UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended June 30, 2004 | ||
| OR | ||
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TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from to | ||
Commission File Number: 333-115489
Dex Media, Inc.
| Delaware | 14-1855759 | |
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(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
198 Inverness Drive West
(303) 784-2900
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of August 12, 2004, there were 150,281,662 shares outstanding of the Registrant’s Common Stock (par value $0.01 per share).
INDEX
1
PART I.
FINANCIAL INFORMATION
| Item 1. | Financial Statements |
DEX MEDIA, INC. AND SUBSIDIARIES
| As of | As of | |||||||||
| June 30, | December 31, | |||||||||
| 2004 | 2003 | |||||||||
| ASSETS | ||||||||||
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Current assets:
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Cash and cash equivalents
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$ | 2,478 | $ | 7,416 | ||||||
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Accounts receivable, net
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106,570 | 116,409 | ||||||||
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Deferred directory costs
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296,653 | 270,626 | ||||||||
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Current deferred taxes
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11,432 | 9,855 | ||||||||
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Other current assets
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8,422 | 13,564 | ||||||||
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Total current assets
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425,555 | 417,870 | ||||||||
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Property, plant and equipment, net
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103,350 | 77,683 | ||||||||
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Goodwill
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3,084,066 | 3,089,317 | ||||||||
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Intangible assets, net
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3,239,879 | 3,446,100 | ||||||||
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Deferred income taxes
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64,832 | 59,387 | ||||||||
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Deferred financing costs
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171,819 | 195,346 | ||||||||
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Other assets
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4,285 | 4,675 | ||||||||
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Total Assets
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$ | 7,093,786 | $ | 7,290,378 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
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Current liabilities:
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Accounts payable
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$ | 45,351 | $ | 65,773 | ||||||
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Employee compensation
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29,407 | 32,783 | ||||||||
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Deferred revenue and customer deposits
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215,436 | 167,754 | ||||||||
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Accrued interest payable
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63,322 | 73,645 | ||||||||
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Current portion of long-term debt
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143,373 | 71,023 | ||||||||
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Other accrued liabilities
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12,455 | 15,233 | ||||||||
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Total current liabilities
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509,344 | 426,211 | ||||||||
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Long-term debt
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6,004,682 | 6,026,411 | ||||||||
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Post-retirement and other post-employment benefit
obligations
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75,201 | 69,381 | ||||||||
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Other liabilities
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838 | 7,603 | ||||||||
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Total Liabilities
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6,590,065 | 6,529,606 | ||||||||
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Commitments and contingencies (Note 11)
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Stockholders’ Equity (Note 1(a)):
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Preferred stock, $.01 par value, 500,000
undesignated shares authorized, none issued and outstanding at
June 30, 2004 and December 31, 2003, respectively
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— | — | ||||||||
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Series A Preferred Stock, $.01 par
value, 500,000 shares authorized, $125.7 million and
$175.3 million of total liquidation preference at
June 30, 2004 and December 31, 2003, respectively.
323,970 and 323,812 shares issued and outstanding at
June 30, 2004 and December 31, 2003, respectively
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3 | 3 | ||||||||
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Common stock, $.01 par value,
200 million shares authorized, 130,544,820 and
129,525,570 shares issued and outstanding at June 30,
2004 and December 31, 2003, respectively
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1,305 | 1,295 | ||||||||
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Additional paid-in capital
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621,171 | 866,640 | ||||||||
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Accumulated deficit
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(117,740 | ) | (103,140 | ) | ||||||
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Accumulated other comprehensive loss
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(1,018 | ) | (4,026 | ) | ||||||
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Total Stockholders’ Equity
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503,721 | 760,772 | ||||||||
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Total Liabilities and Stockholders’ Equity
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$ | 7,093,786 | $ | 7,290,378 | ||||||
See accompanying notes to condensed consolidated financial statements.
2
DEX MEDIA , INC. AND SUBSIDIARIES
| Three Months Ended | Six Months Ended | |||||||||||||||||
| June 30, | June 30, | |||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||||
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Revenue
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$ | 396,704 | $ | 164,278 | $ | 784,881 | $ | 317,151 | ||||||||||
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Operating Expenses:
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Cost of revenue
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122,193 | 50,042 | 240,385 | 97,270 | ||||||||||||||
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General and administrative expense
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42,094 | 17,044 | 83,025 | 33,750 | ||||||||||||||
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Bad debt expense
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10,740 | 6,610 | 23,160 | 13,546 | ||||||||||||||
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Depreciation and amortization expense
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7,383 | 2,593 | 13,713 | 5,367 | ||||||||||||||
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Amortization of intangibles
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103,111 | 53,590 | 206,221 | 107,180 | ||||||||||||||
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Total operating expenses
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285,521 | 129,879 | 566,504 | 257,113 | ||||||||||||||
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Operating income
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111,183 | 34,399 | 218,377 | 60,038 | ||||||||||||||
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Other (income) expense:
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Interest income
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(443 | ) | (313 | ) | (700 | ) | (410 | ) | ||||||||||
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Interest expense
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117,994 | 50,088 | 242,619 | 98,251 | ||||||||||||||
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Other expense
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10 | 4,453 | 43 | 8,529 | ||||||||||||||
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Loss before income taxes
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(6,378 | ) | (19,829 | ) | (23,585 | ) | (46,332 | ) | ||||||||||
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Income tax benefit
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(2,319 | ) | (7,941 | ) | (8,985 | ) | (18,556 | ) | ||||||||||
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Net loss
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$ | (4,059 | ) | $ | (11,888 | ) | $ | (14,600 | ) | $ | (27,776 | ) | ||||||
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Basic and diluted loss per common share
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$ | (0.04 | ) | $ | (0.26 | ) | $ | (0.14 | ) | $ | (0.59 | ) | ||||||
See accompanying notes to condensed consolidated financial statements.
3
DEX MEDIA , INC. AND SUBSIDIARIES
| Six Months Ended | |||||||||||
| June 30, | |||||||||||
| 2004 | 2003 | ||||||||||
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Operating activities:
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Net loss
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$ | (14,600 | ) | $ | (27,776 | ) | |||||
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Adjustments to net loss:
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Bad debt expense
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23,160 | 13,546 | |||||||||
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Depreciation and amortization expense
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13,713 | 5,367 | |||||||||
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Amortization of intangibles
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206,221 | 107,180 | |||||||||
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Amortization of deferred financing costs
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29,556 | 9,114 | |||||||||
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Accretion on discount notes
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19,392 | — | |||||||||
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Stock option expense
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315 | — | |||||||||
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Loss on disposition of investments
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9 | — | |||||||||
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Deferred tax benefit
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(8,985 | ) | (18,556 | ) | |||||||
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Unrealized gain on foreign currency derivative
instrument
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— | (4,517 | ) | ||||||||
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Unrealized loss on translation of foreign
currency debt
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— | 3,579 | |||||||||
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Changes in operating assets and liabilities:
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Accounts receivable
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(13,321 | ) | (4,560 | ) | |||||||
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Deferred directory costs
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(26,027 | ) | (6,323 | ) | |||||||
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Other current assets
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5,142 | 326 | |||||||||
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Other long term assets
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425 | (3,360 | ) | ||||||||
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Accounts payable and other current liabilities
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(22,473 | ) | (6,400 | ) | |||||||
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Accrued interest
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(10,570 | ) | (3,011 | ) | |||||||
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Deferred revenue and customer deposits
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47,682 | 33,227 | |||||||||
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Employee benefit plan obligations and other
long-term liabilities
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2,120 | 3,363 | |||||||||
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Cash provided by operating activities
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251,759 | 101,199 | |||||||||
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Investing activities:
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Working capital adjustment related to the
acquisition of Dex West
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5,251 | — | |||||||||
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Expenditures for property, plant and equipment
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(9,772 | ) | (3,988 | ) | |||||||
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Capitalized software development costs
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(29,608 | ) | (9,442 | ) | |||||||
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Escrow deposits
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— | (2,000 | ) | ||||||||
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Cash used for investing activities
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(34,129 | ) | (15,430 | ) | |||||||
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Financing activities:
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Proceeds from borrowings on revolving credit
facilities
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31,000 | — | |||||||||
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Repayments of borrowings on revolving credit
facilities
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(28,000 | ) | — | ||||||||
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Proceeds from issuance of long-term debt
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250,476 | — | |||||||||
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Repayments on long-term debt
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(222,000 | ) | (109,803 | ) | |||||||
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Payment of refinancing costs
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(6,072 | ) | (846 | ) | |||||||
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Exercise of employee stock options
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4,743 | — | |||||||||
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Distribution to owners
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(252,715 | ) | — | ||||||||
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Cash used for financing activities
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(222,568 | ) | (110,649 | ) | |||||||
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Cash and cash equivalents:
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Decrease
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(4,938 | ) | (24,880 | ) | |||||||
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Beginning balance
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7,416 | 37,626 | |||||||||
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Ending balance
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$ | 2,478 | $ | 12,746 | |||||||
See accompanying notes to condensed consolidated financial statements.
4
DEX MEDIA, INC. AND SUBSIDIARIES
| (1) | Description of Business |
| (a) | Initial Public Offering |
As more fully described in Note 13, on July 27, 2004, the Company consummated its initial public offering of common stock (the “Offering”). Immediately prior to the Offering, the Company completed a 10-for-1 split of all authorized shares of common stock. Share and per share data (except par value) for all periods presented have been restated to reflect the stock split.
| (b) | Acquisition |
On August 19, 2002, Dex Holdings LLC (“Dex Holdings”), the parent of Dex Media, Inc. (“Dex Media” or “the Company”), new entities formed by the private equity firms of The Carlyle Group and Welsh, Carson, Anderson & Stowe (“WCAS”) (together, the “Sponsors”), entered into concurrent purchase agreements (the “Dex East Purchase Agreement” and the “Dex West Purchase Agreement”) to purchase the business of Qwest Dex Holdings, Inc. and its wholly-owned subsidiary Qwest Dex, Inc. (together “Qwest Dex”) from Qwest Communications International Inc. (“Qwest”) in two separate phases.
In the first phase, consummated on November 8, 2002 (the “Dex East Acquisition”), Dex Holdings assigned its right to purchase the directory business in the Dex East States (as defined below) (“Dex West”) to Dex Media East LLC (“Dex Media East”), an indirect wholly-owned subsidiary of Dex Media. Dex Media East now operates the directory business in Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota (the “Dex East States”). The total amount of consideration paid for Qwest Dex’s directory business in the Dex East States was $2.8 billion (excluding fees and acquisition costs).
In the second phase, consummated on September 9, 2003 (the “Dex West Acquisition”), Qwest Dex contributed its remaining assets and liabilities relating to its directory business in the Dex West States (as defined below) to GPP LLC, a newly-formed limited liability company. Immediately following this contribution, Dex Media West LLC, (“Dex Media West”), an indirect wholly-owned subsidiary of Dex Media, purchased all of the interests in GPP LLC for $4.3 billion (excluding fees, acquisition costs and subject to adjustments relating to working capital levels). Immediately following such purchase, Dex Media West merged with GPP LLC. Dex Media West now operates the directory business acquired in Arizona, Idaho, Montana, Oregon, Utah, Washington and Wyoming (the “Dex West States”). In conjunction with the sale, Dex West employees became employees of Dex Media West and were immediately transferred to Dex Media East. On January 1, 2004, all employees of Dex Media East were transferred to another indirect wholly-owned subsidiary of Dex Media, Dex Media Service LLC (“Service Co.”).
| (c) | Operations |
The Company is the exclusive official directory publisher for Qwest Corporation, Qwest’s local exchange carrier (“Qwest LEC”), in the Dex East States and the Dex West States (collectively the “Dex States”), which is the primary local exchange carrier in most service areas within the Dex States. As a result, the Company is the largest telephone directory publisher of white and yellow pages directories to businesses and residents in the Dex States. The Company provides directory and Internet solutions to local and national advertisers. Virtually all of the Company’s revenue is derived from the sale of advertising in its various directories. Published directories are distributed to businesses and residents in the Dex States through third-party vendors.
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| (2) | Basis of Presentation |
| (a) | General |
The accompanying condensed consolidated interim financial statements are unaudited. In compliance with the Securities and Exchange Commission’s (the “SEC”) instructions for interim financial statements, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. In management’s opinion, the condensed consolidated financial statements reflect all adjustments (which consist of normal recurring adjustments) necessary to fairly present the condensed consolidated statement of financial position as of June 30, 2004 and December 31, 2003, the condensed consolidated statements of operations for the three months and six months ended June 30, 2004 and 2003 and the condensed consolidated statements of cash flows for the six months ended June 30, 2004 and 2003. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company as of December 31, 2003 and 2002 and for the year ended December 31, 2003, for the periods from November 9 to December 31, 2002 and from January 1 to November 8, 2002, and for the year ended December 31, 2001 included in the Offering Prospectus as filed with the SEC. The condensed consolidated statements of operations for the three months and six months ended June 30, 2004 are not necessarily indicative of the results expected for the full year.
The condensed consolidated balance sheets as of June 30, 2004 and December 31, 2003, the condensed consolidated statements of operations for the three months and six months ended June 30, 2004 and the condensed consolidated statement of cash flows for the six months ended June 30, 2004 include the financial position, results of operations and cash flows of Dex Media West whereas the condensed consolidated statements of operations for the three months and six months ended June 30, 2003 and the condensed consolidated statement of cash flows for the six months ended June 30, 2003 do not include the results of operations and cash flows of Dex West, the predecessor of Dex Media West. Therefore, the financial statements are not comparable.
The accompanying condensed consolidated balance sheets as of June 30, 2004 and December 31, 2003, the condensed consolidated statements of operations for the three months and six months ended June 30, 2004 and the condensed consolidated statement of cash flows for the six months ended June 30, 2004 include all material adjustments required under purchase accounting related to the Dex West Acquisition. The accompanying condensed consolidated statements of operations for the three months and six months ended June 30, 2003 and the condensed consolidated statement of cash flows for the six months ended June 30, 2003 include all material adjustments required under purchase accounting related to the Dex East Acquisition.
| (b) | Reclassifications |
Certain prior period amounts have been reclassified to conform to the 2004 presentation.
| (3) | Summary of Significant Accounting Policies |
| (a) | Principles of Consolidation |
The consolidated financial statements include the financial statements of Dex Media and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
| (b) | Use of Estimates |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts and disclosures reported in these condensed consolidated financial statements and accompanying notes. Actual results could differ significantly from those estimates.
6
| (c) | Revenue Recognition |
The sale of advertising in printed directories published by the Company is the primary source of revenue. Revenue is recognized ratably over the life of each directory using the deferral and amortization method of accounting, with revenue recognition commencing in the month of delivery. The Company publishes white and yellow pages directories primarily with 12-month lives. From time to time, the Company may choose to change the lives of certain directories in order to more efficiently manage work and account flow. During 2003, the Company determined it would extend the lives of 13 directories published in December 2002 and publish the new editions of these directories in January 2004, in most cases. The lives of the new editions of these directories will be 12 months thereafter. These extensions did not have a significant impact on the Company’s results of operations for the three months and six months ended June 30, 2004 and is not expected to have a material effect on revenue or cost of revenue in future periods under the deferral and amortization method of accounting. For the three months and six months ended June 30, 2004, the Company published 87 and 161 directories, respectively. For the three months and six months ended June 30, 2003, the Company and Dex West collectively published 88 and 149 directories, respectively.
The Company enters into transactions where the Company’s products and services are promoted by an account and, in exchange, the Company carries the account’s advertisement. The Company accounts for these transactions in accordance with Emerging Issues Task Force (“EITF”) Issue No. 99-17, “Accounting for Advertising Barter Transactions.” Such transactions were not significant to the Company’s operations for the three months and six months ended June 30, 2004 and 2003.
In certain cases, the Company enters into agreements with accounts that involve the delivery of more than one product or service. Revenue for such arrangements is allocated in accordance with EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.”
| (d) | Cost of Revenue |
The Company accounts for cost of revenue under the deferral and amortization method of accounting. Accordingly, the cost of revenue recognized in a reporting period consists of (1) costs incurred in that period and recognized in that period, principally sales salaries and wages, (2) costs incurred in a prior period, a portion of which is amortized and recognized in the current period and (3) costs incurred in the current period, a portion of which is amortized and recognized in that period and the balance of which is deferred until future periods. Consequently, there will be a difference between the cost of revenue recognized in any given period and the costs incurred in the given period, which may be significant.
Costs incurred in the current period and subject to deferral include direct costs associated with the publication of directories, including sales commissions, paper, printing, transportation, distribution and pre-press production and employee and systems support costs relating to each of the foregoing. Sales commissions include commissions paid to employees for sales to local advertisers and to third party certified marketing representatives, which act as the Company’s channel to national advertisers. 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 delivery.
| (e) | Stock-Based Compensation |
The Company accounts for the Stock Option Plan of Dex Media, Inc. under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. Had the Company accounted for employee stock options grants under the fair value method prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” the pro forma results of the Company for the three
7
months and six months ended June 30, 2004 and 2003 would have been as follows (in thousands, except per share data):
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