SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): December 2, 2002
R.H. DONNELLEY CORPORATION
(Exact Name of Registrant as Specified in Charter)
<Table>
DELAWARE 1-07155 13-2740040
- ----------------------------- ----------------------------- -----------------------------
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
</Table>
<Table>
ONE MANHATTANVILLE ROAD, PURCHASE, NEW YORK 10577
- ----------------------------------------------------- ------------------------------------
(Address of Principal Executive Offices) (Zip Code)
</Table>
R.H. DONNELLEY INC.*
(Exact Name of Registrant as Specified in Charter)
<Table>
DELAWARE 333-59287 36-2467635
- ----------------------------- ----------------------------- -----------------------------
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
</Table>
<Table>
ONE MANHATTANVILLE ROAD, PURCHASE, NEW YORK 10577
- ----------------------------------------------------- ------------------------------------
(Address of Principal Executive Offices) (Zip Code)
</Table>
Registrants' telephone number, including area code: (914) 933-6400
Not Applicable
------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
* R.H. Donnelley Inc. is a wholly owned subsidiary of R.H. Donnelley
Corporation, which became subject to the filing requirements of Section 15(d) on
October 1, 1998. As of December 2, 2002, 100 shares of R.H. Donnelley Inc.
common stock, no par value, were outstanding.
ITEM 9. REGULATION FD DISCLOSURE.
In connection with the financing related to the acquisition contemplated by
the Stock Purchase Agreement, dated as of September 21, 2002, by and among R.H.
Donnelley Corporation, a Delaware corporation (the "Company"), Sprint
Corporation, a Kansas corporation ("Sprint"), and Centel Directories LLC, a
Delaware limited liability company ("Centel Directories"), pursuant to which the
Company intends to purchase Sprint's directory publishing business ("SPA") as
referenced in the Current Report on Form 8-K filed on October 1, 2001, the
following pro forma financial information is provided.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements (the "pro
forma statements") give effect to the acquisition by the Company of SPA and
related financings on the historical financial position and results of
operations of the Company and SPA.
The pro forma statements give effect to the SPA acquisition and the related
financings as if the transactions had been consummated for the combined
statements of operations on January 1, 2001 and for the combined balance sheet
on September 30, 2002 under the purchase method of accounting.
The pro forma statements are provided for informational purposes only and
do not purport to represent what the combined financial position or results of
operations actually would have been had the SPA acquisition and related
financings and other pro forma adjustments occurred on the dates indicated.
Additionally, the pro forma statements are not necessarily indicative of the
future financial condition or results of operations of the Company.
THE ACQUISITION
On September 21, 2002, the Company entered into an agreement with Sprint
and Centel Directories to purchase all the outstanding capital stock of all of
the entities comprising SPA for $2.23 billion in cash, subject to a working
capital adjustment. Under the purchase method of accounting, the costs to
acquire SPA, including transaction costs, will be allocated to the underlying
net assets in proportion to their respective fair values. Any excess of the
purchase price over the estimated fair value of the net assets acquired,
including identifiable intangible assets, will be allocated to goodwill. A
preliminary allocation of the purchase price to the net assets acquired,
including identifiable intangible assets, has been made based on the best
information currently available. However, additional analysis must be completed
to provide the basis for determining the fair value of identifiable intangible
assets and their respective amortization periods. The finalization of the
purchase price allocation may result in materially different fair values
assigned to the net assets acquired, including identifiable intangible assets
and their useful lives.
Management expects that the SPA acquisition will result in increased
efficiencies and cost savings opportunities for the combined company. These
opportunities include, but are not limited to, information technology cost
savings from the elimination and consolidation of publishing, sales and other
systems, rationalization and increased utilization of pre-press publishing
facilities, and the rationalization of administrative and other support
functions. Management also expects that the combined company will incur certain
general and administrative costs above the amounts historically allocated to SPA
by its parent company. In addition, once the SPA acquisition is consummated, the
Company will evaluate the application of SPA's accounting policies to ensure
consistency with the application of its own policies. However, the net financial
impact of these matters has not been reflected in the accompanying pro forma
statements.
The Company will begin to consolidate the results of SPA from the date of
consummation of the SPA acquisition. Under purchase accounting, the liability
for pre-acquisition deferred revenue reflected on the financial statements of
SPA will be reduced to zero on the date of acquisition. Additionally, deferred
directory costs will be adjusted to reflect only those deferred costs related to
unpublished directories. As a result of these purchase accounting adjustments
and using the deferred revenue and cost balances as of September 30, 2002,
revenue and expenses would be reduced by an estimated $242.4 million and $78.9
million, respectively, in the first year following the SPA acquisition. Had the
SPA acquisition not occurred, SPA's deferred revenue and expenses would have
continued to be amortized into revenue and expenses ratably over the life of
2
the applicable directories. These purchase accounting adjustments are
non-recurring and have no future cash impact. Although the deferred revenue
balance is eliminated under purchase accounting, accounts receivable balances
remain and we will retain all the rights and obligations associated with the
collection of amounts due under the advertising contracts executed prior to
SPA being acquired by the Company.
Additionally, the Company is currently a sales agent for SPA and has a
membership interest in CenDon, L.L.C. ("CenDon"). A portion of the Company's
revenue and partnership and joint venture income is received from SPA. Had the
SPA acquisition occurred on January 1, 2001, all subsequent transactions between
the Company and SPA would have been intercompany transactions. Accordingly, the
transactions between the Company and SPA have been eliminated in the pro forma
statements.
REVENUE RECOGNITION
Upon the consummation of the acquisition of SPA, the Company will be the
publisher of 260 revenue-generating yellow pages directories. Historically, when
the Company was a directory publisher, its accounting policy was to recognize
revenue and direct costs when a directory was both published and substantially
delivered. Upon consummation of the SPA acquisition, the Company presently
intends to recognize revenue and direct costs related to the publication of
yellow pages directories under the deferral method. Under this method, revenue
from advertising sales and costs directly related to sales, production, printing
and distribution are deferred and amortized ratably over a 12-month period,
which is the typical life of a directory.
3
DONNELLEY PRO FORMA COMBINED BALANCE SHEET (UNAUDITED)
AS OF SEPTEMBER 30, 2002
<Table>
<Caption>
DONNELLEY SPA PRE-ACQUISITION ACQUISITION
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ---------- --------------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS:
Cash and cash equivalents..... $ 9,845 $ 681 $ (681)(1) $ -- $ 9,845
Accounts receivable, net...... 30,891 234,862 (27,350)(2) -- 238,403
Deferred directory costs...... -- 91,786 -- (78,923)(4)
6,704 (4) 19,567
Advances to parent company.... -- 21,114 (21,114)(1) -- --
Deferred income taxes......... -- 35,934 -- (35,934)(4) --
Prepaid expenses and other.... 349 6,600 -- -- 6,949
--------- -------- -------- ---------- ----------
Total current assets..... 41,085 390,977 (49,145) (108,153) 274,764
Fixed assets and computer
software, net............... 12,292 13,686 -- -- 25,978
Partnership and joint venture
investments................. 207,643 -- (16,845)(2) -- 190,798
Prepaid pension............... 22,156 -- -- -- 22,156
Deferred income taxes......... -- 3,829 -- (3,829)(4) --
Other non-current assets...... 7,291 46 -- 65,542 (5)
(2,858)(7) 70,021
Intangible assets............. -- -- -- 1,870,000 (4) 1,870,000
Goodwill...................... -- 1,275 -- 171,182 (4)
(1,275)(4) 171,182
--------- -------- -------- ---------- ----------
Total assets............. $ 290,467 $409,813 $(65,990) $1,990,609 $2,624,899
========= ======== ======== ========== ==========
LIABILITIES AND CONVERTIBLE
PREFERRED STOCK:
Accounts payable and accrued
liabilities................. $ 32,309 $ 22,786 $ (9,327)(2) $ -- $ 45,768
Affiliated payables........... -- 17,808 (17,808)(1) -- --
Deferred revenue.............. -- 242,350 -- (242,350)(4) --
Current portion of long-term
debt........................ 2,259 -- -- (2,259)(7) --
--------- -------- -------- ---------- ----------
Total current
liabilities............ 34,568 282,944 (27,135) (244,609) 45,768
Long-term debt................ 221,991 -- -- (221,991)(7)
2,357,125 (5) 2,357,125
Deferred income
taxes -- net................ 57,377 -- -- -- 57,377
Post-retirement and other
benefits.................... 7,322 19,484 (19,484)(1) -- 7,322
Other non-current
liabilities................. 13,920 15,806 (1,801)(1) (14,000)(8)
(7,049)(2) 6,876
Minority interest............. -- (5,451) -- 5,451 (2) --
Total liabilities........ 335,178 312,783 (55,469) 1,881,976 2,474,468
Convertible preferred stock... -- -- -- 120,000 (6) 120,000
</Table>
4
<Table>
<Caption>
DONNELLEY SPA PRE-ACQUISITION ACQUISITION
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ---------- --------------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SHAREHOLDERS' EQUITY:
Preferred stock............... $ -- $ -- $ -- $ -- $ --
Common stock.................. 51,622 1 -- (1)(9) 51,622
Additional paid-in capital.... 39,639 176 -- 63,326 (6)
(176)(9) 102,965
Unamortized restricted
stock....................... (387) -- -- -- (387)
Warrants outstanding.......... -- -- -- 14,674 (6) 14,674
Retained earnings............. 30,539 96,853 (10,521)(3) (89,190)(9) 27,681
Treasury stock................ (164,755) -- -- -- (164,755)
Accumulated other
comprehensive loss.......... (1,369) -- -- -- (1,369)
--------- -------- -------- ---------- -----------
Total shareholders' equity.... (44,711) 97,030 (10,521) (11,367) 30,431
--------- -------- -------- ---------- -----------
Total liabilities,
convertible
preferred stock and
shareholders'
equity.............. $ 290,467 $409,813 $(65,990) $1,990,609 $ 2,624,899
========= ======== ======== ========== ===========
</Table>
- ---------------
(1) Pursuant to the terms of the stock purchase agreement by and among the
Company, Sprint and Centel Directories, prior to the closing, SPA will
settle its intercompany receivables and payables with Sprint and dividend
excess cash to Sprint. The stock purchase agreement further states that
the Company will not assume SPA's existing post-retirement and other benefit
obligations. The effect of these adjustments increased net assets acquired
by $17,298.
(2) The Company currently provides sales agency and pre-press publishing
services for SPA directories in select markets and receives commission and
pre-press publishing revenue from SPA and a priority distribution from
CenDon. As a result of the SPA acquisition, the Company will become the
publisher of these directories. Accordingly, all commissions, pre-press
publishing and priority distribution receivables and payables between the
Company and SPA in the historical financial statements would be intercompany
transactions and, therefore, have been eliminated. The effect of these
adjustments was to reduce shareholders' equity by $33,270.
(3) Represents the net adjustment to shareholders' equity for adjustments (1)
and (2) above.
(4) The SPA acquisition will be accounted for as a purchase business combination
in accordance with the Statement of Financial Accounting Standards No. 141,
Business Combinations. Accordingly, the purchase price will be allocated to
the tangible and identified intangible assets acquired and the liabilities
assumed on the acquisition date, as adjusted to eliminate intercompany items
between the Company and SPA. A preliminary allocation of the purchase price
to the net assets acquired and liabilities assumed has been performed using
a third party valuation, as follows:
<Table>
CALCULATION OF PURCHASE PRICE:
Cash...................................................... $2,230,000
Transaction costs......................................... 21,333
----------
Total purchase price...................................... $2,251,333
==========
</Table>
5
<Table>
ALLOCATION OF PURCHASE PRICE:
SPA historical net assets................................. $ 97,030
Pre-acquisition net asset adjustments..................... 17,298
Intercompany eliminations................................. (33,270)
Fair value adjustments
Reverse pre-acquisition deferred revenue............... 242,350
Reverse deferred directory costs associated with
directories published pre-acquisition................ (78,923)
Deferred taxation(a)................................... (39,763)
Eliminate SPA's historical goodwill.................... (1,275)
----------
SPA tangible assets acquired.............................. 203,447
INTANGIBLE ASSETS:
Directory services license agreement(b)................... 1,600,000
Customer relationships(c)................................. 270,000
Estimated profit on executed sales contracts(d)........... 6,704
Goodwill(e)............................................... 171,182
----------
Total purchase price...................................... $2,251,333
==========
</Table>
-----------------------
(a) This adjustment is to reverse SPA's pre-acquisition deferred tax
assets, which are eliminated as a result of the application of
purchase accounting.
(b) The directory services license agreement includes a 50-year
exclusive license to produce, publish and distribute directories for
Sprint's Local Telecommunications Division ("Sprint LTD") in SPA's
current areas of operation. Should Sprint sell any of the service
areas covered by the agreement, the purchaser will be bound by all
rights and obligations under this agreement. Sprint has also agreed
to purchase a minimum of $3,000 in advertising per year through 2006
and to reimburse the Company for any incremental costs resulting
from any new regulatory requirements. Finally, Sprint will execute a
non-competition agreement and trademark license agreement. As the
term of each of these agreements is 50 years and they are
interrelated, the value of the three agreements has been included as
directory services license agreement shown above. The aggregate fair
value of the agreements has been computed using an expected cash
flow model. The Company is not obligated to close the acquisition if
directories representing more than 8% of revenues are unable to be
included in the transaction due to unforeseen regulatory issues.
(c) The fair value of SPA's existing customer relationships has been
determined based upon the net present value of estimated future cash
flows.
(d) In accordance with purchase accounting applied to the acquisition of
businesses, deferred costs associated with directories unpublished
at the date of acquisition are recorded at fair value less the
expected costs to complete plus a normal profit margin. This step up
of work in progress on unpublished directories will result in a
one-time charge to operating costs immediately following the
acquisition as the associated directories are subsequently
published.
(e) Represents the excess of the purchase price over the fair value of
net assets acquired.
(5) The Company expects to finance most of the purchase price. Expected
borrowings as of the closing of the SPA acquisition are $2,357,125, with
6
expected net proceeds of $2,291,583. Total financing costs associated with
these borrowings are approximately $65,542.
(6) Pursuant to a preferred stock and warrant purchase agreement between the
Company and GS Capital Partners 2000, L.P. ("GSCP 2000"), GSCP 2000 agreed
to invest $200,000 through the purchase of a new series of convertible
preferred stock of the Company and warrants to purchase an aggregate of
1,650,000 shares of common stock of the Company. On November 25, 2002, GSCP
2000 invested the initial $70,000 of this investment through the purchase of
convertible preferred stock of the Company and warrants to purchase 577,500
shares of common stock of the Company. The remaining $130,000 investment
will be made by GSCP 2000 and/or other third parties upon the consummation
of the SPA acquisition. The convertible preferred stock will initially be
convertible at a price of $24.05, subject to adjustment, and will earn a
cumulative dividend of 8%, compounded quarterly, which the Company may pay
in cash or allow to accrue, at its option. The warrants to purchase 577,500
shares of common stock of the Company purchased on November 25, 2002 have an
exercise price of $26.28 per share, which is equal to the prior 30-day
average of the common stock price. The remaining warrants will have an
exercise price per share equal to the 30-day average of the common stock
price at closing. These warrants to purchase an aggregate of 1,650,000
shares of common stock of the Company will be exercisable at any time after
the date of issuance and expire five years after the consummation of the SPA
acquisition. If the SPA acquisition is not consummated, the dividend rate on
the $70,000 of convertible preferred stock will increase to 15% after 30
days.
The $14,674 estimated fair value of the warrants was determined using the
Black-Scholes valuation model. The estimated fair value of the warrants is
deducted from the value of the convertible preferred stock. Also in
connection with the issuance of convertible preferred stock, the Company
estimates that there will be a beneficial conversion feature, or BCF, of
$63,326. The BCF is primarily derived from the conversion price of the
preferred stock in relation to the market value of common stock of the
Company and the estimated fair value of the warrants. The BCF is recorded as
a reduction to the carrying value of the preferred shares and as additional
paid in capital. The BCF is treated as a "deemed dividend" to the preferred
shareholders and will reduce income available to common stockholders and
7
earnings per share in the first year after the SPA acquisition. The
allocation of net proceeds from the issuance of preferred stock has been
estimated as follows:
<Table>
Convertible preferred stock................................. $120,000
Additional paid in capital.................................. 63,326
Warrants outstanding........................................ 14,674
--------
Net proceeds................................................ $198,000
--------
</Table>
The estimated fair value of the warrants and BCF included in these pro forma
statements assumes that $200,000 of convertible preferred shares were issued
and was determined based on the relevant information pertaining to the
$70,000 investment made by GSCP 2000 on November 25, 2002. The fair value of
the warrants and BCF related to this $70,000 investment was calculated to be
$5,136 and $22,164, respectively. The ultimate fair value of the remaining
warrants and additional BCF, if any, in connection with the remaining
$130,000 investment will be determined in part based on the exercise price
of the warrants, as described above, and the market price of common stock of
the Company on the date of closing. Accordingly, the allocation of proceeds
from the sale of convertible preferred stock presented in these pro forma
statements could differ materially from the allocation at the time of
closing.
The convertible preferred stock will have a liquidation value of $200,000
immediately after the closing of the SPA acquisition.
(7) At the closing of the SPA acquisition, the Company will repay the $74,250
outstanding under its existing credit facility, comprised of a short-term
amount of $2,259 and long-term amount of $71,991, and repurchase $150,000
aggregate principal amount of its existing notes (assuming that all of the
existing notes are validly tendered in the tender offer and exit consent
solicitation).
In connection with this repayment, unamortized deferred financing costs of
$2,858 will be written off. This write-off is reported as an extraordinary
loss and is therefore not reflected on the pro forma statement of operations
for the year ended December 31, 2001 but is reflected as an adjustment to
retained earnings on the pro forma balance sheet as of September 30, 2002.
(8) Under the terms of the stock purchase agreement, the Company will pay
$14,000 at the closing of the SPA acquisition to Sprint LTD in settlement of
all amounts owed to Sprint LTD by the Company and SPA related to the CenDon
relationship.
(9) Adjustment to eliminate (i) SPA's historical common stock, additional paid
in capital and retained earnings, (ii) the effect on shareholders' equity
from the pre-acquisition adjustments and (iii) the write-off of deferred
financing costs related to the repayment of debt.
8
DONNELLEY PRO FORMA COMBINED INCOME STATEMENT (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
<Table>
<Caption>
CONFORMING AND
DONNELLEY SPA ELIMINATION ACQUISITION
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ---------- -------------- ----------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues....................... $ 58,783 $409,252 $(39,985)(2) $ -- $ 428,050
Expenses
Operating expenses............... 36,351 150,192 26,320 (1) --
(34,058)(2) 178,805
General & administrative
expenses...................... 12,273 42,642 (26,320)(1) -- 28,595
Depreciation and amortization.... 4,718 6,517 -- 46,050 (3) 57,285
Restructuring charge............. 218 145 -- -- 363
-------- -------- -------- --------- ---------
Total expenses................ 53,560 199,496 (34,058) 46,050 265,048
Partnership and joint venture
income........................... 108,818 -- (13,178)(1) --
(2,678)(2) 92,962
-------- -------- -------- --------- ---------
Operating income.............. 114,041 209,756 (21,783) (46,050) 255,964
Interest expense, net.............. (16,960) (165) -- (117,396)(4) (134,521)
Priority distribution.............. -- (13,178) 13,178 (1) -- --
Other expense...................... -- (49) -- -- (49)
Minority interest.................. -- 159 (159)(2) -- --
-------- -------- -------- --------- ---------
Income before taxes........... 97,081 196,523 (8,764) (163,446) 121,394
Provision for income taxes......... 37,375 76,955 (3,506)(5) (65,378)(5) 45,446
-------- -------- -------- --------- ---------
Net income before extraordinary
loss............................. 59,706 119,568 (5,258) (98,068) 75,948
Less: preferred dividend........... -- -- -- 13,250 (6) 13,250
-------- -------- -------- --------- ---------
Net income (loss) before
extraordinary loss available to
common shareholders.............. $ 59,706 $119,568 $ (5,258) $(111,318) $ 62,698
======== ======== ======== ========= =========
Earnings per share before
extraordinary loss
Basic............................ $ 2.02 $ 1.65(7)
Diluted.......................... 1.97 1.65(7)
Shares used in computing earnings
per share
Basic............................ 29,618 29,618(7)
Diluted.......................... 30,262 29,618(7)
</Table>
9
DONNELLEY PRO FORMA COMBINED INCOME STATEMENT (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 2001
<Table>
<Caption>
CONFORMING
AND
DONNELLEY SPA ELIMINATION ACQUISITION
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues.......................... $ 76,739 $555,637 $(50,527)(2) $ -- $ 581,849
Expenses
Operating expenses.................. 47,833 210,762 42,613 (1) 6,704 (3)
(46,518)(2) 261,394
General & administrative expenses... 16,643 65,761 (42,613)(1) -- 39,791
Depreciation and amortization....... 10,767 8,901 -- 56,900 (3) 76,568
Restructuring charge................ 18,556 1,588 -- -- 20,144
Investment impairment charge........ 11,432 -- -- -- 11,432
-------- -------- -------- --------- ---------
Total expenses................... 105,231 287,012 (46,518) 63,604 409,329
Partnership and joint venture
income.............................. 139,964 -- (18,436)(1)
891 (2) -- 122,419
-------- -------- -------- --------- ---------
Operating income................. 111,472 268,625 (21,554) (63,604) 294,939
Interest expense, net................. (24,944) 1,050 -- (151,707)(4) (175,601)
Priority distribution................. -- (18,436) 18,436 (1) -- --
Other income, net..................... -- 1,493 -- -- 1,493
Minority interest..................... -- (561) 561 (3) -- --
-------- -------- -------- --------- ---------
Income before taxes.............. 86,528 252,171 (2,557) (215,311) 120,831
Provision for income taxes............ 36,272 98,446 (1,023)(5) (86,124)(5) 47,571
-------- -------- -------- --------- ---------
Net income before extraordinary
loss................................ 50,256 153,725 (1,534) (129,187) 73,260
Less: preferred dividend.............. -- -- -- 79,806 (6) 79,806
-------- -------- -------- --------- ---------
Net income (loss) before extraordinary
loss available to common
shareholders........................ $ 50,256 $153,725 $ (1,534) $(208,993) $ (6,546)
======== ======== ======== ========= =========
Earnings per share before
extraordinary loss
Basic............................... $ 1.66 $ (0.22)(7)
Diluted............................. 1.62 (0.22)(7)
Shares used in computing earnings per
share
Basic............................... 30,207 30,207(7)
Diluted............................. 30,976 30,207(7)
</Table>
10
DONNELLEY PRO FORMA COMBINED INCOME STATEMENT (UNAUDITED)
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 2002
<Table>
<Caption>
CONFORMING AND
DONNELLEY SPA ELIMINATION ACQUISITION
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ---------- -------------- ----------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues....................... $ 74,483 $548,869 $(48,607)(2) $ -- $ 574,745
Expenses
Operating expenses............... 45,838 203,952 32,703 (1) 6,704 (3)
(46,359)(2) 242,838
General & administrative
expenses...................... 16,109 54,952 (32,703)(1) -- 38,358
Depreciation and amortization.... 7,248 8,759 -- 60,275 (3) 76,282
Restructuring charge............. 18,774 1,733 -- -- 20,507
Investment impairment charge..... 11,432 -- -- 11,432
-------- -------- -------- --------- ---------
Total expenses................ 99,401 269,396 (46,359) 66,979 389,417
Partnership and joint venture
income........................... 136,243 -- (17,866)(1) --
(1,094)(2) 117,283
-------- -------- -------- --------- ---------
Operating income.............. 111,325 279,473 (21,208) (66,979) 302,611
Interest expense, net.............. (22,934) (113) (155,810)(4) (178,857)
Priority distribution.............. -- (17,866) 17,866 (1) -- --
Other expense...................... -- 1,648 -- -- 1,648
Minority interest.................. -- (555) 555 (3) -- --
-------- -------- -------- --------- ---------
Income before taxes........... 88,391 262,587 (2,787) (222,789) 125,402
Provision for income taxes......... 37,941 102,723 (1,115)(5) (89,116)(5) 50,433
-------- -------- -------- --------- ---------
Net income before extraordinary
loss............................. 50,450 159,864 (1,672) (133,673) 74,969
Less: preferred dividend........... -- -- -- 17,496 (6) 17,496
-------- -------- -------- --------- ---------
Net income (loss) before
extraordinary loss available to
common shareholders.............. $ 50,450 $159,864 $ (1,672) $(151,169) $ 57,473
======== ======== ======== ========= =========
Earnings per share before
extraordinary loss
Basic............................ $ 1.71 $ 1.52(7)
Diluted.......................... 1.67 1.52(7)
Shares used in computing earnings
per share
Basic............................ 29,573 29,573(7)
Diluted.......................... 30,265 29,573(7)
</Table>
- ---------------
(1) SPA reports bad debt expense as part of general and administrative expenses,
whereas the Company reports bad debt expense as operating expense.
Accordingly, to conform to the Company's historical financial statements,
SPA's bad debt expense of $26,320 for the nine months ended September 30,
2002, $42,613 for the year ended December 31, 2001 and $32,703 for the
twelve months ended September 30, 2002 have been reclassified to operating
expense.
In addition, SPA reports priority distribution expense as a separate line
item below operating income, whereas the Company reports priority
distribution income as part of partnership and joint venture income above
operating income. Accordingly, to conform to the Company's historical
financial statements, SPA's priority distribution expense for the nine
months ended September 30, 2002, the year ended December 31, 2001 and
11
the twelve months ended September 30, 2002 has been reclassified to
partnership and joint venture income.
(2) The Company currently provides sales agency and pre-press publishing
services for SPA directories in select markets and receives commission and
pre-publishing revenue from SPA. Similarly, SPA incurs expense for the
services provided by the Company. As a result of the SPA acquisition, the
Company will become the publisher of these directories. Accordingly, this
adjustment eliminates all revenue and expense amounts from transactions
between the Company and SPA as these transactions would have been
intercompany transactions. The Company also receives a priority distribution
payment from SPA under the terms of the CenDon operating agreement. The
priority distribution income recorded by the Company and expense recorded by
SPA have also been eliminated. The minority interest relates to CenDon and
is therefore also eliminated in the pro forma statements.
(3) This adjustment reflects additional depreciation and amortization expense
from the amortization of acquired identifiable intangible assets over their
estimated useful lives. Identifiable intangible assets consist of a
directory services license agreement between the Company and Sprint that
gives the Company the exclusive right to produce, publish and distribute
directories for Sprint LTD in SPA's current areas of operation, a trademark
license agreement that gives the Company the exclusive right to use the
Sprint brand/trademark in SPA's current markets and a non-competition
agreement that prohibits Sprint from producing, publishing and distributing
print directories or selling local advertising in SPA's current markets,
with certain limited exceptions. Because the term of each of these
agreements is 50 years and they are interrelated, an aggregate value of
$1,600,000 was allocated to these agreements. Identifiable intangible assets
also include $270,000 that was allocated to the value of established
customer relationships. The value of the directory services license
agreement and the value of the established customer relationships are being
amortized in a manner that best reflects the economic benefits derived from
these intangible assets. The use of the trademark is being amortized on a
straight-line basis over 50 years, while the established customer
relationships are being amortized under an accelerated method over a 20-year
period, which approximates a straight line equivalent of 14 years. This
method recognizes that the value derived from the customer relationships is
greater in the earlier years and steadily declines over time.
Under purchase accounting, deferred costs associated with unpublished
directories at the date of acquisition are recorded at fair value less the
expected costs to complete plus a normal profit margin. The step up of work
in progress on unpublished directories was estimated to be $6,704 and will
be amortized over a period of less than one year.
Under FAS 142, "Goodwill and Other Intangible Assets," goodwill is no longer
amortized and, instead, the carrying value is subject to annual impairment
testing.
The final allocation of the purchase price will be determined after the SPA
acquisition and will be based on a comprehensive analysis and evaluation of
the fair value of assets acquired and liabilities assumed. The results of
this comprehensive analysis and evaluation may result in materially
different fair values assigned to the assets acquired and liabilities
assumed, including identifiable intangible assets and their respective
useful lives.
12
(4) The pro forma interest expense adjustments for the nine months ended
September 30, 2002, the year ended December 31, 2001 and the twelve months
ended September 30, 2002 are as follows:
<Table>
<Caption>
NINE MONTHS TWELVE MONTHS
ENDED YEAR ENDED ENDED
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2002 2001 2002
------------- ------------ -------------
Interest expense on borrowings........................... $126,898 $169,197 $169,197
Amortization of deferred financing costs................. 6,389 8,518 8,518
Other annual fees........................................ 498 664 664
-------- -------- --------
Interest expense on debt................................. 133,785 178,379 178,379
Eliminate historical interest on existing debt........... (16,389) (26,672) (22,569)
-------- -------- --------
Net interest expense adjustment.......................... $117,396 $151,707 $155,810
======== ======== ========
</Table>
Deferred financing costs related to these borrowings are amortized over the
term of the associated arrangement. The pro forma statements assume that
the Company repaid its existing debt at January 1, 2001. Accordingly,
historical interest expense has been eliminated in the pro forma
statements.
Assuming a 1/8% increase in the interest rate associated with the variable
portion of the debt, pro forma net income would have been reduced by $806
for the nine months ended September 30, 2002 and $1,074 for the year ended
December 31, 2001 and the twelve months ended September 30, 2002.
The new senior secured credit facility will require that, within a
specified period after the closing of the SPA acquisition, the Company
enter into hedge agreements to provide either a fixed interest rate or
interest rate protection for a specified portion of the aggregate principal
amount of tranche A term loan and tranche B term loan. These agreements
have not been executed yet, and we are unable to predict what the ultimate
terms and conditions for such hedge agreements will be. Therefore, an
estimate of the potential impact on interest expense from the hedge
agreements has not been included in the pro forma statements.
(5) Represents the income tax effect of the pro forma adjustments, using a
statutory tax rate of 40%.
(6) Represents the dividend on the convertible preferred stock issued by the
Company to fund a portion of the purchase price of the SPA acquisition. The
preferred stock earns a cumulative dividend of 8%, compounded quarterly,
which the Company may pay in cash or allow to accrue, at its option. The pro
forma preferred dividend was $13,250, $16,480 and $17,496 for the nine
months ended September 30, 2002, the year ended December 31, 2001 and the
twelve months ended September 30, 2002, respectively. The pro forma
preferred dividend for the year ended December 31, 2001 also includes a
deemed dividend of $63,326 related to a beneficial conversion feature from
the issuance of convertible preferred stock. The amount of the BCF is
recognized as a deemed dividend in 2001 as the preferred stock is
convertible into common stock immediately after issuance. See footnote (6)
to the pro forma balance sheet as of September 30, 2002. The pro forma
dividend for the year ended December 31, 2001 is as follows:
<Table>
Stated 8% dividend.......................................... $16,480
BCF deemed dividend......................................... 63,326
-------
Pro forma dividend.......................................... $79,806
=======
</Table>
(7) The preferred stock referred to in footnote (6) above is entitled to
participate in any dividend declared to common shareholders and would
receive the same dividend per share as the common shareholders on an
as-converted basis. Due to this participation feature, earnings per share,
or EPS, are computed under the two-class method. The two-class method is an
earnings allocation formula that calculates basic EPS for common
shareholders and preferred shareholders on an as-converted basis.
13
The calculation of pro forma basic EPS under the two-class method for the
nine months ended September 30, 2002, the year ended December 31, 2001 and
the twelve months ended September 30, 2002 is as follows:
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30, 2002
---------------------
COMMON
COMMON EQUIVALENTS
------- -----------
Net income before extraordinary loss available to common and
common equivalents........................................ $62,698 $62,698
Percentage of shares to total shares........................ 78.08% 21.92%
------- -------
Rights to undistributed earnings............................ 48,955 13,743
Shares attributable......................................... 29,618 8,316
------- -------
Basic EPS before extraordinary loss......................... $ 1.65 $ 1.65
======= =======
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2001
---------------------
COMMON
COMMON EQUIVALENTS
------- -----------
Net loss before extraordinary loss available to common and
common equivalents........................................ $(6,546) $(6,546)
Percentage of shares to total shares........................ 78.08% 21.92%
------- -------
Rights to undistributed earnings............................ (5,111) (1,435)
Shares attributable......................................... 30,207 8,316
------- -------
Basic EPS before extraordinary loss(1)...................... $ (0.22) $ (0.22)
======= =======
</Table>
<Table>
<Caption>
TWELVE MONTHS
ENDED
SEPTEMBER 30, 2002
---------------------
COMMON
COMMON EQUIVALENTS
------- -----------
Net income before extraordinary loss available to common and
common equivalents........................................ $57,473 $57,473
Percentage of shares to total shares........................ 78.05% 21.95%
------- -------
Rights to undistributed earnings............................ 44,858 12,615
Shares attributable......................................... 29,573 8,316
------- -------
Basic EPS before extraordinary loss......................... $ 1.52 $ 1.52
======= =======
</Table>
For the nine months ended September 30, 2002, the year ended December 31,
2001 and the twelve months ended September 30, 2002, the calculation of diluted
EPS is anti-dilutive; therefore, diluted EPS equals basic EPS for all periods.
(1) Basic EPS before extraordinary loss is calculated by dividing the net loss
before extraordinary loss available to common and common equivalents of
$6,546 by the basic shares outstanding of 30,207. Basic EPS under the
two-class method is not used in this case as the effect would have been
anti-dilutive.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
R.H. DONNELLEY CORPORATION
By: /s/ ROBERT J. BUSH
--------------------------------------
Name: Robert J. Bush
Title: Vice President and General
Counsel
R.H. DONNELLEY INC.
By: /s/ ROBERT J. BUSH
--------------------------------------
Name: Robert J. Bush
Title: Vice President and General
Counsel
Date: December 2, 2002
15