UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended September 30, 2004 | ||
| OR | ||
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o
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TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from to | ||
Commission File Number: 001-32249
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 þ No o
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 November 10, 2004, there were 150,294,162 shares outstanding of the Registrant’s Common Stock (par value $0.01 per share).
INDEX
1
PART I.
FINANCIAL INFORMATION
| Item I. | Financial Statements |
DEX MEDIA, INC. AND SUBSIDIARIES
| As of | As of | ||||||||||
| September 30, | December 31, | ||||||||||
| 2004 | 2003 | ||||||||||
| ASSETS | |||||||||||
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Current assets:
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Cash and cash equivalents
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$ | 3,778 | $ | 7,416 | |||||||
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Accounts receivable, net
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103,124 | 116,409 | |||||||||
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Deferred directory costs
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289,866 | 270,626 | |||||||||
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Current deferred taxes
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8,557 | 9,855 | |||||||||
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Other current assets
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16,616 | 13,564 | |||||||||
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Total current assets
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421,941 | 417,870 | |||||||||
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Property, plant and equipment, net
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103,398 | 77,683 | |||||||||
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Goodwill
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3,084,132 | 3,089,317 | |||||||||
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Intangible assets, net
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3,136,769 | 3,446,100 | |||||||||
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Deferred income taxes
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91,287 | 59,387 | |||||||||
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Deferred financing costs
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155,001 | 195,346 | |||||||||
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Other assets
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3,124 | 4,675 | |||||||||
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Total Assets
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$ | 6,995,652 | $ | 7,290,378 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
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Current liabilities:
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|||||||||||
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Accounts payable
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$ | 40,208 | $ | 65,773 | |||||||
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Employee compensation
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41,667 | 32,783 | |||||||||
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Deferred revenue and customer deposits
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212,418 | 167,754 | |||||||||
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Accrued interest payable
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70,947 | 73,645 | |||||||||
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Current portion of long-term debt
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179,083 | 71,023 | |||||||||
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Other accrued liabilities
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15,755 | 15,233 | |||||||||
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Total current liabilities
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560,078 | 426,211 | |||||||||
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Long-term debt
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5,659,827 | 6,026,411 | |||||||||
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Post-retirement and other post-employment benefit
obligations
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78,030 | 69,381 | |||||||||
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Other liabilities
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2,260 | 7,603 | |||||||||
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Total Liabilities
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6,300,195 | 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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|||||||||||
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Preferred stock, $.01 par value,
249.8 million undesignated shares authorized
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— | — | |||||||||
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Series A Junior Participating Preferred
Stock, $0.01 par value, 200,000 shares authorized
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— | — | |||||||||
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Series A Preferred Stock, $.01 par
value, zero and 250 million shares authorized,
$175.3 million of total liquidation preference at
December 31, 2003. 323,812 shares issued and
outstanding at December 31, 2003
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— | 3 | |||||||||
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Common stock, $.01 par value,
700 million shares authorized, 150,294,162 and
129,525,570 shares issued and outstanding at
September 30, 2004 and December 31, 2003, respectively
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1,503 | 1,295 | |||||||||
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Additional paid-in capital
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847,169 | 866,640 | |||||||||
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Accumulated deficit
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(151,405 | ) | (103,140 | ) | |||||||
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Accumulated other comprehensive loss
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(1,810 | ) | (4,026 | ) | |||||||
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Total Stockholders’ Equity
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695,457 | 760,772 | |||||||||
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Total Liabilities and Stockholders’ Equity
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$ | 6,995,652 | $ | 7,290,378 | |||||||
See accompanying notes to condensed consolidated financial statements.
2
DEX MEDIA , INC. AND SUBSIDIARIES
| Three Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||||
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Revenue
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$ | 404,587 | $ | 189,830 | $ | 1,189,467 | $ | 506,981 | ||||||||||
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Operating Expenses:
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Cost of revenue
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123,520 | 54,969 | 363,905 | 152,239 | ||||||||||||||
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General and administrative expense
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51,529 | 24,956 | 134,552 | 58,705 | ||||||||||||||
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Bad debt expense
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10,475 | 6,756 | 33,635 | 20,303 | ||||||||||||||
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Termination of annual advisory fees
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20,000 | — | 20,000 | — | ||||||||||||||
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Depreciation and amortization expense
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8,604 | 3,321 | 22,318 | 8,688 | ||||||||||||||
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Amortization of intangibles
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103,110 | 67,658 | 309,331 | 174,838 | ||||||||||||||
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Total operating expenses
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317,238 | 157,660 | 883,741 | 414,773 | ||||||||||||||
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Operating income
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87,349 | 32,170 | 305,726 | 92,208 | ||||||||||||||
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Other (income) expense:
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Interest income
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(578 | ) | (220 | ) | (1,278 | ) | (694 | ) | ||||||||||
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Interest expense
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144,635 | 64,029 | 387,255 | 162,344 | ||||||||||||||
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Other expense
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18 | 2,769 | 60 | 11,299 | ||||||||||||||
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Loss before income taxes
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(56,726 | ) | (34,408 | ) | (80,311 | ) | (80,741 | ) | ||||||||||
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Income tax benefit
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(23,061 | ) | (13,449 | ) | (32,046 | ) | (32,006 | ) | ||||||||||
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Net loss
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$ | (33,665 | ) | $ | (20,959 | ) | $ | (48,265 | ) | $ | (48,735 | ) | ||||||
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Basic and diluted loss per common share
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$ | (0.24 | ) | $ | (0.33 | ) | $ | (0.39 | ) | $ | (0.93 | ) | ||||||
See accompanying notes to condensed consolidated financial statements.
3
DEX MEDIA , INC. AND SUBSIDIARIES
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2004 | 2003 | ||||||||||
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Operating activities:
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Net loss
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$ | (48,265 | ) | $ | (48,735 | ) | |||||
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Adjustments to net loss:
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Bad debt expense
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33,635 | 20,303 | |||||||||
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Depreciation and amortization expense
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22,318 | 8,688 | |||||||||
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Amortization of intangibles
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309,331 | 174,838 | |||||||||
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Amortization of deferred financing costs
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46,331 | 14,108 | |||||||||
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Accretion on discount notes
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30,636 | — | |||||||||
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Stock option expense
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787 | — | |||||||||
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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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(32,046 | ) | (32,006 | ) | |||||||
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Unrealized gain on foreign currency derivative
instrument
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— | (4,857 | ) | ||||||||
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Unrealized loss on translation of foreign
currency debt
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— | 3,776 | |||||||||
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Changes in operating assets and liabilities:
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Accounts receivable
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(20,350 | ) | 18,159 | ||||||||
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Deferred directory costs
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(19,240 | ) | (18,195 | ) | |||||||
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Other current assets
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(5,247 | ) | 344 | ||||||||
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Other long-term assets
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1,585 | (401 | ) | ||||||||
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Accounts payable and other current liabilities
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(11,521 | ) | (6,270 | ) | |||||||
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Accrued interest
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(2,946 | ) | 37,583 | ||||||||
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Deferred revenue and customer deposits
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44,664 | 70,866 | |||||||||
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Employee benefit plan obligations and other
long-term liabilities
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4,526 | 5,615 | |||||||||
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Cash provided by operating activities
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354,207 | 243,816 | |||||||||
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Investing activities:
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Working capital adjustment related to the
acquisition of Dex West
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5,185 | — | |||||||||
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Expenditures for property, plant and equipment
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(12,590 | ) | (9,838 | ) | |||||||
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Capitalized software development costs
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(35,443 | ) | (15,794 | ) | |||||||
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Escrow deposits
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— | (2,000 | ) | ||||||||
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Escrow funds released
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— | 4,000 | |||||||||
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Additional consideration for the acquisition of
Dex East
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— | (4,472 | ) | ||||||||
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Acquisition of Dex West
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— | (4,290,104 | ) | ||||||||
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Payment of acquisition fees
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— | (54,391 | ) | ||||||||
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Cash used for investing activities
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(42,848 | ) | (4,372,599 | ) | |||||||
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Financing activities:
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Proceeds from borrowings on revolving credit
facilities
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41,000 | 5,000 | |||||||||
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Repayments of borrowings on revolving credit
facilities
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(41,000 | ) | (5,000 | ) | |||||||
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Proceeds from issuance of long-term debt
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250,476 | 3,538,000 | |||||||||
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Repayments on long-term debt
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(539,389 | ) | (229,873 | ) | |||||||
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Payment of refinancing costs
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(6,030 | ) | (111,376 | ) | |||||||
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Issuance of preferred stock
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— | 192,400 | |||||||||
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Redemption of preferred stock
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(128,485 | ) | — | ||||||||
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Issuance of common stock
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375,000 | 769,600 | |||||||||
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Offering costs
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(20,795 | ) | — | ||||||||
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Exercise of employee stock options
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4,426 | — | |||||||||
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Distribution to Owners
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(250,520 | ) | — | ||||||||
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Dividends reinvested
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320 | — | |||||||||
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Payment of debt commitment fee
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— | (17,981 | ) | ||||||||
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Cash (used for) provided by financing activities
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(314,997 | ) | 4,140,770 | ||||||||
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Cash and cash equivalents:
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(Decrease) increase
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(3,638 | ) | 11,987 | ||||||||
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Beginning balance
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7,416 | 37,626 | |||||||||
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Ending balance
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$ | 3,778 | $ | 49,613 | |||||||
See accompanying notes to condensed consolidated financial statements.
4
DEX MEDIA, INC. AND SUBSIDIARIES
| (1) | Description of Business |
| (a) | Initial Public Offering |
Effective July 27, 2004, Dex Media, Inc. (“Dex Media” or the “Company”) consummated its initial public offering of common stock (the “Offering”). The Company issued 19,736,842 shares of common stock at an Offering price of $19.00 per share for net proceeds of $354.2 million. A portion of the net proceeds was used to redeem all of the Company’s outstanding 5% Series A Preferred Stock, including accrued and unpaid dividends, for approximately $128.5 million and to pay fees and expenses related to the Offering. On August 26, 2004, the remainder of net proceeds related to the Offering was used to redeem $183.8 million of Dex Media East’s senior subordinated notes at a redemption price of 112.125% along with the accrued and unpaid interest and $18.2 million of Dex Media West’s senior subordinated notes at a redemption price of 109.875% along with the accrued and unpaid interest. Also in connection with the Offering, the Company paid $10.0 million to each of the Sponsors (as defined below) to eliminate the $4.0 million aggregate annual advisory fees payable under Dex Media East’s and Dex Media West’s management consulting agreements. As a result of the Offering, the Company plans to begin paying dividends on its common stock. Immediately prior to the Offering the Company effected a 10-for-1 common stock split. The share and per share data for all periods presented have been adjusted to reflect the effects of the stock split.
| (b) | Acquisition |
On August 19, 2002, Dex Holdings LLC (“Dex Holdings”), the parent of the Company, both 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 East”) 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) (“Dex West”) 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 and acquisition costs). 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 acquisition, 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
5
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.
| (2) | Basis of Presentation |
| (a) General |
The accompanying condensed consolidated interim financial statements are unaudited. In compliance with the instruction of the Securities and Exchange Commission (the “SEC”) 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 statements of financial position as of September 30, 2004 and December 31, 2003, the condensed consolidated statements of operations for the three months and nine months ended September 30, 2004 and 2003 and the condensed consolidated statements of cash flows for the nine months ended September 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 nine months ended September 30, 2004 are not necessarily indicative of the results expected for the full year.
The condensed consolidated balance sheets as of September 30, 2004 and December 31, 2003, the condensed consolidated statements of operations for the three months and nine months ended September 30, 2004 and 2003 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2004 and 2003 include the financial position, results of operations and cash flows of Dex Media West subsequent to the Dex West Acquisition on September 9, 2003, whereas the condensed consolidated statements of operations for the three months and nine months ended September 30, 2003 and the condensed consolidated statement of cash flows for the nine months ended September 30, 2003 do not include the results of operations and cash flows of Dex West prior to the Dex West Acquisition. Therefore, the financial statements are not comparable.
The accompanying condensed consoli