UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
Annual Report
Pursuant
to Sections 13 or 15(d) of
the Securities Exchange Act of 1934
|
|
|
(Mark one)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal year ended
December 31, 2007
|
or
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period
from to
|
Commission file number
001-07155
R.H. Donnelley
Corporation
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
|
|
13-2740040
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer Identification
No.)
|
1001 Winstead Drive, Cary, N.C.
|
|
27513
|
(Address of principal executive
offices)
|
|
(Zip Code)
|
Registrants telephone number, including area code
(919) 297-1600
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of class
|
|
Name of exchange on which registered
|
Common Stock, par value $1 per share
|
|
New York Stock Exchange
|
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
o
No
þ
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Securities
Act. Yes
o
No
þ
Indicate by check mark whether the Registrant: (1) has
filed all reports required to be filed by Sections 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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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 definition of
accelerated filer, large accelerated filer,
non-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
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes
o
No
þ
The aggregate market value at June 30, 2007, the last day
of our most recently completed second quarter, of shares of the
Registrants common stock (based upon the closing price per
share of $75.78 of such stock on The New York Stock Exchange on
such date) held by non-affiliates of the Registrant was
approximately $5,371,082,476. At June 30, 2007, there were
71,073,662 outstanding shares of the Registrants common
stock. For purposes of this calculation, only those shares held
by directors and executive officers of the Registrant have been
excluded as held by affiliates. Such exclusion should not be
deemed a determination or an admission by the Registrant or any
such person that such individuals or entities are or were, in
fact, affiliates of the Registrant. At February 26, 2008,
there were 68,767,348 outstanding shares of the
Registrants common stock.
Documents
Incorporated By Reference
|
|
|
|
|
|
|
Part III
|
|
|
|
|
|
|
Item 10
|
|
|
Directors, Executive Officers and Corporate Governance
|
|
|
Information responsive to this Item can be found under the
captions Board of Directors and Other
Information Section 16(a) Beneficial Ownership
Reporting Compliance in the Companys Proxy Statement
to be filed with the Commission on or prior to April 29,
2008.
|
Item 11
|
|
|
Executive Compensation
|
|
|
Information responsive to this Item can be found under the
caption Director and Executive Compensation in the
Companys Proxy Statement to be filed with the Commission
on or prior to April 29, 2008.
|
Item 12
|
|
|
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
|
|
|
Information responsive to this Item can be found under the
captions Director and Executive Compensation
Equity Plan Compensation Information and Security
Ownership of Certain Beneficial Owners and Management in
the Companys Proxy Statement to be filed with the
Commission on or prior to April 29, 2008.
|
Item 13
|
|
|
Certain Relationships and Related Transactions and Director
Independence
|
|
|
Information responsive to this Item can be found under the
captions Board of Directors Corporate
Governance Matters and Independence and
Financial Expertise Determinations and Director and
Executive Compensation Compensation Committee
Interlocks and Insider Participation; Certain Relationships and
Related Party Transactions in the Companys Proxy
Statement to be filed with the Commission on or prior to
April 29, 2008.
|
Item 14
|
|
|
Principal Accountant Fees and Services
|
|
|
Information responsive to this Item can be found under the
caption Board of Directors Committees of the
Board of Directors Audit and Finance Committee
and Report of the Audit and Finance
Committee Fees in the Companys
Proxy Statement to be filed with the Commission on or prior to
April 29, 2008.
|
|
|
|
|
|
|
|
PART I
General
Except where otherwise indicated, the terms Company,
Donnelley, RHD, we,
us and our refer to R.H. Donnelley
Corporation and its direct and indirect wholly-owned
subsidiaries. As of December 31, 2007, R.H. Donnelley Inc.
(RHDI or RHD Inc.), Dex Media, Inc.
(Dex Media), Business.com, Inc.
(Business.com) and Local Launch, Inc. (Local
Launch) were our only direct wholly-owned subsidiaries.
Effective January 1, 2008, Local Launch was merged with and
into Business.com. Our executive offices are located at 1001
Winstead Drive, Cary, North Carolina 27513 and our telephone
number is
(919) 297-1600.
Our Internet Website address is
www.rhd.com
. We make
available free of charge on our Website our annual, quarterly
and current reports, including amendments to such reports, as
soon as practicable after we electronically file such material
with, or furnish such material to, the United States Securities
and Exchange Commission (SEC). Our filings can also
be obtained from the SEC Website at
www.sec.gov
. However,
the information found on our Website or the SEC Website is not
part of this annual report.
RHD was formed on February 6, 1973 as a Delaware
corporation. In November 1996, the Company then known as The
Dun & Bradstreet Corporation separated through a
spin-off into three separate public companies: The Dun and
Bradstreet Corporation, ACNielsen Corporation, and Cognizant
Corporation. In June 1998, The Dun & Bradstreet
Corporation separated through a spin-off into two separate
public companies: R.H. Donnelley Corporation (formerly The
Dun & Bradstreet Corporation) and a new company that
changed its name to The Dun & Bradstreet Corporation
(D&B).
Corporate
Overview
We are one of the nations largest Yellow Pages and online
local commercial search companies, based on revenue, 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.
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
1
search site DexKnows.com, and our DexNet Internet Marketing
services which include online profile creation for local
businesses and broad-based distribution across the Internet
through a network of Internet partners and relationships which
host our local business listings and content and through search
engine marketing (SEM) and search engine
optimization (SEO) services (collectively referred
to as Internet Marketing).
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.
Significant
Business Developments
Acquisition
On August 23, 2007, we acquired Business.com, a leading
business search engine and directory and performance based
advertising network, for a disclosed amount of
$345.0 million (the Business.com Acquisition).
The purchase price determined in accordance with generally
accepted accounting principles (GAAP) was
$334.4 million and excludes certain items such as the value
of unvested equity awards, which will be recorded as
compensation expense over their vesting period. The purpose of
the Business.com Acquisition was to expand our existing
interactive portfolio by adding leading Internet advertising
talent and technology, to strengthen RHDs position in the
expanding local commercial search market and to develop an
online performance based advertising network. Business.com also
provides the established
business-to-business
online properties of Business.com, Work.com and the Business.com
Advertising Network. We expect to adopt the Business.com
technology platform to serve our existing advertiser base at our
DexKnows.com Internet Yellow Pages site. Business.com now
operates as a direct, wholly-owned subsidiary of RHD. The
results of Business.com have been included in our consolidated
results commencing August 23, 2007.
Debt
Refinancing
On October 2, 2007, we issued $1.0 billion aggregate
principal amount of 8.875%
Series A-4
Senior Notes due 2017
(Series A-4
Notes). Proceeds from this issuance were (a) used to
repay a $328 million RHD credit facility (RHD Credit
Facility) used to fund the Business.com Acquisition,
(b) contributed to RHDI in order to provide funding for the
tender offer and consent solicitation of RHDIs
$600 million aggregate principal amount 10.875% Senior
Subordinated Notes due 2012 (RHDI Senior Subordinated
Notes) and (c) used to pay related fees and expenses
and for other general corporate purposes. On October 17,
2007, we issued an additional $500 million of our
Series A-4
Notes. Proceeds from this issuance were (a) transferred to
Dex Media East (defined below) in order to repay
$86.4 million and $213.6 million of the Term Loan A
and Term Loan B under the former Dex Media East credit facility,
respectively, (b) contributed to RHDI in order to repay
$91.8 million, $16.2 million and $83.0 million of
Term Loans
A-4,
D-1,
and
D-2
under
the RHDI Credit Facility, respectively, and (c) used to pay
related fees and expenses.
In October 2007, under the terms and conditions of a tender
offer and consent solicitation to purchase RHDIs
$600 million Senior Subordinated Notes that RHDI commenced
on September 18, 2007, $599.9 million, or 99.9%, of
the outstanding RHDI Senior Subordinated Notes were repurchased.
In December 2007, the remaining $0.1 million of RHDI Senior
Subordinated Notes were redeemed.
On October 24, 2007, we replaced the former Dex Media East
credit facility with a new Dex Media East credit facility,
consisting of a $700.0 million aggregate principal amount
Term Loan A facility, a $400.0 million aggregate principal
amount Term Loan B facility, a $100.0 million aggregate
principal amount revolving loan facility and a
$200.0 million aggregate principal amount uncommitted
incremental facility, in which Dex Media East would have the
right, subject to obtaining commitments for such incremental
loans, on one or more occasions to increase the Term Loan A,
Term Loan B or the revolving loan facility by such amount.
Proceeds from the new Dex Media East credit facility were used
on October 24, 2007 to repay the remaining
$56.5 million and $139.7 million of Term Loan A
and Term Loan B under the former Dex Media East credit
facility, respectively, and $32.5 million under the former
Dex Media East revolver. Proceeds from the new Dex Media East
credit facility were also used on November 26, 2007 to fund
the redemption of $449.7 million of
2
Dex Media Easts outstanding 9.875% senior notes due
2009 and $341.3 million of Dex Media Easts
outstanding 12.125% senior subordinated notes due 2012.
In December 2007, we redeemed RHDIs remaining
$7.9 million 8.875% Senior Notes due 2010 (RHDI
Senior Notes).
See Item 8, Financial Statements and Supplementary
Data Note 5,
Long-Term
Debt, Credit Facilities and Notes, for additional
information regarding these refinancing transactions.
Share
Repurchases
In November 2007, the Companys Board of Directors
authorized a $100.0 million stock repurchase plan
(Repurchase Plan). This authorization permits the
Company to purchase its shares of common stock in the open
market pursuant to
Rule 10b-18
of the Securities Exchange Act of 1934 or through block trades
or otherwise over the following twelve months, based on market
conditions and other factors, which purchases may be made or
suspended at any time. In accordance with the Repurchase Plan,
we repurchased 2.5 million shares at a cost of
$95.7 million during December 2007.
Historical
Overview
Beginning in 2003, we completed several acquisitions to be
become one of the largest Yellow Pages and online local
commercial search companies in the United States, based on
revenue. These acquisitions are summarized below. The operating
results from each acquisition have been included in our
consolidated operating results commencing on the date each
acquisition was completed. See Item 8, Financial
Statements and Supplementary Data Note 2,
Identifiable Intangible Assets and Goodwill and
Note 3, Acquisitions, for additional
information regarding these acquisitions.
On August 23, 2007, we acquired Business.com, a leading
business search engine and directory and performance based
advertising network.
On September 6, 2006, we acquired Local Launch (the
Local Launch Acquisition), a local search products,
platform and fulfillment provider. During the years ended
December 31, 2007 and 2006, the Local Launch business
operated as a direct wholly-owned subsidiary of RHD. Effective
January 1, 2008, Local Launch was merged with and into
Business.com. The products and services provided by Local Launch
will continue to be offered to our advertisers through
Business.com and the Local Launch brand and logo will continue
to be utilized for our Internet Marketing offerings.
On January 31, 2006, we acquired Dex Media (the Dex
Media Merger), the exclusive publisher of the
official yellow pages and white pages directories
for Qwest Communications International Inc. (Qwest)
where Qwest was the primary incumbent local exchange carrier
(ILEC) in November 2002. Dex Media is the indirect
parent of Dex Media East LLC (Dex Media East) and
Dex Media West LLC (Dex Media West). Dex Media East
operates our directory business in the following states:
Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota
and South Dakota (collectively, the Dex East
States). Dex Media West operates our directory business in
the following states: Arizona, Idaho, Montana, Oregon, Utah,
Washington and Wyoming (collectively, the Dex West
States and together with the Dex East States,
collectively, the Qwest States). The acquired
business of Dex Media and its subsidiaries (Dex Media
Business) now operates through Dex Media, Inc., one of
RHDs direct, wholly-owned subsidiaries.
On September 1, 2004, we completed the acquisition of the
directory publishing business (AT&T Directory
Business) of AT&T Inc. (formerly known as SBC
Communications, Inc., SBC) in Illinois and Northwest
Indiana, including AT&Ts interest in The
DonTech II Partnership (DonTech), a 50/50
general partnership between us and AT&T (collectively, the
AT&T Directory Acquisition). As a result of the
AT&T Directory Acquisition, we became the publisher of
AT&T branded yellow pages in Illinois and Northwest
Indiana. The acquired AT&T Directory Business now operates
as R. H. Donnelley Publishing and Advertising of Illinois
Partnership, one of our indirect, wholly-owned subsidiaries.
3
On January 3, 2003, we completed the acquisition of the
directory business (the Embarq Directory Business)
of Sprint Nextel Corporation (Sprint) (formerly
known as Sprint Corporation) by acquiring all the outstanding
capital stock of the various entities comprising Sprint
Publishing and Advertising (collectively, the Embarq
Acquisition). As a result, we are the publisher of Embarq
branded yellow pages directories in 18 states including
Nevada and Florida. The Embarq Directory Business now operates
as R.H. Donnelley Publishing and Advertising, Inc., one of our
indirect, wholly-owned subsidiaries.
The purposes of our acquisitions included the following:
|
|
|
|
|
Building RHD into a leading publisher of yellow pages
directories and provider of online commercial search services;
|
|
|
|
Adding leading Internet advertising talent and technology, to
strengthen RHDs position in the expanding local commercial
search market and to develop an online performance based
advertising network;
|
|
|
|
Enhancing our local Internet Marketing capabilities and
offerings.
|
These acquisitions were accounted for as purchase business
combinations and the purchase price for each acquisition was
allocated to the tangible and identifiable intangible assets
acquired and liabilities assumed based on their respective fair
values on each acquisition date. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 of this Annual Report on
Form 10-K
for more information regarding the financing and financial
implications of these acquisitions.
Prior to the Dex Media Merger, we were the sixth largest print
directory publisher in the United States, producing
384 directories in 19 states with an annual
distribution of more than 28 million directories.
Previously, all of our operations were conducted through RHD
Inc., which was then our only wholly-owned direct subsidiary.
Our advertiser base included approximately 260,000 local and
national advertisers with local businesses representing
approximately 85% of gross revenues. Our directory coverage
areas included a number of states with attractive demographics
and rapidly growing populations, including Florida, Nevada,
North Carolina and Virginia, as well as Illinois, including the
large metropolitan area of Chicago.
Prior to the Embarq Acquisition in January 2003, we were one of
the largest independent sales agents and pre-press vendors for
yellow pages advertising in the United States. Commencing in
2003 following the Embarq Acquisition, our operating and
financial results reflected our yellow pages publishing
business, rather than our former business as a sales agent and
pre-press vendor for yellow pages advertising on behalf of other
publishers. As a publisher, we report the full value of
advertising sales and certain direct costs under the deferral
and amortization method. DonTechs business remained
unchanged following the Embarq Acquisition, but our investment
in DonTech was eliminated in connection with the AT&T
Directory Acquisition on September 1, 2004. During 2003 and
in 2004 until the AT&T Directory Acquisition, we continued
to earn revenue from pre-press publishing and other ancillary
services related to the AT&T Directory Business and we
continued to report partnership income from our investment in
DonTech. As a result of the AT&T Directory Acquisition,
AT&T ceased paying us revenue participation income, we
began consolidating all net profits from DonTech and our DonTech
partnership investment was eliminated. Consequently, partnership
income was no longer reported commencing September 1, 2004
and accordingly, the previously reported DonTech operating
segment was no longer applicable.
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. See
Item 8, Financial Statements and Supplementary
Data Note 13, Business
Segments for additional information.
Business
Overview
During 2007, we published and distributed print directories that
provide comprehensive local information to consumers, enabling
them to efficiently search for and find products and services
offered by local
4
businesses. Our print advertising continues to offer a strong
return for advertisers, as ready to buy consumers across the
United States referred to the Yellow Pages approximately
13.4 billion times in 2006 according to the YPA Industry
Usage Study, resulting in a high conversion of advertising
impressions to actual transactions for our customers. Our
advertising customers enjoy this demonstrated value as they
receive a large volume of qualified leads from ready to buy
consumers. Consumers value our advertising products and services
as they can access comprehensive,
up-to-date
information for what they want to buy.
The directional advertising we provide with our print products
is complemented with our online products and services through
our Triple Play service offering. Our Triple Play integrated
marketing solutions suite encompasses an increasing number of
tools consumers use to find businesses that sell the products
and services they need: print Yellow Pages directories, our
proprietary DexKnows.com search site and the rest of the
Internet via Dex Search Marketing tools. Our online products and
services provide merchants with additional methods to connect
with consumers and businesses who are actively seeking to
purchase products and services using the Internet.
Products
and Services
In every market that we serve, we offer an integrated solution
of print and online products and services.
Print
Products
We publish both a white pages section and a yellow pages section
in our print directory products. Whenever practicable, we
combine the two sections into one directory. In large markets
where it is impractical to combine the two sections into one
volume, separate stand-alone white and yellow pages print
directories are normally published at about the same time.
These directories are designed to meet the advertising needs of
local and national businesses and the informational needs of
local consumers. The diversity of advertising options available
enables us to create customized advertising programs that are
responsive to specific advertiser needs and financial resources.
The yellow pages and white pages print directories are also
efficient sources of information for consumers, featuring a
comprehensive list of businesses in the local market that are
conveniently organized under thousands of directory headings.
We have three primary types of printed directories: core
directories, community directories and Plus companion
directories. Core directories generally cover large population
or regional areas, whereas community directories typically focus
on a sub-section of the areas addressed by corresponding core
directories. The Plus companion directory is a small format
directory used in addition to the core and community
directories. It is complementary to the core directory, with
replicated advertising from the core directory available for an
additional charge. These print directory advertising products
can be broken down into three basic categories: Yellow Pages,
White Pages and Specialty/Awareness Products. Additionally, we
offer Hispanic yellow pages in select markets, either on a
standalone basis or as a separate section in the core or
community directory.
Yellow
Pages
We offer businesses a basic listing at no charge in the relevant
edition of our yellow pages directories. This listing includes
the name, address and telephone number of the business and is
included in alphabetical order in the relevant classification.
A range of paid advertising options is available in our yellow
pages directories, as set forth below:
Listing options
Advertisers may enhance their
complimentary listing in several ways. They may pay to have a
listing highlighted or set in a bolder typeface, both of which
increase the visibility of the listing. Advertisers may also
purchase extra lines of text to convey information, such as
hours of operation or a more detailed description of their
business.
In-column
advertising options
For greater prominence on a
page, an advertiser may expand a basic alphabetical listing by
purchasing advertising space in the column in which the listing
appears. The cost of
5
in-column
advertising depends on the size and type of the advertisement
purchased.
In-column
advertisements may include such features as bolding, special
fonts, color, trademarks and graphics.
Display advertising options
A display
advertisement allows businesses to include a wide range of
information, illustrations, photographs and logos. The cost of
display advertisements depends on the size and type of the
advertisement purchased and the market. Display advertisements
are placed usually at the front of a classification, and are
ordered first by size and then by advertiser seniority. This
process of ordering provides a strong incentive for advertisers
to renew their advertising purchases from year to year and to
increase the size of their advertisements to ensure that their
advertisements continue to receive priority placement. Display
advertisements range in size from a quarter column to as large
as two pages, referred to as a double truck
advertisement. Display advertisers are offered various levels of
color including spot-four color, enhanced color, process photo
and high-impact.
White
Pages
State public utilities commissions require the local exchange
carriers (LEC) affiliated with us, Qwest, Embarq and
AT&T, to produce white pages directories to serve their
local service areas. Through the publishing agreements held by
us separately with Qwest, Embarq and AT&T, the LECs have
contracted with us to publish these directories for decades to
come. Our publishing agreements with Qwest and Embarq each run
through 2052 and our publishing agreement with AT&T runs
through 2054. By virtue of these agreements, we provide a white
pages listing to every residence and business in a given area
that sets forth the name, address and phone number of each
residence or business unless they have requested not to be
listed.
Advertising options in white pages include bolding and
highlighting for added visibility, extra lines for the inclusion
of supplemental information and
in-column
and display advertisements. In certain cases, the relevant LEC
can sell various forms of enhanced white pages listings.
Specialty/Awareness
Products
In addition to these primary products, we offer awareness
products which allow businesses to advertise in a variety
of high-visibility locations on or in a directory. Each
directory has a limited inventory of awareness products, which
provide high value to advertisers and are priced at a premium to
in-column
and display advertisements. Awareness products include placement
of customers advertising on the inside and outside of the front
and back cover, on tabs within the directory, on the edges of
the directory, on delivery bags and on card stock inserted in
the directory and delivery bags.
Online
Products and Services
The Internet continues to emerge as an attractive medium for
advertisers. Internet Yellow Pages references have increased as
a percentage of Yellow Pages references from 7% in 2003 to 14%
in 2007, according to The Kelsey Group. Additionally, online
Yellow Pages marketing is expected to grow at a compounded
average growth rate of 24% from 2007 to 2012, according to The
Kelsey Group.
To address this emerging trend, we complement our print
directory portfolio with the following online products and
services:
|
|
|
|
|
Internet Yellow Pages DexKnows.com;
|
|
|
|
Internet Marketing Dex Search Marketing;
|
|
|
|
Business Search Engine and directory and performance based
advertising Business.com,
Work.com
and the Business.com Advertising Network.
|
DexKnows.com
During 2007, we consolidated all of our IYP platforms onto
DexKnows.com to both generate scale efficiencies as well as
provide a consistent solution across our markets.
Advertisers content is placed on the DexKnows.com platform
through basic text listings and business profiles and through
sales of a variety of
6
Internet products, including enhanced business profiles,
e-mail
links, website link and video advertisements. In many cases,
print advertisers content is largely replicated to
DexKnows.com. In some of our markets, advertisers are able to
purchase priority inclusion products that include fully featured
listings and provide the opportunity to be ranked closer to the
top of search results pages.
We purchase information from other national databases to enhance
in-region
listings and supply
out-of-region
listings (although these
out-of-region
listings are not as comprehensive as our in-region information).
DexKnows.com includes approximately 16 million business
listings and more than 140 million residential listings
from across the United States. DexKnows.com was the number one
IYP site within the Qwest
14-state
region for the past 15 quarters, as measured by comScore, a
market research firm.
DexKnows.com allows the user to search based on a category,
business name, or set of keyword terms within a geographic
region. In addition, DexKnows.com providers users with the
ability to refine their searches using criteria that include
such things as specific product and brand names, hours of
operation, payment options and locations.
In June 2007, we introduced the next-generation DexKnows.com
destination site in the Qwest markets. The new site provides a
more relevant search experience for consumers, plus features
such as draggable maps and map-based search, comparison
shopping, user-generated itineraries for multi-stop shopping and
personal contact lists to help consumers build personalized
online yellow pages. The site has undergone continuous
refinements and enhancements, including the introduction of user
generated content, such as business ratings and reviews, and
this new site serves as the foundation for a common IYP site
across all of our markets.
In connection with the Dex Media Merger, we acquired certain
content agreements and distribution agreements with various
search engines, portals and local community destination
websites. These agreements are intended to provide additional
distribution of advertising content, thereby enhancing the value
proposition offered to advertisers. In addition, in August 2007
we announced an expanded distribution agreement with
Yahoo!
®
in which Qwest region advertisers will benefit from inclusion
within the following Yahoo! Local and Yahoo! Yellow Pages
advertising products:
|
|
|
|
|
Featured Listings
sponsored listings with
guaranteed placement on the first or second results pages for
broader exposure in a specific geography or category.
|
|
|
|
Enhanced Listings
sponsored listings that
offer the ability to add a detailed description of their
business, photos, a tagline and coupons to create greater online
visibility for businesses and enhance their appearance within
organic results.
|
|
|
|
Yahoo! Maps Business Listings
sponsored
listings within the context of a map-based view.
|
|
|
|
Yahoo! Yellow Pages
DexKnows.com advertisers
are given a presence in the search results for Yahoo! Yellow
Pages search.
|
Dex
Search Marketing
In September 2006, we acquired Local Launch, a local search
products, platform and fulfillment provider. Local Launch serves
as the foundation for Dex Search Marketing, a new business unit
within RHD Interactive that is focused exclusively on the
delivery of local advertisements through Internet Marketing
across multiple local search directories and major search
engines such as Google, Yahoo, and MSN. Products and services
offered by Dex Search Marketing support the expansion of our
current local Internet Marketing offerings and provide new,
innovative solutions to enhance our local Internet Marketing
capabilities. We began rolling out Dex Search Marketing products
in the AT&T Illinois footprint in late March 2007 and
completed the roll out to our entire footprint in October 2007.
Dex Search Marketing provides a comprehensive approach to
serving the Internet Marketing needs of small businesses through
four major product and service elements:
|
|
|
|
|
Storefront Profile
constructs a simple but
content rich presence on the web for the advertiser that is
highly optimized to rank well within the organic portion of
search engine results pages.
|
7
|
|
|
|
|
Distribution
provides the advertisers
information and business information to multiple local search
platforms including Yahoo! Local, Google Local, and Local.com.
|
|
|
|
Paid Search
develops, deploys, and manages
effective search marketing campaigns across major search
platforms, such as Google and Yahoo!, on behalf of the
advertiser.
|
|
|
|
Reporting
provides transparent, real-time
results, such as click and call activity that occurs on the
advertisers Storefront Profile.
|
Effective January 1, 2008, Local Launch was merged with and
into Business.com. The products and services provided by Local
Launch will continue to be offered to our advertisers through
Business.com and the Local Launch brand and logo will continue
to be utilized for our Internet Marketing offerings.
As we acquired certain businesses at various times, our online
product and service offerings are at different stages of
implementation based on the geographic region of the acquired
businesses. Various differences of our service offering by
region are noted below.
Qwest
Throughout the Qwest States, we have assumed distribution
agreements with various local community websites to make the
structured database of content available to local users of those
websites. These agreements provide us with access to important
channels to enhance our distribution network on behalf of our
advertisers. This enhanced distribution typically leads to
increased usage among consumers and greater value and return on
investment for our advertisers.
Sales of Internet Marketing services continued in 2007 in our
Qwest markets with a focus on migrating the product from the
former Dex Web Clicks, which involved guaranteed clicks
packages, to the Local Launch product, which involves
value-based packages. This Internet Marketing product has been
designed as an affordable solution for small and medium-sized
entities (SMEs) and allows advertisers to
participate in auction-based, paid search Internet advertising
across multiple search engines and portals at fixed monthly
prices. In addition, it provides advertisers with a projected
number of references, or clicks, to their website or
storefront profile landing page over the contract term. In
addition, our Internet Marketing program offers website design
and hosting services to advertisers, in the event they do not
have an existing website. A network of search engines and
portals provides the infrastructure for the provisioning of
online references.
AT&T
and Embarq
During the latter part of 2007, we incorporated all of our
AT&T and Embarq listings and advertiser content onto
DexKnows.com, which is now RHDs uniform IYP platform
across its entire footprint. Prior to this change, our
Internet-based directory product in the AT&T and Embarq
footprints was an online version of the print product rather
than a local destination search site. We offer a suite of
Internet-based directory services targeted at specific
geographies. The Company expects to retire legacy AT&T and
Embarq IYP sites by the end of 2008.
During 2007, RHDs chicagolandyp.com (and similar URLs in
Illinois and Northwest Indiana) and bestredyp.com sites allowed
users to search deep into the content of local yellow pages
advertisements to return more relevant results for their local
directional searches. For each of the online directory sites, we
provide a city portal with information about the targeted
market, along with electronic versions of the white pages and
yellow pages directories. In addition, each site provides users
with national yellow pages and white pages search capability,
allowing users to conduct searches for content outside of our
footprint.
In 2006, we introduced RHD branded Internet Marketing products
into markets across the AT&T and Embarq footprints. In
these markets, RHD used several different Internet Marketing
business models in order to determine which model would serve
customers most effectively for the long term. We determined that
Local Launch value-based Internet Marketing services best met
customers needs for Internet Marketing services and was
our primary product for SMEs in 2007.
8
During 2007, we have continued to sell products associated with
our 2004 reseller agreement with AT&T, which expires in
2009, onto the YellowPages.com platform. This agreement grants
us the (a) exclusive right to sell to local advertisers
within Illinois and Northwest Indiana Internet Yellow Pages
advertising focused upon products and services to be offered
within that territory, and (b) non-exclusive right to sell
to local (excluding National advertisers) advertisers within
Illinois and Northwest Indiana Internet Yellow Pages advertising
focused upon products and services to be offered outside of that
territory, in each case, onto the YellowPages.com platform.
Business.com
On August 23, 2007, we acquired Business.com, a leading
business search engine and directory and performance based
advertising (PBA) network. Under the PBA model,
advertisers effectively bid on a
cost-per-click
basis against other advertisers for priority placement within
search results. The Business.com PBA platform enables this by
providing for flexible advertising provisioning and bid
management capabilities. In addition, its PBA technology also
incorporates a yield management system to allow us to let
demand, in this case the price, and performance, which is the
click-through rate, determine advertising display, thus
increasing our financial gain while promoting search relevancy.
Through this transaction, we added to our existing interactive
portfolio a rapidly growing and profitable
business-to-business
company, with online properties that include Business.com,
Work.com and the Business.com Advertising Network. The
Business.com Advertising Network serves advertising on
non-proprietary websites such as Businessweek.com, Forbes.com
and AllBusiness.com, and shares advertiser revenue with
third-party sites for qualified clicks each time a visitor
clicks on our advertisers listings. This network provides
a way for media buyers of various types to coordinate
advertising campaigns across various sites in an efficient
manner. The Business.com and Work.com properties attract an
audience of highly qualified and motivated business decision
makers. Business.com increases the revenues from these
properties through the use of its PBA platform.
Business
Cycle Overview
Our print directories usually have a
12-month
directory cycle period. A publication process generally takes 15
to 20 months from the beginning of the sales cycle to the
end of a directorys life and the sales stage closes
approximately 70 days prior to publication. Consistent with
our print directories, our online products and services usually
have a
12-month
cycle period.
Sales
Our print and online local marketing consultant team is
comprised of approximately 1,900 members.
We assign our print and online customers among premise local
marketing consultants and telephone local marketing consultants
based on a careful assessment of a customers expected
advertising expenditures. This practice allows us to deploy our
local marketing consultants in an effective manner. Our local
marketing consultants are decentralized and locally based,
operating throughout the country in local service areas.
Management believes that our local marketing consultants
facilitate the establishment of personal, long-term
relationships with local print and online advertisers that are
necessary to maintain a high rate of customer renewal.
The local print and online sales channel is divided into three
sales sub-channels: premise sales, telephone sales and locally
centralized sales.
Premise local marketing consultants
conduct
sales meetings face to face at customers business
locations and typically handle higher dollar and more complex
accounts.
Telephone local marketing consultants
handle
lower dollar value accounts and conduct their sales over the
phone.
9
Locally centralized sales
includes multiple
types of sales efforts, including centralized local marketing
consultants, prospector local marketing consultants and a letter
renewal effort. These sales mechanisms are used to contact
non-advertisers or very low dollar value customers that in many
cases have renewed their account for the same product for
several years. Some of these centralized efforts are also
focused on initiatives to recover former customers.
Management believes that formal training is important to
maintaining a highly productive sales force. Our local marketing
consultants undergo ongoing training, with new local marketing
consultants receiving approximately eight weeks of training in
their first year, including classroom training on sales
techniques, product portfolio, customer care and administration,
standards and ethics. Following classroom training, they are
accompanied on sales calls by experienced local marketing
consultants for further training. Our commitment to developing
best sales practices across RHD are intended to ensure that our
local marketing consultants are able to give advertisers
high-quality service and advice on appropriate advertising
products and services.
In addition to our locally based marketing consultants, we
utilize a separate sales channel to serve our national
advertisers. In 2007, national advertisers accounted for about
15% of revenue. National advertisers are typically national or
large regional chains such as rental car companies, insurance
companies and pizza businesses that purchase advertisements in
many yellow pages directories in multiple geographic regions. In
order to sell to national advertisers, we contract with third
party Certified Marketing Representatives (CMR).
CMRs design and create advertisements for national companies and
place those advertisements in relevant yellow pages directories
nationwide. Some CMRs are departments of general advertising
agencies, while others are specialized agencies that focus
solely on directory advertising. The national advertiser pays
the CMR, which then pays us after deducting its commission. We
accept orders from approximately 160 CMRs and employ
approximately 30 associates to manage our selling efforts
to national customers and our CMR relationships.
Marketing
Our print and online sales and marketing processes are closely
related and managed in an integrated manner. We believe that our
marketing process, composed of both centralized and
decentralized strategies and responsibilities, best suits our
needs.
Our marketing process includes the functions of market
management, product development and management, market research,
pricing, advertising and public relations. The market management
function is decentralized and coordinates with local sales
management to develop market plans and products that address the
needs of individual local markets. The other marketing functions
are centralized and provide support to all markets as needed.
RHD promotes its value through advertising campaigns that are
targeted to both advertisers and consumers. Our advertising is
managed by specific market and includes television, radio,
newspaper and outdoor advertising placements.
Publishing
and Information Services
Pre-press publishing activities include canvass and assignment
preparation, sales order processing, graphics and ad
composition, contract processing, white and yellow pages
processing, database management and pagination. We provide
comprehensive tools and information to effectively conduct sales
and marketing planning, sales management, sales compensation and
customer service activities. Once an individual sales campaign
is complete and final advertisements have been produced, white
and yellow pages are paginated, proofed and prepared for
printing. Most of these functions are accomplished through an
Amdocs
®
(Amdocs) publishing system, a leading industry
system considered to be the standard.
Printing
and Distribution
Our directories are printed through our long-standing
relationship with printing vendor R.R. Donnelley &
Sons Company (R.R. Donnelley), as well as with
Quebecor, Inc. (Quebecor). Although RHD and
R. R. Donnelley share a common heritage, there is
presently no other common ownership or business affiliation
between us. In general, R.R. Donnelley prints all AT&T and
Embarq directories and larger, higher-
10
circulation Qwest directories, whereas Quebecor prints Qwest
directories that are smaller and have a more limited
circulation. Our agreements with R. R. Donnelley and Quebecor
for the printing of all of our directories extend through 2014.
The physical delivery of directories is facilitated through
several outsourcing relationships. Delivery methods utilized to
distribute directories to consumers are selected based on
factors such as cost, quality, geography and market need.
Primary delivery methods include U.S. Postal Service and
hand delivery. We have contracts with three companies for the
distribution of our directories. These contracts are scheduled
to expire at various times from May 2009 through May 2010.
Occasionally, we use United Parcel Service or other types of
expedited delivery methods. Frequently, a combination of these
methods is required to meet the needs of the marketplace.
Printing, paper and distribution costs represented approximately
10.4% of our net revenue for the year ended December 31,
2007.
Credit,
Collections and Bad Debt Expense
Since most of our print and online products and services have
12-month
cycles and most advertising customers are billed over the course
of that
12-month
period, we effectively extend credit to our customers. Many of
these customers are small and medium-sized businesses with
default rates that usually exceed those of larger companies. Our
policies toward the extension of credit and collection
activities are market specific and designed to manage the
expected level of bad debt while accommodating reasonable sales
growth.
Local print and online advertising customers spending above
identified levels as determined appropriate by management for a
particular market may be subject to a credit review that
includes, among other criteria, evaluation of credit or payment
history with us, third party credit scoring, credit checks with
other vendors along with consideration of credit risks
associated with particular headings. Where appropriate, advance
payments (in whole or in part)
and/or
personal guarantees from business owners may be required. Beyond
efforts to assess credit risk prior to extending credit to
advertising customers, we employ well-developed collection
strategies utilizing an integrated system of internal, external
and automated means to engage customers concerning payment
obligations.
Fees for national customers are generally billed upon
publication of each issue of the directory in which the
advertising is placed by CMRs. Because we do not usually enter
into contracts with national advertisers directly, we are
subject to the credit risk of CMRs on sales to those
advertisers, to the extent we do not receive fees in advance. We
have historically experienced favorable credit experience with
CMRs.
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.
We believe that in markets where there were already two or more
competitors, new publications from independents have a greater
impact on other publishers than on the Company. This is
primarily due to the fact that virtually all independents
compete on price. With a differentiated strategy designed to
provide the highest value to advertisers, we tend to be less
affected by the incremental fragmentation of price sensitive
advertisers
11
resulting from new independent entry, but no assurance can be
given that will continue to be the case in the future.
We also compete with other types of media, including television
broadcasting, newspaper, radio, direct mail, search engines,
Internet yellow pages and emerging technologies.
We believe that advertiser preference for directory advertising
is due to its relatively low cost, broad demographic and
geographic distribution and high consumer usage rates. Also,
while overall advertising tends to track a local economys
business cycle, directory advertising historically tends to be
more stable and does not fluctuate as widely with economic
cycles due to this preference by small to medium-sized
businesses. Given the mature state of the directory advertising
industry and our position in most of our markets, most
independent competitors are focused on aggressive pricing to
gain market share. Others focus on niche opportunities such as
community or ethnic directories. Our Plus companion directories
have proven capable of recapturing and even growing usage share
in highly competitive markets. Moreover, we believe the
preference for directory advertising by consumers is its
directional and permission-based nature, ease of use and its
broad coverage of relevant businesses in the local markets.
Directory advertising is attractive because consumers view
directories as a free, comprehensive, non-intrusive single
source of locally relevant information.
The Internet has also emerged as an attractive medium for
advertisers. Historically, advertising on the Internet
represented only a small part of the total U.S. advertising
market, however as the Internet grows and high-speed Internet
access becomes more mainstream, it has increasingly become
prevalent as an advertising medium. Most major yellow pages
publishers operate an Internet-based directory business. Overall
references to print yellow pages directories in the United
States have gradually declined from 2002 through 2006. We
believe this decline was primarily a result of increased usage
of Internet-based directory products, particularly in
business-to-business
and retail categories, as well as the proliferation of very
large retail stores for which consumers and businesses may not
reference the yellow pages. We believe this decline was also a
result of demographic shifts among consumers, particularly the
increase of households in which English was not the primary
language spoken. We believe that over the next several years,
references to print yellow pages directories may continue to
gradually decline as users may increasingly turn to digital and
interactive media delivery devices for local commercial search
information. We expect overall directory usage to grow, largely
due to growth of Internet directory usage.
Directory publishers, including us, have increasingly sold
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 Internet yellow pages 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 compete with all of these online competitors
based on value, local relevance and features. We also partner
with some of these online businesses where it makes strategic
sense to do so to expand the reach of our advertisers to a broad
online consumer base.
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 may result in new technologies being
developed and services being provided that could 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 create 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 believe RHD is well positioned against emerging
competition due to our deep local content, existing advertiser
relationships, our extensive local sales force, and our ability
to offer our customers complete directional advertising
solutions including print directories, online directories, and
Internet Marketing services.
12
Raw
Materials
Our principal raw material is paper. It is one of our largest
cost items, representing approximately 3.9% of our net revenue
for the year ended December 31, 2007. Paper used is
supplied by five paper suppliers: CellMark Paper, Inc.
(CellMark), Kruger, Inc. (Kruger),
AbitibiBowater, Inc. (Abitibi), Nippon Paper
Industries USA, Co., Ltd. (Nippon) and Catalyst
Paper Corporation (Catalyst). Our agreements with
CellMark, Kruger, Catalyst and Abitibi expire on
December 31, 2008 and our agreement with Nippon expires on
December 31, 2009. Pursuant to the contracts with CellMark,
Abitibi and Kruger, the price of the paper was set at inception
of the contract and increases at various dates during the term
of the agreement. Should the market price of the paper drop
below the set prices under that contract, both parties are
obligated to negotiate in good faith a lower paper price. Prices
under the contracts with Nippon and Catalyst are negotiated each
year based on prevailing market rates. Furthermore, we purchase
paper used for the covers of our directories from Tembec
Enterprises, Inc. (formerly known as Spruce Falls, Inc.), which
we refer to as Tembec. Pursuant to an agreement between Tembec
and us, Tembec is obligated to provide 100% of our annual cover
stock paper requirements at a pre-negotiated price by weight.
This agreement expires on December 31, 2009. We cannot
assure you that we will enter into new agreements with
satisfactory terms or at all.
Intellectual
Property
We own and control confidential information as well as a number
of trade secrets, trademarks, service marks, trade names,
copyrights and other intellectual property rights that, in the
aggregate, are of material importance to our business. We
believe that Donnelley, Dex,
Business.com, Work.com, Local
Launch!, Triple Play, DexKnows.com
and Dex Search Marketing and related names, marks
and logos are, in the aggregate, material to our business. We
are licensed to use certain technology and other intellectual
property rights owned and controlled by others, and, similarly,
other companies are licensed to use certain technology and other
intellectual property rights owned and controlled by us.
We are the exclusive official directory publisher of listings
and classified advertisements for Qwest (and its successors)
telephone customers in the geographic areas in the Qwest States
in which Qwest provided local telephone service as of
November 8, 2002 (subject to limited extensions), as well
as having the exclusive right to use certain Qwest branding on
directories in those markets. In addition, Qwest assigned
and/or
licensed to us certain intellectual property used in the Qwest
directory business prior to November 8, 2002. These rights
generally expire in 2052.
We have the exclusive license to produce, publish and distribute
directories for Embarq (and its successors) in the markets where
Sprint provided local telephone service as of September 21,
2002 (subject to limited extensions), as well as the exclusive
license to use Embarqs name and logo on directories in
those markets. These rights generally expire in 2052.
We have the exclusive license to provide yellow pages directory
services for AT&T (and its successors) and to produce,
publish and distribute white pages directories on behalf of
AT&T in Illinois and Northwest Indiana, as well as the
exclusive right to use the AT&T brand and logo on print
directories in that territory. These rights generally expire in
2054.
We own the Local Launch brand and logo and certain core
technology developed by Local Launch, which has been deployed
for our IYP and Internet Marketing online services.
The acquisition of Business.com provides us with a leading
business-to-business
online property supplemented with the attractive Work.com
expert- and user-generated content site. We have begun
integration of certain elements of Business.coms
technology with DexKnows.com to:
|
|
|
|
|
improve the consumer experience on DexKnows.com;
|
|
|
|
implement performance based advertising (PBA) on
DexKnows.com; and
|
|
|
|
implement an advertising network for DexKnows.com.
|
13
We believe that leveraging Business.coms existing
technology platform will accelerate our time to market for these
three areas by 12 to 15 months.
Under license agreements for subscriber listings and directory
delivery lists, each of Qwest, Embarq and AT&T have granted
to us a non-exclusive, non-transferable restricted license of
listing and delivery information for persons and businesses that
order
and/or
receive local exchange telephone services in the relevant
service areas at the prices set forth in the respective
agreements. Generally, we may use the listing information solely
for publishing directories (in any format) and the delivery
information solely for delivering directories, although in the
case of Qwest, we may also resell the information to third
parties solely for direct marketing activities, database
marketing, telemarketing, market analysis purposes and internal
marketing purposes, and use it ourselves in direct marketing
activities undertaken on behalf of third parties. The term of
these license agreements are generally consistent with the term
of the respective publishing agreements described above.
Although we do not consider any individual trademark or other
intellectual property to be material to our operations, we
believe that, taken as a whole, the licenses, marks and other
intellectual property rights that we acquired in conjunction
with the Dex Media Merger, Embarq Acquisition, AT&T
Directory Acquisition, Local Launch Acquisition and Business.com
Acquisition are material to our business. We consider our
trademarks, service marks, databases, software and other
intellectual property to be proprietary, and we rely on a
combination of copyright, trademark, trade secret,
non-disclosure and contract safeguards for protection. We also
benefit from the use of the phrase yellow pages and
the walking fingers logo, both of which we believe to be in the
public domain in the United States.
Employees
As of February 26, 2008, we have approximately
4,700 employees of which approximately 1,500 are
represented by labor unions covered by two collective bargaining
agreements with Dex Media in the Qwest States. We consider
relations with our employees to be good. The unionized employees
are represented by either the International Brotherhood of
Electrical Workers of America (IBEW), which
represents approximately 500 of the unionized workforce, or the
Communication Workers of America (CWA), which
represents approximately 1,000 of the unionized workforce. Dex
Medias collective bargaining agreement with the IBEW
expires in May 2009 and Dex Medias collective bargaining
agreement with the CWA expires in October 2009. We consider our
relationship with both unions to be good.
Executive
Officers of the Registrant
The following table sets forth information concerning the
individuals who serve as executive officers of the Company as of
February 26, 2008.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position(s)
|
|
David C. Swanson
|
|
|
53
|
|
|
Chairman of the Board and Chief Executive Officer
|
Peter J. McDonald
|
|
|
57
|
|
|
President and Chief Operating Officer
|
Steven M. Blondy
|
|
|
48
|
|
|
Executive Vice President and Chief Financial Officer
|
George F. Bednarz
|
|
|
54
|
|
|
Senior Vice President Operations
|
Robert J. Bush
|
|
|
42
|
|
|
Senior Vice President, General Counsel and Corporate Secretary
|
Alan R. Duy
|
|
|
64
|
|
|
Senior Vice President of Information Technology and Publishing
Services
|
Tyler D. Gronbach
|
|
|
39
|
|
|
Senior Vice President of Corporate Communications and
Administration
|
Margaret LeBeau
|
|
|
49
|
|
|
Senior Vice President and Chief Marketing Officer
|
Gretchen Zech
|
|
|
38
|
|
|
Senior Vice President Human Resources
|
Jenny L. Apker
|
|
|
50
|
|
|
Vice President and Treasurer
|
R. Barry Sauder
|
|
|
48
|
|
|
Vice President, Corporate Controller and Chief Accounting
Officer*
|
|
|
|
*
|
|
Following the filing of this Annual Report on
Form 10-K,
Mr. Sauder will assume the role of Principal Accounting
Officer. Until that time, Karen E. Palczuk remains RHDs
Principal Accounting Officer and will sign this Annual Report on
Form 10-K.
|
14
The executive officers serve at the pleasure of the Board of
Directors. We have been advised that there are no family
relationships among any of the officers listed, and there is no
arrangement or understanding among any of them and any other
persons pursuant to which they were appointed as an officer.
David C. Swanson
has been Chief Executive Officer since
May 2002. He had served as Chairman of the Board from December
2002 through January 2006 and was re-elected as Chairman of the
Board in May 2006. He was first elected to the Board of
Directors in December 2001. He served as President and Chief
Operating Officer from December 2000 until May 2002.
Mr. Swanson joined Donnelley as an Account Executive in
1985 and has held increasingly senior management positions over
the next 20 years. Mr. Swanson also serves as Chairman
of the Yellow Pages Association.
Peter J. McDonald
has served as President and Chief
Operating Officer since October 2004. Prior to that,
Mr. McDonald served as Senior Vice President and President
of Donnelley Media from September 2002. Mr. McDonald was a
director of RHD between May 2001 and September 2002. Previously,
Mr. McDonald served as President and Chief Executive
Officer of SBC Directory Operations, a publisher of yellow pages
directories, from October 1999 to April 2000. He was President
and Chief Executive Officer of Ameritech Publishings
yellow pages business from 1994 to 1999, when Ameritech was
acquired by SBC. Prior to that, Mr. McDonald was President
and Chief Executive Officer of DonTech and served in a variety
of sales positions at Donnelley, after beginning his career at
National Telephone Directory Corporation. He is also a past vice
chairman of the Yellow Pages Association.
Steven M. Blondy
has served as Executive Vice President
and Chief Financial Officer since January 2006. Prior to that,
Mr. Blondy served as Senior Vice President and Chief
Financial Officer since March 2002. Prior to joining Donnelley,
Mr. Blondy served as Senior Vice President
Corporate Development for Young & Rubicam, Inc., a
global marketing and communications company, from February 1998
to October 2000. Prior to that, Mr. Blondy served as
Executive Vice President and Chief Financial Officer for Poppe
Tyson, a leading Internet and integrated marketing
communications agency, from 1996 to 1997, and as Chief Financial
Officer for Grundy Worldwide, an independent producer of
television programs in Europe and Australia. Prior to that, he
spent 12 years in the investment banking industry with
Chase Manhattan Bank and Merrill Lynch.
George F. Bednarz
has served as Senior Vice
President Operations since January 2008. Prior to
that, Mr. Bednarz served as Senior Vice
President RHD Interactive since January 2007. Prior
to that, Mr. Bednarz served as Senior Vice
President Integration, Corporate Planning,
Administration and Communications since January 2006. Prior to
that, Mr. Bednarz served as Vice President
Corporate Planning and Information Technology since October
2004. Prior to that, Mr. Bednarz served as Vice President,
Publishing, Information Technology and Corporate Planning, from
January 2003 and Vice President, Publishing and Information
Technology, from April 2001. Mr. Bednarz joined us in
November 1995 to lead the
start-up
implementation of our Morrisville, North Carolina Publishing and
Information Center. Prior to joining us, Mr. Bednarz spent
19 years at The Dun & Bradstreet Corporation, our
former parent, where he held executive positions of increasing
responsibility in various functions.
Robert J. Bush
has served as Senior Vice President and
General Counsel since January 2006. Prior to that, Mr. Bush
served as General Counsel since January 2001. Since 2000,
Mr. Bush served as Vice President and Corporate Secretary,
having joined Donnelley in October 1999 as Assistant Vice
President and Assistant General Counsel. Prior to joining us,
Mr. Bush was Assistant General Counsel and Assistant
Secretary at MIM Corporation, a pharmacy benefit management
company, from 1998 to 1999, and an Associate at the New York
offices of the law firm of Jones, Day, Reavis & Pogue
(now known as Jones Day) from August 1993 to May 1998.
Alan R. Duy
has served as Senior Vice President of
Information Technology and Publishing Services since January
2006. He formerly consulted for RHD in systems integration and
sales force automation projects from 2002 to 2005. Mr. Duy
has more than 40 years of directory experience, most
recently as Vice President of Information Technology for SBC
Communications Inc., an incumbent telecommunications company,
from 1999 to 2000. Prior to that, Mr. Duy was Vice
President of Information Technology and Operations for directory
operations at Ameritech Corporation, an incumbent
telecommunications company, and led the formation of the
companys first Internet Yellow Pages and Internet service
provider businesses. His previous
15
experience includes numerous information technology, publishing,
printing, and marketing positions for other incumbent
telecommunications companies. Mr. Duy will retire from RHD
effective March 31, 2008.
Tyler D. Gronbach
has served as Senior Vice President of
Corporate Communications and Administration since January 2007.
Prior to that, Mr. Gronbach served as Vice President of
Corporate Communications since October 2005. Prior to joining
R.H. Donnelley, Mr. Gronbach served as Vice President of
Corporate Communications with Qwest Communications International
Inc. from 2000 to 2005 and was the Senior Director of Public
Relations from 1998 to 2000.
Margaret LeBeau
has served as Senior Vice President and
Chief Marketing Officer since January 2006. Prior to the Dex
Media Merger, Ms. LeBeau served as Senior Vice President of
Marketing for Dex Media from November 2002 to January 2006.
Ms. LeBeau served as Vice President of
Marketing & Growth Ventures of Qwest Dex from November
1999 until September 2003. Prior to that, she served in other
capacities within Qwest Dex, including Director of Product
Management and Pricing. Prior to joining Qwest Dex,
Ms. LeBeau was a Senior Director in the marketing
department at the American Express Company, a diversified
financial services company.
Gretchen Zech
has served as Senior Vice
President Human Resources since June 2006.
Ms. Zech served as Group Vice President Human
Resources at Gartner, Inc., a technology research and consulting
firm, from 2004 to 2006. Prior to that, Ms. Zech served as
Vice President Human Resources for The Great
Atlantic and Pacific Tea Company, Inc., one of the largest
supermarket chains in the United States, from 2002 to 2004. She
also served as Vice President Human Resources for
the Bloomingdales division of Federated Department Stores,
Inc., a leading department store retailer, from 2001 to 2002.
Prior to that, Ms. Zech served in several Human Resources
leadership positions with Best Buy Company, Inc., a leading
electronics and entertainment retailer.
Jenny L. Apker
has served as Vice President and Treasurer
since May 2003. Prior to that, she was Assistant Treasurer at
Allied Waste Industries, a waste services company, since 1998.
Before joining Allied Waste Industries, Ms. Apker was Vice
President at First Interstate Bank of Arizona, a banking
institution that was subsequently acquired by Wells Fargo. Prior
to joining First Interstate Bank of Arizona, Ms. Apker
spent 11 years at Greyhound Financial Corporation, a
financial services company.
R. Barry Sauder
has served as Vice President,
Corporate Controller and Chief Accounting Officer since January
2008. Prior to joining R.H. Donnelley, Mr. Sauder served as
Vice President, Corporate Controller and Chief Accounting
Officer of InfraSource Services, Inc., a specialty contractor
servicing electric, natural gas and telecommunications
infrastructure, from April 2004 to October 2007. Prior to that,
Mr. Sauder served as Vice President and Principal
Accounting Officer of GSI Commerce, Inc., a provider of
e-commerce
solutions, from January 2001 to April 2004 and Director of
Finance from August 1999 to August 2000. Mr. Sauder is a
certified public accountant.
Forward-Looking
Information
Certain statements contained in this Annual Report on
Form 10-K
regarding Donnelleys 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,
estimates, potential, goal,
outlook, may, predicts,
could, or the negative of those words and other
comparable expressions, are used to identify such
forward-looking statements. Actual events or results may differ
materially. In evaluating those statements, you should
specifically consider various factors, including the risks and
uncertainties discussed below. Those factors may cause our
actual results to differ materially from any of RHDs
forward-looking statements. All forward-looking statements
attributable to us or a person on our behalf are expressly
qualified in their entirety by this cautionary statement. 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. Although we
16
believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results,
levels of activity or performance. These forward-looking
statements are made as of the date of this annual report and,
except as required under the federal securities laws and the
rules and regulations of the SEC, we assume no obligation to
update or revise them or to provide reasons why actual results
may differ.
Risks, uncertainties and contingencies include:
1) Our
ability to meet substantial debt service
obligations
We have a substantial amount of debt and significant debt
service obligations due in large part to the financings related
to the Dex Media Merger, the Embarq Acquisition, the AT&T
Directory Acquisition and the Business.com Acquisition. As of
December 31, 2007, we had total outstanding debt of
$10,175.6 million (including fair value adjustments
required by GAAP as a result of the Dex Media Merger) and had
$347.6 million available under the revolving portion of
various credit facilities of our subsidiaries.
As a result of our significant amount of debt and debt service
obligations, we face increased risks regarding, among other
things, the following:
|
|
|
|
|
our ability to obtain additional financing in excess of the
borrowing capacity under the revolving portions of the various
credit facilities of our subsidiaries on satisfactory terms to
fund working capital requirements, capital expenditures,
acquisitions, investments, debt service requirements, stock
repurchases, dividends and other general corporate requirements
is limited;
|
|
|
|
we are more vulnerable to general economic downturns,
competition and industry conditions, which could place us at a
competitive disadvantage compared to our competitors that may be
less leveraged;
|
|
|
|
we face increased exposure to rising interest rates as a portion
of our debt is at variable interest rates;
|
|
|
|
we have reduced availability of cash flow to fund working
capital requirements, capital expenditures, acquisitions or
other strategic initiatives, investments and other general
corporate requirements because a substantial portion of our cash
flow will be needed to service our debt obligations;
|
|
|
|
we have limited flexibility in planning for, or reacting to,
changes in our business and the industry in which we operate;
|
|
|
|
the agreements governing our debt substantially limit our
ability to access the cash flow and value of our subsidiaries
and, therefore, to make payments on our notes and the notes of
our subsidiaries;
|
|
|
|
our ability to borrow additional funds or refinance existing
indebtedness may be limited; and
|
|
|
|
there could be a material adverse effect on our business and
financial condition if we were unable to service our debt or
obtain additional financing, as needed.
|
Our ability to pay principal and interest on our debt
obligations will depend upon our future operating performance
and our ability to refinance debt. If we are unable to service
our debt and fund our business, we may be forced to reduce or
delay capital expenditures, defer or refuse to pursue certain
strategic initiatives, defer or forgo potential dividends or
share repurchases, seek additional debt financing or equity
capital, restructure or refinance our debt or sell assets. We
may not be able to obtain additional financing, refinance
existing debt or sell assets on satisfactory terms or at all.
Furthermore, the debt under our subsidiaries credit
facilities bear interest at variable rates. If these rates were
to increase significantly, our ability to borrow additional
funds may be reduced and the risks related to our substantial
debt would intensify.
2) Restrictive
covenants under our debt agreements
The indentures governing our existing notes and the notes of our
subsidiaries and the agreements governing our subsidiaries
credit facilities, include a number of significant restrictive
covenants. These covenants could adversely affect us by limiting
our ability to obtain funds from our subsidiaries, to plan for
or
17
react to market conditions or to otherwise meet our capital
needs. These covenants, among other things, restrict our ability
and the ability of our subsidiaries to:
|
|
|
|
|
incur additional debt;
|
|
|
|
pay dividends on, redeem or repurchase capital stock, which in
the case of our restricted subsidiaries could adversely affect
the ability of RHD to satisfy its obligations under its notes;
|
|
|
|
make certain investments;
|
|
|
|
enter into certain types of transactions with affiliates;
|
|
|
|
expand into unrelated businesses;
|
|
|
|
create liens;
|
|
|
|
sell certain assets or merge with or into other
companies; and
|
|
|
|
designate subsidiaries as unrestricted subsidiaries.
|
In addition, our subsidiaries credit facilities include
other and more restrictive covenants and limit our ability to
prepay our notes while borrowings under the credit facilities
are outstanding.
Our failure to comply with these covenants could result in an
event of default, which, if not cured or waived, could require
us to repay these borrowings before their scheduled due dates.
If we were unable to make this repayment or otherwise refinance
these borrowings, the lenders under the RHDI Credit
Facility could foreclose on the stock of RHDI and substantially
all of RHDIs and its subsidiaries assets, and the
lenders under the Dex Media credit facilities could foreclose on
the stock of Dex Media East and Dex Media West and on
substantially all of the assets of Dex Media East and Dex Media
West and their respective subsidiaries. RHD has pledged the
stock of RHDI, and RHDI and RHDIs direct and indirect
existing and future subsidiaries have pledged substantially all
of their assets as collateral under the RHDI Credit
Facility. The Dex Media credit facilities are secured by Dex
Medias pledge of the stock of Dex Media East and Dex Media
West as well as substantially all of the assets of Dex Media
East and Dex Media West and their direct and indirect existing
and future subsidiaries. In addition, these lenders could elect
in the event of default to declare all amounts borrowed under
our and our subsidiaries credit facilities, together with
accrued interest, to be due and payable, which, in some
instances, would be an event of default under the indentures
governing our and our subsidiaries notes. If we were
unable to refinance these borrowings on favorable terms, our
results of operations and financial condition could be adversely
impacted by increased costs and less favorable terms, including
higher interest rates and more restrictive covenants. The
instruments governing the terms of any future refinancing of any
borrowings are likely to contain similar restrictive covenants.
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.
18
Some of the incumbent publishers with which we compete are
larger than we are and have greater financial resources than we
have. Though 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,
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.
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 Internet yellow pages 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. 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. 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
19
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 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.
4) Usage
of printed yellow pages directories and changes in
technology
Overall references to print yellow pages directories in the
United States have gradually declined from 15.1 billion in
2002 to 13.4 billion in 2006 according to the YPA Industry
Usage Study. We believe this decline was primarily a result of
increased usage of
Internet-based
directory products, particularly in
business-to-business
and retail categories, as well as the proliferation of very
large retail stores for which consumers and businesses may not
reference the yellow pages. We believe this decline was also a
result of demographic shifts among consumers, particularly the
increase of households in which English was not the primary
language spoken. We believe that over the next several years,
references to print yellow pages directories may continue to
gradually decline as users may increasingly turn to digital and
interactive media delivery devices for local commercial search
information. Recently the usage of
Internet-based
directory products has increased more rapidly. These trends
have, in part, resulted in organic advertising sales declining
in recent years, and we expect these trends to continue in 2008.
Any decline in usage could:
|
|
|
|
|
impair our ability to maintain or increase our advertising
prices;
|
|
|
|
cause businesses that purchase advertising in our yellow pages
directories to reduce or discontinue those
purchases; and
|
|
|
|
discourage businesses that do not purchase advertising in our
yellow pages directories from doing so.
|
Although we believe that any decline in the usage of our printed
directories will be offset in part by an increase in usage of
our
Internet-based
directories, we cannot assure you that such increase in usage
will result in additional revenue or profits, as revenues and
margins associated with
Internet-based
directories tend to be lower than print directories. For
example, the margins that Business.com has realized tend to be
lower than our print directories. Any of the factors that may
contribute to a decline in usage of our print directories, or a
combination of them, could impair our revenues and have a
material adverse effect on our business.
The directory advertising industry is subject to changes arising
from developments in technology, including information
distribution methods and users technological preferences.
The use of the Internet and wireless devices by consumers as a
means to transact commerce may result in new technologies being
developed and services being provided that could compete with
our products and services. National search companies such as
Google and Yahoo! are focusing and placing a high priority on
local commercial search initiatives. As a result of these
factors, 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 provide services over the
Internet successfully or compete successfully with other
Internet-based
directory services. In addition, if we fail to anticipate or
respond adequately to changes in technology and user preferences
or are unable to finance the capital expenditures necessary to
respond to such changes, our results of operations or financial
condition could be materially adversely affected.
5) Recognition
of impairment charges for our intangible assets or
goodwill
At December 31, 2007, the net carrying value of our
intangible assets and goodwill totaled approximately
$11.2 billion and $3.1 billion, respectively. Our
intangible assets are subject to impairment testing in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 144,
Accounting for the
20
Impairment or Disposal of
Long-lived
Assets
and our goodwill is subject to an impairment test 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 the Companys 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 or
goodwill. An impairment charge related to our intangible assets
or goodwill could have a significant effect on our financial
position and results of operations in the periods recognized.
During the year ended December 31, 2007, we recognized an
impairment charge of $20.0 million associated with the
tradenames acquired in the Embarq Acquisition. This impairment
charge resulted from a change in our branding strategy to
utilize a new Dex market brand for all of our print and online
products across our entire footprint and discontinued use of the
tradenames acquired in the Embarq Acquisition. This impairment
charge was determined using the relief from royalty valuation
method and is included within depreciation and amortization
expense on the consolidated statement of operations for the year
ended December 31, 2007.
The decline in the trading value of our debt and equity
securities will require us to continue to assess the
recoverability of our goodwill and negative industry and
economic trends may indicate that the carrying values of our
other intangible assets are not recoverable. Apart from the
impairment charge discussed above, we concluded that there was
no impairment of intangible assets or goodwill at
December 31, 2007. The trading value of our publicly traded
debt and equity securities has continued to decline subsequent
to December 31, 2007. If the value of our debt and equity
securities does not recover, we will be required to assess the
fair values of the assets and liabilities of the Company and
could conclude that goodwill and other long lived assets are
impaired, which would result in impairment charges in 2008. In
addition, worsening economic conditions in certain of our
markets may require us to assess the recoverability of other
intangible assets during 2008 which could result in additional
impairment charges.
6) Information
technology modernization effort and related IT
matters
We are in the process of upgrading and modernizing our legacy
Amdocs process management infrastructure to the Amdocs
iGen platform, an integrated,
Web-based,
fully scalable set of business applications. While we expect
this modernization effort to permit us to advance our digital
local commercial search and integrated media strategy by more
effectively and efficiently capturing and organizing our local
market content, the modernization effort is complicated and
dependent upon certain integration activities associated with
the Dex Media Merger being successfully accomplished in a timely
manner. The modernization effort is not expected to be fully
implemented until the second half of 2008. During the
modernization effort we may experience a disruption to our
business. We cannot assure you that any disruption caused by the
modernization effort will not materially adversely affect our
business. In addition, we expect to incur capital expenditures
in connection with this modernization effort, which are
relatively higher than our historical levels of capital
expenditures, and which represent funds that would otherwise
have been available to repay debt or for other strategic or
general corporate purposes. For example, we incurred greater
than expected costs in connection with our recently completed
upgrade of our Embarq brand to the Amdocs iGen platform
and expect to incur similar costs in connection with the upgrade
of our remaining brands in 2008.
Achieving certain of the cost savings and other benefits we
expect from the Dex Media Merger will depend in large part on
the successful implementation of the new iGen platform and
related modernization improvements. Failure to realize these
benefits could have an adverse effect on our business, results
of operations or financial condition.
Most of our business activities rely to a significant degree on
the efficient and uninterrupted operation of our computer and
communications systems and those of third parties. Any failure
of current or, in the future, new systems could impair our
collection, processing or storage of data and the
day-to-day
management of our business. This could have a material adverse
effect on our business, financial condition and results of
21
operations. Our computer and communications systems are
vulnerable to damage or interruption from a variety of sources.
Despite precautions taken by us, a natural disaster or other
unanticipated problems that lead to the corruption or loss of
data at our facilities could have a material adverse effect on
our business, financial condition and results of operations.
7) Impact
of bankruptcy proceedings against Qwest, Embarq or AT&T
during the term of the respective commercial
arrangements
Qwest is currently highly leveraged and has a significant amount
of debt service obligations over the near term and thereafter.
In addition, Qwest has faced and may continue to face
significant liquidity issues as well as issues relating to its
compliance with certain covenants contained in the agreements
governing its indebtedness. Based on Qwests public filings
and announcements, Qwest has taken measures to improve its
near-term liquidity and covenant compliance. However, Qwest
still has a substantial amount of indebtedness outstanding and
substantial debt service requirements. Consequently, it may be
unable to meet its debt service obligations without obtaining
additional financing or improving operating cash flow. Embarq is
a relatively new public company with a significant amount of
debt that could suffer some of these same liquidity and debt
service issues. While AT&T is presently a stronger company
financially than either Qwest or Embarq, due to the long term
nature of our agreements with them, it is possible that they
could suffer similar financial issues during the term of our
agreements with them.
Accordingly, we cannot assure you that any of our
telecommunications partners will not ultimately seek protection
under U.S. bankruptcy laws. In any such proceeding, our
agreements with Qwest, Embarq and AT&T, and our respective
rights and the respective ability to provide the services under
those agreements, could be materially adversely impacted.
For example:
|
|
|
|
|
Any of them, or a trustee acting on their behalf, could seek to
reject our agreements with them as executory
contracts under U.S. bankruptcy law, thus allowing them to
avoid their obligations under such contracts. Loss of
substantial rights under these agreements could effectively
require us to operate our business as an independent directory
business, which could have a material adverse effect on us.
|
|
|
|
Any of them, or a trustee acting on their behalf, could seek to
sell certain of their assets, including the assets relating to
their local telephone business, to third parties pursuant to the
approval of the bankruptcy court. In such case, the purchaser of
any such assets might be able to avoid, among other things, our
rights under the respective directory service license and
publishing agreements, trademark license agreements and
non-competition agreements with our telecommunications partners.
|
|
|
|
In the case of Qwest, we may have difficulties obtaining the
funds collected by Qwest on our behalf pursuant to the billing
and collection service agreements at the time such proceeding is
instituted, although pursuant to such agreements, Qwest prepares
settlement statements ten times per month for each state in the
Qwest States summarizing the amounts due to Dex Media East and
Dex Media West and purchases Dex Media Easts and Dex Media
Wests accounts receivable billed by it within
approximately nine business days following such settlement date.
Further, if Qwest continued to bill our customers pursuant to
the billing and collection services agreement following any such
bankruptcy filing, customers of Qwest may be less likely to pay
on time, or at all, bills received, including the amount owed to
us.
|
If one or more of these agreements were rejected, the applicable
agreement may not be specifically enforceable, in which case we
would have only an unsecured claim for damages against Qwest,
Embarq or AT&T, as the case may be, for the breach of
contract resulting from the rejection. If the applicable
directory services license or publishing agreement were
rejected, we would, among other things, no longer be entitled to
be the exclusive official publisher of telephone directories in
the affected markets. We could also lose our right to use the
applicable telephone companys name and logo, and to
enforce the provisions of the applicable agreements under which
we have the right to license trademarks of successor local
exchange carriers in our local markets. If the applicable
non-competition
agreement were rejected and specific enforcement were not
22
available, Qwest, Embarq or AT&T, as the case may be,
would, among other things, no longer be precluded from
publishing print telephone directories or selling certain
advertising in the affected markets. The loss of any rights
under any of these arrangements with Qwest, Embarq or AT&T
may have a material adverse effect on our financial condition or
results of operations.
8) The
inability to enforce any of our key agreements with Sprint,
Embarq, AT&T or Qwest
In connection with our acquisitions, we entered into
non-competition
agreements with each of Sprint, Embarq and AT&T, and in
connection with the Dex Media Merger, we assumed a
non-competition
agreement from Qwest. The Qwest
non-competition
agreement prohibits Qwest from selling directory products
consisting principally of listings and classified advertisements
for subscribers in the geographic areas in the Qwest States in
which Qwest provided local telephone service as of
November 8, 2002 that are directed primarily at customers
in those geographic areas. The Sprint
non-competition
agreement prohibits Sprint in the markets where Sprint provided
local telephone service at the time of the Embarq Acquisition
from selling local directory advertising or producing,
publishing and distributing print directories, with certain
limited exceptions. This
non-compete
agreement survived Sprints
spin-off
of
the Embarq business. The Embarq
non-competition
agreement prohibits Embarq in the markets where Sprint provided
local telephone service at the time of the Embarq Acquisition
from selling local directory advertising or producing,
publishing and distributing print directories, with certain
limited exceptions. The AT&T
non-competition
agreement prohibits AT&T from producing, publishing and
distributing print directories in Illinois and Northwest
Indiana, from selling local or national directory advertising in
such directories and from selling local Internet yellow pages
advertising for certain Internet yellow pages directories (or
from licensing certain AT&T marks to a third party for that
purpose), subject to limited exceptions.
However, under state and federal law, a covenant not to compete
is only enforceable:
|
|
|
|
|
to the extent it is necessary to protect a legitimate business
interest of the party seeking enforcement;
|
|
|
|
if it does not unreasonably restrain the party against whom
enforcement is sought; and
|
|
|
|
if it is not contrary to the public interest.
|
Enforceability of a
non-competition
covenant is determined by a court based on all of the facts and
circumstances of the specific case at the time enforcement is
sought. For this reason, it is not possible for us to predict
whether, or to what extent, a court would enforce either the
Qwest, Sprint, Embarq or AT&Ts covenants not to
compete against us during the term of the respective
non-competition
agreement. If a court were to determine that the
non-competition
agreement is unenforceable, Qwest, Sprint, Embarq or AT&T,
as the case may be, could compete directly against us in the
previously restricted markets. Our inability to enforce the
non-competition
agreement with Qwest, Sprint, Embarq or AT&T could have a
material adverse effect on our financial condition or results of
operations.
Our commercial arrangements with each of Qwest, Embarq and
AT&T have an initial term of 50 years, subject to
specified automatic renewal and early termination provisions.
These commercial arrangements may be terminated by our
counterparty prior to their stated term under certain specified
circumstances, some of which at times may be beyond our
reasonable control
and/or
which
may require extraordinary efforts or the incurrence of material
excess costs on our part in order to avoid breach of the
applicable agreement. It is possible that these arrangements
will not remain in place for their full stated term or that we
may be unable to avoid all potential breaches of or defaults
under these commercial arrangements. Further, any remedy
exercised by Qwest, Embarq or AT&T, as the case may be,
under any of these arrangements could have a material adverse
effect on our financial condition or results of operations.
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 Qwest
States where it provided local telephone service as the
incumbent service provider as of November 8, 2002. If the
staff of a
23
state public utility commission in a Qwest 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.
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 Internet yellow pages 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 that we own and lease
for our business, are subject to stringent laws and regulations
relating to environmental protection. Our 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. 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
business, financial condition and results of operations.
10) Reliance
on, and extension of credit to, small and medium-sized
businesses
Approximately 85% of our directory advertising revenue is
derived from selling advertising to small and medium-sized
enterprises (SMEs). In the ordinary course of our
yellow pages publishing business, we extend credit to these
advertisers for advertising purchases. SMEs, however, tend to
have fewer financial resources and higher failure rates than
large businesses, especially during a downturn in the general
economy. The proliferation of very large retail stores may
continue to harm small- and medium-sized businesses. We believe
these limitations are significant contributing factors to having
advertisers in any given year not renew their
24
advertising in the following year. In addition, full or partial
collection of delinquent accounts can take an extended period of
time. Consequently, we could be adversely affected by our
dependence on and our extension of credit to small- and
medium-sized businesses. For the year ended December 31,
2007, our bad debt expense represented approximately 3.0% of our
net revenue.
11) Dependence
on third-party providers of printing, distribution, delivery,
and IT services
We depend on third parties for the printing and distribution of
our respective directories. We also rely on the services of
Amdocs contractors for information technology (IT)
development and support services related to our directory
publishing business. We must rely on the systems of our
third-party service providers, their ability to perform key
operations on our behalf in a timely manner and in accordance
with agreed levels of service and their ability to attract and
retain sufficient qualified personnel to perform our work. A
failure in the systems of one of our third-party service
providers, or their inability to perform in accordance with the
terms of our contracts or to retain sufficient qualified
personnel, could have a material adverse effect on our business,
results of operations and financial condition.
Our directories are printed through our long-standing
relationship with printing vendor R.R. Donnelley, as well
as with Quebecor. In general, R.R. Donnelley prints all
AT&T and Embarq directories and larger, higher-circulation
Qwest directories, whereas Quebecor prints Qwest directories
that are smaller and have a more limited circulation. Our
agreements with R. R. Donnelley and Quebecor for the
printing of all of our directories extend through 2014.
Because of the large print volume and specialized binding of
directories, only a limited number of companies are capable of
servicing our printing needs. Accordingly, the inability or
unwillingness of R.R. Donnelley or Quebecor, as the case
may be, to provide printing services on acceptable terms or at
all or any deterioration in our relationships with them could
have a material adverse effect on our business. No common
ownership or other business affiliation presently exists between
R.R. Donnelley and us.
We have contracts with three companies for the distribution of
our directories. Although these contracts are scheduled to
expire at various times from May 2009 through May 2010, any of
these vendors may terminate its contract with us upon
120 days written notice. Only a limited number of
companies are capable of servicing our delivery needs.
Accordingly, the inability or unwillingness of our current
vendors to provide delivery services on acceptable terms, or at
all, could have a material adverse effect on our business.
If we were to lose the services of Amdocs contractors, we
would be required either to hire sufficient staff to perform
these IT development and support services
in-house
or
to find an alternative service provider. In the event we were
required to perform any of the services that we currently
outsource, it is unlikely that we would be able to perform them
on a cost-effective basis. There are a limited number of
alternative third-party service providers, if any.
12) Fluctuations
in the price and availability of paper
Our principal raw material is paper. It is one of our largest
cost items, representing approximately 3.9% of our net revenue
for the year ended December 31, 2007. Paper used is
supplied by five paper suppliers: CellMark, Kruger, Abitibi,
Nippon and Catalyst. Our agreements with CellMark, Kruger,
Catalyst and Abitibi expire on December 31, 2008 and our
agreement with Nippon expires on December 31, 2009.
Pursuant to the contracts with CellMark, Abitibi and Kruger, the
price of the paper was set at inception of the contract and
increases at various dates during the term of the agreement.
Should the market price of the paper drop below the set prices
under that contract, both parties are obligated to negotiate in
good faith a lower paper price. Prices under the contracts with
Nippon and Catalyst are negotiated each year based on prevailing
market rates. Furthermore, we purchase paper used for the covers
of our directories from Tembec Enterprises, Inc. (formerly known
as Spruce Falls, Inc.), which we refer to as Tembec. Pursuant to
an agreement between Tembec and us, Tembec is obligated to
provide 100% of our annual cover stock paper requirements at a
pre-negotiated price by weight. This agreement expires on
December 31, 2009. We cannot assure you that we will enter
into new agreements with satisfactory terms or at all.
25
Changes in the supply of, or demand for, paper could affect
market prices or delivery times. We do not engage in hedging
activities to limit our exposure to increases in paper prices.
In the future, the price of paper may fluctuate significantly
due to changes in supply and demand. We cannot assure you that
we will have access to paper in the necessary amounts or at
reasonable prices or that any increases in paper costs would not
have a material adverse effect on our business, results of
operations or financial condition.
13) The
sale of advertising to national accounts is coordinated by third
parties that we do not control
Approximately 15% of our revenue is derived from the sale of
advertising to national or large regional companies, such as
rental car companies, automobile repair shops and pizza delivery
businesses, that purchase advertising in several of our
directories. Substantially all of the revenue derived from
national accounts is serviced through CMRs from which we accept
orders. CMRs are independent third parties that act as agents
for national companies and design their advertisements, arrange
for the placement of those advertisements in directories and
provide billing services. As a result, our relationship with
these national advertisers depends significantly on the
performance of these third party CMRs that we do not control.
Although we believe that our respective relationships with these
CMRs have been mutually beneficial, if some or all of the CMRs
with which we have established relationships were unable or
unwilling to do business with us on acceptable terms or at all,
such inability or unwillingness could materially adversely
affect our business. In addition, any decline in the performance
of CMRs with which we do business could harm our ability to
generate revenue from our national accounts and could materially
adversely affect our business. We also act as a CMR directly
placing certain national advertising. It is possible that status
could adversely impact our relationships with CMRs or expose us
to possible legal claims from CMRs. We are also subject to
credit risk with CMRs from which we accept orders.
14) General
economic factors
Our business results could be adversely affected by a prolonged
national or regional economic recession. We derive substantially
all of our net revenue from the sale of advertising in
directories. Historically, our advertising revenues, as well as
those of yellow pages publishers in general, have not fluctuated
widely with economic cycles. However, a prolonged national or
regional economic recession could have a material adverse effect
on our business, operating results or financial condition. In
addition, a downturn in the real estate and home improvement
markets, such as was recently experienced in Las Vegas and parts
of Florida, may have a larger adverse effect on the types of
businesses that tend to advertise with us. As a result, we may
experience lower than expected revenues for our business in the
future. Lastly, rising fuel prices may have an adverse affect on
our business, particularly with respect to the costs of
distributing our print directories.
In addition, any residual economic effects of, and uncertainties
regarding the following, could adversely affect our business:
|
|
|
|
|
the general possibility, express threat or future occurrence of
terrorist or other related disruptive events; or
|
|
|
|
the United States continuing or expanded involvement in
war, especially with respect to the major markets in which we
operate that depend heavily upon travel, tourism or the military.
|
15) Work
stoppages or increased unionization among our sales
force
Approximately 1,500 of our Dex Media employees are represented
by labor unions covered by two collective bargaining agreements
with Dex Media. In addition, some of our key suppliers
employees are represented by unions. Dex Medias collective
bargaining agreement with the IBEW, which covers approximately
500 of Dex Medias unionized workforce, expires in May
2009, and Dex Medias collective bargaining agreement with
the CWA, which covers approximately 1,000 of Dex Medias
unionized workforce, expires in October 2009. If our unionized
workers, or those of our key suppliers, were to engage in a
strike, work stoppage or other slowdown in the future, our
business could experience a significant disruption of operations
and an increase in operating costs, which could have a material
adverse effect on our business. We cannot assure you that the
collective bargaining agreements with IBEW and CWA will be
renewed in 2009 on
26
satisfactory terms or at all or that a strike or other work
stoppage may not ensue in or prior to 2009. In addition, if a
greater percentage of our workforce becomes unionized, the
business and financial results of our business could be
materially adversely affected.
16) Turnover
among our sales force or key management
The success of our business is dependent on the leadership of
our key personnel. The loss of a significant number of
experienced local marketing consultants
and/or
sales
managers could adversely affect our results of operations,
financial condition and liquidity, as well as our ability to
service our debt. Our success also depends on our ability to
identify, hire, train and retain qualified sales personnel in
each of the regions in which we operate. We currently expend
significant resources and management time in identifying and
training our local marketing consultants and sales managers. Our
ability to attract and retain qualified sales personnel will
depend, however, on numerous factors, including factors outside
our control, such as conditions in the local employment markets
in which we operate.
Furthermore, our success depends on the continued services of
key personnel, including our experienced senior management team
as well as our regional sales management personnel. If we fail
to retain the necessary key personnel, our results of
operations, financial conditions and liquidity, as well as our
ability to service our debt could be adversely affected.
17) The
loss of important intellectual property rights
Some trademarks such as the Qwest,
Embarq, AT&T, Dex,
DexKnows, Donnelley,
Business.com, Work.com, Local
Launch!, Triple Play, DexKnows.com
and Dex Search Marketing brand names and other
intellectual property rights are important to our business. We
rely upon a combination of copyright and trademark laws as well
as contractual arrangements, including licensing agreements,
particularly with respect to Qwest, Embarq and AT&T
markets, to establish and protect our intellectual property
rights. We are required from time to time to bring lawsuits
against third parties to protect our intellectual property
rights. Similarly, from time to time, we are party to
proceedings whereby third parties challenge our rights. We
cannot be sure that any lawsuits or other actions brought by us
will be successful or that we will not be found to infringe the
intellectual property rights of third parties. As the Internet
grows, it may prove more onerous to protect our trade names,
including DexKnows.com, DexOnline.com, Local Launch.com and
Business.com, from domain name infringement or to prevent others
from using Internet domain names that associate their business
with ours. Although we are not aware of any material
infringements of any trademark rights that are significant to
our business, any lawsuits, regardless of their outcome, could
result in substantial costs and diversion of resources and could
have a material adverse effect on our business, financial
condition or results of operations. Furthermore, the loss of
important intellectual property rights could have a material
adverse effect upon our business, financial condition and
results of operations.
18) Legal
Proceedings
We are exposed to defamation, breach of privacy claims and other
litigation matters relating to our business, as well as methods
of collection, processing and use of personal data. The subjects
of our data and users of data collected and processed by us
could also have claims against us if our data were found to be
inaccurate, or if personal data stored by us were improperly
accessed and disseminated by unauthorized persons. These claims
could have a material adverse effect on our business, financial
condition or results of operations or otherwise distract our
management.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
27
The following table details the location and general character
of the material properties used by R.H. Donnelley to
conduct its business:
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
Square
|
|
|
|
|
Lease
|
Property Location
|
|
Footage
|
|
|
Purpose
|
|
Expiration
|
|
Aurora,
CO
(1)(3)
|
|
|
200,000
|
|
|
Sales and Operations
|
|
2008
|
Englewood,
CO
(1)(4)
|
|
|
161,000
|
|
|
Sales and Administration
|
|
2008
|
Cary, NC
|
|
|
122,000
|
|
|
Corporate Headquarters
|
|
2015
|
Omaha,
NE
(1)
|
|
|
103,000
|
|
|
Sales and Operations
|
|
2010
|
Chicago,
IL
(2)
|
|
|
100,000
|
|
|
Sales and Operations
|
|
2012
|
Phoenix,
AZ
(1)
|
|
|
58,000
|
|
|
Sales and Operations
|
|
2017
|
Morrisville,
NC
(2)
|
|
|
55,000
|
|
|
Pre-Press Publishing
|
|
2011
|
Maple Grove,
MN
(1)
|
|
|
53,000
|
|
|
Sales and Operations
|
|
2017
|
Overland Park,
KS
(2)
|
|
|
52,000
|
|
|
Sales and Operations
|
|
2009
|
Beaverton,
OR
(1)
|
|
|
44,000
|
|
|
Sales and Operations
|
|
2016
|
Bellevue,
WA
(1)
|
|
|
42,000
|
|
|
Sales and Operations
|
|
2018
|
Bristol,
TN
(2)
|
|
|
25,000
|
|
|
Graphics Operations
|
|
Owned
|
Murray,
UT
(1)
|
|
|
25,000
|
|
|
Sales and Operations
|
|
2009
|
Fort Myers,
FL
(2)
|
|
|
21,000
|
|
|
Sales and Operations
|
|
2016
|
Tinley Park,
IL
(2)
|
|
|
21,000
|
|
|
Sales and Operations
|
|
2017
|
Dunmore,
PA
(2)
|
|
|
20,000
|
|
|
Graphics Operations
|
|
2009
|
Lombard,
IL
(2)
|
|
|
20,000
|
|
|
Sales and Operations
|
|
2010
|
|
|
|
(1)
|
|
Represents facilities utilized by Dex Media, Inc., our direct
wholly-owned subsidiary, and its direct and indirect
subsidiaries, to conduct their operations.
|
|
(2)
|
|
Represents facilities utilized by R.H. Donnelley Inc., our
direct wholly-owned subsidiary, and its direct subsidiaries, to
conduct their operations.
|
|
(3)
|
|
The Company has entered into a new lease agreement in Englewood,
CO, which will become effective upon the expiration of the
existing lease in November 2008. The new lease expires in
October 2018 and includes approximately 137,000 square feet
of office space.
|
|
(4)
|
|
The Company has entered into a new lease agreement in Lone Tree,
CO, which will become effective upon the expiration of the
existing lease in October 2008. The new lease expires in
September 2019 and includes approximately 143,000 square
feet of office space.
|
We also lease space for additional operations, administrative
and sales offices.
We believe that our current facilities are adequate for our
current and future operations.
|
|
ITEM 3.
|
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
28
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 of such
matters.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of security holders, through
the solicitation of proxies or otherwise, during the quarter
ended December 31, 2007.
29
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
for Registrants Common Equity and Related Stockholder
Matters
The Companys common stock trades on the New York Stock
Exchange under the symbol RHD. The table below
indicates the high and low sales price of the Companys
common stock for each quarter of the last two years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
1st Quarter
|
|
$
|
76.21
|
|
|
$
|
61.91
|
|
|
$
|
66.33
|
|
|
$
|
56.91
|
|
2nd Quarter
|
|
$
|
84.49
|
|
|
$
|
70.67
|
|
|
$
|
58.48
|
|
|
$
|
50.20
|
|
3rd Quarter
|
|
$
|
78.10
|
|
|
$
|
55.34
|
|
|
$
|
55.49
|
|
|
$
|
48.03
|
|
4th Quarter
|
|
$
|
64.63
|
|
|
$
|
33.70
|
|
|
$
|
64.28
|
|
|
$
|
51.49
|
|
On February 26, 2008, there were approximately
2,350 holders of record of the Companys common stock.
On February 26, 2008, the closing market price of the
Companys common stock was $17.24. In accordance with the
Companys Repurchase Plan, we repurchased 2.5 million
shares of RHD common stock at a cost of $95.7 million
during December 2007. No shares of RHD common stock were
repurchased during the year ended December 31, 2006. See
Issuer Purchases of Equity Securities below for
additional information.
In conjunction with the Business.com Acquisition and under the
terms of a related Stock Purchase Agreement, dated as of
July 27, 2007, on August 23, 2007, Jacob Winebaum
purchased from RHD 148,372 shares of RHD common stock for
approximately $9.0 million in a private placement under
Section 4(2) of the Securities Act of 1933.
Mr. Winebaum was the founder and Chief Executive Officer of
Business.com and became President of RHDs Interactive
Division as part of the Business.com Acquisition.
Mr. Winebaum has recently decided to terminate his
employment with RHD to spend more time with his family, but will
continue to serve as a strategic advisor to the Company and sit
on RHD Interactives advisory board.
We have not paid any common stock dividends during the last two
years; however, in December 2007 we announced plans to pay
dividends on our common stock in 2008, but have since determined
to forgo initiating a dividend at this time. For the year ended
December 31, 2007, no Preferred Stock (defined below)
dividends were paid by the Company. Our Preferred Stock earned a
cumulative dividend of 8%, compounded quarterly, prior to its
repurchase by the Company on January 27, 2006, as further
described below. A portion of the cash purchase price for the
repurchase of the Preferred Stock on January 27, 2006 was
attributable to cash dividends payable by the Company for the
period October 1, 2005 through January 3, 2006. Our
various debt instruments contain financial restrictions that
place limitations on our ability to pay dividends in the future
(see Item 7, Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources for
additional information regarding these instruments and
agreements and relevant limitations thereunder).
On January 14, 2005, the Company repurchased
100,303 shares of its outstanding 8% convertible cumulative
preferred stock (Preferred Stock) from investment
partnerships affiliated with The Goldman Sachs Group, Inc. (the
GS Funds) for $277.2 million. The
GS Funds initially had purchased the Preferred Stock in
connection with the Embarq Acquisition. On January 27,
2006, in conjunction with the Dex Media Merger, the Company
repurchased the remaining 100,301 shares of Preferred Stock
held by the GS Funds for an aggregate purchase price of
$336.1 million in cash, including accrued cash dividends
and interest (the GS Repurchase). Subsequent to
the GS Repurchase, we have no outstanding shares of
Preferred Stock. The GS Funds no longer have the right to
elect any directors to the Companys Board of Directors or
any other rights associated with the Preferred Stock. On
November 2, 2006, we repurchased all outstanding warrants
to purchase 1.65 million shares of our common stock from
the GS Funds for an aggregate purchase price of
approximately $53.1 million.
30
On November 9, 2006, certain affiliates of The Carlyle
Group and Welsh, Carson, Anderson & Stowe (the
Selling Shareholders) sold 9,424,360 shares and
9,424,359 shares, respectively, of RHD common stock. The
Selling Shareholders were former shareholders of Dex Media that
became shareholders of RHD in conjunction with the Dex Media
Merger. After this sale, the Selling Shareholders no longer hold
any shares of RHD common stock that they acquired in connection
with the Dex Media Merger. We did not receive any proceeds from
this transaction.
Issuer
Purchases of Equity Securities
The following table presents the monthly share repurchases by
the Company during the fourth quarter of the fiscal year ended
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Dollar Value
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
of Shares that
|
|
|
|
|
|
|
|
|
|
as Part of
|
|
|
May Yet Be
|
|
|
|
Total
|
|
|
Average
|
|
|
the Publicly
|
|
|
Purchased
|
|
|
|
Number
|
|
|
Price
|
|
|
Announced
|
|
|
Under the
|
|
|
|
of Shares
|
|
|
Paid Per
|
|
|
Repurchase
|
|
|
Repurchase
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Program
(1)
|
|
|
Program
(1)
|
|
|
December 1 - 31, 2007
|
|
|
2,538,268
|
|
|
$
|
37.68
|
|
|
|
2,538,268
|
|
|
$
|
4,360,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,538,268
|
|
|
$
|
37.68
|
|
|
|
2,538,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In November 2007, the Companys Board of Directors
authorized a $100.0 million stock repurchase plan, which
was announced by the Company on December 4, 2007. This
authorization permits the Company to purchase its shares of
common stock in the open market pursuant to
Rule 10b-18
of the Securities Exchange Act of 1934 or through block trades
or otherwise over the following twelve months, based on market
conditions and other factors, which purchases may be made or
suspended at any time. Share repurchases under this plan
commenced in December 2007.
|
31
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
Reclassifications
Certain prior period amounts included in the consolidated
statements 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
consolidated statements of operations. In prior periods, certain
selling and support expenses were included in cost of revenue
and others were included in general and administrative expenses.
Additionally, beginning in 2007, we began classifying
adjustments for customer claims to sales allowance, which is
deducted from gross revenue to determine net revenue. 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 in 2006 to conform to the current
periods presentation. Adjustments for customer claims
prior to 2006 were not material. These reclassifications had no
impact on operating income or net income for the years ended
December 31, 2007 and 2006. The table below summarizes
these reclassifications.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Reclass
|
|
|
Reclassified
|
|
|
|
(In thousands)
|
|
|
Net revenue
|
|
$
|
1,895,921
|
|
|
$
|
3,376
|
|
|
$
|
1,899,297
|
|
Cost of revenue
|
|
|
987,056
|
|
|
|
(645,004
|
)
|
|
|
342,052
|
|
Selling and support expenses
|
|
|
|
|
|
|
656,014
|
|
|
|
656,014
|
|
General and administrative expenses
|
|
|
142,418
|
|
|
|
(7,634
|
)
|
|
|
134,784
|
|
The following selected financial data are derived from our
audited consolidated financial statements. The information set
forth below should be read in conjunction with the audited
consolidated financial statements and related notes in
Item 8 and with Managements Discussion and
Analysis of Financial Condition and Results of Operations
in Item 7.
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
(1)
|
|
|
2006
(2)
|
|
|
2005
(3)
|
|
|
2004
(3)(4)
|
|
|
2003
(4)
|
|
|
|
|
|
|
(In thousands, except share and per share data)
|
|
|
|
|
|
Statements of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
2,680,299
|
|
|
$
|
1,899,297
|
|
|
$
|
956,631
|
|
|
$
|
603,116
|
|
|
$
|
256,445
|
|
Partnership income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,967
|
|
|
|
114,052
|
|
Operating income
|
|
|
904,966
|
|
|
|
442,826
|
|
|
|
375,241
|
|
|
|
291,748
|
|
|
|
92,526
|
|
Net income (loss)
|
|
|
46,859
|
|
|
|
(237,704
|
)
|
|
|
67,533
|
|
|
|
70,312
|
|
|
|
(49,953
|
)
|
Preferred dividend
|
|
|
|
|
|
|
1,974
|
|
|
|
11,708
|
|
|
|
21,791
|
|
|
|
58,397
|
|
(Gain) loss on repurchase of Preferred
Stock
(6)
|
|
|
|
|
|
|
(31,195
|
)
|
|
|
133,681
|
|
|
|
|
|
|
|
|
|
Accretion of Preferred Stock to redemption
value
(6)
|
|
|
|
|
|
|
|
|
|
|
211,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders
|
|
$
|
46,859
|
|
|
$
|
(208,483
|
)
|
|
$
|
(288,876
|
)
|
|
$
|
48,521
|
|
|
$
|
(108,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.66
|
|
|
$
|
(3.14
|
)
|
|
$
|
(9.10
|
)
|
|
$
|
1.19
|
|
|
$
|
(3.53
|
)
|
Diluted
|
|
$
|
0.65
|
|
|
$
|
(3.14
|
)
|
|
$
|
(9.10
|
)
|
|
$
|
1.15
|
|
|
$
|
(3.53
|
)
|
Shares Used in Computing Earnings (Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
70,932
|
|
|
|
66,448
|
|
|
|
31,731
|
|
|
|
31,268
|
|
|
|
30,683
|
|
Diluted
|
|
|
71,963
|
|
|
|
66,448
|
|
|
|
31,731
|
|
|
|
32,616
|
|
|
|
30,683
|
|
Balance Sheet
Data
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16,089,093
|
|
|
$
|
16,147,468
|
|
|
$
|
3,873,918
|
|
|
$
|
3,978,922
|
|
|
$
|
2,538,734
|
|
Long-term debt, including current maturities
|
|
|
10,175,649
|
|
|
|
10,403,152
|
|
|
|
3,078,849
|
|
|
|
3,127,342
|
|
|
|
2,092,133
|
|
Preferred
Stock
(6)
|
|
|
|
|
|
|
|
|
|
|
334,149
|
|
|
|
216,111
|
|
|
|
198,223
|
|
Shareholders equity (deficit)
|
|
|
1,822,736
|
|
|
|
1,820,756
|
|
|
|
(291,415
|
)
|
|
|
17,985
|
|
|
|
(56,245
|
)
|
|
|
|
(1)
|
|
Financial data for the year ended December 31, 2007
includes the results of Business.com commencing August 23,
2007.
|
|
(2)
|
|
Financial data for the year ended December 31, 2006
includes the results of the Dex Media Business commencing
February 1, 2006. Net revenue, operating income, net loss
and loss available to common shareholders reflect purchase
accounting adjustments that precluded the recognition of revenue
and certain expenses associated with directories published by
the acquired Dex Media Business prior to and in the month of the
Dex Media Merger. See Item 7 Managements
Discussion and Analysis of Financial Condition and Results of
Operations for further discussion of these items.
|
|
(3)
|
|
Financial data includes the results of the AT&T Directory
Business commencing September 1, 2004. For the years ended
December 31, 2005 and 2004, net revenue, operating income,
net income and income (loss) available to common shareholders
reflect purchase accounting adjustments that precluded the
recognition of revenue and certain expenses associated with
directories published by the acquired AT&T Directory
Business prior to and in the month of the acquisition. See
Item 7 Managements Discussion and Analysis of
Financial Condition and Results of Operations for further
discussion of these items.
|
|
(4)
|
|
Financial data includes the results of the Embarq Directory
Business commencing January 3, 2003. For the years ended
December 31, 2004 and 2003, net revenue, operating income,
net income (loss) and income (loss) available to common
shareholders reflect purchase accounting adjustments that
precluded the recognition of revenue and certain expenses
associated with directories published by the acquired Embarq
Directory Business prior to and in the month of the acquisition.
See Item 7 Managements
|
33
|
|
|
|
|
Discussion and Analysis of Financial Condition and Results of
Operations for further discussion of these items.
|
|
(5)
|
|
In connection with the Business.com Acquisition on
August 23, 2007, Dex Media Merger on January 31, 2006,
AT&T Directory Acquisition on September 1, 2004 and
the Embarq Acquisition on January 3, 2003, we incurred a
significant amount of debt. We also issued Preferred Stock in
November 2002 and January 2003 in connection with the Embarq
Acquisition. Therefore, our cash and debt balances during these
periods were higher than in prior periods.
|
|
(6)
|
|
On January 14, 2005, we repurchased 100,303 shares of
our outstanding Preferred Stock from the GS Funds for
$277.2 million in cash. In connection with the Preferred
Stock repurchase, we recorded an increase to loss available to
common shareholders on the consolidated statement of operations
of $133.7 million to reflect the loss on the repurchase of
these shares for the year ended December 31, 2005. On
January 27, 2006, we completed the GS Repurchase
whereby we repurchased the remaining 100,301 shares of our
outstanding Preferred Stock from the GS Funds for
$336.1 million in cash, including accrued cash dividends
and interest. Based on the terms of the stock purchase
agreement, the GS Repurchase became a probable event on
October 3, 2005, requiring the recorded value of the
Preferred Stock to be accreted to its redemption value of
$334.1 million at December 31, 2005 and
$336.1 million at January 27, 2006. The accretion to
redemption value of $211.0 million and $2.0 million
(which represented accrued dividends and interest) for the years
ended December 31, 2005 and 2006, respectively, has been
recorded as an increase to loss available to common shareholders
on the consolidated statements of operations. In conjunction
with the GS Repurchase, we also reversed the previously
recorded beneficial conversion feature (BCF) related
to these shares and recorded a decrease to loss available to
common shareholders on the consolidated statement of operations
of approximately $31.2 million for the year ended
December 31, 2006.
|
34
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This Item should be read in conjunction with the audited
consolidated financial statements and notes thereto that are
included in Item 8. Unless otherwise indicated, the terms
Company, Donnelley, RHD,
we, us and our refer to R.H.
Donnelley Corporation and its direct and indirect wholly-owned
subsidiaries.
Corporate
Overview
We are one of the nations largest Yellow Pages and online
local commercial search companies, based on revenue, 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.
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 which include online profile creation for
local businesses and broad-based distribution across the
Internet through a network of Internet partners and
relationships which host our local business listings and content
and through search engine marketing (SEM) and search
engine optimization (SEO) services (collectively
referred to as Internet Marketing).
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.
Significant
Business Developments
Acquisition
On August 23, 2007, we acquired Business.com, a leading
business search engine and directory and performance based
advertising network, for a disclosed amount of
$345.0 million (the Business.com Acquisition).
The purchase price determined in accordance with generally
accepted accounting principles (GAAP) was
$334.4 million and excludes certain items such as the value
of unvested equity awards, which will be recorded as
compensation expense over their vesting period. The purpose of
the Business.com
35
Acquisition was to expand our existing interactive portfolio by
adding leading Internet advertising talent and technology, to
strengthen RHDs position in the expanding local commercial
search market and to develop an online performance based
advertising network. Business.com also provides the established
business-to-business
online properties of Business.com, Work.com and the Business.com
Advertising Network. We expect to adopt the Business.com
technology platform to serve our existing advertiser base at our
DexKnows.com Internet Yellow Pages site. Business.com now
operates as a direct, wholly-owned subsidiary of RHD. The
results of Business.com have been included in our consolidated
results commencing August 23, 2007.
In connection with the Business.com Acquisition, we identified
and recorded certain intangible assets at their estimated fair
value, including (1) advertiser relationships,
(2) third party contracts, (3) technology and network
platforms and (4) trade names and trademarks. These
intangible assets are being amortized over remaining useful
lives ranging from 3 to 10 years under the straight-line
method, with the exception of the advertiser relationships and
network platform intangible assets, which are amortized under
the income forecast method. At December 31, 2007,
$258.8 million has been accounted for as goodwill resulting
from the Business.com Acquisition.
Debt
Refinancing
On October 2, 2007, we issued $1.0 billion aggregate
principal amount of 8.875%
Series A-4
Senior Notes due 2017
(Series A-4
Notes). Proceeds from this issuance were (a) used to
repay a $328 million RHD credit facility
(RHD Credit Facility) used to fund the
Business.com Acquisition, (b) contributed to
R.H. Donnelley Inc. (RHDI) in order to provide
funding for the tender offer and consent solicitation of
RHDIs $600 million aggregate principal amount
10.875% Senior Subordinated Notes due 2012
(RHDI Senior Subordinated Notes) and
(c) used to pay related fees and expenses and for other
general corporate purposes. On October 17, 2007, we issued
an additional $500 million of our
Series A-4
Notes. Proceeds from this issuance were (a) transferred to
Dex Media East (defined below) in order to repay
$86.4 million and $213.6 million of the Term
Loan A and Term Loan B under the former Dex Media East
credit facility, respectively, (b) contributed to RHDI in
order to repay $91.8 million, $16.2 million and
$83.0 million of Term
Loans A-4,
D-1, and D-2 under the RHDI Credit Facility, respectively,
and (c) used to pay related fees and expenses.
In October 2007, under the terms and conditions of a tender
offer and consent solicitation to purchase RHDIs
$600 million Senior Subordinated Notes that RHDI commenced
on September 18, 2007, $599.9 million, or 99.9%, of
the outstanding RHDI Senior Subordinated Notes were
repurchased. In December 2007, the remaining $0.1 million
of RHDI Senior Subordinated Notes were redeemed.
On October 24, 2007, we replaced the former Dex Media East
credit facility with a new Dex Media East credit facility,
consisting of a $700.0 million aggregate principal amount
Term Loan A facility, a $400.0 million aggregate
principal amount Term Loan B facility, a
$100.0 million aggregate principal amount revolving loan
facility and a $200.0 million aggregate principal amount
uncommitted incremental facility, in which Dex Media East would
have the right, subject to obtaining commitments for such
incremental loans, on one or more occasions to increase the Term
Loan A, Term Loan B or the revolving loan facility by
such amount. Proceeds from the new Dex Media East credit
facility were used on October 24, 2007 to repay the
remaining $56.5 million and $139.7 million of Term
Loan A and Term Loan B under the former Dex Media East
credit facility, respectively, and $32.5 million under the
former Dex Media East revolver. Proceeds from the new Dex Media
East credit facility were also used on November 26, 2007 to
fund the redemption of $449.7 million of Dex Media
Easts outstanding 9.875% senior notes due 2009 and
$341.3 million of Dex Media Easts outstanding
12.125% senior subordinated notes due 2012.
In December 2007, we redeemed RHDIs remaining
$7.9 million 8.875% Senior Notes due 2010
(RHDI Senior Notes).
See Item 8, Financial Statements and Supplementary
Data Note 5, Long-Term Debt, Credit
Facilities and Notes, for additional information regarding
these refinancing transactions.
36
Share
Repurchases
In November 2007, the Companys Board of Directors
authorized a $100.0 million stock repurchase plan
(Repurchase Plan). This authorization permits the
Company to purchase its shares of common stock in the open
market pursuant to
Rule 10b-18
of the Securities Exchange Act of 1934 or through block trades
or otherwise over the following twelve months, based on market
conditions and other factors, which purchases may be made or
suspended at any time. In accordance with the Repurchase Plan,
we repurchased 2.5 million shares at a cost of
$95.7 million during December 2007.
Forward-Looking
Information
Certain statements contained in this Annual Report on
Form 10-K
regarding Donnelleys 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,
estimates, potential, goal,
outlook, may, predicts,
could, or the negative of those words and other
comparable expressions, are used to identify such
forward-looking statements. Actual events or results may differ
materially. In evaluating those statements, you should
specifically consider various factors, including the risks,
uncertainties and contingencies disclosed under Item 1A of
this Annual Report on
Form 10-K.
Those factors may cause our actual results to differ materially
from any of RHDs forward-looking statements. All
forward-looking statements attributable to us or a person on our
behalf are expressly qualified in their entirety by this
cautionary statement. 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. Although we
believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results,
levels of activity or performance. These forward-looking
statements are made as of the date of this annual report and,
except as required under the federal securities laws and the
rules and regulations of the United States Securities and
Exchange Commission (SEC), we assume no obligation
to update or revise them or to provide reasons why actual
results may differ.
Acquisitions
Beginning in 2003, we completed several acquisitions to be
become one of the largest Yellow Pages and online local
commercial search companies in the United States, based on
revenue. These acquisitions are summarized below. The operating
results from each acquisition have been included in our
consolidated operating results commencing on the date each
acquisition was completed. See Item 8, Financial
Statements and Supplementary Data Note 2,
Identifiable Intangible Assets and Goodwill and
Note 3, Acquisitions, for additional
information regarding these acquisitions.
On August 23, 2007, we acquired Business.com, a leading
business search engine and directory and performance based
advertising network.
On September 6, 2006, we acquired Local Launch (the
Local Launch Acquisition), a local search products,
platform and fulfillment provider. During the years ended
December 31, 2007 and 2006, the Local Launch business
operated as a direct wholly-owned subsidiary of RHD. Effective
January 1, 2008, Local Launch was merged with and into
Business.com. The products and services provided by Local Launch
will continue to be offered to our advertisers through
Business.com and the Local Launch brand and logo will continue
to be utilized for our Internet Marketing offerings.
On January 31, 2006, we acquired Dex Media (the Dex
Media Merger), the exclusive publisher of the
official yellow pages and white pages directories
for Qwest Communications International Inc. (Qwest)
where Qwest was the primary incumbent local exchange carrier
(ILEC) in November 2002. Dex Media is the indirect
parent of Dex Media East LLC (Dex Media East) and
Dex Media West LLC (Dex Media West). Dex Media East
operates our directory business in the following states:
Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota
and South Dakota (collectively, the Dex East
States). Dex Media West operates our directory business in
the following states: Arizona, Idaho, Montana, Oregon, Utah,
37
Washington and Wyoming (collectively, the Dex West
States and together with the Dex East States,
collectively, the Qwest States). The acquired
business of Dex Media and its subsidiaries (Dex Media
Business) now operates through Dex Media, Inc., one of
RHDs direct, wholly-owned subsidiaries. To finance the Dex
Media Merger, we issued $660 million 6.875% Senior
Discount Notes due January 15, 2013 for gross proceeds of
$600.5 million and $1.21 billion 8.875% Senior
Notes due January 15, 2016 to pay the cash portion of the
purchase price to the Dex Media stockholders.
In connection with the Dex Media Merger, we acquired directory
services agreements (collectively, the Dex Directory
Services Agreements) which Dex Media had entered into with
Qwest including, (1) a publishing agreement with a term of
50 years commencing November 8, 2002 (subject to
automatic renewal for additional one-year terms), which grants
us the right to be the exclusive official directory publisher of
listings and classified advertisements of Qwests telephone
customers in the geographic areas in the Qwest States in which
Qwest (and its successors) provided local telephone services as
of November 8, 2002, as well as having the exclusive right
to use certain Qwest branding on directories in those markets
and (2) a non-competition agreement with a term of
40 years commencing November 8, 2002, pursuant to
which Qwest (on behalf of itself and its affiliates and
successors) has agreed not to sell directory products consisting
principally of listings and classified advertisements for
subscribers in the geographic areas in the Qwest States in which
Qwest provided local telephone service as of November 8,
2002 that are directed primarily at consumers in those
geographic areas.
On September 1, 2004, we completed the acquisition of the
directory publishing business (AT&T Directory
Business) of AT&T Inc. (formerly known as SBC
Communications, Inc., SBC) in Illinois and Northwest
Indiana, including AT&Ts interest in The
DonTech II Partnership (DonTech), a 50/50
general partnership between us and AT&T (collectively, the
AT&T Directory Acquisition). As a result of the
AT&T Directory Acquisition, we became the publisher of
AT&T branded yellow pages in Illinois and Northwest
Indiana. The acquired AT&T Directory Business now operates
as R. H. Donnelley Publishing and Advertising of Illinois
Partnership, one of our indirect, wholly-owned subsidiaries.
Directory services agreements between AT&T and the Company
include a directory services license agreement, a
non-competition agreement, an Internet Yellow Pages reseller
agreement and a directory publishing listing agreement
(collectively, AT&T Directory Services
Agreements) with certain affiliates of AT&T. The
directory services license agreement designates us as the
official and exclusive provider of yellow pages directory
services for AT&T (and its successors) in Illinois and
Northwest Indiana (the Territory), grants us the
exclusive license (and obligation as specified in the agreement)
to produce, publish and distribute white pages directories in
the Territory as AT&Ts agent and grants us the
exclusive license (and obligation as specified in the agreement)
to use the AT&T brand and logo on print directories in the
Territory. The non-competition agreement prohibits AT&T
(and its affiliates and successors), with certain limited
exceptions, from (1) producing, publishing and distributing
yellow and white pages print directories in the Territory,
(2) soliciting or selling local or national yellow or white
pages advertising for inclusion in such directories, and
(3) soliciting or selling local Internet yellow pages
advertising for certain Internet yellow pages directories in the
Territory or licensing AT&T marks to any third party for
that purpose. The Internet Yellow Pages reseller agreement
grants us the (a) exclusive right to sell to local
advertisers within the Territory Internet yellow pages
advertising focused upon products and services to be offered
within that territory, and (b) non-exclusive right to sell
to local (excluding National advertisers) advertisers within the
Territory Internet yellow pages advertising focused upon
products and services to be offered outside of the Territory, in
each case, onto the YellowPages.com platform. The directory
publishing listing agreement gives us the right to purchase and
use basic AT&T subscriber listing information and updates
for the purpose of publishing directories. The AT&T
Directory Services Agreements (other than the Internet Yellow
Pages reseller agreement) have initial terms of 50 years,
commencing in September 2004, subject to automatic renewal and
early termination under specified circumstances. The Internet
Yellow Pages reseller agreement has a term of 5 years,
commencing in September 2004.
On January 3, 2003, we completed the acquisition of the
directory business (the Embarq Directory Business)
of Sprint Nextel Corporation (Sprint) (formerly
known as Sprint Corporation) by acquiring all the outstanding
capital stock of the various entities comprising Sprint
Publishing and Advertising (collectively,
38
the Embarq Acquisition). As a result, we are the
publisher of Embarq branded yellow pages directories in
18 states including Nevada and Florida. The Embarq
Directory Business now operates as R.H. Donnelley Publishing and
Advertising, Inc., one of our indirect, wholly-owned
subsidiaries.
Directory services agreements between Embarq and the Company,
which were executed in May 2006 in conjunction with
Sprints spin-off of its local telephone business, include
a directory services license agreement, a trademark license
agreement and a non-competition agreement with certain
affiliates of Embarq, as well as a non-competition agreement
with Sprint entered into in January 2003 (collectively
Embarq Directory Services Agreements). The Embarq
Directory Services Agreements replaced the previously existing
analogous agreements with Sprint, except that Sprint remained
bound by its non-competition agreement. The directory services
license agreement grants us the exclusive license (and
obligation as specified in the agreement) to produce, publish
and distribute yellow and white pages directories for Embarq
(and its successors) in 18 states where Embarq provided
local telephone service at the time of the agreement. The
trademark license agreement grants us the exclusive license (and
obligation as specified in the agreement) to use certain
specified Embarq trademarks in those markets, and the
non-competition agreements prohibit Embarq and Sprint (and their
respective affiliates and successors) in those markets from
selling local directory advertising, with certain limited
exceptions, or producing, publishing and distributing print
directories. The Embarq Directory Services Agreements have
initial terms of 50 years, commencing in January 2003,
subject to automatic renewal and early termination under
specified circumstances.
The purposes of our acquisitions included the following:
|
|
|
|
|
Building RHD into a leading publisher of yellow pages
directories and provider of online commercial search services;
|
|
|
|
Adding leading Internet advertising talent and technology, to
strengthen RHDs position in the expanding local commercial
search market and to develop an online performance based
advertising network;
|
|
|
|
Enhancing our local Internet Marketing capabilities and
offerings.
|
These acquisitions were accounted for as purchase business
combinations and the purchase price for each acquisition was
allocated to the tangible and identifiable intangible assets
acquired and liabilities assumed based on their respective fair
values on each acquisition date.
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.
Critical
Accounting Estimates
The preparation of financial statements in accordance with GAAP
requires management to estimate the effect of various matters
that are inherently uncertain as of the date of the financial
statements. Each of these estimates varies in regard to the
level of judgment involved and its potential impact on the
Companys reported financial results. Estimates are deemed
critical when a different estimate could have reasonably been
used or when changes in the estimate are reasonably likely to
occur from period to period, and could materially impact the
Companys financial condition, changes in financial
condition or results of operations. The Companys
significant accounting polices as of December 31, 2007 are
discussed in Note 2 of the notes to the consolidated
financial statements included in Item 8 of this Annual
Report. The critical estimates inherent in these accounting
polices as of December 31, 2007 are discussed below.
Management believes the current assumptions and other
considerations used to estimate these amounts in the
Companys consolidated financial statements are appropriate.
39
Intangible
Assets and Goodwill Valuation and Amortization
Our intangible assets consist of directory services agreements
between the Company and each of Qwest, AT&T and Embarq,
respectively, a non-competition agreement between the Company
and Sprint, established customer relationships and a third party
contract, trademarks and trade names, an advertising commitment
and technology and network platforms, all resulting from the Dex
Media Merger, AT&T Directory Acquisition, Embarq
Acquisition, Business.com Acquisition or Local Launch
Acquisition. The intangible assets are being amortized over the
period the assets are expected to contribute to the cash flow of
the Company, which reflect the expected pattern of benefit. Our
recorded goodwill resulted from the Dex Media Merger, AT&T
Directory Acquisition, Embarq Acquisition, Business.com
Acquisition and Local Launch Acquisition and is not subject to
amortization, however is subject to annual impairment testing.
The intangible assets are subject to impairment testing in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 144,
Accounting for the
Impairment or Disposal of Long-Lived Assets
(SFAS No. 144). The Company reviews
the carrying value of its intangible assets for impairment
whenever events or circumstances indicate that their carrying
amount may not be recoverable. The impairment test for the
intangible assets is performed by comparing the carrying amount
of the intangible assets to the sum of the undiscounted expected
future cash flows relating to these assets. In accordance with
SFAS No. 144, impairment exists if the sum of the
future undiscounted cash flows is less than the carrying amount
of the intangible asset, or its related group of assets.
Impairment would result in a write-down of the intangible asset
to its estimated fair value based on discounted future cash
flows.
Goodwill is subject to impairment testing in accordance with
SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142). Goodwill is tested for
impairment by comparing the carrying amount of the reporting
unit to the estimated fair value of the reporting unit. In
accordance with SFAS No. 142, impairment may exist if
the carrying amount of the reporting unit is less than its
estimated fair value. Impairment would result in a write-down
equal to the difference between the carrying amount and the
estimated fair value of the reporting unit goodwill.
We used certain estimates and assumptions in our impairment
evaluation, including, but not limited to, projected future cash
flows, revenue growth, customer attrition levels, and estimated
write-offs. During the year ended December 31, 2007, we
recognized an impairment charge of $20.0 million associated
with the tradenames acquired in the Embarq Acquisition. This
impairment charge resulted from a change in our branding
strategy to utilize a new Dex market brand for all of our print
and online products across our entire footprint and discontinued
use of the tradenames acquired in the Embarq Acquisition. This
impairment charge was determined using the relief from royalty
valuation method and is included within depreciation and
amortization expense on the consolidated statement of operations
for the year ended December 31, 2007.
The decline in the trading value of our debt and equity
securities will require us to continue to assess the
recoverability of our goodwill and negative industry and
economic trends may indicate that the carrying values of our
other intangible assets are not recoverable. Apart from the
impairment charge discussed above, we concluded that there was
no impairment of intangible assets or goodwill at
December 31, 2007. The trading value of our publicly traded
debt and equity securities has continued to decline subsequent
to December 31, 2007. If the value of our debt and equity
securities does not recover, we will be required to assess the
fair values of the assets and liabilities of the Company and
could conclude that goodwill and other long lived assets are
impaired, which would result in impairment charges in 2008. In
addition, worsening economic conditions in certain of our
markets may require us to assess the recoverability of other
intangible assets during 2008 which could result in additional
impairment charges.
Had the aggregate net book value of the intangible assets and
goodwill at December 31, 2007 been impaired by 1%, net
income in 2007 would have been adversely impacted by
approximately $88.2 million.
Additionally, management must assess whether the remaining
useful lives of the intangible assets represent the period that
the intangible assets are expected to contribute to our cash
flow. In our assessment process, we used certain estimates and
assumptions, including projected future cash flows, customer
attrition levels and industry and economic conditions. In
accordance with SFAS No. 144, we evaluate the
remaining
40
useful lives of the intangible assets whenever events or
circumstances indicate that a revision to the remaining period
of amortization is warranted. If the estimated remaining useful
lives change, the remaining carrying amount of the intangible
asset would be amortized prospectively over that revised
remaining useful life. For the year ended December 31,
2007, amortization of intangible assets was $408.3 million.
Had the remaining useful lives of the intangible assets been
shortened by 10%, net income in 2007 would have been adversely
impacted by approximately $32.2 million.
Income
Taxes
We account for income taxes under the asset and liability method
in accordance with SFAS No. 109,
Accounting for
Income Taxes
(SFAS No. 109). Deferred
tax liabilities or assets reflect temporary differences between
amounts of assets and liabilities for financial and tax
reporting. Such amounts are adjusted, as appropriate, to reflect
changes in tax rates expected to be in effect when the temporary
differences reverse. A valuation allowance is established to
offset any deferred tax assets if, based upon the available
evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
We adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes: An Interpretation
of FASB Statement No. 109
(FIN No. 48) on January 1, 2007.
This interpretation clarifies the accounting for uncertainty in
income taxes recognized in an entitys financial statements
in accordance with SFAS No. 109. FIN No. 48
prescribes a recognition threshold and measurement principles
for the financial statement recognition and measurement of tax
positions taken or expected to be taken on a tax return. Under
FIN No. 48, the impact of an uncertain income tax
position on an income tax return must be recognized at the
largest amount that is more likely than not to be sustained upon
audit by the relevant taxing authority. An uncertain income tax
position will not be recognized if it has less than a 50%
likelihood of being sustained. Additionally,
FIN No. 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosures and transition requirements.
See Item 8, Financial Statements and Supplementary
Data Note 9, Income Taxes,
for more information regarding our provision (benefit) for
income taxes as well as the impact of adopting
FIN No. 48.
In the ordinary course of business, there may be many
transactions and calculations where the ultimate tax outcome is
uncertain. The calculation of tax liabilities involves dealing
with uncertainties in the application of complex tax laws. We
recognize potential liabilities for anticipated tax audit issues
based on an estimate of the ultimate resolution of whether, and
the extent to which, additional taxes will be due. Although we
believe the estimates are reasonable, no assurance can be given
that the final outcome of these matters will not be different
than what is reflected in the historical income tax provisions
and accruals.
As part of our financial reporting process, we must assess the
likelihood that our deferred tax assets can be recovered. Unless
recovery is more likely than not, the provision for taxes must
be increased by recording a reserve in the form of a valuation
allowance for the deferred tax assets that are estimated not to
be ultimately recoverable. In this process, certain relevant
criteria are evaluated including the existence of deferred tax
liabilities that can be used to absorb deferred tax assets and
taxable income in future years. Our judgment regarding future
taxable income may change due to future market conditions,
changes in U.S. tax laws and other factors. These changes,
if any, may require material adjustments to these deferred tax
assets and an accompanying reduction or increase in net income
in the period when such determinations are made.
In addition, we operate within multiple taxing jurisdictions and
we are subject to audit in these jurisdictions. These audits can
involve complex issues, which may require an extended period of
time to resolve. We maintain a liability for the estimate of
potential income tax exposure and in our opinion adequate
provision for income taxes has been made for all years.
Allowance
for Doubtful Accounts and Sales Claims
We record our revenue net of an allowance for sales claims. In
addition, we record a provision for bad debts. The provision for
bad debts and allowance for sales claims are estimated based on
historical experience. We also evaluate the current condition of
our customer balances, bankruptcy filings, any change in credit
41
policy, historical charge-off patterns, recovery rates and other
data when determining our allowance for doubtful accounts
reserve. We review these estimates periodically to assess
whether additional adjustment is needed based on economic events
or other circumstances, including actual experience at the end
of the billing and collection cycle. We believe that the
allowance for doubtful accounts and sales claims is adequate to
cover anticipated losses under current conditions; however,
significant deterioration in any of the factors noted above or
in the overall economy could materially change these
expectations. The provisions for sales claims and doubtful
accounts are estimated based on a percentage of revenue.
Accordingly, an additional 1% change in these allowance
percentages would have impacted 2007 net income by
approximately $16.5 million.
Pension
Benefits
Our pension plan obligations and related assets of the
Companys defined benefit pension plans are presented in
Note 10 to our consolidated financial statements. Plan
assets consist primarily of marketable equity and debt
instruments and are valued using market quotations. The
determination of plan obligations and annual pension expense
requires management to make a number of assumptions. Key
assumptions in measuring the plan obligations include the
discount rate, the rate of future salary increases and the
long-term expected return on plan assets. During 2007 and 2006,
we utilized the Citigroup Pension Liability Index as the
appropriate discount rate for our defined benefit pension plans.
This Index is widely used by companies throughout the United
States and is considered to be one of the preferred standards
for establishing a discount rate. In 2005, the discount rate was
determined using a methodology that discounts the projected plan
cash flows to the measurement date using the spot rates provided
in the Citigroup Pension Discount Curve. A single discount rate
was then computed so that the present value of the benefit
plans cash flows using this single rate equaled the
present value computed using the Citigroup Pension Discount
Curve. Salary increase assumptions are based upon historical
experience and anticipated future management actions. Asset
returns are based upon the anticipated average rate of earnings
expected on invested funds of the plan over the long-run. At
December 31, 2007, the weighted-average actuarial
assumptions were: discount rate of 5.90%; long-term rate of
return on plan assets of 8.25% for RHD plans and 8.50% for Dex
Media plans; and assumed salary increases of 3.66%. Net periodic
pension costs recognized in 2007 were $12.8 million. A 1%
increase in the discount rate would affect 2007 net income
by approximately $3.5 million and a 1% decrease in the
discount rate would affect 2007 net income by approximately
$3.1 million; a 1% increase in assumed salary increases
would affect 2007 net income by approximately
$1.2 million and a 1% decrease in assumed salary increases
would affect 2007 net income by approximately
$1.1 million; and a 1% change in the long-term rate of
return on plan assets would affect 2007 net income by
approximately $2.3 million.
Stock-Based
Compensation
On January 1, 2006, we adopted SFAS No. 123(R),
Share-Based Payment
(SFAS No. 123(R)) using the Modified
Prospective Method. Under this method, we are required to record
compensation expense in the consolidated statement of operations
for all employee stock-based awards granted, modified or settled
after the date of adoption and for the unvested portion of
previously granted stock awards that remain outstanding as of
the beginning of the period of adoption based on their grant
date fair values. Under SFAS No. 123(R), the fair
value of our stock-based awards is calculated using the
Black-Scholes model at the time these stock-based awards are
granted. SFAS No. 123(R) and the use of the
Black-Scholes model requires significant judgment and the use of
estimates, particularly for assumptions such as expected
volatility, risk-free interest rates and expected lives to value
stock-based awards and forfeiture rates to recognize stock-based
compensation. The following assumptions were used in valuing
stock-based awards and for recognition of stock-based
compensation for the years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
December 31, 2007
|
|
December 31, 2006
|
|
Expected volatility
|
|
23.5%
|
|
28.2%
|
Risk-free interest rate
|
|
4.5%
|
|
4.4%
|
Expected life
|
|
5 Years
|
|
5 years
|
Forfeiture rate
|
|
5.0%
|
|
5.0%
|
Dividend yield
|
|
0%
|
|
0%
|
42
We estimate expected volatility based on the historical
volatility of the price of our common stock over the expected
life of our stock-based awards. The expected life represents the
period of time that stock-based awards granted are expected to
be outstanding, which is estimated consistent with the
simplified method identified in SAB No. 107 (defined
below). The simplified method calculates the expected life as
the average of the vesting and contractual terms of the award.
The risk-free interest rate is based on applicable
U.S. Treasury yields that approximate the expected life of
stock-based awards granted. We also use historical data to
estimate a forfeiture rate. Estimated forfeitures are adjusted
to the extent actual forfeitures differ, or are expected to
materially differ, from such estimates.
These assumptions reflect our best estimates, but they involve
inherent uncertainties based on certain conditions generally
outside the control of the Company. As a result, if other
assumptions had been used, total stock-based compensation, as
determined in accordance with SFAS No. 123(R) could
have been materially impacted. Furthermore, if we use different
assumptions for future grants, stock-based compensation could be
materially impacted in future periods.
New
Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board
(FASB) issued SFAS No. 141(R),
Business
Combinations
(SFAS No. 141(R)).
SFAS No. 141(R) replaces SFAS No. 141,
Business Combinations
(SFAS No. 141), and establishes
principles and requirements for how an acquirer in a business
combination recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and
any noncontrolling interest in the acquiree, recognizes and
measures the goodwill acquired in the business combination or a
gain from a bargain purchase, and determines what information to
disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.
SFAS No. 141(R) is effective for business combinations
for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after
December 15, 2008 and earlier adoption is prohibited.
In December 2007, the SEC issued Staff Accounting
Bulletin No. 110, Use of a Simplified Method in
Developing Expected Term of Share Options
(SAB No. 110). SAB No. 110
amends and replaces Staff Accounting Bulletin No. 107
(SAB No. 107), which expressed the views
of the staff regarding the use of the simplified
method in developing an estimate of the expected life of
plain vanilla share options and allowed usage of the
simplified method for share option grants prior to
December 31, 2007. SAB No. 110 will continue to
permit, under certain circumstances, the use of the simplified
method beyond December 31, 2007. SAB No. 110 is
effective January 1, 2008 and the Company does not expect
the adoption of SAB No. 110 to have a material impact
on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115
(SFAS No. 159).
SFAS No. 159 permits companies to choose to measure
many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value.
The objective of SFAS No. 159 is to provide
opportunities to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without
having to apply hedge accounting provisions.
SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes
for similar types of assets and liabilities.
SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. We adopted SFAS No. 159
effective January 1, 2008. The adoption of
SFAS No. 159 did not have a material impact on our
consolidated financial position and results of operations.
In September 2006, the 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 have a material impact on our consolidated financial
position and results of operations.
We have reviewed other new accounting standards not identified
above and do not believe any other new standards will have a
material impact on our financial position or operating results.
43
RESULTS
OF OPERATIONS
Year
Ended December 31, 2007 compared to Year Ended
December 31, 2006
Factors
Affecting Comparability
Reclassifications
Certain prior period amounts included in the consolidated
statements 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
consolidated statements of operations. In prior periods, certain
selling and support expenses were included in cost of revenue
and others were included in general and administrative expenses.
Additionally, beginning in 2007, we began classifying
adjustments for customer claims to sales allowance, which is
deducted from gross revenue to determine net revenue. 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 in 2006 to conform to the current
periods presentation. These reclassifications had no
impact on operating income or net income for the years ended
December 31, 2007 and 2006. The table below summarizes
these reclassifications.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Reclass
|
|
|
As Reclassified
|
|
|
|
(Amounts in millions)
|
|
|
Net revenue
|
|
$
|
1,895.9
|
|
|
$
|
3.4
|
|
|
$
|
1,899.3
|
|
Cost of revenue
|
|
|
987.1
|
|
|
|
(645.0
|
)
|
|
|
342.1
|
|
Selling and support expenses
|
|
|
|
|
|
|
656.0
|
|
|
|
656.0
|
|
General and administrative expenses
|
|
|
142.4
|
|
|
|
(7.6
|
)
|
|
|
134.8
|
|
Acquisitions
As a result of the Dex Media Merger and the AT&T Directory
Acquisition, the related financings and associated purchase
accounting, our 2007 results reported in accordance with GAAP
are not comparable to our 2006 reported GAAP results. GAAP
results presented for the year ended December 31, 2006
include eleven months of results from the Dex Media Business,
which was acquired on January 31, 2006. Under the deferral
and amortization method of revenue recognition, the billable
value of directories published is recognized as revenue in
subsequent reporting periods. However, purchase accounting
precluded us from recognizing in 2006 directory revenue and
certain expenses associated with directories that published
prior to the Dex Media Merger, including all directories
published in the month the Dex Media Merger was completed. Thus,
our reported 2007 and 2006 GAAP results are not comparable and
our 2006 results are not indicative of our underlying operating
and financial performance. Accordingly, management is presenting
adjusted pro forma information for the year ended
December 31, 2006 that, among other things, eliminates the
purchase accounting impact on revenue and certain expenses
related to the Dex Media Merger and assumes the Dex Media Merger
occurred on January 1, 2006. Management believes that the
presentation of this adjusted pro forma information will help
financial statement users better and more easily compare current
period underlying operating results against what the combined
company performance would more likely have been in the
comparable prior period. All of the adjusted pro forma amounts
disclosed under the caption
Non-GAAP Measures Adjusted Pro Forma
Amounts below or elsewhere are non-GAAP measures, which
are reconciled to the most comparable GAAP measures under that
caption below. While the adjusted pro forma results exclude the
effects of purchase accounting, and certain other non-recurring
items, to better reflect underlying operating results in 2006,
because of differences between RHD and Dex Media and their
respective accounting policies, the 2007 GAAP results and 2006
adjusted pro forma results are not strictly comparable and
should not be treated as such.
44
GAAP Reported
Results
Net
Revenue
The components of our net revenue for the years ended
December 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Gross directory advertising revenue
|
|
$
|
2,697.3
|
|
|
$
|
1,907.3
|
|
|
$
|
790.0
|
|
Sales claims and allowances
|
|
|
(54.8
|
)
|
|
|
(41.9
|
)
|
|
|
(12.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net directory advertising revenue
|
|
|
2,642.5
|
|
|
|
1,865.4
|
|
|
|
777.1
|
|
Other revenue
|
|
|
37.8
|
|
|
|
33.9
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
2,680.3
|
|
|
$
|
1,899.3
|
|
|
$
|
781.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our directory advertising revenue is earned primarily from the
sale of advertising in yellow pages directories we publish, net
of sales claims and allowances. Directory advertising revenue
also includes revenue for Internet-based advertising products
including online directories such as DexKnows.com, Business.com,
and Internet Marketing services. Directory advertising revenue
is 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. Revenue with respect to print
advertising and Internet-based advertising products that are
sold with print advertising, is recognized under the deferral
and amortization method, whereby revenue is initially deferred
when a directory is published and recognized ratably over the
directorys life, which is typically 12 months.
Revenue with respect to Internet-based services that are not
sold with print advertising, such as Internet Marketing
services, is recognized as delivered or fulfilled.
Gross directory advertising revenue for the year ended
December 31, 2007 increased $790.0 million, or 41.4%,
from the year ended December 31, 2006. The increase is
primarily due to an increase of $778.2 million in gross
directory advertising revenue from directories acquired in the
Dex Media Merger (Qwest directories), which included
gross directory advertising revenue of $1,647.1 million for
the year ended December 31, 2007 as compared to
$868.9 million for the year ended December 31, 2006.
Due to purchase accounting, gross directory advertising revenue
for the year ended December 31, 2006 excluded the
amortization of advertising revenue for Qwest directories
published prior to February 2006 totaling $661.5 million.
Purchase accounting related to the Dex Media Merger had no
impact on reported revenue in 2007. The increase is also a
result of recognizing a full year of results during 2007 from
the Dex Media Business acquired on January 31, 2006, as
opposed to eleven months of results during 2006.
The increase in gross directory advertising revenue for the year
ended December 31, 2007 is also due to new product
introductions, including online products and services and
incremental revenue from Business.com and Local Launch. These
increases are partially offset by declines in renewal business,
declines in sales productivity related to systems modernization
and weaker housing trends in certain of our Embarq markets.
Sales claims and allowances for the year ended December 31,
2007 increased $12.9 million, or 30.8%, from the year ended
December 31, 2006. The increase in sales claims and
allowances for the year ended December 31, 2007 is
primarily due to recognizing a full year of results during 2007
from the acquired Dex Media Business, as opposed to eleven
months of results during 2006 and the related purchase
accounting impact during that period, offset by lower claims
experience during 2007 primarily in the Qwest markets.
Other revenue for the year ended December 31, 2007
increased $3.9 million, or 11.5%, from the year ended
December 31, 2006. Other revenue includes barter revenue,
late fees received on outstanding customer balances, commissions
earned on sales contracts with respect to advertising placed
into other publishers directories, and sales of
directories and certain other advertising-related products. The
increase in other revenue for the year ended December 31,
2007 is primarily a result of recognizing a full year of results
during 2007 from the Dex Media Business, as opposed to eleven
months of results during 2006, partially offset by declines in
barter activity.
45
Advertising sales is a statistical measure and consists of sales
of advertising in print directories distributed during the
period and Internet-based products and services with respect to
which such advertising first appeared publicly during the
period. It is important to distinguish advertising sales from
net revenue, which under GAAP is recognized under the deferral
and amortization method. Advertising sales for the year ended
December 31, 2007 were $2,743.4 million, compared to
$2,732.8 million for the year ended December 31, 2006.
Advertising sales for these periods assumes the Business.com
Acquisition occurred on January 1, 2006, and for the year
ended December 31, 2006 assumes the Dex Media Merger
occurred on January 1, 2006. The $10.6 million, or
0.4%, increase in advertising sales for the year ended
December 31, 2007 is a result of stronger ad sales in the
second and fourth quarters of 2007, increases in our new online
products and services, and Business.com and Local Launch
revenue, partially offset by declines in renewal business,
mainly driven by conservatism in advertiser spending based on
economic indicators. Revenue with respect to print advertising,
and Internet-based advertising products that are sold with print
advertising, is recognized under the deferral and amortization
method, whereby revenue is initially deferred when a directory
is published and recognized ratably over the directorys
life, which is typically 12 months. Revenue with respect to
Internet-based services that are not sold with print
advertising, such as Internet Marketing services, is recognized
as delivered or fulfilled.
Expenses
The components of our total expenses for the years ended
December 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Cost of revenue
|
|
$
|
450.3
|
|
|
$
|
342.1
|
|
|
$
|
108.2
|
|
Selling and support expenses
|
|
|
716.3
|
|
|
|
656.0
|
|
|
|
60.3
|
|
General and administrative expenses
|
|
|
145.6
|
|
|
|
134.8
|
|
|
|
10.8
|
|
Depreciation and amortization
|
|
|
463.1
|
|
|
|
323.6
|
|
|
|
139.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
1,775.3
|
|
|
$
|
1,456.5
|
|
|
$
|
318.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our operating expenses in 2007 include investments in 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
investments include launching our new Dex market brand and our
new uniform resource locator (URL), DexKnows.com,
across our entire footprint, the introduction of plus companion
directories in our Embarq and AT&T markets, as well as
associated marketing and advertising campaigns, employee
training associated with new product introductions,
modernization and consolidation of our IT platform. We expect
that these investments 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. 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. All deferred costs related to
the sale and production of directories are recognized ratably
over the life of each directory under the deferral and
amortization method of accounting, with cost recognition
commencing in the month of directory distribution.
46
Cost
of Revenue
Total cost of revenue for the year ended December 31, 2007
was $450.3 million, compared to $342.1 million
reported for the year ended December 31, 2006. The primary
components of the $108.2 million, or 31.6%, increase in
cost of revenue are as follows:
|
|
|
|
|
|
|
$ Change
|
|
|
|
(Amounts
|
|
|
|
in millions)
|
|
|
Expenses related to the Dex Media Business excluded from the
year ended December 31, 2006 due to purchase accounting
from the Dex Media Merger
|
|
$
|
119.3
|
|
Increased internet production and distribution costs
|
|
|
37.2
|
|
Increased print, paper and distribution costs
|
|
|
10.9
|
|
Decreased cost uplift expense (defined below)
|
|
|
(49.3
|
)
|
Decreased barter expense
|
|
|
(8.0
|
)
|
All other, net
|
|
|
(1.9
|
)
|
|
|
|
|
|
Total increase in cost of revenue for the year ended
December 31, 2007
|
|
$
|
108.2
|
|
|
|
|
|
|
The increase in cost of revenue for the year ended
December 31, 2007 is primarily due to the effects of
purchase accounting associated with the Dex Media Merger in
2006, as well as recognizing a full year of results from the
acquired Dex Media Business during 2007.
As a result of purchase accounting required by GAAP, print and
delivery costs related to directories that published prior to
and in the month of the Dex Media Merger totaling
$119.3 million were not reported during the year ended
December 31, 2006. Directory expenses incurred during the
year ended December 31, 2006 include the amortization of
deferred directory costs relating to Qwest directories published
beginning in February 2006.
During the year ended December 31, 2007, we incurred
$37.2 million of additional expenses related to internet
production and distribution due to investment in our Triple Play
strategy, as well as recognizing a full year of results from the
acquired Dex Media Business, compared to the year ended
December 31, 2006. This investment focuses on enhancing and
growing our Internet Yellow Pages (IYP) and Internet
Marketing products and services.
During the year ended December 31, 2007, we incurred
$10.9 million of additional print, paper and distribution
costs, compared to the year ended December 31, 2006, due to
new companion print products in our Embarq and AT&T
markets, as well as recognizing a full year of results from the
acquired Dex Media Business. Companion directories are a small
format directory that serves as a complement to the core
directory, with replicated advertising from the core directory
available for an additional charge to our advertisers. Increases
were offset by the commencement of our print product
optimization program and negotiated price reductions in our
print expenses.
As a result of purchase accounting required by 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 and the AT&T
Directory Acquisition at their fair value, determined as
(a) the estimated billable value of the published directory
less (b) the expected costs to complete the directories,
plus (c) a normal profit margin. We refer to this purchase
accounting entry as cost uplift. Cost uplift
associated with print, paper and delivery costs is amortized
over the terms of the applicable directories to cost of revenue,
whereas cost uplift associated with commissions is amortized
over the terms of the applicable directories to selling and
support expenses. The fair value of these costs as of the date
each acquisition was completed was determined to be
$157.7 million and $81.3 million for the Dex Media
Merger and the AT&T Directory Acquisition, respectively.
Cost uplift amortization associated with print, paper and
delivery costs totaled $15.3 million for the year ended
December 31, 2007, compared to $64.6 million for the
year ended December 31, 2006, related to the Dex Media
Merger. This represents a decrease in cost uplift expense of
$49.3 million for the year ended
47
December 31, 2007. There was no amortization of cost uplift
recognized as cost of revenue for the years ended
December 31, 2007 and 2006 relating to the AT&T
Directory Acquisition.
During the year ended December 31, 2007, barter expenses
declined $8.0 million compared to the year ended
December 31, 2006, due to declines in barter activity in
our Qwest markets.
Changes in the All other category primarily relate to a decrease
in print delivery management costs due to synergies resulting
from the Dex Media Merger.
Selling
and Support Expenses
Total selling and support expenses for the year ended
December 31, 2007 were $716.3 million, compared to
$656.0 million reported for the year ended
December 31, 2006. The primary components of the
$60.3 million, or 9.2%, increase in selling and support
expenses are as follows:
|
|
|
|
|
|
|
$ Change
|
|
|
|
(Amounts
|
|
|
|
in millions)
|
|
|
Expenses related to the Dex Media Business excluded from the
year ended December 31, 2006 due to purchase accounting
from the Dex Media Merger
|
|
$
|
100.7
|
|
Increased advertising and branding expenses
|
|
|
22.5
|
|
Decreased cost uplift expense
|
|
|
(45.8
|
)
|
Decreased commissions and salesperson costs
|
|
|
(9.5
|
)
|
All other, net
|
|
|
(7.6
|
)
|
|
|
|
|
|
Total increase in selling and support expenses for the year
ended
December 31, 2007
|
|
$
|
60.3
|
|
|
|
|
|
|
The increase in selling and support expenses for the year ended
December 31, 2007 is primarily due to the effects of
purchase accounting associated with the Dex Media Merger in
2006, as well as recognizing a full year of results from the
acquired Dex Media Business during 2007.
As a result of purchase accounting required by GAAP, deferred
commissions and other selling and support costs related to
directories that published prior to and in the month of the Dex
Media Merger totaling $100.7 million were not reported
during the year ended December 31, 2006. Directory expenses
incurred during the year ended December 31, 2006 include
the amortization of deferred directory costs relating to Qwest
directories published beginning in February 2006.
During the year ended December 31, 2007, we incurred
$22.5 million of additional advertising and branding
expenses as compared to the year ended December 31, 2006.
These media and collateral costs were 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. The increase is also
attributable to recognizing a full year of results from the
acquired Dex Media Business. Advertising expense includes
$7.8 million related to traffic acquisition costs
associated with the operations of Business.com, with no
comparable expense for the prior corresponding period.
Cost uplift associated with commissions totaled
$13.6 million during the year ended December 31, 2007
relating to the Dex Media Merger, compared to $59.4 million
for the year ended December 31, 2006 relating to the Dex
Media Merger and the AT&T Directory Acquisition. This
represents a decrease in cost uplift of $45.8 million for
the year ended December 31, 2007.
During the year ended December 31, 2007, commissions and
salesperson costs declined $9.5 million compared to the
year ended December 31, 2006, primarily due to lower CMR
commission rates.
Changes in the All other category primarily relate to a decrease
in non-cash stock-based compensation expense, partially offset
by an increase in sales training costs due to new product
introductions across our entire footprint, including online
products and services.
48
General
and Administrative Expenses
General and administrative (G&A) expenses for
the year ended December 31, 2007 were $145.6 million,
compared to $134.8 million for the year ended
December 31, 2006. The primary components of the
$10.8 million, or 8.0%, increase in G&A expenses are
as follows:
|
|
|
|
|
|
|
$ Change
|
|
|
|
(Amounts
|
|
|
|
in millions)
|
|
|
Increase in information technology (IT) expenses
|
|
$
|
7.3
|
|
Decreased general corporate expenses
|
|
|
(3.8
|
)
|
All other, net
|
|
|
7.3
|
|
|
|
|
|
|
Total increase in G&A expenses for the year ended
December 31, 2007
|
|
$
|
10.8
|
|
|
|
|
|
|
The increase in G&A expenses for the year ended
December 31, 2007 is primarily due recognizing a full year
of results from the acquired Dex Media Business during 2007, as
opposed to eleven months of results during 2006.
During the year ended December 31, 2007, we incurred
approximately $7.3 million of additional IT expenses
compared to the year ended December 31, 2006, due to
recognizing a full year of results from the acquired Dex Media
Business, investment in 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. This increase is
partially offset by cost savings resulting from lower rates
associated with a recently negotiated IT contract, which became
effective in July 2007.
G&A expenses for the year ended December 31, 2007
included reductions in general corporate expenses of
$3.8 million from the year ended December 31, 2006,
primarily due to achieving cost synergies and expense reduction
efforts associated with the Dex Media Merger.
Depreciation
and Amortization
Depreciation and amortization (D&A) expense for
the year ended December 31, 2007 was $463.1 million,
compared to $323.6 million for the year ended
December 31, 2006. Amortization of intangible assets was
$408.3 million for the year ended December 31, 2007,
compared to $277.5 million for the year ended
December 31, 2006. The increase in amortization expense for
the year ended December 31, 2007 is primarily due to
recognizing a full year of amortization related to intangible
assets acquired in the Dex Media Merger, amortizing the local
customer relationships intangible asset acquired in the Dex
Media Merger beginning in the first quarter of 2007 and
amortization of intangible assets acquired in the Business.com
Acquisition. During the year ended December 31, 2007, we
recognized an impairment charge of $20.0 million associated
with the tradenames acquired in the Embarq Acquisition. This
impairment charge resulted from a change in our branding
strategy to utilize a new Dex market brand for all of our print
and online products across our entire footprint and discontinued
use of the tradenames acquired in the Embarq Acquisition. This
impairment charge was determined using the relief from royalty
valuation method and is included within depreciation and
amortization on the consolidated statement of operations for the
year ended December 31, 2007.
Depreciation of fixed assets and amortization of computer
software was $54.8 million for the year ended
December 31, 2007, compared to $46.1 million for the
year ended December 31, 2006. The increase in depreciation
expense for the year ended December 31, 2007 was primarily
due to recognizing a full year of depreciation related to fixed
assets acquired in the Dex Media Merger as well as additional
depreciation expense resulting from fixed asset additions
related to computer software.
49
Operating
Income
Operating income for the years ended December 31, 2007 and
2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Total
|
|
$
|
905.0
|
|
|
$
|
442.8
|
|
|
$
|
462.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income for the year ended December 31, 2007 of
$905.0 million increased by $462.2 million from
operating income of $442.8 million for the year ended
December 31, 2006. The increase in operating income for the
year ended December 31, 2007 is due to the effects of
purchase accounting associated with the Dex Media Merger in
2006, recognizing a full year of results from the acquired Dex
Media Business during 2007, and other revenue and expense trends
described above.
Non-operating
Income
During the year ended December 31, 2007, we recognized a
non-operating gain on the sale of an investment of
$1.8 million.
Interest
Expense, Net
Net interest expense for the year ended December 31, 2007
was $830.9 million, compared to $765.1 million for the
year ended December 31, 2006, and includes
$40.0 million and $21.9 million, respectively, of
non-cash amortization of deferred financing costs. The increase
in net interest expense of $65.8 million for the year ended
December 31, 2007 when compared to the prior corresponding
period, is primarily due to call premium payments of
$71.7 million and write-off of unamortized deferred
financing costs of $16.8 million (which is included in the
amortization of deferred financing costs of $40.0 million
noted above) associated with the refinancing transactions
conducted during the fourth quarter of 2007. The increase in net
interest expense is also attributable to recognizing a full
period of interest expense related to the outstanding debt
associated with the Dex Media Merger and GS Repurchase
(defined below) and debt acquired in the Dex Media Merger.
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
$92.1 million for the year ended December 31, 2007,
compared to $26.4 million for the year ended
December 31, 2006. The offset to interest expense for the
year ended December 31, 2007 includes $62.2 million
related to the redemption of Dex Media Easts outstanding
9.875% senior notes and 12.125% senior subordinated
notes on November 26, 2007.
The increase in net interest expense is also partially offset by
lower outstanding debt during the year ended December 31,
2007 due to debt repayments. See Liquidity and Capital
Resources for further detail regarding our debt
obligations.
Provision
(Benefit) for Income Taxes
The effective tax rate on income before income taxes of 38.3%
for the year ended December 31, 2007 compares to 26.2% on
loss before income taxes for the year ended December 31,
2006. The increase in the rate is a result of higher state tax
expense due to the increase of uncertain tax liabilities in
various tax jurisdictions, specifically New York and North
Carolina, and due to an increase in the valuation allowance
against certain state net operating losses that the Company
believes will more likely than not expire prior to their
utilization. In addition, the rate increase also reflects
recognition of additional interest expense of $1.6 million
and $1.2 million in 2007 related to the taxable years 2004
and 2005, respectively, as a result of the IRS settlement in
July 2007 (see below).
50
The 2007 provision for income taxes of $29.0 million is
comprised of a federal tax provision of $27.5 million,
resulting from a current tax provision of $11.8 million
relating to an Internal Revenue Service (IRS)
settlement and a deferred tax provision of $15.7 million
resulting from a current year taxable loss. The 2007 state tax
provision of $1.5 million results from a current tax
provision of $8.5 million relating to taxes due in states
where subsidiaries of the Company file separate company returns,
offset by a deferred state tax benefit of $7.0 million
relating to the apportioned taxable income or loss among various
states. A federal net operating loss for income tax purposes of
approximately $303.3 million was generated in 2007
primarily as a result of tax amortization expense recorded with
respect to the intangible assets acquired in the Dex Media
Merger, AT&T Directory Acquisition, Embarq Acquisition and
Business.com Acquisition.
At December 31, 2007, the Company had federal and state net
operating loss carryforwards of approximately
$618.3 million (net of carryback) and $801.3 million,
respectively, which will begin to expire in 2026 and 2008,
respectively. These amounts include consideration of net
operating losses expected to expire unused due to the Internal
Revenue Code Section 382 limitation for ownership changes
related to Business.com that occurred prior to the Business.com
Acquisition.
The 2006 income tax benefit of $84.5 million is comprised
of a federal deferred tax benefit of $112.9 million
resulting from the periods taxable loss, offset by a state
tax provision of $28.4 million. The 2006 state tax
provision of $28.4 million primarily resulted from the
modification of apportioned taxable income or loss among various
states. A net operating loss for tax purposes of approximately
$216.3 million was generated in 2006 primarily as a result
of tax amortization expense recorded with respect to the
intangible assets acquired in the Dex Media Merger, AT&T
Directory Acquisition and Embarq Acquisition.
In July 2007, we effectively settled all issues under
consideration with the IRS related to its audit for taxable
years 2003 and 2004. Therefore, tax years 2005 and 2006 are
still subject to examination by the IRS. Certain state tax
returns are under examination by various regulatory authorities.
We continuously review issues raised in connection with ongoing
examinations and open tax years to evaluate the adequacy of our
reserves. We believe that our accrued tax liabilities under
FIN No. 48 are adequate to cover uncertain tax
positions related to U.S. federal and state income taxes.
Net
Income (Loss), Loss Available to Common Shareholders and
Earnings (Loss) Per Share
Net income for the year ended December 31, 2007 was
$46.9 million, compared to a net loss of
$(237.7) million reported for the year ended
December 31, 2006. Net income for the year ended
December 31, 2007 as compared to the net loss reported for
the year ended December 31, 2006 is primarily due to
recognizing a full year of results from the acquired Dex Media
Business during 2007, absent any adverse impact from purchase
accounting associated with the Dex Media Merger. Net income for
the year ended December 31, 2007 was negatively impacted by
increased interest expense and D&A as described above.
On January 27, 2006, we repurchased the remaining
100,301 shares of our outstanding 8% convertible cumulative
preferred stock (Preferred Stock) from investment
partnerships affiliated with The Goldman Sachs Group, Inc. (the
GS Funds) for $336.1 million in cash, including
accrued cash dividends and interest (the GS
Repurchase). Based on the terms of the stock purchase
agreement, the recorded value of the Preferred Stock was
accreted to its redemption value of $336.1 million at
January 27, 2006. The accretion to redemption value of
$2.0 million (which represented accrued dividends and
interest) was recorded as an increase to loss available to
common shareholders on the consolidated statement of operations
for the year ended December 31, 2006. In conjunction with
the GS Repurchase, we also reversed the previously recorded
beneficial conversion feature (BCF) related to these
shares and recorded a decrease to loss available to common
shareholders of $31.2 million on the consolidated statement
of operations for the year ended December 31, 2006.
The resulting loss available to common shareholders was
$(208.5) million for the year ended December 31, 2006.
Subsequent to the GS Repurchase and for the year ended
December 31, 2007, we accounted for earnings (loss) per
share (EPS) in accordance with
SFAS No. 128,
Earnings Per Share
(SFAS No. 128). For the year ended
December 31, 2006 (through January 27, 2006, the
closing date of the GS Repurchase), we accounted for EPS in
accordance with Emerging Issues Task Force (EITF)
No. 03-6,
Participating Securities
51
and the Two-Class Method under FASB Statement 128
(EITF 03-6),
which established standards regarding the computation of EPS by
companies that have issued securities other than common stock
that contractually entitle the holder to participate in
dividends and earnings of the company.
EITF 03-6
requires earnings available to common shareholders for the
period, after deduction of preferred stock dividends, to be
allocated between the common and preferred stockholders based on
their respective rights to receive dividends. Basic EPS is then
calculated by dividing loss allocable to common shareholders by
the weighted average number of shares outstanding.
EITF 03-6
does not require the presentation of basic and diluted EPS for
securities other than common stock. Therefore, the following EPS
amounts only pertain to our common stock.
Under the guidance of SFAS No. 128, diluted EPS is
calculated by dividing loss allocable to common shareholders by
the weighted average common shares outstanding plus dilutive
potential common stock. Potential common stock includes stock
options, stock appreciation rights (SARs),
restricted stock and warrants, the dilutive effect of which is
calculated using the treasury stock method, and prior to the
GS Repurchase, our Preferred Stock, the dilutive effect of
which was calculated using the
if-converted
method.
The calculation of basic and diluted EPS for the years ended
December 31, 2007 and 2006, respectively, is presented
below.
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts in thousands, except percentages and per share
amounts)
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders
|
|
$
|
46,859
|
|
|
$
|
(208,483
|
)
|
Amount allocable to common
shareholders
(1)
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Income (loss) allocable to common shareholders
|
|
|
46,859
|
|
|
|
(208,483
|
)
|
Weighted average common shares outstanding
|
|
|
70,932
|
|
|
|
66,448
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.66
|
|
|
$
|
(3.14
|
)
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders
|
|
$
|
46,859
|
|
|
$
|
(208,483
|
)
|
Amount allocable to common
shareholders
(1)
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Income (loss) allocable to common shareholders
|
|
$
|
46,859
|
|
|
|
(208,483
|
)
|
Weighted average common shares outstanding
|
|
|
70,932
|
|
|
|
66,448
|
|
Dilutive effect of stock awards and
warrants
(2)
|
|
|
1,031
|
|
|
|
|
|
Dilutive effect of Preferred Stock assuming
conversion
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
71,963
|
|
|
|
66,448
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.65
|
|
|
$
|
(3.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In computing EPS using the two-class method, we have not
allocated the net loss reported for the year ended
December 31, 2006 between common and preferred shareholders
since preferred shareholders had no contractual obligation to
share in the net loss.
|
|
(2)
|
|
Due to the loss allocable to common shareholders reported for
the year ended December 31, 2006, the effect of all
stock-based awards, warrants and the assumed conversion of the
Preferred Stock were anti-dilutive and therefore are not
included in the calculation of diluted EPS. For the years ended
December 31, 2007 and 2006, 2,593 shares and
2,263 shares, respectively, of stock-based awards had
exercise prices that exceeded the average market price of the
Companys common stock for the respective periods. For the
year ended December 31, 2006, the assumed conversion of the
Preferred Stock into 391 shares of common stock was
anti-dilutive and therefore not included in the calculation of
diluted EPS.
|
52
Non-GAAP Measures
Adjusted Pro Forma Amounts
As a result of the Dex Media Merger and AT&T Directory
Acquisition, the related financings and associated purchase
accounting, our 2007 results reported in accordance with GAAP
are not comparable to our 2006 reported GAAP results. GAAP
results presented for the year ended December 31, 2006
include eleven months of results from the Dex Media Business,
which was acquired on January 31, 2006. Under the deferral
and amortization method of revenue recognition, the billable
value of directories published is recognized as revenue in
subsequent reporting periods. However, purchase accounting
precluded us from recognizing in 2006 directory revenue and
certain expenses associated with directories that published
prior to the Dex Media Merger, including all directories
published in the month the Dex Media Merger was completed. Thus,
our reported 2007 and 2006 GAAP results are not comparable and
our 2006 results are not indicative of our underlying operating
and financial performance. Accordingly, management is presenting
adjusted pro forma information for the year ended
December 31, 2006 that, among other things, eliminates the
purchase accounting impact on revenue and certain expenses
related to the Dex Media Merger and assumes the Dex Media Merger
occurred on January 1, 2006. Management believes that the
presentation of this adjusted pro forma information will help
financial statement users better and more easily compare current
period underlying operating results against what the combined
company performance would more likely have been in the
comparable prior period. All of the adjusted pro forma amounts
disclosed below or elsewhere are non-GAAP measures, which are
reconciled to the most comparable GAAP measures below. While the
adjusted pro forma results exclude the effects of purchase
accounting, and certain other non-recurring items, to better
reflect underlying operating results in 2006, because of
differences between RHD and Dex Media and their respective
accounting policies, the 2007 GAAP results and 2006 adjusted pro
forma results are not strictly comparable and should not be
treated as such.
2007
Reported GAAP Operating Income Compared to 2006 Adjusted
Pro Forma Operating Income
The components of reported GAAP operating income for the year
ended December 31, 2007 and adjusted pro forma operating
income for the year ended December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
|
December 31, 2007
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
Reported
|
|
|
Reported
|
|
|
|
|
|
Adjusted
|
|
|
|
|
|
|
GAAP
|
|
|
GAAP
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Net revenue
|
|
$
|
2,680.3
|
|
|
$
|
1,899.3
|
|
|
$
|
789.2
|
(1)
|
|
$
|
2,688.5
|
|
|
$
|
(8.2
|
)
|
Expenses, other than depreciation and amortization
|
|
|
1,312.2
|
|
|
|
1,132.9
|
|
|
|
108.8
|
(2)
|
|
|
1,241.7
|
|
|
|
70.5
|
|
Depreciation and amortization
|
|
|
463.1
|
|
|
|
323.6
|
|
|
|
20.5
|
(3)
|
|
|
344.1
|
|
|
|
119.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
905.0
|
|
|
$
|
442.8
|
|
|
$
|
659.9
|
|
|
$
|
1,102.7
|
|
|
$
|
(197.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents all deferred revenue for directories that published
prior to the Dex Media Merger, which would have been recognized
during the period absent purchase accounting required under
GAAP. Adjustments also include GAAP revenue for January 2006 as
reported by Dex Media.
|
|
(2)
|
|
Represents (a) certain deferred expenses for directories
that published prior to the Dex Media Merger, which would have
been recognized during the period absent purchase accounting
required under GAAP, (b) GAAP expenses for January 2006 as
reported by Dex Media, (c) exclusion of transaction
expenses reported by Dex Media in January 2006 directly related
to the Dex Media Merger and (d) the exclusion of cost
uplift recorded under purchase accounting associated with the
Dex Media Merger and the AT&T Directory Acquisition.
|
|
(3)
|
|
Represents the additional amortization expense related to the
identifiable intangible assets acquired in the Dex Media Merger,
assuming the Dex Media Merger was consummated on January 1,
2006.
|
53
2007
Reported GAAP Net Revenue Compared to 2006 Adjusted Pro
Forma Net Revenue
The components of reported GAAP net revenue for the year ended
December 31, 2007 and adjusted pro forma net revenue for
the year ended December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
|
December 31, 2007
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
Reported
|
|
|
Reported
|
|
|
|
|
|
Adjusted
|
|
|
|
|
|
|
GAAP
|
|
|
GAAP
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Gross directory advertising revenue
|
|
$
|
2,697.3
|
|
|
$
|
1,907.3
|
|
|
$
|
798.1
|
(1)
|
|
$
|
2,705.4
|
|
|
$
|
(8.1
|
)
|
Sales claims and allowances
|
|
|
(54.8
|
)
|
|
|
(41.9
|
)
|
|
|
(23.0
|
)
(1)
|
|
|
(64.9
|
)
|
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net directory advertising revenue
|
|
|
2,642.5
|
|
|
|
1,865.4
|
|
|
|
775.1
|
|
|
|
2,640.5
|
|
|
|
2.0
|
|
Other revenue
|
|
|
37.8
|
|
|
|
33.9
|
|
|
|
14.1
|
(2)
|
|
|
48.0
|
|
|
|
(10.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
2,680.3
|
|
|
$
|
1,899.3
|
|
|
$
|
789.2
|
|
|
$
|
2,688.5
|
|
|
$
|
(8.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents gross directory advertising revenue and sales claims
and allowances for directories that published prior to the Dex
Media Merger, which would have been recognized during the period
absent purchase accounting required under GAAP. Adjustments also
include GAAP results for January 2006 as reported by Dex Media.
|
|
(2)
|
|
Other revenue includes barter revenue, late fees paid on
outstanding customer balances, commissions earned on sales
contracts with respect to advertising placed into other
publishers directories, sales of directories and certain
other print and internet products.
|
Gross directory advertising revenue with respect to print
advertising, and Internet-based advertising products that are
sold with print advertising, is recognized under the deferral
and amortization method, whereby revenue is initially deferred
when a directory is published and recognized ratably over the
directorys life, which is typically 12 months.
Revenue with respect to Internet-based services that are not
sold with print advertising, such as Internet Marketing
services, is recognized as delivered or fulfilled. Accordingly,
revenue recognized in a reporting period consists of
(i) revenue incurred in that period and fully recognized in
that period, (ii) revenue incurred in a prior period, a
current portion of which is amortized and recognized in the
current period, and (iii) revenue 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.
Gross revenue for the year ended December 31, 2007 was
$2,697.3 million, representing a decrease of
$8.1 million, or 0.3%, from adjusted pro forma gross
revenue of $2,705.4 million for the year ended
December 31, 2006. The primary components of this decrease
include declines in renewal business, mainly driven by
conservatism in advertiser spending based on economic
indicators, weaker advertising sales in the first and third
quarters of 2007, partially offset by stronger advertising sales
in the second and fourth quarters of 2007, increases in our new
online products and services, Business.com and Local Launch
revenue.
Reported sales claims and allowances for the year ended
December 31, 2007 were $54.8 million, representing a
decrease of $10.1 million or 15.6% from adjusted pro forma
sales claims and allowances of $64.9 million reported for
the year ended December 31, 2006. This decrease is
primarily due to higher sales claims experience in 2006
associated with the prior legacy Dex Media systems conversion.
The system conversion issues were resolved during 2006.
Reported other revenue for the year ended December 31, 2007
was $37.8 million, representing a decrease of
$10.2 million or 21.3% from adjusted pro forma other
revenue of $48.0 million for the year ended
December 31, 2006. This decrease is primarily related to
declines in barter activity and declines in revenue related to
other advertising related products.
54
2007
Reported GAAP Expenses Compared to 2006 Adjusted Pro Forma
Expenses
Reported GAAP expenses, other than depreciation and
amortization, for the year ended December 31, 2007 of
$1,312.2 million increased by $70.5 million, or 5.7%,
from adjusted pro forma expenses of $1,241.7 million for
the year ended December 31, 2006. The primary components of
the $70.5 million increase in reported GAAP expenses, other
than depreciation and amortization, for the year ended
December 31, 2007 are shown below:
|
|
|
|
|
|
|
$ Change
|
|
|
|
(Amounts
|
|
|
|
in millions)
|
|
|
Increased internet production and distribution costs
|
|
$
|
33.8
|
|
Cost uplift expense
|
|
|
28.9
|
|
Increased advertising and branding expenses
|
|
|
22.5
|
|
Increased print, paper and distribution costs
|
|
|
10.9
|
|
Increased IT expenses
|
|
|
4.1
|
|
Decreased commissions and salesperson costs
|
|
|
(9.5
|
)
|
Decreased barter expense
|
|
|
(8.0
|
)
|
Decreased general corporate expenses
|
|
|
(5.5
|
)
|
All other, net
|
|
|
(6.7
|
)
|
|
|
|
|
|
Total increase in 2007 reported GAAP expenses, other than
depreciation and amortization, compared to 2006 adjusted pro
forma expenses
|
|
$
|
70.5
|
|
|
|
|
|
|
Reported GAAP internet production and distribution costs for the
year ended December 31, 2007 increased $33.8 million
from adjusted pro forma internet production and distribution
costs for the year ended December 31, 2006 due to
investment in our Triple Play strategy as well as costs
associated with the operations of Business.com. Investment in
our Triple Play strategy focuses on enhancing and growing our
IYP and Internet Marketing products and services. Adjusted pro
forma internet production and distribution costs for the year
ended December 31, 2006 also included expenses for January
2006 as reported by Dex Media.
During the year ended December 31, 2007, reported GAAP
expenses, other than depreciation and amortization, include
$28.9 million of cost uplift expense related to the Dex
Media Merger, while adjusted pro forma expenses for the year
ended December 31, 2006 exclude cost uplift expense.
Similarly, reported GAAP expenses for the year ended
December 31, 2006 included $124.0 million of cost
uplift expense related to the Dex Media Merger and AT&T
Directory Acquisition, with no comparable adjusted pro forma
expense for the year ended December 31, 2006. Cost uplift
related to the Dex Media Merger has been fully recognized in
2007 as all directories that were scheduled to publish on a
12 month cycle have been published. Cost uplift related to
the Dex Media Merger will not impact future periods.
During the year ended December 31, 2007, we incurred
$22.5 million of additional advertising and branding
expenses as compared to adjusted pro forma advertising and
branding expenses for the year ended December 31, 2006.
These media and collateral costs were 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. The increase in advertising
expense also includes $7.8 million related to traffic
acquisition costs associated with the operations of Business.com.
During the year ended December 31, 2007, we incurred
$10.9 million of additional print, paper and distribution
costs as compared to adjusted pro forma print, paper and
distribution costs during the year ended December 31, due
to new companion print products in our Embarq and AT&T
markets. Increases were offset by the commencement of our print
product optimization program and negotiated price reductions in
our print expenses.
During the year ended December 31, 2007, we incurred
approximately $4.1 million of additional GAAP IT
expenses compared to adjusted pro forma IT expenses for the year
ended December 31, 2006, due to recognizing a full year of
results from the acquired Dex Media Business, investment in our
IT infrastructure
55
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. This increase is partially offset by cost savings
resulting from lower rates associated with a recently negotiated
IT contract, which became effective in July 2007. Adjusted pro
forma IT expenses for the year ended December 31, 2006 also
included expenses for January 2006 as reported by Dex Media.
Commissions and salesperson costs for the year ended
December 31, 2007 decreased $9.5 million from adjusted
pro forma commissions and salesperson costs for the year ended
December 31, 2006, primarily due to lower CMR commission
rates.
During the year ended December 31, 2007, barter expenses
declined $8.0 million, compared to adjusted pro forma
barter expenses for the year ended December 31, 2006, due
to declines in barter activity in our Qwest markets.
Reported GAAP general corporate expenses for the year ended
December 31, 2007 were $5.5 million lower than
adjusted pro forma general corporate expenses for the year ended
December 31, 2006, primarily due to achieving cost
synergies and expense reduction efforts associated with the Dex
Media Merger.
Changes in the all other category primarily relate to a decrease
in non-cash stock-based compensation expense, partially offset
by an increase in sales training costs due to new product
introductions across our entire footprint, including online
products and services.
Reported GAAP D&A expense for the year ended
December 31, 2007 was $463.1 million, compared to
adjusted pro forma D&A expense of $344.1 million for
the year ended December 31, 2006. Adjusted pro forma
D&A expense for the year ended December 31, 2006
includes incremental D&A as if the Dex Media Merger had
occurred on January 1, 2006. The increase in reported
GAAP D&A for the year ended December 31, 2007 of
$119.0 million is primarily related to amortizing the local
customer relationships intangible asset acquired in the Dex
Media Merger beginning in the first quarter of 2007, the
impairment charge associated with the tradenames acquired in the
Embarq Acquisition discussed above, and amortization of
intangible assets acquired in the Business.com Acquisition.
2007
Reported GAAP Operating Income Compared to 2006 Adjusted
Pro Forma Operating Income
Reported GAAP operating income for the year ended
December 31, 2007 was $905.0 million, representing a
decrease of $197.7 million from adjusted pro forma
operating income of $1,102.7 million for the year ended
December 31, 2006, reflecting the variances between
revenues and expenses from period to period described above.
56
Year
Ended December 31, 2006 compared to Year Ended
December 31, 2005
Factors
Affecting Comparability
Reclassifications
Certain prior period amounts included in the consolidated
statements 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
consolidated statements of operations. In prior periods, certain
selling and support expenses were included in cost of revenue
and others were included in general and administrative expenses.
Additionally, beginning in 2007, we began classifying
adjustments for customer claims to sales allowance, which is
deducted from gross revenue to determine net revenue. 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 in 2006 and bad debt expense in 2005
to conform to the current periods presentation.
Adjustments for customer claims prior to 2006 were not material.
These reclassifications had no impact on operating income or net
income for the years ended December 31, 2006 and 2005. The
table below summarizes these reclassifications.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
Year Ended December 31, 2005
|
|
|
|
As
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Reclass
|
|
|
Reclassified
|
|
|
Reported
|
|
|
Reclass
|
|
|
Reclassified
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
1,895.9
|
|
|
$
|
3.4
|
|
|
$
|
1,899.3
|
|
|
$
|
956.6
|
|
|
$
|
|
|
|
$
|
956.6
|
|
Cost of revenue
|
|
|
987.1
|
|
|
|
(645.0
|
)
|
|
|
342.1
|
|
|
|
436.0
|
|
|
|
(320.1
|
)
|
|
|
115.9
|
|
Selling and support expenses
|
|
|
|
|
|
|
656.0
|
|
|
|
656.0
|
|
|
|
|
|
|
|
327.4
|
|
|
|
327.4
|
|
General and administrative expenses
|
|
|
142.4
|
|
|
|
(7.6
|
)
|
|
|
134.8
|
|
|
|
60.2
|
|
|
|
(7.2
|
)
|
|
|
53.0
|
|
Acquisitions
As a result of the Dex Media Merger and AT&T Directory
Acquisition, the related financings and associated purchase
accounting, our 2006 results reported in accordance with GAAP
are not comparable to our 2005 reported GAAP results. GAAP
results presented for the year ended December 31, 2006
include eleven months of results from the Dex Media Business,
which was acquired on January 31, 2006. Under the deferral
and amortization method of revenue recognition, the billable
value of directories published is recognized as revenue in
subsequent reporting periods. However, purchase accounting
precluded us from recognizing directory revenue and certain
expenses associated with directories that published prior to
each acquisition, including all directories published in the
month each acquisition was completed. Thus, our reported 2006
and 2005 GAAP results are not comparable or indicative of our
underlying operating and financial performance. Accordingly,
management is presenting (1) 2006 adjusted pro forma
information that, among other things, eliminates the purchase
accounting impact on revenue and certain expenses related to the
Dex Media Merger and assumes the Dex Media Merger occurred on
January 1, 2006, and (2) 2005 combined adjusted
information reflecting the sum of (a) RHDs 2005
adjusted results (reflecting adjustments relating to the
AT&T Directory Acquisition) and (b) Dex Medias
reported GAAP results during the period. Management believes
that the presentation of this adjusted pro forma and combined
adjusted information will help financial statement users better
and more easily compare current period underlying operating
results against what the combined company performance would more
likely have been in the comparable prior period. All of the
adjusted pro forma and combined adjusted amounts disclosed under
the caption Non-GAAP Measures Adjusted
Pro Forma and Combined Adjusted Amounts or elsewhere are
non-GAAP measures, which are reconciled to the most comparable
GAAP measures under that caption below. While the adjusted pro
forma and combined adjusted results each exclude the effects of
purchase accounting, and certain other non-recurring items, to
better reflect underlying operating results in the respective
periods, because of differences between RHD, Dex Media and
AT&T and their respective predecessor accounting policies,
the adjusted pro forma and combined adjusted results are not
strictly comparable and should not be treated as such.
57
SFAS No. 123(R)
For the year ended December 31, 2006, the Company
recognized $43.3 million of stock-based compensation
expense in accordance with SFAS No. 123 (R) related to
stock-based awards granted under our various employee and
non-employee stock incentive plans, with no expense on a
comparable basis in 2005.
GAAP Reported
Results
Net
Revenue
The components of our net revenue for the years ended
December 31, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Gross directory advertising revenue
|
|
$
|
1,907.3
|
|
|
$
|
956.0
|
|
|
$
|
951.3
|
|
Sales claims and allowances
|
|
|
(41.9
|
)
|
|
|
(10.4
|
)
|
|
|
(31.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net directory advertising revenue
|
|
|
1,865.4
|
|
|
|
945.6
|
|
|
|
919.8
|
|
Other revenue
|
|
|
33.9
|
|
|
|
11.0
|
|
|
|
22.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
1,899.3
|
|
|
$
|
956.6
|
|
|
$
|
942.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our directory advertising revenue is earned primarily from the
sale of advertising in yellow pages directories we publish, net
of sales claims and allowances. Directory advertising revenue
also includes revenue for those Internet-based advertising
products that are bundled with print advertising, including
certain IYP products, and Internet-based advertising products
not bundled with print advertising, such as our SEM and SEO
services. Directory advertising revenue is affected by several
factors, including changes in the quantity and size of
advertisements sold, defectors and new advertisers, as well as
the proportion of premium advertisements sold, changes in the
pricing of advertising, changes in the quantity and mix of
advertising purchased per account and the introduction of
additional products that generate incremental revenue. Revenue
with respect to print advertising, and Internet-based
advertising products that are bundled with print advertising, is
recognized under the deferral and amortization method, whereby
revenue is initially deferred when a directory is published and
recognized ratably over the directorys life, which is
typically 12 months. Revenue with respect to Internet-based
services that are not bundled with print advertising, such as
SEM and SEO services, is recognized as delivered or fulfilled.
Total net revenue in 2006 was $1,899.3 million,
representing an increase of $942.7 million from total net
revenue reported in 2005 of $956.6 million. The increase in
total net revenue in 2006 is primarily a result of the Dex Media
Merger, as well as, to a lesser extent, purchase accounting
resulting from the AT&T Directory Acquisition. Total net
revenue for 2006 includes $857.2 million of net revenue
from Qwest directories with no comparable revenue in 2005. Due
to purchase accounting, total net revenue for 2006 excluded the
amortization of advertising revenue for Qwest directories
published before February 2006 under the deferral and
amortization method totaling $649.1 million, which would
have been reported in the period absent purchase accounting.
Purchase accounting related to the Dex Media Merger will not
adversely impact reported revenue during 2007. Purchase
accounting resulting from the AT&T Directory Acquisition
negatively impacted net revenue during 2005 by
$85.0 million with respect to AT&T-branded directories
that published prior to the AT&T Directory Acquisition,
which would have been recognized during 2005 had it not been for
purchase accounting required under GAAP. Purchase accounting
related to the AT&T Directory Acquisition did not adversely
impact reported revenue during 2006.
The increase in total net revenue also resulted from higher
recurring advertising in our major Embarq markets and improved
sales performance in certain of our AT&T markets. The
increase in total net revenue is offset by declines in some of
our other AT&T markets due to
re-alignment
of the coverage areas of our publications to better reflect
shopping patterns as well as tightening our credit standards to
build a more stable account base over time.
58
Other revenue in 2006 totaled $33.9 million, representing
an increase of $22.9 million from other revenue reported in
2005 of $11.0 million. The increase in other revenue in
2006 is primarily a result of the Dex Media Merger. Other
revenue includes barter revenue, late fees paid on outstanding
customer balances, commissions earned on sales contracts with
respect to advertising placed into other publishers
directories, and sales of directories and certain other print
products.
Advertising sales is a statistical measure and consists of sales
of advertising in print directories distributed during the
period and Internet-based products and services with respect to
which such advertising first appeared publicly during the
period. It is important to distinguish advertising sales from
net revenue, which under GAAP is recognized under the deferral
and amortization method. Advertising sales for the years ended
December 31, 2006 and 2005 were $2,648.2 million and
$2,695.1 million, respectively, and assumes the Dex Media
Merger occurred on January 1, 2005. The $46.9 million
decrease in advertising sales is primarily a result of the
transition and integration of our Dex Media Business, including
higher customer sales claims and allowances resulting from prior
legacy Dex Media systems conversion that led to declines in
advertising sales in certain of our Qwest markets. The decrease
in advertising sales also resulted from declines in national
sales associated with rescoping and consolidation of products in
our AT&T markets. These declines are partially offset by
continued growth associated with our products in our Embarq
markets. This decrease in advertising sales will adversely
impact amortization of directory advertising revenues over the
next four quarters. Revenue with respect to print advertising,
and Internet-based advertising products that are bundled with
print advertising, is recognized under the deferral and
amortization method, whereby revenue is initially deferred when
a directory is published and recognized ratably over the
directorys life, which is typically 12 months.
Revenue with respect to Internet-based services that are not
bundled with print advertising, such as SEM and SEO services, is
recognized as delivered or fulfilled.
Expenses
The components of our total expenses for the years ended
December 31, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Cost of revenue
|
|
$
|
342.1
|
|
|
$
|
115.9
|
|
|
$
|
226.2
|
|
Selling and support expenses
|
|
|
656.0
|
|
|
|
327.4
|
|
|
|
328.6
|
|
General and administrative expenses
|
|
|
134.8
|
|
|
|
53.0
|
|
|
|
81.8
|
|
Depreciation and amortization expense
|
|
|
323.6
|
|
|
|
85.1
|
|
|
|
238.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,456.5
|
|
|
$
|
581.4
|
|
|
$
|
875.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substantially all expenses are derived from our directory
publishing business and Internet-based advertising products and
services. Certain costs directly related to the selling and
production of directories are initially deferred and recognized
ratably over the life of the directory. These costs are
specifically identifiable to a particular directory and include
sales commissions and print, paper and initial distribution
costs. Sales commissions include commissions paid to employees
for sales to local advertisers and to CMRs, which act as our
channel to national advertisers. All other expenses, such as
sales person salaries, sales manager compensation, sales office
occupancy, publishing and information technology services, are
not specifically identifiable to a particular directory and are
recognized as incurred. Our costs recognized in a reporting
period consist of: (i) costs incurred in that period and
fully recognized in that period; (ii) costs incurred in a
prior period, a portion of which is amortized and recognized in
the current period; and (iii) costs incurred in the current
period, a portion of which is amortized and recognized in the
current period and the balance of which is deferred until future
periods. Consequently, there will be a difference between costs
recognized in any given period and costs incurred in the given
period, which may be significant. All deferred costs related to
the sale and production of directories are recognized ratably
over the life of each directory under the deferral and
amortization method of accounting, with cost recognition
commencing in the month of directory distribution.
59
Cost
of Revenue
Total cost of revenue in 2006 was $342.1 million compared
to $115.9 million in 2005. The primary components of the
$226.2 million increase in cost of revenue in 2006,
compared to 2005, are as follows:
|
|
|
|
|
|
|
$ Change
|
|
|
|
(Amounts
|
|
|
|
in millions)
|
|
|
Expenses recorded in 2006 related to the Dex Media Business
|
|
$
|
154.1
|
|
Expenses related to the AT&T Directory Business excluded
from the comparable
|
|
|
|
|
2005 period due to purchase accounting from the AT&T
Directory Acquisition
|
|
|
4.7
|
|
Increased cost uplift expense (defined below)
|
|
|
64.6
|
|
All other
|
|
|
2.8
|
|
|
|
|
|
|
Total 2006 increase in cost of revenue, compared to 2005
|
|
$
|
226.2
|
|
|
|
|
|
|
Cost of revenue in 2006 increased $226.2 million compared
to 2005 primarily as a result of the Dex Media Merger. Expenses
of $154.1 million incurred to support the Dex Media
Business during 2006 include printing, paper, distribution,
Internet production and distribution and other cost of revenue.
There were no comparable expenses during 2005.
Similar to the deferral and amortization method of revenue
recognition, certain costs directly related to the production of
our directories are initially deferred when incurred and
recognized ratably over the life of a directory. As a result of
purchase accounting required by GAAP, print and delivery costs
totaling $119.3 million were not reported during 2006
related to directories that published prior to and in the month
of the Dex Media Merger. Directory expenses incurred during 2006
include the amortization of deferred directory costs relating to
Qwest directories published beginning in February 2006. In
addition, $4.7 million of print and delivery costs for
directories that published prior to the AT&T Directory
Acquisition were not reported during 2005 due to purchase
accounting.
As a result of purchase accounting required by 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 and the AT&T
Directory Acquisition at their fair value, determined as
(a) the estimated billable value of the published directory
less (b) the expected costs to complete the directories,
plus (c) a normal profit margin. We refer to this purchase
accounting entry as cost uplift. Cost uplift
associated with print, paper and delivery costs is amortized
over the terms of the applicable directories to cost of revenue,
whereas cost uplift associated with commissions is amortized
over the terms of the applicable directories to selling and
support expenses. The fair value of these costs was determined
to be $157.7 million and $81.3 million for the Dex
Media Merger and the AT&T Directory Acquisition,
respectively. Cost uplift amortization associated with print,
paper and delivery costs totaled $64.6 million during 2006
relating to the Dex Media Merger, with no comparable expense
during 2005. There was no amortization of cost uplift recognized
as cost of revenue for the years ended December 31, 2006
and 2005 relating to the AT&T Directory Acquisition.
60
Selling
and Support Expenses
Total selling and support expenses were $656.0 million in
2006 compared to $327.4 million in 2005. The primary
components of the $328.6 million increase in selling and
support expenses in 2006, compared to 2005, are as follows:
|
|
|
|
|
|
|
$ Change
|
|
|
|
(Amounts
|
|
|
|
in millions)
|
|
|
Expenses recorded in 2006 related to the Dex Media Business
|
|
$
|
295.0
|
|
Expenses related to the AT&T Directory Business excluded
from the comparable
|
|
|
|
|
2005 period due to purchase accounting from the AT&T
Directory Acquisition
|
|
|
10.4
|
|
Stock-based compensation expense resulting from the adoption of
SFAS No. 123(R)
|
|
|
15.5
|
|
Increased commissions and salesperson costs
|
|
|
10.1
|
|
Decreased cost uplift expense
|
|
|
(5.6
|
)
|
All other
|
|
|
3.2
|
|
|
|
|
|
|
Total 2006 increase in selling and support expenses, compared to
2005
|
|
$
|
328.6
|
|
|
|
|
|
|
Selling and support expenses in 2006 increased
$328.6 million compared to 2005 primarily as a result of
the Dex Media Merger. Expenses of $295.0 million incurred
to support the Dex Media Business during 2006 include bad debt,
commissions, salesperson expenses, advertising and other selling
and support expenses. There were no comparable expenses during
2005.
Similar to the deferral and amortization method of revenue
recognition, certain costs directly related to the selling of
our directories are initially deferred when incurred and
recognized ratably over the life of a directory. As a result of
purchase accounting required by GAAP, deferred commissions and
other selling and support costs totaling $100.7 million
were not reported during 2006 related to directories that
published prior to and in the month of the Dex Media Merger.
Directory expenses incurred during 2006 include the amortization
of deferred directory costs relating to Qwest directories
published beginning in February 2006. In addition,
$10.4 million of deferred commissions for directories that
published prior to the AT&T Directory Acquisition were not
reported during 2005 due to purchase accounting. Purchase
accounting related to the AT&T Directory Acquisition
adversely impacted selling and support expenses during 2006 by
$2.1 million, due to the remaining amortization of cost
uplift.
Selling and support expenses during 2006 also included
$15.5 million of non-cash stock-based compensation expense
resulting from SFAS No. 123(R), which the Company
adopted effective January 1, 2006, with no expense on a
comparable basis in 2005. During 2006, $4.8 million of
non-cash stock-based compensation expense resulted from
modifications to stock-based awards due to acceleration of
vesting terms as a result of the Dex Media Merger. Selling and
support expenses includes non-cash stock-based compensation
expense for employees whose wages are classified as selling and
support expenses.
Also during 2006, we incurred approximately $10.1 million
of additional selling expenses, including commissions and
salesperson costs, compared to 2005 due to initiatives to
improve sales results in certain markets.
Cost uplift associated with commissions, which is amortized as
selling and support expenses, totaled $59.4 million during
2006 relating to the Dex Media Merger and the AT&T
Directory Acquisition. This represents a decrease in cost uplift
of $5.6 million from $65.0 million recorded during
2005 relating to the AT&T Directory Acquisition.
61
General
and Administrative Expenses
General and administrative (G&A) expenses in
2006 were $134.8 million compared to $53.0 million in
2005, representing an increase of $81.8 million. The
primary components of the $81.8 million increase in
G&A expenses in 2006, compared to 2005, are as follows:
|
|
|
|
|
|
|
$ Change
|
|
|
|
(Amounts
|
|
|
|
in millions)
|
|
|
Increased G&A expenses related to the Dex Media Business
|
|
$
|
50.1
|
|
Stock-based compensation expense resulting from the adoption of
SFAS No. 123(R)
|
|
|
27.8
|
|
Increase in IT expenses
|
|
|
10.4
|
|
All other G&A expenses
|
|
|
(6.5
|
)
|
|
|
|
|
|
Total 2006 increase in G&A expenses, compared to 2005
|
|
$
|
81.8
|
|
|
|
|
|
|
G&A expenses during 2006 included $50.1 million of
G&A expenses primarily to support the acquired Dex Media
Business, with no comparable expense in 2005. G&A expenses
include financial services, human resources and administrative
services.
G&A expenses during 2006 also included $27.8 million
of non-cash stock-based compensation expense resulting from
SFAS No. 123(R), which we adopted effective
January 1, 2006, with no expense on a comparable basis in
2005. During 2006, $8.6 million of non-cash stock-based
compensation expense resulted from modifications to stock-based
awards due to acceleration of vesting terms as a result of the
Dex Media Merger. G&A expenses include non-cash stock-based
compensation expense for employees whose wages are classified as
G&A expenses.
During 2006, we incurred approximately $10.4 million of
additional IT expenses compared to 2005, due to enhancements and
technical support of multiple production systems as we begin
implementing our integration plan to a consolidated IT platform
subsequent to the Dex Media Merger.
Depreciation
and Amortization
Depreciation and amortization (D&A) expenses
during 2006 totaled $323.6 million compared to
$85.1 million in 2005, representing an increase of
$238.5 million. Amortization of intangible assets was
$277.5 million during 2006 compared to $72.1 million
in 2005. The increase in amortization expense is due to the
increase in intangible assets resulting from the Dex Media
Merger.
Depreciation of fixed assets and amortization of computer
software was $46.1 million during 2006 compared to
$13.0 million in 2005. The increase in depreciation expense
was primarily due to the depreciable assets acquired in the Dex
Media Merger.
Operating
Income
Operating income for the years ended December 31, 2006 and
2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
|
(Amounts in millions)
|
|
|
Total
|
|
$
|
442.8
|
|
|
$
|
375.2
|
|
|
$
|
67.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income for 2006 of $442.8 million increased by
$67.6 million from 2005 operating income of
$375.2 million, primarily as a result of the Dex Media
Merger. The results for 2006 and 2005 were adversely affected by
purchase accounting that precluded us from recognizing all
deferred revenue and certain expenses associated with those
directories published prior to the Dex Media Merger and
AT&T Directory Acquisition, including all directories
published in the month each acquisition was completed. While
total net revenue in 2006 increased by $942.7 million over
total net revenue in 2005, primarily resulting from the Dex
Media Merger, offsetting that increase in total net revenue was
an increase in total expenses in 2006 of $875.1 million,
62
also primarily a result of the Dex Media Merger and the 2005
purchase accounting impact from the AT&T Directory
Acquisition.
Since all deferred net revenue related to directories published
prior to and in the month of the Dex Media Merger and AT&T
Directory Acquisition is eliminated in purchase accounting, but
only certain direct expenses related to these directories are
eliminated under purchase accounting, purchase accounting has a
disproportionate adverse effect on reported revenues. Each month
subsequent to the Dex Media Merger until the impact of purchase
accounting expires, revenue will increase at a higher rate than
the related expenses when compared to the prior year.
In addition to the impact of purchase accounting, total expenses
in 2006 reflect non-cash stock-based compensation expense
recognized as a result of the adoption of
SFAS No. 123(R), with no expense on a comparable basis
in 2005. Additionally, 2006 cost of revenue reflects an increase
in deferred cost uplift amortization as described above.
When the effects of purchase accounting are eliminated, adjusted
pro forma operating income for 2006 is substantially higher
compared to GAAP operating income in 2005. See
Non-GAAP Measures - Adjusted Pro Forma and Combined
Adjusted Amounts below.
Operating income in 2007 will be impacted solely by the cost
uplift aspect of purchase accounting related to the Dex Media
Merger of approximately $35.8 million.
Interest
Expense, Net
Net interest expense in 2006 was $765.1 million, compared
to $264.5 million in 2005. The increase in net interest
expense of $500.6 million in 2006 is a result of
dramatically higher outstanding debt balances associated with
the Dex Media Merger, combined with higher interest rates. See
Liquidity and Capital Resources for a further
description of our debt obligations and the provisions of the
related debt instruments. Net interest expense in 2005 includes
a $25.3 million call premium payment and write-off of
unamortized deferred financing costs of $7.4 million
associated with the December 20, 2005 tender offer and exit
consent solicitation of our subsidiaries
8.875% Senior Notes due 2016. Net interest expense in 2006
includes $21.9 million of non-cash amortization of deferred
financing costs, compared to $23.6 million of non-cash
amortization of deferred financing costs in 2005 (including the
write-off of unamortized deferred financing costs of
$7.4 million noted above).
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 in
2006 was $26.4 million.
(Benefit)
Provision for Income Taxes
The 2006 income tax benefit of $84.5 million is comprised
of a federal deferred tax benefit of $112.9 million
resulting from the current period taxable loss, offset by a
state tax provision of $28.4 million. The 2006 state
tax provision of $28.4 million primarily resulted from the
modification of apportioned taxable income or loss among various
states as reflected in the Companys 2005 state tax
returns that were filed in 2006. A net operating loss of
approximately $216.3 million was generated in 2006
primarily as a result of tax amortization expense recorded with
respect to the intangible assets acquired in the Dex Media
Merger, AT&T Directory Acquisition and Embarq Acquisition.
At December 31, 2006, the Company had federal and state net
operating loss carryforwards of approximately
$712.8 million (net of carryback) and $782.3 million,
respectively, which will begin to expire in 2023 and 2008,
respectively. The Company also had $3.6 million of federal
alternative minimum tax (AMT) credit carryforward, which does
not expire.
The 2005 provision for income taxes of $43.2 million is
comprised of a deferred tax provision due to the taxable loss
generated in the current period. The 2005 deferred tax provision
resulted in an effective tax rate
63
of 39.0% and net operating losses of approximately
$168.6 million related to tax deductions and amortization
expense recorded for tax purposes compared to book purposes with
respect to the intangible assets acquired in the Embarq
Acquisition and the AT&T Directory Acquisition. The 2005
effective tax rate reflects a decrease in the state and local
tax rate due to integration of the Embarq Acquisition and the
AT&T Directory Acquisition.
We are currently under federal tax audit by the Internal Revenue
Service for the taxable years 2003 and 2004. We believe that
adequate provisions have been made with respect to the federal
tax audit and believe the resolution of such audit will not have
a material adverse effect on our financial position, results of
operations or cash flows. In addition, certain state tax returns
are under examination by various regulatory authorities. We
continuously review issues raised in connection with ongoing
examinations and open tax years to evaluate the adequacy of our
reserves. We believe that our accrued tax liabilities are
adequate to cover all probable U.S. federal and state
income tax loss contingencies.
Net
(Loss) Income, Loss Available to Common Shareholders and Loss
Per Share
Net loss for 2006 was $(237.7) million as compared to net
income of $67.5 million in 2005. The results for 2006 and
2005 were adversely affected by purchase accounting that
precluded us from recognizing all deferred revenue and certain
expenses associated with those directories published prior to
the Dex Media Merger and AT&T Directory Acquisition,
including all directories published in the month each
acquisition was completed. The net loss recorded in 2006 also
reflects increased interest expense associated with the
dramatically higher outstanding debt balances associated with
the Dex Media Merger, combined with higher interest rates, as
well as an increase in amortization expense associated with
intangible assets acquired in the Dex Media Merger.
Purchase accounting resulting from the Dex Media Merger will
impact reported results in 2007 by the cost uplift aspect of
purchase accounting described above of approximately
$35.8 million and the offset to interest expense related to
the fair value adjustment of Dex Medias debt described
above of approximately $31.3 million.
Prior to the GS Repurchase in January 2006, the 8% dividend
on our Preferred Stock reduced earnings available to common
shareholders from which earnings per share amounts were
calculated. The amount of the Preferred Stock dividend included
the stated 8% dividend, plus a deemed dividend for a BCF. The
BCF is a function of the conversion price of the Preferred
Stock, the fair value of the related warrants issued with the
Preferred Stock and the fair market value of the underlying
common stock on the date of issuance of the Preferred Stock. In
connection with the issuance of our Preferred Stock and each
subsequent quarterly accrued dividend through October 3,
2005, a BCF was recorded because the fair value of the
underlying common stock at the time of issuance of the Preferred
Stock was greater than the conversion price of the Preferred
Stock. The full amount of the BCF was treated as a deemed
dividend because the Preferred Stock was convertible into common
stock immediately after issuance in January 2003. The Preferred
Stock dividend for 2005 of $11.7 million consisted of the
8% dividend of $10.1 million (including $2.5 million
of accrued cash dividends recognized during the fourth quarter
of 2005) and a BCF of $1.6 million.
On January 14, 2005, we repurchased 100,303 shares of
our outstanding Preferred Stock from the GS Funds for
$277.2 million in cash. In connection with the Preferred
Stock repurchase, we recorded an increase to loss available to
common shareholders of $133.7 million to reflect the loss
on the repurchase of these shares. The excess of the cash paid
to the GS Funds over the carrying amount of the repurchased
Preferred Stock, plus the amount previously recognized for the
BCF associated with these shares was recognized as the loss on
repurchase.
On January 27, 2006, we completed the GS Repurchase,
whereby we repurchased the remaining 100,301 shares of our
outstanding Preferred Stock from the GS Funds for
$336.1 million in cash. As a result of the
GS Repurchase becoming a probable event under the terms of
the stock purchase agreement on October 3, 2005 (See
Item 8, Financial Statements and Supplementary
Data Note 8, Redeemable Preferred
Stock and Warrants), the recorded value of the Preferred
Stock was accreted to its redemption value of
$334.1 million at December 31, 2005 and
$336.1 million at January 27, 2006. The accretion to
redemption
64
value of $211.0 million and $2.0 million (which
represented accrued dividends and interest) for the years ended
December 31, 2005 and 2006, respectively, has been recorded
as an increase to loss available to common shareholders on the
consolidated statements of operations. In conjunction with the
GS Repurchase, we also reversed the previously recorded BCF
related to these shares and recorded a decrease to loss
available to common shareholders on the consolidated statement
of operations of approximately $31.2 million for the year
ended December 31, 2006.
The resulting loss available to common shareholders was
$(208.5) million for 2006, as compared to
$(288.9) million in 2005.
For the years ended December 31, 2006 (through
January 27, 2006, the closing date of the GS Repurchase)
and 2005, we accounted for (loss) earnings per share in
accordance with Emerging Issues Task Force Issue
No. 03-6,
Participating Securities and the Two-Class Method under
FASB Statement 128
(EITF 03-6),
which established standards regarding the computation of EPS by
companies that have issued securities other than common stock
that contractually entitle the holder to participate in
dividends and earnings of the company.
EITF 03-6
requires earnings available to common shareholders for the
period, after deduction of preferred stock dividends, to be
allocated between the common and preferred shareholders based on
their respective rights to receive dividends. Basic EPS was then
calculated by dividing (loss) income allocable to common
shareholders by the weighted average number of shares
outstanding.
EITF 03-6
does not require the presentation of basic and diluted EPS for
securities other than common stock. Therefore, the following EPS
amounts only pertain to our common stock.
Under the guidance of
EITF 03-6,
diluted EPS was calculated by dividing (loss) income allocable
to common shareholders by the weighted average common shares
outstanding plus dilutive potential common stock. Potential
common stock includes stock options, SARs, restricted stock and
warrants, the dilutive effect of which is calculated using the
treasury stock method, and prior to the GS Repurchase, our 8%
Preferred Stock, the dilutive effect of which was calculated
using the if-converted method.
Subsequent to the GS Repurchase, we account for EPS in
accordance with SFAS No. 128,
Earnings Per Share,
and no longer utilize the two-class method for EPS
computations. The calculation of basic and diluted loss per
share for the years ended December 31, 2006 and 2005,
respectively, are presented below.
65
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands,
|
|
|
|
except percentages and
|
|
|
|
per share amounts)
|
|
|
Basic EPS Two-Class Method
|
|
|
|
|
|
|
|
|
Loss available to common shareholders
|
|
$
|
(208,483
|
)
|
|
$
|
(288,876
|
)
|
Amount allocable to common
shareholders
(1)
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Loss allocable to common shareholders
|
|
|
(208,483
|
)
|
|
|
(288,876
|
)
|
Weighted average common shares outstanding
|
|
|
66,448
|
|
|
|
31,731
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share Two-Class Method
|
|
$
|
(3.14
|
)
|
|
$
|
(9.10
|
)
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
Loss available to common shareholders
|
|
$
|
(208,483
|
)
|
|
$
|
(288,876
|
)
|
Amount allocable to common
shareholders
(1)
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Loss allocable to common shareholders
|
|
|
(208,483
|
)
|
|
|
(288,876
|
)
|
Weighted average common shares outstanding
|
|
|
66,448
|
|
|
|
31,731
|
|
Dilutive effect of stock awards and
warrants
(2)
|
|
|
|
|
|
|
|
|
Dilutive effect of Preferred Stock assuming
conversion
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
66,448
|
|
|
|
31,731
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(3.14
|
)
|
|
$
|
(9.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In computing EPS using the two-class method, we have not
allocated the net loss reported for the years ended
December 31, 2006 and 2005, respectively, between common
and preferred shareholders since preferred shareholders had no
contractual obligation to share in the net loss.
|
|
(2)
|
|
Due to the loss allocable to common shareholders reported for
the years ended December 31, 2006 and 2005, respectively,
the effect of all stock-based awards, warrants and the assumed
conversion of the Preferred Stock were anti-dilutive and
therefore are not included in the calculation of diluted EPS.
For the years ended December 31, 2006 and 2005,
2,263 shares and 60 shares, respectively, of
stock-based awards had exercise prices that exceeded the average
market price of the Companys common stock for the
respective periods. For the years ended December 31, 2006
and 2005, the assumed conversion of the Preferred Stock into
391 shares and 5,132 shares, respectively, of common
stock was anti-dilutive and therefore not included in the
calculation of diluted EPS.
|
Non-GAAP Measures
Adjusted Pro Forma and Combined Adjusted Amounts
As a result of the Dex Media Merger and AT&T Directory
Acquisition, the related financings and associated purchase
accounting, our 2006 results reported in accordance with GAAP
are not comparable to our 2005 reported GAAP results. GAAP
results presented for the year ended December 31, 2006
include eleven months of results from the Dex Media Business,
which was acquired on January 31, 2006. Under the deferral
and amortization method of revenue recognition, the billable
value of directories published is recognized as revenue in
subsequent reporting periods. However, purchase accounting
precluded us from recognizing directory revenue and certain
expenses associated with directories that published prior to
each acquisition, including all directories published in the
month each acquisition was completed. Thus, our reported 2006
and 2005 GAAP results are not comparable or indicative of our
underlying operating and financial performance. Accordingly,
management is presenting (1) 2006 adjusted pro forma
information that, among other things, eliminates the purchase
accounting impact on revenue and certain expenses related to the
Dex Media Merger and assumes the Dex Media Merger occurred on
January 1, 2006, and (2) 2005 combined adjusted
information reflecting the sum of (a) RHDs 2005
adjusted results (reflecting adjustments relating to the
AT&T Directory Acquisition) and (b) Dex Medias
reported GAAP results during the period. Management believes
that the
66
presentation of this adjusted pro forma and combined adjusted
information will help financial statement users better and more
easily compare current period underlying operating results
against what the combined company performance would more likely
have been in the comparable prior period. All of the adjusted
pro forma and combined adjusted amounts disclosed below or
elsewhere are non-GAAP measures, which are reconciled to the
most comparable GAAP measures under that caption below. While
the adjusted pro forma and combined adjusted results each
exclude the effects of purchase accounting, and certain other
non-recurring items, to better reflect underlying operating
results in the respective periods, because of differences
between RHD, Dex Media and AT&T and their respective
predecessor accounting policies, the adjusted pro forma and
combined adjusted results are not strictly comparable and should
not be treated as such.
2006
Adjusted Pro Forma Operating Income Compared to 2005 Combined
Adjusted Operating Income
The components of adjusted pro forma operating income for the
year ended December 31, 2006 and combined adjusted
operating income for the year ended December 31, 2005 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
Reported
|
|
|
|
|
|
Adjusted
|
|
|
|
GAAP
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
(Amounts in millions)
|
|
|
Net revenue
|
|
$
|
1,899.3
|
|
|
$
|
789.2
|
(1)
|
|
$
|
2,688.5
|
|
Expenses, other than depreciation and amortization
|
|
|
1,132.9
|
|
|
|
108.8
|
(2)
|
|
|
1,241.7
|
|
Depreciation and amortization
|
|
|
323.6
|
|
|
|
20.5
|
(3)
|
|
|
344.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
442.8
|
|
|
$
|
659.9
|
|
|
$
|
1,102.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2005
|
|
|
|
Reported
|
|
|
|
|
|
Dex
|
|
|
Combined
|
|
|
|
GAAP
|
|
|
Adjustments
|
|
|
Media GAAP
|
|
|
Adjusted
|
|
|
|
(Amounts in millions)
|
|
|
Net revenue
|
|
$
|
956.6
|
|
|
$
|
85.0
|
(4)
|
|
$
|
1,658.4
|
(6)
|
|
$
|
2,700.0
|
|
Expenses, other than depreciation and amortization
|
|
|
496.3
|
|
|
|
(49.9
|
)
(5)
|
|
|
757.2
|
(6)
|
|
|
1,203.6
|
|
Depreciation and amortization
|
|
|
85.1
|
|
|
|
|
|
|
|
377.2
|
(6)
|
|
|
462.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
375.2
|
|
|
$
|
134.9
|
|
|
$
|
524.0
|
|
|
$
|
1,034.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents all deferred revenue for directories that published
prior to the Dex Media Merger, which would have been recognized
during the period absent purchase accounting required under
GAAP. Adjustments also include GAAP revenue for January 2006 as
reported by Dex Media.
|
|
(2)
|
|
Represents (a) certain deferred expenses for directories
that published prior to the Dex Media Merger, which would have
been recognized during the period absent purchase accounting
required under GAAP, (b) GAAP expenses for January 2006 as
reported by Dex Media, (c) exclusion of transaction
expenses reported by Dex Media in January 2006 directly related
to the Dex Media Merger and (d) the exclusion of cost
uplift recorded under purchase accounting for the AT&T
Directory Acquisition and the Dex Media Merger.
|
|
(3)
|
|
Represents the additional amortization expense related to the
identifiable intangible assets acquired in the Dex Media Merger
over their estimated useful lives, assuming the Dex Media Merger
was consummated on January 1, 2006.
|
|
(4)
|
|
Represents all deferred revenue for directories that published
prior to the AT&T Directory Acquisition, which would have
been recognized during the period had it not been for purchase
accounting required under GAAP.
|
|
(5)
|
|
Represents elimination of cost uplift for the AT&T
Directory Acquisition, net of certain deferred expenses for
AT&T directories that published prior to the AT&T
Directory Acquisition, which would have been recognized during
the period had it not been for purchase accounting required
under GAAP.
|
|
(6)
|
|
Represents net revenue, expenses and depreciation and
amortization reported by Dex Media on a GAAP basis for the year
ended December 31, 2005.
|
67
2006
Adjusted Pro Forma Revenue Compared to 2005 Combined Adjusted
Revenue
The components of adjusted pro forma revenue for the year ended
December 31, 2006 and combined adjusted revenue for the
year ended December 31, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
Reported
|
|
|
Dex Media Merger
|
|
|
Adjusted
|
|
|
|
GAAP
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
(Amounts in millions)
|
|
|
Gross directory advertising revenue
|
|
$
|
1,907.3
|
|
|
$
|
798.1
|
(1)
|
|
$
|
2,705.4
|
|
Sales claims and allowances
|
|
|
(41.9
|
)
|
|
|
(23.0
|
)
(1)
|
|
|
(64.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net directory advertising revenue
|
|
|
1,865.4
|
|
|
|
775.1
|
|
|
|
2,640.5
|
|
Other revenue
|
|
|
33.9
|
|
|
|
14.1
|
(2)
|
|
|
48.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
1,899.3
|
|
|
$
|
789.2
|
|
|
$
|
2,688.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2005
|
|
|
|
|
|
|
AT&T Directory
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Acquisition
|
|
|
Dex Media
|
|
|
Combined
|
|
|
|
GAAP
|
|
|
Adjustments
|
|
|
GAAP
|
|
|
Adjusted
|
|
|
|
(Amounts in millions)
|
|
|
Gross directory advertising revenue
|
|
$
|
956.0
|
|
|
$
|
85.5
|
(3)
|
|
$
|
1,609.5
|
(4)
|
|
$
|
2,651.0
|
|
Sales claims and allowances
|
|
|
(10.4
|
)
|
|
|
(0.5
|
)
(3)
|
|
|
|
|
|
|
(10.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net directory advertising revenue
|
|
|
945.6
|
|
|
|
85.0
|
|
|
|
1,609.5
|
|
|
|
2,640.1
|
|
Other revenue
|
|
|
11.0
|
|
|
|
|
|
|
|
48.9
|
(4)
|
|
|
59.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
956.6
|
|
|
$
|
85.0
|
|
|
$
|
1,658.4
|
|
|
$
|
2,700.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents gross directory advertising revenue and sales claims
and allowances for directories that published prior to the Dex
Media Merger, which would have been recognized during the period
had it not been for purchase accounting required under GAAP.
Adjustments also include GAAP results for January 2006 as
reported by Dex Media.
|
|
(2)
|
|
Other revenue includes barter revenue, late fees paid on
outstanding customer balances, commissions earned on sales
contracts with respect to advertising placed into other
publishers directories, sales of directories and certain
other print and internet products.
|
|
(3)
|
|
Represents gross directory advertising revenue and sales claims
and allowances for AT&T directories that published prior to
the AT&T Directory Acquisition, which would have been
recognized during the period had it not been for purchase
accounting required under GAAP.
|
|
(4)
|
|
Represents 2005 reported GAAP results for Dex Media. Prior to
the Dex Media Merger, Dex Media only reported directory
advertising revenue net of sales claims and allowances.
|
Adjusted pro forma net revenue for 2006 was
$2,688.5 million, representing a decrease of
$11.5 million or 0.4% from combined adjusted net revenue of
$2,700.0 million in 2005. Under the deferral and
amortization method of revenue recognition, revenue from
directory advertising sales is initially deferred when a
directory is published and recognized ratably over the life of
the directory, which is typically 12 months. Adjusted pro
forma net directory advertising revenue for 2006 decreased from
combined adjusted net directory advertising revenue in 2005
primarily due to unfavorable sales claims and allowance
experience primarily in the Qwest markets resulting from
customer claims associated with the prior legacy Dex Media
systems conversion, as well as declines in some of our AT&T
markets due to rescoping and consolidation of products, offset
by the amortization of revenue from favorable sales performances
in certain of our larger markets over the prior four quarters.
68
2006
Adjusted Pro Forma Expenses Compared to 2005 Combined Adjusted
Expenses
Adjusted pro forma expenses, other than depreciation and
amortization, for 2006 of $1,241.7 million increased by
$38.1 million from combined adjusted expenses of
$1,203.6 million for 2005. The primary components of the
$38.1 million increase in 2006 adjusted pro forma expenses,
other than depreciation and amortization, are shown below:
|
|
|
|
|
|
|
$ Change
|
|
|
|
(Amounts in
|
|
|
|
millions)
|
|
|
Stock-based compensation expense resulting from adoption of
SFAS No. 123(R)
|
|
$
|
43.3
|
|
Increased internet production and distribution costs
|
|
|
23.4
|
|
Increased advertising costs
|
|
|
16.0
|
|
Decreased general corporate expenses
|
|
|
(32.3
|
)
|
Decreased other marketing costs
|
|
|
(10.8
|
)
|
All other
|
|
|
(1.5
|
)
|
|
|
|
|
|
Total increase in 2006 adjusted pro forma expenses, other than
depreciation and amortization, compared to 2005 combined
adjusted expenses
|
|
$
|
38.1
|
|
|
|
|
|
|
Adjusted pro forma expenses, other than depreciation and
amortization, for 2006 were impacted by $43.3 million of
non-cash stock-based compensation expense resulting from
SFAS No. 123(R), which the Company adopted effective
January 1, 2006, with no expense on a comparable basis in
2005. During 2006, $13.4 million of the reported
$43.3 million of non-cash stock-based compensation expense
resulted from modifications to stock-based awards outstanding
due to acceleration of vesting terms as a result of the Dex
Media Merger.
Adjusted pro forma expenses, other than depreciation and
amortization, in 2006 increased by $23.4 million from 2005
combined adjusted expenses, due to increased Internet production
and distribution costs as we expanded our digital product line
offerings, which includes the acquired Dex Media Business.
Adjusted pro forma advertising costs in 2006 were
$16.0 million greater, compared to combined adjusted
advertising expenses in 2005 due to increased market investment
and competitive responses.
Adjusted pro forma general corporate expenses were
$32.3 million lower and marketing costs were
$10.8 million lower for 2006 compared to combined adjusted
expenses in 2005. Reductions in adjusted pro forma expenses
relate partially to achieving economies that accompany scale
subsequent to the Dex Media Merger, as well as Company-wide
efforts to reduce certain expenses throughout 2006.
Adjusted pro forma D&A for 2006 was $344.1 million and
includes incremental D&A as if the Dex Media Merger had
occurred on January 1, 2006. Combined adjusted D&A for
2005 of $462.3 million represents D&A reported by both
RHD and Dex Media. The decrease in adjusted pro forma D&A
for 2006 of $118.2 million from combined adjusted D&A
for 2005 is primarily related to differences between RHD and Dex
Medias valuation and useful life assumptions utilized for
the amortization of Dex Medias intangible assets.
2006
Adjusted Pro Forma Operating Income Compared to 2005 Combined
Adjusted Operating Income
Adjusted pro forma operating income for 2006 was
$1,102.7 million, representing an increase of
$68.6 million or 6.6% from combined adjusted operating
income in 2005 of $1,034.1 million, reflecting the
variances between revenues and expenses from period to period
described above.
69
LIQUIDITY
AND CAPITAL RESOURCES
Debt
Long-term debt of the Company at December 31, 2007 and
2006, including fair value adjustments required by GAAP as a
result of the Dex Media Merger, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
(Amounts in thousands)
|
|
|
RHD
|
|
|
|
|
|
|
|
|
6.875% Senior Notes due 2013
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
6.875%
Series A-1
Senior Discount Notes due 2013
|
|
|
339,222
|
|
|
|
335,401
|
|
6.875%
Series A-2
Senior Discount Notes due 2013
|
|
|
613,649
|
|
|
|
606,472
|
|
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
|
|
|
|
|
|
RHDI
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,571,536
|
|
|
|
1,946,535
|
|
8.875% Senior Notes due 2010
|
|
|
|
|
|
|
7,934
|
|
10.875% Senior Subordinated Notes due 2012
|
|
|
|
|
|
|
600,000
|
|
Dex Media, Inc.
|
|
|
|
|
|
|
|
|
8% Senior Notes due 2013
|
|
|
512,097
|
|
|
|
513,663
|
|
9% Senior Discount Notes due 2013
|
|
|
719,112
|
|
|
|
663,153
|
|
Dex Media East
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,106,050
|
|
|
|
656,571
|
|
9.875% Senior Notes due 2009
|
|
|
|
|
|
|
476,677
|
|
12.125% Senior Subordinated Notes due 2012
|
|
|
|
|
|
|
390,314
|
|
Dex Media West
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,071,491
|
|
|
|
1,450,917
|
|
8.5% Senior Notes due 2010
|
|
|
398,736
|
|
|
|
403,260
|
|
5.875% Senior Notes due 2011
|
|
|
8,774
|
|
|
|
8,786
|
|
9.875% Senior Subordinated Notes due 2013
|
|
|
824,982
|
|
|
|
833,469
|
|
|
|
|
|
|
|
|
|
|
Total RHD Consolidated
|
|
|
10,175,649
|
|
|
|
10,403,152
|
|
Less current portion
|
|
|
177,175
|
|
|
|
382,631
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
9,998,474
|
|
|
$
|
10,020,521
|
|
|
|
|
|
|
|
|
|
|
Credit
Facilities
At December 31, 2007, total outstanding debt under our
credit facilities was $3,749.1 million, comprised of
$1,571.5 million under the RHDI credit facility,
$1,106.1 million under the new Dex Media East credit
facility and $1,071.5 million under the Dex Media West
credit facility.
RHD
To finance the Business.com Acquisition and related fees and
expenses, on August 23, 2007, RHD entered into a
$328.0 million credit facility (RHD Credit
Facility), with a scheduled maturity date of
December 31, 2011. On October 2, 2007, the RHD Credit
Facility was paid in full from the proceeds of our
Series A-4
Notes. The repayment of the RHD Credit Facility was accounted
for as an extinguishment of debt resulting in a loss charged to
interest expense during the year ended December 31, 2007 of
$0.8 million related to the write-off of unamortized
deferred financing costs.
70
RHDI
As of December 31, 2007, outstanding balances under
RHDIs senior secured credit facility, as amended and
restated (RHDI Credit Facility), totaled
$1,571.5 million, comprised of $314.0 million under
Term Loan D-1, $1,257.5 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). Prior to the refinancing transactions on
October 17, 2007 (discussed below), RHDIs Credit
Facility also consisted of a Term Loan
A-4,
which
has been paid in full. 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. On October 17, 2007,
$91.8 million, $16.2 million and $83.0 million of
Term Loans
A-4,
D-1,
and D-2, respectively, were repaid from the proceeds of the
Series A-4
Notes issued on October 17, 2007. The repayment of these
term loans was accounted for as an extinguishment of debt
resulting in a loss charged to interest expense during the year
ended December 31, 2007 of $4.2 million related to the
write-off of unamortized deferred financing costs. 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 6.50% and
6.86% at December 31, 2007 and 2006, respectively.
As of December 31, 2007, RHDIs Credit Facility bears
interest, at our option, at either:
|
|
|
|
|
The higher of (i) a base rate as determined by the
Administrative Agent, Deutsche Bank Trust Company Americas
and (ii) the Federal Funds Effective Rate (as defined) plus
0.50%, and in each case, plus a 0.25% margin on the RHDI
Revolver and a 0.50% margin on Term Loan D-1 and Term Loan
D-2; or
|
|
|
|
The LIBOR rate plus a 1.25% margin on the RHDI Revolver and a
1.50% margin on Term Loan D-1 and Term Loan D-2. We may elect
interest periods of 1, 2, 3 or 6 months (or 9 or
12 months if, at the time of the borrowing, all lenders
agree to make such term available), for LIBOR borrowings.
|
Dex
Media East
On October 24, 2007, we replaced the former Dex Media East
credit facility with a new Dex Media East credit facility. The
new Dex Media East credit facility consists of a
$700.0 million aggregate principal amount Term Loan A
facility, a $400.0 million aggregate principal amount Term
Loan B facility, a $100.0 million aggregate principal
amount revolving loan facility (new Dex Media East
Revolver) and a $200.0 million aggregate principal
amount uncommitted incremental facility, in which Dex Media East
would have the right, subject to obtaining commitments for such
incremental loans, on one or more occasions to increase the Term
Loan A, Term Loan B or the revolving loan facility by such
amount. The new Dex Media East credit facility is secured by
pledges of similar assets and has similar covenants and events
of default as the former Dex Media East credit facility.
As of December 31, 2007, the principal amounts owing under
the Term Loan A and Term Loan B totaled $1,100.0 million,
comprised of $700.0 million and $400.0 million,
respectively, and $6.1 million was outstanding under the
new Dex Media East Revolver (with an additional
$3.0 million utilized under three standby letters of
credit). The new 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 new Dex Media East credit facility was 6.87% at
December 31, 2007. The weighted average interest rate of
outstanding debt under the former Dex Media East credit facility
was 6.85% at December 31, 2006.
The former Dex Media East credit facility, as amended and
restated in connection with the Dex Media Merger, consisted of
revolving loan commitments (former Dex Media East
Revolver) and a Term Loan A and Term Loan B. On
October 17, 2007, $86.4 million and
$213.6 million of the Term Loan A and Term Loan B under the
former Dex Media East credit facility, respectively, were repaid
from the proceeds of the
Series A-4
Notes issued on October 17, 2007.
Proceeds from the new Dex Media East credit facility were used
on October 24, 2007 to repay the remaining
$56.5 million and $139.7 million of Term Loan A and
Term Loan B under the former Dex Media
71
East credit facility, respectively, and $32.5 million under
the former Dex Media East Revolver. The repayment of the term
loans and revolving loan commitments outstanding under the
former Dex Media East credit facility was accounted for as an
extinguishment of debt resulting in a loss charged to interest
expense during the year ended December 31, 2007 of
$0.2 million related to the write-off of unamortized
deferred financing costs.
Proceeds from the new Dex Media East credit facility were also
used on November 26, 2007 to fund the redemption of
$449.7 million of Dex Media Easts outstanding
9.875% senior notes due 2009 and $341.3 million of Dex
Media Easts outstanding 12.125% senior subordinated
notes due 2012. See below for further details.
As of December 31, 2007, the new Dex Media East credit
facility bears interest, at our option, at either:
|
|
|
|
|
The higher of (i) the base rate determined by the
Administrative Agent, JP Morgan Chase Bank, N.A. and
(ii) the Federal Funds Effective Rate (as defined) plus
0.50%, and in each case, plus a 0.75% (or 0.50% if leverage
ratio is less than 2 to 1) margin on the new Dex Media East
Revolver and Term Loan A and a 1.00% margin on Term Loan
B; or
|
|
|
|
The LIBOR rate plus a 1.75% (or 1.50% if leverage ratio is less
than 2 to 1) margin on the new Dex Media East Revolver and
Term Loan A and a 2.00% margin on Term Loan B. We may elect
interest periods of 1, 2, 3, or 6 months (or 9 or
12 months if, at the time of the borrowing, all lenders
agree to make such term available), for LIBOR borrowings.
|
Dex
Media West
As of December 31, 2007, the Dex Media West credit
facility, as amended and restated in connection with the Dex
Media Merger, consists of revolving loan commitments (Dex
Media West Revolver) and a Term Loan A, Term Loan B-1 and
Term Loan B-2. The Dex Media West Revolver consists of a total
principal amount of $100.0 million, which is available for
general corporate purposes, subject to certain conditions. As of
December 31, 2007, the principal amounts owed under the
Term Loan A, Term Loan B-1, and Term Loan B-2 totaled
$1,053.5 million, comprised of $152.9 million,
$310.7 million, and $589.9 million, respectively, and
$18.0 million was outstanding under the Dex Media West
Revolver. The Term Loan B-1 in the amount of $444.2 million
was utilized to redeem Dex Media Wests senior notes that
were put to Dex Media West in connection with the change of
control offer associated with the Dex Media Merger and to fund a
portion of the cash consideration paid to Dex Media, Inc.s
stockholders in connection with the Dex Media Merger. The
remaining $58.8 million is no longer available. 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 6.51% and 6.83% at
December 31, 2007 and 2006, respectively.
As of December 31, 2007, the Dex Media West credit facility
bears interest, at our option, at either:
|
|
|
|
|
The higher of (i) the base rate determined by the
Administrative Agent, JP Morgan Chase Bank, N.A. and
(ii) the Federal Funds Effective Rate (as defined) plus
0.50%, and in each case, plus a 0.25% margin on the Dex Media
West Revolver and Term Loan A and a 0.50% margin on Term Loan
B-1 and Term Loan B-2; or
|
|
|
|
The LIBOR rate plus a 1.25% margin on the Dex Media West
Revolver and Term Loan A and a 1.50% margin on Term Loan B-1 and
Term Loan B-2. We may elect interest periods of 1, 2, 3, or
6 months (or 9 or 12 months if, at the time of the
borrowing, all lenders agree to make such term available), for
LIBOR borrowings.
|
Notes,
Preferred Stock and Warrants
At December 31, 2007, RHD had total outstanding notes of
$6,426.6 million, comprised of $3,962.9 million
outstanding RHD notes, $1,231.2 million outstanding Dex
Media, Inc. notes and $1,232.5 million outstanding Dex
Media West notes.
72
RHD
At December 31, 2007, RHD had total outstanding notes of
$3,962.9 million, comprised of $300.0 million
6.875% Senior Notes, $339.2 million 6.875%
Series A-1
Senior Discount Notes, $613.7 million 6.875%
Series A-2
Senior Discount Notes, $1,210.0 million 8.875%
Series A-3
Senior Notes and $1,500.0 million 8.875%
Series A-4
Senior Notes.
On October 2, 2007, we issued $1.0 billion of
Series A-4
Notes. Proceeds from the
Series A-4
Notes were (a) used to repay the $328 million RHD
Credit Facility used to fund the Business.com Acquisition,
(b) contributed to RHDI in order to provide funding for the
tender offer and consent solicitation of RHDIs
$600 million 10.875% Senior Subordinated Notes
(RHDI Senior Subordinated Notes) and (c) used
to pay related fees and expenses and for other general corporate
purposes. On October 17, 2007, we issued an additional
$500 million of
Series A-4
Notes. Proceeds from this issuance were (a) transferred to
Dex Media East in order to repay $86.4 million and
$213.6 million of the Term Loan A and Term Loan B under the
former Dex Media East credit facility, respectively,
(b) contributed to RHDI in order to repay
$91.8 million, $16.2 million and $83.0 million of
Term Loans
A-4,
D-1,
and D-2 under the RHDI Credit Facility, respectively, and
(c) used to pay related fees and expenses.
Interest on the
Series A-4
Notes is payable semi-annually on April 15th and October 15th of
each year, commencing on April 15, 2008. The
Series A-4
Notes are senior unsecured obligations of RHD, senior in right
of payment to all of RHDs existing and future senior
subordinated debt and future subordinated obligations and rank
equally with RHDs existing and future senior unsecured
debt. The
Series A-4
Notes are effectively subordinated to RHDs secured debt,
including RHDs guarantee of borrowings under the RHDI
Credit Facility and are structurally subordinated to any
existing or future liabilities (including trade payables) of our
direct and indirect subsidiaries. At December 31, 2007, the
Series A-4
Notes had a fair market value of $1.37 billion.
The
Series A-4
Notes were issued to certain institutional investors in an
offering exempt from registration requirements under the
Securities Act of 1933. Under the terms of a registration rights
agreement, the Company has agreed to file a registration
statement for the
Series A-4
Notes within 210 days subsequent to the initial closing.
We issued $300 million of 6.875% Senior Notes due
January 15, 2013 (Holdco Notes), the proceeds
of which were used to redeem 100,303 shares of the then
outstanding Preferred Stock from the GS Funds, pay transaction
costs and repay debt associated with RHDIs Credit
Facility. Interest is payable on the Holdco Notes semi-annually
in arrears on January 15th and July 15th of each year,
commencing July 15, 2005. At December 31, 2007, the
6.875% Holdco Notes had a fair market value of
$265.5 million.
In order to fund the cash portion of the Dex Media Merger
purchase price, we issued $660 million aggregate principal
amount at maturity ($600.5 million gross proceeds) of
6.875%
Series A-2
Senior Discount Notes due January 15, 2013 and
$1.21 billion principal amount of 8.875%
Series A-3
Senior Notes due January 15, 2016. Interest is payable
semi-annually on January 15th and July 15th of each year for the
Series A-2
Senior Discount Notes and the
Series A-3
Senior Notes, commencing July 15, 2006. We also issued
$365 million aggregate principal amount at maturity
($332.1 million gross proceeds) of 6.875%
Series A-1
Senior Discount Notes due January 15, 2013 to fund the GS
Repurchase. Interest is payable semi-annually on January 15th
and July 15th of each year, commencing July 15, 2006. All
of these notes are unsecured obligations of RHD, senior in right
of payment to all future senior subordinated and subordinated
indebtedness of RHD and structurally subordinated to all
indebtedness of our subsidiaries. At December 31, 2007, the
6.875%
Series A-1
and
Series A-2
Senior Discount Notes and 8.875%
Series A-3
Senior Notes had a fair market value of $300.2 million,
$543.1 million and $1.12 billion, respectively.
On May 30, 2006, RHD redeemed the outstanding preferred
stock purchase rights issued pursuant to the Companys
stockholder rights plan at a redemption price of one cent per
right for a total redemption payment of $0.7 million. This
payment was recorded as a charge to retained earnings for the
year ended December 31, 2006.
73
On November 2, 2006, we repurchased all outstanding
warrants to purchase 1.65 million shares of our common
stock for an aggregate purchase price of approximately
$53.1 million.
RHDI
In connection with the Embarq Acquisition, RHDI issued 8.875%
$325 million of Senior Notes due 2010 (RHDI Senior
Notes) and $600 million of RHDI Senior Subordinated
Notes. On December 20, 2005, we repurchased through a
tender offer and exit consent solicitation $317.1 million
of the RHDI Senior Notes. Proceeds from the RHDI Credit
Facilitys $350 million Term Loan D-1 were used to
fund the partial repurchase of the RHDI Senior Notes, a tender
premium of $25.3 million and pay transaction costs of the
tender offer. The partial repurchase of the RHDI Senior Notes
was accounted for as an extinguishment of debt resulting in a
loss of $32.7 million charged to interest expense during
the year ended December 31, 2005, consisting of the tender
premium and the write-off of unamortized deferred financing
costs of $7.4 million. In December 2007, we redeemed the
remaining $7.9 million of RHDI Senior Notes. Proceeds from
the RHDI Revolver were used to fund the redemption, a redemption
premium of $0.2 million and pay transaction costs. The
redemption of the RHDI Senior Notes was accounted for as an
extinguishment of debt resulting in a loss of $0.2 million
charged to interest expense during the year ended
December 31, 2007, consisting of the redemption premium and
the write-off of unamortized deferred financing costs of less
than $0.1 million.
In October 2007, under the terms and conditions of a tender
offer and consent solicitation to purchase the $600 million
RHDI Senior Subordinated Notes that RHDI commenced on
September 18, 2007, $599.9 million, or 99.9%, of the
outstanding RHDI Senior Subordinated Notes were repurchased.
Proceeds from the
Series A-4
Notes were contributed by RHD to RHDI in order to fund the
repurchase of the RHDI Senior Subordinated Notes, a tender
premium of $39.7 million and pay transaction costs of the
tender offer. In December 2007, the remaining $0.1 million
of RHDI Senior Subordinated Notes were redeemed. The tender and
redemption of the RHDI Senior Subordinated Notes was accounted
for as an extinguishment of debt resulting in a loss of
$51.3 million charged to interest expense during the year
ended December 31, 2007, consisting of the tender premium
and the write-off of unamortized deferred financing costs of
$11.6 million.
Dex
Media, Inc.
At December 31, 2007, Dex Media, Inc. had total outstanding
notes of $1,231.2 million, comprised of $512.1 million
8% Senior Notes and $719.1 million 9% Senior
Discount Notes.
Dex Media, Inc. has issued $500 million aggregate principal
amount of 8% Senior Notes due 2013. These Senior Notes are
unsecured obligations of Dex Media, Inc. and interest is payable
on May 15th and November 15th of each year. As of
December 31, 2007, $500 million aggregate principal
amount was outstanding excluding fair value adjustments. At
December 31, 2007, the 8% Senior Notes had a fair
market value of $466.3 million.
Dex Media, Inc. has issued $750 million aggregate principal
amount of 9% Senior Discount Notes due 2013, under two
indentures. Under the first indenture totaling $389 million
aggregate principal amount, the 9% Senior Discount Notes
were issued at an original issue discount with interest accruing
at 9%, per annum, compounded semi-annually. These Senior
Discount Notes are unsecured obligations of Dex Media, Inc. and
interest accrues in the form of increased accreted value until
November 15, 2008 (Full Accretion Date), at
which time the accreted value will be equal to the full
principal amount at maturity. Under the second indenture
totaling $361 million aggregate principal amount, interest
accrues at 8.37% per annum, compounded semi-annually, which
creates a premium at the Full Accretion Date that will be
amortized over the remainder of the term. After
November 15, 2008, the 9% Senior Discount Notes bear
cash interest at 9% per annum, payable semi-annually on May 15th
and November 15th of each year. These Senior Discount Notes are
unsecured obligations of Dex Media, Inc. and no cash interest
will accrue on the discount notes prior to the Full Accretion
Date. As of December 31, 2007, $749.9 million
aggregate principal amount was outstanding excluding fair value
adjustments. At December 31, 2007, the 9% Senior
Discount Notes had a fair market value of $673.1 million.
74
Dex
Media East
On November 26, 2007, proceeds from the new Dex Media East
credit facility were used to fund the redemption of
$449.7 million of Dex Media Easts outstanding
9.875% Senior Notes due 2009, $341.3 million of Dex
Media Easts outstanding 12.125% Senior Subordinated
Notes due 2012, redemption premiums associated with these Senior
Notes and Senior Subordinated Notes of $11.1 million and
$20.7 million, respectively, and pay transaction costs. The
redemption of these Senior Notes and Senior Subordinated Notes
was accounted for as an extinguishment of debt resulting in a
loss of $31.8 million charged to interest expense during
the year ended December 31, 2007 related to the redemption
premiums. In addition, as a result of redeeming these Senior
Notes and Senior Subordinated Notes, interest expense was offset
by $62.2 million during the year ended December 31,
2007, resulting from accelerated amortization of the remaining
fair value adjustment recorded as a result of the Dex Media
Merger.
2007
Refinancings
The purpose of these refinancing transactions that occurred
throughout 2007 was to refinance certain debt obligations with
debt yielding more favorable interest rates and to simplify and
provide for more flexibility within our operating and capital
structure.
Dex
Media West
At December 31, 2007, Dex Media West had total outstanding
notes of $1,232.5 million, comprised of $398.7 million
8.5% Senior Notes, $8.8 million 5.875% Senior
Notes and $825.0 million Senior Subordinated Notes.
Dex Media West issued $385 million aggregate principal
amount of 8.5% Senior Notes due 2010. These Senior Notes
are unsecured obligations of Dex Media West and interest is
payable on February 15th and August 15th of each year. As of
December 31, 2007, $385 million aggregate principal
amount was outstanding excluding fair value adjustments. At
December 31, 2007, the 8.5% Senior Notes had a fair
market value of $389.8 million.
Dex Media West issued $300 million aggregate principal
amount of 5.875% Senior Notes due 2011. These Senior Notes
are unsecured obligations of Dex Media West and interest is
payable on May 15th and November 15th of each year. As of
December 31, 2007, $8.7 million aggregate principal
amount was outstanding excluding fair value adjustments. At
December 31, 2007, the 5.875% Senior Notes had a fair
market value of $8.7 million.
Dex Media West issued $780 million aggregate principal
amount of 9.875% Senior Subordinated Notes due 2013. These
Senior Subordinated Notes are unsecured obligations of Dex Media
West and interest is payable on February 15th and August 15th of
each year. As of December 31, 2007, $761.7 million
aggregate principal amount was outstanding excluding fair value
adjustments. At December 31, 2007, the 9.875% Senior
Subordinated Notes had a fair market value of
$788.4 million.
The Companys credit facilities and the indentures
governing the notes contain usual and customary affirmative and
negative covenants that, among other things, place limitations
on our ability to (i) incur additional indebtedness;
(ii) pay dividends and repurchase our capital stock;
(iii) enter into mergers, consolidations, acquisitions,
asset dispositions and sale-leaseback transactions;
(iv) make capital expenditures; (v) issue capital
stock of our subsidiaries; (vi) engage in transactions with
our affiliates; and (vii) make investments, loans and
advances. The Companys credit facilities also contain
financial covenants relating to maximum consolidated leverage,
minimum interest coverage and maximum senior secured leverage as
defined therein. Substantially all of RHDIs and its
subsidiaries assets, including the capital stock of RHDI and its
subsidiaries, are pledged to secure the obligations under the
RHDI Credit Facility. Substantially all of the assets of Dex
Media East and Dex Media West and their subsidiaries, including
their equity interests, are pledged to secure the obligations
under their respective credit facilities.
75
Impact of
Purchase Accounting
As a result of the Dex Media Merger and in accordance with
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 $92.1 million (including $62.2 million
related to the redemption of Dex Media Easts Senior Notes
and Senior Subordinated Notes) and $26.4 million during the
years ended December 31, 2007 and 2006, respectively. A
total premium of $222.3 million was recorded upon
consummation of the Dex Media Merger, of which
$103.8 million remains unamortized at December 31,
2007, as shown in the following table. In connection with the
redemption of Dex Media Easts Senior Notes and Senior
Subordinated Notes, the remaining fair value adjustment related
to these debt obligations was fully amortized as of
December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Initial Fair Value
|
|
|
Unamortized
|
|
|
Long-Term
|
|
|
Excluding
|
|
|
|
Book Value at
|
|
|
Fair Value at
|
|
|
Adjustment at
|
|
|
Fair Value
|
|
|
Debt at
|
|
|
Unamortized
|
|
|
|
January 31,
|
|
|
January 31,
|
|
|
January 31,
|
|
|
Adjustment at
|
|
|
December 31,
|
|
|
Fair Value
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
December 31, 2007
|
|
|
2007
|
|
|
Adjustment
|
|
|
|
(Amounts in millions)
|
|
|
Dex Media, Inc. 8% Senior Notes
|
|
$
|
500.0
|
|
|
$
|
515.0
|
|
|
$
|
15.0
|
|
|
$
|
12.1
|
|
|
$
|
512.1
|
|
|
$
|
500.0
|
|
Dex Media, Inc. 9% Senior Discount Notes
|
|
|
598.8
|
|
|
|
616.0
|
|
|
|
17.2
|
|
|
|
14.6
|
|
|
|
719.1
|
|
|
|
704.5
|
|
Dex Media East 9.875% Senior Notes
|
|
|
450.0
|
|
|
|
484.3
|
|
|
|
34.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dex Media East 12.125% Senior Subordinated Notes
|
|
|
341.3
|
|
|
|
395.9
|
|
|
|
54.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dex Media West 8.5% Senior Notes
|
|
|
385.0
|
|
|
|
407.1
|
|
|
|
22.1
|
|
|
|
13.7
|
|
|
|
398.7
|
|
|
|
385.0
|
|
Dex Media West 5.875% Senior Notes
|
|
|
300.0
|
|
|
|
300.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
8.8
|
|
|
|
8.7
|
|
Dex Media West 9.875% Senior Subordinated Notes
|
|
|
761.8
|
|
|
|
840.8
|
|
|
|
79.0
|
|
|
|
63.3
|
|
|
|
825.0
|
|
|
|
761.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Dex Media Outstanding Debt at January 31, 2006
|
|
$
|
3,336.9
|
|
|
$
|
3,559.2
|
|
|
$
|
222.3
|
|
|
$
|
103.8
|
|
|
$
|
2,463.7
|
|
|
$
|
2,359.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
76
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 12 to 24 months. However, we make no assurances
that our business will generate sufficient cash flow from
operations or that sufficient borrowing will be available under
the revolver portions of the Companys credit facilities to
enable us to fund our operations 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 and Preferred
Stock repurchase transactions, we have a significant amount of
debt. Aggregate outstanding debt as of December 31, 2007
was $10.2 billion (including fair value adjustments
required by GAAP as a result of the Dex Media Merger).
The completion of the Dex Media Merger triggered change of
control offers on all of Dex Medias and its subsidiaries
outstanding notes, requiring us to make offers to repurchase the
notes. $291.3 million of the 5.875% Dex Media West senior
notes due 2011, $0.3 million of the 9.875% Dex Media East
senior notes due 2009, $0.2 million of the 9.875% Dex Media
West senior subordinated notes due 2013 and $0.1 million of
the 9% Dex Media, Inc. senior discount notes due 2013 were
tendered in the applicable change of control offer and
repurchased by us.
During the year ended December 31, 2007, we made scheduled
principal payments of $239.9 million and prepaid an
additional $1,434.2 million in principal under our credit
facilities, which includes prepayments associated with the
aforementioned 2007 refinancings, for total credit facility
repayments of $1,674.1 million, excluding revolver
repayments. During the year ended December 31, 2007, we
made revolver payments of $781.4 million, offset by
revolver borrowings of $722.6 million, resulting in a net
decrease of $58.8 million of the revolver portions under
the Companys credit facilities.
For the year ended December 31, 2007, we made aggregate
cash interest payments of $721.5 million. At
December 31, 2007, we had $46.1 million of cash and
cash equivalents before checks not yet presented for payment of
$10.8 million, and combined available borrowings under our
revolvers of $347.6 million. In connection with the
aforementioned 2007 refinancings, we received approximately
$47.9 million for general corporate purposes. During 2007,
we periodically utilized our revolvers as a financing resource
to balance the timing of our periodic payments and our
prepayments made under our credit facilities and interest
payments on our and our subsidiaries senior notes and
senior subordinated notes with the timing of cash receipts from
operations. Our present intention is to repay borrowings under
all revolvers in a timely manner and keep any outstanding
amounts to a minimum.
Share
Repurchases and Other Common Stock Transactions
In November 2007, the Companys Board of Directors
authorized a $100.0 million Repurchase Plan. This
authorization permits the Company to purchase its shares of
common stock in the open market pursuant to
Rule 10b-18
of the Securities Exchange Act of 1934 or through block trades
or otherwise over the following twelve months, based on market
conditions and other factors, which purchases may be made or
suspended at any time. In accordance with the Repurchase Plan,
we repurchased 2.5 million shares at a cost of
$95.7 million during December 2007.
On November 9, 2006, certain affiliates of The Carlyle
Group and Welsh, Carson, Anderson & Stowe (the
Selling Shareholders) sold 9,424,360 shares and
9,424,359 shares, respectively, of RHD common stock. The
Selling Shareholders were former shareholders of Dex Media that
became shareholders of RHD in
77
conjunction with the Dex Media Merger. After this sale, the
Selling Shareholders no longer hold any shares of RHD common
stock that they acquired in connection with the Dex Media
Merger. We did not receive any proceeds from this transaction.
Tax Basis
of Acquisitions
In connection with the AT&T Directory Acquisition and the
Embarq Acquisition, we made an election under Internal Revenue
Code Section 338(h)(10) to treat the applicable stock
purchase as an asset purchase, which, in each case, permitted us
to record the acquired intangible assets and goodwill at fair
value for tax purposes, rather than at the prior owners
tax cost basis (carry-over basis), which, in all
cases, was significantly less than fair value. Intangible assets
and goodwill acquired in the Dex Media Merger were recorded at
their carryover bases for tax purposes and are being amortized
over a 15-year period from their inception. Such intangible
assets and goodwill resulted from treating earlier acquisitions
by the prior owners of Dex Media, for tax purposes, as a
purchase of the assets of the business.
Accordingly, our tax deductible amortization is substantially
higher than it would have been in a typical stock purchase
transaction since it is based upon the fair value of the
acquired intangible assets and goodwill using the straight-line
method generally over 15 years. Annual amortization of
goodwill and the other acquired intangible assets for tax
purposes is approximately $672.5 million. Goodwill is not
subject to amortization for book purposes. As a result of this
amortization expense which offsets taxable income, our cash tax
requirements are significantly reduced by the tax effect of
these amortization deductions.
Cash Flow
Activities
Cash provided by operating activities was $691.8 million
for the year ended December 31, 2007. Key contributors to
operating cash flow include the following:
|
|
|
|
|
$46.9 million in net income.
|
|
|
|
$666.1 million of net non-cash charges primarily consisting
of $463.1 million of depreciation and amortization,
$80.8 million in bad debt provision, $39.0 million of
stock-based compensation expense, $47.3 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, $26.3 million loss on extinguishment of debt
related to the 2007 refinancing transactions noted above,
$8.7 million in deferred income taxes, and
$0.9 million loss on disposal of fixed assets.
|
|
|
|
$122.2 million net use of cash from an increase in accounts
receivable of $95.8 million and a decrease in deferred
directory revenue of $26.4 million. The change in deferred
revenue and accounts receivable are analyzed together given the
fact that when a directory is published, the annual billable
value of that directory is initially deferred and unbilled
accounts receivable are established. Each month thereafter,
typically one twelfth of the billing value is recognized as
revenue and billed to customers.
|
|
|
|
$6.0 million net use of cash from an increase in other
assets, consisting of a $5.1 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,
and a $0.9 million increase in prepaid expenses.
|
|
|
|
$66.1 million net source of cash from an increase in
accounts payable and accrued liabilities, primarily reflecting a
$47.9 million increase in trade accounts payable and a
$19.4 million increase in accrued interest payable on
outstanding debt, partially offset by a $1.2 million
decrease in accrued liabilities, which include accrued salaries
and related bonuses and accrued income taxes.
|
|
|
|
$40.9 million increase in other non-current liabilities,
including pension and postretirement long-term liabilities.
|
78
Cash used in investing activities for the year ended
December 31, 2007 was $409.1 million and includes the
following:
|
|
|
|
|
$77.5 million used to purchase fixed assets, primarily
computer equipment, software and leasehold improvements.
|
|
|
|
$329.1 million of net cash payments to acquire Business.com.
|
|
|
|
$2.5 million used to fund an equity investment.
|
Cash used in financing activities for the year ended
December 31, 2007 was $392.9 million and includes the
following:
|
|
|
|
|
$1,468.7 million in proceeds, net of costs, from the
issuance of the
Series A-4
Notes, which were used to fund the repayment of the RHD Credit
Facility, the redemption of RHDIs 10.875% Senior
Subordinated Notes, partial repayment of the Term Loans under
the former Dex Media East credit facility and partial repayment
of Term Loans
A-4,
D-1 and
D-2 and the RHDI Revolver under the RHDI Credit Facility.
|
|
|
|
$1,416.8 million in proceeds, net of costs, from borrowings
under our credit facilities. The new Dex Media East credit
facility was used to fund the repayment of the remaining Term
Loans and revolver under the former Dex Media East credit
facility and the redemption of Dex Media Easts
9.875% Senior Notes and 12.125% Senior Subordinated
Notes. The RHD Credit Facility was used to fund the Business.com
Acquisition.
|
|
|
|
$1,674.1 million in principal payments on term loans under
our credit facilities. Of this amount, $239.9 million
represents scheduled principal payments and
$1,434.2 million represents principal payments made on an
accelerated basis, at our option, from proceeds received with
the 2007 refinancing transactions and from available cash flow
generated from operations.
|
|
|
|
$1,470.6 million in note repayments. Of this amount,
$1,398.9 million was used to redeem RHDIs
8.875% Senior Notes and 10.875% Senior Subordinated
Notes and Dex Media Easts 9.875% Senior Notes and
12.125% Senior Subordinated Notes. Tender and redemption
premium payments of $71.7 million were incurred in
conjunction with these note repayments.
|
|
|
|
$722.6 million in borrowings under our revolvers, used
primarily to fund temporary working capital requirements, as
well as the repurchase of our common stock and the redemption of
RHDIs 8.875% Senior Notes.
|
|
|
|
$781.4 million in principal payments on our revolvers.
|
|
|
|
$89.6 million used to repurchase our common stock. Amount
represents the value of common stock repurchased actually
settled in cash as of December 31, 2007.
|
|
|
|
$13.4 million in proceeds from the exercise of employee
stock options.
|
|
|
|
$9.0 million in proceeds from the issuance of common stock
in connection with the Business.com Acquisition.
|
|
|
|
$7.7 million in the decreased balance of checks not yet
presented for payment.
|
Cash provided by operating activities was $768.3 million
for the year ended December 31, 2006. Key contributors to
operating cash flow include the following:
|
|
|
|
|
$237.7 million in net loss.
|
|
|
|
$392.2 million net source of cash from non-cash charges
primarily consisting of $323.6 million of depreciation and
amortization, $71.1 million in bad debt provision,
$43.3 million of stock-based compensation expense and
$39.4 million in other non-cash charges, which primarily
consists of amortization related to fair value adjustments
required by GAAP as a result of the Dex Media Merger, offset by
a $85.2 million deferred tax benefit.
|
79
|
|
|
|
|
$559.8 million net source of cash from a
$635.7 million increase in deferred directory revenue,
offset by an increase in accounts receivable of
$75.9 million. The change in deferred revenue and accounts
receivable are analyzed together given the fact that when a
directory is published, the annual billable value of that
directory is initially deferred and unbilled accounts receivable
are established. Each month thereafter, typically one twelfth of
the billing value is recognized as revenue and billed to
customers. Additionally, under purchase accounting rules,
deferred revenue was not recorded on directories that were
published prior to and in the month of the Dex Media Merger,
however we retained all of the rights associated with the
collection of amounts due under the advertising contracts
executed prior to and in the month of the Dex Media Merger.
|
|
|
|
$23.0 million net use of cash from an increase in other
assets, reflecting a $24.7 million increase in prepaid
expenses and other current and non-current assets, primarily
relating to changes in the fair value of the Companys
interest rate swap agreements, offset by a decrease in deferred
directory costs of $1.7 million, consisting of a decrease
in deferred directory costs of $23.6 million offset by
$21.9 million in amortization of deferred directory costs
relating to directories that were scheduled to publish
subsequent to the Dex Media Merger. Deferred directory costs
represent cash payments for certain costs associated with the
publication of directories. Since deferred directory costs are
initially deferred when incurred, the cash payments are made
prior to the expense being recognized.
|
|
|
|
$63.0 million net source of cash from an increase in
accounts payable and accrued liabilities, primarily reflecting a
$69.3 million increase in accrued interest payable on
outstanding debt and a $0.4 million increase in trade
accounts payable, offset by a $6.7 million decrease in
accrued liabilities, including accrued salaries and related
bonuses.
|
|
|
|
$14.0 million net source of cash from an increase in other
non-current liabilities, including pension and postretirement
long-term liabilities.
|
Cash used by investing activities for the year ended
December 31, 2006 was $1,980.0 million and includes
the following:
|
|
|
|
|
$78.5 million used to purchase fixed assets, primarily
computer equipment, software and leasehold improvements.
|
|
|
|
$1,901.5 million in cash payments primarily in connection
with the Dex Media Merger, including merger fees net of cash
received from Dex Media, as well as the Local Launch Acquisition.
|
Cash provided by financing activities for the year ended
December 31, 2006 was $1,360.2 million and includes
the following:
|
|
|
|
|
$2,514.4 million in net borrowings, consisting of
$2,142.5 million related to the
Series A-2
Senior Discount Notes and
Series A-3
Senior Notes, which were used to fund the cash portion of the
Dex Media Merger, and
Series A-1
Senior Discount Notes, which were used to fund the GS
Repurchase. Net borrowings also consist of $444.2 million
of the Dex Media West Term Loan B-1, $150.0 million of
which was used to fund the cash portion of the Dex Media Merger
and $294.2 million of which was used to fund the purchase
of the 5.875% Dex Media West Senior Notes, 9.875% Dex Media West
Senior Subordinated Notes and 9% Dex Media, Inc. Senior Discount
Notes in conjunction with change of control offers. These
borrowings were net of financing costs of $72.3 million.
|
|
|
|
$1,738.0 million in principal payments on debt. Of this
amount, $282.1 million represents scheduled principal
payments, $295.0 million represents principal payments made
on an accelerated basis, at our option, from available cash flow
generated from operations, $291.9 million represents Dex
Media senior notes tendered for repurchase by the Company and
$869.0 million represents principal payments on the
revolvers.
|
|
|
|
$336.8 million used for the GS Repurchase and redemption of
preferred stock purchase rights under our stockholder rights
plan.
|
|
|
|
$934.9 million in borrowings under the revolvers.
|
80
|
|
|
|
|
$53.1 million used to repurchase all outstanding warrants
from the GS Funds.
|
|
|
|
$31.6 million in proceeds from the exercise of employee
stock options.
|
|
|
|
$7.2 million in the increased balance of checks not yet
presented for payment.
|
Off-Balance
Sheet Arrangements
The Company does not have any off-balance sheet arrangements
that are material to its results of operations, financial
condition or liquidity.
Contractual
Obligations
The contractual obligations table presented below sets forth our
annual commitments as of December 31, 2007 for principal
and interest payments on our debt, as well as other cash
obligations for the next five years and thereafter. The debt
repayments as presented in this table include only the scheduled
principal payments under our current debt agreements and do not
include any anticipated prepayments. The debt repayments also
exclude fair value adjustments required under purchase
accounting, as these adjustments do not impact our payment
obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
More than 5
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
|
(Amounts in millions)
|
|
|
Long-Term
Debt
(1)
|
|
$
|
10,071.8
|
|
|
$
|
177.2
|
|
|
$
|
2,498.0
|
|
|
$
|
874.6
|
|
|
$
|
6,522.0
|
|
Interest on Long-Term
Debt
(2)
|
|
|
4,663.2
|
|
|
|
722.5
|
|
|
|
1,445.1
|
|
|
|
1,151.7
|
|
|
|
1,343.9
|
|
Operating
Leases
(3)
|
|
|
189.2
|
|
|
|
26.0
|
|
|
|
50.5
|
|
|
|
38.2
|
|
|
|
74.5
|
|
Unconditional Purchase
Obligations
(4)
|
|
|
162.4
|
|
|
|
52.7
|
|
|
|
64.7
|
|
|
|
45.0
|
|
|
|
|
|
Other Long-Term
Liabilities
(5)
|
|
|
355.8
|
|
|
|
32.0
|
|
|
|
66.8
|
|
|
|
69.3
|
|
|
|
187.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
15,442.4
|
|
|
$
|
1,010.4
|
|
|
$
|
4,125.1
|
|
|
$
|
2,178.8
|
|
|
$
|
8,128.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Included in long-term debt are principal amounts owed under our
credit facilities and our senior notes and senior subordinated
notes, including the current portion of long-term debt.
|
|
(2)
|
|
Interest on debt represents cash interest payment obligations
assuming all indebtedness at December 31, 2007 will be paid
in accordance with its contractual maturity and assumes interest
rates on variable interest debt as of December 31, 2007
will remain unchanged in future periods. The weighted average
interest rates under the RHDI, Dex Media East and Dex Media West
Credit Facilities were 6.50%, 6.87% and 6.51%, respectively, at
December 31, 2007. Please refer to Liquidity and
Capital Resources for interest rates on our senior notes
and our senior subordinated notes.
|
|
(3)
|
|
We enter into operating leases in the normal course of business.
Substantially all lease agreements have fixed payment terms.
Some lease agreements provide us with renewal or early
termination options. Our future operating lease obligations
would change if we exercised these renewal or early termination
options and if we entered into additional operating lease
agreements. The amounts in the table assume we do not exercise
any such renewal or early termination options.
|
|
(4)
|
|
In connection with our software system modernization and
on-going support services related to the Amdocs software system,
we are obligated to pay Amdocs approximately $128.2 million
over the years 2008 through 2012. In connection with the
AT&T Directory Acquisition, we entered into an Internet
Yellow Pages reseller agreement whereby we are obligated to pay
to AT&T $7.2 million over the years 2008 and 2009. In
conjunction with the Dex Media Merger, we are obligated to pay
Qwest approximately $8.3 million over the years 2008 and
2009 for certain information technology, communications and
billing and collection services. We have entered into agreements
with Yahoo!, whereby Yahoo! will serve and maintain our local
search listings for placement on its web-based electronic local
information directory
|
81
|
|
|
|
|
and electronic mapping products. We are obligated to pay Yahoo!
up to $18.8 million over the years 2008 through 2010.
|
|
|
|
(5)
|
|
We have defined benefit plans covering substantially all
employees. Our funding policy is to contribute an amount at
least equal to the minimum legal funding requirement. Based on
past performance and the uncertainty of the dollar amounts to be
paid, if any, we have excluded such amounts from the above
table. We also have unfunded postretirement plans that provide
certain healthcare and life insurance benefits to those
full-time employees who reach retirement age while working for
the Company. Those expected future benefit payments, including
administrative expenses, net of employee contributions, are
included in the table above. We expect to make contributions of
approximately $15.8 million and $6.8 million to our
pension plans and postretirement plan, respectively, in 2008.
|
In addition to amounts presented in the table above, our
unrecognized tax benefits as of December 31, 2007 total
$14.0 million, including accrued interest and penalties. It
is reasonably possible that this amount of unrecognized tax
benefits could decrease within the next twelve months. We are
currently under audit in New York State and New York City for
taxable years 2000 through 2003 and North Carolina for taxable
years 2003 through 2006. If the New York State, New York City or
North Carolina audits are resolved within the next twelve
months, the total amount of unrecognized tax benefits could
decrease by approximately $14.0 million. The unrecognized
tax benefits related to the New York State, New York City and
North Carolina audits relate to apportionment and allocation of
income among our various legal entities.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
Interest
Rate Risk and Risk Management
The RHDI Credit Facility, the Dex Media West, and the new 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 new
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 the
following interest rate swaps that effectively convert
approximately $2.6 billion or 69% of the Companys
variable rate debt to fixed rate debt as of December 31,
2007. At December 31, 2007, approximately 37% of our total
debt outstanding consists of variable rate debt, excluding the
effect of our interest rate swaps. Including the effect of our
interest rate swaps, total fixed rate debt comprised
approximately 89% of our total debt portfolio as of
December 31, 2007. Under the terms of the agreements, the
Company receives variable interest based on three-month LIBOR
and pays a fixed rate of interest.
82
|
|
|
|
|
|
|
|
|
Effective Dates
|
|
Notional Amount
|
|
|
Pay Rates
|
|
Maturity Dates
|
|
|
(Amounts
|
|
|
|
|
|
|
|
in millions)
|
|
|
|
|
|
|
September 7, 2004
|
|
$
|
200
|
(3)
|
|
3.490% - 3.750%
|
|
September 8, 2008 - September 7, 2009
|
September 15, 2004
|
|
|
200
|
(3)
|
|
3.500% - 3.910%
|
|
September 15, 2008 - September 15, 2009
|
September 17, 2004
|
|
|
100
|
(2)
|
|
3.510% - 3.740%
|
|
September 17, 2008 - September 17, 2009
|
September 23, 2004
|
|
|
100
|
(2)
|
|
3.4335% - 3.438%
|
|
September 23, 2008
|
December 20, 2005
|
|
|
150
|
(3)
|
|
4.74% - 4.752%
|
|
June 20, 2008 - December 22, 2008
|
February 14, 2006
|
|
|
300
|
(3)
|
|
4.925% - 4.9435%
|
|
February 14, 2008 - February 14, 2009
|
February 28, 2006
|
|
|
50
|
(1)
|
|
4.93275%
|
|
August 28, 2008
|
March 10, 2006
|
|
|
150
|
(2)
|
|
5.010%
|
|
March 10, 2008
|
May 25, 2006
|
|
|
300
|
(3)
|
|
5.326%
|
|
May 25, 2009 -- May 26, 2009
|
May 26, 2006
|
|
|
200
|
(2)
|
|
5.2725% -5.275%
|
|
May 26, 2009
|
May 31, 2006
|
|
|
100
|
(2)
|
|
5.295% - 5.312%
|
|
May 31, 2008 - May 31, 2009
|
June 12, 2006
|
|
|
150
|
(2)
|
|
5.27% - 5.279%
|
|
June 12, 2009
|
November 26, 2007
|
|
|
600
|
(4)
|
|
4.1852% - 4.604%
|
|
November 26, 2010 -- November 26, 2012
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Consists of one swap.
|
|
(2)
|
|
Consists of two swaps.
|
|
(3)
|
|
Consists of three swaps.
|
|
(4)
|
|
Consists of four swaps.
|
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 $2.6 billion
have been designated as cash flow hedges to hedge three-month
LIBOR-based interest payments on $2.6 billion of bank debt.
As of December 31, 2007, these respective interest rate
swaps provided an effective hedge of the three-month LIBOR-based
interest payments on $2.6 billion of bank debt.
The notional amount of our interest rate swaps is used to
measure interest to be paid or received and does not represent
the amount of exposure to credit loss. Assuming a 0.125%
increase in the interest rate associated with the floating rate
borrowings under our credit facilities (after giving effect to
the interest rate swaps), interest expense would increase
$1.4 million on an annual basis.
Please refer to Note 2, Summary of Significant
Accounting Policies and Note 6, Derivative
Financial Instruments, included in Item 8 of this
annual report, for additional information regarding our
derivative financial instruments and hedging activities.
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.
83
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
$2.6 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. During May 2006, the Company entered into
$1.0 billion notional value of interest rate swaps, which
were not designated as cash flow hedges until July 2006. In
addition, certain interest rate swaps acquired as a result of
the Dex Media Merger with a notional amount of $425 million
were not designated as cash flow hedges. As of December 31,
2007 all of the undesignated interest rate swaps acquired as a
result of the Dex Media Merger were settled. Resulting gains or
losses on the change in the fair value of these interest rate
swaps have been recognized in earnings as a component of
interest expense.
84
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
R.H. DONNELLEY CORPORATION
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-9
|
|
|
|
|
F-10
|
|
F-1
Managements
Report on Internal Control Over Financial Reporting
The management of R.H. Donnelley Corporation is responsible for
establishing and maintaining adequate internal control over the
Companys financial reporting within the meaning of
Rule 13a-15(f)
promulgated under the Securities Exchange Act of 1934. Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements in the
financial statements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions
or that the degree of compliance with policies and procedures
may deteriorate.
Management assessed the effectiveness of R.H. Donnelley
Corporations internal control over financial reporting as
of December 31, 2007. In undertaking this assessment,
management used the criteria established by the Committee of
Sponsoring Organizations (COSO) of the Treadway Commission
contained in the Internal Control Integrated
Framework.
Based on its assessment, management has concluded that as of
December 31, 2007, the Companys internal control over
financial reporting is effective based on the COSO criteria.
The Companys internal control over financial reporting as
of December 31, 2007 has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in
their report that appears on
page F-4.
KPMG LLP has also audited the Consolidated Financial Statements
of R.H. Donnelley Corporation and subsidiaries as of and for the
year ended December 31, 2007, included in this Annual
Report on
Form 10-K,
as stated in their report that appears on
page F-3.
F-2
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
R.H. Donnelley Corporation:
We have audited the accompanying consolidated balance sheets of
R.H. Donnelley Corporation and subsidiaries as of
December 31, 2007 and 2006, and the related consolidated
statements of operations and comprehensive income (loss), cash
flows and changes in shareholders equity for the years
then ended. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of R.H. Donnelley Corporation and subsidiaries as of
December 31, 2007 and 2006, and the results of their
operations and their cash flows for the years then ended, in
conformity with U.S. generally accepted accounting
principles.
As discussed in Note 2 to the notes to consolidated
financial statements, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment
, as of January 1, 2006,
Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R)
, as of December 31,
2006, and FASB Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes: an Interpretation of FASB Statement
No. 109
, as of January 1, 2007.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), R.H.
Donnelley Corporations internal control over financial
reporting as of December 31, 2007, based on criteria
established in
Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO)
, and our report dated
March 13, 2008 expressed an unqualified opinion on the
effectiveness of the Companys internal control over
financial reporting.
/s/ KPMG LLP
Raleigh, North Carolina
March 13, 2008
F-3
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
R.H. Donnelley Corporation:
We have audited R.H. Donnelley Corporations internal
control over financial reporting as of December 31, 2007,
based on criteria established in
Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
R.H.
Donnelley Corporations management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, R.H. Donnelley Corporation maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2007, based on criteria
established in
Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of R.H. Donnelley Corporation and
subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of operations and comprehensive
income (loss), cash flows and changes in shareholders
equity for the years then ended, and our report dated
March 13, 2008 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
Raleigh, North Carolina
March 13, 2008
F-4
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
R.H. Donnelley Corporation:
In our opinion, the consolidated statements of operations and
comprehensive income (loss), cash flows and changes in
shareholders equity (deficit) for the year ended
December 31, 2005 present fairly, in all material respects,
the results of operations and cash flows of R.H. Donnelley
Corporation and its subsidiaries for the year ended
December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers
LLP
Raleigh, North Carolina
March 15, 2006
F-5
R.H.
DONNELLEY CORPORATION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except
|
|
|
|
share data)
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
46,076
|
|
|
$
|
156,249
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
Billed
|
|
|
258,839
|
|
|
|
248,334
|
|
Unbilled
|
|
|
847,446
|
|
|
|
842,869
|
|
Allowance for doubtful accounts and sales claims
|
|
|
(42,817
|
)
|
|
|
(42,952
|
)
|
|
|
|
|
|
|
|
|
|
Net accounts receivable
|
|
|
1,063,468
|
|
|
|
1,048,251
|
|
Deferred directory costs
|
|
|
183,687
|
|
|
|
211,822
|
|
Short-term deferred income taxes, net
|
|
|
47,759
|
|
|
|
|
|
Prepaid and other current assets
|
|
|
126,201
|
|
|
|
115,903
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,467,191
|
|
|
|
1,532,225
|
|
Fixed assets and computer software, net
|
|
|
187,680
|
|
|
|
159,362
|
|
Other non-current assets
|
|
|
139,406
|
|
|
|
141,619
|
|
Intangible assets, net
|
|
|
11,170,482
|
|
|
|
11,477,996
|
|
Goodwill
|
|
|
3,124,334
|
|
|
|
2,836,266
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
16,089,093
|
|
|
$
|
16,147,468
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
230,693
|
|
|
$
|
169,490
|
|
Accrued interest
|
|
|
198,828
|
|
|
|
179,419
|
|
Deferred directory revenue
|
|
|
1,172,035
|
|
|
|
1,197,796
|
|
Short-term deferred income taxes, net
|
|
|
|
|
|
|
79,882
|
|
Current portion of long-term debt
|
|
|
177,175
|
|
|
|
382,631
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,778,731
|
|
|
|
2,009,218
|
|
Long-term debt
|
|
|
9,998,474
|
|
|
|
10,020,521
|
|
Deferred income taxes, net
|
|
|
2,288,384
|
|
|
|
2,099,102
|
|
Other non-current liabilities
|
|
|
200,768
|
|
|
|
197,871
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
14,266,357
|
|
|
|
14,326,712
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Common stock, par value $1 per share, authorized
400,000,000 shares; issued
88,169,275 shares at December 31, 2007 and 2006;
outstanding 68,758,026 and 70,464,717 at
December 31, 2007 and 2006, respectively
|
|
|
88,169
|
|
|
|
88,169
|
|
Additional paid-in capital
|
|
|
2,402,181
|
|
|
|
2,341,009
|
|
Accumulated deficit
|
|
|
(385,540
|
)
|
|
|
(437,496
|
)
|
Treasury stock, at cost, 19,411,249 shares at
December 31, 2007 and 17,704,558 shares at
December 31, 2006
|
|
|
(256,334
|
)
|
|
|
(161,470
|
)
|
Accumulated other comprehensive loss
|
|
|
(25,740
|
)
|
|
|
(9,456
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
1,822,736
|
|
|
|
1,820,756
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
16,089,093
|
|
|
$
|
16,147,468
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
R.H.
DONNELLEY CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenues
|
|
$
|
2,680,299
|
|
|
$
|
1,899,297
|
|
|
$
|
956,631
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (exclusive of depreciation and amortization
shown separately below)
|
|
|
450,254
|
|
|
|
342,052
|
|
|
|
115,875
|
|
Selling and support expenses
|
|
|
716,333
|
|
|
|
656,014
|
|
|
|
327,355
|
|
General and administrative expenses
|
|
|
145,640
|
|
|
|
134,784
|
|
|
|
53,014
|
|
Depreciation and amortization
|
|
|
463,106
|
|
|
|
323,621
|
|
|
|
85,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,775,333
|
|
|
|
1,456,471
|
|
|
|
581,390
|
|
Operating income
|
|
|
904,966
|
|
|
|
442,826
|
|
|
|
375,241
|
|
Non-operating income
|
|
|
1,818
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(830,892
|
)
|
|
|
(765,055
|
)
|
|
|
(264,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
75,892
|
|
|
|
(322,229
|
)
|
|
|
110,709
|
|
Provision (benefit) for income taxes
|
|
|
29,033
|
|
|
|
(84,525
|
)
|
|
|
43,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
46,859
|
|
|
|
(237,704
|
)
|
|
|
67,533
|
|
Preferred dividend
|
|
|
|
|
|
|
1,974
|
|
|
|
11,708
|
|
(Gain) loss on repurchase of redeemable convertible preferred
stock
|
|
|
|
|
|
|
(31,195
|
)
|
|
|
133,681
|
|
Accretion of redeemable convertible preferred stock to
redemption value
|
|
|
|
|
|
|
|
|
|
|
211,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders
|
|
$
|
46,859
|
|
|
$
|
(208,483
|
)
|
|
$
|
(288,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.66
|
|
|
$
|
(3.14
|
)
|
|
$
|
(9.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.65
|
|
|
$
|
(3.14
|
)
|
|
$
|
(9.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
70,932
|
|
|
|
66,448
|
|
|
|
31,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
71,963
|
|
|
|
66,448
|
|
|
|
31,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
46,859
|
|
|
$
|
(237,704
|
)
|
|
$
|
67,533
|
|
Unrealized (loss) gain on interest rate swaps, net of tax
(benefit) provision of $(15,468), $(5,460) and $8,126 for the
years ended December 31, 2007, 2006 and 2005, respectively
|
|
|
(25,270
|
)
|
|
|
(9,449
|
)
|
|
|
12,710
|
|
Minimum pension liability adjustment, net of tax provision
(benefit) of $2,863 and $(9,049) for the years ended
December 31, 2006 and 2005, respectively
|
|
|
|
|
|
|
4,792
|
|
|
|
(14,148
|
)
|
Benefit plans adjustment, net of tax provision of $5,446
|
|
|
8,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
30,575
|
|
|
$
|
(242,361
|
)
|
|
$
|
66,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
R.H.
DONNELLEY CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
46,859
|
|
|
$
|
(237,704
|
)
|
|
$
|
67,533
|
|
Reconciliation of net income (loss) to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
463,106
|
|
|
|
323,621
|
|
|
|
85,146
|
|
Deferred income tax provision (benefit)
|
|
|
8,668
|
|
|
|
(85,152
|
)
|
|
|
43,176
|
|
Loss on disposal of assets
|
|
|
857
|
|
|
|
34
|
|
|
|
|
|
Provision for bad debts
|
|
|
80,850
|
|
|
|
71,066
|
|
|
|
30,004
|
|
Stock-based compensation expense
|
|
|
39,017
|
|
|
|
43,283
|
|
|
|
5,689
|
|
Loss on extinguishment of debt
|
|
|
26,321
|
|
|
|
|
|
|
|
32,725
|
|
Other non-cash charges
|
|
|
47,272
|
|
|
|
39,385
|
|
|
|
5,712
|
|
Changes in assets and liabilities, net of effects from
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) in accounts receivable
|
|
|
(95,787
|
)
|
|
|
(75,914
|
)
|
|
|
(31,881
|
)
|
(Increase) decrease in other assets
|
|
|
(5,966
|
)
|
|
|
(22,997
|
)
|
|
|
52,469
|
|
Increase in accounts payable and accrued liabilities
|
|
|
66,142
|
|
|
|
63,008
|
|
|
|
101,908
|
|
(Decrease) increase in deferred directory revenue
|
|
|
(26,455
|
)
|
|
|
635,690
|
|
|
|
82,016
|
|
Increase (decrease) in other non-current liabilities
|
|
|
40,925
|
|
|
|
13,989
|
|
|
|
(82,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
691,809
|
|
|
|
768,309
|
|
|
|
392,052
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to fixed assets and computer software
|
|
|
(77,470
|
)
|
|
|
(78,543
|
)
|
|
|
(31,605
|
)
|
Acquisitions, net of cash received
|
|
|
(329,102
|
)
|
|
|
(1,901,466
|
)
|
|
|
(6,450
|
)
|
Equity investment
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(409,072
|
)
|
|
|
(1,980,009
|
)
|
|
|
(38,055
|
)
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of debt, net of costs
|
|
|
1,468,648
|
|
|
|
2,079,005
|
|
|
|
293,439
|
|
Additional borrowings under the Credit Facilities, net of costs
|
|
|
1,416,822
|
|
|
|
435,376
|
|
|
|
341,417
|
|
Credit Facilities repayments
|
|
|
(1,674,095
|
)
|
|
|
(577,292
|
)
|
|
|
(345,227
|
)
|
Note repayments
|
|
|
(1,398,892
|
)
|
|
|
(291,716
|
)
|
|
|
(317,066
|
)
|
Revolver borrowings
|
|
|
722,550
|
|
|
|
934,900
|
|
|
|
268,000
|
|
Revolver repayments
|
|
|
(781,400
|
)
|
|
|
(869,000
|
)
|
|
|
(304,200
|
)
|
Tender, redemption and call premium payments
|
|
|
(71,656
|
)
|
|
|
|
|
|
|
(25,268
|
)
|
Repurchase of common stock
|
|
|
(89,578
|
)
|
|
|
|
|
|
|
|
|
Repurchase of redeemable convertible preferred stock and
redemption of preferred stock purchase rights
|
|
|
|
|
|
|
(336,819
|
)
|
|
|
(277,197
|
)
|
Repurchase of warrants
|
|
|
|
|
|
|
(53,128
|
)
|
|
|
|
|
Proceeds from employee stock option exercises
|
|
|
13,412
|
|
|
|
31,665
|
|
|
|
7,383
|
|
Proceeds from issuance of common stock
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in checks not yet presented for payment
|
|
|
(7,721
|
)
|
|
|
7,165
|
|
|
|
1,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(392,910
|
)
|
|
|
1,360,156
|
|
|
|
(356,959
|
)
|
(Decrease) increase in cash and cash equivalents
|
|
|
(110,173
|
)
|
|
|
148,456
|
|
|
|
(2,962
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
156,249
|
|
|
|
7,793
|
|
|
|
10,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
46,076
|
|
|
$
|
156,249
|
|
|
$
|
7,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash interest paid
|
|
$
|
721,505
|
|
|
$
|
663,683
|
|
|
$
|
231,930
|
|
Income tax payments (refunds) received, net
|
|
|
10,075
|
|
|
|
1,015
|
|
|
|
(851
|
)
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-8
R.H.
DONNELLEY CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Unamortized
|
|
|
Earnings
|
|
|
|
|
|
Other
|
|
|
Shareholders
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Warrants
|
|
|
Restricted
|
|
|
(Accumulated
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Equity
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Outstanding
|
|
|
Stock
|
|
|
Deficit)
|
|
|
Stock
|
|
|
Income (Loss)
|
|
|
(Deficit)
|
|
|
|
(In thousands)
|
|
|
Balance, December 31, 2004
|
|
$
|
51,622
|
|
|
$
|
107,238
|
|
|
$
|
13,758
|
|
|
$
|
(135
|
)
|
|
$
|
3,855
|
|
|
$
|
(163,603
|
)
|
|
$
|
5,250
|
|
|
$
|
17,985
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,533
|
|
|
|
|
|
|
|
|
|
|
|
67,533
|
|
Loss on repurchase of preferred stock
|
|
|
|
|
|
|
(72,147
|
)
|
|
|
|
|
|
|
|
|
|
|
(61,534
|
)
|
|
|
|
|
|
|
|
|
|
|
(133,681
|
)
|
Beneficial conversion feature from
|
|
|
|
|
|
|
(35,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,091
|
)
|
repurchase of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock to
|
|
|
|
|
|
|
(6,536
|
)
|
|
|
|
|
|
|
|
|
|
|
(204,484
|
)
|
|
|
|
|
|
|
|
|
|
|
(211,020
|
)
|
redemption value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion feature from
|
|
|
|
|
|
|
(5,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,385
|
)
|
accretion of preferred stock to redemption value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend
|
|
|
|
|
|
|
(8,159
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,549
|
)
|
|
|
|
|
|
|
|
|
|
|
(11,708
|
)
|
Employee stock option exercises
|
|
|
|
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
335
|
|
|
|
|
|
|
|
12,335
|
|
Restricted stock issued
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
Stock issued for employee bonus plans
|
|
|
|
|
|
|
1,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(265
|
)
|
|
|
|
|
|
|
1,714
|
|
Compensatory stock awards
|
|
|
|
|
|
|
5,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
5,190
|
|
Restricted stock amortization
|
|
|
|
|
|
|
364
|
|
|
|
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499
|
|
Beneficial conversion feature from
|
|
|
|
|
|
|
595
|
|
|
|
|
|
|
|
|
|
|
|
1,057
|
|
|
|
|
|
|
|
|
|
|
|
1,652
|
|
issuance of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on interest rate swaps, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,710
|
|
|
|
12,710
|
|
Minimum pension liability adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,148
|
)
|
|
|
(14,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
51,622
|
|
|
|
|
|
|
|
13,758
|
|
|
|
|
|
|
|
(197,122
|
)
|
|
|
(163,485
|
)
|
|
|
3,812
|
|
|
|
(291,415
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(237,704
|
)
|
|
|
|
|
|
|
|
|
|
|
(237,704
|
)
|
Gain on repurchase of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,195
|
|
|
|
|
|
|
|
|
|
|
|
31,195
|
|
Beneficial conversion feature from repurchase of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,195
|
)
|
|
|
|
|
|
|
|
|
|
|
(31,195
|
)
|
Redemption of preferred stock purchase rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(696
|
)
|
|
|
|
|
|
|
|
|
|
|
(696
|
)
|
Preferred stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,974
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,974
|
)
|
Employee stock option exercises
|
|
|
|
|
|
|
31,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,015
|
|
|
|
|
|
|
|
33,776
|
|
Issuance of common stock Dex Media Merger
|
|
|
36,547
|
|
|
|
2,222,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,259,359
|
|
Vested Dex Media equity awards
|
|
|
|
|
|
|
77,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,354
|
|
Compensatory stock awards
|
|
|
|
|
|
|
48,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,452
|
|
Unrealized loss on interest rate swaps, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,449
|
)
|
|
|
(9,449
|
)
|
Minimum pension liability adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,792
|
|
|
|
4,792
|
|
Adjustment to initially apply SFAS No. 158, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,611
|
)
|
|
|
(8,611
|
)
|
Repurchase of warrants
|
|
|
|
|
|
|
(39,370
|
)
|
|
|
(13,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
88,169
|
|
|
|
2,341,009
|
|
|
|
|
|
|
|
|
|
|
|
(437,496
|
)
|
|
|
(161,470
|
)
|
|
|
(9,456
|
)
|
|
|
1,820,756
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,859
|
|
|
|
|
|
|
|
|
|
|
|
46,859
|
|
Employee stock option exercises
|
|
|
|
|
|
|
12,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
678
|
|
|
|
|
|
|
|
13,412
|
|
Issuance of common stock Business.com Acquisition
|
|
|
|
|
|
|
8,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148
|
|
|
|
|
|
|
|
9,000
|
|
Cumulative effect of FIN No. 48 adoption
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,097
|
|
|
|
|
|
|
|
|
|
|
|
5,097
|
|
Other adjustments related to compensatory stock awards
|
|
|
|
|
|
|
569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
569
|
|
Unrealized loss on interest rate swaps, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,270
|
)
|
|
|
(25,270
|
)
|
Benefit plans adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,986
|
|
|
|
8,986
|
|
Compensatory stock awards
|
|
|
|
|
|
|
39,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,017
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95,690
|
)
|
|
|
|
|
|
|
(95,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
88,169
|
|
|
$
|
2,402,181
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(385,540
|
)
|
|
$
|
(256,334
|
)
|
|
$
|
(25,740
|
)
|
|
$
|
1,822,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-9
R.H.
DONNELLEY CORPORATION
(Tabular amounts in thousands, except per share data and
percentages)
|
|
1.
|
Business
and Presentation
|
The consolidated financial statements include the accounts of
R.H. Donnelley Corporation and its direct and indirect
wholly-owned subsidiaries (the Company,
RHD, Donnelley, we,
us and our). As of December 31,
2007, R.H. Donnelley Inc. (RHDI or RHD
Inc.), Dex Media, Inc. (Dex Media),
Business.com, Inc. (Business.com) and Local Launch,
Inc. (Local Launch) were our only direct
wholly-owned subsidiaries. Effective January 1, 2008, Local
Launch was merged with and into Business.com. All intercompany
transactions and balances have been eliminated.
We are one of the nations largest Yellow Pages and online
local commercial search companies, based on revenue, 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
Certain prior period amounts included in the consolidated
statements 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
consolidated statements of operations. In prior periods, certain
selling and support expenses were included in cost of revenue
and others were included in general and administrative expenses.
Additionally, beginning in 2007, we began classifying
adjustments for customer claims to sales allowance, which is
deducted from gross revenue to determine net revenue. 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 in 2006 and bad debt expense in 2005
to conform to the current periods presentation.
Adjustments for customer claims prior to 2006 were not material.
These reclassifications had no impact on operating income or net
income for the years ended December 31, 2006 and 2005. The
table below summarizes these reclassifications.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
Year Ended December 31, 2005
|
|
|
|
As
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Reclass
|
|
|
Reclassified
|
|
|
Reported
|
|
|
Reclass
|
|
|
Reclassified
|
|
|
|
(In thousands)
|
|
|
Net revenue
|
|
$
|
1,895,921
|
|
|
$
|
3,376
|
|
|
$
|
1,899,297
|
|
|
$
|
956,631
|
|
|
$
|
|
|
|
$
|
956,631
|
|
Cost of revenue
|
|
|
987,056
|
|
|
|
(645,004
|
)
|
|
|
342,052
|
|
|
|
436,016
|
|
|
|
(320,141
|
)
|
|
|
115,875
|
|
Selling and support expenses
|
|
|
|
|
|
|
656,014
|
|
|
|
656,014
|
|
|
|
|
|
|
|
327,355
|
|
|
|
327,355
|
|
General and administrative expenses
|
|
|
142,418
|
|
|
|
(7,634
|
)
|
|
|
134,784
|
|
|
|
60,228
|
|
|
|
(7,214
|
)
|
|
|
53,014
|
|
In addition, certain prior period amounts included on the
consolidated statements of cash flows have been reclassified to
conform to the current periods presentation.
Significant
Business Developments
Acquisition
On August 23, 2007, we acquired Business.com, a leading
business search engine and directory and performance based
advertising network, for a disclosed amount of
$345.0 million (the Business.com Acquisition).
The purchase price determined in accordance with generally
accepted accounting principles (GAAP) was
$334.4 million and excludes certain items such as the value
of unvested equity awards, which
F-10
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
will be recorded as compensation expense over their vesting
period. The purpose of the Business.com Acquisition was to
expand our existing interactive portfolio by adding leading
Internet advertising talent and technology, to strengthen
RHDs position in the expanding local commercial search
market and to develop an online performance based advertising
network. Business.com now operates as a direct, wholly-owned
subsidiary of RHD. The results of Business.com have been
included in our consolidated results commencing August 23,
2007. See Note 3, Acquisitions, and
Note 5, Long-Term Debt, Credit Facilities and
Notes, for a further description of the Business.com
Acquisition and related financing.
Debt
Refinancing
On October 2, 2007, we issued $1.0 billion aggregate
principal amount of 8.875%
Series A-4
Senior Notes due 2017
(Series A-4
Notes). Proceeds from this issuance were (a) used to
repay a $328 million RHD credit facility (RHD Credit
Facility) used to fund the Business.com Acquisition,
(b) contributed to RHDI in order to provide funding for the
tender offer and consent solicitation of RHDIs
$600 million aggregate principal amount 10.875% Senior
Subordinated Notes due 2012 (RHDI Senior Subordinated
Notes) and (c) used to pay related fees and expenses
and for other general corporate purposes. On October 17,
2007, we issued an additional $500 million of our
Series A-4
Notes. Proceeds from this issuance were (a) transferred to
Dex Media East (defined below) in order to repay
$86.4 million and $213.6 million of the Term Loan A
and Term Loan B under the former Dex Media East credit facility,
respectively, (b) contributed to RHDI in order to repay
$91.8 million, $16.2 million and $83.0 million of
Term Loans
A-4,
D-1,
and D-2 under the RHDI Credit Facility, respectively, and
(c) used to pay related fees and expenses.
In October 2007, under the terms and conditions of a tender
offer and consent solicitation to purchase RHDIs
$600 million Senior Subordinated Notes that RHDI commenced
on September 18, 2007, $599.9 million, or 99.9%, of
the outstanding RHDI Senior Subordinated Notes were repurchased.
In December 2007, the remaining $0.1 million of RHDI Senior
Subordinated Notes were redeemed.
On October 24, 2007, we replaced the former Dex Media East
credit facility with a new Dex Media East credit facility,
consisting of a $700.0 million aggregate principal amount
Term Loan A facility, a $400.0 million aggregate principal
amount Term Loan B facility, a $100.0 million aggregate
principal amount revolving loan facility and a
$200.0 million aggregate principal amount uncommitted
incremental facility, in which Dex Media East would have the
right, subject to obtaining commitments for such incremental
loans, on one or more occasions to increase the Term Loan A,
Term Loan B or the revolving loan facility by such amount.
Proceeds from the new Dex Media East credit facility were used
on October 24, 2007 to repay the remaining
$56.5 million and $139.7 million of Term Loan A and
Term Loan B under the former Dex Media East credit facility,
respectively, and $32.5 million under the former Dex Media
East Revolver (defined in Note 5, Long-Term Debt,
Credit Facilities and Notes). Proceeds from the new Dex
Media East credit facility were also used on November 26,
2007 to fund the redemption of $449.7 million of Dex Media
Easts outstanding 9.875% senior notes due 2009 and
$341.3 million of Dex Media Easts outstanding
12.125% senior subordinated notes due 2012.
In December 2007, we redeemed RHDIs remaining
$7.9 million 8.875% Senior Notes due 2010 (RHDI
Senior Notes).
See Note 5, Long-Term Debt, Credit Facilities and
Notes, for additional information regarding these
refinancing transactions.
Share
Repurchases
In November 2007, the Companys Board of Directors
authorized a $100.0 million stock repurchase plan
(Repurchase Plan). This authorization permits the
Company to purchase its shares of common stock in the open
market pursuant to
Rule 10b-18
of the Securities Exchange Act of 1934 or through block trades
or
F-11
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
otherwise over the following twelve months, based on market
conditions and other factors, which purchases may be made or
suspended at any time. In accordance with the Repurchase Plan,
we repurchased 2.5 million shares at a cost of
$95.7 million during December 2007.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Revenue Recognition.
We earn revenue
principally from the sale of advertising into our yellow pages
directories. Revenue from the sale of such advertising is
deferred when a directory is published, net of estimated sales
claims, and recognized ratably over the life of a directory,
which is typically 12 months (the deferral and
amortization method). The Company also recognizes revenue
for those Internet-based advertising products that are sold with
print advertising using the deferral and amortization method.
Revenue with respect to Internet-based advertising that is not
sold with print advertising is recognized ratably over the
period the advertisement appears on the site. Revenue with
respect to our other products and services, such as search
engine marketing (SEM) and search engine
optimization (SEO) services (collectively referred
to as Internet Marketing), is recognized as
delivered or fulfilled. Revenue and deferred revenue from the
sale of advertising is recorded net of an allowance for sales
claims, estimated based primarily on historical experience. We
increase or decrease this estimate as information or
circumstances indicate that the estimate may no longer represent
the amount of claims we may incur in the future. The Company
recorded sales claims allowances of $54.8 million,
$41.9 million and $10.4 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
The Company enters into transactions, such as exclusivity
arrangements, sponsorships, and other media access transactions,
where the Companys products and services are promoted by a
third party and, in exchange, the Company carries the third
partys advertisement. The Company accounts for these
transactions in accordance with Emerging Issues Task Force
(EITF) Issue
No. 99-17,
Accounting for Advertising Barter Transactions.
Revenue
and expense related to such transactions are included in the
consolidated statements of operations consistent with, and only
to the extent of, reasonably similar and recent items sold or
purchased for cash.
In certain cases, the Company enters into agreements with
customers that involve the delivery of more than one product or
service. Revenue for such arrangements is allocated to the
separate units of accounting using the relative fair value
method in accordance with EITF Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables.
Deferred Directory Costs.
Costs directly
related to the selling and production of our directories are
initially deferred when incurred and recognized ratably over the
life of a directory, which is typically 12 months. These
costs are specifically identifiable to a particular directory
and include sales commissions and print, paper and initial
distribution costs. Such costs that are paid prior to directory
publication are classified as other current assets until
publication, when they are then reclassified as deferred
directory costs.
Cash and Cash Equivalents.
Cash equivalents
include liquid investments with a maturity of less than three
months at their time of purchase. The Company places its
investments with high quality financial institutions. At times,
such investments may be in excess of federally insured limits.
Accounts Receivable.
Accounts receivable
consist of balances owed to us by our advertising customers.
Advertisers typically enter into a twelve-month contract for
their advertising. Most local advertisers are billed a pro rata
amount of their contract value on a monthly basis. On behalf of
national advertisers, Certified Marketing Representatives
(CMRs) pay to the Company the total contract value
of their advertising, net of their commission, within
60 days after the publication month. Billed receivables
represent the amount that has been billed to advertisers. Billed
receivables are recorded net of an allowance for doubtful
accounts and sales claims, estimated based on historical
experience. We increase or decrease this estimate as information
or circumstances indicate that the estimate no longer
appropriately represents the amount of bad debts and sales
F-12
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
claims we may incur. Unbilled receivables represent
contractually owed amounts, net of an allowance for sales
claims, for published directories that have yet to be billed to
advertisers.
Fixed Assets and Computer Software.
Fixed
assets and computer software are recorded at cost. Fixed assets
and computer software acquired in conjunction with acquisitions
are recorded at fair value on the acquisition date. Depreciation
and amortization are provided over the estimated useful lives of
the assets using the straight-line method. Estimated useful
lives are thirty years for buildings, five years for machinery
and equipment, ten years for furniture and fixtures and three to
five years for computer equipment and computer software.
Leasehold improvements are amortized on a straight-line basis
over the shorter of the term of the lease or the estimated
useful life of the improvement. Fixed assets and computer
software at December 31, 2007 and 2006 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Computer software
|
|
$
|
215,410
|
|
|
$
|
140,100
|
|
Computer equipment
|
|
|
40,287
|
|
|
|
31,491
|
|
Machinery and equipment
|
|
|
8,220
|
|
|
|
6,182
|
|
Furniture and fixtures
|
|
|
16,532
|
|
|
|
12,386
|
|
Leasehold improvements
|
|
|
26,112
|
|
|
|
15,081
|
|
Buildings
|
|
|
1,863
|
|
|
|
1,735
|
|
Construction in Process Computer software and
equipment
|
|
|
14,014
|
|
|
|
33,396
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
322,438
|
|
|
|
240,371
|
|
Less accumulated depreciation and amortization
|
|
|
(134,758
|
)
|
|
|
(81,009
|
)
|
|
|
|
|
|
|
|
|
|
Net fixed assets and computer software
|
|
$
|
187,680
|
|
|
$
|
159,362
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense on fixed assets and
computer software for the years ended December 31, 2007,
2006 and 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Depreciation of fixed assets
|
|
$
|
16,649
|
|
|
$
|
15,928
|
|
|
$
|
4,887
|
|
Amortization of computer software
|
|
|
38,181
|
|
|
|
30,188
|
|
|
|
8,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization on fixed assets and computer
software
|
|
$
|
54,830
|
|
|
$
|
46,116
|
|
|
$
|
13,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Intangible Assets and
Goodwill.
As a result of the Dex Media Merger
(defined below), AT&T Directory Acquisition (defined
below), Embarq Acquisition (defined below), Business.com
Acquisition and Local Launch Acquisition (defined below),
certain long-term intangible assets were identified and recorded
at their estimated fair value. Amortization expense for the
years ended December 31, 2007, 2006 and 2005 was
$408.3 million, $277.5 million and $72.1 million,
respectively. Amortization expense for these intangible assets
for the five succeeding years is estimated to be approximately
$415.8 million, $403.4 million, $390.3 million,
$376.2 million and $353.7 million, respectively.
Amortization expense for the year ended December 31, 2007
includes an impairment charge of $20.0 million associated
with the tradenames acquired in the Embarq Acquisition. This
impairment charge resulted from a change in our branding
strategy to utilize a new Dex market brand for all of our print
and online products across our entire footprint and discontinued
use of the tradenames acquired in the Embarq Acquisition. This
impairment charge was determined using the relief from royalty
valuation method.
F-13
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The acquired long-term intangible assets and their respective
book values at December 31, 2007 are shown in the following
table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology,
|
|
|
|
|
|
|
Directory
|
|
|
Local
|
|
|
National
|
|
|
|
|
|
|
|
|
|
|
|
Network
|
|
|
|
|
|
|
Services
|
|
|
Customer
|
|
|
CMR
|
|
|
Third-Party
|
|
|
Trade
|
|
|
Advertising
|
|
|
Platforms &
|
|
|
|
|
|
|
Agreements
|
|
|
Relationships
|
|
|
Relationships
|
|
|
Contract
|
|
|
Names
|
|
|
Commitment
|
|
|
Other
|
|
|
Total
|
|
|
Initial fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qwest
|
|
$
|
7,320,000
|
|
|
$
|
875,000
|
|
|
$
|
205,000
|
|
|
$
|
|
|
|
$
|
490,000
|
|
|
$
|
25,000
|
|
|
$
|
|
|
|
$
|
8,915,000
|
|
AT&T
|
|
|
952,500
|
|
|
|
90,000
|
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,097,500
|
|
Embarq
|
|
|
1,625,000
|
|
|
|
200,000
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,885,000
|
|
Business.com
|
|
|
|
|
|
|
14,700
|
|
|
|
|
|
|
|
49,000
|
|
|
|
18,500
|
|
|
|
|
|
|
|
18,500
|
|
|
|
100,700
|
|
Local Launch
|
|
|
|
|
|
|
1,400
|
|
|
|
|
|
|
|
|
|
|
|
800
|
|
|
|
|
|
|
|
5,100
|
|
|
|
7,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,897,500
|
|
|
|
1,181,100
|
|
|
|
320,000
|
|
|
|
49,000
|
|
|
|
509,300
|
|
|
|
25,000
|
|
|
|
23,600
|
|
|
|
12,005,500
|
|
Accumulated amortization
|
|
|
(561,548
|
)
|
|
|
(163,661
|
)
|
|
|
(35,344
|
)
|
|
|
(3,841
|
)
|
|
|
(63,477
|
)
|
|
|
(3,993
|
)
|
|
|
(3,154
|
)
|
|
|
(835,018
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net intangible assets
|
|
$
|
9,335,952
|
|
|
$
|
1,017,439
|
|
|
$
|
284,656
|
|
|
$
|
45,159
|
|
|
$
|
445,823
|
|
|
$
|
21,007
|
|
|
$
|
20,446
|
|
|
$
|
11,170,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The acquired long-term intangible assets and their respective
book values at December 31, 2006 are shown in the following
table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directory
|
|
|
Local
|
|
|
National
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
Customer
|
|
|
CMR
|
|
|
Trade
|
|
|
Advertising
|
|
|
Technology
|
|
|
|
|
|
|
Agreements
|
|
|
Relationships
|
|
|
Relationships
|
|
|
Names
|
|
|
Commitment
|
|
|
& Other
|
|
|
Total
|
|
|
Initial fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qwest
|
|
$
|
7,320,000
|
|
|
$
|
875,000
|
|
|
$
|
205,000
|
|
|
$
|
490,000
|
|
|
$
|
25,000
|
|
|
$
|
|
|
|
$
|
8,915,000
|
|
AT&T
|
|
|
952,500
|
|
|
|
90,000
|
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,097,500
|
|
Embarq
|
|
|
1,625,000
|
|
|
|
200,000
|
|
|
|
60,000
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
1,915,000
|
|
Local Launch
|
|
|
|
|
|
|
1,400
|
|
|
|
|
|
|
|
800
|
|
|
|
|
|
|
|
5,100
|
|
|
|
7,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,897,500
|
|
|
|
1,166,400
|
|
|
|
320,000
|
|
|
|
520,800
|
|
|
|
25,000
|
|
|
|
5,100
|
|
|
|
11,934,800
|
|
Accumulated amortization
|
|
|
(335,261
|
)
|
|
|
(58,908
|
)
|
|
|
(22,264
|
)
|
|
|
(38,019
|
)
|
|
|
(1,910
|
)
|
|
|
(442
|
)
|
|
|
(456,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net intangible assets
|
|
$
|
9,562,239
|
|
|
$
|
1,107,492
|
|
|
$
|
297,736
|
|
|
$
|
482,781
|
|
|
$
|
23,090
|
|
|
$
|
4,658
|
|
|
$
|
11,477,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the Dex Media Merger, we acquired directory
services agreements (collectively, the Dex Directory
Services Agreements) which Dex Media had entered into with
Qwest (defined in Note 3, Acquisitions)
including, (1) a publishing agreement with a term of
50 years commencing November 8, 2002 (subject to
automatic renewal for additional one-year terms), which grants
us the right to be the exclusive official directory publisher of
listings and classified advertisements of Qwests telephone
customers in the geographic areas in the Qwest States (defined
in Note 3, Acquisitions) in which Qwest (and
its successors) provided local telephone services as of
November 8, 2002, as well as having the exclusive right to
use certain Qwest branding on directories in those markets and
(2) a non-competition agreement with a term of
40 years commencing November 8, 2002, pursuant to
which Qwest (on behalf of itself and its affiliates and
successors) has agreed not to sell directory products consisting
principally of listings and classified advertisements for
subscribers in the geographic areas in the Qwest States in which
Qwest provided local telephone service as of November 8,
2002 that are directed primarily at consumers in those
geographic areas. The fair value assigned to the Dex Media
Directory Services Agreements of $7.3 billion was based on
the multi-period excess
F-14
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
earnings method and is being amortized under the straight-line
method over 42 years. Under the multi-period excess
earnings method, the projected cash flows of the intangible
asset are computed indirectly, which means that future cash
flows are projected with deductions made to recognize returns on
appropriate contributory assets, leaving the excess, or residual
net cash flow, as indicative of the intangible asset fair value.
As a result of the Dex Media Merger, we also acquired
(1) an advertising commitment agreement whereby Qwest has
agreed to purchase an aggregate of $20 million of
advertising per year through 2017 from us at pricing on terms at
least as favorable as those offered to similar large customers
and (2) an intellectual property contribution agreement
pursuant to which Qwest assigned and or licensed to us the Qwest
intellectual property previously used in the Qwest directory
services business along with (3) a trademark license
agreement pursuant to which Qwest granted to us the right until
November 2007 to use the Qwest Dex and Qwest Dex Advantage marks
in connection with directory products and related marketing
material in the Qwest States and the right to use these marks in
connection with
DexKnows.com
®
(the intangible assets in (2) and (3) collectively,
Trade Names). The fair value assigned to the Dex
Media advertising commitment was based on the multi-period
excess earnings method and is being amortized under the
straight-line method over 12 years.
Directory services agreements between AT&T and the Company
include a directory services license agreement, a
non-competition agreement, an Internet Yellow Pages reseller
agreement and a directory publishing listing agreement
(collectively, AT&T Directory Services
Agreements) with certain affiliates of AT&T. The
directory services license agreement designates us as the
official and exclusive provider of yellow pages directory
services for AT&T (and its successors) in Illinois and
Northwest Indiana (the Territory), grants us the
exclusive license (and obligation as specified in the agreement)
to produce, publish and distribute white pages directories in
the Territory as AT&Ts agent and grants us the
exclusive license (and obligation as specified in the agreement)
to use the AT&T brand and logo on print directories in the
Territory. The non-competition agreement prohibits AT&T
(and its affiliates and successors), with certain limited
exceptions, from (1) producing, publishing and distributing
yellow and white pages print directories in the Territory,
(2) soliciting or selling local or national yellow or white
pages advertising for inclusion in such directories, and
(3) soliciting or selling local Internet yellow pages
advertising for certain Internet yellow pages directories in the
Territory or licensing AT&T marks to any third party for
that purpose. The Internet Yellow Pages reseller agreement
grants us the (a) exclusive right to sell to local
advertisers within the Territory Internet yellow pages
advertising focused upon products and services to be offered
within that territory, and (b) non-exclusive right to sell
to local (excluding National advertisers) advertisers within the
Territory Internet yellow pages advertising focused upon
products and services to be offered outside of the Territory, in
each case, onto the YellowPages.com platform. The directory
publishing listing agreement gives us the right to purchase and
use basic AT&T subscriber listing information and updates
for the purpose of publishing directories. The AT&T
Directory Services Agreements (other than the Internet Yellow
Pages reseller agreement) have initial terms of 50 years,
commencing in September 2004, subject to automatic renewal and
early termination under specified circumstances. The Internet
Yellow Pages reseller agreement has a term of 5 years,
commencing in September 2004. The fair value assigned to the
AT&T Directory Services Agreements and the Internet Yellow
Pages reseller agreement of $950.0 million and
$2.5 million, respectively, was based on the present value
of estimated future cash flows and is being amortized under the
straight-line method over 50 years and 5 years,
respectively.
Directory services agreements between Embarq and the Company,
which were executed in May 2006 in conjunction with
Sprints spin-off of its local telephone business, include
a directory services license agreement, a trademark license
agreement and a non-competition agreement with certain
affiliates of Embarq, as well as a non-competition agreement
with Sprint entered into in January 2003 (collectively
Embarq Directory Services Agreements). The Embarq
Directory Services Agreements replaced the previously existing
analogous agreements with Sprint, except that Sprint remained
bound by its non-competition agreement. The directory services
license agreement grants us the exclusive license (and
obligation as specified in the agreement) to produce, publish
and distribute yellow and white pages directories for Embarq
(and its
F-15
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
successors) in 18 states where Embarq provided local
telephone service at the time of the agreement. The trademark
license agreement grants us the exclusive license (and
obligation as specified in the agreement) to use certain
specified Embarq trademarks in those markets, and the
non-competition agreements prohibit Embarq and Sprint (and their
respective affiliates and successors) in those markets from
selling local directory advertising, with certain limited
exceptions, or producing, publishing and distributing print
directories. The Embarq Directory Services Agreements have
initial terms of 50 years, commencing in January 2003,
subject to automatic renewal and early termination under
specified circumstances. The fair value of the Embarq Directory
Services Agreements of $1.6 billion was determined based on
the present value of estimated future cash flows at the time of
the Embarq Acquisition in January 2003, and is being amortized
under the straight-line method over 50 years.
The fair values of local and national customer relationships
obtained as a result of the Dex Media Merger, AT&T
Directory Acquisition and Embarq Acquisition were determined
based on the present value of estimated future cash flows. These
intangible assets are being amortized under the income
forecast method, which assumes the value derived from
customer relationships is greater in the earlier years and
steadily declines over time. The weighted average useful life of
these relationships is approximately 20 years. As a result
of cost uplift (defined below) from purchase accounting being
substantially amortized, during the first quarter of 2007, we
commenced amortization of local customer relationships obtained
as a result of the Dex Media Merger. As a result of purchase
accounting required by GAAP, we recorded the deferred directory
costs related to directories that were scheduled to publish
subsequent to the Dex Media Merger at their fair value,
determined as (a) the estimated billable value of the
published directory less (b) the expected costs to complete
the directories, plus (c) a normal profit margin. We refer
to this purchase accounting entry as cost uplift.
The fair value of acquired trade names obtained as a result of
the Dex Media Merger and Embarq Acquisition was determined based
on the relief from royalty method, which values the
trade names based on the estimated amount that a company would
have to pay in an arms length transaction to use these trade
names. As mentioned above, we recognized an impairment charge of
$20.0 million during the year ended December 31, 2007
associated with the trade names acquired in the Embarq
Acquisition. The Qwest tradenames are being amortized under the
straight-line method over 15 years. The Embarq tradenames
were being amortized under the straight-line method over
15 years.
In connection with the Business.com Acquisition, we identified
and recorded certain intangible assets at their estimated fair
value, including (1) advertiser relationships,
(2) third party contracts, (3) technology and network
platforms and (4) trade names and trademarks. These
intangible assets are being amortized over remaining useful
lives ranging from 3 to 10 years under the straight-line
method, with the exception of the advertiser relationships and
network platform intangible assets, which are amortized under
the income forecast method.
In connection with the Local Launch Acquisition, we identified
and recorded certain intangible assets at their estimated fair
value, including (1) local customer relationships,
(2) non-compete agreements, (3) technology and
(4) tradenames. These intangible assets are being amortized
under the straight-line method over remaining useful lives
ranging from 3 to 7 years.
Other than the Embarq tradenames mentioned above, no impairment
losses were recognized related to our other intangible assets
for the years ended December 31, 2007, 2006 and 2005,
respectively.
The excess purchase price for the Dex Media Merger, AT&T
Directory Acquisition, Embarq Acquisition, Business.com
Acquisition and Local Launch Acquisition over the net tangible
and identifiable intangible assets acquired of
$2.5 billion, $216.7 million, $97.0 million,
$258.8 million and $6.8 million, respectively, was
recorded as goodwill. Annual amortization of goodwill and the
acquired intangible assets for tax purposes is approximately
$672.5 million.
The change in goodwill during the year ended December 31,
2007 was primarily related to the Business.com Acquisition.
During the year ended December 31, 2007, we recorded
adjustments to goodwill totaling $30.8 million associated
with the Dex Media Merger that primarily related to deferred
income taxes.
F-16
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2007, we re-occupied the remaining portion of our leased
facilities in Chicago, Illinois, which we vacated in conjunction
with the 2005 Restructuring Actions (defined in Note 4,
Restructuring Charges). As a result, we reversed the
remaining amount of our reserve related to these leased
facilities during the year ended December 31, 2007 by
$1.8 million, with a corresponding offset to goodwill. The
total amount of goodwill that is expected to be deductible for
tax purposes related to the Dex Media Merger is approximately
$2.1 billion.
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 142,
Goodwill and Other
Intangible Assets
(SFAS No. 142),
goodwill is not amortized, but is subject to periodic impairment
testing. No impairment losses were recorded related to our
goodwill for the years ended December 31, 2007, 2006 and
2005, respectively.
The decline in the trading value of our debt and equity
securities will require us to continue to assess the
recoverability of our goodwill and negative industry and
economic trends may indicate that the carrying values of our
other intangible assets are not recoverable. The trading value
of our publicly traded debt and equity securities has continued
to decline subsequent to December 31, 2007. If the value of
our debt and equity securities does not recover, we will be
required to assess the fair values of the assets and liabilities
of the Company and could conclude that goodwill and other long
lived assets are impaired, which would result in impairment
charges in 2008. In addition, worsening economic conditions in
certain of our markets may require us to assess the
recoverability of other intangible assets during 2008 which
could result in additional impairment charges.
Interest Expense and Deferred Financing
Costs.
Interest expense for the years ended
December 31, 2007, 2006 and 2005 was $834.5 million,
$772.7 million and $265.0 million, respectively.
Certain costs associated with the issuance of debt instruments
are capitalized and included in other non-current assets on the
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 $40.0 million, $21.9 million and
$23.6 million in 2007, 2006 and 2005, 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. Interest
expense in 2007 includes tender and redemption premium payments
of $71.7 million and write-off of unamortized deferred
financing costs of $16.8 million (which is included in the
amortization of deferred financing costs of $40.0 million
noted above) associated with the refinancing transactions
conducted during the fourth quarter of 2007. Interest expense in
2005 includes a $25.3 million tender premium payment and
write-off of unamortized deferred financing costs of
$7.4 million (which is included in the amortization of
deferred financing costs of $23.6 million noted above)
associated with the December 20, 2005 tender offer and exit
consent solicitation of our subsidiaries
8.875% Senior Notes due 2016. See Note 5,
Long-Term Debt, Credit Facilities and Notes for a
further description of these debt extinguishments. In
conjunction with the Dex Media Merger and as a result of
purchase accounting required under generally accepted accounting
principles (GAAP), we recorded Dex Medias debt
at its fair value on January 31, 2006. We recognize an
offset to interest expense in each period subsequent to the Dex
Media Merger for the amortization of the corresponding fair
value adjustment over the life of the respective debt. The
offset to interest expense for the years ended December 31,
2007 and 2006 was $92.1 million and $26.4 million,
respectively. The offset to interest expense for the year ended
December 31, 2007 includes $62.2 million related to
the redemption of Dex Media Easts outstanding
9.875% senior notes and 12.125% senior subordinated
notes on November 26, 2007.
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 $55.2 million,
$32.7 million and $18.1 million in 2007, 2006 and
2005, respectively. Total advertising expense
F-17
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
for 2007 includes $7.8 million related to traffic
acquisition costs associated with the operations of Business.com.
Concentration of Credit Risk.
Approximately
85% of our directory advertising revenue is derived from the
sale of advertising to local small- and medium-sized businesses.
These advertisers typically enter into
12-month
advertising sales contracts and make monthly payments over the
term of the contract. Some advertisers prepay the full amount or
a portion of the contract value. Most new advertisers and
advertisers desiring to expand their advertising programs are
subject to a credit review. If the advertisers qualify, we may
extend credit to them for their advertising purchase. Small- and
medium-sized businesses tend to have fewer financial resources
and higher failure rates than large businesses. In addition,
full collection of delinquent accounts can take an extended
period of time and involve significant costs. While we do not
believe that extending credit to our local advertisers will have
a material adverse effect on our results of operations or
financial condition, no assurances can be given. We do not
require collateral from our advertisers, although we do charge
interest to advertisers that do not pay by specified due dates.
The remaining approximately 15% of our directory advertising
revenue is derived from the sale of advertising to national or
large regional chains, such as rental car companies, automobile
repair shops and pizza delivery businesses. Substantially all of
the revenue derived through national accounts is serviced
through CMRs from which we accept orders. CMRs are independent
third parties that act as agents for national advertisers. The
CMRs are responsible for billing the national customers for
their advertising. We receive payment for the value of
advertising placed in our directory, 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 December 31, 2007, we had interest rate swap agreements
with major financial institutions with a notional value of
$2.6 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.
Derivative Financial Instruments and Hedging
Activities.
The Company accounts for its
derivative financial instruments and hedging activities in
accordance with 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.
We do not use derivative financial instruments
for trading or speculative purposes and our derivative financial
instruments are limited to interest rate swap agreements. 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. Additionally, the credit facility of RHDI
requires that we maintain hedge agreements to provide either a
fixed interest rate or interest rate protection on at least 50%
of its total outstanding debt, while the Dex Media West (defined
below) and new Dex Media East credit facilities require that we
maintain hedge agreements to provide a fixed rate on at least
33% of their respective indebtedness. To satisfy our objectives
and requirements, 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.
The Companys interest rate swap agreements effectively
convert $2.6 billion, or approximately 69%, of our variable
rate debt to fixed rate debt, mitigating our exposure to
increases in interest rates. At December 31,
F-18
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2007, approximately 37% of our total debt outstanding consists
of variable rate debt, excluding the effect of our interest rate
swaps. Including the effect of our interest rate swaps, total
fixed rate debt comprised approximately 89% of our total debt
portfolio as of December 31, 2007.
On the day a derivative contract is executed, the Company may
designate the derivative instrument as a hedge of the
variability of cash flows to be received or paid (cash flow
hedge). For all hedging relationships, the Company formally
documents the hedging relationship and its risk-management
objective and strategy for undertaking the hedge, the hedging
instrument, the item, the nature of the risk being hedged, how
the hedging instruments effectiveness in offsetting the
hedged risk will be assessed, and a description of the method of
measuring ineffectiveness. The Company also formally assesses,
both at the hedges inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions
are highly effective in offsetting changes in cash flows of
hedged items.
All derivative financial instruments are recognized as either
assets or liabilities on the consolidated balance sheets with
measurement at fair value. On a quarterly basis, the fair values
of the interest rate swaps are determined based on quoted market
prices and, to the extent the swaps provide an effective hedge,
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. For derivative financial
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. Any gains or losses
related to the quarterly fair value adjustments are presented as
a non-cash operating activity on the consolidated statements of
cash flows.
The Company discontinues hedge accounting prospectively when it
is determined that the derivative is no longer effective in
offsetting changes in the cash flows of the hedged item, the
derivative or hedged item is expired, sold, terminated,
exercised, or management determines that designation of the
derivative as a hedging instrument is no longer appropriate. In
situations in which hedge accounting is discontinued, the
Company continues to carry the derivative at its fair value on
the consolidated balance sheet and recognizes any subsequent
changes in its fair value in earnings as a component of interest
expense. Any amounts previously recorded to accumulated other
comprehensive loss will be amortized to interest expense in the
same period(s) in which the interest expense of the underlying
debt impacts earnings.
Please refer to Note 6, Derivative Financial
Instruments for additional information regarding our
derivative financial instruments and hedging activities.
Pension and Postretirement Benefits.
Pension
and other postretirement benefits represent estimated amounts to
be paid to employees in the future. The accounting for benefits
reflects the recognition of these benefit costs over the
employees approximate service period based on the terms of
the plan and the investment and funding decisions made. The
determination of the benefit obligation and the net periodic
pension and other postretirement benefit costs requires
management to make assumptions regarding the discount rate,
return on retirement plan assets, increase in future
compensation and healthcare cost trends. Changes in these
assumptions can have a significant impact on the projected
benefit obligation, funding requirement and net periodic benefit
cost. The assumed discount rate is the rate at which the pension
benefits could be settled. During 2007 and 2006, we utilized the
Citigroup Pension Liability Index as the appropriate discount
rate for our defined benefit pension plans. In 2005, the
discount rate was determined using a methodology that discounts
the projected plan cash flows to the measurement date using the
spot rates provided in the Citigroup Pension Discount Curve. A
single discount rate was then computed so that the present value
of the benefit cash flows using this single rate equaled the
present value computed using the Citigroup Pension Discount
Curve. The expected long-term rate of return on plan assets is
based on the mix of assets held by the plan and the expected
long-term rates of return within each asset class. The
anticipated trend of future healthcare costs is based on
historical experience and external factors.
F-19
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R)
(SFAS No. 158). This statement
requires recognition of the overfunded or underfunded status of
defined benefit postretirement plans as an asset or liability in
the statement of financial position and to recognize changes in
that funded status in accumulated other comprehensive income
(loss) in the year in which the changes occur.
SFAS No. 158 also requires measurement of the funded
status of a plan as of the date of the statement of financial
position. SFAS No. 158 became effective for
recognition of the funded status of the benefit plans for fiscal
years ending after December 15, 2006 and is effective for
the measurement date provisions for fiscal years ending after
December 15, 2008. We adopted the funded status recognition
provisions of SFAS No. 158 related to our defined
benefit pension and postretirement plans as of December 31,
2006, as required. We complied with the measurement date
provisions of SFAS No. 158 as of December 31,
2006.
Please refer to Note 10, Benefit Plans, which
addresses the financial impact of our adoption of
SFAS No. 158, and for further information regarding
our benefit plans.
Income Taxes.
We account for income taxes
under the asset and liability method in accordance with
SFAS No. 109,
Accounting for Income Taxes
(SFAS No. 109). Deferred tax
liabilities or assets reflect temporary differences between
amounts of assets and liabilities for financial and tax
reporting. Such amounts are adjusted, as appropriate, to reflect
changes in tax rates expected to be in effect when the temporary
differences reverse. A valuation allowance is established to
offset any deferred tax assets if, based upon the available
evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes: An Interpretation
of FASB Statement No. 109
(FIN No. 48). This interpretation
clarifies the accounting for uncertainty in income taxes
recognized in an entitys financial statements in
accordance with SFAS No. 109. FIN No. 48
prescribes a recognition threshold and measurement principles
for the financial statement recognition and measurement of tax
positions taken or expected to be taken on a tax return. Under
FIN No. 48, the impact of an uncertain income tax
position on an income tax return must be recognized at the
largest amount that is more likely than not to be sustained upon
audit by the relevant taxing authority. An uncertain income tax
position will not be recognized if it has less than a 50%
likelihood of being sustained. Additionally,
FIN No. 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosures and transition requirements. This
interpretation is effective for fiscal years beginning after
December 15, 2006 and as such, we adopted
FIN No. 48 on January 1, 2007.
The Companys policy is to recognize interest and penalties
related to unrecognized tax benefits in income tax expense. See
Note 9, Income Taxes, for more information
regarding our provision (benefit) for income taxes as well as
the impact of adopting FIN No. 48.
Earnings (Loss) Per Share.
Subsequent to the
GS Repurchase (defined in Note 7, Redeemable
Preferred Stock, Warrants and Other) and for the year
ended December 31, 2007, we accounted for earnings (loss)
per share (EPS) in accordance with
SFAS No. 128,
Earnings Per Share
(SFAS No. 128). For the year ended
December 31, 2006 (through January 27, 2006, the
closing date of the GS Repurchase), we accounted for EPS in
accordance with
EITF No. 03-6,
Participating Securities and the Two-Class Method under
FASB Statement 128
(EITF 03-6),
which established standards regarding the computation of EPS by
companies that have issued securities other than common stock
that contractually entitle the holder to participate in
dividends and earnings of the company.
EITF 03-6
requires earnings available to common shareholders for the
period, after deduction of preferred stock dividends, to be
allocated between the common and preferred stockholders based on
their respective rights to receive dividends. Basic EPS is then
calculated by dividing loss allocable to common shareholders by
the weighted average number of shares outstanding.
EITF 03-6
does not require the presentation of basic and diluted EPS for
securities other than common stock. Therefore, the following EPS
amounts only pertain to our common stock.
F-20
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under the guidance of SFAS No. 128, diluted EPS is
calculated by dividing loss allocable to common shareholders by
the weighted average common shares outstanding plus dilutive
potential common stock. Potential common stock includes stock
options, stock appreciation rights (SARs),
restricted stock and warrants, the dilutive effect of which is
calculated using the treasury stock method, and prior to the
GS Repurchase, our Preferred Stock (defined in Note 7,
Redeemable Preferred Stock, Warrants and Other), the
dilutive effect of which was calculated using the
if-converted method.
The calculation of basic and diluted EPS for the years ended
December 31, 2007, 2006 and 2005, respectively, is
presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders
|
|
$
|
46,859
|
|
|
$
|
(208,483
|
)
|
|
$
|
(288,876
|
)
|
Amount allocable to common shareholders(1)
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocable to common shareholders
|
|
|
46,859
|
|
|
|
(208,483
|
)
|
|
|
(288,876
|
)
|
Weighted average common shares outstanding
|
|
|
70,932
|
|
|
|
66,448
|
|
|
|
31,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.66
|
|
|
$
|
(3.14
|
)
|
|
$
|
(9.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders
|
|
$
|
46,859
|
|
|
$
|
(208,483
|
)
|
|
$
|
(288,876
|
)
|
Amount allocable to common shareholders(1)
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocable to common shareholders
|
|
|
46,859
|
|
|
|
(208,483
|
)
|
|
|
(288,876
|
)
|
Weighted average common shares outstanding
|
|
|
70,932
|
|
|
|
66,448
|
|
|
|
31,731
|
|
Dilutive effect of stock awards and warrants(2)
|
|
|
1,031
|
|
|
|
|
|
|
|
|
|
Dilutive effect of Preferred Stock assuming conversion(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
71,963
|
|
|
|
66,448
|
|
|
|
31,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.65
|
|
|
$
|
(3.14
|
)
|
|
$
|
(9.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In computing EPS using the two-class method, we have not
allocated the net loss reported for the years ended
December 31, 2006 and 2005, respectively, between common
and preferred shareholders since preferred shareholders had no
contractual obligation to share in the net loss.
|
|
(2)
|
|
Due to the loss allocable to common shareholders reported for
the years ended December 31, 2006 and 2005, respectively,
the effect of all stock-based awards, warrants and the assumed
conversion of the Preferred Stock were anti-dilutive and
therefore are not included in the calculation of diluted EPS.
For the years ended December 31, 2007, 2006 and 2005,
2,593 shares, 2,263 shares and 60 shares,
respectively, of stock-based awards had exercise prices that
exceeded the average market price of the Companys common
stock for the respective periods. For the years ended
December 31, 2006 and 2005, the assumed conversion of the
Preferred Stock into 391 shares and 5,132 shares,
respectively, of common stock was anti-dilutive and therefore
not included in the calculation of diluted EPS.
|
Stock-Based
Awards
We maintain a shareholder approved stock incentive plan, the
2005 Stock Award and Incentive Plan (2005 Plan),
whereby certain employees and non-employee directors are
eligible to receive stock options,
F-21
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SARs, limited stock appreciation rights in tandem with stock
options and restricted stock. Prior to adoption of the 2005
Plan, we maintained a shareholder approved stock incentive plan,
the 2001 Stock Award and Incentive Plan (2001 Plan).
Under the 2005 Plan and 2001 Plan, 5 million and
4 million shares, respectively, were originally authorized
for grant. Stock awards are typically granted at the market
value of our common stock at the date of the grant, become
exercisable in ratable installments or otherwise, over a period
of one to five years from the date of grant, and may be
exercised up to a maximum of ten years from the date of grant.
The Compensation Committee determines termination, vesting and
other relevant provisions at the date of the grant. We have
implemented a policy of issuing treasury shares held by the
Company to satisfy stock issuances associated with stock-based
award exercises.
Non-employee directors receive options to purchase
1,500 shares and an award of 1,500 shares of
restricted stock upon election to the Board. Non-employee
directors also receive, on an annual basis, options to purchase
1,500 shares and an award of 1,500 shares of
restricted stock. Non-employee directors may also elect to
receive additional equity awards in lieu of all or a portion of
their cash fees.
On January 1, 2006, the Company adopted the provisions of
SFAS No. 123 (R),
Share-Based Payment
(SFAS No. 123 (R)), using the
Modified Prospective Method. Under this method, we are required
to record compensation expense in the consolidated statement of
operations for all employee stock-based awards granted, modified
or settled after the date of adoption and for the unvested
portion of previously granted stock awards that remain
outstanding as of the beginning of the period of adoption based
on their grant date fair values. The Company estimates
forfeitures over the requisite service period when recognizing
compensation expense. Estimated forfeitures are adjusted to the
extent actual forfeitures differ, or are expected to materially
differ, from such estimates. For the years ended
December 31, 2007 and 2006, the Company utilized a
forfeiture rate of 5% in determining compensation expense.
Prior to adopting SFAS No. 123 (R), the Company
accounted for stock-based awards granted to employees and
non-employee directors in accordance with the intrinsic
value-based method prescribed by Accounting Principles Board
Opinion No. 25,
Accounting for Stock Issued to Employees
(APB No. 25) and related
interpretations. Compensation expense related to the issuance of
stock options to employees or non-employee directors was only
recognized if the exercise price of the stock option was less
than the market value of the underlying common stock on the date
of grant. Compensation expense related to SARs was determined at
the end of each period in the amount by which the quoted market
value of the underlying shares covered by the grant exceeded the
grant price and was recognized over the vesting term. In
accordance with the Modified Prospective Method, financial
statement amounts for the year ended December 31, 2005 have
not been restated to reflect the fair value method of expensing
stock-based compensation.
The following table depicts the effect of adopting
SFAS No. 123 (R) on net loss, loss available to common
shareholders and loss per share for the year ended
December 31, 2006. The Companys reported net loss,
loss available to common shareholders and basic and diluted loss
per share for the year ended December 31, 2006, which
reflect compensation expense related to the Companys
stock-based awards recorded in accordance with
SFAS No. 123 (R), is compared to net loss, loss
available to common shareholders and basic and diluted loss per
share for the same period that would have been reported had such
compensation expense been determined under APB No. 25.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
As Reported
|
|
|
Per APB No. 25
|
|
|
Total stock-based compensation expense
|
|
$
|
43,283
|
|
|
$
|
11,682
|
|
Net loss
|
|
|
(237,704
|
)
|
|
|
(214,392
|
)
|
Loss available to common shareholders
|
|
|
(208,483
|
)
|
|
|
(185,171
|
)
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.14
|
)
|
|
$
|
(2.79
|
)
|
Diluted
|
|
$
|
(3.14
|
)
|
|
$
|
(2.79
|
)
|
F-22
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Upon adoption of SFAS No. 123 (R), pro forma
disclosure permitted by SFAS No. 123,
Accounting
for Stock Based Compensation
(SFAS No. 123) is no longer a
permitted alternative. As the Company adopted
SFAS No. 123 (R), as of January 1, 2006,
using the Modified Prospective Method, the Company has provided
the following pro forma disclosure of the effect on net income
and loss per share for the year ended December 31, 2005, as
if the Company had accounted for its employee stock awards
granted under the fair value method of SFAS No. 123.
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2005
|
|
|
Net income, as reported
|
|
$
|
67,533
|
|
Add: Stock-based compensation expense included in
reported net income, net of related tax effects
|
|
|
3,162
|
|
Less: Stock-based compensation expense that would have been
included in the determination of net income if the fair value
method had been applied to all awards, net of related tax effects
|
|
|
(7,791
|
)
|
|
|
|
|
|
Pro forma net income
|
|
|
62,904
|
|
Loss on repurchase of preferred stock
|
|
|
(133,681
|
)
|
Accretion of preferred stock to redemption value
|
|
|
(211,020
|
)
|
Preferred dividend
|
|
|
(11,708
|
)
|
|
|
|
|
|
Pro forma loss available to common shareholders
|
|
$
|
(293,505
|
)
|
|
|
|
|
|
Basic loss per share
|
|
|
|
|
As reported
|
|
$
|
(9.10
|
)
|
Pro forma
|
|
$
|
(9.25
|
)
|
Diluted loss per share
|
|
|
|
|
As reported
|
|
$
|
(9.10
|
)
|
Pro forma
|
|
$
|
(9.25
|
)
|
The weighted average fair value of stock-based awards granted
during 2005 was $19.76 per share. The pro forma information
noted above was determined based on the fair value of
stock-based awards calculated using the Black-Scholes
option-pricing model with the following assumptions:
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
December 31, 2005
|
|
|
|
Dividend yield
|
|
0%
|
|
|
Expected volatility
|
|
29%
|
|
|
Risk-free interest rate
|
|
3.9%
|
|
|
Expected holding period
|
|
5 years
|
|
|
F-23
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In accordance with APB No. 25, the following table
presents changes in awards outstanding under all of our stock
incentive plans for the year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Exercise/Grant
|
|
|
|
Shares
|
|
|
Price Per Share
|
|
|
Awards outstanding, December 31, 2004
|
|
|
4,034,885
|
|
|
$
|
29.57
|
|
Granted
|
|
|
384,093
|
|
|
|
59.54
|
|
Exercised
|
|
|
(334,718
|
)
|
|
|
22.06
|
|
Canceled or expired
|
|
|
(82,016
|
)
|
|
|
46.99
|
|
|
|
|
|
|
|
|
|
|
Awards outstanding, December 31, 2005
|
|
|
4,002,244
|
|
|
$
|
32.69
|
|
|
|
|
|
|
|
|
|
|
Available for future grants at December 31, 2005
|
|
|
5,301,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with APB No. 25, the following table
summarizes information about stock awards outstanding and
exercisable at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards Outstanding
|
|
|
Stock Awards Exercisable
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Range of
|
|
|
|
|
Remaining
|
|
|
Weighted Average
|
|
|
|
|
|
Exercise/
|
|
Exercise/Grant
|
|
|
|
|
Contractual Life
|
|
|
Exercise/Grant
|
|
|
|
|
|
Grant Price Per
|
|
Prices
|
|
Shares
|
|
|
(In Years)
|
|
|
Price Per Share
|
|
|
Shares
|
|
|
Share
|
|
|
$11.10 - $14.75
|
|
|
34,109
|
|
|
|
1.76
|
|
|
$
|
14.02
|
|
|
|
34,109
|
|
|
$
|
14.02
|
|
$15.22 - $19.41
|
|
|
401,804
|
|
|
|
3.09
|
|
|
|
15.74
|
|
|
|
401,804
|
|
|
|
15.74
|
|
$24.75 - $29.59
|
|
|
1,795,290
|
|
|
|
4.47
|
|
|
|
25.97
|
|
|
|
1,398,971
|
|
|
|
25.96
|
|
$30.11 - $39.21
|
|
|
236,075
|
|
|
|
4.14
|
|
|
|
30.80
|
|
|
|
79,719
|
|
|
|
31.01
|
|
$41.10 - $43.85
|
|
|
1,142,486
|
|
|
|
5.40
|
|
|
|
41.32
|
|
|
|
210,772
|
|
|
|
41.12
|
|
$46.06 - $53.74
|
|
|
36,600
|
|
|
|
5.28
|
|
|
|
47.90
|
|
|
|
7,066
|
|
|
|
47.24
|
|
$56.72 - $64.95
|
|
|
355,880
|
|
|
|
6.20
|
|
|
|
59.54
|
|
|
|
225
|
|
|
|
59.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,002,244
|
|
|
|
4.72
|
|
|
$
|
32.69
|
|
|
|
2,132,666
|
|
|
$
|
25.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Please refer to Note 8, Stock Incentive Plans,
for additional information regarding our stock incentive plans
and the adoption of SFAS No. 123 (R).
Treasury Stock.
In November 2007, the
Companys Board of Directors authorized a
$100.0 million Repurchase Plan. This authorization permits
the Company to purchase its shares of common stock in the open
market pursuant to
Rule 10b-18
of the Securities Exchange Act of 1934 or through block trades
or otherwise over the following twelve months, based on market
conditions and other factors, which purchases may be made or
suspended at any time. Purchases of common stock are accounted
for using the cost method whereby the total cost of the shares
reacquired is charged to treasury stock, a contra equity
account. When treasury stock is reissued, the cost of the shares
reissued (determined based on the
first-in,
first-out cost flow assumption) is charged against treasury
stock and the excess of the reissuance price over cost is
credited to additional paid-in capital. In accordance with the
Repurchase Plan, the Company repurchased a total of
2.5 million shares at a cost of $95.7 million during
December 2007.
Fair Value of Financial Instruments.
SFAS No.
107,
Disclosures About Fair Value of Financial Instruments
(SFAS No. 107), requires disclosure of the
fair value of financial instruments for which it is practicable
to estimate that value. At December 31, 2007 and 2006, the
fair value of cash and cash equivalents, accounts receivable,
and accounts payable and accrued liabilities approximated their
carrying value based on the short-term nature of these
instruments. The Company has utilized quoted market prices,
where available, to compute the fair value of our long-term debt
as disclosed in Note 5, Long-Term Debt, Credit
Facilities and
F-24
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Notes. These estimates of fair value may be affected by
assumptions made and, accordingly, are not necessarily
indicative of the amounts the Company could realize in a current
market exchange.
Estimates.
The preparation of financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and certain expenses and the
disclosure of contingent assets and liabilities. Actual results
could differ materially from those estimates and assumptions.
Estimates and assumptions are used in the determination of
recoverability of long-lived assets, sales allowances,
allowances for doubtful accounts, depreciation and amortization,
employee benefit plans expense, restructuring reserves, and
certain assumptions pertaining to our stock-based awards, among
others.
New Accounting Pronouncements.
In December
2007, the FASB issued SFAS No. 141(R),
Business
Combinations
(SFAS No. 141(R)).
SFAS No. 141(R) replaces SFAS No. 141,
Business Combinations
(SFAS No. 141), and establishes principles
and requirements for how an acquirer in a business combination
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree, recognizes and measures
the goodwill acquired in the business combination or a gain from
a bargain purchase, and determines what information to disclose
to enable users of the financial statements to evaluate the
nature and financial effects of the business combination.
SFAS No. 141 (R) is effective for business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008 and earlier adoption is prohibited.
In December 2007, the Securites and Exchange Commission
(SEC) issued Staff Accounting
Bulletin No. 110, Use of a Simplified Method in
Developing Expected Term of Share Options
(SAB No. 110). SAB No. 110
amends and replaces Staff Accounting Bulletin No. 107
(SAB No. 107), which expressed the views
of the staff regarding the use of the simplified
method in developing an estimate of the expected life of
plain vanilla share options and allowed usage of the
simplified method for share option grants prior to
December 31, 2007. SAB No. 110 will continue to
permit, under certain circumstances, the use of the simplified
method beyond December 31, 2007. SAB No. 110 is
effective January 1, 2008 and the Company does not expect
the adoption of SAB No. 110 to have a material impact
on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115
(SFAS No. 159).
SFAS No. 159 permits companies to choose to measure
many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value.
The objective of SFAS No. 159 is to provide
opportunities to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without
having to apply hedge accounting provisions.
SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes
for similar types of assets and liabilities.
SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. We adopted SFAS No. 159
effective January 1, 2008. The adoption of
SFAS No. 159 did not have a material impact on our
consolidated financial position and results of operations.
In September 2006, the 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 have a material impact on our consolidated financial
position and results of operations.
We have reviewed other new accounting standards not identified
above and do not believe any other new standards will have a
material impact on our financial position or operating results.
F-25
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Business.com
Acquisition
On August 23, 2007, we completed the Business.com
Acquisition for a disclosed amount of $345.0 million. The
purchase price determined in accordance with GAAP was
$334.4 million and excludes certain items such as the value
of unvested equity awards, which will be recorded as
compensation expense over their vesting period. The purpose of
the Business.com Acquisition was to expand our existing
interactive portfolio by adding leading Internet advertising
talent and technology, to strengthen RHDs position in the
expanding local commercial search market and to develop an
online performance based advertising network. Business.com also
provides the established
business-to-business
online properties of Business.com, Work.com and the Business.com
Advertising Network. We expect to adopt the Business.com
technology platform to serve our existing advertiser base at our
DexKnows.com Internet Yellow Pages site. Business.com now
operates as a direct, wholly-owned subsidiary of RHD. The
results of Business.com have been included in our consolidated
results commencing August 23, 2007. Proceeds from the RHD
Credit Facility were used to fund the Business.com Acquisition.
In conjunction with the Business.com Acquisition and under the
terms of a related Stock Purchase Agreement, dated as of
July 27, 2007, on August 23, 2007, Jacob Winebaum
purchased from RHD 148,372 shares of RHD common stock for
approximately $9.0 million. Mr. Winebaum was the
founder and Chief Executive Officer of Business.com.
Local
Launch Acquisition
On September 6, 2006, we acquired (the Local Launch
Acquisition) Local Launch, a local search products,
platform and fulfillment provider. Local Launch specializes in
search through publishing, distribution, directory and organic
marketing solutions. The purpose of the Local Launch Acquisition
was to support the expansion of our current local Internet
Marketing offerings and provide new, innovative solutions to
enhance our local Internet Marketing capabilities. The results
of the Local Launch business are included in our consolidated
results commencing September 6, 2006. During the years
ended December 31, 2007 and 2006, the Local Launch business
operated as a direct wholly-owned subsidiary of RHD. Effective
January 1, 2008, Local Launch was merged with and into
Business.com. The products and services provided by Local Launch
will continue to be offered to our advertisers through
Business.com and the Local Launch brand and logo will continue
to be utilized for our Internet Marketing offerings.
Dex Media
Merger
On January 31, 2006, we acquired Dex Media for an equity
purchase price of $4.1 billion (the Dex Media
Merger). Pursuant to the Agreement and Plan of Merger,
dated October 3, 2005 (Merger Agreement), each
issued and outstanding share of Dex Media common stock was
converted into $12.30 in cash and 0.24154 of a share of RHD
common stock, resulting in an aggregate cash value of
$1.9 billion and aggregate stock value of
$2.2 billion, based on 36,547,381 newly issued shares of
RHD common stock. Additionally, we assumed Dex Medias
outstanding indebtedness on January 31, 2006 with a fair
value of $5.5 billion. The total allocable purchase price
also included transaction costs of $26.7 million that were
directly related to the Dex Media Merger, severance and related
costs for certain Dex Media employees of $17.7 million and
Dex Media vested equity awards outstanding as of
January 31, 2006 with an estimated fair value of
$77.4 million, for a total aggregate purchase price of
$9.8 billion.
Dex Media is the exclusive publisher of the official
yellow pages and white pages directories for Qwest
Communications International Inc. (Qwest) where
Qwest was the primary incumbent local exchange carrier
(ILEC) in November 2002. The purpose of the Dex
Media Merger was to take a further step in the transformation of
RHD into a leading publisher of yellow pages directories, as
well as to combine the complementary strengths of both companies.
F-26
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Dex Media is the indirect parent of Dex Media East LLC
(Dex Media East) and Dex Media West LLC (Dex
Media West). Dex Media East operates our directory
business in the following states: Colorado, Iowa, Minnesota,
Nebraska, New Mexico, North Dakota and South Dakota
(collectively, the Dex East States). Dex Media West
operates our directory business in the following states:
Arizona, Idaho, Montana, Oregon, Utah, Washington and Wyoming
(collectively, the Dex West States and together with
the Dex East States, collectively, the Qwest
States). The acquired business of Dex Media and its
subsidiaries (Dex Media Business) now operates
through Dex Media, Inc., one of RHDs direct, wholly-owned
subsidiaries. The results of the Dex Media Business have been
included in the Companys operating results commencing
February 1, 2006. To finance the Dex Media Merger, we
issued $660 million 6.875% Senior Discount Notes due
January 15, 2013 for gross proceeds of $600.5 million
and $1.21 billion 8.875% Senior Notes due
January 15, 2016 to pay the cash portion of the purchase
price to the Dex Media stockholders.
AT&T
Directory Acquisition
On September 1, 2004, we completed the acquisition of the
directory publishing business (AT&T Directory
Business) of AT&T Inc. (AT&T)
(formerly known as SBC Communications, Inc., SBC) in
Illinois and Northwest Indiana, including AT&Ts
interests in The DonTech II Partnership
(DonTech), a
50
/
50
general partnership between us and AT&T (collectively, the
AT&T Directory Acquisition) for
$1.41 billion in cash, after working capital adjustments
and the settlement of a $30 million liquidation preference
owed to us related to DonTech. As a result of the AT&T
Directory Acquisition, we became the publisher of AT&T
branded yellow pages directories in Illinois and Northwest
Indiana. This transaction was consummated pursuant to a purchase
agreement dated as of July 28, 2004, as amended, by and
among RHD, Ameritech Corporation (Ameritech), a
direct wholly-owned subsidiary of AT&T, and Ameritech
Publishing, Inc. (API), a direct wholly-owned
subsidiary of Ameritech. The results of the AT&T Directory
Business have been included in our consolidated results
commencing September 1, 2004. The acquired AT&T
Directory Business now operates as R.H. Donnelley
Publishing & Advertising of Illinois Partnership, one
of our indirect, wholly-owned subsidiaries.
Embarq
Acquisition
On January 3, 2003, we completed the acquisition of the
directory business (the Embarq Directory Business)
of Sprint Nextel Corporation (Sprint) (formerly
known as Sprint Corporation) by acquiring all the outstanding
capital stock of the various entities comprising Sprint
Publishing & Advertising (collectively, the
Embarq Acquisition) for $2.23 billion in cash.
As a result, we are the publisher of Embarq (formerly Sprint)
branded yellow pages directories in 18 states. In May 2006,
Sprint spun-off its local telephone business as Embarq
Corporation (Embarq) and in connection with the
spin-off, we entered into new agreements with Embarq that
replaced the related agreements with Sprint, except that Sprint
remains bound by certain non-competition obligations. The
results of the Embarq Directory Business are included in our
consolidated results commencing January 3, 2003. The Embarq
Directory Business now operates as R.H. Donnelley
Publishing & Advertising, Inc., one of our indirect
wholly-owned subsidiaries.
The purposes of our acquisitions included the following:
|
|
|
|
|
Building RHD into a leading publisher of yellow pages
directories and provider of online commercial search services;
|
|
|
|
Adding leading Internet advertising talent and technology, to
strengthen RHDs position in the expanding local commercial
search market and to develop an online performance based
advertising network;
|
|
|
|
Enhancing our local Internet Marketing capabilities and
offerings.
|
F-27
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
These acquisitions were accounted for as purchase business
combinations in accordance with SFAS No. 141. Each
purchase price was allocated to the related tangible and
identifiable intangible assets acquired and liabilities assumed
based on their respective estimated fair values on the
acquisition dates with the remaining consideration recorded as
goodwill. Certain long-term intangible assets were identified
and recorded at their estimated fair values. Identifiable
intangible assets acquired primarily include directory services
agreements between the Company and each of Qwest, AT&T and
Embarq, respectively, a
non-competition
agreement between the Company and Sprint, established customer
relationships, third party contracts, trademarks and trade
names, an advertising commitment and technology and network
platforms, all resulting from the Dex Media Merger, AT&T
Directory Acquisition, Embarq Acquisition, Business.com
Acquisition or Local Launch Acquisition. In accordance with
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
benefits derived from such assets. Goodwill is not amortized but
is subject to impairment testing on an annual basis. See
Note 2, Summary of Significant Accounting
Policies Identifiable Intangible Assets and
Goodwill, for a further description of our intangible
assets and goodwill.
Under purchase accounting rules, we did not assume or record the
deferred revenue balance associated with directories published
by Dex Media of $114.0 million at January 31, 2006 or
the AT&T Directory Business of $204.1 million at
September 1, 2004. These amounts represented revenue that
would have been recognized subsequent to each acquisition under
the deferral and amortization method in the absence of purchase
accounting. Accordingly, we did not and will not record revenue
associated with directories that were published prior to each
acquisition, as well as directories that were published in the
month each acquisition was completed. Although the deferred
revenue balances associated with directories that were published
prior to each acquisition were eliminated, we retained all the
rights associated with the collection of amounts due under and
contractual obligations under the advertising contracts executed
prior to the acquisitions. As a result, the billed and unbilled
accounts receivable balances acquired in each acquisition became
assets of the Company. Also under purchase accounting rules, we
did not assume or record the deferred directory costs related to
those directories that were published prior to each acquisition
as well as directories that published in the month each
acquisition was completed, totaling $205.1 million for
Qwest-branded directories and $175.8 million for
AT&T-branded directories. These costs represented cost of
revenue that would have been recognized subsequent to the
acquisitions under the deferral and amortization method in the
absence of purchase accounting.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed in the Dex Media Merger
on January 31, 2006:
|
|
|
|
|
Current assets
|
|
$
|
792,645
|
|
Non-current assets
|
|
|
80,320
|
|
Intangible assets
|
|
|
8,915,000
|
|
Goodwill
|
|
|
2,544,980
|
|
|
|
|
|
|
Total assets acquired
|
|
|
12,332,945
|
|
Current liabilities
|
|
|
(304,542
|
)
|
Non-current liabilities
|
|
|
(7,786,229
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(8,090,771
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
4,242,174
|
|
|
|
|
|
|
The following unaudited condensed pro forma information has been
prepared in accordance with SFAS No. 141 for the years
ended December 31, 2006 and 2005, respectively, and assumes
the Dex Media Merger (and related GS Repurchase) and related
financing occurred on January 1, 2005. The following
unaudited condensed pro forma information does not purport to
represent what the Companys results of
F-28
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
operations would actually have been if the Dex Media Merger (and
related GS Repurchase) had in fact occurred on January 1,
2005 and is not necessarily representative of results of
operations for any future period. The unaudited condensed pro
forma financial information for the year ended December 31,
2006 does not eliminate the adverse impact of purchase
accounting relating to the Dex Media Merger. The unaudited
condensed pro forma financial information for the year ended
December 31, 2005 reflects the combination of GAAP results
for both RHD and Dex Media.
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Net revenue
|
|
$
|
2,039,192
|
|
|
$
|
2,615,047
|
|
Operating income
|
|
|
470,353
|
|
|
|
1,029,102
|
|
Net (loss) income
|
|
|
(275,943
|
)
|
|
|
99,816
|
|
(Loss) income available to common shareholders
|
|
|
(275,943
|
)
|
|
|
99,816
|
|
Diluted (loss) earnings per share
|
|
$
|
(3.97
|
)
|
|
$
|
1.46
|
|
The table below shows the activity in our restructuring reserves
during 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
|
|
|
|
Actions
|
|
|
Actions
|
|
|
Actions
|
|
|
Actions
|
|
|
Total
|
|
|
Balance at December 31, 2004
|
|
$
|
3,461
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,461
|
|
Additions to reserve charged to goodwill
|
|
|
|
|
|
|
8,828
|
|
|
|
|
|
|
|
|
|
|
|
8,828
|
|
Payments
|
|
|
(1,884
|
)
|
|
|
(2,356
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
1,577
|
|
|
|
6,472
|
|
|
|
|
|
|
|
|
|
|
|
8,049
|
|
Additions to reserve charged to goodwill
|
|
|
|
|
|
|
|
|
|
|
18,914
|
|
|
|
|
|
|
|
18,914
|
|
Payments
|
|
|
(606
|
)
|
|
|
(1,074
|
)
|
|
|
(11,299
|
)
|
|
|
|
|
|
|
(12,979
|
)
|
Reserve reversal credited to goodwill
|
|
|
|
|
|
|
(3,455
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
971
|
|
|
|
1,943
|
|
|
|
7,615
|
|
|
|
|
|
|
|
10,529
|
|
Additions to reserve charged to goodwill
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
|
|
|
|
96
|
|
Additions to reserve charged to earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,542
|
|
|
|
5,542
|
|
Payments
|
|
|
(208
|
)
|
|
|
(135
|
)
|
|
|
(3,825
|
)
|
|
|
|
|
|
|
(4,168
|
)
|
Reserve reversal credited to goodwill
|
|
|
|
|
|
|
(1,808
|
)
|
|
|
(559
|
)
|
|
|
|
|
|
|
(2,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
763
|
|
|
$
|
|
|
|
$
|
3,327
|
|
|
$
|
5,542
|
|
|
$
|
9,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
F-29
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 have vacated certain of our leased
Dex Media facilities in Colorado, Minnesota, Nebraska and
Oregon. The costs associated with these actions are shown in the
table above under the caption 2006 Restructuring
Actions. We estimated the costs associated with terminated
employees, including Dex Media executive officers, and
abandonment of certain of our leased facilities, net of
estimated sublease income, to be approximately
$18.9 million and such costs were charged to goodwill
during 2006. During January 2007, we finalized our estimate of
costs associated with terminated employees and recognized a
charge to goodwill of $0.1 million. Payments made with
respect to severance and relocation during 2007 and 2006 totaled
$1.6 million and $10.8 million, respectively. During
2007, we finalized our assessment of the relocation reserve
established as a result of the Dex Media Merger and as a result,
we reversed the remaining amount in the reserve of
$0.6 million, with a corresponding offset to goodwill.
Payments of $2.2 million and $0.5 million were made
during 2007 and 2006, respectively, with respect to the vacated
leased Dex Media facilities. The remaining lease payments for
these facilities will be made through 2016.
During the first quarter of 2005, we completed a restructuring
relating to the integration of the AT&T Directory Business.
There were 63 employees affected by the restructuring, 57
were terminated during the first quarter of 2005, and 6 were
relocated to our corporate headquarters in Cary, North Carolina.
Additionally, we vacated certain of our leased facilities in
Chicago, Illinois. The costs associated with these actions are
shown in the table above under the caption 2005
Restructuring Actions. We estimated the costs associated
with the terminated employees and the abandonment of certain of
our leased facilities to be approximately $8.8 million and
such costs were charged to goodwill during the first quarter of
2005. There were no payments made with respect to severance and
relocation during 2007. Payments made with respect to severance
and relocation during 2006 and 2005 were $0.1 million and
$1.4 million, respectively. Payments of $0.1 million,
$1.0 million and $1.0 million, net of sublease income,
were charged against the reserve during 2007, 2006 and 2005,
respectively, with respect to the leased facilities in Chicago,
Illinois. During 2006, we formalized a plan to re-occupy in
early 2007 a portion of the leased facilities in Chicago,
Illinois, which we vacated in conjunction with the AT&T
Directory Acquisition. As a result, we reduced our reserve
related to these leased facilities during the year ended
December 31, 2006 by $3.5 million, with a
corresponding offset to goodwill. During 2007, we re-occupied
the remaining portion of our leased facilities in Chicago,
Illinois. As a result, we reversed the remaining amount of our
reserve related to these leased facilities during the year ended
December 31, 2007 by $1.8 million, with a
corresponding offset to goodwill.
Following the Embarq Acquisition on January 3, 2003, we
consolidated publishing and technology operations, sales offices
and administrative personnel and relocated the headquarters
functions from Overland Park, Kansas and Purchase, New York to
Cary, North Carolina. Approximately 140 people were
affected by the relocation of the headquarters functions in
Overland Park, Kansas and Purchase, New York, of which 75 were
included in the restructuring reserve. The remaining
65 people relocated with the Company. The costs associated
with these actions are shown in the table above under the
caption 2003 Restructuring Actions. Payments of
$0.2 million, $0.2 million and $0.4 million, net
of sublease income, were charged against the reserve with
respect to the former pre-press publishing facility during 2007,
2006 and 2005, respectively. Remaining payments will be made
through 2012. Payments of $0.6 million were made during
2005 related to severance and related costs. Payments of
$0.4 million and $0.8 million, net of sublease income,
were charged against the reserve with respect to the former
headquarters office lease during 2006 and 2005, respectively.
The former headquarters office lease expired during 2006.
F-30
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Long-Term
Debt, Credit Facilities and Notes
|
Long-term debt of the Company at December 31, 2007 and
2006, including fair value adjustments required by GAAP as a
result of the Dex Media Merger, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
RHD
|
|
|
|
|
|
|
|
|
6.875% Senior Notes due 2013
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
6.875%
Series A-1
Senior Discount Notes due 2013
|
|
|
339,222
|
|
|
|
335,401
|
|
6.875%
Series A-2
Senior Discount Notes due 2013
|
|
|
613,649
|
|
|
|
606,472
|
|
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
|
|
|
|
|
|
RHDI
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,571,536
|
|
|
|
1,946,535
|
|
8.875% Senior Notes due 2010
|
|
|
|
|
|
|
7,934
|
|
10.875% Senior Subordinated Notes due 2012
|
|
|
|
|
|
|
600,000
|
|
Dex Media, Inc.
|
|
|
|
|
|
|
|
|
8% Senior Notes due 2013
|
|
|
512,097
|
|
|
|
513,663
|
|
9% Senior Discount Notes due 2013
|
|
|
719,112
|
|
|
|
663,153
|
|
Dex Media East
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,106,050
|
|
|
|
656,571
|
|
9.875% Senior Notes due 2009
|
|
|
|
|
|
|
476,677
|
|
12.125% Senior Subordinated Notes due 2012
|
|
|
|
|
|
|
390,314
|
|
Dex Media West
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
1,071,491
|
|
|
|
1,450,917
|
|
8.5% Senior Notes due 2010
|
|
|
398,736
|
|
|
|
403,260
|
|
5.875% Senior Notes due 2011
|
|
|
8,774
|
|
|
|
8,786
|
|
9.875% Senior Subordinated Notes due 2013
|
|
|
824,982
|
|
|
|
833,469
|
|
|
|
|
|
|
|
|
|
|
Total RHD Consolidated
|
|
|
10,175,649
|
|
|
|
10,403,152
|
|
Less current portion
|
|
|
177,175
|
|
|
|
382,631
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
9,998,474
|
|
|
$
|
10,020,521
|
|
|
|
|
|
|
|
|
|
|
Credit
Facilities
At December 31, 2007, total outstanding debt under our
credit facilities was $3,749.1 million, comprised of
$1,571.5 million under the RHDI credit facility,
$1,106.1 million under the new Dex Media East credit
facility and $1,071.5 million under the Dex Media West
credit facility.
RHD
To finance the Business.com Acquisition and related fees and
expenses, on August 23, 2007, RHD entered into a
$328.0 million credit facility, with a scheduled maturity
date of December 31, 2011. On October 2, 2007, the RHD
Credit Facility was paid in full from the proceeds of our
Series A-4
Notes. The repayment of the RHD Credit Facility was accounted
for as an extinguishment of debt resulting in a loss charged to
interest expense during the year ended December 31, 2007 of
$0.8 million related to the write-off of unamortized
deferred financing costs.
F-31
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
RHDI
As of December 31, 2007, outstanding balances under
RHDIs senior secured credit facility, as amended and
restated (RHDI Credit Facility), totaled
$1,571.5 million, comprised of $314.0 million under
Term Loan D-1, $1,257.5 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). Prior to the refinancing transactions on
October 17, 2007 (discussed below), RHDIs Credit
Facility also consisted of a Term Loan
A-4,
which
has been paid in full. 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. On October 17, 2007,
$91.8 million, $16.2 million and $83.0 million of
Term Loans
A-4,
D-1,
and D-2, respectively, were repaid from the proceeds of the
Series A-4
Notes issued on October 17, 2007. The repayment of these
term loans was accounted for as an extinguishment of debt
resulting in a loss charged to interest expense during the year
ended December 31, 2007 of $4.2 million related to the
write-off of unamortized deferred financing costs. 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 6.50% and
6.86% at December 31, 2007 and 2006, respectively.
As of December 31, 2007, RHDIs Credit Facility bears
interest, at our option, at either:
|
|
|
|
|
The higher of (i) a base rate as determined by the
Administrative Agent, Deutsche Bank Trust Company Americas
and (ii) the Federal Funds Effective Rate (as defined) plus
0.50%, and in each case, plus a 0.25% margin on the RHDI
Revolver and a 0.50% margin on Term Loan D-1 and Term Loan
D-2; or
|
|
|
|
The LIBOR rate plus a 1.25% margin on the RHDI Revolver and a
1.50% margin on Term Loan D-1 and Term Loan D-2. We may elect
interest periods of 1, 2, 3 or 6 months (or 9 or
12 months if, at the time of the borrowing, all lenders
agree to make such term available), for LIBOR borrowings.
|
Dex Media
East
On October 24, 2007, we replaced the former Dex Media East
credit facility with a new Dex Media East credit facility. The
new Dex Media East credit facility consists of a
$700.0 million aggregate principal amount Term Loan A
facility, a $400.0 million aggregate principal amount Term
Loan B facility, a $100.0 million aggregate principal
amount revolving loan facility (new Dex Media East
Revolver) and a $200.0 million aggregate principal
amount uncommitted incremental facility, in which Dex Media East
would have the right, subject to obtaining commitments for such
incremental loans, on one or more occasions to increase the Term
Loan A, Term Loan B or the revolving loan facility by such
amount. The new Dex Media East credit facility is secured by
pledges of similar assets and has similar covenants and events
of default as the former Dex Media East credit facility.
As of December 31, 2007, the principal amounts owing under
the Term Loan A and Term Loan B totaled $1,100.0 million,
comprised of $700.0 million and $400.0 million,
respectively, and $6.1 million was outstanding under the
new Dex Media East Revolver (with an additional
$3.0 million utilized under three standby letters of
credit). The new 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 new Dex Media East credit facility was 6.87% at
December 31, 2007. The weighted average interest rate of
outstanding debt under the former Dex Media East credit facility
was 6.85% at December 31, 2006.
The former Dex Media East credit facility, as amended and
restated in connection with the Dex Media Merger, consisted of
revolving loan commitments (former Dex Media East
Revolver) and a Term Loan A and Term Loan B. On
October 17, 2007, $86.4 million and
$213.6 million of the Term Loan A and Term
F-32
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Loan B under the former Dex Media East credit facility,
respectively, were repaid from the proceeds of the
Series A-4
Notes issued on October 17, 2007.
Proceeds from the new Dex Media East credit facility were used
on October 24, 2007 to repay the remaining
$56.5 million and $139.7 million of Term Loan A and
Term Loan B under the former Dex Media East credit facility,
respectively, and $32.5 million under the former Dex Media
East Revolver. The repayment of the term loans and revolving
loan commitments outstanding under the former Dex Media East
credit facility was accounted for as an extinguishment of debt
resulting in a loss charged to interest expense during the year
ended December 31, 2007 of $0.2 million related to the
write-off of unamortized deferred financing costs.
Proceeds from the new Dex Media East credit facility were also
used on November 26, 2007 to fund the redemption of
$449.7 million of Dex Media Easts outstanding
9.875% senior notes due 2009 and $341.3 million of Dex
Media Easts outstanding 12.125% senior subordinated
notes due 2012. See below for further details.
As of December 31, 2007, the new Dex Media East credit
facility bears interest, at our option, at either:
|
|
|
|
|
The higher of (i) the base rate determined by the
Administrative Agent, JP Morgan Chase Bank, N.A. and
(ii) the Federal Funds Effective Rate (as defined) plus
0.50%, and in each case, plus a 0.75% (or 0.50% if leverage
ratio is less than 2 to 1) margin on the new Dex Media East
Revolver and Term Loan A and a 1.00% margin on Term Loan
B; or
|
|
|
|
The LIBOR rate plus a 1.75% (or 1.50% if leverage ratio is less
than 2 to 1) margin on the new Dex Media East Revolver and
Term Loan A and a 2.00% margin on Term Loan B. We may elect
interest periods of 1, 2, 3, or 6 months (or 9 or
12 months if, at the time of the borrowing, all lenders
agree to make such term available), for LIBOR borrowings.
|
Dex Media
West
As of December 31, 2007, the Dex Media West credit
facility, as amended and restated in connection with the Dex
Media Merger, consists of revolving loan commitments (Dex
Media West Revolver) and a Term Loan A, Term Loan B-1 and
Term Loan B-2. The Dex Media West Revolver consists of a total
principal amount of $100.0 million, which is available for
general corporate purposes, subject to certain conditions. As of
December 31, 2007, the principal amounts owed under the
Term Loan A, Term Loan B-1, and Term Loan B-2 totaled
$1,053.5 million, comprised of $152.9 million,
$310.7 million, and $589.9 million, respectively, and
$18.0 million was outstanding under the Dex Media West
Revolver. The Term Loan B-1 in the amount of $444.2 million
was utilized to redeem Dex Media Wests senior notes that
were put to Dex Media West in connection with the change of
control offer associated with the Dex Media Merger and to fund a
portion of the cash consideration paid to Dex Media, Inc.s
stockholders in connection with the Dex Media Merger. The
remaining $58.8 million is no longer available. 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 6.51% and 6.83% at
December 31, 2007 and 2006, respectively.
As of December 31, 2007, the Dex Media West credit facility
bears interest, at our option, at either:
|
|
|
|
|
The higher of (i) the base rate determined by the
Administrative Agent, JP Morgan Chase Bank, N.A. and
(ii) the Federal Funds Effective Rate (as defined) plus
0.50%, and in each case, plus a 0.25% margin on the Dex Media
West Revolver and Term Loan A and a 0.50% margin on Term Loan
B-1 and Term Loan B-2; or
|
|
|
|
The LIBOR rate plus a 1.25% margin on the Dex Media West
Revolver and Term Loan A and a 1.50% margin on Term Loan B-1 and
Term Loan B-2. We may elect interest periods of 1, 2, 3, or
6 months
|
F-33
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
(or 9 or 12 months if, at the time of the borrowing, all
lenders agree to make such term available), for LIBOR borrowings.
|
Notes
At December 31, 2007, RHD had total outstanding notes of
$6,426.6 million, comprised of $3,962.9 million
outstanding RHD notes, $1,231.2 million outstanding Dex
Media, Inc. notes and $1,232.5 million outstanding Dex
Media West notes.
RHD
At December 31, 2007, RHD had total outstanding notes of
$3,962.9 million, comprised of $300.0 million
6.875% Senior Notes, $339.2 million 6.875%
Series A-1
Senior Discount Notes, $613.7 million 6.875%
Series A-2
Senior Discount Notes, $1,210.0 million 8.875%
Series A-3
Senior Notes and $1,500.0 million 8.875%
Series A-4
Senior Notes.
On October 2, 2007, we issued $1.0 billion of
Series A-4
Notes. Proceeds from the
Series A-4
Notes were (a) used to repay the $328 million RHD
Credit Facility used to fund the Business.com Acquisition,
(b) contributed to RHDI in order to provide funding for the
tender offer and consent solicitation of RHDIs
$600 million Senior Subordinated Notes and (c) used to
pay related fees and expenses and for other general corporate
purposes. On October 17, 2007, we issued an additional
$500 million of
Series A-4
Notes. Proceeds from this issuance were (a) transferred to
Dex Media East in order to repay $86.4 million and
$213.6 million of the Term Loan A and Term Loan B under the
former Dex Media East credit facility, respectively,
(b) contributed to RHDI in order to repay
$91.8 million, $16.2 million and $83.0 million of
Term Loans
A-4,
D-1,
and D-2 under the RHDI Credit Facility, respectively, and
(c) used to pay related fees and expenses.
Interest on the
Series A-4
Notes is payable semi-annually on April 15th and October 15th of
each year, commencing on April 15, 2008. The
Series A-4
Notes are senior unsecured obligations of RHD, senior in right
of payment to all of RHDs existing and future senior
subordinated debt and future subordinated obligations and rank
equally with any of RHDs existing and future senior
unsecured debt. The
Series A-4
Notes are effectively subordinated to RHDs secured debt,
including RHDs guarantee of borrowings under the RHDI
Credit Facility and are structurally subordinated to any
existing or future liabilities (including trade payables) of our
direct and indirect subsidiaries. At December 31, 2007, the
Series A-4
Notes had a fair market value of $1.37 billion.
The 8.875%
Series A-4
Notes with a face value of $1.5 billion are redeemable at
our option beginning in 2012 at the following prices (as a
percentage of face value):
|
|
|
|
|
Redemption Year
|
|
Price
|
|
|
2012
|
|
|
104.438
|
%
|
2013
|
|
|
102.958
|
%
|
2014
|
|
|
101.479
|
%
|
2015 and thereafter
|
|
|
100.000
|
%
|
The
Series A-4
Notes were issued to certain institutional investors in an
offering exempt from registration requirements under the
Securities Act of 1933. Under the terms of a registration rights
agreement, the Company has agreed to file a registration
statement for the
Series A-4
Notes within 210 days subsequent to the initial closing.
We issued $300 million of 6.875% Senior Notes due
January 15, 2013 (Holdco Notes), the proceeds
of which were used to redeem 100,303 shares of the then
outstanding Preferred Stock from the GS Funds, pay transaction
costs and repay debt associated with RHDIs Credit
Facility. Interest is payable on the Holdco
F-34
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Notes semi-annually in arrears on January 15th and July 15th of
each year, commencing July 15, 2005. At December 31,
2007, the 6.875% Holdco Notes had a fair market value of
$265.5 million.
The 6.875% Holdco Notes with a face value of $300 million
are redeemable at our option beginning in 2009 at the following
prices (as a percentage of face value):
|
|
|
|
|
Redemption Year
|
|
Price
|
|
|
2009
|
|
|
103.438
|
%
|
2010
|
|
|
101.719
|
%
|
2011 and thereafter
|
|
|
100.000
|
%
|
In order to fund the cash portion of the Dex Media Merger
purchase price, we issued $660 million aggregate principal
amount at maturity ($600.5 million gross proceeds) of
6.875%
Series A-2
Senior Discount Notes due January 15, 2013 and
$1.21 billion principal amount of 8.875%
Series A-3
Senior Notes due January 15, 2016. Interest is payable
semi-annually on January 15th and July 15th of each year for the
Series A-2
Senior Discount Notes and the
Series A-3
Senior Notes, commencing July 15, 2006. We also issued
$365 million aggregate principal amount at maturity
($332.1 million gross proceeds) of 6.875%
Series A-1
Senior Discount Notes due January 15, 2013 to fund the GS
Repurchase. Interest is payable semi-annually on January 15th
and July 15th of each year, commencing July 15, 2006. All
of these notes are unsecured obligations of RHD, senior in right
of payment to all future senior subordinated and subordinated
indebtedness of RHD and structurally subordinated to all
indebtedness of our subsidiaries. At December 31, 2007, the
6.875%
Series A-1
and
Series A-2
Senior Discount Notes and 8.875%
Series A-3
Senior Notes had a fair market value of $300.2 million,
$543.1 million and $1.12 billion, respectively.
The 6.875%
Series A-1
Senior Discount Notes with a face value of $365 million and
Series A-2
Senior Discount Notes with a face value of $660 million are
redeemable at our option beginning in 2009 at the following
prices (as a percentage of face value):
|
|
|
|
|
Redemption Year
|
|
Price
|
|
|
2009
|
|
|
103.438
|
%
|
2010
|
|
|
101.719
|
%
|
2011 and thereafter
|
|
|
100.000
|
%
|
The 8.875%
Series A-3
Senior Notes with a face value of $1.21 billion are
redeemable at our option beginning in 2011 at the following
prices (as a percentage of face value):
|
|
|
|
|
Redemption Year
|
|
Price
|
|
|
2011
|
|
|
104.438
|
%
|
2012
|
|
|
102.958
|
%
|
2013
|
|
|
101.479
|
%
|
2014 and thereafter
|
|
|
100.000
|
%
|
RHDI
In connection with the Embarq Acquisition, RHDI issued
$325 million of RHDI Senior Notes and $600 million of
RHDI Senior Subordinated Notes. On December 20, 2005, we
repurchased through a tender offer and exit consent solicitation
$317.1 million of the RHDI Senior Notes. Proceeds from the
RHDI Credit Facilitys $350 million Term Loan D-1 were
used to fund the partial repurchase of the RHDI Senior Notes, a
tender premium of $25.3 million and pay transaction costs
of the tender offer. The partial repurchase of the RHDI Senior
Notes was accounted for as an extinguishment of debt resulting
in a loss of $32.7 million charged to interest expense
during the year ended December 31, 2005, consisting of the
tender premium and the write-off of unamortized deferred
financing costs of $7.4 million. In December 2007, we
redeemed the
F-35
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
remaining $7.9 million of RHDI Senior Notes. Proceeds from
the RHDI Revolver were used to fund the redemption, a redemption
premium of $0.2 million and pay transaction costs. The
redemption of the RHDI Senior Notes was accounted for as an
extinguishment of debt resulting in a loss of $0.2 million
charged to interest expense during the year ended
December 31, 2007, consisting of the redemption premium and
the write-off of unamortized deferred financing costs of less
than $0.1 million.
In October 2007, under the terms and conditions of a tender
offer and consent solicitation to purchase the RHDI Senior
Subordinated Notes that RHDI commenced on September 18,
2007, $599.9 million, or 99.9%, of the outstanding RHDI
Senior Subordinated Notes were repurchased. Proceeds from the
Series A-4
Notes were contributed by RHD to RHDI in order to fund the
repurchase of the RHDI Senior Subordinated Notes, a tender
premium of $39.7 million and pay transaction costs of the
tender offer. In December 2007, the remaining $0.1 million
of RHDI Senior Subordinated Notes were redeemed. The tender and
redemption of the RHDI Senior Subordinated Notes was accounted
for as an extinguishment of debt resulting in a loss of
$51.3 million charged to interest expense during the year
ended December 31, 2007, consisting of the tender premium
and the write-off of unamortized deferred financing costs of
$11.6 million.
Dex
Media, Inc.
At December 31, 2007, Dex Media, Inc. had total outstanding
notes of $1,231.2 million, comprised of $512.1 million
8% Senior Notes and $719.1 million 9% Senior
Discount Notes.
Dex Media, Inc. has issued $500 million aggregate principal
amount of 8% Senior Notes due 2013. These Senior Notes are
unsecured obligations of Dex Media, Inc. and interest is payable
on May 15th and November 15th of each year. As of
December 31, 2007, $500 million aggregate principal
amount was outstanding excluding fair value adjustments. At
December 31, 2007, the 8% Senior Notes had a fair
market value of $466.3 million.
The 8% Senior Notes with a face value of $500 million
are redeemable at our option beginning in 2008 at the following
prices (as a percentage of face value):
|
|
|
|
|
Redemption Year
|
|
Price
|
|
|
2008
|
|
|
104.000
|
%
|
2009
|
|
|
102.667
|
%
|
2010
|
|
|
101.333
|
%
|
2011 and thereafter
|
|
|
100.000
|
%
|
Dex Media, Inc. has issued $750 million aggregate principal
amount of 9% Senior Discount Notes due 2013, under two
indentures. Under the first indenture totaling $389 million
aggregate principal amount, the 9% Senior Discount Notes
were issued at an original issue discount with interest accruing
at 9%, per annum, compounded semi-annually. These Senior
Discount Notes are unsecured obligations of Dex Media, Inc. and
interest accrues in the form of increased accreted value until
November 15, 2008 (Full Accretion Date), at
which time the accreted value will be equal to the full
principal amount at maturity. Under the second indenture
totaling $361 million aggregate principal amount, interest
accrues at 8.37% per annum, compounded semi-annually, which
creates a premium at the Full Accretion Date that will be
amortized over the remainder of the term. After
November 15, 2008, the 9% Senior Discount Notes bear
cash interest at 9% per annum, payable semi-annually on May 15th
and November 15th of each year. These Senior Discount Notes are
unsecured obligations of Dex Media, Inc. and no cash interest
will accrue on the discount notes prior to the Full Accretion
Date. As of December 31, 2007, $749.9 million
aggregate principal amount was outstanding excluding fair value
adjustments. At December 31, 2007, the 9% Senior
Discount Notes had a fair market value of $673.1 million.
F-36
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The remaining $749.9 million face value of 9% Senior
Discount Notes are redeemable at our option beginning in 2008 at
the following prices (as a percentage of face value):
|
|
|
|
|
Redemption Year
|
|
Price
|
|
|
2008
|
|
|
104.500
|
%
|
2009
|
|
|
103.000
|
%
|
2010
|
|
|
101.500
|
%
|
2011 and thereafter
|
|
|
100.000
|
%
|
Dex Media
East
On November 26, 2007, proceeds from the new Dex Media East
credit facility were used to fund the redemption of
$449.7 million of Dex Media Easts outstanding
9.875% Senior Notes due 2009, $341.3 million of Dex
Media Easts outstanding 12.125% Senior Subordinated
Notes due 2012, redemption premiums associated with these Senior
Notes and Senior Subordinated Notes of $11.1 million and
$20.7 million, respectively, and pay transaction costs. The
redemption of these Senior Notes and Senior Subordinated Notes
was accounted for as an extinguishment of debt resulting in a
loss of $31.8 million charged to interest expense during
the year ended December 31, 2007 related to the redemption
premiums. In addition, as a result of redeeming these Senior
Notes and Senior Subordinated Notes, interest expense was offset
by $62.2 million during the year ended December 31,
2007, resulting from accelerated amortization of the remaining
fair value adjustment recorded as a result of the Dex Media
Merger.
Dex Media
West
At December 31, 2007, Dex Media West had total outstanding
notes of $1,232.5 million, comprised of $398.7 million
8.5% Senior Notes, $8.8 million 5.875% Senior
Notes and $825.0 million Senior Subordinated Notes.
Dex Media West issued $385 million aggregate principal
amount of 8.5% Senior Notes due 2010. These Senior Notes
are unsecured obligations of Dex Media West and interest is
payable on February 15th and August 15th of each year. As of
December 31, 2007, $385 million aggregate principal
amount was outstanding excluding fair value adjustments. At
December 31, 2007, the 8.5% Senior Notes had a fair
market value of $389.8 million.
The 8.5% Senior Notes with a face value of
$385 million are redeemable at our option beginning in 2007
at the following prices (as a percentage of face value):
|
|
|
|
|
Redemption Year
|
|
Price
|
|
|
2008
|
|
|
102.125
|
%
|
2009 and thereafter
|
|
|
100.000
|
%
|
Dex Media West issued $300 million aggregate principal
amount of 5.875% Senior Notes due 2011. These Senior Notes
are unsecured obligations of Dex Media West and interest is
payable on May 15th and November 15th of each year. As of
December 31, 2007, $8.7 million aggregate principal
amount was outstanding excluding fair value adjustments. At
December 31, 2007, the 5.875% Senior Notes had a fair
market value of $8.7 million.
F-37
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The remaining $8.7 million face value of 5.875% Senior
Notes are redeemable at our option beginning in 2008 at the
following prices (as a percentage of face value):
|
|
|
|
|
Redemption Year
|
|
Price
|
|
|
2008
|
|
|
102.938
|
%
|
2009
|
|
|
101.469
|
%
|
2010 and thereafter
|
|
|
100.000
|
%
|
Dex Media West issued $780 million aggregate principal
amount of 9.875% Senior Subordinated Notes due 2013. These
Senior Subordinated Notes are unsecured obligations of Dex Media
West and interest is payable on February 15th and August 15th of
each year. As of December 31, 2007, $761.7 million
aggregate principal amount was outstanding excluding fair value
adjustments. At December 31, 2007, the 9.875% Senior
Subordinated Notes had a fair market value of
$788.4 million.
The remaining $761.7 million face value of
9.875% Senior Subordinated Notes are redeemable at our
option beginning in 2008 at the following prices (as a
percentage of face value):
|
|
|
|
|
Redemption Year
|
|
Price
|
|
|
2008
|
|
|
104.938
|
%
|
2009
|
|
|
103.292
|
%
|
2010
|
|
|
101.646
|
%
|
2011 and thereafter
|
|
|
100.000
|
%
|
Aggregate maturities of long-term debt (including current
portion and excluding fair value adjustments under purchase
accounting) at December 31, 2007 were:
|
|
|
|
|
2008
|
|
$
|
177,175
|
|
2009
|
|
|
808,800
|
|
2010
|
|
|
1,689,238
|
|
2011
|
|
|
695,584
|
|
2012
|
|
|
179,000
|
|
Thereafter
|
|
|
6,522,036
|
|
|
|
|
|
|
Total
|
|
$
|
10,071,833
|
|
|
|
|
|
|
The Companys credit facilities and the indentures
governing the notes contain usual and customary affirmative and
negative covenants that, among other things, place limitations
on our ability to (i) incur additional indebtedness;
(ii) pay dividends and repurchase our capital stock;
(iii) enter into mergers, consolidations, acquisitions,
asset dispositions and sale-leaseback transactions;
(iv) make capital expenditures; (v) issue capital
stock of our subsidiaries; (vi) engage in transactions with
our affiliates; and (vii) make investments, loans and
advances. The Companys credit facilities also contain
financial covenants relating to maximum consolidated leverage,
minimum interest coverage and maximum senior secured leverage as
defined therein. Substantially all of RHDIs and its
subsidiaries assets, including the capital stock of RHDI
and its subsidiaries, are pledged to secure the obligations
under the RHDI Credit Facility. Substantially all of the assets
of Dex Media East and Dex Media West and their subsidiaries,
including their equity interests, are pledged to secure the
obligations under their respective credit facilities.
Impact of
Dex Media Merger
The completion of the Dex Media Merger triggered change of
control offers on all of the Dex Media outstanding notes,
requiring us to make offers to repurchase the notes.
$291.3 million of the 5.875% Dex Media West Senior Notes
due 2011, $0.3 million of the 9.875% Dex Media East Senior
Notes due 2009,
F-38
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$0.2 million of the 9.875% Dex Media West Senior
Subordinated Notes due 2013 and $0.1 million of the 9% Dex
Media, Inc. Senior Discount Notes due 2013 were tendered in the
applicable change of control offer and repurchased by us.
As a result of the Dex Media Merger, an adjustment was
established to record the acquired debt at fair value on
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
$92.1 million (including $62.2 million related to the
redemption of Dex Media Easts Senior Notes and Senior
Subordinated Notes) and $26.4 million during the years
ended December 31, 2007 and 2006, respectively. A total
premium of $222.3 million was recorded upon consummation of
the Dex Media Merger, of which $103.8 million remains
unamortized at December 31, 2007, as shown in the following
table. In connection with the redemption of Dex Media
Easts Senior Notes and Senior Subordinated Notes, the
remaining fair value adjustment related to these debt
obligations was fully amortized as of December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
Initial Fair Value
|
|
|
Unamortized Fair
|
|
|
|
Adjustment at
|
|
|
Value Adjustment at
|
|
|
|
January 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Dex Media, Inc.
|
|
|
|
|
|
|
|
|
8% Senior Notes due 2013
|
|
$
|
15,000
|
|
|
$
|
12,097
|
|
9% Senior Discount Notes due 2013
|
|
|
17,177
|
|
|
|
14,596
|
|
Dex Media East
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
|
|
|
|
|
|
9.875% Senior Notes due 2009
|
|
|
34,290
|
|
|
|
|
|
12.125% Senior Subordinated Notes due 2012
|
|
|
54,600
|
|
|
|
|
|
Dex Media West
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
|
|
|
|
|
|
8.5% Senior Notes due 2010
|
|
|
22,138
|
|
|
|
13,736
|
|
5.875% Senior Notes due 2011
|
|
|
76
|
|
|
|
54
|
|
9.875% Senior Subordinated Notes due 2013
|
|
|
79,022
|
|
|
|
63,333
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
222,303
|
|
|
$
|
103,816
|
|
|
|
|
|
|
|
|
|
|
F-39
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Derivative
Financial Instruments
|
The RHDI Credit Facility, the Dex Media West, and the new 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 Company has entered into the
following interest rate swaps that effectively convert
approximately $2.6 billion of the Companys variable
rate debt to fixed rate debt as of December 31, 2007.
|
|
|
|
|
|
|
|
|
Effective Dates
|
|
Notional Amount
|
|
|
Pay Rates
|
|
Maturity Dates
|
|
|
(Amounts in millions)
|
|
|
|
|
|
|
September 7, 2004
|
|
|
200
|
(3)
|
|
3.490% 3.750%
|
|
September 8, 2008 September 7, 2009
|
September 15, 2004
|
|
|
200
|
(3)
|
|
3.500% 3.910%
|
|
September 15, 2008 September 15, 2009
|
September 17, 2004
|
|
|
100
|
(2)
|
|
3.510% 3.740%
|
|
September 17, 2008 September 17, 2009
|
September 23, 2004
|
|
|
100
|
(2)
|
|
3.4335% 3.438%
|
|
September 23, 2008
|
December 20, 2005
|
|
|
150
|
(3)
|
|
4.74% 4.752%
|
|
June 20, 2008 December 22, 2008
|
February 14, 2006
|
|
|
300
|
(3)
|
|
4.925% 4.9435%
|
|
February 14, 2008 February 14, 2009
|
February 28, 2006
|
|
|
50
|
(1)
|
|
4.93275%
|
|
August 28, 2008
|
March 10, 2006
|
|
|
150
|
(2)
|
|
5.010%
|
|
March 10, 2008
|
May 25, 2006
|
|
|
300
|
(3)
|
|
5.326%
|
|
May 25, 2009 May 26, 2009
|
May 26, 2006
|
|
|
200
|
(2)
|
|
5.2725% -5.275%
|
|
May 26, 2009
|
May 31, 2006
|
|
|
100
|
(2)
|
|
5.295% 5.312%
|
|
May 31, 2008 May 31, 2009
|
June 12, 2006
|
|
|
150
|
(2)
|
|
5.27% 5.279%
|
|
June 12, 2009
|
November 26, 2007
|
|
|
600
|
(4)
|
|
4.1852% 4.604%
|
|
November 26, 2010 November 26, 2012
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Consists of one swap.
|
|
(2)
|
|
Consists of two swaps.
|
|
(3)
|
|
Consists of three swaps.
|
|
(4)
|
|
Consists of four swaps.
|
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.
The Companys interest rate swap agreements effectively
convert $2.6 billion of variable rate debt to fixed rate
debt, mitigating the Companys exposure to increases in
interest rates. Under the terms of the interest rate swap
agreements, we receive variable interest based on the
three-month LIBOR and pay a
F-40
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
weighted average fixed rate of 4.61%. The interest rate swaps
mature at varying dates from February 14, 2008 through
November 26, 2012. The weighted average rate received on
our interest rate swaps was 5.02% during the year ended
December 31, 2007. These periodic payments and receipts are
recorded as interest expense.
Interest rate swaps with a notional value of $2.6 billion
have been designated as cash flow hedges to hedge three-month
LIBOR-based interest payments on $2.6 billion of bank debt.
As of December 31, 2007, these respective interest rate
swaps provided an effective hedge of the three-month LIBOR-based
interest payments on $2.6 billion of bank debt.
During May 2006, the Company entered into $1.0 billion
notional value of interest rate swaps, which were not designated
as cash flow hedges until July 2006. The Company recorded
changes in the fair value of these interest rate swaps as a
reduction to interest expense of $4.4 million for the year
ended December 31, 2006. In addition, certain interest rate
swaps acquired as a result of the Dex Media Merger with a
notional amount of $425 million were not designated as cash
flow hedges. During the years ended December 31, 2007 and
2006, $125 million and $300 million, respectively, of
these interest rate swaps were settled, leaving no undesignated
swaps at December 31, 2007. For the year ended
December 31, 2007 and 2006, the Company recorded additional
interest expense of $3.4 million and $3.7 million,
respectively, as a result of the change in fair value of the
acquired undesignated interest rate swaps.
During the years ended December 31, 2007, 2006 and 2005,
the Company reclassified $15.2 million, $22.6 million
and $0.6 million of hedging gains into earnings,
respectively. As of December 31, 2007, $2.8 million of
deferred losses, net of tax, on derivative instruments recorded
in accumulated other comprehensive loss are expected to be
reclassified into earnings during the next 12 months.
Transactions and events are expected to occur over the next
12 months that will necessitate reclassifying these
derivative losses to earnings.
|
|
7.
|
Redeemable
Preferred Stock, Warrants and Other
|
We have 10 million shares of Preferred Stock authorized for
issuance. In a series of transactions related to the Embarq
Acquisition in November 2002 and January 2003, we issued through
a private placement 200,604 shares of 8% convertible
cumulative preferred stock (Preferred Stock) and
warrants to purchase 1.65 million shares of our common
stock to investment partnerships affiliated with The Goldman
Sachs Group, Inc. (the GS Funds) for gross proceeds
of $200 million. On January 27, 2006, we completed the
GS Repurchase (defined below) and as a result, there are no
outstanding shares of our Preferred Stock. The aforementioned
warrants remained outstanding following the GS Repurchase until
November 2, 2006, at which time we repurchased all of the
outstanding warrants from the GS Funds.
Prior to the GS Repurchase, the Preferred Stock, and any accrued
and unpaid dividends, were convertible by the GS Funds into
common stock at any time after issuance at a price of $24.05 per
share and earned a cumulative dividend of 8% compounded
quarterly. We could not pay cash dividends on the Preferred
Stock through September 30, 2005, during which time the
dividend accreted. Accrued cash dividends on the Preferred Stock
of approximately $2.5 million through January 3, 2006
were included in the purchase price of the GS Repurchase.
The net proceeds received from the issuance of Preferred Stock
in January 2003 and November 2002 were allocated to the
Preferred Stock, warrants and the beneficial conversion feature
(BCF) of the Preferred Stock based on their relative
fair values. The fair value of the Preferred Stock was estimated
using the Dividend Discount Method, which determines the fair
value based on the discounted cash flows of the security. The
BCF is a function of the conversion price of the Preferred
Stock, the fair value of the warrants and the fair market value
of the underlying common stock on the date of issuance. The fair
value of the warrants
F-41
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
($12.18 for January 2003 warrants and $10.43 for November 2002
warrants) was determined based on the Black-Scholes model, with
the following assumptions:
|
|
|
|
|
Dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
35
|
%
|
Risk-free interest rate
|
|
|
3.0
|
%
|
Expected holding period
|
|
|
5 years
|
|
In connection with each issuance of our Preferred Stock and each
subsequent quarterly dividend date through September 30,
2005, a BCF was recorded because the fair value of the
underlying common stock at the time of issuance was greater than
the conversion price of the Preferred Stock. The BCF has been
treated as a deemed dividend because the Preferred Stock was
convertible into common stock immediately after issuance.
Commencing October 3, 2005, the date of the stock purchase
agreement relating to the GS Repurchase, the Preferred Stock was
no longer convertible into common stock, and consequently, we no
longer recognized any BCF. The Preferred Stock dividend for the
year ended December 31, 2005 of $11.7 million
consisted of the stated 8% dividend of $10.1 million
(including $2.5 million of accrued cash dividends) and a
BCF of $1.6 million.
On January 14, 2005, we repurchased 100,303 shares of
our outstanding Preferred Stock from the GS Funds for
$277.2 million in cash. In order to fund this repurchase,
on January 14, 2005, we issued $300 million of Holdco
Notes. See Note 5, Long-Term Debt, Credit Facilities
and Notes for a further discussion of the financing
associated with this transaction. In connection with this
Preferred Stock repurchase, we recorded an increase to loss
available to common shareholders on the consolidated statement
of operations of $133.7 million to reflect the loss on the
repurchase of these shares for the year ended December 31,
2005. The excess of the cash paid to the GS Funds over the
carrying amount of the repurchased Preferred Stock, plus the
amount previously recognized for the BCF associated with these
shares was recognized as a loss on repurchase. Such amount
represents a return to the GS Funds and, therefore was treated
in a manner similar to the treatment of the Preferred Stock
dividend.
On January 27, 2006, in conjunction with the Dex Media
Merger, we repurchased the remaining 100,301 shares of
Preferred Stock from the GS Funds for $336.1 million in
cash, including accrued cash dividends and interest (the
GS Repurchase), pursuant to the terms of a Stock
Purchase and Support Agreement (the Stock Purchase
Agreement) dated October 3, 2005. In order to fund
the GS Repurchase, we issued $365 million aggregate
principal amount at maturity ($332.1 million gross
proceeds) of 6.875%
Series A-1
Senior Discount Notes due January 15, 2013. See
Note 5, Long-Term Debt, Credit Facilities and
Notes for a further discussion of the financing associated
with this transaction.
Based on the terms of the Stock Purchase Agreement, the recorded
value of the Preferred Stock was accreted to its redemption
value of $334.1 million at December 31, 2005 and
$336.1 million at January 27, 2006. The accretion to
redemption value of $211.0 million and $2.0 million
(which represented accrued dividends and interest) for the years
ended December 31, 2005 and 2006, respectively, was
recorded as an increase to loss available to common shareholders
on the consolidated statements of operations. In conjunction
with the GS Repurchase, we also reversed the previously recorded
BCF related to these shares and recorded a decrease to loss
available to common shareholders on the consolidated statement
of operations of approximately $31.2 million for the year
ended December 31, 2006.
On November 2, 2006, we repurchased all outstanding
warrants to purchase 1.65 million shares of our common
stock for an aggregate purchase price of approximately
$53.1 million. Exercise prices related to the warrants
ranged between $26.28 and $28.62 per share. As a result, the
value of these warrants were removed from shareholders
equity on our consolidated balance sheet at December 31,
2006.
F-42
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On May 30, 2006, RHD redeemed the outstanding preferred
stock purchase rights issued pursuant to the Companys
stockholder rights plan at a redemption price of one cent per
right for a total redemption payment of $0.7 million. This
payment was recorded as a charge to retained earnings for the
year ended December 31, 2006.
On November 9, 2006, certain affiliates of The Carlyle
Group and Welsh, Carson, Anderson & Stowe (the
Selling Shareholders) sold 9,424,360 shares and
9,424,359 shares, respectively, of RHD common stock. The
Selling Shareholders were former shareholders of Dex Media that
became shareholders of RHD in conjunction with the Dex Media
Merger. After this sale, the Selling Shareholders no longer hold
any shares of RHD common stock that they acquired in connection
with the Dex Media Merger. We did not receive any proceeds from
this transaction.
For the years ended December 31, 2007 and 2006, the Company
recognized $39.0 million and $43.3 million,
respectively, of stock-based compensation expense related to
stock-based awards granted under our various employee and
non-employee stock incentive plans.
Prior to the adoption of SFAS No. 123 (R), the Company
presented all tax benefits of deductions resulting from the
exercise of stock-based awards as operating cash flows in the
consolidated statements of cash flows. SFAS No. 123
(R) requires that these cash flows be classified as financing
cash flows. During the years ended December 31, 2007 and
2006, the Company was not able to utilize the tax benefit
resulting from stock-based award exercises due to net operating
loss carryforwards. As such, neither operating nor financing
cash flows were affected by the tax impact of stock-based award
exercises for the years ended December 31, 2007 and 2006.
Under SFAS No. 123 (R), the fair value for our stock
options and SARs is calculated using the Black-Scholes model at
the time these stock-based awards are granted. The amount, net
of estimated forfeitures, is then amortized over the vesting
period of the stock-based award. The weighted average fair value
per share of stock options and SARs granted during the years
ended December 31, 2007 and 2006 was $22.47 and $20.08,
respectively. The following assumptions were used in valuing
these stock-based awards for the years ended December 31,
2007 and 2006, respectively:
|
|
|
|
|
|
|
December 31, 2007
|
|
December 31, 2006
|
|
Dividend yield
|
|
0%
|
|
0%
|
Expected volatility
|
|
23.5%
|
|
28.2%
|
Risk-free interest rate
|
|
4.5%
|
|
4.4%
|
Expected life
|
|
5 Years
|
|
5 Years
|
We estimate expected volatility based on the historical
volatility of the price of our common stock over the expected
life of our stock-based awards. The expected life represents the
period of time that stock-based awards granted are expected to
be outstanding, which is estimated consistent with the
simplified method identified in SAB No. 107. The
simplified method calculates the expected life as the average of
the vesting and contractual terms of the award. The risk-free
interest rate is based on applicable U.S. Treasury yields
that approximate the expected life of stock-based awards granted.
The Company grants restricted stock to certain of its employees,
including executive officers, and non-employee directors in
accordance with the 2005 Plan. Under SFAS No. 123 (R),
compensation expense related to these awards is measured at fair
value on the date of grant based on the number of shares granted
and the quoted market price of the Companys common stock
at such time.
F-43
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the year ended December 31, 2007, we granted
1.3 million stock options and SARs. The following table
presents a summary of the Companys stock options and SARs
activity and related information for the year ended
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise/Grant
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price Per Share
|
|
|
Value
|
|
|
Awards outstanding, January 1, 2007
|
|
|
5,281,773
|
|
|
$
|
41.98
|
|
|
$
|
29,690
|
|
Granted
|
|
|
1,266,795
|
|
|
|
73.29
|
|
|
|
|
|
Business.com stock-based awards converted
|
|
|
196,826
|
|
|
|
10.01
|
|
|
|
5,391
|
|
Exercises
|
|
|
(718,483
|
)
|
|
|
30.50
|
|
|
|
(7,991
|
)
|
Forfeitures
|
|
|
(163,109
|
)
|
|
|
61.93
|
|
|
|
(369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards outstanding, December 31, 2007
|
|
|
5,863,802
|
|
|
$
|
48.51
|
|
|
$
|
26,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for future grants at December 31, 2007
|
|
|
3,071,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of stock-based awards vested during
the years ended December 31, 2007 and 2006 was
$1.7 million and $34.4 million, respectively. The
total fair value of stock-based awards vested during the years
ended December 31, 2007 and 2006 was $19.0 million and
$26.4 million, respectively.
The following table summarizes information about stock-based
awards outstanding and exercisable at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards Outstanding
|
|
|
|
Stock Awards Exercisable
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
Range of
|
|
|
|
|
Remaining
|
|
|
Weighted Average
|
|
|
|
|
|
|
Remaining
|
|
|
Exercise/
|
|
Exercise/Grant
|
|
|
|
|
Contractual Life
|
|
|
Exercise/Grant
|
|
|
|
|
|
|
Contractual Life
|
|
|
Grant Price Per
|
|
Prices
|
|
Shares
|
|
|
(In Years)
|
|
|
Price Per Share
|
|
|
|
Shares
|
|
|
(In Years)
|
|
|
Share
|
|
$0.22 $5.36
|
|
|
113,929
|
|
|
|
8.35
|
|
|
$
|
2.33
|
|
|
|
|
26,523
|
|
|
|
8.08
|
|
|
$
|
2.30
|
|
$10.78 $14.75
|
|
|
139,009
|
|
|
|
5.60
|
|
|
|
10.78
|
|
|
|
|
117,692
|
|
|
|
5.50
|
|
|
|
10.78
|
|
$15.22 $19.41
|
|
|
186,960
|
|
|
|
4.07
|
|
|
|
16.77
|
|
|
|
|
133,640
|
|
|
|
1.99
|
|
|
|
16.19
|
|
$24.75 $29.59
|
|
|
1,448,776
|
|
|
|
2.45
|
|
|
|
26.02
|
|
|
|
|
1,448,776
|
|
|
|
2.45
|
|
|
|
26.02
|
|
$30.11 $39.21
|
|
|
82,614
|
|
|
|
2.19
|
|
|
|
31.46
|
|
|
|
|
82,614
|
|
|
|
2.19
|
|
|
|
31.46
|
|
$41.10 $43.85
|
|
|
892,815
|
|
|
|
3.35
|
|
|
|
41.26
|
|
|
|
|
892,815
|
|
|
|
3.35
|
|
|
|
41.26
|
|
$46.06 $55.25
|
|
|
79,397
|
|
|
|
5.22
|
|
|
|
51.91
|
|
|
|
|
36,304
|
|
|
|
4.62
|
|
|
|
51.14
|
|
$56.55 $66.23
|
|
|
1,800,368
|
|
|
|
4.91
|
|
|
|
63.81
|
|
|
|
|
1,035,123
|
|
|
|
4.74
|
|
|
|
63.82
|
|
$70.44 $80.68
|
|
|
1,119,934
|
|
|
|
6.18
|
|
|
|
74.36
|
|
|
|
|
1,675
|
|
|
|
6.16
|
|
|
|
74.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,863,802
|
|
|
|
4.33
|
|
|
$
|
48.51
|
|
|
|
|
3,775,162
|
|
|
|
3.42
|
|
|
$
|
39.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of exercisable stock-based awards
as of December 31, 2007 was $22.2 million.
F-44
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the status of our non-vested
stock awards as of December 31, 2007 and changes during the
year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Non-vested
|
|
|
Grant Date
|
|
|
Non-Vested
|
|
|
Weighted Average
|
|
|
|
Stock Options
|
|
|
Exercise Price Per
|
|
|
Restricted
|
|
|
Grant Date Fair
|
|
|
|
and SARs
|
|
|
Award
|
|
|
Stock
|
|
|
Value Per Award
|
|
|
Non-vested at January 1, 2007
|
|
|
1,797,668
|
|
|
$
|
45.18
|
|
|
|
193,083
|
|
|
$
|
61.31
|
|
Granted
|
|
|
1,266,795
|
|
|
|
73.29
|
|
|
|
18,701
|
|
|
|
73.39
|
|
Non-vested Business.com
|
|
|
196,826
|
|
|
|
10.01
|
|
|
|
|
|
|
|
|
|
Options Converted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(1,009,540
|
)
|
|
|
52.35
|
|
|
|
(48,461
|
)
|
|
|
73.11
|
|
Forfeitures
|
|
|
(163,109
|
)
|
|
|
61.93
|
|
|
|
(11,759
|
)
|
|
|
60.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2007
|
|
|
2,088,640
|
|
|
$
|
63.96
|
|
|
|
151,564
|
|
|
$
|
62.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, there was $38.2 million of
total unrecognized compensation cost related to non-vested
stock-based awards. The cost is expected to be recognized over a
weighted average period of approximately two years. After
applying the Companys estimated forfeiture rate, we expect
2.0 million non-vested stock-based awards to vest over a
weighted average period of approximately two years. The
intrinsic value at December 31, 2007 of the non-vested
stock-based awards expected to vest is $5.0 million and the
corresponding weighted average grant date exercise price is
$64.95 per share.
On February 27, 2007, the Company granted 1.1 million
SARs to certain employees, including executive officers, in
conjunction with its annual grant of stock incentive awards.
These SARs, which are settled in our common stock, were granted
at a grant price of $74.31 per share, which was equal to the
market value of the Companys common stock on the grant
date, and vest ratably over three years. In accordance with
SFAS No. 123 (R), we recognized non-cash compensation
expense related to these SARs of $11.2 million for the year
ended December 31, 2007.
As a result of the Business.com Acquisition, 4.2 million
outstanding Business.com equity awards were converted into
0.2 million RHD equity awards on August 23, 2007. For
the year ended December 31, 2007, we recognized non-cash
compensation expense related to these converted equity awards of
$4.0 million.
On December 13, 2006, the Company granted 0.1 million
shares of restricted stock to certain executive officers. These
restricted shares, which are settled in our common stock, were
granted at a grant price of $60.64 per share, which was equal to
the market value of the Companys common stock on the date
of grant. The vesting of these restricted shares is contingent
upon our common stock equaling or exceeding $65.00 per share for
20 consecutive trading days and continued employment with the
Company through the third anniversary of the date of grant. In
accordance with SFAS No. 123 (R), we recognized
non-cash compensation expense related to these restricted shares
of $2.4 million and $0.1 million for the years ended
December 31, 2007 and 2006, respectively.
On February 21, 2006, the Company granted 0.1 million
shares of restricted stock to certain employees, including
executive officers. These restricted shares, which are settled
in our common stock, were granted at a grant price of $64.26 per
share, which was equal to the market value of the Companys
common stock on the date of grant, and vest ratably over three
years. In accordance with SFAS No. 123 (R), we
recognized non-cash compensation expense related to these
restricted shares of $1.7 million and $2.8 million for
the years ended December 31, 2007 and 2006, respectively.
On February 21, 2006, the Company granted 0.6 million
SARs to certain employees, not including executive officers, in
conjunction with its annual grant of stock incentive awards.
These SARs, which are
F-45
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
settled in our common stock, were granted at a grant price of
$64.26 per share, which was equal to the market value of the
Companys common stock on the grant date, and vest ratably
over three years. On February 24, 2005, the Company granted
0.5 million SARs to certain employees, not 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 $59.00 per share,
which was equal to the market value of the Companys common
stock on the grant date, and vest ratably over three years. On
July 28, 2004, the Company granted 0.9 million SARs to
certain employees, including executive officers, in connection
with the AT&T Directory Acquisition. These SARs, which are
settled in our common stock, were granted at a grant price of
$41.58 per share, which was equal to the market value of the
Companys common stock on the grant date, and initially
were scheduled to vest entirely only after five years. The
maximum appreciation of the July 28, 2004 and
February 24, 2005 SAR grants is 100% of the initial grant
price. We recognized non-cash compensation expense related to
these and other smaller SAR grants of $7.2 million,
$13.9 million and $4.1 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
In connection with the Embarq Acquisition, the Company granted
1.5 million options (Founders Grant) to certain
employees, including executive officers, during 2002. These
options were granted in October 2002 at an exercise price of
$25.54, which was equal to the market value of the
Companys common stock on the date of grant. However, the
award of these options was contingent upon the successful
closing of the Embarq Acquisition. Therefore, these options were
subject to forfeiture until January 3, 2003, by which time
the market value of the Companys common stock exceeded the
exercise price. Accordingly, these options were accounted for as
compensatory options under APB No. 25 and resulted in a
charge of $1.0 million for the year ended December 31,
2005.
In connection with the Dex Media Merger, the Company granted on
October 3, 2005, 1.1 million SARs to certain
employees, including executive officers. These SARs were granted
at an exercise price of $65.00 (above the then prevailing market
price of our common stock) and vest ratably over three years.
The award of these SARs was contingent upon the successful
completion of the Dex Media Merger and therefore were not
identified as awards outstanding as of December 31, 2005.
We recognized non-cash compensation expense related to these
SARs of $7.0 million and $9.1 million for the years
ended December 31, 2007 and 2006, respectively.
At January 31, 2006, stock-based awards outstanding under
the existing Dex Media equity compensation plans totaled
4.0 million Dex Media option shares and had a weighted
average exercise price of $5.48 per option share. As a result of
the Dex Media Merger, all outstanding Dex Media equity awards
were converted to RHD equity awards on February 1, 2006.
Upon conversion to RHD equity awards, the number of securities
to be issued upon exercise of outstanding awards totaled
1.7 million shares of RHD and had a weighted average
exercise price of $12.73 per share. At December 31, 2007,
the number of RHD shares remaining available for future issuance
totaled less than 0.1 million under the Dex Media, Inc.
2004 Incentive Award Plan. For the years ended December 31,
2007 and 2006, non-cash compensation expense related to these
converted awards totaled $2.6 million and
$4.1 million, respectively.
The Dex Media Merger triggered a change in control under the
Companys stock incentive plans. Accordingly, all awards
granted to employees through January 31, 2006, with the
exception of stock-based awards held by executive officers and
members of the Board of Directors (who waived the change of
control provisions of such awards), became fully vested. In
addition, the vesting conditions related to the July 28,
2004 SARs grant, noted above, were modified as a result of the
Dex Media Merger, and the SARs now vest ratably over three years
from the date of grant. For the years ended December 31,
2007 and 2006, $2.3 million and $13.4 million,
respectively, of non-cash compensation expense, which is
included in the total non-cash compensation expense amounts
noted above, was recognized as a result of these modifications.
Non-cash stock-based compensation expense relating to existing
stock options held by executive officers and members of the
Board of Directors as of January 1, 2006, which were not
modified as a result of the Dex Media
F-46
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Merger, as well as non-cash stock-based compensation expense
from smaller grants issued subsequent to the Dex Media Merger
not mentioned above, totaled $2.9 million and
$13.3 million for the years ended December 31, 2007
and 2006, respectively.
Deferred tax assets and liabilities are determined based on the
estimated future tax effects of temporary differences between
the financial statement and tax basis of assets and liabilities,
as measured by tax rates at which temporary differences are
expected to reverse. Deferred tax expense (benefit) is the
result of changes in the deferred tax assets and liabilities.
Provision (benefit) for income taxes consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current provision
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
11,839
|
|
|
$
|
|
|
|
$
|
|
|
State and local
|
|
|
8,526
|
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
20,365
|
|
|
|
627
|
|
|
|
|
|
Deferred provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
15,712
|
|
|
|
(112,897
|
)
|
|
|
37,087
|
|
State and local
|
|
|
(7,044
|
)
|
|
|
27,745
|
|
|
|
6,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision (benefit)
|
|
|
8,668
|
|
|
|
(85,152
|
)
|
|
|
43,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
29,033
|
|
|
$
|
(84,525
|
)
|
|
$
|
43,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the significant differences
between the U.S. Federal statutory tax rate and our
effective tax rate, which has been applied to the Companys
income (loss) before income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Statutory U.S. Federal tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local taxes, net of U.S. Federal tax benefit
|
|
|
(9.1
|
)
|
|
|
(8.8
|
)
|
|
|
3.6
|
|
Non-deductible expense
|
|
|
0.9
|
|
|
|
0.4
|
|
|
|
0.4
|
|
Change in valuation allowance
|
|
|
10.2
|
|
|
|
(0.1
|
)
|
|
|
|
|
Other
|
|
|
1.3
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
38.3
|
%
|
|
|
26.2
|
%
|
|
|
39.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-47
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Certain prior period amounts included in the following table
have been reclassified to conform to the current periods
presentation. Deferred tax assets and liabilities consisted of
the following at December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
15,103
|
|
|
$
|
23,467
|
|
Deferred and other compensation
|
|
|
37,120
|
|
|
|
14,079
|
|
Deferred directory revenue and costs
|
|
|
22,270
|
|
|
|
|
|
Deferred financing costs
|
|
|
25,836
|
|
|
|
45,585
|
|
Capital investments
|
|
|
6,208
|
|
|
|
5,978
|
|
Debt and other interest
|
|
|
49,503
|
|
|
|
67,992
|
|
Pension and other retirement benefits
|
|
|
27,782
|
|
|
|
40,977
|
|
Restructuring reserves
|
|
|
1,586
|
|
|
|
896
|
|
Net operating loss and credit carryforwards
|
|
|
250,276
|
|
|
|
280,106
|
|
Other
|
|
|
10,980
|
|
|
|
1,320
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
446,664
|
|
|
|
480,400
|
|
Valuation allowance
|
|
|
(13,726
|
)
|
|
|
(5,978
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
432,938
|
|
|
|
474,422
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Deferred directory revenue and costs
|
|
|
|
|
|
|
101,465
|
|
Fixed assets and capitalized software
|
|
|
34,751
|
|
|
|
12,798
|
|
Purchased goodwill and intangible assets
|
|
|
2,638,668
|
|
|
|
2,535,702
|
|
Other
|
|
|
144
|
|
|
|
3,441
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
2,673,563
|
|
|
|
2,653,406
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
2,240,625
|
|
|
$
|
2,178,984
|
|
|
|
|
|
|
|
|
|
|
The 2007 provision for income taxes of $29.0 million is
comprised of a federal tax provision of $27.5 million,
resulting from a current tax provision of $11.8 million
relating to an Internal Revenue Service (IRS)
settlement and a deferred tax provision of $15.7 million
resulting from a current year taxable loss. The 2007 state tax
provision of $1.5 million results from a current tax
provision of $8.5 million relating to taxes due in states
where subsidiaries of the Company file separate company returns,
offset by a deferred state tax benefit of $7.0 million
relating to the apportioned taxable income or loss among various
states. A federal net operating loss for income tax purposes of
approximately $303.3 million was generated in 2007
primarily as a result of tax amortization expense recorded with
respect to the intangible assets acquired in the Dex Media
Merger, AT&T Directory Acquisition, Embarq Acquisition and
Business.com Acquisition. The acquired intangible assets
resulted in a deferred tax liability of $2.6 billion at
December 31, 2007.
At December 31, 2007, the Company had federal and state net
operating loss carryforwards of approximately
$618.3 million (net of carryback) and $801.3 million,
respectively, which will begin to expire in 2026 and 2008,
respectively. These amounts include consideration of net
operating losses expected to expire unused due to the Internal
Revenue Code Section 382 limitation for ownership changes
related to Business.com that occurred prior to the Business.com
Acquisition. A portion of the benefits from the net operating
loss carryforwards will be reflected in additional paid-in
capital as a portion of these net operating loss carryforwards
are generated by deductions related to the exercise of stock
awards. The 2007 and 2006 deduction for stock awards was
$30.8 million and $83.4 million, respectively.
Included in the $30.8 million deduction for stock awards in
2007 is a suspended $8.6 million windfall tax benefit as
required by
F-48
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS No. 123 (R). This benefit will be recognized for
financial reporting purposes when the net operating loss is
utilized.
In assessing the realizability of our deferred tax assets, we
have considered whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during periods in
which those temporary differences become deductible. In making
this determination, under the applicable financial reporting
standards, we are allowed to consider the scheduled reversal of
deferred tax liabilities, projected future taxable income, and
tax planning strategies. The Company believes that it is more
likely than not that some of the deferred tax assets associated
with capital investments will not be realized, contributing to a
valuation allowance of $6.2 million at December 31,
2007. Additionally, we believe it is more likely than not that
state net operating losses in various states will not be used
before expiration, resulting in a valuation allowance of
$7.5 million, for a total valuation allowance of
$13.7 million at December 31, 2007.
The 2006 income tax benefit of $84.5 million is comprised
of a federal deferred tax benefit of $112.9 million
resulting from the periods taxable loss, offset by a state
tax provision of $28.4 million. The 2006 state tax
provision of $28.4 million primarily resulted from the
modification of apportioned taxable income or loss among various
states. A net operating loss for tax purposes of approximately
$216.3 million was generated in 2006 primarily as a result
of tax amortization expense recorded with respect to the
intangible assets acquired in the Dex Media Merger, AT&T
Directory Acquisition and Embarq Acquisition. The acquired
intangible assets resulted in a deferred tax liability of
$2.2 billion.
The 2005 provision for income taxes of $43.2 million is
comprised of a deferred tax provision due to the taxable loss
generated during that period. The 2005 deferred tax provision
resulted in an effective tax rate of 39.0% and net operating
losses of approximately $168.6 million related to tax
deductions and amortization expense recorded for tax purposes
compared to book purposes with respect to the intangible assets
acquired in the Embarq Acquisition and the AT&T Directory
Acquisition. The 2005 effective tax rate reflects a decrease in
the state and local tax rate due to integration of the Embarq
Acquisition and the AT&T Directory Acquisition.
As noted in further detail below, in July 2007, we effectively
settled all issues under consideration with the IRS related to
its audit for taxable years 2003 and 2004. Therefore, tax years
2005 and 2006 are still subject to examination by the IRS.
Certain state tax returns are under examination by various
regulatory authorities. We continuously review issues raised in
connection with ongoing examinations and open tax years to
evaluate the adequacy of our reserves. We believe that our
accrued tax liabilities under FIN No. 48 are adequate
to cover uncertain tax positions related to U.S. federal
and state income taxes.
Adoption
of FIN No. 48
As a result of implementing FIN No. 48, we recognized
an increase of $160.1 million in the liability for
unrecognized tax benefits as of January 1, 2007. The
increase in the liability included a reduction in deferred tax
liabilities of $165.2 million and a decrease in accumulated
deficit of $5.1 million.
F-49
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the beginning and ending amount of gross
unrecognized tax benefits is as follows:
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
171,476
|
|
Gross additions based on tax positions related to the current
year
|
|
|
1,695
|
|
Gross additions for tax positions of prior years
|
|
|
6,673
|
|
Gross reductions based on tax positions related to the current
year
|
|
|
(581
|
)
|
Gross reductions for tax positions of prior years
|
|
|
(1,125
|
)
|
Settlements
|
|
|
(168,150
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
9,988
|
|
|
|
|
|
|
Included in the balance of unrecognized benefits at
December 31, 2007 and January 1, 2007 are
$9.4 million and $5.6 million, respectively, of tax
benefits that, if recognized, would favorably affect the
effective tax rate.
Our policy is to recognize interest and penalties related to
unrecognized tax benefits in income tax expense. During the year
ended December 31, 2007, the Company recognized
approximately $1.5 million in interest and penalties. As of
December 31, 2007 and January 1, 2007, we have
accrued $5.9 million and $3.8 million, respectively,
related to interest and have accrued $0.8 million for tax
penalties as of December 31, 2007. No amounts were accrued
for tax penalties as of January 1, 2007.
In July 2007, we effectively settled all issues under
consideration with the IRS related to its audit for taxable
years 2003 and 2004. As a result of the settlement, the
unrecognized tax benefits associated with our uncertain Federal
tax positions decreased by $167.0 million during the year
ended December 31, 2007. As a result of the IRS settlement,
we recognized additional interest expense of $1.6 million
and $1.2 million related to the taxable years 2004 and
2005, respectively. The recognition of this interest expense
within our tax provision (net of tax benefit) has increased our
effective tax rate for the year ended December 31, 2007.
The unrecognized tax benefits impacted by the IRS audit
primarily related to items for which the ultimate deductibility
was highly certain but for which there was uncertainty regarding
the timing of such deductibility.
It is reasonably possible that the amount of unrecognized tax
benefits could decrease within the next twelve months. We are
currently under audit in New York State and New York City for
taxable years 2000 through 2003 and North Carolina for taxable
years 2003 through 2006. During the year ended December 31,
2007, we recorded an increase in the liability for unrecognized
tax benefits of $14.0 million. If the New York State, New
York City or North Carolina audits are resolved within the next
twelve months, the total amount of unrecognized tax benefits
could decrease by approximately $14.0 million. The
unrecognized tax benefits related to the New York State, New
York City and North Carolina audits relate to apportionment and
allocation of income among our various legal entities.
As noted above, in July 2007, we effectively settled the
IRSs federal tax audit for the taxable years 2003 and
2004. Therefore, tax years 2005 and 2006 are still subject to
examination by the IRS. In addition, certain state tax returns
are under examination by various regulatory authorities,
including New York and North Carolina. Our state tax return
years are open to examination for an average of three years.
However, certain jurisdictions remain open to examination longer
than three years due to the existence of net operating loss
carryforwards and statutory waivers.
As a result of the Dex Media Merger, we acquired Dex
Medias pension plan, defined contribution plan and
postretirement plan. As a result of the Business.com
Acquisition, we acquired Business.coms defined
contribution plan. Effective January 1, 2007, the DonTech
Retirement Plan was merged with and into the RHD Retirement Plan
(defined below). We now have two defined benefit pension plans
(the RHD Retirement Plan and the Dex Media Pension Plan), three
defined contribution plans (the RHD 401(k) Savings Plan, the Dex
F-50
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Media Employee Savings Plan and the Business.com, Inc. 401(k)
Plan) and a postretirement plan (the RHD Group Benefit Plan),
which became effective on January 1, 2007.
RHD Pension Plan.
The RHD cash balance defined
benefit pension plan (RHD Retirement Plan) covers
substantially all legacy RHD employees with at least one year of
service. The benefits to be paid to employees are based on age,
years of service and a percentage of total annual compensation.
The percentage of compensation allocated to a retirement account
ranges from 3.0% to 12.5% depending on age and years of service
(cash balance benefit). Benefits for certain
employees who were participants in the predecessor The
Dun & Bradstreet Corporation (D&B)
defined benefit pension plan are also determined based on the
participants average compensation and years of service
(final average pay benefit) and benefits to be paid
will equal the greater of the final average pay benefit or the
cash balance benefit. Annual pension costs are determined using
the projected unit credit actuarial cost method. Our funding
policy is to contribute an amount at least equal to the minimum
legal funding requirement. We were required to make
contributions of $3.6 million to the RHD Retirement Plan
during 2007. We were not required to make any contributions to
our pension plans during 2006 or 2005. The underlying pension
plan assets are invested in diversified portfolios consisting
primarily of equity and debt securities. A measurement date of
December 31 is used for all of our plan assets.
We also have an unfunded non-qualified defined benefit pension
plan, the Pension Benefit Equalization Plan (PBEP),
which covers senior executives and certain key employees.
Benefits are based on years of service and compensation
(including compensation not permitted to be taken into account
under the previously mentioned defined benefit pension plan).
Dex Media Pension Plan.
We have a
noncontributory defined benefit pension plan covering
substantially all management and occupational (union) employees
within Dex Media. Annual pension costs are determined using the
projected unit credit actuarial cost method. Our funding policy
is to contribute an amount at least equal to the minimum legal
funding requirement. We were required to make contributions of
$12.8 million to the Dex Media Pension Plan during 2007. No
contributions were required or made to the plan during 2006. The
underlying pension plan assets are invested in diversified
portfolios consisting primarily of equity and debt securities. A
measurement date of December 31 is used for all of our plan
assets.
RHD, Dex Media and Business.com Savings
Plans.
Under the RHD plan, we contribute 50% for
each dollar contributed by a participating employee, up to a
maximum of 6% of each participating employees salary
(including bonus and commissions). Contributions under this plan
were $2.5 million, $3.0 million and $2.5 million
for the years ended December 31, 2007, 2006 and 2005,
respectively. For management employees under the Dex Media plan,
we contribute 100% of the first 4% of each participating
employees salary and 50% of the next 2%. For management
employees, the match is limited to 5% of each participating
employees eligible earnings. For occupational employees
under the Dex Media plan, we contribute 81% of the first 6% of
each participating employees salary not to exceed 4.86% of
eligible earnings for any one pay period. Matching contributions
are limited to $4,860 per occupational employee annually.
Contributions under the Dex Media plan were $5.7 million
and $5.3 million for the year ended December 31, 2007
and eleven months ended December 31, 2006, respectively.
Under the Business.com plan, the Company may make matching
contributions at the discretion of the Board of Directors. The
Company did not make any contributions to the plan subsequent to
the Business.com Acquisition.
Postretirement Benefits.
Our unfunded
postretirement benefit plan provides certain healthcare and life
insurance benefits to certain full-time employees who reach
retirement eligibility while working for their respective
companies.
F-51
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Benefit
Obligation and Funded Status
Information presented below for 2006 includes combined amounts
for the legacy RHD benefit plans for the twelve months ended
December 31, 2006 and the acquired Dex Media plans for the
eleven months ended December 31, 2006. A summary of the
funded status of the benefit plans at December 31, 2007 and
2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Plans
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year
|
|
$
|
315,104
|
|
|
$
|
125,759
|
|
|
$
|
91,721
|
|
|
$
|
23,227
|
|
Dex Media benefit obligation, as of February 1, 2006
|
|
|
|
|
|
|
208,408
|
|
|
|
|
|
|
|
69,309
|
|
Service cost
|
|
|
14,209
|
|
|
|
13,281
|
|
|
|
2,005
|
|
|
|
2,668
|
|
Interest cost
|
|
|
17,741
|
|
|
|
16,717
|
|
|
|
5,325
|
|
|
|
4,642
|
|
Plan participant contributions
|
|
|
|
|
|
|
|
|
|
|
420
|
|
|
|
337
|
|
Amendments
|
|
|
555
|
|
|
|
387
|
|
|
|
|
|
|
|
(66
|
)
|
Actuarial (gain)/loss
|
|
|
(21,284
|
)
|
|
|
(12,814
|
)
|
|
|
1,107
|
|
|
|
(4,512
|
)
|
Benefits paid
|
|
|
(6,813
|
)
|
|
|
(6,654
|
)
|
|
|
(4,679
|
)
|
|
|
(3,884
|
)
|
Plan settlement
|
|
|
(18,820
|
)
|
|
|
(29,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of year
|
|
$
|
300,692
|
|
|
$
|
315,104
|
|
|
$
|
95,899
|
|
|
$
|
91,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year
|
|
$
|
239,064
|
|
|
$
|
100,783
|
|
|
$
|
|
|
|
$
|
|
|
Dex Media fair value of plan assets, as of February 1, 2006
|
|
|
|
|
|
|
158,555
|
|
|
|
|
|
|
|
|
|
Return on plan assets
|
|
|
13,011
|
|
|
|
16,220
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
16,455
|
|
|
|
140
|
|
|
|
4,259
|
|
|
|
3,547
|
|
Plan participant contributions
|
|
|
|
|
|
|
|
|
|
|
420
|
|
|
|
337
|
|
Benefits paid
|
|
|
(6,813
|
)
|
|
|
(6,654
|
)
|
|
|
(4,679
|
)
|
|
|
(3,884
|
)
|
Plan settlement
|
|
|
(18,820
|
)
|
|
|
(29,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of year
|
|
$
|
242,897
|
|
|
$
|
239,064
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(57,795
|
)
|
|
$
|
(76,040
|
)
|
|
$
|
(95,899
|
)
|
|
$
|
(91,721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the Dex Media Merger, we recorded a liability
associated with Dex Medias pension and postretirement
plans at fair value as of January 31, 2006 of
$119.4 million. Net amounts recognized in the consolidated
balance sheets at December 31, 2007 and 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Plans
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Current liabilities
|
|
$
|
(417
|
)
|
|
$
|
(200
|
)
|
|
$
|
(6,835
|
)
|
|
$
|
(5,525
|
)
|
Non-current liabilities
|
|
|
(57,378
|
)
|
|
|
(75,840
|
)
|
|
|
(89,064
|
)
|
|
|
(86,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(57,795
|
)
|
|
$
|
(76,040
|
)
|
|
$
|
(95,899
|
)
|
|
$
|
(91,721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for all defined benefit
pension plans was $271.0 million and $289.2 million at
December 31, 2007 and 2006, respectively.
F-52
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The projected benefit obligation and accumulated benefit
obligation for the unfunded PBEP at December 31, 2007 and
2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Projected benefit obligation
|
|
$
|
6,233
|
|
|
$
|
5,287
|
|
Accumulated benefit obligation
|
|
$
|
4,063
|
|
|
$
|
3,323
|
|
Components
of Net Periodic Benefit Expense
The net periodic benefit expense of the pension plans for the
years ended December 31, 2007, 2006 and 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Service cost
|
|
$
|
14,209
|
|
|
$
|
13,281
|
|
|
$
|
5,050
|
|
Interest cost
|
|
|
17,741
|
|
|
|
16,717
|
|
|
|
6,406
|
|
Expected return on plan assets
|
|
|
(19,314
|
)
|
|
|
(19,203
|
)
|
|
|
(8,363
|
)
|
Amortization of unrecognized prior service cost
|
|
|
152
|
|
|
|
130
|
|
|
|
133
|
|
Settlement gain
|
|
|
(1,543
|
)
|
|
|
(982
|
)
|
|
|
|
|
Other adjustment
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
Amortization of unrecognized net loss
|
|
|
1,586
|
|
|
|
2,062
|
|
|
|
1,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense
|
|
$
|
12,825
|
|
|
$
|
12,005
|
|
|
$
|
4,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net periodic benefit expense of the postretirement plans for
the years ended December 31, 2007, 2006 and 2005 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Service cost
|
|
$
|
2,005
|
|
|
$
|
2,668
|
|
|
$
|
685
|
|
Interest cost
|
|
|
5,325
|
|
|
|
4,642
|
|
|
|
1,195
|
|
Other adjustment
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service cost
|
|
|
856
|
|
|
|
219
|
|
|
|
814
|
|
Amortization of unrecognized net loss
|
|
|
63
|
|
|
|
813
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense
|
|
$
|
8,243
|
|
|
$
|
8,342
|
|
|
$
|
2,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption
of SFAS No. 158
Upon the initial implementation of SFAS No. 158 at
December 31, 2006, we recorded all previously unrecognized
prior service costs and actuarial gains and losses as a
component of accumulated other comprehensive loss. The following
table presents the incremental effect of applying
SFAS No. 158 on individual line items in the
consolidated balance sheet as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
|
|
|
|
After
|
|
|
Application
|
|
SFAS No. 158
|
|
Application
|
|
|
of SFAS No. 158
|
|
Adjustment
|
|
of SFAS No. 158
|
|
Liability for pension and postretirement benefits
|
|
$
|
(155,380
|
)
|
|
$
|
(12,381
|
)
|
|
$
|
(167,761
|
)
|
Deferred income taxes
|
|
|
|
|
|
|
(5,145
|
)
|
|
|
|
|
Accumulated other comprehensive loss, net of tax
|
|
$
|
(9,871
|
)
|
|
$
|
(8,611
|
)
|
|
$
|
(18,482
|
)
|
F-53
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the amount of previously
unrecognized actuarial gains and losses and prior service cost,
both currently in accumulated other comprehensive loss, expected
to be recognized as net periodic benefit expense in 2008:
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
|
|
Plans
|
|
Plans
|
|
Previously unrecognized actuarial loss expected to be recognized
in 2008
|
|
$
|
828
|
|
|
$
|
36
|
|
Previously unrecognized prior service cost expected to be
recognized in 2008
|
|
$
|
196
|
|
|
$
|
666
|
|
Amounts recognized in accumulated other comprehensive loss at
December 31, 2007 and 2006 consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Plans
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Net actuarial loss (gain)
|
|
$
|
10,907
|
|
|
$
|
25,924
|
|
|
$
|
694
|
|
|
$
|
(355
|
)
|
Prior service cost
|
|
$
|
1,753
|
|
|
$
|
1,350
|
|
|
$
|
2,039
|
|
|
$
|
2,894
|
|
Assumptions
The following assumptions were used in determining the benefit
obligations for the pension plans and postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average discount rate
|
|
|
6.48
|
%
|
|
|
5.90
|
%
|
Rate of increase in future compensation
|
|
|
3.66
|
%
|
|
|
3.66
|
%
|
The discount rate reflects the current rate at which the pension
and postretirement obligations could effectively be settled at
the end of the year. During 2007 and 2006, we utilized the
Citigroup Pension Liability Index (the Index) as the
appropriate discount rate for our defined benefit pension plans.
This Index is widely used by companies throughout the United
States and is considered to be one of the preferred standards
for establishing a discount rate. In 2005, the discount rate was
determined using a methodology that discounts the projected plan
cash flows to the measurement date using the spot rates provided
in the Citigroup Pension Discount Curve. A single discount rate
was then computed so that the present value of the benefit cash
flows using this single rate equaled the present value computed
using the Citigroup Pension Discount Curve.
The following assumptions were used in determining the net
periodic benefit expense for the RHD pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Weighted average discount rate
|
|
|
5.90
|
%
|
|
|
5.50
|
%
|
|
|
5.75
|
%
|
Rate of increase in future compensation
|
|
|
3.66
|
%
|
|
|
3.66
|
%
|
|
|
3.66
|
%
|
Expected return on plan assets
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
The following assumptions were used in determining the net
periodic benefit expense for the Dex Media pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006
|
|
|
February 1, 2006
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
|
2007
|
|
|
December 31, 2006
|
|
|
June 30, 2006
|
|
|
Weighted average discount rate
|
|
|
5.90
|
%
|
|
|
6.25
|
%
|
|
|
5.50
|
%
|
Rate of increase in future compensation
|
|
|
3.66
|
%
|
|
|
3.66
|
%
|
|
|
3.66
|
%
|
Expected return on plan assets
|
|
|
8.50
|
%
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
F-54
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On December 1, 2007 and July 1, 2006 and thereafter,
settlements of Dex Medias pension plan occurred as defined
by SFAS No. 88,
Employers Accounting
for Settlements and Curtailments of Defined Benefit Plans and
for Termination Benefits
. At that time, lump sum
payments to participants exceeded the sum of the service cost
plus interest cost component of the net periodic benefit costs
for the year. These settlements resulted in the recognition of
actuarial gains of $1.5 million and $1.0 million for
the years ended December 31, 2007 and 2006, respectively.
Pension expense in 2006 was recomputed based on assumptions as
of the July 1, 2006 settlement date, resulting in an
increase in the discount rate from 5.50% to 6.25% based on the
Index.
The weighted average discount rate used to determine the net
periodic expense for the RHD postretirement plan was 5.90%,
5.50% and 5.75% for 2007, 2006 and 2005, respectively. The
weighted average discount rate used to determine net periodic
expense for the Dex Media postretirement plan was 5.90% and
5.50% for 2007 and 2006, respectively.
The following table reflects assumed healthcare cost trend rates
used in determining the net periodic benefit expense for our
postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Healthcare cost trend rate assumed for next year
|
|
|
|
|
|
|
|
|
Under 65
|
|
|
9.0
|
%
|
|
|
10.0
|
%
|
65 and older
|
|
|
11.0
|
%
|
|
|
12.0
|
%
|
Rate to which the cost trend rate is assumed to decline
|
|
|
|
|
|
|
|
|
Under 65
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
65 and older
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Year ultimate trend rate is reached
|
|
|
2013
|
|
|
|
2013
|
|
The following table reflects assumed healthcare cost trend rates
used in determining the benefit obligations for our
postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Healthcare cost trend rates assumed for next year
|
|
|
|
|
|
|
|
|
Under 65
|
|
|
10.4%-11.0
|
%
|
|
|
10.0
|
%
|
65 and older
|
|
|
11.4%-13.0
|
%
|
|
|
12.0
|
%
|
Rate to which the cost trend rate is assumed to decline
|
|
|
|
|
|
|
|
|
Under 65
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
65 and older
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Years ultimate trend rates are reached
|
|
|
2014-2016
|
|
|
|
2013
|
|
Assumed healthcare cost trend rates have a significant effect on
the amounts reported for postretirement benefit plans. A
one-percent change in the assumed healthcare cost trend rate
would have had the following effects at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
One Percent Change
|
|
|
|
Increase
|
|
|
Decrease
|
|
|
Effect on the aggregate of the service and interest cost
components of net periodic postretirement benefit cost
(Consolidated Statement of Operations)
|
|
$
|
446
|
|
|
$
|
(373
|
)
|
Effect on accumulated postretirement benefit obligation
(Consolidated Balance Sheet)
|
|
$
|
4,769
|
|
|
$
|
(4,078
|
)
|
F-55
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Plan
Assets
The pension plan weighted-average asset allocation at
December 31, 2007, by asset category, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RHD Plan
|
|
|
Dex Media Plan
|
|
|
|
Plan Assets at
|
|
|
Asset
|
|
|
Plan Assets at
|
|
|
Asset
|
|
|
|
December 31,
|
|
|
Allocation
|
|
|
December 31,
|
|
|
Allocation
|
|
|
|
2007
|
|
|
Target
|
|
|
2007
|
|
|
Target
|
|
|
Equity securities
|
|
|
64
|
%
|
|
|
65
|
%
|
|
|
64
|
%
|
|
|
65
|
%
|
Debt securities
|
|
|
36
|
%
|
|
|
35
|
%
|
|
|
36
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pension plan weighted-average asset allocation at
December 31, 2006, by asset category, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RHD Plans
|
|
|
Dex Media Plan
|
|
|
|
Plan Assets at
|
|
|
Asset
|
|
|
Plan Assets at
|
|
|
Asset
|
|
|
|
December 31,
|
|
|
Allocation
|
|
|
December 31,
|
|
|
Allocation
|
|
|
|
2006
|
|
|
Target
|
|
|
2006
|
|
|
Target
|
|
|
Equity securities
|
|
|
67
|
%
|
|
|
65
|
%
|
|
|
66
|
%
|
|
|
65
|
%
|
Debt securities
|
|
|
33
|
%
|
|
|
35
|
%
|
|
|
34
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The plans assets are invested in accordance with
investment practices that emphasize long-term investment
fundamentals. The plans investment objective is to achieve
a positive rate of return over the long-term from capital
appreciation and a growing stream of current income that would
significantly contribute to meeting the plans current and
future obligations. These objectives can be obtained through a
well-diversified portfolio structure in a manner consistent with
each plans investment policy statement.
The plans assets are invested in marketable equity and
fixed income securities managed by professional investment
managers. Plan assets are invested using a combination of active
and passive (indexed) investment strategies. The plans
assets are to be broadly diversified by asset class, investment
style, number of issues, issue type and other factors consistent
with the investment objectives outlined in each plans
investment policy statement. The plans assets are to be
invested with prudent levels of risk and with the expectation
that long-term returns will maintain and contribute to
increasing purchasing power of the plans assets, net of
all disbursements, over the long-term.
The plans assets in separately managed accounts may not be
used for the following purposes: short sales, purchases of
letter stock, private placements, leveraged transactions,
commodities transactions, option strategies, purchases of Real
Estate Investment Trusts, investments in some limited
partnerships, investments by the managers in their own
securities, their affiliates or subsidiaries, investment in
futures, use of margin or investments in any derivative not
explicitly permitted in each plans investment policy
statement.
For 2007, 2006 and 2005, we used a rate of 8.25% as the expected
long-term rate of return assumption on the plan assets for the
RHD pension plans. The basis used for determining this rate was
the long-term capital market return forecasts for an asset mix
similar to the plans asset allocation target of 65% equity
securities and 35% debt securities. For 2007 and 2006, we used a
rate of 8.50% and 9.00%, respectively, as the expected long-term
rate of return assumption on the plan assets for the Dex Media
pension plan. The basis used for determining these rates also
included an opportunity for active management of the assets to
add value over the long term. The active management expectation
was supported by calculating historical returns for the seven
investment managers who actively manage the Dex Media
plans assets. The decrease in the rate for
F-56
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2007 was a result of increasing the debt securities portion of
the asset mix held by the Dex Media pension plan.
Although we review our expected long-term rate of return
assumption annually, our performance in any one particular year
does not, by itself, significantly influence our evaluation. Our
assumption is generally not revised unless there is a
fundamental change in one of the factors upon which it is based,
such as the target asset allocation or long-term capital market
return forecasts.
Estimated
Future Benefit Payments
The pension plans benefits and postretirement plans benefits
expected to be paid in each of the next five fiscal years and in
the aggregate for the five fiscal years thereafter are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
Part D
|
|
|
|
Plans
|
|
|
Plans
|
|
|
Subsidy
|
|
|
2008
|
|
$
|
25,208
|
|
|
$
|
6,835
|
|
|
$
|
68
|
|
2009
|
|
|
25,288
|
|
|
|
7,407
|
|
|
|
90
|
|
2010
|
|
|
26,006
|
|
|
|
8,068
|
|
|
|
111
|
|
2011
|
|
|
25,839
|
|
|
|
8,598
|
|
|
|
136
|
|
2012
|
|
|
25,914
|
|
|
|
8,930
|
|
|
|
164
|
|
Years
2013-2017
|
|
|
141,564
|
|
|
|
46,186
|
|
|
|
1,173
|
|
We expect to make contributions of approximately
$15.8 million and $6.8 million to our pension plans
and postretirement plan, respectively, in 2008.
Additional
Information and Subsequent Events
On August 17, 2006, the Pension Protection Act of 2006 (the
Act) was signed into law. In general, the Act
requires that all single-employer defined benefit plans be fully
funded within a seven year period, beginning in 2008. Some
provisions of the Act were effective January 1, 2006,
however, most of the new provisions are effective
January 1, 2008. The Act replaces the prior rules for
funding with a new standard that is based on the plans
funded status. Funding must be determined using specified
interest rates and a specified mortality assumption. At this
time, we do not expect the adoption of the new requirements to
have a material impact on the plans liabilities. However,
the funding requirements under the Act will be greater than
under the previous rules.
Effective January 1, 2008, the DonTech PBEP was merged with
and into the RHD PBEP and was amended. The merger of these plans
streamlines RHDs administrative processes.
We lease office facilities and equipment under operating leases
with non-cancelable lease terms expiring at various dates
through 2017. Rent and lease expense for 2007, 2006 and 2005 was
$26.4 million,
F-57
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$25.3 million and $10.0 million, respectively. The
future non-cancelable minimum rental payments applicable to
operating leases at December 31, 2007 are:
|
|
|
|
|
2008
|
|
$
|
25,977
|
|
2009
|
|
|
26,833
|
|
2010
|
|
|
23,617
|
|
2011
|
|
|
21,017
|
|
2012
|
|
|
17,160
|
|
Thereafter
|
|
|
74,546
|
|
|
|
|
|
|
Total
|
|
$
|
189,150
|
|
|
|
|
|
|
In connection with the AT&T Directory Acquisition, we
entered into an Internet Yellow Pages reseller agreement whereby
we are obligated to pay AT&T $7.2 million over the
years 2008 and 2009. In connection with our software system
modernization and on-going support services related to the
Amdocs software system, we are obligated to pay Amdocs
$128.2 million over the years 2008 through 2012. In
conjunction with the Dex Media Merger, we are obligated to pay
Qwest approximately $8.3 million over the years 2008 and
2009 for certain information technology, communications and
billing and collection services. We have entered into agreements
with Yahoo!, whereby Yahoo! will serve and maintain our local
search listings for placement on its web-based electronic local
information directory and electronic mapping products. We are
obligated to pay Yahoo! up to $18.8 million over the years
2008 through 2010.
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 of such
matters.
F-58
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Management reviews and analyzes its business of providing local
commercial search products and solutions, including publishing
yellow pages directories, as one operating segment.
|
|
14.
|
R.H.
Donnelley Corporation (Parent Company) Financial
Statements
|
The following condensed Parent Company financial statements
should be read in conjunction with the consolidated financial
statements of RHD.
In general, substantially all of the net assets of the Company
and its subsidiaries are restricted from being paid as dividends
to any third party, and our subsidiaries are restricted from
paying dividends, loans or advances to us with very limited
exceptions, under the terms of our credit facilities. See
Note 5, Long-Term Debt, Credit Facilities and
Notes, for a further description of our debt instruments.
F-59
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
R.H.
Donnelley Corporation
Condensed
Parent Company Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,900
|
|
|
$
|
122,565
|
|
Intercompany, net
|
|
|
279,244
|
|
|
|
|
|
Prepaid and other current assets
|
|
|
8,948
|
|
|
|
9,485
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
307,092
|
|
|
|
132,050
|
|
Investment in subsidiaries
|
|
|
5,231,597
|
|
|
|
4,507,776
|
|
Fixed assets and computer software, net
|
|
|
10,462
|
|
|
|
7,258
|
|
Other non-current assets
|
|
|
91,506
|
|
|
|
148,066
|
|
Intercompany note receivable
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,940,657
|
|
|
$
|
4,795,150
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
14,032
|
|
|
$
|
8,483
|
|
Accrued interest
|
|
|
123,882
|
|
|
|
90,971
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
137,914
|
|
|
|
99,454
|
|
Intercompany, net
|
|
|
|
|
|
|
413,098
|
|
Long-term debt
|
|
|
3,962,871
|
|
|
|
2,451,873
|
|
Deferred income taxes, net
|
|
|
5,161
|
|
|
|
|
|
Other long-term liabilities
|
|
|
11,975
|
|
|
|
9,969
|
|
Shareholders equity
|
|
|
1,822,736
|
|
|
|
1,820,756
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
5,940,657
|
|
|
$
|
4,795,150
|
|
|
|
|
|
|
|
|
|
|
F-60
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
R.H.
Donnelley Corporation
Condensed
Parent Company Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expenses
|
|
$
|
19,678
|
|
|
$
|
1,641
|
|
|
$
|
38
|
|
Partnership and equity income (loss)
|
|
|
338,606
|
|
|
|
(125,677
|
)
|
|
|
131,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
318,928
|
|
|
|
(127,318
|
)
|
|
|
131,343
|
|
Interest expense, net
|
|
|
(244,854
|
)
|
|
|
(194,911
|
)
|
|
|
(20,634
|
)
|
Other income
|
|
|
1,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
75,892
|
|
|
|
(322,229
|
)
|
|
|
110,709
|
|
Provision (benefit) for income taxes
|
|
|
29,033
|
|
|
|
(84,525
|
)
|
|
|
43,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
46,859
|
|
|
|
(237,704
|
)
|
|
|
67,533
|
|
Preferred dividend
|
|
|
|
|
|
|
1,974
|
|
|
|
11,708
|
|
(Gain) loss on repurchase of redeemable convertible preferred
stock
|
|
|
|
|
|
|
(31,195
|
)
|
|
|
133,681
|
|
Accretion of redeemable convertible preferred stock to
redemption value
|
|
|
|
|
|
|
|
|
|
|
211,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders
|
|
$
|
46,859
|
|
|
$
|
(208,483
|
)
|
|
$
|
(288,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-61
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
R.H.
Donnelley Corporation
Condensed
Parent Company Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flow from operating activities
|
|
$
|
(220,262
|
)
|
|
$
|
37,777
|
|
|
$
|
(11,219
|
)
|
Cash flow from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to fixed assets and computer software
|
|
|
(4,095
|
)
|
|
|
(6,389
|
)
|
|
|
|
|
Acquisitions, net of cash received
|
|
|
(336,925
|
)
|
|
|
(1,768,626
|
)
|
|
|
(6,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(341,020
|
)
|
|
|
(1,775,015
|
)
|
|
|
(6,450
|
)
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt, net of costs
|
|
|
1,468,648
|
|
|
|
2,079,005
|
|
|
|
293,439
|
|
Borrowings under credit facility
|
|
|
328,000
|
|
|
|
|
|
|
|
|
|
Credit facility repayments
|
|
|
(328,000
|
)
|
|
|
|
|
|
|
|
|
Repurchase of redeemable convertible preferred stock and
redemption of purchase rights
|
|
|
|
|
|
|
(336,819
|
)
|
|
|
(277,197
|
)
|
(Decrease) increase in checks not yet presented for payment
|
|
|
(408
|
)
|
|
|
505
|
|
|
|
|
|
Proceeds from employee stock option exercises
|
|
|
13,412
|
|
|
|
31,665
|
|
|
|
7,383
|
|
Proceeds from the issuance of common stock
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(89,578
|
)
|
|
|
|
|
|
|
|
|
Repurchase of warrants
|
|
|
|
|
|
|
(53,128
|
)
|
|
|
|
|
Intercompany investments
|
|
|
(907,735
|
)
|
|
|
|
|
|
|
|
|
Intercompany debt
|
|
|
(300,000
|
)
|
|
|
|
|
|
|
(5,126
|
)
|
Dividends from subsidiaries
|
|
|
264,278
|
|
|
|
137,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
457,617
|
|
|
|
1,858,973
|
|
|
|
18,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash
|
|
|
(103,665
|
)
|
|
|
121,735
|
|
|
|
830
|
|
Cash at beginning of year
|
|
|
122,565
|
|
|
|
830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
18,900
|
|
|
$
|
122,565
|
|
|
$
|
830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-62
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
15.
|
Valuation
and Qualifying Accounts
|
Certain prior period amounts have been reclassified to conform
to the current periods presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Addition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to Allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business.com
|
|
|
Net Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Acquisition
|
|
|
Charged to
|
|
|
Write-offs
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
and Dex
|
|
|
Revenue and
|
|
|
and Other
|
|
|
End of
|
|
|
|
Period
|
|
|
Media Merger
|
|
|
Expense
|
|
|
Deductions
|
|
|
Period
|
|
|
Allowance for Doubtful Accounts and Sales Claims
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007
|
|
$
|
42,952
|
|
|
|
449
|
|
|
|
135,726
|
|
|
|
(136,310
|
)
|
|
$
|
42,817
|
|
For the year ended December 31, 2006
|
|
$
|
27,328
|
|
|
|
57,353
|
|
|
|
116,330
|
|
|
|
(158,059
|
)
|
|
$
|
42,952
|
|
For the year ended December 31, 2005
|
|
$
|
33,093
|
|
|
|
|
|
|
|
54,921
|
|
|
|
(60,686
|
)
|
|
$
|
27,328
|
|
Deferred Tax Asset Valuation Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007
|
|
$
|
5,978
|
|
|
|
|
|
|
|
7,748
|
|
|
|
|
|
|
$
|
13,726
|
|
For the year ended December 31, 2006
|
|
$
|
6,148
|
|
|
|
|
|
|
|
|
|
|
|
(170
|
)
|
|
$
|
5,978
|
|
For the year ended December 31, 2005
|
|
$
|
6,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,148
|
|
|
|
16.
|
Quarterly
Information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
(1)
|
|
$
|
661,296
|
|
|
$
|
667,028
|
|
|
$
|
671,195
|
|
|
$
|
680,780
|
|
Operating income
|
|
|
227,978
|
|
|
|
239,163
|
|
|
|
237,470
|
|
|
|
200,355
|
|
Net income (loss)
|
|
|
15,951
|
|
|
|
24,923
|
|
|
|
18,125
|
|
|
$
|
(12,140
|
)
|
Basic earnings (loss) per share
|
|
$
|
0.23
|
|
|
$
|
0.35
|
|
|
$
|
0.25
|
|
|
$
|
(0.17
|
)
|
Diluted earnings (loss) per share
|
|
$
|
0.22
|
|
|
$
|
0.34
|
|
|
$
|
0.25
|
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
(1)(2)
|
|
$
|
320,680
|
|
|
$
|
432,925
|
|
|
$
|
525,938
|
|
|
$
|
619,754
|
|
Operating
income
(3)
|
|
|
38,067
|
|
|
|
73,395
|
|
|
|
144,587
|
|
|
|
186,777
|
|
Net loss
|
|
|
(71,718
|
)
|
|
|
(79,827
|
)
|
|
|
(35,385
|
)
|
|
|
(50,774
|
)
|
Preferred
dividend
(4)
|
|
|
1,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on repurchase of preferred
stock
(4)
|
|
|
(31,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common shareholders
|
|
|
(42,497
|
)
|
|
|
(79,827
|
)
|
|
|
(35,385
|
)
|
|
|
(50,774
|
)
|
Basic and diluted loss per share
|
|
$
|
(0.76
|
)
|
|
$
|
(1.15
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.72
|
)
|
|
|
|
(1)
|
|
Adjustments for customer claims have been reclassified to net
revenue during 2007 and 2006. See Note 1, Business
and Presentation, for additional information regarding
this reclassification.
|
|
(2)
|
|
Revenue from the sale of advertising is recognized under the
deferral and amortization method, whereby revenue from
advertising sales is initially deferred when a directory is
published and recognized ratably over the life of the directory.
Due to purchase accounting rules, we were not able to recognize
any revenue from directories published by the Dex Media Business
or the AT&T Directory Business prior to each acquisition or
for any directories published in the months the acquisitions
were completed.
|
F-63
R.H.
DONNELLEY CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Concluded)
|
|
|
(3)
|
|
Similar to the deferral and amortization method of revenue
recognition, certain costs directly related to the selling and
production of directories are initially deferred and recognized
ratably over the life of the directory. Due to purchase
accounting rules, we were not able to recognize any expenses
from directories published by the Dex Media Business or the
AT&T Directory Business prior to each acquisition or for
any directories published in the months the acquisitions were
completed.
|
|
(4)
|
|
On January 27, 2006, we repurchased the remaining
100,301 shares of our outstanding Preferred Stock from the
GS Funds for $336.1 million in cash, including accrued cash
dividends and interest pursuant to the terms of the Stock
Purchase Agreement. Based on the terms of the Stock Purchase
Agreement, the repurchase of the Preferred Stock became a
probable event on October 3, 2005, requiring the recorded
value of the Preferred Stock to be accreted to its redemption
value of $334.1 million at December 31, 2005, and as a
result of the GS Repurchase, $336.1 million at
January 27, 2006. The accretion to redemption value of
$2.0 million (which represented accrued dividends and
interest) for the quarter ended March 31, 2006 has been
recorded as an increase to loss available to common shareholders
on the consolidated statement of operations. In conjunction with
the GS Repurchase, we also reversed the previously recorded BCF
related to these shares and recorded a decrease to loss
available to common shareholders on the consolidated statement
of operations of approximately $31.2 million for the
quarter ended March 31, 2006.
|
F-64
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
|
On March 31, 2006, RHDs Audit and Finance Committee
of the Board of Directors (the Committee) dismissed
PricewaterhouseCoopers LLP as the Companys principal
independent registered public accounting firm. Effective
March 31, 2006, the Committee appointed KPMG LLP as the
Companys principal independent registered public
accounting firm for the fiscal years ended December 31,
2007 and 2006. For additional information regarding this matter,
please refer to our Current Report on
Form 8-K
filed with the SEC on April 6, 2006. There have been no
disagreements with either of the Companys principal
independent registered public accounting firms for the two-year
period ended December 31, 2007.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES.
|
(a)
Evaluation of Disclosure Controls and
Procedures.
Based on their evaluation, as of
December 31, 2007, 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, as amended), 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.
Managements Report on Internal Control over Financial
Reporting and the independent registered public accounting
firms attestation report on the Companys internal
control over financial reporting required under Item 308 of
Regulation S-K
has been included in Item 8 immediately preceding the
Companys consolidated financial statements.
(b)
Changes in Internal Controls.
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.
|
|
ITEM 9B.
|
OTHER
INFORMATION.
|
None
85
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|
Information in response to this Item is incorporated herein by
reference to the sections entitled Board of
Directors and Other Information
Section 16(a) Beneficial Ownership Reporting
Compliance in the Companys Proxy Statement to be
filed on or prior to April 29, 2008 with the Securities and
Exchange Commission, except that Executive Officers of the
Registrant in Item 1 of this Annual Report responds
to Item 401(b), (d) and (e) of
Regulation S-K
with respect to executive officers. The Company has adopted a
code of ethics that applies to the Principal Executive Officer,
Principal Financial Officer and the Principal Accounting Officer
that has been filed as an exhibit to this Report and is
available on our website at www.rhd.com, or you may request a
copy at the address on the cover page of this Annual Report on
Form 10-K
free of charge.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION.
|
Information in response to this Item is incorporated herein by
reference to the section entitled Director and Executive
Compensation in the Companys Proxy Statement to be
filed on or prior to April 29, 2008 with the Securities and
Exchange Commission.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
|
Information in response to this Item is incorporated herein by
reference to the sections entitled Director and Executive
Compensation Equity Plan Compensation
Information and Security Ownership of Certain
Beneficial Owners and Management in the Companys
Proxy Statement to be filed on or prior to April 29, 2008
with the Securities and Exchange Commission.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE.
|
Information in response to this Item is incorporated herein by
reference to the sections entitled Board of
Directors Corporate Governance Matters and
Independence and Financial Expertise
Determinations and Director and Executive
Compensation Compensation Committee Interlocks and
Insider Participation; Certain Relationships and Related Party
Transactions in the Companys Proxy Statement to be
filed on or prior to April 29, 2008 with the Securities and
Exchange Commission.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
|
Information in response to this Item is incorporated herein by
reference to the sections entitled Board of
Directors Committees of the Board of
Directors Audit and Finance Committee and
Report of the Audit and Finance Committee on
Financial Reporting Fees in the Companys
Proxy Statement to be filed on or prior to April 29, 2008
with the Securities and Exchange Commission.
86
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES.
|
(a)(1)
and (2) List of financial statements and financial
statement schedules
The following consolidated financial statements of the Company
are included under Item 8:
|
|
|
|
|
Managements Report on Internal Control Over Financial
Reporting
|
|
|
|
|
Reports of Independent Registered Public Accounting Firms
|
|
|
|
|
Consolidated Balance Sheets at December 31, 2007 and 2006
|
|
|
|
|
Consolidated Statements of Operations and Comprehensive Income
(Loss) for each of the years in the three year period ended
December 31, 2007
|
|
|
|
|
Consolidated Statements of Cash Flows for each of the years in
the three year period ended
|
|
|
|
|
December 31, 2007
|
|
|
|
|
Consolidated Statements of Changes in Shareholders Equity
(Deficit) for each of the years in the three year period ended
December 31, 2007
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
|
|
Financial statement schedules for the Company have not been
prepared because the required information has been included in
the Companys consolidated financial statements included in
Item 8 of this Annual Report.
87
(b) Exhibits:
|
|
|
|
|
Exhibit No.
|
|
Document
|
|
|
2
|
.1#
|
|
Agreement and Plan of Merger, dated as of October 3, 2005,
by and among the Company, Dex Media, Inc. and Forward
Acquisition Corp. (incorporated by reference to Exhibit 2.1
to the Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
October 6, 2005, Commission File
No. 001-07155)
|
|
3
|
.1
|
|
Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Quarterly
Report on
Form 10-Q
for the three months ended March 31, 1999, filed with the
Securities and Exchange Commission on May 14, 1999
Commission File
No. 001-07155)
|
|
3
|
.2*
|
|
Third Amended and Restated By-laws of the Company, as amended
|
|
4
|
.1
|
|
Indenture, dated as of December 3, 2002, between R.H.
Donnelley Inc. (as successor to R.H. Donnelley Finance
Corporation I), as Issuer, and The Bank of New York, as Trustee,
with respect to the 8.875% Senior Notes due 2010
(incorporated by reference to Exhibit 4.13 to the
Companys Annual Report on
Form 10-K,
filed with the Securities and Exchange Commission on
March 20, 2003, Commission File
No. 001-07155)
This is no longer in effect.
|
|
4
|
.2
|
|
Form of 8.875% Senior Notes due 2010 (included in
Exhibit 4.1) This is no longer in effect.
|
|
4
|
.3
|
|
Supplemental Indenture, dated as of January 3, 2003, among
R.H. Donnelley Inc., as Issuer, the Company and the other
guarantors signatory thereto, as Guarantors, and The Bank of New
York, as Trustee, with respect to the 8.875% Senior Notes
due 2010 of R.H. Donnelley Inc. (incorporated by reference to
Exhibit 4.14 to the Companys Annual Report on
Form 10-K,
filed with the Securities and Exchange Commission on
March 20, 2003, Commission File
No. 001-07155)
This is no longer in effect.
|
|
4
|
.4
|
|
Second Supplemental Indenture, dated as of September 1,
2004, by and among R.H. Donnelley Inc., the guarantors party
thereto and The Bank of New York, as Trustee, with respect to
the 8.875% Senior Notes due 2010 of R.H. Donnelley Inc.
(incorporated by reference to Exhibit 4.1 to the
Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
September 3, 2004, Commission File
No. 001-07155)
This is no longer in effect.
|
|
4
|
.5
|
|
Third Supplemental Indenture, dated as of December 6, 2005,
among R.H. Donnelley Inc., as Issuer, the Company and the
subsidiary guarantors named therein, as Guarantors, and The Bank
of New York, as Trustee, with respect to the 8.875% Senior
Notes due 2010 of R.H. Donnelley Inc. (incorporated by reference
to Exhibit 4.1 of the Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
December 20, 2005, Commission File
No. 001-07155)
This is no longer in effect.
|
|
4
|
.6
|
|
Guarantees relating to the 8.875% Senior Notes due 2010
(incorporated by reference to Exhibit 4.16 to the
Companys Annual Report on
Form 10-K,
filed with the Securities and Exchange Commission on
March 20, 2003, Commission File
No. 001-07155)
This is no longer in effect.
|
|
4
|
.7
|
|
Senior Guarantees relating to Second Supplemental Indenture to
the Indenture governing the 8.875% Senior Notes due 2010
(incorporated by reference to Exhibit 4.3 to the
Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
September 3, 2004, Commission File
No. 001-07155)
This is no longer in effect.
|
|
4
|
.8
|
|
Indenture, dated as of December 3, 2002, between R.H.
Donnelley Inc. (as successor to R.H. Donnelley Finance
Corporation I), as Issuer, and The Bank of New York, as Trustee,
with respect to the 10.875% Senior Subordinated Notes due
2012 (incorporated by reference to Exhibit 4.17 to the
Companys Annual Report on
Form 10-K,
filed with the Securities and Exchange Commission on
March 20, 2003, Commission File
No. 001-07155)
This is no longer in effect.
|
|
4
|
.9
|
|
Form of 10.875% Senior Subordinated Notes due 2012
(included in Exhibit 4.8) This is no longer in effect.
|
88
|
|
|
|
|
Exhibit No.
|
|
Document
|
|
|
4
|
.10
|
|
Supplemental Indenture, dated as of January 3, 2003, among
R.H. Donnelley Inc., as Issuer, the Company and the other
guarantors signatory thereto, as Guarantors, and The Bank of New
York, as Trustee, with respect to the 10.875% Senior
Subordinated Notes due 2012 (incorporated by reference to
Exhibit 4.18 to the Companys Annual Report on
Form 10-K,
filed with the Securities and Exchange Commission on
March 20, 2003, Commission File
No. 001-07155)
This is no longer in effect.
|
|
4
|
.11
|
|
Second Supplemental Indenture, dated as of January 9, 2004,
among R.H. Donnelley Inc., as Issuer, the Company and other
guarantors signatory thereto, as Guarantors, and The Bank of New
York, as Trustee, with respect to the 10.875% Senior
Subordinated Notes due 2012 (incorporated by reference to
Exhibit 4.21 to the Companys Annual Report on
Form 10-K,
filed with the Securities and Exchange Commission on
March 12, 2004, Commission File
No. 001-07155)
This is no longer in effect.
|
|
4
|
.12
|
|
Third Supplemental Indenture, dated as of September 1,
2004, among R.H. Donnelley Inc., and the guarantors party
thereto, as Guarantors, and The Bank of New York, as Trustee,
with respect to the 10.875% Senior Subordinated Notes due
2012 of R.H. Donnelley Inc. (incorporated by reference to
Exhibit 4.2 to the Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
September 3, 2004, Commission File
No. 001-07155)
This is no longer in effect.
|
|
4
|
.13
|
|
Guarantees relating to the 10.875% Senior Subordinated
Notes due 2012 (incorporated by reference to Exhibit 4.20
to the Companys Annual Report on
Form 10-K,
filed with the Securities and Exchange Commission on
March 20, 2003, Commission File
No. 001-07155)
This is no longer in effect.
|
|
4
|
.14
|
|
Senior Subordinated Guarantees relating to the Third
Supplemental Indenture to the Indenture governing the
10.875% Notes due 2012 (incorporated by reference to
Exhibit 4.4 to the Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
September 3, 2004, Commission File
No. 001-07155)
This is no longer in effect.
|
|
4
|
.15
|
|
Fourth Supplemental Indenture, dated as of October 2, 2007,
by and among R.H. Donnelley Inc., as issuer, R.H. Donnelley
Corporation, as guarantor, the subsidiary guarantors named
therein, as guarantors, and The Bank of New York, as trustee
(incorporated by reference to Exhibit 4.1 to the Current
Report on
Form 8-K,
filed with the Securities and Exchange Commission on
October 5, 2007, Commission file
No. 001-07155).
This is no longer in effect.
|
|
4
|
.16
|
|
Indenture, dated as of November 10, 2003, between Dex
Media, Inc. and U.S. Bank National Association, as Trustee, with
respect to the 8% Notes due 2013 (incorporated by reference
to Exhibit 4.1 to Dex Media, Inc.s Registration
Statement on
Form S-4,
filed with the Securities and Exchange Commission on
April 14, 2004, Commission File
No. 333-114472)
|
|
4
|
.17
|
|
Form of 8% Notes due 2013 (included in Exhibit 4.16)
|
|
4
|
.18
|
|
Supplemental Indenture, dated as of January 31, 2006,
between Dex Media, Inc. (f/k/a Forward Acquisition Corp.) and
U.S. Bank National Association, as Trustee, with respect to Dex
Media, Inc.s 8% Notes due 2013 (incorporated by
reference to Exhibit 4.1 to Dex Media, Inc.s Current
Report on
Form 8-K,
filed with the Securities and Exchange Commission on
February 6, 2006, Commission File
No. 333-131626)
|
|
4
|
.19
|
|
Indenture, dated November 10, 2003, between Dex Media, Inc.
and U.S. Bank National Association, as Trustee, with respect to
Dex Media, Inc.s 9% Discount Notes due 2013 (incorporated
by reference to Exhibit 4.3 to Dex Media, Inc.s
Registration Statement on
Form S-4,
filed with the Securities and Exchange Commission on
April 14, 2004, Commission File
No. 333-114472)
|
|
4
|
.20
|
|
Form of 9% Discount Notes due 2013 (included in
Exhibit 4.19)
|
89
|
|
|
|
|
Exhibit No.
|
|
Document
|
|
|
4
|
.21
|
|
Supplemental Indenture, dated as of January 31, 2006,
between Dex Media, Inc. (f/k/a Forward Acquisition Corp.) and
U.S. Bank National Association, as Trustee, with respect to Dex
Media, Inc.s 9% Discount Notes due 2013 (incorporated by
reference to Exhibit 4.2 to Dex Media, Inc.s Current
Report on
Form 8-K
filed with the Securities and Exchange Commission on
February 6, 2006, Commission File
No. 333-131626)
|
|
4
|
.22
|
|
Indenture, dated February 11, 2004, between Dex Media, Inc.
and U.S. Bank National Association, as Trustee with respect to
Dex Media, Inc.s 9% Discount Notes due 2013 (incorporated
by reference to Exhibit 4.5 to Dex Media, Inc.s
Registration Statement on
Form S-4,
filed with the Securities and Exchange Commission on
April 14, 2004, Commission File
No. 333-114472)
|
|
4
|
.23
|
|
Form of 9% Discount Notes due 2013 (included in
Exhibit 4.22)
|
|
4
|
.24
|
|
Supplemental Indenture, dated as of January 31, 2006,
between Dex Media, Inc. (f/k/a Forward Acquisition Corp.) and
U.S. Bank National Association, as Trustee, with respect to Dex
Media, Inc.s 9% Discount Notes due 2013 (incorporated by
reference to Exhibit 4.3 to Dex Media, Inc.s Current
Report on
Form 8-K,
filed with the Securities and Exchange Commission on
February 6, 2006, Commission File
No. 333-131626)
|
|
4
|
.25
|
|
Indenture, dated November 8, 2002, among Dex Media East
LLC, Dex Media East Finance Co. and U.S. Bank National
Association, as Trustee, with respect to Dex Media East
LLCs
9
7
/
8
% Senior
Notes due 2009 (incorporated by reference to Exhibit 4.7 to
Dex Media, Inc.s Registration Statement on
Form S-4,
filed with the Securities and Exchange Commission on
April 14, 2004, Commission File
No. 333-114472)
This is no longer if effect.
|
|
4
|
.26
|
|
Form of
9
7
/
8
% Senior
Notes due 2009 (included in Exhibit 4.25) This is no longer
in effect.
|
|
4
|
.27
|
|
Indenture, dated November 8, 2002, among Dex Media East
LLC, Dex Media East Finance Co. and U.S. Bank National
Association, as Trustee, with respect to Dex Media East
LLCs
12
1
/
8
% Senior
Subordinated Notes due 2012 (incorporated by reference to
Exhibit 4.9 to Dex Media, Inc.s Registration
Statement on
Form S-4,
filed with the Securities and Exchange Commission on
April 14, 2004, Commission File
No. 333-114472)
This is no longer in effect.
|
|
4
|
.28
|
|
Form of
12
1
/
8
% Senior
Subordinated Notes due 2012 (included in Exhibit 4.27) This
is no longer in effect.
|
|
4
|
.29
|
|
Indenture, dated August 29, 2003, among Dex Media West LLC,
Dex Media West Finance Co. and U.S. Bank National Association,
as Trustee, with respect to Dex Media West LLCs
8
1
/
2
% Senior
Notes due 2010 (incorporated by reference to Exhibit 4.11
to Dex Media, Inc.s Registration Statement on
Form S-4,
filed with the Securities and Exchange Commission on
April 14, 2004, Commission File
No. 333-114472)
|
|
4
|
.30
|
|
Form of
8
1
/
2
% Senior
Notes due 2010 (included in Exhibit 4.29)
|
|
4
|
.31
|
|
Indenture, dated August 29, 2003, among Dex Media West LLC,
Dex Media West Finance Co. and U.S. Bank National Association,
as Trustee, with respect to Dex Media West LLCs
9
7
/
8
% Senior
Subordinated Notes due 2013 (incorporated by reference to
Exhibit 4.13 to Dex Media, Inc.s Registration
Statement on
Form S-4,
filed with the Securities and Exchange Commission on
April 14, 2004, Commission File
No. 333-114472)
|
|
4
|
.32
|
|
Form of
9
7
/
8
% Senior
Subordinated Notes due 2013 (included in Exhibit 4.31)
|
|
4
|
.33
|
|
Indenture, dated November 24, 2004, among Dex Media West
LLC, Dex Media West Finance Co. and U.S. Bank National
Association, as Trustee, with respect to Dex Media West
LLCs
5
7
/
8
% Senior
Notes due 2011 (incorporated by reference to Exhibit 4.7 to
Dex Media West LLC and Dex Media West Finance Co.s
Registration Statement on
Form S-4,
declared effective by the Securities and Exchange Commission on
February 3, 2005, Commission File
No. 333-121259)
|
90
|
|
|
|
|
Exhibit No.
|
|
Document
|
|
|
4
|
.34
|
|
Form of
5
7
/
8
% Senior
Notes due 2011 (included in Exhibit 4.33)
|
|
4
|
.35
|
|
Indenture, dated as of January 14, 2005, among the Company
and The Bank of New York, as Trustee, with respect to the
Companys 6.78% Senior Notes due 2013 of the Company
(incorporated by reference to Exhibit 4.1 to the
Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
January 19, 2005, Commission File
No. 001-07155)
|
|
4
|
.36
|
|
Form of
6
7
/
8
% Senior
Notes due 2013 (included in Exhibit 4.35)
|
|
4
|
.37
|
|
Indenture, dated January 27, 2006, between the Company, as
Issuer, and The Bank of New York, as Trustee, with respect to
the Companys 6.875%
Series A-1
Senior Discount Notes due 2013 (incorporated by reference to
Exhibit 4.1 to the Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
February 2, 2006, Commission File
No. 001-07155)
|
|
4
|
.38
|
|
Form of 6.875%
Series A-1
Senior Discount Note due 2013 (included in Exhibit 4.37)
|
|
4
|
.39
|
|
Indenture, dated January 27, 2006, between the Company (as
successor to R.H. Donnelly Finance Corporation III), as Issuer,
and The Bank of New York, as Trustee, with respect to the
Companys 6.875%
Series A-2
Senior Discount Notes due 2013 (incorporated by reference to
Exhibit 4.3 to the Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
February 2, 2006, Commission File
No. 001-07155)
|
|
4
|
.40
|
|
Form of 6.875%
Series A-2
Senior Discount Note due 2013 (included in Exhibit 4.39)
|
|
4
|
.41
|
|
Supplemental Indenture, dated January 31, 2006, by and
between the Company and The Bank of New York, as Trustee, with
respect to the Companys 6.875%
Series A-2
Senior Discount Notes due 2013 (incorporated by reference to
Exhibit 4.5 to the Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
February 2, 2006, Commission File
No. 001-07155)
|
|
4
|
.42
|
|
Indenture, dated January 27, 2006, by and between the
Company (as successor to R.H. Donnelly Finance Corporation III),
as Issuer, and The Bank of New York, as Trustee, with respect to
the Companys 8.875%
Series A-3
Senior Notes due 2016 (incorporated by reference to
Exhibit 4.6 to the Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
February 2, 2006, Commission File
No. 001-07155)
|
|
4
|
.43
|
|
Form of 8.875%
Series A-3
Senior Note due 2016 (included in Exhibit 4.42)
|
|
4
|
.44
|
|
Supplemental Indenture, dated January 31, 2006, between the
Company and The Bank of New York, as Trustee, with respect to
the Companys 8.875%
Series A-3
Senior Notes due 2016 (incorporated by reference to
Exhibit 4.8 to the Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
February 2, 2006, Commission File
No. 001-07155)
|
|
4
|
.45
|
|
Indenture, dated October 2, 2007, between R.H. Donnelly
Corporation and The Bank of New York, as trustee, relating to
R.H. Donnelley Corporations 8.875%
Series A-4
Senior Notes due 2017 (incorporated by reference to
Exhibit 4.1 to the Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
October 5, 2007, Commission file
No. 001-07155)
|
|
4
|
.46
|
|
Form of 8.875%
Series A-4
Senior Notes due 2017, included in Exhibit 4.45.
|
|
10
|
.1
|
|
Non-Competition Agreement, dated as of January 3, 2003, by
and among the Company, R.H. Donnelley Publishing &
Advertising, Inc. (f/k/a Sprint Publishing &
Advertising, Inc.), CenDon, L.L.C., R.H. Donnelley Directory
Company (f/k/a Centel Directory Company), Sprint Corporation and
the Sprint Local Telecommunications Division (incorporated by
reference to Exhibit 10.4 to the Companys Current
Report on
Form 8-K,
filed with the Securities and Exchange Commission on
January 17, 2003, Commission File
No. 001-07155)
|
91
|
|
|
|
|
Exhibit No.
|
|
Document
|
|
|
10
|
.2
|
|
Letter from Sprint Nextel Corporation, dated as of May 16,
2006, acknowledging certain matters with respect to the
Non-Competition Agreement described above as Exhibit 10.1
(incorporated by reference to Exhibit 10.12 to the
Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
May 19, 2006, Commission File
No. 001-07155)
|
|
10
|
.3
|
|
Directory Services License Agreement, dated as of May 16,
2006, by and among R.H. Donnelley Publishing &
Advertising, Inc., CenDon, L.L.C., R.H. Donnelley Directory
Company, Embarq Corporation, Embarq Directory Trademark Company,
LLC and certain subsidiaries of Embarq Corporation formerly
constituting Sprint Local Telecommunications Division
(incorporated by reference to Exhibit 10.6 to the
Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
May 19, 2006)
|
|
10
|
.4
|
|
Trademark License Agreement, dated as of May 16, 2006, by
and among R.H. Donnelley Publishing & Advertising,
Inc., R.H. Donnelley Directory Company and Embarq Directory
Trademark Company, LLC (incorporated by reference to
Exhibit 10.7 to the Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
May 19, 2006)
|
|
10
|
.5
|
|
Publisher Trademark License Agreement, dated as of May 16,
2006, by and among R.H. Donnelley Publishing &
Advertising, Inc., CenDon, L.L.C., R.H. Donnelley Directory
Company and Embarq Corporation (incorporated by reference to
Exhibit 10.8 to the Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
May 19, 2006)
|
|
10
|
.6
|
|
Non-Competition Agreement, dated as of May 16, 2006, by and
among R.H. Donnelley Corporation, R.H. Donnelley
Publishing & Advertising, Inc., CenDon, L.L.C., R.H.
Donnelley Directory Company, Embarq Corporation and certain
subsidiaries of Embarq Corporation formerly constituting Sprint
Local Telecommunications Division (incorporated by reference to
Exhibit 10.9 to the Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
May 19, 2006)
|
|
10
|
.7
|
|
Subscriber Listings Agreement, dated as of May 16, 2006, by
and among R.H. Donnelley Publishing & Advertising,
Inc., CenDon, L.L.C., R.H. Donnelley Directory Company, Embarq
Corporation and certain subsidiaries of Embarq Corporation
formerly constituting Sprint Local Telecommunications Division
(incorporated by reference to Exhibit 10.10 to the
Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
May 19, 2006)
|
|
10
|
.8
|
|
Standstill Agreement, dated as of May 16, 2006, by and
between R.H. Donnelley Publishing & Advertising, Inc.
and Embarq Corporation (incorporated by reference to
Exhibit 10.11 to the Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
May 19, 2006)
|
|
10
|
.9#
|
|
Directory Services License Agreement, dated as of
September 1, 2004, among the Company, R.H. Donnelley
Publishing & Advertising of Illinois Partnership
(f/k/a The APIL Partners Partnership), DonTech II
Partnership, Ameritech Corporation, SBC Directory Operations,
Inc. and SBC Knowledge Ventures, L.P. (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
September 3, 2004, Commission File
No. 001-07155)
|
|
10
|
.10
|
|
Non-Competition Agreement, dated as of September 1, 2004,
by and between the Company and SBC Communications Inc.
(incorporated by reference to Exhibit 10.2 to the
Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
September 3, 2004, Commission File
No. 001-07155)
|
92
|
|
|
|
|
Exhibit No.
|
|
Document
|
|
|
10
|
.11
|
|
SMARTpages Reseller Agreement, dated as of September 1,
2004, among SBC Communications, Inc., Southwestern Bell Yellow
Pages, Inc., SBC Knowledge Ventures, L.P., the Company, R.H.
Donnelley Publishing & Advertising of Illinois
Partnership (f/k/a The APIL Partners Partnership) and
DonTech II Partnership (incorporated by reference to
Exhibit 10.3 to the Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
September 3, 2004, Commission File
No. 001-07155)
|
|
10
|
.12
|
|
Ameritech Directory Publishing Listing License Agreement, dated
as of September 1, 2004, among R.H. Donnelley
Publishing & Advertising of Illinois Partnership
(f/k/a The APIL Partners Partnership), DonTech II
Partnership and Ameritech Services Inc. (incorporated by
reference to Exhibit 10.4 to the Companys Current
Report on
Form 8-K,
filed with the Securities and Exchange Commission on
September 3, 2004, Commission File
No. 001-07155)
|
|
10
|
.13
|
|
Publishing Agreement, dated November 8, 2002, as amended,
by and among Dex Holding LLC., Dex Media East LLC (f/k/a SGN
LLC), Dex Media West LLC (f/k/a/GPP LLC) and Qwest
Corporation (incorporated by reference to Exhibit 10.19 to
Dex Media, Inc.s Registration Statement on
Form S-4,
filed with the Securities and Exchange Commission on
April 14, 2004, Commission File
No. 333-114472)
|
|
10
|
.14
|
|
Amended and Restated Agreement for the Provision of Billing and
Collection Services for Directory Publishing Services, dated
September 1, 2003, by and between Qwest Corporation and Dex
Media East LLC (f/k/a SGN LLC) (incorporated by reference to
Exhibit 10.8 to Dex Media, Inc.s Registration
Statement on
Form S-4,
filed with the Securities and Exchange Commission on
April 14, 2004, Commission File
No. 333-114472)
|
|
10
|
.15
|
|
Agreement for the Provision of Billing and Collection Services
for Directory Publishing Services, dated as of September 1,
2003, by and between Qwest Corporation and Dex Media West LLC
(f/k/a GPP LLC) (incorporated by reference to Exhibit 10.9
to Dex Media, Inc.s Registration Statement on
Form S-4,
filed with the Securities and Exchange Commission on
April 14, 2004, Commission File
No. 333-114472)
|
|
10
|
.16
|
|
Non-Competition and Non-Solicitation Agreement, dated
November 8, 2002, by and between Dex Media East LLC (f/k/a
SGN LLC), Dex Media West LLC (f/k/a GPP LLC), Dex Holdings LLC
and Qwest Corporation, Qwest Communications International Inc.
and Qwest Dex, Inc. (incorporated by reference to
Exhibit 10.10 to Dex Media, Inc.s Registration
Statement on
Form S-4,
filed with the Securities and Exchange Commission on
April 14, 2004, Commission File
No. 333-114472)
|
|
10
|
.17ˆ
|
|
Amended and Restated 1998 Directors Stock Plan
(incorporated by reference to Exhibit 10.18 to the
Companys Annual Report on
Form 10-K,
filed with the Securities and Exchange Commission on
March 27, 2000, Commission File
No. 001-07155)
|
|
10
|
.18ˆ
|
|
Pension Benefit Equalization Plan (incorporated by reference to
Exhibit 99.1 to the Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
October 26, 2007, Commission File
No. 001-07155)
|
|
10
|
.19ˆ
|
|
2001 Stock Award and Incentive Plan (incorporated by reference
to Exhibit 10.17 to the Companys Annual Report on
Form 10-K,
filed with the Securities and Exchange Commission on
March 27, 2002, Commission File
No. 001-07155)
|
|
10
|
.20ˆ
|
|
2005 Stock Award and Incentive Plan (incorporated by reference
to Exhibit 10.15 to the Companys Quarterly Report on
Form 10-Q,
filed with the Securities and Exchange Commission on
August 5, 2005, Commission File
No. 001-07155)
|
|
10
|
.21ˆ
|
|
Form of Non-Qualified Stock Option Agreement under 2005 Plan
(incorporated by reference to Exhibit 10.16 to the
Companys Quarterly Report on
Form 10-Q,
filed with the Securities and Exchange Commission on
August 5, 2005, Commission File
No. 001-07155)
|
93
|
|
|
|
|
Exhibit No.
|
|
Document
|
|
|
10
|
.22ˆ
|
|
Form of Annual Incentive Program Award under 2005 Plan
(incorporated by reference to Exhibit 10.17 to the
Companys Quarterly Report on
Form 10-Q,
filed with the Securities and Exchange Commission on
August 5, 2005, Commission File
No. 001-07155)
|
|
10
|
.23ˆ
|
|
Form of Restricted Stock Units Agreement under 2005 Plan
(incorporated by reference to Exhibit 10.19 to the
Companys Quarterly Report on
Form 10-Q,
filed with the Securities and Exchange Commission on
May 10, 2006, Commission File
No. 001-07155)
|
|
10
|
.24ˆ
|
|
Form of Stock Appreciation Rights Grant Agreement under 2005
Plan (incorporated by reference to Exhibit 10.10 to the
Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
October 6, 2005, Commission File
No. 001-07155)
|
|
10
|
.25ˆ
|
|
Form of R.H. Donnelley Corporation Restricted Stock Units
Agreement under 2005 Plan (incorporated by reference to
Exhibit 10.21 to the Companys Annual Report on
Form 10-K
for the year ended December 31, 2005, filed with the
Securities and Exchange Commission on March 16, 2006,
Commission File
No. 001-07155)
|
|
10
|
.26ˆ
|
|
Deferred Compensation Plan, as amended and restated as of
January 1, 2008 (incorporated by reference to the
Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
October 26, 2007, Commission File
No. 001-07155)
|
|
10
|
.27ˆ
|
|
Stock Option Plan of Dex Media, Inc., effective as of
November 8, 2002 (incorporated by reference to
Exhibit 10.27 to Dex Media, Inc.s Registration
Statement on
Form S-4,
filed with the Securities and Exchange Commission on
April 14, 2004, Commission File
No. 333-114472)
|
|
10
|
.28ˆ
|
|
First Amendment to Stock Option Plan of Dex Media, Inc.,
effective as of September 9, 2003 (incorporated by
reference to Exhibit 10.28 to Dex Media, Inc.s
Registration Statement on
Form S-4,
filed with the Securities and Exchange Commission on
April 14, 2004, Commission File
No. 333-114472)
|
|
10
|
.29ˆ
|
|
Second Amendment to Stock Option Plan of Dex Media, Inc.,
effective as of December 18, 2003 (incorporated by
reference to Exhibit 10.29 to Dex Media, Inc.s
Registration Statement on
Form S-4,
filed with the Securities and Exchange Commission on
April 14, 2004, Commission File
No. 333-114472)
|
|
10
|
.30ˆ
|
|
Dex Media, Inc. 2004 Incentive Award Plan (incorporated by
reference to Exhibit 4.5 to Dex Media, Inc.s
Registration Statement on
Form S-8,
filed with the Securities and Exchange Commission on
November 19, 2004, Commission file
No. 333-120631)
|
|
10
|
.31ˆ
|
|
Amended and Restated Employment Agreement, dated October 3,
2005, by and between the Company and David C. Swanson
(incorporated by reference to Exhibit 10.7 to the
Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
October 6, 2005, Commission File
No. 001-07155)
|
|
10
|
.32ˆ
|
|
Amended and Restated Employment Agreement, dated October 3,
2005, by and between the Company and Peter J. McDonald
(incorporated by reference to Exhibit 10.8 to the
Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
October 6, 2005, Commission File
No. 001-07155)
|
|
10
|
.33ˆ
|
|
Amended and Restated Employment Agreement, dated October 3,
2005, by and between the Company and Steven M. Blondy
(incorporated by reference to Exhibit 10.9 to the
Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
October 6, 2005, Commission File
No. 001-07155)
|
|
10
|
.34ˆ
|
|
Employment Agreement, dated as of February 21, 2006, by and
between the Company and George A. Burnett (incorporated by
reference to Exhibit 10.1 to the Companys Current
Report on
Form 8-K,
filed with the Securities and Exchange Commission on
February 23, 2006, Commission File
No. 001-07155).
This Agreement is no longer in effect.
|
94
|
|
|
|
|
Exhibit No.
|
|
Document
|
|
|
10
|
.35ˆ
|
|
Separation Agreement and Release, dated as of May 5, 2006,
by and between the Company and George A. Burnett (incorporated
by reference to Exhibit 10.32 to the Companys
Quarterly Report on
Form 10-Q,
filed with the Securities and Exchange Commission on
November 8, 2006, Commission File
No. 001-07155)
|
|
10
|
.36ˆ
|
|
Employment Agreement, dated as of January 1, 2001, by and
between the Company and Robert J. Bush (incorporated by
reference to Exhibit 10.37 to the Companys Annual
Report on
Form 10-K,
filed with the Securities and Exchange Commission on
March 28, 2001, Commission File
No. 001-07155)
|
|
10
|
.37ˆ
|
|
Amendment No. 1 to Employment Agreement, dated as of
February 27, 2001, by and between the Company and Robert J.
Bush (incorporated by reference to Exhibit 10.38 to the
Companys Annual Report on
Form 10-K,
filed with the Securities and Exchange Commission on
March 28, 2001, Commission File
No. 001-07155)
|
|
10
|
.38ˆ
|
|
Board of Director Compensation Plan (incorporated by reference
to Exhibit 10.85 to the Companys Annual Report on
Form 10-K
for the year ended December 31, 2005, filed with the
Securities and Exchange Commission on March 16, 2006,
Commission File
No. 001-07155)
|
|
10
|
.39#
|
|
Second Amended and Restated Credit Agreement, dated
December 13, 2005, among the Company, R.H. Donnelley Inc.,
the several banks and other financial institutions or entities
from time to time parties thereto as lenders, J.P. Morgan
Securities Inc. and Deutsche Bank Trust Company Americas,
as co-lead arrangers and joint-bookrunners, JPMorgan Chase Bank,
N.A., as syndication agent, Bear Stearns Corporate Lending Inc.,
Credit Suisse, Cayman Islands Branch, Goldman Sachs Credit
Partners L.P., UBS Securities LLC and Wachovia Bank, National
Association, as co-documentation agents, and Deutsche Bank
Trust Company Americas, as administrative agent
(incorporated by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
December 19, 2005, Commission File
No. 001-07155)
|
|
10
|
.40
|
|
First Amendment, dated as of April 24, 2006, to the Second
Amended and Restated Credit Agreement, dated December 13,
2005, among the Company, R.H. Donnelley Inc., the several banks
and other financial institutions or entities from time to time
parties thereto as lenders, and Deutsche Bank Trust Company
Americas, as administrative agent (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
April 28, 2006, Commission File
No. 001-07155)
|
|
10
|
.41
|
|
Second Amended and Restated Guaranty and Collateral Agreement,
dated as of December 13, 2005, among the Company, R.H.
Donnelley Inc., and the subsidiaries of R.H. Donnelley Inc.
party thereto, and Deutsche Bank Trust Company Americas, as
collateral agent (incorporated by reference to Exhibit 10.2
to the Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
December 19, 2005, Commission File
No. 001-07155)
|
|
10
|
.42
|
|
Reaffirmation, dated as of April 24, 2006, among R.H.
Donnelley Corporation, R.H. Donnelley Inc. and its subsidiaries
and Deutsche Bank Trust Company Americas, as administrative
agent (incorporated by reference to Exhibit 10.2 to the
Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
April 28, 2006, Commission File
No. 001-07155)
|
|
10
|
.43#
|
|
Amended and Restated Credit Agreement, dated January 31,
2006, among Dex Media, Inc. (f/k/a Forward Acquisition Corp.),
Dex Media West, Inc., Dex Media West LLC, and JPMorgan Chase
Bank, N.A., as collateral agent, and the other lenders from time
to time parties thereto (incorporated by reference to
Exhibit 10.1 to Dex Media, Inc.s Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
February 6, 2006, Commission File
No. 333-131626)
|
95
|
|
|
|
|
Exhibit No.
|
|
Document
|
|
|
10
|
.44
|
|
Reaffirmation Agreement, dated January 31, 2006, among Dex
Media, Inc. (f/k/a Forward Acquisition Corp.), Dex Media West,
Inc., Dex Media West LLC, Dex Media West Finance Co., JPMorgan
Chase Bank, N.A., as administrative agent and collateral agent
(incorporated by reference to Exhibit 10.2 to Dex Media,
Inc.s Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
February 6, 2006, Commission File
No. 333-131626)
|
|
10
|
.45
|
|
Guarantee and Collateral Agreement, dated as of
September 9, 2003, among Dex Media West, Inc., Dex Media
West LLC, Dex Media West Finance Co. and JPMorgan Chase Bank, as
collateral agent (incorporated by reference to Exhibit 10.7
to Dex Media, Inc.s Registration Statement on
Form S-4,
filed with the Securities and Exchange Commission on
April 14, 2004, Commission File
No. 333-114472)
|
|
10
|
.46
|
|
First Amendment, dated as of April 24, 2006, to the Amended
and Restated Credit Agreement dated as of January 31, 2006,
among Dex Media, Inc., Dex Media West, Inc., Dex Media West LLC,
the lenders from time to time party thereto, JPMorgan Chase
Bank, N.A., as administrative agent and collateral agent, and
the other agents parties thereto (incorporated by reference to
Exhibit 10.1 to Dex Media, Inc.s Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
April 28, 2006, Commission File
No. 333-131626)
|
|
10
|
.47
|
|
Reaffirmation Agreement, dated as of April 24, 2006, among
Dex Media, Inc., Dex Media West, Inc., Dex Media West LLC, Dex
Media West Finance Co. and JPMorgan Chase Bank, N.A., as
collateral agent (incorporated by reference to Exhibit 10.2
to Dex Media, Inc.s Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
April 28, 2006, Commission File
No. 333-131626)
|
|
10
|
.48
|
|
First Amendment, dated as of April 24, 2006, to the Amended
and Restated Credit Agreement dated as of January 31, 2006,
among Dex Media, Inc., Dex Media East, Inc., Dex Media East LLC,
the lenders from time to time party thereto, JPMorgan Chase
Bank, N.A., as administrative agent and collateral agent, and
the other agents parties thereto (incorporated by reference to
Exhibit 10.3 to Dex Media, Inc.s Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
April 28, 2006, Commission File
No. 333-131626)
This agreement is no longer in effect.
|
|
10
|
.49
|
|
Reaffirmation Agreement, dated as of April 24, 2006, among
Dex Media, Inc., Dex Media East, Inc., Dex Media East LLC, Dex
Media East Finance Co., Dex Media International, Inc. and
JPMorgan Chase Bank, N.A., as collateral agent (incorporated by
reference to Exhibit 10.4 to Dex Media, Inc.s Current
Report on
Form 8-K,
filed with the Securities and Exchange Commission on
April 28, 2006, Commission File
No. 333-131626)
This agreement is no longer in effect.
|
|
10
|
.50
|
|
Warrant Purchase Agreement, dated as of November 2, 2006,
by and among R.H. Donnelley Corporation and certain investment
partnerships affiliated with The Goldman Sachs Group, Inc.
(incorporated by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
November 3, 2006, Commission File
No. 001-07155).
This Agreement is no longer in effect
|
|
10
|
.51
|
|
Credit Agreement, dated as of August 23, 2007, among R.H.
Donnelley Corporation, as borrower, JPMorgan Chase Bank, N.A.,
as administrative agent, and the several banks and other
financial institutions from time to time party thereto
(incorporated by reference to Exhibit 10.1 to the Current
Report on
Form 8-K,
filed with the Securities and Exchange Commission on
August 28, 2007, Commission File
No. 001-07155)
This agreement is no longer in effect.
|
|
10
|
.52
|
|
Registration Rights Agreement, dated October 2, 2007, by
and between R.H. Donnelley Corporation and the initial
purchasers identified therein (incorporated by reference to
Exhibit 10.1 to the Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
October 5, 2007, Commission file
No. 001-07155).
|
96
|
|
|
|
|
Exhibit No.
|
|
Document
|
|
|
10
|
.53
|
|
Registration Rights Agreement, dated October 17, 2007, by
and between R.H. Donnelley Corporation and the initial
purchasers identified therein (incorporated by reference to
Exhibit 10.1 to the Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
October 17, 2007, Commission file
No. 001-07155)
|
|
10
|
.54
|
|
Credit Agreement, dated as of October 24, 2007, by and
among Dex Media East LLC, as borrower, Dex Media East, Inc., Dex
Media, Inc., JPMorgan Chase Bank, N.A., as administrative agent
and collateral agent, and the several banks and other financial
institutions or entities from time to time party thereto
(incorporated by reference to Exhibit 10.1 to Dex Media
East LLCs Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
October 26, 2007, Commission File
No. 333-102395)
|
|
10
|
.55
|
|
Guarantee and Collateral Agreement, dated as of October 24,
2007, by and among Dex Media East LLC, Dex Media East Inc., the
subsidiary guarantor a party thereto and JPMorgan Chase Bank,
NA, as Collateral Agent (incorporated by reference to
Exhibit 10.2 to Dex Media East LLCs Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
October 26, 2007, Commission File
No. 333-102395)
|
|
10
|
.56
|
|
Pledge Agreement, dated as of October 24, 2007, by and
among Dex Media, Inc. and JPMorgan Chase Bank, NA, as Collateral
Agent (incorporated by reference to Exhibit 10.2 to Dex
Media, Inc.s Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
October 26, 2007, Commission File
No. 333-131626)
|
|
10
|
.57
|
|
R.H. Donnelley, Inc. 401(k) Restoration Plan, effective as of
January 1, 2005 (incorporated by reference to
Exhibit 99.2 to the Companys Current Report on
Form 8-K,
filed with the Securities and Exchange Commission on
October 26, 2007, Commission File
No. 001-07155)
|
|
14
|
.1
|
|
Policy on Business Conduct (amended and restated as of
January 1, 2007)
|
|
21
|
.1*
|
|
Subsidiaries of the Registrant
|
|
23
|
.1*
|
|
Consent of KPMG LLP, Independent Registered Public Accounting
Firm
|
|
23
|
.2*
|
|
Consent of Pricewaterhouse Coopers LLP, Independent Registered
Public Accounting Firm
|
|
31
|
.1*
|
|
Certification of Annual Report on
Form 10-K
for the period ended December 31, 2007 by David C.
Swanson, Chairman and Chief Executive Officer of R.H. Donnelley
Corporation under Section 302 of the Sarbanes-Oxley Act
|
|
31
|
.2*
|
|
Certification of Annual Report on
Form 10-K
for the period ended December 31, 2007 by Steven M.
Blondy, Executive Vice President and Chief Financial Officer of
R.H. Donnelley Corporation under Section 302 of the
Sarbanes-Oxley Act
|
|
32
|
.1*
|
|
Certification of Annual Report on
Form 10-K
for the period ended December 31, 2007 under
Section 906 of the Sarbanes-Oxley Act by David C. Swanson,
Chairman and Chief Executive Officer, and Steven M. Blondy,
Executive Vice President and Chief Financial Officer, for
R.H. Donnelley Corporation
|
|
|
|
*
|
|
Filed herewith.
|
|
ˆ
|
|
Management contract or compensatory plan.
|
|
#
|
|
The Company agrees to furnish supplementally a copy of any
omitted exhibits or schedules to the Securities and Exchange
Commission upon request.
|
97
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this Annual Report on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 13th day of March 2008.
R.H. Donnelley Corporation
David C. Swanson,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been duly signed by the following persons
on behalf of the Registrant and in the capacities and on the
date indicated.
|
|
|
|
|
|
|
/s/
David
C. Swanson
(David
C. Swanson)
|
|
Chairman of the Board and
Chief Executive Officer
|
|
March 13, 2008
|
|
|
|
|
|
/s/
Steven
M. Blondy
(Steven
M. Blondy)
|
|
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
|
|
March 13, 2008
|
|
|
|
|
|
/s/
Karen
E. Palczuk
(Karen
E. Palczuk)
|
|
Vice President Financial Planning and
Analysis (Interim Principal
Accounting Officer)
|
|
March 13, 2008
|
|
|
|
|
|
/s/
Michael
P. Conners
(Michael
P. Connors)
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/
Nancy
E. Cooper
(Nancy
E. Cooper)
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/
Robert
Kamerschen
(Robert
Kamerschen)
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/
Thomas
Reddin
(Thomas
Reddin)
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/
Alan
F. Schultz
(Alan
F. Schultz)
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/
David
M. Veit
(David
M. Veit)
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/
Barry
Lawson Williams
(Barry
Lawson Williams)
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/
Edwina
Woodbury
(Edwina
Woodbury)
|
|
Director
|
|
March 13, 2008
|
98
Exhibit Index
|
|
|
|
|
Exhibit No.
|
|
Document
|
|
|
3
|
.2*
|
|
Third Amended and Restated By-laws of the Company, as amended
|
|
21
|
.1*
|
|
Subsidiaries of the Registrant
|
|
23
|
.1*
|
|
Consent of KPMG LLP, Independent Registered Public Accounting
Firm
|
|
23
|
.2*
|
|
Consent of Pricewaterhouse Coopers LLP, Independent Registered
Public Accounting Firm
|
|
31
|
.1*
|
|
Certification of Annual Report on Form 10-K for the period ended
December 31, 2007 by David C. Swanson, Chairman and
Chief Executive Officer of R.H. Donnelley Corporation under
Section 302 of the Sarbanes-Oxley Act
|
|
31
|
.2*
|
|
Certification of Annual Report on Form 10-K for the period ended
December 31, 2007 by Steven M. Blondy, Executive Vice
President and Chief Financial Officer of R.H. Donnelley
Corporation under Section 302 of the Sarbanes-Oxley Act
|
|
32
|
.1*
|
|
Certification of Annual Report on Form 10-K for the period
ended December 31, 2007 under Section 906 of the
Sarbanes-Oxley Act by David C. Swanson, Chairman and Chief
Executive Officer, and Steven M. Blondy, Executive Vice
President and Chief Financial Officer, for R.H. Donnelley
Corporation
|
|
|
|
ˆ
|
|
Management contract or compensatory plan.
|
|
*
|
|
Filed herewith
|
99
RH Donnelley (NYSE:RHD)
Historical Stock Chart
From Jul 2024 to Aug 2024
RH Donnelley (NYSE:RHD)
Historical Stock Chart
From Aug 2023 to Aug 2024