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: 333-102395
Dex Media East LLC
| Delaware | 42-1554575 | |
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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
INDEX
1
PART I.
FINANCIAL INFORMATION
| Item I. | Financial Statements |
DEX MEDIA EAST LLC
| As of | As of | |||||||||
| September 30, | December 31, | |||||||||
| 2004 | 2003 | |||||||||
| ASSETS | ||||||||||
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Current assets:
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||||||||||
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Cash and cash equivalents
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$ | — | $ | 2,758 | ||||||
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Accounts receivable, net
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40,207 | 62,176 | ||||||||
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Deferred directory costs
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122,383 | 128,333 | ||||||||
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Current deferred taxes
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5,162 | 5,979 | ||||||||
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Amounts due from affiliates
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— | 28,554 | ||||||||
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Other current assets
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8,984 | 5,906 | ||||||||
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Total current assets
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176,736 | 233,706 | ||||||||
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Property, plant and equipment, net
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52,906 | 39,667 | ||||||||
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Goodwill
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890,731 | 890,731 | ||||||||
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Intangible assets, net
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1,408,955 | 1,544,800 | ||||||||
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Deferred income taxes
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48,178 | 42,151 | ||||||||
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Deferred financing costs
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54,486 | 78,925 | ||||||||
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Amounts due from affiliate related to
post-retirement and other post-employment benefit obligations
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— | 35,519 | ||||||||
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Other assets
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1,339 | 1,719 | ||||||||
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Total Assets
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$ | 2,633,331 | $ | 2,867,218 | ||||||
| LIABILITIES AND OWNER’S EQUITY | ||||||||||
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Current liabilities:
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||||||||||
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Accounts payable
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$ | 21,446 | $ | 49,062 | ||||||
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Amounts due to affiliate
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14,744 | — | ||||||||
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Employee compensation
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— | 32,783 | ||||||||
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Deferred revenue and customer deposits
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82,549 | 99,522 | ||||||||
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Accrued interest payable
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35,945 | 18,684 | ||||||||
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Current portion of long-term debt
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101,840 | 50,845 | ||||||||
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Other accrued liabilities
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10,535 | 9,120 | ||||||||
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Total current liabilities
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267,059 | 260,016 | ||||||||
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Long-term debt
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1,687,837 | 2,090,268 | ||||||||
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Post-retirement and other post-employment benefit
obligations
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— | 69,381 | ||||||||
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Amounts due to affiliate related to
post-retirement and other post-employment obligations
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37,693 | — | ||||||||
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Other liabilities
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2,049 | 7,195 | ||||||||
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Total Liabilities
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1,994,638 | 2,426,860 | ||||||||
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Commitments and contingencies (Note 10)
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||||||||||
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Accumulated deficit
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(78,348 | ) | (69,902 | ) | ||||||
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Accumulated other comprehensive loss
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(1,810 | ) | (4,026 | ) | ||||||
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Owner’s interest
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718,851 | 514,286 | ||||||||
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Total Owner’s Equity
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638,693 | 440,358 | ||||||||
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Total Liabilities and Owner’s Equity
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$ | 2,633,331 | $ | 2,867,218 | ||||||
See accompanying notes to condensed consolidated financial statements.
2
DEX MEDIA EAST LLC
| Three Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||||
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Revenue
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$ | 182,891 | $ | 175,259 | $ | 543,488 | $ | 492,410 | ||||||||||
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Operating Expenses:
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||||||||||||||||||
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Cost of revenue
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54,984 | 50,150 | 165,634 | 147,420 | ||||||||||||||
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General and administrative expense
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22,741 | 19,454 | 59,205 | 53,203 | ||||||||||||||
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Bad debt expense
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4,935 | 4,899 | 16,267 | 18,446 | ||||||||||||||
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Termination of annual advisory fees
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10,000 | — | 10,000 | — | ||||||||||||||
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Depreciation and amortization expense
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3,488 | 2,707 | 9,117 | 8,074 | ||||||||||||||
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Amortization of intangibles
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45,282 | 53,590 | 135,845 | 160,770 | ||||||||||||||
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Total operating expenses
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141,430 | 130,800 | 396,068 | 387,913 | ||||||||||||||
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Operating income
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41,461 | 44,459 | 147,420 | 104,497 | ||||||||||||||
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Other (income) expense:
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||||||||||||||||||
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Interest income
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(327 | ) | (118 | ) | (645 | ) | (592 | ) | ||||||||||
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Interest expense
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68,573 | 47,449 | 163,121 | 145,764 | ||||||||||||||
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Other expense, net
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— | 2,769 | 43 | 11,299 | ||||||||||||||
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Loss before income taxes
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(26,785 | ) | (5,641 | ) | (15,099 | ) | (51,974 | ) | ||||||||||
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Income tax benefit
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(11,350 | ) | (2,259 | ) | (6,653 | ) | (20,816 | ) | ||||||||||
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Net loss
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$ | (15,435 | ) | $ | (3,382 | ) | $ | (8,446 | ) | $ | (31,158 | ) | ||||||
See accompanying notes to condensed consolidated financial statements.
3
DEX MEDIA EAST LLC
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2004 | 2003 | ||||||||||
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Operating activities:
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Net loss
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$ | (8,446 | ) | $ | (31,158 | ) | |||||
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Adjustments to net loss:
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|||||||||||
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Bad debt expense
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16,267 | 18,446 | |||||||||
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Depreciation and amortization expense
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9,117 | 8,074 | |||||||||
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Amortization of intangibles
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135,845 | 160,770 | |||||||||
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Amortization of deferred financing costs
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25,336 | 12,985 | |||||||||
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Stock option expense
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344 | — | |||||||||
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Deferred tax benefit
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(6,653 | ) | (20,816 | ) | |||||||
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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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|||||||||||
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Accounts receivable
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5,701 | (9,402 | ) | ||||||||
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Deferred directory costs
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5,951 | (589 | ) | ||||||||
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Other current assets
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(3,078 | ) | 1,431 | ||||||||
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Other long-term assets
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424 | (3,348 | ) | ||||||||
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Accounts payable and other liabilities
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(27,878 | ) | (10,478 | ) | |||||||
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Accrued interest
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17,014 | 23,154 | |||||||||
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Deferred revenue and customer deposits
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(16,973 | ) | 24,582 | ||||||||
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Amounts due to affiliates
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14,744 | 4,120 | |||||||||
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Amounts due to affiliates related to
post-retirement and other post-employment benefits
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3,831 | (372 | ) | ||||||||
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Employee benefit plan obligations and other
long-term liabilities
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(3,928 | ) | 5,999 | ||||||||
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Cash provided by operating activities
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167,618 | 182,317 | |||||||||
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Investing activities:
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|||||||||||
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Expenditures for property, plant and equipment
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(7,465 | ) | (8,305 | ) | |||||||
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Capitalized software development costs
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(14,891 | ) | (15,434 | ) | |||||||
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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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Cash used for investing activities
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(22,356 | ) | (26,211 | ) | |||||||
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Financing activities:
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|||||||||||
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Proceeds from borrowings on revolving credit
facility
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18,000 | 5,000 | |||||||||
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Repayments of borrowings on revolving credit
facility
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(18,000 | ) | (5,000 | ) | |||||||
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Proceeds from issuance of long-term debt
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— | 160,000 | |||||||||
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Repayments on long-term debt
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(351,189 | ) | (149,873 | ) | |||||||
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Payment of refinancing costs
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(941 | ) | (2,639 | ) | |||||||
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Contributions from parent
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212,280 | 50,000 | |||||||||
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Distributions to parent
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(8,170 | ) | (210,000 | ) | |||||||
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Cash used for financing activities
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(148,020 | ) | (152,512 | ) | |||||||
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Cash and cash equivalents:
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|||||||||||
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(Decrease) increase
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(2,758 | ) | 3,594 | ||||||||
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Beginning balance
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2,758 | 37,626 | |||||||||
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Ending balance
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$ | — | $ | 41,220 | |||||||
See accompanying notes to condensed consolidated financial statements.
4
DEX MEDIA EAST LLC
| (1) | Description of Business |
| (a) | Dex Media Initial Public Offering |
Effective July 27, 2004, the Company’s indirect parent, Dex Media, Inc. (“Dex Media”) consummated its initial public offering of common stock, (the “Offering”). Part of the proceeds related to the Offering were used to redeem $183.8 million of the Company’s senior subordinated notes on August 26, 2004 at a redemption price of 112.125% along with the accrued and unpaid interest. In connection with the Offering, the Company paid $5.0 million to each of the Sponsors (as defined below) to eliminate the aggregate $2.0 million annual advisory fee payable under its management consulting agreements.
| (b) | Acquisition |
On August 19, 2002, Dex Holdings LLC (“Dex Holdings”), the parent of Dex Media, 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 “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” or “the Company”), 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, 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 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, which is the primary local exchange carrier in most service areas within the Dex East 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 East 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 East States through third-party vendors.
5
| (2) | Basis of Presentation |
| (a) | General |
The accompanying condensed consolidated interim financial statements are unaudited. In compliance with the instructions 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 Company’s Form 10-K 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 accompanying condensed consolidated statements of operations for the three months and nine months ended September 30, 2003 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2003 include all material adjustments required under purchase accounting.
| (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 condensed consolidated financial statements include the financial statements of Dex Media East 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.
| (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 publication dates of certain directories in order to more efficiently manage work and account flow. The lives of the effected directories will primarily be 12 months thereafter. Such extensions did not have a significant impact on the Company’s results of operations for the three months and nine months ended September 30, 2004 and they are not expected to have a material effect on revenue or cost of revenue in future
6
periods under the deferral and amortization method of accounting. For the three months ended September 30, 2004 and 2003, the Company published 25 and 26 directories, respectively. For the nine months ended September 30, 2004 and 2003, the Company published 117 and 114 directories, respectively, in the Dex East States.
The Company enters into transactions where the Company’s products and services are promoted by a third party and, in exchange, the Company carries the party’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.” Revenue and expense related to such transactions are classified in the consolidated statements of operations consistently with similar items sold or purchased for cash. Such barter transactions were not significant to the Company’s operations for the three months and nine months ended September 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. and the Dex Media, Inc. 2004 Incentive Award Plan 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 months and nine months ended September 30, 2004 and 2003 would have been as follows (in thousands):