense
|
|
|
8.8
|
|
Decreased cost uplift expense
|
|
|
(8.1
|
)
|
All other, net
|
|
|
(1.7
|
)
|
|
|
|
|
Total increase in selling and support
expenses for the three months ended
March 31, 2008
|
|
$
|
8.1
|
|
|
|
|
|
During the three months ended March 31, 2008, we incurred $9.1 million of additional advertising
and branding expenses as compared to the three months ended March 31, 2007. Advertising expense for
the three months ended March 31, 2008 includes $8.0 million of costs associated with traffic
purchased and distributed to multiple advertiser landing pages, with no comparable expense for the
prior corresponding period. The remaining increase in advertising and branding expenses relates to
costs incurred to promote our Triple Play strategy, our Dex brand name for all of our print and
online products, as well as the use of DexKnows.com as our new URL across our entire footprint.
During the three months ended March 31, 2008, bad debt expense increased $8.8 million, compared to
the three months ended March 31, 2007, primarily due to higher provision rates, deterioration in
accounts receivable aging categories and write-offs, which have been driven by weaker housing
trends, reduced consumer confidence and more cautious advertiser spending in our markets given their perception of the
economic health of their respective markets.
Amortization of cost uplift during the three months ended March 31, 2007 totaled $8.1 million, with
no comparable expense for the three months ended March 31, 2008.
21
General and Administrative Expenses
General and administrative (G&A) expenses for the three months ended March 31, 2008 were $34.9
million compared to $37.5 million for the three months ended March 31, 2007. The primary components
of the $2.6 million, or 6.9%, decrease in G&A expenses were as follows:
|
|
|
|
|
|
|
|
|
(amounts in millions)
|
|
$ Change
|
|
|
Decrease in non-cash stock-based compensation expense under SFAS No. 123 (R)
|
|
$
|
(3.7
|
)
|
Decrease in IT expenses
|
|
|
(1.3
|
)
|
All other, net
|
|
|
2.4
|
|
|
|
|
|
Total decrease in G&A expenses for the three months ended March 31, 2008
|
|
$
|
(2.6
|
)
|
|
|
|
|
During the three months ended March 31, 2008, non-cash stock-based compensation expense under SFAS
No. 123 (R) declined $3.7 million, compared to the three months ended March 31, 2007, primarily due
to additional expense related to vesting of awards granted to retirement or early retirement
eligible employees during the three months ended March 31, 2007.
During the three months ended March 31, 2008, IT expenses declined $1.3 million, compared to the
three months ended March 31, 2007, primarily due to 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, and enhancements and technical support of multiple production systems as we continue
to integrate to a consolidated IT platform.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended March 31, 2008 was $118.3 million
compared to $103.0 million for the three months ended March 31, 2007. Amortization of intangible
assets was $104.0 million for the three months ended March 31, 2008 compared to $89.8 million for
the three months ended March 31, 2007. The increase in amortization expense for the three months
ended March 31, 2008 is primarily 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, and amortization of intangible assets acquired in the
Business.com Acquisition of $4.9 million.
Depreciation of fixed assets and amortization of computer software was $14.3 million for the three
months ended March 31, 2008 compared to $13.2 million for the three months ended March 31, 2007.
The increase in depreciation expense for the three months ended March 31, 2008 was primarily due to
recognizing depreciation expense related to capital projects placed in service during 2007.
Goodwill Impairment
As a result of the decline in the trading value of our debt and equity securities during the three
months ended March 31, 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.
The impairment test of our definite-lived intangible assets was performed by comparing the carrying
amount of our intangible 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. Our
testing results of our definite-lived intangible assets indicated no impairment as of March 31,
2008. No impairment losses were recorded related to our definite-lived intangible assets during the
three months ended March 31, 2008 and 2007.
22
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.
No impairment losses were recorded related to our goodwill during the three months ended March 31,
2007.
If the trading value of our debt and equity securities further declines, we will be required to
again assess the fair values of the assets and liabilities of the Company and could conclude that
goodwill and other long-lived assets are further impaired, which would result in additional
impairment charges. In addition, if economic conditions in certain of our markets do not improve,
we will be required to assess the recoverability of other intangible assets, which could result in
additional impairment charges.
Operating (Loss) Income
Operating (loss) income for the three months ended March 31, 2008 and 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(amounts in millions)
|
|
2008
|
|
2007
|
|
$ Change
|
|
|
|
Total
|
|
$
|
(2,237.6
|
)
|
|
$
|
228.0
|
|
|
$
|
(2,465.6
|
)
|
|
|
|
Operating loss for the three months ended March 31, 2008 of $2.2 billion compares to operating
income of $228.0 million for the three months ended March 31, 2007. The change to operating loss
for the three months ended March 31, 2008 from operating income for the three months ended March
31, 2007 is primarily due to the non-cash goodwill impairment charge noted above as well as the
revenue and expense trends described above.
Interest Expense, Net
Net interest expense for the three months ended March 31, 2008 was $195.9 million compared to
$201.6 million for the three months ended March 31, 2007, and includes $5.4 million and $6.8
million, respectively, of non-cash amortization of deferred financing costs. The decrease in net
interest expense of $5.7 million, or 2.8%, for the three months ended March 31, 2008 is primarily
due to lower interest rates associated with the Companys refinancing transactions conducted during
the fourth quarter of 2007, as well as lower interest rates on our variable rate debt during the
period. 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 $4.3 million and $7.6 million
for the three months ended March 31, 2008 and 2007, respectively. The decline in the amortization
of the fair value adjustment for the three months ended March 31, 2008 is directly attributable to
the Companys refinancing transactions conducted during the fourth quarter of 2007.
23
Income Taxes
The effective tax rate on loss before income taxes of 33.3% for the three months ended March 31,
2008 compares to an effective tax rate of 39.5% on income before income taxes for the three months
ended March 31, 2007. As a result of the non-cash goodwill impairment charge of $2.5 billion
recorded during the three months ended March 31, 2008, we recognized a decrease in our deferred tax
liability of $825.1 million, which directly impacted our deferred tax benefit. The change in the
effective tax rate for the three months ended March 31, 2008 is primarily due to the tax
consequences of the non-cash goodwill impairment charge. The change in the effective tax rate is
also attributable to the refinancing transactions conducted during the fourth quarter of 2007,
which shifted interest expense to our subsidiaries with lower state income tax rates, and an
increase in our valuation allowance related to certain 2008 state tax losses.
Net (Loss) Income and (Loss) Earnings Per Share
Net loss for the three months ended March 31, 2008 of $1.6 billion compares to net income of $16.0
million for the three months ended March 31, 2007. The change to net loss for the three months
ended March 31, 2008 from net income for the three months ended March 31, 2007 is primarily due to
the non-cash goodwill impairment charge noted above as well as the revenue and expense trends
described above.
We account for (loss) earnings 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 (loss) income 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 March 31, 2008, basic EPS was $(23.60), compared to basic EPS of $0.23 for
the three months ended March 31, 2007. For the three months ended March 31, 2008, diluted EPS was
$(23.60), compared to diluted EPS of $0.22 for the three months ended March 31, 2007. Due to the
fact that there was a reported net loss for the three months ended March 31, 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 three
months ended March 31, 2008.
24
LIQUIDITY AND CAPITAL RESOURCES
Long-term debt of the Company at March 31, 2008 and December 31, 2007, including fair value
adjustments required by GAAP as a result of the Dex Media Merger, consisted of the following:
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
March 31, 2008
|
|
December 31, 2007
|
|
RHD
|
|
|
|
|
|
|
|
|
6.875% Senior Notes due 2013
|
|
$
|
300,000
|
|
|
$
|
300,000
|
6.875% Series A-1 Senior Discount Notes due 2013
|
|
|
340,211
|
|
|
|
339,222
|
6.875% Series A-2 Senior Discount Notes due 2013
|
|
|
615,438
|
|
|
|
613,649
|
8.875% Series A-3 Senior Notes due 2016
|
|
|
1,210,000
|
|
|
|
1,210,000
|
8.875% Series A-4 Senior Notes due 2017
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
R.H. Donnelley Inc. (RHDI)
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,507,648
|
|
|
|
1,571,536
|
|
|
|
|
|
|
|
|
|
Dex Media, Inc.
|
|
|
|
|
|
|
|
|
8% Senior Notes due 2013
|
|
|
511,686
|
|
|
|
512,097
|
9% Senior Discount Notes due 2013
|
|
|
733,824
|
|
|
|
719,112
|
|
|
|
|
|
|
|
|
|
Dex Media East
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,101,900
|
|
|
|
1,106,050
|
|
|
|
|
|
|
|
|
|
Dex Media West
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,031,061
|
|
|
|
1,071,491
|
8.5% Senior Notes due 2010
|
|
|
397,554
|
|
|
|
398,736
|
5.875% Senior Notes due 2011
|
|
|
8,770
|
|
|
|
8,774
|
9.875% Senior Subordinated Notes due 2013
|
|
|
822,754
|
|
|
|
824,982
|
|
|
|
Total RHD Consolidated
|
|
|
10,080,846
|
|
|
|
10,175,649
|
Less current portion
|
|
|
186,343
|
|
|
|
177,175
|
|
|
|
Long-term debt
|
|
$
|
9,894,503
|
|
|
$
|
9,998,474
|
|
|
|
Credit Facilities
At March 31, 2008, total outstanding debt under our credit facilities was $3,640.6 million,
comprised of $1,507.6 million under the RHDI credit facility, $1,101.9 million under the Dex Media
East credit facility and $1,031.1 million under the Dex Media West credit facility.
RHDI
As of March 31, 2008, outstanding balances under RHDIs senior secured credit facility, as amended
and restated (RHDI Credit Facility), totaled $1,507.6 million, comprised of $301.2 million under
Term Loan D-1 and $1,206.4 million under Term Loan D-2 and no amount was outstanding under the
$175.0 million Revolving Credit Facility (the RHDI Revolver) (with an additional $0.3 million
utilized under a standby letter of credit). All Term Loans require quarterly principal and interest
payments. The RHDI Credit Facility provides for a new 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. The RHDI Revolver matures in December 2009 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 4.39% and 6.50% at March 31, 2008 and December 31, 2007, respectively.
On May 8, 2008, we announced our intention to amend the RHDI Credit Facility. See Proposed
Refinancing below for additional information.
25
Dex Media East
As of March 31, 2008, outstanding balances under the Dex Media East credit facility totaled
$1,101.9 million, comprised of $700.0 million under Term Loan A and $400.0 million under Term Loan
B and $1.9 million was outstanding under the $100.0 million revolving loan facility (Dex Media
East Revolver) (with an additional $3.0 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 4.75% and 6.87% at March 31, 2008 and December 31, 2007, respectively.
Dex Media West
As of March 31, 2008, outstanding balances under the Dex Media West credit facility totaled
$1,031.1 million, comprised of $135.8 million under Term Loan A, $307.1 million under Term Loan
B-1, and $583.1 million under Term Loan B-2 and $5.1 million was outstanding under the $100.0
million revolving loan facility (Dex Media West Revolver). The Term Loan A and Dex Media West
Revolver will mature in September 2009 and the Term Loan B-1 and Term Loan B-2 will mature in March
2010. The weighted average interest rate of outstanding debt under the Dex Media West credit
facility was 4.49% and 6.51% at March 31, 2008 and December 31, 2007, respectively.
On May 8, 2008, we announced our intention to refinance the Dex Media West credit facility. See
Proposed Refinancing below for additional information.
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 $4.3
million and $7.6 million for the three months ended March 31, 2008 and 2007, respectively. As of
March 31, 2008, $99.5 million of the fair value adjustment remains unamortized as shown in the
following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
|
|
|
|
|
|
|
|
|
|
|
Debt at March
|
|
|
Unamortized
|
|
Long-
|
|
31, 2008
|
|
|
Fair Value
|
|
Term
|
|
Excluding
|
|
|
Adjustment at
|
|
Debt at
|
|
Unamortized
|
|
|
March 31,
|
|
March 31,
|
|
Fair Value
|
(amounts in millions)
|
|
2008
|
|
2008
|
|
Adjustment
|
|
Dex Media, Inc. 8% Senior Notes
|
|
$
|
11.7
|
|
|
$
|
511.7
|
|
|
$
|
500.0
|
|
Dex Media, Inc. 9% Senior Discount Notes
|
|
|
14.1
|
|
|
|
733.8
|
|
|
|
719.7
|
|
Dex Media West 8.5% Senior Notes
|
|
|
12.5
|
|
|
|
397.6
|
|
|
|
385.1
|
|
Dex Media West 5.875% Senior Notes
|
|
|
0.1
|
|
|
|
8.8
|
|
|
|
8.7
|
|
Dex Media West 9.875% Senior Subordinated Notes
|
|
|
61.1
|
|
|
|
822.8
|
|
|
|
761.7
|
|
|
|
|
Total Dex Media Outstanding Debt at January
31, 2006
|
|
$
|
99.5
|
|
|
$
|
2,474.7
|
|
|
$
|
2,375.2
|
|
|
|
|
26
Proposed
Refinancings
We have
launched a series of refinancings that we expect will reduce
near-term mandatory debt repayments, extend our maturity profile and
reduce debt levels. These refinancings include, without limitation,
amendments to the RHDI Credit Facility and the Dex Media West credit
facility. We expect to incur additional interest expense in
connection with the proposed refinancings. We cannot assure that any
such refinancings will be completed in a timely manner, without
conditions or at all.
RHDI
RHD
intends to amend the RHDI Credit Facility in order to, among other
things, provide additional covenant flexibility and extend the maturity date of the RHDI Revolver to June 2011.
Dex Media West
Dex Media West intends to refinance its credit facility. The new Dex Media West credit facility is
presently contemplated to consist of a $140.0 million Term Loan A maturing in October 2013, a
$950.0 million Term Loan B maturing in October 2014 and a $100.0 million revolving credit facility
maturing in October 2013. The new Dex Media West credit facility is presently contemplated to
include a $400.0 million uncommitted incremental facility that may be incurred as additional
revolving loans or additional term loans. The proceeds from the new Dex Media West credit facility
is expected to be used to refinance the existing Dex Media West credit facility and pay related
fees and expenses. We cannot assure you that the covenants and other features of the new
Dex Media West credit facility will be as favorable as the corresponding terms of the current Dex
Media West credit facility.
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. 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 months. Further, assuming we successfully complete
the Dex Media West credit facility refinancing, 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 24 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. 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.
Primarily as a result of our business combinations, we have a significant amount of debt.
Aggregate outstanding debt as of March 31, 2008 was $10.1 billion (including fair value adjustments
required by GAAP as a result of the Dex Media Merger).
During the three months ended March 31, 2008, we made scheduled principal payments of $31.4 million
and prepaid an additional $60.0 million in principal under our credit facilities, which resulted in
total credit facility repayments of $91.4 million excluding revolver payments. During the three
months ended March 31, 2008, we made revolver payments of $232.4 million offset by revolver
borrowings of $215.3 million resulting in a net decrease of $17.1 million of the revolver portions
under the Companys credit facilities.
For the three months ended March 31, 2008, we made aggregate cash interest payments of $214.3
million. At March 31, 2008, we had $29.9 million of cash and cash equivalents before checks not yet
presented for payment of $14.9 million, and combined available borrowings under our revolvers of
$364.7 million. During the three months ended March 31, 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.
27
Cash provided by operating activities was $99.9 million for the three months ended March 31, 2008.
Key contributors to operating cash flow include the following:
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$(1,623.1) million in net loss, which includes the impact of the non-cash goodwill
impairment charge.
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$1,651.5 million of net non-cash items consisting of the non-cash goodwill impairment
charge of $2,463.6 million, offset by $(812.1) million in deferred income taxes, which
includes the tax impact of the non-cash goodwill impairment charge.
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$150.5 million of other net non-cash items primarily consisting of $118.3 million of
depreciation and amortization, $29.8 million in bad debt provision and $10.8 million of
stock-based compensation expense, partially offset by $(8.4) million in other non-cash
items, 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, which reduced interest expense.
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$39.3 million net use of cash from an increase in accounts receivable of $65.7
million due to an increase in days outstanding of customer balances and deterioration in
accounts receivable aging categories, which has been driven by weaker economic
conditions, as well as publication cycle seasonality, offset by an increase in deferred
directory revenues of $26.4 million. 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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$21.6 million net source of cash from a decrease in other assets, primarily
consisting of a $34.3 million decrease in prepaid directory costs resulting from
publication seasonality, offset by a $12.7 million increase 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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$52.9 million net use of cash from a decrease in accounts payable and accrued
liabilities, primarily reflecting a $41.9 million decrease in accrued interest payable
on outstanding debt resulting from interest payments of $247.8 million, partially offset
by $205.9 million in accruals during the period, and a $41.0 million decrease in trade
accounts payable resulting from timing of invoice processing versus payment thereon,
offset by a $30.0 million increase in accrued liabilities, which include accrued
salaries and related bonuses and accrued income taxes.
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$8.4 million decrease in other non-current liabilities, including pension and
postretirement long-term liabilities.
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Cash used in investing activities for the three months ended March 31, 2008 was $5.8 million and
includes the following:
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$10.1 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 three months ended March 31, 2008 was $110.3 million and
includes the following:
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$91.4 million in principal payments on term loans under our credit facilities. Of
this amount, $31.4 million represents scheduled principal payments and $60.0 million
represents principal payments made on an accelerated basis, at our option, from
available cash flow generated from operations.
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$215.3 million in borrowings under our revolvers, used primarily to fund temporary
working capital requirements.
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$232.4 million in principal payments on our revolvers.
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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 had not settled as of December 31, 2007.
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$4.2 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 $143.8 million for the three months ended March 31, 2007.
Key contributors to operating cash flow include the following:
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$16.0 million in net income.
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$159.5 million of net non-cash charges primarily consisting of $103.0 million of
depreciation and amortization, $21.0 million in bad debt provision, $13.9 million of
stock-based compensation expense and $11.4 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 $10.2
million in deferred income taxes.
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$15.0 million net use of cash from an increase in accounts receivable of $58.1
million offset by an increase in deferred directory revenues of $43.1 million. 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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$31.5 million net source of cash from an decrease in other assets, consisting of a
$35.4 million decrease in prepaid expenses and other current assets, offset by a $3.9
million increase in other non-current assets, primarily relating to changes in the fair
value of the Companys interest rate swap agreements.
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$56.4 million net use of cash from a decrease in accounts payable and accrued
liabilities, primarily reflecting a $29.7 million decrease in accrued liabilities,
including accrued salaries and related bonuses, and a $32.6 million decrease in accrued
interest payable on outstanding debt, offset by a $5.9 million increase in trade
accounts payable.
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$8.2 million net source of cash from an increase in other non-current liabilities,
including pension and postretirement long-term liabilities.
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Cash used in investing activities for the three months ended March 31, 2007 was $15.6 million and
includes the following:
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$13.1 million used to purchase fixed assets, primarily computer equipment, software
and leasehold improvements.
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$2.5 million used to fund an equity investment.
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Cash used in financing activities for the three months ended March 31, 2007 was $209.7 million and
includes the following:
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$419.9 million in principal payments on debt borrowed under each of the credit
facilities. Of this amount, $73.5 million represents scheduled principal payments,
$120.0 million represents principal payments made on an accelerated basis, at our
option, from excess cash flow generated from operations and $226.4 million represents
principal payments on the revolvers.
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$207.3 million source in borrowings under the revolvers.
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$9.1 million in proceeds from the exercise of employee stock options.
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$6.2 million in the decreased balance of checks not yet presented for payment.
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Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk and Risk Management
The RHDI Credit Facility and the Dex Media West and Dex Media East credit facilities bear interest
at variable rates and, accordingly, our earnings and cash flow are affected by changes in interest
rates. The RHDI Credit Facility requires that we maintain hedge agreements to provide either a
fixed interest rate or interest rate protection on at least 50% of RHDIs total outstanding debt.
The Dex Media West and Dex Media East 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 $2.7
billion or 73% of the Companys variable rate debt to fixed rate debt as of March 31, 2008. At
March 31, 2008, approximately 36% 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 90% of our total debt portfolio as of March 31, 2008.
The interest rate swaps mature at varying dates from May 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 three months ended March 31, 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.
Interest rate swaps with a notional value of $2.7 billion have been designated as cash flow hedges
and provided an effective hedge of the three-month LIBOR-based interest payments on $2.7 billion of
bank debt.
Certain interest rate swaps acquired as a result of the Dex Media Merger with a notional amount of
$125.0 million remained undesignated as cash flow hedges at March 31, 2007. For the three months
ended March 31, 2007, the Company recorded additional interest expense of $0.4 million as a result
of the change in fair value of the acquired undesignated interest rate swaps. All undesignated
interest rate swaps acquired as a result of the Dex Media Merger were settled as of December 31,
2007.
31
Market Risk Sensitive Instruments
The Company utilizes a combination of fixed-rate and variable-rate debt to finance its operations.
The variable-rate debt exposes the Company to variability in interest payments due to changes in
interest rates. Management believes that it is prudent to mitigate the interest rate risk on a
portion of its variable-rate borrowings. To satisfy this objective, the Company has entered into
fixed interest rate swap agreements to manage fluctuations in cash flows resulting from changes in
interest rates on variable-rate debt. Certain interest rate swap agreements have been designated as
cash flow hedges. In accordance with the provisions of SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities
(SFAS No. 133)
,
as amended by SFAS No. 138,
Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FAS 133
and SFAS No.
149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities
, the swaps are
recorded at fair value. On a quarterly basis, the fair values of the swaps are determined based on
quoted market prices and, assuming effectiveness, the differences between the fair value and the
book value of the swaps are recognized in accumulated other comprehensive loss, a component of
shareholders equity. The swaps and the hedged item (three-month LIBOR-based interest payments on
$2.7 billion of bank debt) have been designed so that the critical terms (interest reset dates,
duration and index) coincide. Assuming the critical terms continue to coincide, the cash flows from
the swaps will exactly offset the cash flows of the hedged item and no ineffectiveness will exist.
For derivative instruments that are not designated or do not qualify as hedged transactions, the
initial fair value, if any, and any subsequent gains or losses on the change in the fair value are
reported in earnings as a component of interest expense.
Item 4.
Controls and Procedures
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(a)
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Evaluation of Disclosure Controls and Procedures.
Based on their
evaluation, as of the end of the period covered by this Quarterly
Report on Form 10-Q, of the effectiveness of the Companys disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) the principal executive
officer and principal financial officer of the Company have each
concluded that such disclosure controls and procedures are effective
and sufficient to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commissions rules and forms.
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(b)
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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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32
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.
Item 1A. Risk Factors
The three
risk factors presented below replace and supersede risk factors
numbered 3, 5 and 9,
respectively, set forth in our Annual Report on Form 10-K for the fiscal year ended December 31,
2007 (2007 Form 10-K). 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 in the first quarter of 2008 and we
expect this trend to continue throughout 2008.
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.
33
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, sometimes larger
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.
34
5) Recognition of impairment charges for our intangible assets or goodwill
At March 31, 2008, the net carrying value of our intangible assets totaled approximately $11.1
billion and the net carrying value of our goodwill totaled
approximately $660.2 million. Our
intangible assets are subject to impairment testing in accordance with SFAS No. 144,
Accounting for
the Impairment or Disposal of Long-lived Assets
, and our goodwill is subject to impairment tests in
accordance with SFAS No. 142,
Goodwill and Other Intangible Assets
. We review the carrying value of
our intangible assets and goodwill 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 mergers and acquisitions could result in an impairment charge for
any of our intangible assets, goodwill or other long-lived assets.
As a result of the decline in the trading value of our debt and equity securities during the three
months ended March 31, 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.
If the
trading value of our debt and equity securities further declines, we will be required to
again assess the fair values of our assets and liabilities and could conclude that goodwill and other
long-lived assets are further impaired, which would result in additional impairment charges. In addition,
if economic conditions in certain markets do not improve, we will be required to assess the
recoverability of other intangible assets, which could result in additional impairment charges.
Any additional impairment charge related to our intangible assets,
goodwill 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.
35
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.
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Item 6.
Exhibits
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Exhibit No.
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Document
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31.1*
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Certification of Quarterly Report on Form 10-Q for the period
ended March 31, 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 March 31, 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 March 31, 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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37
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: May 8, 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
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(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
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(Principal Accounting Officer)
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38
Exhibit Index
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Exhibit No.
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Document
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31.1*
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Certification of Quarterly Report on Form 10-Q for the period ended
March 31, 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
March 31, 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
March 31, 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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39