item 14 exhibits financial statement schedules reports form 8k list documents filed part report 1 financial statements see index financial statements schedules page 21 2 financial statement schedules see index financial statements schedules page 21 3 financial information performance outlook 1993 ten year selected financial data 4 exhibits see index exhibits pages 26 28 indicates exhibits management contracts compensatory plans required filed exhibits responsive information appearing pages 6 12 24 45 exhibit incorporated herein reference information appearing exhibit shall deemed filed part form 10k b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dun bradstreet corporation registrant charles w moritz charles w moritz chairman board robert e weissman robert e weissman president chief executive officer edwin bescherer jr edwin beschererjr executive vice presidentfinance chief financial officer thomas w young thomas w young senior vice president controller date march 25 1994 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated hall adams jr john r meyer hall adams jr director john r meyer director clifford l alexander jr charles w moritz clifford l alexander jr charles w moritz director kingman douglass james r peterson kingman douglass director james r peterson director mary johnston evans michael r quinlan mary johnston evans director michael r quinlan director robert hanson volney taylor robert hanson director volney taylor director robert j lanigan robert eweissman robert j lanigan director robert e weissman director vernon r loucks jr vernon r loucks jr director dated march 25 1994 report independent public accountants shareowners board directors dun bradstreet corporation report consolidated financial statements dun bradstreet corporation december 31 1993 1992 years ended december 31 1993 1992 1991 incorporated reference form 10k page 17 1993 annual report dun bradstreet corporation connection audits financial statements also audited related financial statement schedules listed index page 21 form 10k opinion financial statement schedules referred considered relation basic financial statements taken whole present fairly material respects information required included therein coopers lybrand stamford connecticut january 27 1994 schedule x dun bradstreet corporation subsidiaries schedule x supplementary income statement information years ended december 31 1993 1992 1991 millions col colb charged costs expenses years ended item december 31 1993 1992 1991 maintenance repairs 697 765 771 items omitted amounts less one percent consolidated operating revenue disclosed consolidated financial statements statement differences section symbol shall expressed ss page 41 djv1 entries updated bold printitem 14 exhibits financial statement schedules reports form 8k alist documents filed part report 1 financial statements see index financial statements schedule page 20 2 financial statement schedule see index financial statements schedule page 20 3 financial information performance outlook 1994 ten year selected financial data 4 exhibits see index exhibits pages 24 26 indicates exhibits management contracts compensatory plans required filed exhibits responsive information appearing pages 7 39 exhibit incorporated herein reference information appearing exhibit shall deemed filed part form 10k b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dun bradstreet corporation registrant charles w moritz charles w moritz chairman board robert e weissman robert e weissman president chief executive officer edwin bescherer jr edwin beschererjr executive vice presidentfinance chief financial officer thomas w young thomas w young senior vice president controller date march 27 1995 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated hall adams jr john r meyer hall adams jr director john r meyer director clifford l alexander jr charles w moritz clifford l alexander jr charles w moritz director mary johnston evans james r peterson mary johnston evans director james r peterson director robert hanson michael r quinlan robert hanson director michael r quinlan director robert j lanigan volney taylor robert j lanigan director volney taylor director vernon r loucks jr robert eweissman vernon r loucks jr director robert e weissman director date march 27 1995 report independent public accountants shareowners board directors dun bradstreet corporation report consolidated financial statements dun bradstreet corporation december 31 1994 1993 years ended december 31 1994 1993 1992 incorporated reference form 10k page 21 1994 annual report dun bradstreet corporation connection audits financial statements also audited related financial statement schedule listed index page 20 form 10k opinion financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information required included therein coopers lybrand llp stamford connecticut january 25 1995item 14 exhibits financial statement schedules reports form 8k list documents filed part report 1 financial statements see index financial statements schedule page 19 2 financial statement schedule see index financial statements schedule page 19 3 financial information business segments 1995 ten year selected financial data 4 exhibits see index exhibits pages 22 24 indicates exhibits management contracts compensatory plans required filed exhibits responsive information appearing pages 4 35 exhibit incorporated herein reference information appearing exhibit shall deemed filed part form 10k b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dun bradstreet corporation registrant robert e weissman robert e weissman chairman chief executive officer nicholas l trivisonno nicholas l trivisonno executive vice president finance chief financial officer thomas w young thomas w young senior vice president controller date march 27 1996 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated hall adams jr james r peterson hall adams jr director james r peterson director clifford l alexander jr bernard puckett clifford l alexander jr director bernard puckett director mary johnston evans michael r quinlan mary johnston evans director michael r quinlan director robert j lanigan volney taylor robert j lanigan director volney taylor director vernon r loucks jr robert e weissman vernon r loucks jr director robert e weissman director john r meyer john r meyer director date march 27 1996 index financial statements schedule financial statements companys consolidated financial statements notes thereto related report thereon coopers lybrand llp independent public accountants years ended december 31 1995 1994 1993 appearing pages 15 35 accompanying 1995 annual report incorporated reference annual report form 10k see additional financial data indicated read conjunction consolidated financial statements page 10k 1995 annual report independent public 15 accountants statement management responsibility financial 15 statements december 31 1995 1994 consolidated statement financial 17 position years ended december 31 1995 1994 1993 consolidated statement 16 income consolidated statement cash 18 flows consolidated statement shareholders 19 equity notes consolidated financial 20 33 statements quarterly financial data unaudited years ended december 31 1995 33 managements discussion analysis financial condition results operations 9 14 financial information business segments 4 8 tenyear selected financial 34 35 data schedule report independent public 20 15 accountants dun bradstreet corporation subsidiaries iivaluation qualifying accounts years ended december 31 1995 1994 1993 21 schedules one listed omitted required inapplicable required information provided consolidated financial statements including notes thereto report independent public accountants shareholders board directors dun bradstreet corporation report consolidated financial statements dun bradstreet corporation december 31 1995 1994 years ended december 31 1995 1994 1993 incorporated reference form 10k page 15 1995 annual report dun bradstreet corporation connection audits financial statements also audited related financial statement schedule listed index page 19 form 10k opinion financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information required included therein coopers lybrand llp stamford connecticut january 23 1996item 14 exhibits financial statement schedules reports form 8k list documents filed part report 1 financial statements see index financial statements schedules page 15 2 financial statement schedule see index financial statements schedules page 15 3 exhibits see index exhibits pages 18 20 b reports form 8k filed october 24 1996 item 5 events reported financial statements include consolidated statement income six months ended june 30 1996 years ended december 31 1995 1994 1993 consolidated statement financial position june 30 1996 december 31 1995 financial data schedules separate financial statements subsidiaries consolidated fifty percent owned 1 financial statements dontech see index page 15 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dun bradstreet corporation registrant svolney taylor volney taylor chairman chief executive officer sfrank sowinski frank sowinski senior vice president chief financial officer schester j geveda jr chester j geveda jr vice president controller date march 27 1997 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated shall adams jr sjohn r meyer hall adams jr director john r meyer director sclifford l alexander jr sjames r peterson clifford l alexander director james r peterson director smary johnston evans smichael r quinlan mary johnston evans director michael r quinlan director sronald l kuehn jr svolney taylor ronald l kuehn jr director volney taylor director srobert j lanigan robert j lanigan director svernon r loucks jr vernon r loucks jr director date march 27 1997 index financial statements schedules financial statements companys consolidated financial statements notes thereto related report thereon coopers lybrand llp independent accountants years ended december 31 1996 1995 1994 appearing pages 25 46 accompanying 1996 annual report incorporated reference annual report form 10k see additional financial data indicated read conjunction consolidated financial statements report independent accountants shareholders board directors dun bradstreet corporation report consolidated financial statements dun bradstreet corporation december 31 1996 1995 years ended december 31 1996 1995 1994 incorporated reference form 10k page 25 1996 annual report dun bradstreet corporation connection audits financial statements also audited related financial statement schedule listed index page 15 form 10k opinion financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information required included therein coopers lybrand llp new york new york february 26 1997 note represents primarily chargeoff uncollectible accounts reserve provided index exhibits regulation sk exhibit number 3 articles incorporation bylaws restated certificate incorporation dun bradstreet corporation dated june 15 1988 incorporated herein reference exhibit 4a registrants registration 3325774 form s8 filed november 25 1988 b bylaws registrant dated december 15 1993 incorporated herein reference exhibit e registrants annual report form 10k year ended december 31 1993 file number 17155 filed march 25 1994 4 instruments defining rights security holders including indentures acredit agreement dated august 30 1996 among dun bradstreet corporation borrowing subsidiaries party hereto lenders party hereto chase manhattan bank citibank na morgan guaranty trust company new york 1000000000 revolving credit competitive advance facility another instrument respect issue long term debt filed exhibit annual report form 10k authorized principal amount issue exceed 10 total assets registrant subsidiaries consolidated basis dun bradstreet corporation agrees furnish copy instrument commission upon request 10 material contracts nonfunded deferred compensation plan nonemployee directors registrant amended november 20 1996 b pension benefit equalization plan amended december 21 1994 incorporated herein reference exhibit f registrants annual report form 10k year ended december 31 1994 file number 17155 filed march 27 1995 c profit participation benefit equalization plan amended restated effective january 1 1995 incorporated herein reference exhibit e registrants annual report form 10k year ended december 31 1995 file number 17155 filed march 27 1995 1982 key employees stock option plan registrant subsidiaries amended april 18 1995 incorporated herein reference exhibit f registrants annual report form 10k year ended december 31 1995 file number 17155 filed march 27 1995 e 1991 key employees stock option plan registrant subsidiaries amended april 18 1995 incorporated herein reference exhibit c registrants proxy statement dated march 10 1995 file number 17155 f tenyear incentive stock option agreement incorporated herein reference exhibit 28b registrants registration 3344551 form s8 filed december 18 1991 g tenyear nonqualified stock option agreement incorporated herein reference exhibit 28c registrants registration 3344551 form s8 filed december 18 1991 h stock appreciation rights agreement relating incentive stock options incorporated herein reference exhibit 28d registrants registration 3344551 form s8 filed december 18 1991 stock appreciation rights agreement relating nonqualified stock options incorporated herein reference exhibit 28e registrants registration 3344551 form s8 filed december 18 1991 j limited stock appreciation rights agreement relating incentive stock options incorporated herein reference exhibit 28f registrants registration 3344551 form s8 filed december 18 1991 regulation sk exhibit number k limited stock appreciation rights agreement relating nonqualified stock options incorporated herein reference exhibit 28g registrants registration 3344551 form s8 filed december 18 1991 l key employees performance unit plan registrant subsidiaries amended october 16 1996 subject shareholder approval may 1 1997 incorporated reference exhibit b registrants proxy statement dated march 27 1997 file number 17155 corporate management incentive plan amended october 16 1996 february 19 1997 incorporated herein reference exhibit registrants proxy statement dated march 27 1997 file number 17155 n 1989 key employees restricted stock plan registrant subsidiaries amended april 18 1995 incorporated herein reference exhibit registrants proxy statement dated march 10 1995 file number 17155 restricted stock agreement incorporated herein reference exhibit l registrants annual report form 10k year ended december 31 1989 file number 17155 filed march 26 1990 p form changeincontrol severance agreement approved july 19 1989 incorporated herein reference exhibit registrants annual report form 10k year ended december 31 1989 file number 17155 filed march 26 1990 q supplemental executive benefit plan amended december 21 1994 incorporated herein reference exhibit g registrants annual report form 10k year ended december 31 1994 file number 17155 filed march 27 1995 r restricted stock plan nonemployee directors adopted july 20 1994 incorporated reference exhibit e registrants proxy statement dated march 10 1995 file number 17155 executive transition plan amended february 19 1997 1996 dun bradstreet corporation non employee directors stock incentive plan adopted december 18 1996 amended january 15 1997 u agreement limited partnership db investors lp dated october 14 1993 incorporated herein reference exhibit h registrants annual report form 10k year ended december 31 1993 file number 17155 filed march 25 1994 v purchase agreement purchase agreement amendment dated october 14 1993 among db investors lp parties incorporated herein reference exhibit registrants annual report form 10k year ended december 31 1993 file number 17155 filed march 25 1994 w agreement retire general partner interest dated october 21 1996 db investors lp ims america ltd x distribution agreement dated october 28 1996 among company cognizant corporation acnielsen corporation tax allocation agreement dated october 28 1996 among company cognizant corporation acnielsen corporation z employee benefits agreement dated october 28 1996 among company cognizant corporation acnielsen corporation aa indemnity joint defense agreement dated october 28 1996 among company cognizant corporation acnielsen corporation regulation sk exhibit number 11 statement computation per share earnings computation earnings per share common stock fully diluted basis 13 annual report security holders 1996 annual report 21 subsidiaries registrant list active subsidiaries january 31 1997 23 consents experts counsel consent independent accountants 27 financial data schedules filed herewith represents management contract compensatory plan report independent accountants board directors partners amdon audited financial statements amdon business hereafter referred dontech listed index page 15 financial statements responsibility dontechs management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position dontech december 31 1996 1995 results operations cash flows three years period ended december 31 1996 conformity generally accepted accounting principles chicago illinois january 3 1997 s1 dontech balance sheets december 31 1996 1995 assets 1996 1995 current assets cash equivalents 4559000 2491000 accounts receivable net allowances 13908000 1996 23106000 1995 261252000 240566000 deferred expenses 86329000 80737000 3057000 1382000 total current assets 355197000 325176000 fixed assets net accumulated depreciation amortization 6621000 9118000 total assets 361818000 334294000 liabilities partners capital current liabilities accounts payable 23720000 22797000 accrued liabilities 5106000 10526000 deferred sales revenue 174105000 168825000 total current liabilities 202931000 202148000 partners capital 158887000 132146000 total liabilities partners capital 361818000 334294000 accompanying notes integral part financial statements s2 dontech statements partners capital years ended december 31 1996 1995 1994 ameritech reuben h publishing donnelley corporation illinois total inc balance december 31 1993 58910000 44205000 103115000 net income 109079000 85705000 194784000 distributions partners 100240000 78760000 179000000 balance december 31 1994 67749000 51150000 118899000 net income 112446000 92001000 204447000 distributions partners 107525000 83675000 191200000 balance december 31 1995 72670000 59476000 132146000 net income 120039000 102255000 222294000 distributions partners 106920000 88633000 195553000 balance december 31 1996 85789000 73098000 158887000 accompanying notes integral part financial statements s3 dontech statements operations years ended december 31 1996 1995 1994 1996 1995 1994 sales 459083000 442952000 436577000 less allowances 50202000 51076000 50310000 net sales 408881000 391876000 386267000 expenses operating expenses 135136000 139447000 145257000 selling general administrative 45980000 45582000 45449000 occupancy depreciation 8148000 6175000 3587000 total expenses 189264000 191204000 194293000 income operations 219617000 200672000 191974000 income 2677000 3775000 2810000 net income 222294000 204447000 194784000 accompanying notes integral part financial statements s4 dontech statements cash flows years ended december 31 1996 1995 1994 accompanying notes integral part financial statements s5 dontech 1 form organization nature business amdon dba dontech partnership general partnership reuben h donnelley corporation donnelley wholly owned subsidiary dun bradstreet corporation delaware corporation ameritech publishing illinois inc apiil wholly owned subsidiary ameritech inc illinois corporation business ameritech advertising services partnership dissolved upon certain events specified amended restated partnership agreement dated september 20 1990 effective january 1 1991 partnership participates directory agreement donnelley illinois bell telephone company ibt business ameritech illinois apiil ameritech publishing inc api business ameritech advertising services partnership also participates subcontracting agreement api perform certain apis obligations publishing services contract api indiana bell telephone company incorporated indiana bell business ameritech indiana partnership publishes various directories identified directory agreements solicits advertising primary source revenues manufactures delivers directories board directors board appointed administer activities partnership time term partnership board may call additional capital contributions equal amounts partners opinion board additional capital required operation partnership partnerships net income allocated partner based predefined percentage set forth amended restated partnership agreement addition apiil required make annual contribution partnership sufficient maintain predefined partnership interest percentage 2 significant accounting policies cash equivalents cash equivalents include highly liquid investments initial maturity date three months less carrying value cash equivalents estimates fair value due shortterm nature b sales deferred sales revenue substantially sales made customers cities covered directories recorded deferred sales revenue accounts receivable month publication revenue related sales recognized lives directories generally twelve months sales made customers outside cities covered directories recognized quarter sales national accounts recognized full month publication c fixed assets fixed assets recorded cost depreciated straightline basis estimated useful lives assets upon asset retirement disposition cost related accumulated depreciation removed accounts gain loss included s6 dontech statement operations amounts incurred repairs maintenance charged operations deferred expenses printing manufacturing compilation sales delivery administrative costs publications deferred recognized proportion revenue e income taxes provision income taxes made proportional share partnerships income responsibility individual partners f reclassifications certain reclassifications made december 31 1995 1994 financial statements conform december 31 1996 presentation reclassifications impact previously reported net income partners capital 3 deferred expenses deferred expenses consist following december 31 1996 1995 printing manufacturing 34720000 29260000 selling 33407000 31977000 18202000 19500000 86329000 80737000 s7 dontech 4 fixed assets fixed assets consist following december 31 1996 1995 machinery equipment 17329000 16497000 furniture fixtures 3712000 3639000 leasehold improvements 974000 850000 22015000 20986000 less accumulated depreciation amortization 15394000 11868000 6621000 9118000 5 related party transactions directory agreement partnership obligated pay illinois bell telephone ibt minimum 75 million per year exchange exclusive right publish certain regional directories billing collection services performed ibt base fee services 75 million calendar year directory agreement terminated termination fee 37 million payable year following date directory agreement terminates april 14 1993 partnership ibt renewed directory agreement december 31 1999 anticipation future renewals addition base fee partnership agreed pay ibt amount equal 7 12 increase total revenue received certain sources identified directory agreement revenues received immediately preceding calendar year additional fee due ibt 1122000 1996 487000 1995 1994 additional fee due addition donnelley provides compilation photocomposition data processing services partnership dun bradstreet corporation donnelleys parent company provides employee benefits administrative services certain business insurance coverages partnership amount paid services determined beginning year based upon estimated activity adjusted actual end year total amount paid services approximately 22 million 1996 1995 214 million 1994 amount paid employee benefits includes administration partnerships profit sharing 401k plans well health care long short term disability dental pension plans partnership also entered subcontracting agreements publishing certain indiana bell directories delivery directories donnelley addition directory fulfillment memorandum understanding partnership obligated perform certain directory fulfillment services ameritech advertising services aas 6 concentration credit risk financial instruments potentially subject partnership concentration credit risk consist principally commercial paper accounts receivables partnership invests s8 dontech excess cash commercial paper investment rating aa higher experienced losses investments partnerships trade accounts receivable primarily composed amounts due customers whose businesses state illinois collateral generally required partnerships customers 7 use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expense reporting period actual results could differ estimates 8 lease commitments partnership leases certain office warehouse facilities noncancelable lease arrangements rent expense operating leases approximately 2564000 2323000 2655000 1996 1995 1994 respectively future minimum lease payments required noncancelable operating leases initial remaining lease terms excess one year december 31 1996 follows december 31 amount 1997 2445000 1998 2257000 1999 2287000 2000 2316000 2001 2282000 thereafter 3893000 15480000 s9 dontech 9 employee retirement profit participation plans partnership defined benefit pension plan covering substantially employees principal plan principal plans assets invested equity funds fixed income funds real estate total expense principal plan approximately 1181000 1647000 1247000 1996 1995 1994 respectively partnership contributes amounts plan actuarially determined meet future benefit payments additionally partnership profit participation plan profit plan covers substantially employees may voluntarily contribute 6 salaries profit plan guaranteed matching contribution partnership fifty cents per dollar contributed partnership also makes contributions profit plan based formula contingent upon attainment financial goals set advance defined plan contributions plan partnership 809000 1025000 760000 1996 1995 1994 respectively 10 valuation qualifying accounts years ended december 31 col b col c col e additions 1 2 balance charged beginning costs balance period accounts end expenses period description deductions 1996 allowance 23106000 21307000 30505000 13908000 doubtful accounts 1995 allowance 18777000 30189000 25860000 23106000 doubtful accounts 1994 allowance 18441000 24566000 24230000 18777000 doubtful accounts s10item 14 exhibits financial statement schedules reports form 8k list documents filed part report 1 financial statements see index financial statements schedules page 14 2 financial statement schedules see index financial statements schedules page 14 3 exhibits see index exhibits pages 17 19 b reports form 8k filed december 19 1997 item 5 events reported c exhibits see index exhibits pages 17 19 financial statement schedules see index financial statements schedules page 14 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dun bradstreet corporation registrant volney taylor volney taylor chairman chief executive officer date march 20 1998 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities date indicated date march 20 1998 index financial statements schedules financial statements companys consolidated financial statements notes thereto related report thereon coopers lybrand llp independent accountants years ended december 31 1997 1996 1995 appearing pages 35 56 accompanying 1997 annual report incorporated reference annual report form 10k see additional financial data indicated read conjunction consolidated financial statements schedules one listed omitted required inapplicable required information provided consolidated financial statements including notes thereto report independent accountants shareholders board directors dun bradstreet corporation report consolidated financial statements dun bradstreet corporation december 31 1997 1996 years ended december 31 1997 1996 1995 report includes explanatory paragraph regarding companys change certain revenue recognition accounting policies incorporated reference form 10k page 35 1997 annual report dun bradstreet corporation connection audits financial statements also audited related financial statement schedule listed index page 14 form 10k opinion financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information required included therein coopers lybrand llp new york new york february 13 1998 schedule ii dun bradstreet corporation subsidiaries schedule ii valuation qualifying accounts years ended december 31 1997 1996 1995 note represents primarily writeoff uncollectible accounts reserve provided index exhibits filed herewith represents management contract compensatory planitem 14 exhibits financial statement schedules reports form 8k a1 2 list financial statements financial statement schedules following consolidated financial statements company included item 8 consolidated statements operations three years ended december 31 1998 consolidated balance sheets december 31 1998 1997 consolidated statements cash flows three years ended december 31 1998 consolidated statement changes shareholders equity deficit three years ended december 31 1998 notes consolidated financial statements following combined financial statements dontech included item 8 combined statement operations three years ended december 31 combined balance sheets december 31 1998 1997 combined statements cash flows three years ended december 31 combined statements partners capital three years ended december 31 1998 following financial statement schedule company included item 8 schedule ii valuation qualifying accounts b reports form 8k report form 8k filed november 2 1998 item 5 events report companys decision adopt stockholder rights plan succeed companys prior rights plan expired november 5 1998 c exhibits filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized 26th day march 1999 rh donnelley corporation frank r noonan frank r noonan chairman chief executive officer pursuant requirements securities exchange act 1934 amended report duly signed following persons capacities date indicated signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized 26th day march 1999 rh donnelley inc frank r noonan frank r noonan president chief executive officer pursuant requirements securities exchange act 1934 amended report duly signed following persons capacities date indicateditem 14 exhibits financial statement schedules reports form 8k a1 2 list financial statements financial statement schedules following consolidated financial statements company included item 8 consolidated statements operations three years ended december 31 1999 consolidated balance sheets december 31 1999 1998 consolidated statements cash flows three years ended december 31 1999 consolidated statement changes shareholders equity deficit three years ended december 31 1999 notes consolidated financial statements following combined financial statements dontech included item 8 combined statement operations three years ended december 31 1999 combined balance sheets december 31 1999 1998 combined statements cash flows three years ended december 31 1999 combined statements partners capital three years ended december 31 1999 notes combined financial statements following financial statement schedule company included item 8 schedule ii valuation qualifying accounts included footnote 14 valuation qualifying accounts notes consolidated financial statements b reports form 8k none filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized 27th day march 2000 rh donnelley corporation frank r noonan frank r noonan chairman chief executive officer pursuant requirements securities exchange act 1934 amended report duly signed following persons capacities date indicated frank r noonan chairman board march 27 2000 frank r noonan chief executive officer philip c danford senior vice president march 27 2000 philip c danford chief financial officer william c drexler vice president controller march 27 2000 william c drexler diane p baker director march 27 2000 diane p baker kenneth g campbell director march 27 2000 kenneth g campbell darius w gaskins jr director march 27 2000 darius w gaskins jr william g jacobi director march 27 2000 william g jacobi robert kamerschen director march 27 2000 robert kamerschen carol j parry director march 27 2000 carol j parry barry lawson williams director march 27 2000 barry lawson williams signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized 27th day march 2000 rh donnelley inc frank r noonan frank r noonan president chief executive officer pursuant requirements securities exchange act 1934 amended report duly signed following persons capacities date indicated frank r noonan director president march 27 2000 frank r noonan chief executive officer philip c danford director senior vice president march 27 2000 philip c danford chief financial officer william c drexler vice president controller march 27 2000 william c drexler stephen b wiznitzer director senior vice president march 27 2000 stephen b wiznitzer general counselitem 14 exhibits financial statement schedules reports form 8k a1 2 list financial statements financial statement schedules following consolidated financial statements company included item 8 consolidated statements operations three years ended december 31 2000 consolidated balance sheets december 31 2000 1999 consolidated statements cash flows three years ended december 31 2000 consolidated statements changes shareholders equity deficit three years ended december 31 2000 notes consolidated financial statements following combined financial statements dontech included item 8 combined statements operations three years ended december 31 2000 combined balance sheets december 31 2000 1999 combined statements cash flows three years ended december 31 2000 combined statements partners capital three years ended december 31 2000 notes combined financial statements following financial statement schedule company included item 8 schedule ii valuation qualifying accounts included footnote 12 valuation qualifying accounts notes consolidated financial statements b reports form 8k current report form 8k dated january 11 2001 disclosing item 9 certain members senior management company scheduled later day present investor conference among things intended reiterate previous public disclosure companys full year 2000 projected earnings per share 185 onetime costs 2001 projected earnings per share 240 c exhibits exhibit document 31 certificate incorporation company incorporated reference exhibit 31 quarterly report form 10q three months ended march 31 1999 commission file 00107155 32 bylaws company incorporated reference exhibit 32 quarterly report form 10q three months ended march 31 1999 commission file 00107155 33 certificate incorporation rh donnelley inc incorporated reference exhibit 33 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 34 bylaws rh donnelley inc incorporated reference exhibit 34 registration statement form s4 filed securities exchange commission july 17 1998 registration 33359287 41 indenture dated june 5 1998 rh donnelley inc issuer company guarantor bank new york trustee respect 9 18 senior subordinated notes due 2008 incorporated reference exhibit 41 registration statement form s4 filed securities exchange commission july 17 1998 registration 33359287 42 form 9 18 senior subordinated notes due 2008 included exhibit 41 43 company guarantee included exhibit 41 44 rights agreement dated october 27 1998 rh donnelley corporation first chicago trust company incorporated reference exhibit 4 registration statement form 8a filed securities exchange commission november 5 1998 registration 00107155 45 amendment 1 rights agreement dated february 26 2001 among rh donnelley corporation first chicago trust company new york initial rights agent bank new york successor rights agent 101 form distribution agreement company fka dun bradstreet corporation new dun bradstreet corporation incorporated reference exhibit 992 form 8k company fka dun bradstreet corporation filed june 30 1998 commission file 00107155 102 form tax allocation agreement company fka dun bradstreet corporation new dun bradstreet corporation incorporated reference exhibit 993 form 8k company fka dun bradstreet corporation filed june 30 1998 commission file 00107155 103 form employee benefits agreement company fka dun bradstreet corporation new dun bradstreet corporation incorporated reference exhibit 994 form 8k company fka dun bradstreet corporation filed june 30 1998 commission file 00107155 104 form intellectual property agreement company fka dun bradstreet corporation new dun bradstreet corporation incorporated reference exhibit 995 form 8k company fka dun bradstreet corporation filed june 30 1998 commission file 00107155 105 form amended restated transition services agreement company fka dun bradstreet corporation new dun bradstreet corporation cognizant corporation ims health incorporated acnielsen corporation gartner group inc incorporated reference exhibit 999 form 8k company fka dun bradstreet corporation filed june 30 1998 commission file 00107155 106 credit agreement among company rh donnelley inc chase manhattan bank administrative agent lenders party thereto incorporated reference exhibit 109 registration statement form s4 filed securities exchange commission july 17 1998 registration 33359287 107 first amendment credit agreement dated march 4 1999 among company rh donnelley inc chase manhattan bank administrative agent lenders party thereto incorporated reference exhibit 101 quarterly report form 10q three months ended march 31 1999 commission file 00107155 108 dontech ii partnership agreement effective august 19 1997 rh donnelley inc fka reuben h donnelley corporation ameritech publishing illinois inc incorporated reference exhibit 1010 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 109 revenue participation agreement dated august 19 1997 apil partners partnership rh donnelley inc fka reuben h donnelley corporation incorporated reference exhibit 1011 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 1010 master agreement executed august 19 1997 among rh donnelley inc fka reuben h donnelley corporation company fka dun bradstreet corporation amdon partnership aka dontech ii ameritech publishing inc ameritech publishing illinois inc ameritech corporation dontech publishing company llc apil partners partnership incorporated reference exhibit 1012 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 1011 exclusive sales agency agreement effective august 19 1997 apil partners partnership dontech ii incorporated reference exhibit 1013 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 1012 second amended restated partnership agreement effective august 19 1997 rh donnelley inc fka reuben h donnelley corporation ameritech publishing illinois incorporated reference exhibit 1014 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 1013 key employees performance unit plan amended restated incorporated reference exhibit 1015 amendment 3 registration statement form s4 filed securities exchange commission september 28 1998 registration 33359287 1014 1991 key employees stock option plan amended restated april 25 2000 incorporated reference exhibit 1017 companys quarterly report form 10q three months ended september 30 2000 commission file 00107155 1015 amended restated 1998 directors stock plan incorporated reference exhibit 1018 companys annual report form 10k year ended december 31 1999 commission file 00107155 1016 annual incentive plan amended restated incorporated reference exhibit 1018 amendment 3 registration statement form s4 filed securities exchange commission september 28 1998 registration 33359287 1017 supplemental executive benefit plan incorporated reference exhibit 1019 amendment 3 registration statement form s4 filed securities exchange commission september 28 1998 registration 33359287 1018 deferred compensation plan incorporated reference exhibit 401 companys registration statement form s8 filed securities exchange commission november 24 1999 registration 33391613 1019 employment agreement dated september 28 1998 company frank r noonan incorporated reference exhibit 101 companys quarterly report form 10q quarter ended september 30 1998 commission file 00107155 1020 employment agreement dated september 28 1998 company philip c danford incorporated reference exhibit 102 companys quarterly report form 10q quarter ended september 30 1998 commission file 00107155 1021 amendment 1 employment agreement dated july 27 2000 company phillip c danford 1022 amendment 2 employment agreement dated february 27 2001 company phillip c danford 1023 employment agreement dated september 28 1998 company david c swanson incorporated reference exhibit 104 companys quarterly report form 10q quarter ended september 30 1998 commission file 00107155 1024 amendment 1 employment agreement dated july 27 2000 company david c swanson 1025 amendment 2 employment agreement dated february 27 2001 company david c swanson 1026 employment agreement dated september 28 1998 company judith norton incorporated reference exhibit 1025 companys annual report form 10k year ended december 31 1999 commission file 00107155 1027 amendment 1 employment agreement dated july 27 2000 company judith norton 1028 amendment 2 employment agreement dated february 27 2001 company judith norton 1029 separation agreement release dated march 15 2001 company judith norton 1030 employment agreement dated march 23 2000 get digital smartcom inc thomas daniel 1031 separation agreement release dated february 28 2001 get digital smartcom thomas daniel 1032 employment agreement dated september 28 1998 company frank colarusso 1033 amendment 1 employment agreement dated july 27 2000 company frank colarusso 1034 amendment 2 employment agreement dated february 27 2001 company frank colarusso 1035 employment agreement dated september 26 2000 company william c drexler 1036 amendment 1 employment agreement dated february 27 2001 company william c drexler 1037 employment agreement dated january 1 2001 company robert j bush 1038 amendment 1 employment agreement dated february 27 2001 company robert j bush 21 subsidiaries company 23 consent independent accountants filed herewith management contract compensatory plan signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized 26th day march 2001 rh donnelley corporation frank r noonan frank r noonan chairman chief executive officer pursuant requirements securities exchange act 1934 amended report duly signed following persons capacities date indicated signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized 26th day march 2001 rh donnelley inc frank r noonan frank r noonan president chief executive officer pursuant requirements securities exchange act 1934 amended report duly signed following persons capacities date indicated exhibit index exhibit document 31 certificate incorporation company incorporated reference exhibit 31 quarterly report form 10q three months ended march 31 1999 commission file 00107155 32 bylaws company incorporated reference exhibit 32 quarterly report form 10q three months ended march 31 1999 commission file 00107155 33 certificate incorporation rh donnelley inc incorporated reference exhibit 33 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 34 bylaws rh donnelley inc incorporated reference exhibit 34 registration statement form s4 filed securities exchange commission july 17 1998 registration 33359287 41 indenture dated june 5 1998 rh donnelley inc issuer company guarantor bank new york trustee respect 9 18 senior subordinated notes due 2008 incorporated reference exhibit 41 registration statement form s4 filed securities exchange commission july 17 1998 registration 33359287 42 form 9 18 senior subordinated notes due 2008 included exhibit 41 43 company guarantee included exhibit 41 44 rights agreement dated october 27 1998 rh donnelley corporation first chicago trust company incorporated reference exhibit 4 registration statement form 8a filed securities exchange commission november 5 1998 registration 00107155 45 amendment 1 rights agreement dated february 26 2001 among rh donnelley corporation first chicago trust company new york initial rights agent bank new york successor rights agent 101 form distribution agreement company fka dun bradstreet corporation new dun bradstreet corporation incorporated reference exhibit 992 form 8k company fka dun bradstreet corporation filed june 30 1998 commission file 00107155 102 form tax allocation agreement company fka dun bradstreet corporation new dun bradstreet corporation incorporated reference exhibit 993 form 8k company fka dun bradstreet corporation filed june 30 1998 commission file 00107155 103 form employee benefits agreement company fka dun bradstreet corporation new dun bradstreet corporation incorporated reference exhibit 994 form 8k company fka dun bradstreet corporation filed june 30 1998 commission file 00107155 104 form intellectual property agreement company fka dun bradstreet corporation new dun bradstreet corporation incorporated reference exhibit 995 form 8k company fka dun bradstreet corporation filed june 30 1998 commission file 00107155 105 form amended restated transition services agreement company fka dun bradstreet corporation new dun bradstreet corporation cognizant corporation ims health incorporated acnielsen corporation gartner group inc incorporated reference exhibit 999 form 8k company fka dun bradstreet corporation filed june 30 1998 commission file 00107155 106 credit agreement among company rh donnelley inc chase manhattan bank administrative agent lenders party thereto incorporated reference exhibit 109 registration statement form s4 filed securities exchange commission july 17 1998 registration 33359287 107 first amendment credit agreement dated march 4 1999 among company rh donnelley inc chase manhattan bank administrative agent lenders party thereto incorporated reference exhibit 101 quarterly report form 10q three months ended march 31 1999 commission file 00107155 108 dontech ii partnership agreement effective august 19 1997 rh donnelley inc fka reuben h donnelley corporation ameritech publishing illinois inc incorporated reference exhibit 1010 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 109 revenue participation agreement dated august 19 1997 apil partners partnership rh donnelley inc fka reuben h donnelley corporation incorporated reference exhibit 1011 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 1010 master agreement executed august 19 1997 among rh donnelley inc fka reuben h donnelley corporation company fka dun bradstreet corporation amdon partnership aka dontech ii ameritech publishing inc ameritech publishing illinois inc ameritech corporation dontech publishing company llc apil partners partnership incorporated reference exhibit 1012 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 1011 exclusive sales agency agreement effective august 19 1997 apil partners partnership dontech ii incorporated reference exhibit 1013 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 1012 second amended restated partnership agreement effective august 19 1997 rh donnelley inc fka reuben h donnelley corporation ameritech publishing illinois incorporated reference exhibit 1014 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 1013 key employees performance unit plan amended restated incorporated reference exhibit 1015 amendment 3 registration statement form s4 filed securities exchange commission september 28 1998 registration 33359287 1014 1991 key employees stock option plan amended restated april 25 2000 incorporated reference exhibit 1017 companys quarterly report form 10q three months ended september 30 2000 commission file 00107155 1015 amended restated 1998 directors stock plan incorporated reference exhibit 1018 companys annual report form 10k year ended december 31 1999 commission file 00107155 1016 annual incentive plan amended restated incorporated reference exhibit 1018 amendment 3 registration statement form s4 filed securities exchange commission september 28 1998 registration 33359287 1017 supplemental executive benefit plan incorporated reference exhibit 1019 amendment 3 registration statement form s4 filed securities exchange commission september 28 1998 registration 33359287 1018 deferred compensation plan incorporated reference exhibit 401 companys registration statement form s8 filed securities exchange commission november 24 1999 registration 33391613 1019 employment agreement dated september 28 1998 company frank r noonan incorporated reference exhibit 101 companys quarterly report form 10q quarter ended september 30 1998 commission file 00107155 1020 employment agreement dated september 28 1998 company philip c danford incorporated reference exhibit 102 companys quarterly report form 10q quarter ended september 30 1998 commission file 00107155 1021 amendment 1 employment agreement dated july 27 2000 company phillip c danford 1022 amendment 2 employment agreement dated february 27 2001 company phillip c danford 1023 employment agreement dated september 28 1998 company david c swanson incorporated reference exhibit 104 companys quarterly report form 10q quarter ended september 30 1998 commission file 00107155 1024 amendment 1 employment agreement dated july 27 2000 company david c swanson 1025 amendment 2 employment agreement dated february 27 2001 company david c swanson 1026 employment agreement dated september 28 1998 company judith norton incorporated reference exhibit 1025 companys annual report form 10k year ended december 31 1999 commission file 00107155 1027 amendment 1 employment agreement dated july 27 2000 company judith norton 1028 amendment 2 employment agreement dated february 27 2001 company judith norton 1029 separation agreement release dated march 15 2001 company judith norton 1030 employment agreement dated march 23 2000 get digital smartcom inc thomas daniel 1031 separation agreement release dated february 28 2001 get digital smartcom thomas daniel 1032 employment agreement dated september 28 1998 company frank colarusso 1033 amendment 1 employment agreement dated july 27 2000 company frank colarusso 1034 amendment 2 employment agreement dated february 27 2001 company frank colarusso 1035 employment agreement dated september 26 2000 company william c drexler 1036 amendment 1 employment agreement dated february 27 2001 company william c drexler 1037 employment agreement dated january 1 2001 company robert j bush 1038 amendment 1 employment agreement dated february 27 2001 company robert j bush 21 subsidiaries company 23 consent independent accountants filed herewith management contract compensatory planitem 14 exhibits financial statement schedules reports form 8k a1 2 list financial statements financial statement schedules following consolidated financial statements company included item 8 consolidated statements operations three years ended december 31 2001 consolidated balance sheets december 31 2001 2000 consolidated statements cash flows three years ended december 31 2001 consolidated statements changes shareholders deficit three years ended december 31 2001 notes consolidated financial statements following combined financial statements dontech included item 8 combined statements operations three years ended december 31 combined balance sheets december 31 2001 2000 combined statements cash flows three years ended december 31 combined statements partners capital three years ended december 31 2001 notes combined financial statements following financial statement schedule company included item 8 schedule ii valuation qualifying accounts included footnote 14 valuation qualifying accounts notes consolidated financial statements c exhibits filed herewith management contract compensatory plan signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 27th day march 2002 rh donnelley corporation frank r noonan frank r noonan chairman chief executive officer pursuant requirements securities exchange act 1934 amended report duly signed following persons capacities date indicated signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 27th day march 2002 rh donnelley inc frank r noonan frank r noonan president chief executive officer pursuant requirements securities exchange act 1934 amended report duly signed following persons capacities date indicateditem 14 controls procedures evaluation disclosure controls procedures based evaluation date within 90 days filing date annual report form 10k effectiveness company’s disclosure controls procedures defined rules 13a14c 15d14c securities exchange act 1934 amended principal executive officer principal financial officer company concluded disclosure controls procedures effective sufficient ensure information required disclosed company reports files submits securities exchange act 1934 recorded processed summarized reported within time periods specified securities exchange commission’s rules forms b changes internal controls subsequent evaluation significant changes company’s internal controls factors could significantly affect controls including corrective action regard significant deficiencies material weaknesses part iv item 15item 14 principal accountant fees services information responsive item incorporated reference sections entitled “board directorscommittees board directors audit finance committee” “report audit finance committee financial reporting fees” company’s proxy statement filed prior march 31 2004 securities exchange commission part iv item 15item 14 principal accountant fees services information response item incorporated herein reference sections entitled “board directors committees board directors audit finance committee” “ report audit finance committee financial reporting fees” company’s proxy statement filed prior march 31 2005 securities exchange commission part iv item 15item 14 principal accountant fees services information response item incorporated herein reference sections entitled “board directorscommittees board directors audit finance committee” “ report audit finance committee financial reportingfees” company’s proxy statement filed prior april 28 2006 securities exchange commission part iv item 15item 14 principal accountant fees services information response item incorporated herein reference sections entitled “board directorscommittees board directors audit finance committee” “ report audit finance committee financial reportingfees” company’s proxy statement filed prior april 30 2007 securities exchange commission part iv item 15item 14 principal accountant fees services generally audit finance committee approves year specific types estimated amounts audit nonaudit services contemplated performed independent registered public accounting firm calendar year work commences chairman audit finance committee may approve services prohibited applicable law regulation previously approved audit finance committee 250000 one time chairman may also approve services previously approved audit finance committee amounts 250000 higher previously approved audit finance committee either case chairman report approval additional services andor amounts audit finance committee next scheduled meeting special meeting may called absolute discretion chairman amounts subject committee ratification chairman may also defer audit finance committee respect additional services amounts chairman andor audit finance committee authorized approve additional nonaudit services without limit determine services impair independence independent registered public accounting firm aggregate fees professional services rendered company kpmg years ended december 31 2009 2008 follows audit fees audit fees years ended december 31 2009 2008 professional services rendered kpmg audits consolidated financial statements company including audit internal control financial reporting section 404 sarbanesoxley act reviews financial statements included company’s quarterly reports form 10q comfort letters consents review documents filed sec auditrelated fees auditrelated fees billed kpmg years ended december 31 2009 2008 tax fees tax fees billed year ended december 31 2009 services rendered kpmg connection general tax compliance tax planning tax advice tax fees billed kpmg year ended december 31 2008 fees year ended december 31 2009 services rendered kpmg associated company’s process improvement initiatives fresh start accounting administrative fees billed kpmg year ended december 31 2008 products services offered kpmg substantially tax services cases related fees disclosed approved committee prior material substantive work performed audit finance committee engaged services anton collin mitchell “acm” audits company’s employee benefit plans 2009 2008 fees paid acm company’s employee benefit plan audits totaled 127000 2009 167000 2008 part iv item 15item 14 principal accountant fees services information response item incorporated herein reference section entitled “principal accountant fees services” company’s proxy statement filed prior may 2 2011 securities exchange commission part iv item 15item 14 principal accountant fees services information response item incorporated herein reference section entitled “audit committee principal accountant fees services” company’s proxy statement filed prior april 30 2012 sec part iv item 15item 14 principal accountant fees services generally audit finance committee approves year specific types estimated amounts audit nonaudit services contemplated performed independent registered public accounting firm calendar year work commences chairman audit finance committee may approve services prohibited applicable law regulation previously approved audit finance committee 250000 one time chairman may also approve services previously approved audit finance committee amounts 250000 higher previously approved audit finance committee either case chairman report approval additional services andor amounts audit finance committee next scheduled meeting special meeting may called absolute discretion chairman amounts subject committee ratification chairman may also defer audit finance committee respect additional services amounts chairman andor audit finance committee authorized approve additional nonaudit services without limit determine services impair independence independent registered public accounting firm aggregate fees professional services rendered company kpmg years ended december 31 2012 2011 follows audit fees audit fees years ended december 31 2012 2011 professional services rendered kpmg audits consolidated financial statements company including audit internal control financial reporting section 404 sarbanesoxley act reviews financial statements included companys quarterly reports form 10q comfort letters consents review documents filed sec auditrelated fees auditrelated fees billed kpmg years ended december 31 2012 2011 tax fees tax fees billed years ended december 31 2012 2011 services rendered kpmg connection general tax compliance tax planning tax advice fees billed kpmg year ended december 31 2012 fees year ended december 31 2011 services rendered kpmg associated companys process improvement initiatives administrative fees tax services cases related fees disclosed approved committee prior material substantive work performed company engaged services crowe chizek llp crowe audits companys employee benefit plans 2012 anton collins mitchell llp “acm” audits companys employee benefit plans 2011 fees paid crowe acm companys employee benefit plan audits totaled 32000 2012 82231 2011 part iv item 15item 14 principal accountant fees services information response item incorporated herein reference sections entitled “board directors committees board directors audit finance committee” “ report audit finance committee financial reporting fees” company’s proxy statement filed prior april 29 2008 securities exchange commission part iv item 15item 14 principal accountant fees services information response item incorporated herein reference sections entitled “board directorscommittees board directors audit finance committee” “ report audit finance committee financial reportingfees” company’s proxy statement filed prior april 30 2009 securities exchange commission part iv item 15 item 7managements discussion analysis financial condition results operations information response item set forth financial review pages 13 16 1993 annual report information incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations information response item set forth financial review pages 16 20 1994 annual report information incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations information response item set forth financial review pages 9 14 1995 annual report information incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations information response item set forth financial review pages 20 24 1996 annual report information incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations information response item set forth managements discussion analysis financial condition results operations pages 29 34 1997 annual report information incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operations matters discussed form 10k rh donnelley corporation company rh donnelley inc donnelley contain forward looking statements subject safe harbor created private securities litigation reform act 1995 possible words believe expect anticipate planned estimated potential goal outlook similar expressions relate company donnelley management used identify forward looking statements forward looking statements reflect companys donnelleys current beliefs specific assumptions respect future business decisions based information currently available accordingly statements subject significant risks uncertainties contingencies could cause companys donnelleys actual operating results performance business prospects differ expressed implied statements risks uncertainties contingencies include following 1 loss market share competition 2 uncertainties caused consolidation telecommunications industry 3 introduction competing products technologies companies 4 complexity uncertainty regarding development new high technology products 5 pricing pressures competitors andor customers 6 changes yellow pages industry markets 7 companys inability complete implementation year 2000 plans timely basis 8 sustained economic downturn united states company except otherwise indicated term company refers rh donnelley corporation wholly owned subsidiary rh donnelley inc donnelley wholly owned subsidiary company operations donnelley subsidiary therefore consolidated basis financial statements company donnelley substantially identical company provides advertising sales marketing services yellow pages directory products longterm sales agency agreements joint venture partnerships operating units major telephone companies well independent operations company sales agent new york state operating unit bell atlantic florida operating unit sprint also serves sales agent cendon partnership cendon 5050 partnership donnelley operating unit sprint formed publish directories florida nevada virginia north carolina company also began publishing independent yellow pages directory cincinnati area 1998 due similarities company aggregates businesses directory advertising services segment company also 50 partner dontech partnership dontech partnership operating unit ameritech acts exclusive sales agent yellow pages directories published ameritech illinois northwest indiana addition receiving 50 profits dontech company also receives direct fees revenue participation operating unit ameritech tied advertising sales dontech provides advertising sales yellow pages directory products partnership considered separate operating segment since among things employees dontech including officers managers employees company also provides prepress publishing services yellow pages directories including advertisement creation sales contract management listing database management sales reporting commissions pagination billing services imaging independent yellow pages publishers existing customers separately negotiated contracts business classified directory publishing services factors affecting comparability prior july 1 1998 company operated part dun bradstreet corporation old db december 17 1997 board directors old db approved principle plan separate two publiclytraded companies rh donnelley corporation new dun bradstreet corporation new db distribution method old db distributed shareholders shares new db common stock july 1 1998 part distribution old db distributed shareholders shares new db stock connection distribution old db changed name rh donnelley corporation historical consolidated financial statements reflect financial position results operations cash flows company standalone entity periods presented historical financial statements include allocations certain old db general administrative expenses corporate assets liabilities related companys business management believes allocations reasonable however costs allocations necessarily indicative costs would incurred company performed provided functions separate entity example company estimates general administrative expenses would approximately 44 million 86 million higher amounts allocated old db first six months 1998 full year 1997 respectively additionally connection distribution company issued debt defined see liquidity capital resources estimates additional interest expense 184 million 427 million would incurred 1998 1997 respectively assuming debt outstanding january 1 1997 items affecting comparability 1998 results prior periods include sale companys proprietaryeast peast business december 1997 proprietarywest pwest business may 1996 also august 1997 companys sales agency contract cincinnati bell expired company made strategic decision leverage expertise yellow pages advertising sales knowledge cincinnati area launch independent yellow pages directory 1998 company published initial cincinnati directory revenues publication placed cincinnati directory among nations top five independent directories advertising sales calendar cycle sales advertising sales billing value advertisements sold company dontech given calendar year referred calendar cycle sales company recognizes advertising sales basis revenues recognized sales contract signed company sales agent directory published company publisher directories 1998 calendar cycle sales 9954 million compared 10672 million 1997 excluding sales peast 738 million 1997 sales 1998 consistent 1997 however advertising sales cincinnati area significantly lower 1998 due expiration sales agency agreement cincinnati bell partially offset initiation independent directory excluding impact change sales showed 45 increase underlying comparable businesses 1997 advertising sales directory advertising services segment decreased 140 1998 compared 1997 however excluding sales peast adjusting change cincinnati operations sales directory advertising services segment showed 41 increase 1998 1997 increase driven growth 77 sprint markets particularly las vegas nevada hickory north carolina tallahassee florida areas 26 increase bell atlantic markets increase bell atlantic markets primarily due 63 million sales buffalo north country markets 1998 company appointed exclusive sales agent bell atlantic service markets advertising sales dontech increased 50 1998 compared 1997 primarily due strong growth chicago surrounding areas calendar cycle sales decreased 43 1997 10672 million 11156 million 1996 directory advertising services segment advertising sales decreased 75 1997 compared 1996 sales bell atlantic directories 74 lower 1996 due rescheduling publication dates certain directories 1997 1998 sales cincinnati bell decreased 229 company sell advertising november 1997 directories due expiration sales agency contract sales peast 180 due sale business declines partially offset 55 growth sprint markets primarily las vegas advertising sales dontech increased 13 1997 1996 publication cycle sales company believes additional measurement sales performance publication cycle method calculates sales basis annual value directory according publication date regardless advertising directory sold directory publication date changes one year next prior year publication date adjusted conform present year maintain comparability 1998 publication cycle sales 9939 million compared 10863 million 1997 sales 1998 9939 million 18 lower 1997 sales 10125 million excluding 1997 sales peast 738 million excluding advertising sales related companys changing cincinnati operations noted advertising sales increased 22 9624 million 9835 million 1998 increase due strong growth sprint dontech markets advertising sales directory advertising services segment decreased 157 1998 compared 1997 excluding sales peast sales related companys changing cincinnati operations sales increased 06 strong growth 77 sprint markets offset decline sales bell atlantic markets 22 decrease driven primarily lower sales new york city area including manhattan queens staten island brooklyn advertising sales dontech increased 46 1997 due growth dontech markets sales efficiencies result completion final phase twoyear initiative rebalance publication schedules ameritech directories prior 1997 sales production inefficiencies arose unbalanced production schedule majority directories dontech affiliated published fourth quarter publication dates directories evenly distributed throughout year enabling dontech achieve higher sales increased productivity utilization enhanced customer satisfaction publication cycle sales 10863 million 1997 consistent 1996 sales 10819 million sales directory advertising services segment decreased approximately 16 strong growth sprint markets offset decrease resulting expiration cincinnati bell contract sale peast business 1997 sales dontech increased 43 1996 due growth chicago markets results operations 1998 vs 1997 revenues 1998 1700 million decreased 291 2399 million 1997 excluding revenues peast 780 million 1998 revenues increased 50 81 million increase due higher revenues directory advertising services directory publishing services segments increase directory advertising services revenues due strong growth sprint markets nevada florida partially offset lower revenues bell atlantic cincinnati markets increase directory publishing services revenues resulted new longterm contract purchaser companys peast business operating expenses 1998 1235 million decreased 253 1653 million 1997 however excluding operating expenses peast 1997 506 million operating expenses increased 76 87 million increase primarily attributable increase costs related new buffalo operation costs relating publication companys first cincinnati independent directory higher information technology costs general administrative expenses 1998 284 million decreased 38 296 million 1997 excluding general administrative expenses peast 86 million general administrative expenses increased 353 74 million increase due increased costs related standalone company increased information technology spending costs associated startup chinese joint venture china unicom see liquidity capital resources provision bad debts 86 million 1998 decreased 99 million 1997 however excluding 71 million related peast provision decreased 28 million reduction mainly attributable lower bell atlantic revenues income partnerships related fees includes companys share profits cendon dontech partnerships revenue participation income increased 44 1998 1359 million 1302 million 1997 driven mainly 33 increase dontech income dontechs increase primarily due strong growth advertising sales however dontech income held charge adjustments billing receivables charge mainly relates companys share accounts deemed uncollectible equity income cendon increased 36 million 1998 158 million primarily due also strong growth advertising sales interest expense 231 million 1998 represents interest debt incurred connection distribution june company borrowed 350 million variable rate credit facilities issued 150 million fixed rate notes current level debt interest rates company anticipates interest expense range 40 42 million per year effective tax rate 1998 400 compared 411 1997 higher effective tax rate 1997 due amortization goodwill nondeductible expense tax purposes company anticipates effective tax rate future years approximate 40 net income 1998 616 million 178 per diluted share compared 849 million 248 per diluted share 1997 previously stated management believes historical results indicative current operations include results businesses sold company include full year effect certain costs expenses company incurred result separation old db historical results adjusted exclude operations peast business ii include estimated additional general administrative expenses associated standalone company iii assume debt outstanding periods prior distribution net income 1998 would 479 million 139 per diluted share compared 427 million 125 per diluted share 1997 directory advertising services segment revenues directory advertising services consist sales commissions companys sales agency agreements billing value advertisements sold companys independent operation sales commission revenues bell atlantic sprint sales agency operations recognized advertising contract signed customer sales commission revenues cendon publisher recognized directory published company record share revenues cendon recognizes share profits income partnerships related fees component operating income revenues companys independent operation recognized directory published revenues directory advertising services 1381 million 1998 compared 2148 million 1997 excluding peast revenues 780 million revenues increased 1 1998 revenues sprint markets 109 offset 196 decrease cincinnati 23 decrease bell atlantic markets operating income directory advertising services includes revenues direct costs incurred businesses plus allocation certain centralized operating general administrative costs charged directly businesses operating income 1998 directory advertising services 326 million compared 410 million 1997 excluding peast operating income 110 million 1997 operating income increased 85 due 340 increase operating income sprint markets including cendon partially offset lower operating income cincinnati bell atlantic business dontech partnership segment company record share revenues costs dontech partnership recognizes share profits income partnerships related fees companys income partnerships related dontech increased 33 1998 39 million due 50 increase sales increase income held charge previously mentioned directory publishing services segment revenues 319 million 272 higher 1997 revenues 251 million elimination intercompany revenues 08 million 99 million respectively increase primarily due increased revenue resulting new longterm contract purchaser companys peast business revenue replaced work directory publishing services performed peast business owned company operating income directory publishing services includes revenues direct costs incurred business plus allocation certain centralized operating general administrative costs charged directly business segment incurred operating loss 30 million 1998 compared 46 million 1997 improvement principally due reduced expenses depreciation amortization 63 million 69 million respectively 1998 1997 result companys investment raleigh operations results operations 1997 vs 1996 revenues 1997 2399 million compared 2700 million 1996 decrease 112 primarily due lower revenues peast due sale business 1997 lower revenues cincinnati due expiration companys sales agency agreement 1997 revenues also adversely affected scheduling shifts publication schedules certain bell atlantic directories total expenses 1997 2353 million consistent 1996 amount 2355 million expenses 1997 related peast pwest 108 million lower 1996 however offsetting decrease 40 million startup costs 1997 associated cincinnati independent directories 57 million higher depreciation due completion raleigh publishing facility income partnerships related fees decreased 21 1302 million 1997 compared 1329 million 1996 income related fees dontech decreased 42 1997 1162 million compared 1214 million 1996 decrease dontech earnings principally due contractual reduction companys share dontech profits 54 1996 53 1997 portion decline also due sales production inefficiencies arose unbalanced production schedule majority directories dontech affiliated published fourth quarter companys partnership income cendon increased 122 million 1997 97 million 1996 primarily due strong sales growth sprint markets especially las vegas operating income 1997 decreased 327 million 195 compared 1996 decrease primarily due lower operating income due sale peast lower income partnerships dontech expiration cincinnati bell contract 1997 decrease bell atlantic revenues mentioned effective tax rate 1997 411 compared 438 1996 higher tax rate 1996 due nondeductible capital loss tax purposes related sale pwest business 1996 directory advertising services segment revenues directory advertising services decreased 125 2148 million 1997 compared 2453 million 1996 decrease due sale peast business rescheduling certain bell atlantic directories 1997 partially offset higher revenues sprint markets operating income directory advertising services decreased 365 1997 primarily due sale peast business 1997 additional startup costs associated cincinnati independent directories decrease revenues bell atlantic directories dontech partnership segment previously stated companys income partnerships dontech decreased 42 51 million 1997 primarily due contractual decrease companys share profits sales production inefficiencies arose unbalanced production schedule directory publishing services segment revenues 251 million 1997 consistent 1996 revenues 247 million elimination intercompany revenues 99 million 101 million respectively operating loss 1997 46 million 23 million higher 1996 due higher depreciation companys investment raleigh facility became operational second quarter 1997 operating income excluding depreciation 23 million consistent 1996 liquidity capital resources connection distribution donnelley borrowed 300 million senior secured term facilities term facilities issued 150 million senior subordinated notes donnelley also borrowed 50 million 100 million senior revolving credit facility revolver together term facilities credit agreement net proceeds borrowings debt dividended old db distributed new db connection distribution term facilities mature june 4 2004 december 5 2006 require quarterly principal repayments notes pay interest semiannually annual rate 9125 due 2008 credit agreement indenture governing notes contain various financial restrictive covenants including restrictions indebtedness capital expenditures commitments february 28 1999 donnelley 3109 million outstanding debt credit agreement weighted average interest rate 72 per annum available borrowing capacity 880 million revolver reduce exposure changes interest rates floating rate longterm debt credit agreement donnelley entered interest rate swap agreements total notional principal amount 175 million agreements effectively change interest rate 175 million floating rate borrowing fixed rates interest rate swap agreements expire june 2001 june 2003 notional amount swap agreements used measure interest paid received represent amount exposure credit loss donnelley exposed credit risk event nonperformance party interest rate swap agreements however donnelley anticipate nonperformance counterparty june 1998 financial accounting standards board issued statement 133 accounting derivative instruments hedging activities required adopted years beginning june 15 1999 companys limited use derivatives management anticipate adoption new statement significant effect earnings financial position company 1998 company entered joint venture china united telecommunications corporation china unicom publish yellow pages directories offer internet directory services peoples republic china terms joint venture agreement company invest cash approximately 156 million acquire 15 equity interest joint venture 1998 company invested 13 million make additional contributions totaling 143 million next two three years company anticipates contributing approximately 80 million 1999 38 million 2000 25 million 2001 payments funded cash flows operations borrowings revolver 1998 board directors authorized company repurchase common stock systematic repurchase plan offset dilutive effect earnings exercise employee stock options also authorized general repurchase plan 20 million common stock time depending market conditions february 28 1999 company spent approximately 47 million repurchase shares systematic general repurchase plans company believes cash operations together available debt capacity revolver sufficient permit company fund cash requirements including operating expenses anticipated capital expenditures debt service requirements foreseeable future cash flow net cash flow provided operations 977 million 1998 997 million 1997 1005 million 1996 net income declined three year period mainly due loss income businesses sold lower earnings bell atlantic cincinnati operations increases expenses principally interest general administrative expenses result companys separation old db decline offset timing partnership cash receipts receivables changes certain changes liabilities three year period fluctuations cash received partnerships relative income partnerships result timing receipts anticipated fluctuate significantly future cash generated accounts receivable positive 1997 mainly due lower bell atlantic sales timing directory publications situation reversed 1998 new receivables associated cincinnati directory 1998 coupled reversal bell atlantic receivables situation caused negative effect cash flow year cash flow operations also impacted changes net deferred tax liabilities three year period principally result estimates used approximate tax balances company separate entity 1996 1997 accounts payable accrued liabilities current liabilities higher 1998 result accrued interest payable related debt anticipated cash flow fluctuate future three year period respect liabilities net cash flow investing activities used 127 million 1998 provided 1057 million 1997 used 165 million 1996 amount 1997 includes 1220 million sale peast business 1996 amount includes 214 million received sale pwest business expenditures property equipment computer software 127 million 1998 163 million 1997 378 million 1996 higher spending 1996 due companys investment new publishing facility raleigh north carolina company currently material commitments capital expenditures net cash used financing activities 828 million 1998 2054 million 1997 855 million 1996 prior july 1 1998 cash deposits transferred old db daily basis old db funded companys disbursement bank accounts required net amounts transferred old db 5293 million 1998 2054 million 1997 855 million 1996 amount transferred 1998 includes net proceeds debt amounts 1997 1996 include proceeds sale peast pwest businesses respectively additionally cash used 1998 repay debt 314 million repurchase common stock companys systematic stock repurchase plan 10 million pay dividends shareholders 120 million 1998 company announced would cease paying dividend payment fourth quarter 1998 cash dividend year 2000 issue year 2000 y2k issue result computer programs written using two digits rather four digits define applicable year computer programs date sensitive software may recognize date using 00 year 1900 rather year 2000 could result system failure miscalculations causing disruptions operations including among things temporary inability process transactions part y2k compliance program companys installed computer systems software products assessed y2k problems company replaced financial systems general ledger accounts payable fixed assets systems use programs oracle corporation tested certified y2k compliant remaining systems software programs modified replaced company requesting assurances software vendors purchased licensed software may purchase license software correctly process date information times additionally modifications existing software new software installed company subjected companys internal y2k compliance program described continued modifications existing software conversions new software company believes able mitigate exposure y2k issue 2000 however continued modifications conversions made completed timely basis y2k issue could material adverse effect companys operating results financial condition companys y2k compliance program divided five major phases 1 assessment computer systems software products collectively computer systems y2k compliance 2 remediation ie conversion modification computer system y2k compliant 3 testing remediation confirm remediation adversely impacted operation computer systems process dates year 2000 beyond 4 implementation remediated computer systems production 5 certification remediation y2k compliance percentage completion phase end february 1999 shown table addition possible certain computer systems software products companys computer systems software databases technology interface integrated may accept input store manipulate output dates year 2000 thereafter without error interruption company conducted review computer systems attempt identify ways systems could affected interfaceor integrationrelated problems correctly processing date information company communicating third parties maintains business relationships monitor evaluate progress identifying addressing y2k issues assessing potential impact company currently nothing come companys attention would indicate y2k compliance efforts major third party would material adverse effect companys results operations financial condition however assurance company identify interface integrationrelated third partyrelated problems advance occurrence company able successfully remedy problems discovered expenses companys efforts identify address problems expenses liabilities company may become subject result problems could material adverse effect results operations financial condition company expects y2k compliance program substantially completed first quarter 1999 company continually assesses risk noncompliance systems major third parties currently process developing contingency plans alternative arrangements circumstances outside direct control company spent approximately 41 million addressing y2k issues estimates spend additional 12 million 1999 costs funded cash flows operations market risk sensitive instruments interest rate risk company exposed interest rate risk credit agreement borrows prevailing shortterm variable rates order manage exposure fluctuations interest rates company uses interest rate swap agreements allow company raise funds floating rates effectively swap fixed rates lower available fixed rate borrowings made directly derivative financial instruments viewed company risk management tools entered hedging purposes company use derivative financial instruments trading speculative purposes discussion companys accounting policies derivative financial instruments included note 2 summary significant accounting policies disclosure relating financial instruments included note 12 financial instruments fair value interest rate risk calculated company utilizing estimates termination value companys interest rate swaps based upon 10 increase decrease interest rates december 31 1998 levels fair values present value projected future cash flows based market rates prices chosen december 31 1998 unrealized fair value interest rate swaps loss 36 million assuming instantaneous parallel upward shift yield curve 10 december 31 1998 levels unrealized fair value companys interest rate swaps would loss 06 million assuming instantaneous parallel downward shift yield curve 10 december 31 1998 levels unrealized fair value companys interest rate swaps would loss 65 million foreign exchange risk companys 15 equity interest joint venture china unicom represents companys foreign operations given current size joint venture operations companys 15 equity interest exposure changes foreign exchange rates time minimal item 7aitem 7 managements discussion analysis financial condition results operations matters discussed form 10k rh donnelley corporation company rh donnelley inc donnelley contain forwardlooking statements subject safe harbor created private securities litigation reform act 1995 applicable words believe expect anticipate planned estimated potential goal outlook similar expressions relate company donnelley management used identify forwardlooking statements regardless identifying phrases statements forwardlooking statements reflect companys donnelleys managements current beliefs specific assumptions respect future business decisions results well general market conditions based information currently available accordingly statements subject significant risks uncertainties contingencies could cause companys donnelleys actual operating results performance business prospects differ materially expressed implied statements risks uncertainties contingencies include following 1 loss market share competition 2 uncertainties caused consolidation telecommunications industry 3 introduction competing products technologies companies especially internetrelated products services competitive internetrelated services recently implemented company 4 complexity uncertainty regarding development andor deployment new hightechnology products including internetrelated services recently implemented company well uncertainty regarding acceptance rate services small business community 5 pricing pressures competitors andor customers 6 changes yellow pages industry markets 7 sustained economic downturn united states company except otherwise indicated terms company us refer rh donnelley corporation wholly owned subsidiary rh donnelley inc donnelley december 31 1999 operations subsidiary therefore consolidated basis financial statements financial statements donnelley substantially identical business organized three business segments directory advertising services das dontech partnership dontech directory publishing services dps within das segment provide advertising sales marketing services yellow pages directory products longterm sales agency agreements partnerships operating units major telephone companies independent proprietary operation joint venture interest act sales agent new york state operating unit bell atlantic corporation bell atlantic florida operating unit sprint corporation sprint serve sales agent publisher cendon partnership cendon 5050 partnership operating unit sprint formed publish directories florida nevada virginia north carolina also publish independent yellow pages directory cincinnati area 1875 equity interest joint venture unicom media ltd china united telecommunications corporation china unicom publish yellow pages directories offer internet directory services peoples republic china due similarities aggregate businesses das segment sales commission revenue bell atlantic sprint sales agency operations recognized advertising contract signed customer sales commission revenue cendon revenue sale advertising independent cincinnati directory recognized directory published since case publisher 50 partner dontech acts exclusive sales agent yellow pages directories published ameritech corporation ameritech illinois northwest indiana partner dontech initially operating unit ameritech since merger sbc communications inc sbc ameritech october 1999 controlled sbc merger trigger change agreement governing dontech partnership addition 50 interest profits dontech receive direct fees revenue participation operating unit sbc tied advertising sales dontech provides advertising sales yellow pages directory products similar das segment partnership considered separate operating segment since among things employees dontech including officers managers employees within dps segment provide prepress publishing services yellow pages directories including advertisement creation sales contract management listing database management sales reporting commissions pagination billing services imaging yellow pages publishers certain existing customers separately negotiated contracts revenue recognized straightline basis throughout year services performed recent developments february 2000 announced new initiative known get digital smartsm designed deliver comprehensive package internet marketing ecommerce services small mediumsized local businesses number agreements leading providers internet technology services offer variety services including website design hosting ecommerce capabilities services drive traffic exposure internet connectivity new initiative marketed initially miamifort lauderdale florida area expect expand 2000 markets presently provide services depending upon results southern florida factors affecting comparability prior july 1 1998 operated part dun bradstreet corporation context specifically describing distribution referred old db otherwise db december 1997 board directors old db approved principle plan separate two publicly traded companies rh donnelley corporation new dun bradstreet corporation new db distribution method old db distributed shareholders shares new db common stock july 1 1998 part distribution old db distributed shareholders shares new db stock old db changed name rh donnelley corporation historical consolidated financial statements reflect financial position results operations cash flows standalone entity periods presented historical consolidated financial statements include allocations date distribution certain db general administrative expenses related business management believes allocations reasonable however management believes costs indicative costs would incurred performed provided functions separate entity management estimates general administrative expenses would approximately 44 million 86 million higher amounts allocated db first six months 1998 full year 1997 respectively additionally connection distribution issued debt defined liquidity capital resources management estimates additional interest expense 184 million 427 million would incurred 1998 1997 respectively assuming debt outstanding january 1 1997 also affecting comparability prior period results sale proprietaryeast peast business december 1997 expiration sales agency contract cincinnati bell august 1997 appointment bell atlantic exclusive sales agent service 26 yellow pages directories buffalo new york market may 1998 contract cincinnati bell expired launched independent yellow pages directory cincinnati area published initial directory august 1998 1997 data included herein restated reflect change recording revenue certain directories sprint relationship see prior year form 10ka details results operations 1999 vs 1998 vs 1997 advertising sales calendar cycle basis calendar cycle advertising sales represent billing value advertisements sold annual directory company dontech given calendar year sales recognized basis revenues recognized sales contract signed sales agent directory published publisher directory selling advertising specific directory managed sales campaign typical sales campaign begins approximately six eight months prior scheduled publication date result act sales agent amount calendar sales fluctuate prior year due various factors including changes actual commencement date sales campaign timing sales campaign advertising sales 10667 million 9916 million 10647 million 1999 1998 1997 respectively however 1997 sales amount includes advertising sales peast business 738 million excluding sales comparability purposes advertising sales 1997 9909 million calendar cycle sales das dontech excluding sales peast last three years follows calendar cycle sales das increased 720 million 128 1999 compared 1998 primarily due increase 172 bell atlantic markets 36 sprint markets approximately half increase bell atlantic sales due addition bell atlantics buffalo market remaining increase due improving performance directories higher sales directories result timing started selling advertising buffalo market october 1998 therefore calendar cycle sales 63 million 1998 represented three months operations increase sprint markets 1999 primarily due growth las vegas tallahassee central florida directories calendar sales cincinnati directory decreased 06 million 1999 compared 1998 calendar sales dontech 1999 adversely affected certain systems problems related administration billing collections functions whereby sales force chicago 2000 directory campaign continued sell customers believed paying timely basis actually past due ultimately withdrawn chicago directory believe underlying systems problems largely addressed although expect residual effects 2000 results steadily improve throughout year return normal growth rates fourth quarter advertising sales das decreased 199 million 34 1998 compared 1997 however 1997 sales included sales agency agreement cincinnati bell expired august 1997 loss sales partially offset sales independent yellow pages directory adjusting impact change comparability purposes sales das increased 205 million 39 1998 compared 1997 increase driven growth 70 sprint markets particularly las vegas hickory tallahassee areas 26 increase bell atlantic markets increase bell atlantic markets primarily due 63 million sales buffalo market advertising sales dontech increased 206 million 50 1998 compared 1997 primarily due strong growth chicago surrounding areas publication cycle basis management believes additional useful measurement sales performance publication cycle basis method measures sales based value annual directory according publication date regardless advertising directory sold directory publication date changes one year next prior year publication date adjusted conform present year maintain comparability accordingly publication cycle sales 1998 adjusted amounts reported prior year reduce das 05 million increase dontech 58 million conform 1999 publication dates similarly publication cycle sales 1997 adjusted reduce das 12 million increase dontech 57 million also 1999 sprint took responsibility national advertising sales central florida consideration annual fee payable us consequently national advertising sales 1999 accordingly conform 1999 presentation national sales 61 million 57 million excluded 1998 1997 publication cycle sales das respectively advertising sales publication cycle basis 10451 million 9893 million 10826 million 1999 1998 1997 respectively however 1997 sales amount included advertising sales peast business 738 million excluding sales comparability purposes advertising sales 1997 10088 million publication cycle sales das dontech excluding sales peast last three years follows publication cycle advertising sales das increased 371 million 64 1999 compared 1998 primarily due sales buffalo market sales dontech increased 187 million 46 due overall growth dontech markets advertising sales das decreased 372 million 60 1998 compared 1997 however 1997 sales included sales agency agreement cincinnati bell adjusting impact change cincinnati operations sales das 1998 essentially unchanged 1997 strong growth 71 sprint markets offset 20 decline sales bell atlantic markets decrease driven primarily lower sales new york city area advertising sales dontech 1998 increased 177 million 45 1997 due growth dontech markets sales efficiencies result completion final phase twoyear initiative rebalance publication schedules ameritech directories revenues 1999 increased 161 million 95 1852 million compared 1691 million 1998 revenues 1998 decreased 697 million 292 1997 revenues 2388 million however 1997 amount included revenue 780 million peast business excluding revenue comparability purposes 1998 revenues 1691 million increased 83 million 52 1997 revenues 1608 million revenue segment excluding peast revenue last three years follows directory advertising services segment increase das revenue 166 million primarily due higher revenue bell atlantic 145 million result higher sales approximately half came addition buffalo markets higher fees earned sale yellow pages television yptv® product 22 million due increase volume revenue sprint markets also increased 05 million offset decrease revenue cincinnati directory 06 million increase das revenue 1998 1997 due strong growth sprint markets 60 million principally nevada florida partially offset decrease due weakness bell atlantic market 20 million change cincinnati operation 25 million directory publishing services segment dps revenue 1999 essentially unchanged 1998 increase 1998 revenue compared 1997 result new longterm contract purchaser peast business costs expenses operating expenses 1999 1384 million 150 million 122 higher operating expenses 1234 million 1998 increase due increase sales costs commissions 88 million due increase sales enhancements commission plans costs associated sale yptv product increased 17 million corresponding increase fees earned software related costs increased 11 million due shift developmental type expenditures 1998 capitalized maintenance type expenditures expensed incurred 1999 operating expenses 1998 decreased 412 million 250 1646 million 1997 however amount 1997 included 506 million operating expenses relating peast business excluding expenses comparability purposes operating expenses 1998 increased 94 million 82 1997 expenses 1140 million increase primarily attributable increase costs related startup buffalo operation 19 million incremental costs relating startup publication first cincinnati independent directory 20 million higher information technology costs 22 million general administrative expenses 1999 292 million 08 million 28 higher general administrative expenses 284 million 1998 1999 incurred additional finance human resources costs approximately 25 million result standalone entity entire year 13 million startup expenses relating new internet marketing ecommerce initiative increases partially offset reduction employee benefits costs 25 million general administrative expenses 1998 decreased 12 million 41 296 million 1997 however 1997 amount included general administrative expenses related peast 86 million excluding expenses comparability purposes general administrative expenses 1998 increased 74 million 352 210 million 1997 increase primarily due increase finance human resources related costs associated becoming standalone company 34 million higher information technology spending 14 million costs associated establishing relationship unicom media ltd 10 million provision bad debts 1999 86 million 03 million 36 higher provision bad debts 83 million 1998 percentage das revenues 1999 provision bad debts decreased 56 compared 60 1998 decrease primarily due relatively higher revenues 1999 related yptv operations generally lower bad debt losses bad debt provision 1998 decreased 101 million 184 million 1997 however 1997 bad debt expense included 71 million related peast excluding expense comparability purposes bad debt expense 1998 decreased 30 million compared bad debt expense 113 million 1997 bad debt provision excluding peast 83 das revenues higher provision rate 1997 mainly attributable higher provision taken certain bell atlantic revenues partnership income partnerships related fees includes share profits losses cendon partnership dontech partnership including revenue participation unicom media ltd income partnerships related fees 1999 1392 million 33 million 24 increase 1359 million 1998 income dontech increased 34 million income cendon increased 12 million case due growth advertising sales 1999 unicom media ltd received necessary regulatory approvals commenced directory operations share losses startup ventures directory operations totaled 06 million 1999 addition recorded 07 million amortization expense amortize difference book value investment share net assets unicom media ltd difference approximately 132 million amortized 10 years anticipate unicom media ltd incur losses 2000 share losses comparable 1999 amount income partnerships related fees 1998 increased 57 million 44 1302 million 1997 however 1997 amount included 17 million partnership income related peast business partnership dissolved connection sale peast excluding income comparability purposes income partnerships related fees 1998 increased 74 million 58 1285 million 1997 increase driven increase 39 million income dontech 35 million cendon case due strong growth advertising sales operating income operating income 1999 1299 million 47 million 38 higher operating income 1252 million 1998 operating income 1998 93 million 69 lower operating income 1345 million 1997 however operating income 1997 included 110 million related peast excluding operating income peast comparability purposes 1998 operating income increased 17 million 14 compared 1997 operating income loss excluding peast segment last three years follows operating income das dps includes revenues direct costs depreciation amortization incurred businesses plus allocation certain shared operating general administrative expenses based estimated business usage shared operating general administrative expenses allocated dontech operating loss represents general administrative expenses depreciation amortization activities allocated das dps increase das operating income 1999 39 million driven increases bell atlantic sprint including cendon due increases advertising sales revenues exceeded corresponding increases costs also contributing increase slightly lower operating loss cincinnati slightly higher operating profit yptv operations increases partially offset share losses unicom media ltd related amortization expense see partnership income explanation increase dontech operating income increase operating loss dps 1999 primarily due higher software maintenance costs operating loss increased higher costs standalone entity startup expenses relating new internet marketing ecommerce initiative partially offset lower employee benefits costs increase 23 million das operating income 1998 compared 1997 primarily due increase operating income sprint markets including cendon increase partially offset lower operating income cincinnati due change sales agency relationship startup independent directory well bell atlantic business see partnership income explanation increase dontech operating income decrease operating loss dps 1998 principally due improved profitability result sale peast business lower depreciation charges result sale peast business work originally performed internally performed purchaser longterm contract operating loss increased due higher costs associated becoming standalone company higher information technology spending costs associated establishing relationship unicom media ltd interest taxes interest expense 1999 367 million increased 136 million 231 million 1998 increase due full years interest incurred 1999 whereas 1998 amount included interest expense issuance debt june 1998 increase partially offset reduction average outstanding debt balance due lower borrowings revolver defined liquidity capital resources result strong cash flows scheduled principal repayments effective tax rate 1999 1998 1997 408 400 411 respectively increase 1999 compared 1998 primarily due nondeductible losses relating unicom media ltd higher effective tax rate 1997 due amortization goodwill nondeductible expense tax purposes net income net income 1999 552 million 161 per diluted share compared 613 million 177 per diluted share 1998 847 million 248 per diluted share 1997 however previously stated management believes historical results years prior 1999 indicative current operations include results peast business sold include full year effect certain costs expenses incurred result separation db historical results 1998 1997 adjusted exclude operations peast business ii include estimated additional general administrative expenses associated standalone company iii assume debt outstanding periods prior distribution net income 1998 would 476 million 138 per diluted share net income 1997 would 425 million 124 per diluted share liquidity capital resources connection distribution donnelley borrowed 300 million senior secured term facilities term facilities issued 150 million senior subordinated notes donnelley also borrowed 50 million 100 million senior revolving credit facility revolver together term facilities credit agreement obligations credit agreement secured security interests granted lenders substantially assets including capital stock existing newlyformed subsidiaries net proceeds borrowings debt distributed db connection distribution term facilities mature june 2004 december 2006 require quarterly principal repayments 2006 revolver matures june 2004 notes pay interest semiannually annual rate 9125 due june 2008 credit agreement indenture governing notes contain various financial restrictive covenants including restrictions asset dispositions similar transactions indebtedness capital expenditures commitments 1999 repaid 239 million outstanding debt reduced outstanding debt balance december 31 1999 4447 million 4686 million december 31 1998 weightedaverage interest rate borrowings credit agreement 74 71 december 31 1999 1998 respectively scheduled principal repayments 2000 term facilities 98 million additional borrowing capacity 100 million revolver december 31 1999 generated 626 million cash flows operations decrease 363 million compared 989 million operating cash flow 1998 1999 made interest payments estimated quarterly income tax payments full year whereas 1998 made payments periods subsequent distribution additional interest income tax payments negatively affected cash flows 1999 approximately 223 million 120 million respectively higher accounts receivable december 31 1999 result higher sales also adversely affected cash flows 49 million compared 1998 timing cash distributions partnerships 1999 positive effect cash flows approximately 25 million believe cash flows operations available borrowing capacity revolver sufficient fund operations meet anticipated investment capital expenditure debt service requirements foreseeable future cash flows operating activities 1998 08 million lower 1997 operating cash flows 997 million cash flows 1998 negatively affected lower net income lower cash distributions partnership investments partially offset net cash generated changes working capital lower net income mainly due loss income peast lower earnings bell atlantic cincinnati operations increases expenses primarily interest general administrative expenses result separation db lower cash distributions partnership investments due timing net cash generated changes working capital due changes accounts receivable accrued liabilities cash generated accounts receivable positive 1997 mainly due lower bell atlantic sales timing directory publications situation reversed 1998 new receivables associated cincinnati directory 1998 coupled reversal bell atlantic receivable situation caused negative effect cash flow year cash flows generated changes accrued liabilities impacted changes net deferred tax liabilities result estimates used approximate tax balances separate entity 1997 accrued interest payable related debt end 1998 cash used investing activities totaled 154 million 1999 compared 140 million 1998 1999 invested additional 80 million unicom media ltd compared 13 million investment 1998 expenditures acquire property equipment computer software decreased 1999 74 million compared 127 million 1998 decrease 1999 due higher software development costs expenditures purchase computerrelated equipment 1998 result separation db well delay certain expenditures computerrelated equipment software development 2000 1997 cash provided investing activities 1057 million included 1220 million sale peast business anticipate expenditures computerrelated equipment software development costs 2000 approximately 11 million 13 million addition terms joint venture agreement invest additional 65 million unicom media ltd next two years lastly connection recently announced internet marketing ecommerce initiative expect invest 6 million 8 million 2000 foregoing material commitments capital expenditures cash used financing activities 1999 471 million principally repurchase stock share repurchase plans defined repayment debt cash used financing activities 1998 totaled 827 million included net proceeds 4904 million issuance debt distributed db connection distribution also prior distribution cash deposits transferred db daily basis db funded disbursement bank accounts required net amount transferred approximately 389 million included net distributions db amount 5293 million 1998 repaid 314 million debt paid 120 million dividends ceased paying dividends payment fourth quarter 1998 cash dividend net amount transferred db 1997 2054 million included proceeds 1220 million sale peast business 1999 spent 280 million repurchase 1589400 shares common stock systematic share repurchase plan open market share repurchase plan collectively share repurchase plans represented 46 outstanding shares beginning year repurchase shares share repurchase plans continue funded operating cash flows december 1999 board directors authorized company spend additional 25 million repurchase shares open market share repurchase plan next two years addition end 1999 available authorization repurchase 25 million shares systematic share repurchase plan offset dilutive impact earnings exercise employee stock options 1998 agreed invest 158 million acquire 1875 interest unicom media ltd joint venture china unicom media ltd holds 80 interest unicom yellow pages yellow pages directories operating subsidiary owns operates chinabig comprehensive bilingual internet directory december 31 1999 terms joint venture agreement contributed 93 million cash anticipate making additional cash contributions 40 million 2000 25 million 2001 payments funded cash flows operations borrowings revolver also option purchase additional 125 interest unicom media ltd 10 million time november 5 2000 time determined exercise option year 2000 issue year 2000 y2k issue result computer programs written using two digits rather four digits define applicable year computer programs date sensitive software may recognize date using 00 year 1900 rather year 2000 prior january 1 2000 great deal concern levels government across business community united states y2k issue could result systems failures miscalculations causing disruptions operations including among things temporary inability process ordinary business transactions december 31 1999 invested 55 million investigate test remediate replace computer systems ensure would continue function properly without material disruption following december 31 1999 date experienced anticipate experience material systems failures disruptions related y2k issue assurance given however experience residual failures disruptions related y2k issue future effect failures disruptions financial condition results operations detailed discussion y2k compliance program see managements discussion analysis year 2000 issue quarterly report form 10q period ended september 30 1999 risk management exposed interest rate risk credit agreement borrow prevailing shortterm variable rates reduce exposure changes interest rates floating rate longterm debt entered interest rate swap agreements total notional principal amount 175 million expire june 2001 june 2003 agreements effectively change interest rate 175 million floating rate borrowings fixed rates view derivative financial instruments risk management tools entered hedging purposes use derivative financial instruments trading speculative purposes notional amount swap agreements used measure interest paid received represent amount exposure credit loss exposed credit risk event nonperformance counterparty interest rate swap agreements however anticipate nonperformance counterparty discussion accounting policies derivative financial instruments included note 2 disclosure relating financial instruments included note 12 consolidated financial statements item 8 market risk sensitive instruments interest rate risk fair value interest rate risk estimate termination value interest rate swaps based quoted market interest rates december 31 1999 unrealized fair value interest rate swaps gain 42 million assuming instantaneous parallel upward shift yield curve 10 yearend level 60 unrealized fair value interest rate swaps would gain 66 million assuming instantaneous parallel downward shift yield curve 10 december 31 1999 level unrealized fair value interest rate swaps would gain 18 million foreign exchange risk exposed foreign exchange risk equity interest unicom media ltd required contributions 2000 2001 40 million 25 million respectively subject adjustment exchange rate peoples republic china currency rmb date payment 10 higher lower specified exchange rate rmb82778 assuming 10 depreciation rmb rmb9106 us dollar amount contributions would decrease approximately 36 million 23 million respectively assuming 10 appreciation rmb rmb745 us dollar amount contributions would increase approximately 44 million 28 million respectively exchange rate rmb change suddenly due changes monetary policy market conditions factors peoples republic china exchange rate relatively stable last five years ranging rmb82716 rmb84462 decided use financial instruments forward contracts options hedge potential exposure believe instruments costly relative potential risk unicom media ltd currently represents foreign operation item 7aitem 7 managements discussion analysis financial condition results operations certain statements contained form 10k regarding rh donnelleys future operating results performance business plans prospects statements constituting historical fact forwardlooking statements subject safe harbor created private securities litigation reform act 1995 possible words believe expect anticipate planned estimated potential goal outlook similar expressions relate rh donnelley management used identify forwardlooking statements regardless identifying phrases statements forwardlooking statements reflect rh donnelleys current beliefs specific assumptions respect future business plans prospects decisions results based information currently available rh donnelley accordingly statements subject significant risks uncertainties contingencies could cause rh donnelleys actual operating results performance business plans prospects differ expressed implied statements risks uncertainties contingencies include without limitation following 1 loss market share competition 2 uncertainties caused consolidation telecommunications industry 3 introduction competing products technologies companies 4 complexity uncertainty regarding development andor deployment new high technology products uncertainty regarding acceptance rate products 5 pricing pressures competitors andor customers 6 changes yellow pages industries markets 7 sustained economic downturn united states 8 failure appropriately remedy previously disclosed billing collections problems respect dontech 9 share repurchases subject market conditions compliance legal restrictions companys debt covenants item read conjunction audited consolidated financial statements notes thereto included item 8 form 10k readers cautioned place undue reliance forwardlooking statements speak date hereof company undertakes obligation update forwardlooking statements company rh donnelley corporation leading marketer yellow pages marketing advertising services tailored small mediumsized businesses unless otherwise indicated terms company us refer rh donnelley corporation direct indirect wholly owned subsidiaries unless otherwise specified tabular amounts presented millions dollars prior july 1 1998 operated part dun bradstreet corporation context specifically describing distribution referred old db otherwise db board directors old db approved principle plan separate two publicly traded companies rh donnelley corporation new dun bradstreet corporation new db distribution method old db distributed shareholders shares new db common stock july 1 1998 part distribution old db distributed shareholders shares new db stock old db changed name rh donnelley corporation business organized three operating segments december 31 2000 dontech partnership dontech directory advertising services das get digital smart gds result transactions described strategic transactions restructured reportable operating segments 2000 better reflect companys current operations way view businesses das includes prepress publishing operations formerly reported separately directory publishing services also information technology costs portion previously allocated included entirely das prior period amounts restated accordance new reporting structure dontech 5050 partnership operating unit sbc communications inc sbc dontech acts exclusive sales agent yellow pages directories published ameritech corporation wholly owned subsidiary sbc ameritech illinois northwest indiana addition 50 interest profits dontech receive direct fees revenue participation tied advertising sales partner although dontech provides advertising sales yellow pages directory products similar das partnership considered separate operating segment since among things employees dontech including officers managers employees within das segment provide advertising sales marketing services yellow pages directory products affiliated entities sprint corporation sprint perform prepress publishing services yellow pages directories exclusive sales agent central florida operating unit sprint exclusive sales agent nevada florida virginia north carolina cendon llc cendon joint venture centel directory company centel subsidiary sprint provide prepress publishing services yellow pages directories publishers serve sales agent well otherwise unaffiliated independent yellow pages publisher separately negotiated contracts das also includes information technology costs addition results das segment include operating results cincinnati bell atlantic businesses investment chinabigcom limited previously known unicom media limited chinabig dates transactions caused changes reporting respective business see strategic transactions serve sales agent recognize revenue sales commissions time advertising contract executed customer includes sales commission revenue realized sprint including cendon directories published june 30 2000 bell atlantic june 30 2000 publisher recognized revenue directory published included revenue realized publication directories cendon june 30 2000 publication cincinnati proprietary directory 1999 revenue recognized 2000 cincinnati proprietary operation business sold prior scheduled directory publication date recognize revenue prepress publishing services straightline basis throughout year services performed gds segment includes get digital smart business began operations first quarter 2000 test economic viability offering internet marketing ecommerce services small mediumsized businesses miamift lauderdale market ceased operations business december 2000 strategic transactions 2000 entered number transactions designed enhance shareholder value sharpen strategic focus create efficient cost structure transactions included following executed agreement bell atlantic early termination sales agency agreements set expire 2003 2005 sold cincinnati proprietary operations net cash generated transactions 100 million restructured extended cendon relationship 2010 original relationship set expire 2004 connection investment unaffiliated third party chinabig became passive investor longer recognize share losses chinabig ceased operations gds business december 2000 result proceeds transactions strengthened financial position prepaying 900 million debt net debt total debt less cash end 2000 2963 million compared 4424 million end 1999 additionally spent 536 million repurchase 28 million shares common stock represented 8 outstanding shares beginning year disposition businesses related cost cutting actions april 27 2000 sold cincinnati proprietary directory business yellow book usa inc 8 million june 30 2000 entered agreement affiliate bell atlantic corporation known verizon communications bell atlantic early termination directory services agreements company bell atlantic dated september 5 1985 may 5 1998 amended agency agreements pursuant agency agreements company served exclusive sales agent bell atlantic directories covering substantially new york state agency agreements scheduled expire 2005 2003 respectively 1999 agency agreements accounted approximately 41 total publication cycle advertising sales 54 consolidated net revenue 10 consolidated operating income terms agreement received cash proceeds 114 million reduced approximately 3 million liabilities assumed bell atlantic related preclosing period also received commissions approximately 42 million sales occurred prior closing yet payable terms agency agreements addition received commissions approximately 15 million sales certain directories published preclosing period december 2000 ceased operations get digital smart business gds launched february 2000 miamift lauderdale market test economic viability providing variety products services designed deliver comprehensive package internet marketing ecommerce capabilities small mediumsized local businesses test demonstrated demand products services offered business broadly capable providing adequate return investment december 2000 entered agreement pursuant innuity inc provider ecommerce services small mediumsized businesses assumed rights obligations gds customer contracts recognized onetime costs 29 million severance related costs also implemented costcutting measures 2000 including headcount reductions raleigh nc facility corporate headquarters consistent new operating structure recognized net pretax gain transactions approximately 865 million 535 million taxes cendon restructuring extension effective directories published june 30 2000 company centel entered series agreements effectively restructured existing cendon partnership limited liability company llc extended sales agency arrangement 2010 partnership agreement sales agency agreement set expire 2004 new arrangement focuses responsibilities sales certain prepress publishing services latter 2003 establishes us exclusive sales agent centels print electronic internet directory products markets previously covered partnership agreement centel assumed responsibility printing delivery directories related support services marketing customer service collections receive sales commissions advertising sold subject adjustment based contractual provisions sales allowances bad debts receive priority distribution membership interest llc tied advertising sales commissions recorded revenue priority distribution recorded partnership income related fees new agreement revenue related costs recognized time sale rather time directory publication historically case cendon accordingly 2000 results include onetime operating income benefit 158 million relating advertising sales made related costs incurred prior effective date agreement directories published subsequent effective date agreement chinabig investment 18 interest chinabig publishes yellow pages directories offers internet directory services peoples republic china 2000 management chinabig made decision focus time resources internet aspect business plan known chinabigcom connection equity investment unaffiliated third party order facilitate raising additional capital provide greater flexibility june 15 2000 chinabig existing investor including company restructured existing joint venture agreement chinabig among things significantly reduce influence daily operations chinabig result restructured agreement passive investor chinabig account investment cost method prior june 15 2000 accounted investment equity method therefore subsequent june 15 2000 share losses chinabig longer recognized consolidated statement operations results operations year ended december 31 2000 vs year ended december 31 1999 due numerous strategic transactions referred believe reported results 2000 indicative underlying ongoing operations believe comparisons 1999 would meaningful accordingly information presented reported audited basis adjusted unaudited basis therefore results operations discussion ignores longer relevant material changes 2000 1999 disposed operations bell atlantic cincinnati gds discuss detail onetime items described strategic transactions period comparisons bell atlantic cincinnati operations periods prior disposition see managements discussion analysis financial condition results operations quarterly reports form 10q first second quarters 2000 gds begin active operations 2000 period comparison would meaningful adjusted amounts assume transactions described occurred january 1 1999 derived excluding reported amounts advertising sales revenue expenses bell atlantic cincinnati gds operations well onetime items restructuring cendon relationship disposition businesses believe compared reported audited results operations adjusted unaudited information indicative underlying financial operational performance 2000 may better reflect future performance adjusted unaudited information purport represent actual results would transactions occurred assumed dates project financial condition results operations future period advertising sales calendar cycle basis calendar cycle advertising sales represent billing value advertisements sold annual directory stated basis revenue recognized sales contract signed company acts sales agent directory published company acted publisher selling advertising specific directory managed sales campaign typical sales campaign begins approximately six eight months prior scheduled publication date result amount calendar sales fluctuate prior year due various factors including changes actual commencement date sales campaign timing sales campaign reported adjusted calendar advertising sales segment presented excludes bell atlantic sales 1820 million onetime sales benefit cendon restructuring 958 million 2000 bell atlantic sales 4440 million cincinnati sales 100 million 1999 reported calendar advertising sales 8977 million 2000 compared 10667 million 1999 adjusted basis calendar advertising sales 2000 6199 million compared 6127 million 1999 sales dontech declined 4282 million prior year amount 4323 million calendar sales dontech entire year 2000 latter part 1999 adversely affected issues related administration billing collection functions ameritech resulted loss customers significantly delinquent withdrawn directories well timing certain sales campaigns 2000 compared 1999 adjusted sales das increased 1917 million prior year amount 1804 million primarily due growth sprint markets las vegas central florida publication cycle basis believe additional useful measure sales performance publication cycle sales publication cycle sales represent sales directories published current period compared sales directories published prior year period regardless advertising directory sold directory publication date changes one year next prior year publication date adjusted conform present year maintain comparability changes directory publication dates 2000 would require adjustments prior year publication sales amounts reported adjusted publication cycle advertising sales segment presented excludes bell atlantic sales 2381 million 2000 bell atlantic cincinnati sales 4268 million 100 million respectively 1999 reported publication cycle advertising sales 8605 million 2000 compared 10451 million 1999 adjusted publication cycle sales 2000 6224 million compared 6083 million 1999 publication cycle sales dontech 4308 million slightly prior year amount 4276 million absence growth dontech publication cycle sales due previously discussed billing collections issues ameritech adversely impacted sales throughout year sbc began administrative improvements second half 2000 part improvements expected complete process integrating dontechs customers accounts receivable management system end first quarter 2001 adjusted publication cycle sales das increased 1916 million prior year amount 1807 million increase primarily driven growth las vegas central florida markets net revenue net revenue consists principally sales commissions earned value advertising sold less estimate potential claims allowances fees prepress publishing services effective january 1 2000 revenue reported net estimated claims allowances previously estimated claims allowances recorded provision bad debts reported adjusted net revenue segment follows excludes bell atlantic revenue 428 million onetime revenue benefit 210 million cendon restructuring 2000 revenue bell atlantic cincinnati 974 million 96 million respectively 1999 b excludes revenue gds 2000 reported revenue 1413 million 2000 compared 1819 million 1999 adjusted revenue 2000 773 million compared 749 million 1999 increase primarily due higher commission revenues 23 million sprint resulting increase sales revenue prepress publishing operations approximately 09 million higher offset decrease revenue yellow pages television yptvr operation 07 million expenses reported adjusted expenses follows adjusted operating expenses 2000 exclude expenses bell atlantic 304 million cincinnati expenses 07 million onetime expenses connection cendon restructuring 94 million gds expenses 90 million adjusted operating expenses 1999 exclude bell atlantic cincinnati expenses 754 million 100 million respectively b excludes general administrative expenses bell atlantic 24 million cincinnati 03 million 2000 general administrative expenses bell atlantic 40 million cincinnati 14 million expenses 13 million related startup gds 1999 c excludes onetime provision connection cendon restructuring 12 million 2000 provision cincinnati 19 million bell atlantic 01 million 1999 excludes depreciation amortization expense 26 million bell atlantic 01 million cincinnati 2000 depreciation amortization expense 53 million bell atlantic 02 million cincinnati 1999 reported operating expenses 967 million 2000 compared 1384 million 1999 adjusted operating expenses 2000 472 million compared 530 million 1999 decrease primarily due reduced costs prepress publishing operations information technology function due improvements operational efficiency lower salaries benefit costs result headcount reductions reported general administrative expenses 252 million 2000 compared 292 million 1999 adjusted general administrative expenses 2000 1999 225 million result cost cutting actions strategic initiatives taken 2000 obtained savings corporate planning development functions savings offset costs investment banking legal fees incurred connection previously announced process explore possible sale company reported provision bad debts 43 million 2000 compared 53 million 1999 adjusted provision bad debts 2000 declined slightly 31 million 33 million 1999 percentage net revenue adjusted provision bad debts 40 2000 compared favorably 44 1999 reported depreciation amortization expense 154 million 2000 compared 183 million 1999 adjusted depreciation amortization expense 127 million 2000 comparable 128 million 1999 income partnerships related fees income partnerships related fees partnership income includes share results dontech including revenue participation cendon including priority distribution chinabig june 15 2000 reported adjusted partnership income relationship follows excludes onetime benefit restructuring cendon relationship 54 million 2000 reported partnership income 1477 million 2000 compared 1392 million 1999 adjusted partnership income 1423 million 2000 compared 1392 million 1999 partnership income dontech 1240 million 2000 compared 1235 million 1999 growth dontech partnership income held previously mentioned billing collections issues ameritech adversely impacted sales throughout year adjusted partnership income cendon 194 million 2000 compared 169 million 1999 increase cendon partnership income primarily due growth sales cendon markets especially las vegas previously mentioned effective june 15 2000 passive investor chinabig longer recognize share losses operating income operating income reportable segments except dontech includes costs directly incurred business unit plus allocation certain shared operating general administrative expenses based estimated business usage operating loss represents corporate general overhead costs allocated business segments reported adjusted operating income segment follows excludes onetime operating income benefit 158 million cendon restructuring operating income bell atlantic 73 million operating loss cincinnati 10 million 2000 operating income bell atlantic 127 million operating loss cincinnati 39 million 1999 b excludes operating loss gds 2000 1999 reported operating income 1474 million 2000 compared 1299 million 1999 adjusted operating income 2000 1342 million compared 1224 million 1999 see income partnerships related fees explanation increase dontech operating income adjusted das operating income increased 260 million 2000 160 million 1999 primarily due strong growth sprint lower costs prepress publishing operations adjusted operating loss decreased 158 million 2000 171 million 1999 primarily due lower corporate personnel depreciation occupancy costs interest taxes interest expense 2000 348 million compared 372 million 1999 decrease driven reduction average outstanding debt balance due prepayment 900 million debt third quarter interest income increased 2000 39 million compared 04 million 1999 due interest earned proceeds bell atlantic cincinnati transactions effective tax rate 2000 decreased 382 compared 408 1999 decrease effective rate due various actions taken 2000 restructuring investment chinabig share losses chinabig recognized june 15 2000 could offset domestic source income recognized increased effective tax rate 1999 extraordinary loss connection prepayment debt 2000 recognized extraordinary loss 07 million taxes 04 million writeoff related deferred financing costs extraordinary loss effect reducing diluted earnings per share 002 2000 net income earnings per share reported net income 2000 1248 million 383 per diluted share compared 552 million 161 per diluted share 1999 previously stated due numerous strategic initiatives undertaken year believe reported earnings per share 2000 indicative underlying ongoing operations company accordingly disclosed diluted earnings per share 2000 189 excludes onetime operating income benefit cendon restructuring gain disposition businesses onetime costs associated shutdown gds includes results bell atlantic cincinnati gds operations relevant portion 2000 results operations year ended december 31 1999 vs year ended december 31 1998 historical consolidated financial statements 1998 include allocations date distribution certain db general administrative expenses related business believe allocations reasonable however believe costs indicative costs would incurred performed provided functions separate entity accordingly estimate general administrative expenses would approximately 44 million higher amounts allocated db first six months 1998 also estimate additional interest expense 184 million would incurred 1998 assuming debt outstanding january 1 1998 information presented adjusted basis years ended december 31 1999 1998 comparable include full year results bell atlantic cincinnati operations previously described restructured reportable operating segments 2000 1999 1998 amounts restated accordance new reporting structure advertising sales calendar cycle basis advertising sales 10667 million 1999 compared 9916 million 1998 calendar cycle sales dontech das follows calendar sales dontech 1999 adversely affected billing collection problems ameritech whereby sales force chicago 2000 directory campaign continued sell customers believed paying timely basis actually past due ultimately withdrawn chicago directory calendar cycle sales das increased 1999 compared 1998 primarily due increase 172 bell atlantic markets 36 sprint markets approximately half increase bell atlantic sales due addition bell atlantics buffalo market remaining increase due improving performance directories higher sales directories result timing started selling advertising buffalo market october 1998 therefore calendar cycle sales 63 million 1998 represented three months operations increase sprint markets 1999 primarily due growth las vegas tallahassee central florida directories calendar sales cincinnati directory decreased 06 million 1999 compared 1998 publication cycle basis publication cycle sales 1998 adjusted amounts originally reported reduce das 05 million increase dontech 58 million conform 1999 publication dates 1999 sprint assumed responsibility national advertising sales central florida consideration annual fee payable us consequently national advertising sales 1999 accordingly conform 1999 presentation national sales 61 million excluded 1998 das publication cycle sales publication cycle sales 10451 million 1999 compared 9893 million 1998 publication cycle sales dontech das follows sales dontech increased due overall growth dontech markets increase das publication cycle sales 1999 compared 1998 primarily due sales buffalo market net revenue result restructuring reportable operating segments revenue 1999 1998 earned das segment net revenue 1999 increased 157 million 94 1819 million compared 1662 million 1998 increase primarily due higher revenue bell atlantic 148 million result higher sales approximately half came addition buffalo markets higher fees earned sale yptv product 22 million due increase volume increases partially offset decrease revenue cincinnati directory 06 million slightly lower revenue prepress publishing operations 05 million expenses operating expenses 1999 1384 million 150 million 122 higher operating expenses 1234 million 1998 increase due increase sales costs commissions 88 million due increase sales enhancements commission plans costs associated sale yptv product increased 17 million corresponding increase fees earned software related costs increased 11 million due shift developmental type expenditures 1998 capitalized maintenance type expenditures expensed incurred 1999 general administrative expenses 1999 292 million 08 million 28 higher general administrative expenses 284 million 1998 1999 incurred additional finance human resources costs approximately 25 million result standalone entity entire year 13 million startup expenses relating internet marketing ecommerce initiative increases partially offset reduction employee benefits costs 25 million provision bad debts 1999 53 million comparable provision bad debts 54 million 1998 percentage net revenue 1999 provision bad debts decreased 29 compared 33 1998 decrease primarily due relatively higher revenue 1999 related yptv operations generally lower bad debt losses income partnerships related fees partnership income 1999 1392 million 33 million 24 increase 1359 million 1998 income dontech increased 34 million income cendon increased 12 million case due growth advertising sales 1999 chinabig received necessary regulatory approvals commenced directory operations share losses startup ventures directory operations totaled 06 million 1999 addition recorded 07 million amortization expense amortize difference book value investment share net assets chinabig difference approximately 132 million amortized 10 years operating income operating income 1999 1299 million 47 million 38 higher operating income 1252 million 1998 operating income segment follows see income partnerships related fees explanation increase dontech operating income increase das operating income 1999 14 million driven increases bell atlantic sprint including cendon due increases advertising sales revenue exceeded corresponding increases costs also contributing increase slightly lower operating loss cincinnati slightly higher operating profit yptv operations increases partially offset higher operating loss prepress publishing operation due higher software maintenance costs share losses chinabig related amortization expense gds operating loss represents startup expenses relating internet marketing ecommerce initiative operating loss increased higher costs standalone entity partially offset lower employee benefits costs interest taxes interest expense 1999 372 million increased 138 million compared 234 million 1998 increase due full years interest incurred 1999 whereas 1998 amount included interest expense issuance debt june 1998 increase partially offset reduction average outstanding debt balance due lower borrowings revolver defined liquidity capital resources result strong cash flows scheduled principal repayments interest income increased slightly 04 million 1999 compared 03 million 1998 effective tax rate 1999 408 compared 400 1998 increase effective tax rate primarily due nondeductible losses relating chinabig net income net income 1999 552 million 161 per diluted share compared 613 million 177 per diluted share 1998 however previously stated historical results 1998 include additional general administrative expenses 44 million interest expense 184 million estimate would incurred standalone entity entire year adjusting 1998 reported results amounts net income would 476 million 138 per diluted share liquidity capital resources december 31 2000 outstanding debt 3518 million debt consisted 150 million outstanding senior subordinated notes 2018 million outstanding senior secured term facilities term facilities also additional borrowing capacity 100 million available 100 million senior revolving credit facility revolver together term facilities credit agreement notes pay interest semiannually annual rate 9125 due june 2008 credit agreement provides floating interest rate based spread london interbank offered rate libor greater either prime rate fed funds rate plus 50 basis points election company term facilities mature june 2004 december 2006 require quarterly principal repayments 2006 obligations credit agreement secured security interests granted lenders substantially assets including capital stock existing newly formed subsidiaries credit agreement indenture governing notes contain various financial restrictive covenants including restrictions asset dispositions similar transactions indebtedness capital expenditures dividends commitments cash flows operations 2000 increased 202 million 323 828 million prior year amount 626 million increase driven higher net income excluding aftertax net gain disposition businesses collections accounts receivable mainly due buyout agency agreements collection outstanding bell atlantic receivables partially offsetting increase higher payments accrued liabilities mainly due severance taxes related bell atlantic cincinnati transactions believe cash flows operations available borrowing capacity revolver sufficient fund operations meet anticipated investment capital expenditure debt service requirements foreseeable future cash flows operations 1999 626 million decreased 363 million 367 compared 1998 cash flow operations 989 million 1999 made interest payments estimated quarterly income tax payments full year whereas 1998 made payments periods subsequent distribution additional payments negatively affected cash flows 1999 approximately 343 million higher accounts receivable december 31 1999 result higher sales also adversely affected cash flows 45 million compared 1998 timing cash distributions partnerships 1999 positive effect cash flows approximately 25 million cash flows investing activities 2000 1094 million consisted primarily net proceeds received buyout bell atlantic agency agreements sale cincinnati operations proceeds partially offset capital spending 77 million investments chinabig 49 million make final required investment chinabig 16 million june 2001 cash used investing activities totaled 154 million 1999 140 million 1998 consisted capital expenditures contributions chinabig anticipate capital expenditures 2001 equipment software approximately 8 million 10 million contribution chinabig material commitments investment spending cash used financing activities 2000 1391 million compared 471 million 1999 significant increase due use proceeds bell atlantic cincinnati transactions well cash flow operations repay 930 million debt repurchase 536 million common stock systematic share repurchase plan open market share repurchase plan collectively share repurchase plans amounts partially offset 76 million proceeds employee stock option exercises 2001 scheduled principal repayments term facilities 42 million cash used financing activities 1999 471 million consisted principally repurchase common stock share repurchase plans scheduled repayment debt cash used financing activities 1998 totaled 827 million included net proceeds 4904 million issuance debt distributed db connection distribution also prior distribution cash deposits transferred db daily basis db funded disbursement bank accounts required net amount transferred approximately 389 million included net distributions db amount 5293 million 1998 repaid 314 million debt paid 120 million dividends ceased paying dividends payment fourth quarter 1998 cash dividend repurchase shares common stock share repurchase plans 2001 funded cash hand december 31 2000 2001 operating cash flows end 2000 available authorization repurchase 757 million stock 100 million open market share repurchase plan april 2002 repurchase 23 million shares systematic share repurchase plan offset dilutive impact earnings exercise employee stock options risk management exposed interest rate risk credit agreement borrow prevailing shortterm variable rates reduce exposure changes interest rates floating rate debt entered interest rate swap agreements total notional principal amount 175 million expire june 2001 june 2003 agreements effectively change interest rate 175 million floating rate borrowings fixed rates notional amount swap agreements used measure interest paid received represent amount exposure credit loss exposed credit risk event nonperformance counterparty interest rate swap agreements however currently anticipate nonperformance counterparty view derivative financial instruments risk management tools entered hedging purposes use derivative financial instruments trading speculative purposes june 2001 interest rate swap agreement notional value 50 million expire due reduced level indebtedness time management intend replace expiring interest rate swap agreement discussion accounting policies derivative financial instruments included note 2 disclosure relating financial instruments included note 10 consolidated financial statements item 8 market risk sensitive instruments interest rate risk fair value interest rate risk estimate termination value interest rate swaps based quoted market interest rates december 31 2000 unrealized fair value interest rate swaps loss 01 million however assuming instantaneous parallel upward shift yield curve 10 yearend level 59 unrealized fair value interest rate swaps would equal gain 04 million assuming instantaneous parallel downward shift yield curve 10 december 31 2000 level unrealized fair value interest rate swaps would equal loss 06 million foreign exchange risk material foreign exchange risk currently commitment contribute additional 16 million chinabig june 2001 amount subject adjustment exchange rate peoples republic china currency rmb date payment 10 higher lower specified exchange rate rmb82778 however exchange rate relatively stable last five years ranging rmb8277 rmb8336 additionally assuming 10 appreciation depreciation rmb us dollar amount contribution would decrease increase 02 million respectively item 7aitem 7 managements discussion analysis financial condition results operations item read conjunction audited consolidated financial statements notes thereto included item 8 forwardlooking information certain statements contained form 10k regarding rh donnelleys future operating results performance business plans prospects statements constituting historical fact forwardlooking statements subject safe harbor created private securities litigation reform act 1995 possible words believe expect anticipate would planned estimated potential goal outlook similar expressions relate rh donnelley management used identify forwardlooking statements regardless identifying phrases statements forwardlooking statements reflect rh donnelleys current beliefs assumptions respect future business plans prospects decisions results based information currently available rh donnelley accordingly statements subject significant risks uncertainties contingencies could cause rh donnelleys actual operating results performance business plans prospects decisions differ expressed implied statements readers cautioned place undue reliance forwardlooking statements speak date hereof company undertakes obligation update forwardlooking statements risks uncertainties contingencies include without limitation following 1 dependence limited number relationships business consists primarily two relationships perpetual partnership sbc communications inc sbc called dontech two sales agency arrangements sprint corporation sprint assurance given able renew existing sprint sales agency various prepress publishing agreements expire able secure additional business replace expired contracts 2 dependence business partners company exclusive sales agent sprint dontech exclusive sales agent sbc respective markets exclusive sales agent company dontech responsible sales management sales force compensation recruiting training sales related matters publisher respective directories sprint sbc responsible consequently control matters including without limitation product development pricing scheduling marketing distribution billing collections credit customer service believe economic interests company dontech generally aligned sprint sbc respect yellow pages directory operations sprint sbc could implement policies decisions could adverse impact overall yellow pages directory operations particularly business relationships policies decisions company dontech would likely participation influence could material adverse effect results operations financial condition dontech afforded certain protections respective agreements believe could mitigate significant degree adverse effects policy changes andor decisions company assurances given policy changes andor decisions would material adverse effect results operations financial condition lastly maintain large receivable balances sprint sbc liquidity difficulties may experience could materially impact companys results operations financial condition liquidity 3 uncertainty regarding changes industry ability offer sales agency prepress publishing services sbc sprint markets publishers industry andor ability diversify business portfolio may impacted uncertainties caused consolidation past future telecommunications industry well recent consolidation activity independent yellow pages publishing industry publishers provide sales publishing functions internally consequently assurance company able obtain additional outsourcing business publishers addition effects telecommunications act 1996 still developing ultimate impact changes still uncertain changes yellow pages industry markets could also affect results plans prospects also introduction competing products technologies including electronic delivery directory information companies andor pricing pressures competitors andor customers could adversely affect results operations financial condition 4 general economic factors business results could adversely affected continuation deterioration economic slowdown presently experienced united states especially respect markets operate addition residual economic effects uncertainties regarding terrorist attacks occurred september 11 2001 ii general possibility express threat similar terrorist related disruptive events iii future occurrence similar terrorist related disruptive events especially respect major markets operate depend heavily upon travel tourism could also adversely affect business 5 use cash flow company intends use cash flow following repay debt repurchase outstanding common stock andor pursue growth initiatives within line business core competencies whether acquisition joint ventures outsourcing opportunities otherwise share repurchases would subject market conditions compliance legal restrictions well restrictions companys debt covenants growth initiatives pursued would subject implementation integration related risks assurance given proposed transaction would accretive earnings company rh donnelley corporation leading independent marketer yellow pages advertising services tailored small mediumsized businesses unless otherwise indicated terms company us refer rh donnelley corporation direct indirect wholly owned subsidiaries prior july 1 1998 company operated part dun bradstreet corporation db unless otherwise specified tabular amounts presented millions dollars business organized two reportable operating segments january 1 2001 dontech partnership dontech directory advertising services das dontech 5050 perpetual partnership operating unit sbc acts exclusive sales agent yellow pages directories published sbc illinois northwest indiana dontech provides advertising sales services receives commission sbc income dontech comprised two components 50 interest net profits dontech revenue participation income received directly sbc revenue participation income based percentage dontech advertising sales comprises 80 total income dontech total income dontech accounted 79 72 83 operating income general corporate costs unallocated expenses years ended december 31 2001 2000 1999 respectively certain general administrative expenses incurred support business allocated dontech segment income dontech accounts significant portion operating income material decline advertising sales dontech would likely material adverse effect results operations financial condition also provide certain prepress publishing services dontech directories included das segment described although dontech provides advertising sales yellow pages directory products similar das partnership considered separate operating segment since among things partnership board directors employees dontech including officers managers employees directory advertising services within das segment sell yellow pages advertising affiliated entities sprint perform prepress publishing services yellow pages directories exclusive sales agent greater orlando florida market central florida operating unit sprint exclusive sales agent nevada florida virginia north carolina cendon llc cendon joint venture centel directory company centel subsidiary sprint affiliates sell yellow pages advertising markets states provide prepress publishing services yellow pages directories dontech sprint sell advertising well unaffiliated third party publisher separately negotiated contracts information technology costs also included das addition das segment periods prior 2001 includes operating results cincinnati bell atlantic businesses share losses chinabigcom limited chinabig dates transactions caused changes reporting respective business see factors affecting comparability receive sales commissions advertising sell sprint cendon priority distribution membership interest cendon priority distribution amount priority distribution earned based percentage cendon advertising sales income sprint also highly dependent level advertising sales material decline level advertising sales could material adverse effect results operations financial condition end 2002 prepress publishing contract unaffiliated third party publisher expire notified contract renewed revenue contract approximately 8 million per year however due certain restructuring actions described factors affecting comparability anticipate expiration contract material adverse effect results operations financial condition current prepress publishing service agreements sbc sprint extend 2003 recently renegotiated prepress publishing service agreement sbc extend term 2008 substantially terms yet sought negotiate extension sprint prepress publishing agreement awaiting outcome sbc extension negotiations intend pursue negotiations sprint promptly however assurances given successful extending agreement terms conditions extension revenue prepress publishing services operation accounted approximately 43 23 17 total consolidated revenue 2001 2000 1999 respectively critical accounting policies understanding accounting policies necessary complete analysis results operations financial condition accounting policies could material effect results operations financial condition follows revenue recognition earn revenue form commissions sale advertising fees prepress publishing services sales agent sales commission revenue recognized time advertising contract executed customer includes sales commission revenue realized sprint including cendon directories published june 30 2000 bell atlantic june 30 2000 publisher part publishing partnership revenue recognized directory published included revenue cendon partnership june 30 2000 publication cincinnati proprietary directory prior sale sales commission revenue recorded net potential claims allowances estimated based historical experience revenue prepress publishing operations recognized services performed partnership joint venture income partnership joint venture income includes 50 share net profits dontech revenue participation income priority distribution revenue participation income priority distribution earned recognized sales contract executed customer prior restructuring cendon relationship effective july 1 2000 general partner cendon partnership 5050 partnership centel formed publish directories florida nevada virginia north carolina recognized 50 share net profits partnership joint venture income partnership joint venture income also included share losses chinabig june 15 2000 time became passive investor longer required recognize share losses partnership joint venture investments carrying value dontech investment revenue participation receivable priority distribution receivable reflected partnership joint venture investments investment chinabig reflected noncurrent assets consolidated balance sheets carrying value partnership joint venture investments evaluated impairment events changes circumstances indicate carrying value investment may impaired impairment deemed occurred impairment determined permanent carrying value investment writtendown estimated fair value estimate fair value would determined based independent third party valuations discounting estimated future cash flows based independent third party valuation recorded impairment charge 114 million fourth quarter 2001 related investment chinabig see factors affecting comparability concentration credit risk maintain significant receivable balances sbc sprint revenue participation priority distribution sales commissions ultimate remittance receivables subject adjustment specified maximums contractual provisions based collections companies individual advertisers company currently foresee material credit risk associated receivables although assurance full payment received timely basis see note 1 consolidated financial statements item 8 additional information accounting policies factors affecting comparability 2000 entered following transactions resulted pretax net gain 865 million 535 million aftertax onetime operating income benefit 158 million executed agreement affiliates bell atlantic corporation known verizon communications bell atlantic early termination sales agency agreements sold cincinnati proprietary operations restructured extended cendon sales agency relationship 2010 original relationship set expire 2004 connection investment unaffiliated third party chinabig became passive investor longer recognize share losses chinabig ceased operations get digital smart gds business disposition businesses related cost cutting actions april 27 2000 sold cincinnati proprietary directory business yellow book usa inc 8 million june 30 2000 entered agreement bell atlantic early termination directory services agreements amended agency agreements company bell atlantic pursuant agency agreements company served exclusive sales agent bell atlantic directories covering substantially new york state agency agreements scheduled expire 2003 2005 transactions contemplated agreement also consummated june 30 2000 terms agreement received termination payment 114 million also received payment approximately 57 million commissions sales occurred prior closing yet payable terms agency agreements sales directories published preclosing period december 2000 ceased operations get digital smart business gds formally launched february 2000 miamift lauderdale market test economic viability providing variety products services designed deliver comprehensive package internet marketing ecommerce capabilities small mediumsized local businesses test demonstrated demand products services offered business broadly capable providing adequate return investment within originally planned time horizon recognized onetime costs 29 million related shutdown business also implemented costcutting measures 2000 including headcount reductions prepress publishing facility raleigh corporate headquarters consistent new operating structure cendon partnership restructuring extension effective directories published june 30 2000 entered series agreements centel effectively restructured cendon partnership limited liability company extended sales agency arrangement 2010 partnership agreement sales agency agreement set expire 2004 new arrangement focuses responsibilities sales certain prepress publishing services establishes us exclusive sales agent centels directory products markets previously covered partnership agreement centel assumed responsibility printing delivery directories previously performed cendon partnership related support services marketing customer service collections previously performed company new arrangement centel manages cendon receive sales commissions advertising sold consideration transferring control publishing functions centel also receive priority distribution priority distribution allows us maintain level profitability would earned cendon partnership original expiration date 2004 new arrangement revenue related costs recognized time sale previous cendon partnership shared responsibility publishing delivery functions revenue related costs recognized time directory publication accordingly upon restructuring cendon arrangement 2000 onetime operating income benefit 158 million recorded benefit related advertising sales made costs incurred prior effective date agreement directories published subsequent effective date agreement chinabig investment impairment charge currently 18 interest chinabig publishes yellow pages directories offers internet directory services peoples republic china connection equity investment unaffiliated third party order facilitate raising additional capital provide greater flexibility june 15 2000 chinabig existing investor including company restructured existing joint venture agreement chinabig among things significantly reduce ability influence operations chinabig result restructured agreement passive investor chinabig account investment cost method prior june 15 2000 accounted investment equity method therefore subsequent june 15 2000 share losses chinabig longer recognized consolidated statement operations november 2001 management received independent third party valuation chinabigs current business plan capital needs outlook profitability cash flow valuation conducted connection proposed equity financing results valuation provided range possible estimated fair values chinabig implied value 18 interest substantially lower carrying value 134 million management determined carrying value investment permanently impaired recorded impairment charge 114 million fourth quarter 2001 write investment 20 million management believes best estimate current fair value investment prior valuations chinabig business assumed rapid development internet advertising china currently forecast restructuring special charge operating results 2001 include charge 186 million connection executive management employment transition arrangements expiration prepress publishing contract result elimination approximately 100 positions 2002 charge includes 99 million associated executive management transition arrangements including severance accrued benefits executive pension plans related costs 33 million employee severance related costs 44 million idle leased space raleigh publishing facility planned relocation corporate headquarters due excess capacity 10 million professional fees writeoff assets longer considered useable 2000 1999 adjusted results due mentioned transactions 2000 believe comparisons 2001 results 2000 reported results 2000 reported results 1999 reported results would meaningful accordingly information 2000 1999 presented reported audited basis adjusted unaudited basis longer relevant material disclosing reported amounts results operations discuss results disposed operations bell atlantic cincinnati gds onetime operating income benefit restructuring cendon relationship period comparisons bell atlantic cincinnati operations periods prior disposition see managements discussion analysis financial condition results operations quarterly reports form 10q first second quarters 2000 gds begin full operations 2000 therefore period comparisons possible adjusted amounts assume 2000 transactions described occurred january 1 1999 derived excluding reported amounts advertising sales revenue expenses bell atlantic cincinnati gds operations well onetime items restructuring cendon relationship believe adjusted unaudited information indicative underlying financial operational performance 2000 may better reflect results continuing businesses however adjusted unaudited information purport represent actual results would transactions occurred assumed dates project results operations financial condition future period results operations three years ended december 31 2001 advertising sales agent earn commission value advertising sold therefore report consolidated statements operations gross value advertising sold nevertheless disclose discuss publication calendar advertising sales believe good indicator operational performance sales commission revenue participation income priority distribution income computed based upon calendar advertising sales discussion publication calendar sales provided publication sales publication sales represent value advertising sales directories published current period regardless advertising directory sold sales give indication underlying sales growth directories dontech sell advertising direct correlation reported revenue profitability indicated period sales consummated recognized prior periods see calendar sales compared sales directories published prior year period events occur current year effect comparability publication sales prior year changes directory publication dates contractual changes prior year publication sales adjusted conform current year presentation maintain comparability accordingly facilitate comparability 2000 1999 publication sales dontech decreased 03 million 10 million respectively das sales 2000 increased 17 million account changes directory publication dates contractual provisions changes directory publication dates impact reported revenue profitability since sales agent dontech recognize revenue period sale completed time directory publication reported adjusted publication advertising sales segment follows excludes bell atlantic sales 2381 million 2000 bell atlantic cincinnati sales 4268 million 100 million respectively 1999 reported publication sales 6275 million 8619 million 10441 million 2001 2000 1999 respectively adjusted publication sales 6275 million 6238 million 6073 million 2001 2000 1999 respectively publication sales growth dontech relatively flat last two years sales 2001 dontech adversely affected weakening economy uncertainty among advertisers following events september 11 2001 increased competition sales 2000 dontech adversely affected certain systems related issues billing collections function ameritech corporation wholly owned subsidiary sbc ameritech prior conversion sbcs systems adjusted publication sales das 2001 flat compared 2000 due weakening economy tighter credit standards light weakening economy increased uncertainty among advertisers especially tourist based market orlando das sales showed strong growth 2000 compared 1999 driven primarily growth las vegas central florida markets two largest sales campaigns january las vegas chicago consumer completed yearend publish first quarter 2002 results sales campaigns significantly prior year campaigns result publication sales first quarter 2002 expected approximately 10 lower publication sales first quarter 2001 defined publication sales recorded period directory published whereas calendar sales recorded period sales contract signed since calendar sale precedes publication sale terms reporting lower calendar sales one quarter generally lead lower publication sales subsequent periods however since revenue profitability driven calendar sales shortfall january las vegas chicago consumer directories adversely affected 2001 revenue profitability described impact revenue profitability 2002 calendar sales dontech earn commission revenue based contractual percentage billing value advertisements sold annual directory calendar sales recorded sales contract executed customer company dontech operate solely sales agents calendar sales stated basis revenue recognized accordingly reported revenue profitability directly correlated calendar sales selling advertising specific directory managed sales campaign typical sales campaign begins approximately six eight months prior scheduled publication date result amount calendar sales fluctuate prior year due various factors including changes actual commencement date sales campaign timing sales campaign fluctuations material would likely material effect results operations financial condition period reported adjusted calendar sales segment follows excludes bell atlantic sales 1820 million onetime sales benefit cendon restructuring 958 million 2000 bell atlantic sales 4440 million cincinnati sales 100 million 1999 reported calendar sales 6079 million 8977 million 10667 million 2001 2000 1999 respectively adjusted calendar sales 6079 million 6199 million 6127 million 2001 2000 1999 respectively sales dontech 2001 declined 13 2000 due weakening economic conditions increased uncertainty among many small medium sized businesses following events september 11 2001 increased competition chicago market sales campaign 2002 chicago consumer directory dontechs largest directory terms advertising sales peak selling period immediately september 11th severely impacted uncertainty caused terrorist attacks 2002 chicago consumer campaign completed december 2001 results significantly prior years results directory published february 2002 decline 2000 sales compared 1999 due certain systems related issues billing collection functions ameritech resulted loss customers significantly delinquent withdrawn directories well timing certain sales campaigns 2000 compared 1999 systems related issues essentially corrected third quarter 2001 partially conversion sbcs systems adjusted sales das 2001 declined 33 2000 due weakening economy tighter credit standards light weakening economy increased uncertainty among advertisers following september 11 2001 effects weakening economy increased uncertainty exacerbated tourist based markets las vegas orlando sales campaign january 2002 las vegas directory one sprints largest directories terms advertising sales also peak selling period immediately september 11th severely impacted uncertainty caused terrorist attacks january 2002 las vegas campaign completed december 2001 results significantly prior years results 2000 adjusted das sales increased 63 1999 saw good growth sales las vegas central florida markets net revenue derived principally two sources sales commissions earned value advertising sold sprint fees prepress publishing services revenue sprint accounted 57 46 23 consolidated revenue years ended december 31 2001 2000 1999 respectively reported adjusted net revenue segment follows excludes bell atlantic revenue 428 million onetime revenue benefit 210 million cendon restructuring 2000 revenue bell atlantic cincinnati 974 million 96 million respectively 1999 revenue recorded cincinnati 2000 directory sold prior scheduled publication date b excludes revenue gds 2000 reported revenue 767 million 1413 million 1819 million 2001 2000 1999 respectively adjusted revenue 767 million 773 million 749 million 2001 2000 1999 respectively revenue 2001 slightly lower adjusted revenue 2000 lower das calendar sales resulted decrease 34 million revenue cable television yellow pages product 10 million lower discontinued offering product beginning 2001 decreases partially offset lower claims allowances 31 million primarily due reversal 2001 14 million sales claims allowances recognized 2000 based actual results longer needed higher revenue prepress publishing operations 07 million primarily due full year services performed new owner publisher cincinnati directory sold april 2000 adjusted revenue 2000 24 million higher adjusted revenue 1999 primarily due increase sprint calendar sales prepress publishing revenue increased 09 million 2000 compared 1999 offset decrease revenue cable television yellow pages product 07 million expenses reported adjusted expenses follows excludes operating expenses bell atlantic 304 million cincinnati 07 million gds 90 million onetime expenses connection cendon restructuring 94 million 2000 operating expenses bell atlantic 754 million cincinnati 100 million 1999 b excludes general administrative expenses bell atlantic 24 million cincinnati 03 million 2000 general administrative expenses bell atlantic 40 million cincinnati 14 million gds startup expenses 13 million 1999 c excludes depreciation amortization expense 26 million bell atlantic 01 million cincinnati 2000 depreciation amortization expense 53 million bell atlantic 02 million cincinnati 1999 excludes onetime provision connection cendon restructuring 12 million 2000 provision cincinnati 19 million bell atlantic 01 million 1999 reported operating expenses 448 million 967 million 1384 million 2001 2000 1999 respectively adjusted operating expenses 448 million 472 million 530 million 2001 2000 1999 respectively decrease 2001 operating expenses compared 2000 due lower sales compensation related costs proportionate decrease sales full year effect cost savings initiatives implemented 2000 absence sales production costs associated cable television yellow pages product decrease 2000 operating expenses compared 1999 primarily due reduced costs prepress publishing operations information technology function due improvements operational efficiency lower salaries benefit costs result headcount reductions reported general administrative expenses 166 million 252 million 292 million 2001 2000 1999 respectively adjusted general administrative expenses 166 million 225 million 225 million 2001 2000 1999 respectively decrease costs 2001 compared 2000 primarily due full year effect cost savings initiatives implemented 2000 due reduction headcount realized savings lower salary benefit costs lower rental costs due consolidation staff elimination corporate planning international development efforts general administrative costs 2000 consistent 1999 cost cutting actions strategic initiatives implemented 2000 offset investment banking costs legal fees incurred connection process explore possible sale company see factors affecting comparability restructuring special charge chinabig investment impairment charge discussion charges reflected table reported depreciation amortization expense 108 million 154 million 183 million 2001 2000 1999 respectively adjusted depreciation amortization expense 108 million 127 million 128 million 2001 2000 1999 respectively decrease 2001 depreciation expense compared 2000 due software development costs raleigh prepress publishing operation fully amortized 2000 writeoff assets 2000 lower capital spending 2001 reported provision bad debts 30 million 43 million 53 million 2001 2000 1999 respectively adjusted basis provision bad debts relatively consistent 30 million 31 million 33 million 2001 2000 1999 respectively partnership joint venture income partnership joint venture income partnership income 1400 million 1477 million 1392 million 2001 2000 1999 respectively partnership income dontech 1224 million 2001 1240 million 2000 1235 million 1999 dontech partnership income relatively flat last three years weakening economy uncertainty among advertisers increased competition adversely impacted calendar sales also negatively affected partnership income 2001 also partnership income 2000 adversely affected certain systems related issues billing collections function ameritech partnership income cendon 176 million 2001 248 million 2000 169 million 1999 partnership income cendon 2000 includes onetime benefit 54 million restructuring cendon relationship decrease 2001 cendon income compared 2000 primarily due onetime benefit 2000 lower sales cendon markets 2001 increase cendon income 2000 compared 1999 due onetime benefit growth sales cendon markets especially las vegas previously mentioned effective june 15 2000 became passive investor chinabig longer recognize share losses partnership income includes share chinabig losses 11 million 2000 june 15 12 million 1999 operating income operating income dontech includes 50 share net profits dontech revenue participation income sbc operating income das includes results costs directly incurred constituent business unit less allocation certain shared expenses based estimated business usage general corporate represents overhead administrative costs allocated das business units reported adjusted operating income follows excludes onetime operating income benefit 158 million cendon restructuring operating income bell atlantic 73 million operating loss cincinnati 10 million 2000 operating income bell atlantic 127 million operating loss cincinnati 39 million 1999 b excludes operating loss gds 2000 1999 reported operating income 1115 million 1474 million 1299 million 2001 2000 1999 respectively adjusted operating income 1115 million 1342 million 1224 million 2001 2000 1999 respectively see partnership joint venture income explanation changes dontech operating income increase adjusted das operating income 2001 compared 2000 due lower information technology publishing costs higher income sprint lower information technology publishing costs due fullyear benefit cost cutting initiatives strategic actions taken 2000 despite lower sales sprint operating income benefited cost management controls reversal prior period sales claims allowances adjusted das operating income increased 2000 compared 1999 primarily due strong growth sprint lower costs prepress publishing operations general corporate costs decreased last two years due cost cutting initiatives headcount reductions resulted lower salary benefit costs lower rental costs elimination corporate planning international development efforts lower depreciation expense interest taxes interest expense 267 million 348 million 372 million 2001 2000 1999 respectively decrease interest expense last two years driven lower debt prepaid 65 million debt 2001 90 million debt 2000 also made scheduled principal repayments 3 million 2000 interest income 18 million 39 million 04 million 2001 2000 1999 respectively interest income 2001 decreased compared 2000 cash used prepay debt repurchase shares interest income 2000 higher compared 1999 due interest earned proceeds bell atlantic cincinnati transactions effective tax rate 2001 increased 419 compared 382 2000 due effect chinabig investment impairment charge tax purposes 114 million impairment charge deductible current year income charge gave rise deferred tax asset 43 million realized offsetting future capital gains given current business portfolio projection future results management believes company generate future capital gains realize asset accordingly valuation allowance full value asset established management believes chinabig impairment charge effect companys 2002 effective tax rate effective tax rate 2002 approximate 2000 effective tax rate effective tax rate 408 1999 share losses chinabig could offset domestic source income recognized extraordinary loss connection prepayment debt 2001 2000 recognized extraordinary loss 04 million taxes 03 million 07 million taxes 04 million respectively writeoff related deferred financing costs extraordinary loss effect reducing diluted earnings per share 001 2001 002 2000 net income earnings per share net income 498 million 1248 million 552 million 2001 2000 1999 respectively diluted earnings per share 161 383 161 2001 2000 1999 respectively net income earnings per share 2001 includes restructuring special charge investment impairment charge net income earnings per share 2000 includes onetime operating income benefit cendon restructuring net gain disposition bell atlantic cincinnati gds businesses liquidity capital resources primary source liquidity cash flows operations additionally available 100 million 100 million senior revolving credit facility revolver believe cash flows generated operations available borrowing capacity revolver sufficient fund operations meet obligations employees vendors creditors least next 12 24 months sources cash flow primarily revenue participation priority distribution sales commission payments received sbc sprint payments directly dependent value advertising sold amount cash flow sources impacted among factors competition markets general economic conditions level demand yellow pages advertising management believes advertising sales decline 10 cash flow operations together available borrowing capacity revolver would still sufficient fund operations meet obligations employees vendors creditors least next 12 24 months addition publisher respective directories sprint sbc responsible consequently control many critical functions decisions impact results dontech historically case respective policies decisions performance respective obligations areas participation influence could material adverse effect results operations financial condition see forwardlooking information material future commitments contractual obligations include following 70 million payment represents amount due cendon share obligation cendon owes applicable telephone companies prior cendon partnership payment due 2005 fully provided financial statements december 31 2001 outstanding debt 2868 million consisted 150 million senior subordinated notes 1368 million senior secured term facilities term facilities together revolver credit agreement notes pay interest semiannually annual rate 9125 due june 2008 credit agreement provides floating interest rate based spread london interbank offered rate libor greater either prime rate fed funds rate plus 50 basis points election company obligations credit agreement secured security interests granted lenders substantially assets including capital stock existing newly formed subsidiaries credit agreement indenture governing notes contain various financial restrictive covenants including restrictions asset dispositions similar transactions indebtedness capital expenditures dividends commitments cash flow operations 2001 869 million higher 828 million 2000 payments accounts payable accrued liabilities decreased 537 million 2000 included significant payments severance taxes related bell atlantic cincinnati transactions cash receipts dontech partnership cendon joint venture excess income increased 96 million primarily due timing cash receipts relative recognition income dontech cendon recognized sales contract executed however cash received publisher bills advertiser therefore timing differences exist income recognized cash collected partially offsetting increases lower collections accounts receivable 410 million 2001 accounts receivable collections 2000 included collection outstanding bell atlantic receivables time buyout agency agreements cash flows operations 2000 increased 202 million 1999 amount 626 million increase driven higher net income excluding aftertax net gain disposition businesses collections accounts receivable mainly due buyout agency agreements collection outstanding bell atlantic receivables partially offsetting increase higher payments accrued liabilities mainly due severance taxes related bell atlantic cincinnati transactions cash used investing activities 61 million 2001 compared cash provided investing activities 2000 1094 million included 1220 million buyout bell atlantic agency agreements sale cincinnati operations capital expenditures decreased 2001 compared 2000 1999 due lower capital requirements result reduction headcount disposition businesses investments made chinabig 2001 2000 1999 made accordance joint venture agreement final required investment 16 million made 2001 currently material commitments investment spending cash used financing activities 1215 million 1391 million 471 million 2001 2000 1999 respectively consists debt repayment repurchases common stock proceeds received exercise employee stock options significant increase 2000 compared 1999 due use proceeds bell atlantic cincinnati transactions well cash flow operations repay 930 million debt repurchase 536 million common stock systematic share repurchase plan open market share repurchase plan collectively share repurchase plans repurchase shares common stock share repurchase plans 2002 would funded primarily operating cash flows february 28 2002 available authorization repurchase 231 million stock 100 million open market share repurchase plan repurchase 19 million shares systematic share repurchase plan offset dilutive impact earnings exercise employee stock options amount repurchase share repurchase plans limited restrictions imposed credit agreement indenture restrictions based 50 cumulative net income less cumulative repurchases restricted payments maximum amount could repurchase credit agreement indenture recalculated quarter upon filing quarterly form 10qs annual form 10k filing form 10k ability repurchase 80 million shares item 7aitem 7 management’s discussion analysis financial condition results operations item read conjunction audited consolidated financial statements notes thereto included item 8 unless otherwise indicated terms “company” “donnelley” “we” “us” “our” refer rh donnelley corporation direct indirect wholly owned subsidiaries january 3 2003 acquired outstanding common stock spa sprint corporation’s directory publishing business see “significant business development” result commencing 2003 operating financial results longer reflect sales commissions prepress fees transactions spa since intercompany transactions eliminated consolidation rather report full value advertising sales certain direct costs deferral amortization method order facilitate discussion historical results opposed future results use past tense referring operating financial results years 2000 2002 dontech remains unchanged following spa transaction financial presentation dontech appear consistently historical future periods forwardlooking information certain statements contained annual report form 10k regarding rh donnelley’s future operating results performance business plans prospects statements constituting historical fact “forwardlooking statements” subject safe harbor created private securities litigation reform act 1995 possible words “believe” “expect” “anticipate” “should” “will” “would” “planned” “estimated” “potential” “goal” “outlook” “could” similar expressions used identify forwardlooking statements forwardlooking statements reflect current beliefs assumptions respect future results business plans prospects based solely information currently available us accordingly statements subject significant risks uncertainties actual results business plans prospects could differ significantly expressed implied statements caution readers place undue reliance undertake obligation update forwardlooking statements risks uncertainties include without limitation following 1 ability meet substantial debt service obligations substantial amount debt significant debt service obligations 2003 thereafter closing spa acquisition total outstanding debt 23562 million january 3 2003 debt comprised borrowings 1410 million new 1525 million credit facility 325 million 8 78 senior notes 600 million 10 78 notes following tender offer exit consent solicitation 212 million aggregate remaining principal amount 9 18 senior subordinated notes issued 1998 “existing notes” result significant amount debt service obligations face increasing risks associated limited following • ability obtain additional financing excess additional borrowing capacity 125 million revolving credit facility satisfactory terms fund working capital requirements capital expenditures acquisitions investments debt service requirements general corporate requirements limited • vulnerable general economic downturns competition industry conditions could place us competitive disadvantage compared competitors less leveraged • face increased exposure rising interest rates portion debt variable interest rates • reduced availability cash flow fund working capital requirements capital expenditures acquisitions investments general corporate requirements substantial portion cash flow needed service debt obligations • limited flexibility planning reacting changes business industry operate ability pay principal interest debt obligations depend upon future operating performance ability refinance debt unable service debt fund business may forced reduce delay capital expenditures seek additional debt financing equity capital restructure refinance debt sell assets cannot assure would able obtain additional financing refinance existing debt sell assets satisfactory terms 2 restrictive covenants terms debt preferred stock agreements indentures governing notes credit facility include number significant restrictive covenants could adversely affect us limiting ability plan react market conditions meet capital needs covenants among things restrict ability subsidiaries • incur additional debt • pay dividends equity interests repurchase equity interests • make certain investments • enter certain types transactions affiliates • place restrictions restricted subsidiaries pay dividends make payments us • use assets security transactions • sell certain assets merge companies addition credit facility includes restrictive covenants prohibits us prepaying notes existing notes borrowings credit facility outstanding credit facility also requires us maintain certain financial ratios meet financial tests failure comply covenants could result event default cured waived could require us repay borrowings scheduled due date unable make repayment otherwise refinance borrowings lenders credit facility could foreclose assets addition lenders could elect declare amounts borrowed credit facility together accrued interest due payable instances would event default indentures governing notes unable refinance borrowings favorable terms results operations financial condition could adversely impacted increased costs less favorable terms including rates covenants future refinancing credit facility likely contain similar restrictive covenants furthermore terms purchase agreement respect preferred stock among things restricts ability subsidiaries • incur additional debt • pay dividends shares common stock repurchase shares common stock • enter certain types transactions affiliates • sell acquire certain assets failure comply terms would result breach agreement could material adverse effect business addition without consent gs funds cannot issue shares common stock 18 months following sale preferred stock could adversely affect liquidity see “ liquidity capital resources” description preferred stock 3 declining usage print yellow pages directories changes technology since 1997 overall usage printed yellow pages directories united states declined cannot assure usage yellow pages directories remain stable decline believe declines usage printed directories part result increased usage internetbased directory products cannot assure able provide services internet successfully able compete successfully internetbased directory services declines usage could impair ability maintain increase advertising prices cause businesses purchase advertising yellow pages directories reduce discontinue purchases discourage businesses purchase advertising yellow pages directories factors may contribute decline usage printed directories combination could impair revenues material adverse effect business yellow pages directory advertising business subject changes arising developments technology including information distribution methods users’ technological preferences use internet consumers means transact commerce may result new technologies developed services provided could compete products services result factors growth future financial performance may depend ability develop market new products services create new distribution channels enhancing existing products services distribution channels order incorporate latest technological advances accommodate changing user preferences including use internet fail anticipate respond adequately changes technology user preferences unable finance capital expenditures necessary respond changes results operations financial condition could materially adversely affected 4 sbc’s dontech’s actions could adversely impact business dontech 5050 perpetual partnership affiliate sbc communications inc “sbc” exclusive sales agent sbc directories illinois northwest indiana dontech responsible management sales forces including compensation recruiting training sales related matters publisher sbc responsibility control matters including without limitation product development pricing scheduling marketing distribution billing collections credit customer service believe dontech economic interests generally aligned sbc respect sbc’s yellow pages directory operations sbc could implement policies decisions dontech would likely little participation influence andor perform obligations manner could material adverse effect results operations financial condition potentially relationship sbc cannot assure policies decisions would material adverse effect results operations financial condition relationship sbc also maintain large receivable balance sbc liquidity difficulties sbc may experience could materially impact results operations financial condition dontech partnership agreement related sbc contractual arrangements perpetual terms arrangements terminate upon occurrence certain enumerated events including without limitation unremedied breaches certain material provisions thereof mutual agreement parties bankruptcy partner parent change control partner excluding change control ultimate parent company partner addition applicable law contractual arrangements potentially may remain effect perpetuity cannot assure dontech relationship remain full force effect perpetuity without material modification dontech sbc perform respective material obligations particularly payment obligations agreements sbc seek terminate arrangements event party seeks terminate contractual arrangements party may dispute attempted termination case court arbitrator may required determine appropriateness attempted termination cannot assure outcome proceeding termination material modification agreements failure sbc dontech perform respective material obligations would material adverse effect results operations financial condition 5 competition us directory advertising industry highly competitive 240 independent publishers operating united states compete regional bell operating company “rboc” directory publishers telephone utility publishers markets compete one yellow pages directory publishers predominantly independent publishers markets compete limited basis rboc directory publishers adjacent markets one publishers verizon information services directory business affiliated verizon communications inc announced plans publish directories offer local internet directory services markets beyond verizon communications offers local phone service including several spa markets effectively verizon information services competing independent publisher markets rboc utility publisher announced similar plans cannot assure rboc utility publishers future many parent companies telephone utility publishers larger us greater financial resources assurances given able compete effectively publishers advertising sales acquisitions future also compete advertising sales media including newspapers magazines radio direct mail internet television many competitors larger us greater financial resources additionally advances technology brought new participants new products new channels industry including increasing use electronic delivery directory information advertising medium cannot assure able successfully compete responding developments addition telecommunications act 1996 effectively opened local telephone markets increased competition may adversely impact market position telephone utilities including relationships telecommunications act 1996 opened local telephone markets increased competition cannot assure sprint sbc remain dominant local telephone service provider local service areas sprint longer dominant local telephone service provider particular local service area license exclusive publisher sprint markets use sprint brand name directories markets may valuable presently anticipate may realize anticipated benefits commercial arrangements sprint affiliates sbc longer dominant local telephone service provider dontech service area financial results recognize dontech could adversely affected 6 ability successfully integrate spa operations integration spa operations involves number risks including • difficulty integrating operations personnel different locations • diversion management attention • potential disruption ongoing business unknown reactions combination spa us vendors customers key constituencies • difficulties assimilating technologies services products spa • inability retain key personnel • inability successfully incorporate acquired business components existing infrastructure • inability maintain uniform standards controls procedures policies unable effectively integrate operations personnel timely efficient manner may realize benefits expected acquisition failure overcome risks problems encountered connection acquisition could slow growth lower quality services could reduce customer demand 7 reliance extension credit small mediumsized businesses significant portion revenue derived selling advertising small mediumsized businesses ordinary course yellow pages publishing business extend credit advertisers advertising purchases small mediumsized businesses however tend fewer financial resources higher financial failure rates large businesses addition collection procedures delinquent accounts take extended period time involve increased costs consequently could adversely affected dependence extension credit small mediumsized businesses 8 dependence thirdparty providers printing distribution delivery services depend third parties printing distribution directories currently two contracts printing directories rr donnelley sons “rr donnelley” although contracts expire december 2005 december 2007 large print volume specialized binding directories limited number companies capable servicing printing needs accordingly inability unwillingness rr donnelley provide printing services us acceptable terms could material adverse effect business common ownership business affiliation exists rr donnelley us also contracts delivery directories individual households businesses geographic area covered directories contracts scheduled expire february 2004 may terminated vendors upon 120 days written notice limited number companies capable servicing delivery needs accordingly inability unwillingness current vendors provide delivery services us acceptable terms could material adverse effect business 9 general economic factors business results could adversely affected prolonged national regional economic recession typically advertising revenues well yellow pages publishers general fluctuate widely economic cycles however prolonged national regional economic recession could material adverse effect business results operations financial condition addition residual economic effects uncertainties regarding terrorist attacks occurred september 11 2001 ii general possibility express threat future occurrence similar terrorist related disruptive events iii threat united states’ involvement war especially respect major markets operate depend heavily upon travel tourism military could also adversely affect business 10 fluctuations price availability paper acquisition principal raw material paper printer currently purchases behalf agreed upon prices near spot market price currently longterm purchase arrangements commitments paper mills outside suppliers accordingly subject price increases delays receiving principal raw material changes supply demand paper could affect delivery times prices conditions warrant may enter longer term supply agreements future paper one largest variable cost items account approximately 10 15 annual operating expenses cannot assure available necessary raw materials reasonable prices increases paper costs would material adverse effect business results operations financial condition 11 sale advertising national accounts coordinated third parties control expect approximately 15 revenues 2003 derived sale advertising national large regional companies rental car companies automobile repair shops pizza delivery businesses purchase advertising several directories order sell advertising accounts contract cmrs independent third parties act agents national companies design advertisements arrange placement advertisements directories provide billing services result relationships national advertisers depend significantly performance third party cmrs control although believe relationships cmrs mutually beneficial cmrs established relationships unable unwilling provide services us acceptable terms inability unwillingness could materially adversely affect business 12 turnover among sales force key management success depends significant extent ability identify hire train retain qualified sales personnel markets operate expend significant amount resources management time identifying training sales representatives ability attract retain qualified sales personnel depends numerous factors including factors outside control conditions local employment markets operate decrease number sales representatives could adversely affect results operations financial condition liquidity well ability service debt furthermore depend continued services key personnel including experienced senior management team well regional sales management personnel although believe could replace senior management team key employees within reasonable time period need arise loss key personnel could material adverse effect business 13 loss important intellectual property rights trademarks “sprint” “donnelley” brand names intellectual property rights important business rely upon combination copyright trademark laws well contractual arrangements including licensing agreements particularly respect sprint markets establish protect intellectual property rights required time bring lawsuits third parties order protect intellectual property rights similarly time expect party proceedings third parties challenge rights cannot sure lawsuits actions brought us successful found infringe intellectual property rights third parties although aware material infringements trademark rights significant business lawsuits regardless outcome could result substantial costs diversion resources could material adverse effect business financial condition results operations addition rights use sprint name diamond logo certain markets loss important intellectual property rights trademarks could material adverse effect upon business financial condition results operations 14 impact bankruptcy proceedings sprint term spa commercial arrangements contract rights directory services license agreement trademark license agreement noncompetition agreement sprint constitute substantial portion commercial arrangements sprint pursuant commercial arrangements exclusive directory publisher sprint markets sprint currently provides telephone service certain circumstances markets acquired sprint future bankruptcy case commenced sprint possible part directory services license agreement andor noncompetition agreement could considered executory contract could therefore subject rejection sprint trustee appointed bankruptcy case pursuant section 365 section 1123 united states bankruptcy code one agreements rejected applicable agreement may specifically enforceable case would unsecured claim damages sprint breach contract resulting rejection directory services license agreement rejected would among things longer entitled sprint’s exclusive publisher telephone directories affected markets could also lose right enforce provisions agreement right license trademarks successor local exchange carriers sprint markets noncompetition agreement rejected specific enforcement available sprint would among things longer precluded publishing print telephone directories selling local directory advertising applicable restricted markets sprint created bankruptcy remote special purpose vehicle form limited liability company contributed assigned trademarks licensed us trademark license agreement limited liability company operating agreements limited liability company require among things board managers entity include one independent manager unaffiliated sprint consent independent manager required entity take certain actions including among things commencement bankruptcy proceeding trademarks contributed limited liability company rights trademark license agreement subject rejection event bankruptcy proceeding involving sprint unless also bankruptcy proceeding involving limited liability company although believe likelihood entity subject bankruptcy proceeding limited structure governing provisions operating agreement trademark license agreement rejected bankruptcy proceeding would lose right use sprint brand name spa directories cannot assure loss rights certain arrangements sprint would material adverse effect financial condition results operations 15 ability enforce noncompetition agreement sprint agreed general publish print telephone directories sell local advertising use directories acquired markets term noncompetition agreement however state federal law covenant compete enforceable • extent necessary protect legitimate business interest party seeking enforcement • unreasonably restrain party enforcement sought • contrary public interest enforceability noncompetition covenant determined court based facts circumstances specific case time enforcement sought reason possible us predict whether extent court enforce sprint’s covenants compete us term noncompetition agreement court determine noncompetition agreement unenforceable sprint could compete directly us directory publishing business previously restricted markets cannot assure inability enforce noncompetition agreement sprint would material adverse effect financial condition results operations significant business development january 3 2003 completed acquisition spa 22135 million cash preliminary working capital adjustment purchase price subject final working capital adjustment spa publisher 260 revenuegenerating yellow pages directories 18 states prior acquisition acted sales agent prepress publishing vendor spa 44 directories 4 states acquisition transforms company sales agent prepress vendor leading publisher yellow pages directories finance acquisition entered new 1525 million credit facility consisting 500 million term loan 900 million term loan b 125 million revolver also issued 325 million 8 78 notes 600 million 10 78 notes finally gs funds purchased 200 million preferred stock take advantage favorable market conditions ensure timely consummation spa acquisition issued notes borrowed term loan b december 2002 total gross proceeds 1825 million deposited held escrow pending spa acquisition closing gs funds also invested initial 70 million purchase 70000 shares preferred stock investment portion 200 million commitment closing spa acquisition gs funds purchased remaining 130 million preferred stock borrowed term loan 10 million revolver connection transaction entered directory services license agreement trademark license agreement noncompetition agreement sprint directory services license agreement gives us exclusive right produce publish distribute directories sprint markets sprint currently provides local telephone service trademark license agreement gives us exclusive right use certain sprint trademarks including sprint diamond logo markets noncompetition agreement prohibits sprint producing publishing distributing print directories selling local advertising markets certain limited exceptions agreements interrelated initial terms 50 years subject earlier termination specified circumstances prior acquisition provided sales agency prepress publishing services spa accordingly december 31 2002 aggregate receivable 433 million commissions prepress publishing fees priority distribution income spa result acquisition receivables became intercompany items included part purchase price also longterm liabilities december 31 2002 include amount due sprint 70 million paid cash closing acquisition accounted purchase business combination purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values acquisition date results spa business included consolidated results january 3 2003 acquisition closing date accordingly results spa included audited financial statements year ended december 31 2002 allocation purchase price fair value assets acquired liabilities assumed shown table purchase price allocation preliminary based best information currently available could change additional information arises company prior spa acquisition discussion relates results company three years ended december 31 2002 leading independent marketer yellow pages advertising services united states business organized two reportable operating segments dontech partnership directory advertising services dontech 5050 perpetual partnership operating unit sbc dontech acts exclusive sales agent yellow pages directories published sbc illinois northwest indiana receives commission sbc income dontech comprised 50 interest net profits dontech revenue participation income received directly affiliate sbc revenue participation income based percentage dontech advertising sales comprises approximately 80 85 total annual income related dontech total income dontech accounted 76 79 72 operating income general corporate costs unallocated expenses years ended december 31 2002 2001 2000 respectively certain general administrative expenses incurred support business allocated dontech segment income dontech accounts significant portion operating income material decline advertising sales dontech would likely material adverse effect results operations financial condition also provide certain prepress publishing services sbc directories dontech sells advertising income included das segment described although dontech provides advertising sales yellow pages directory products similar das partnership considered separate operating segment since among things partnership board directors employees dontech including officers managers employees following spa transaction dontech continues act sales agent sbc earn commissions advertising contract signed continue account dontech equity method accounting historical directory advertising services within das segment sold yellow pages advertising affiliated entities sprint performed prepress publishing services yellow pages directories exclusive sales agent greater orlando florida market “central florida” operating unit sprint exclusive sales agent nevada florida virginia north carolina cendon llc “cendon” joint venture centel directory company “centel” subsidiary sprint affiliates sold yellow pages advertising markets states received sales commissions advertising sold sprint cendon priority distribution membership interest cendon amount priority distribution earned based percentage cendon advertising sales prior acquisition material decline advertising sales markets could material adverse effect results operations financial condition das segment also included prepress publishing services provided sbc sprint respective yellow pages directories sold advertising separately negotiated contracts agreement sbc extends 2008 agreement sprint scheduled expire 2003 also provided prepress publishing services unaffiliated third party agreement expired end 2002 jointly agreed orderly transition work take place first quarter 2003 revenue prepress publishing services operation accounted approximately 42 43 23 total consolidated revenue 2002 2001 2000 respectively however going forward revenue prepress publishing services account significantly lower percentage total revenue consolidated revenues considerably higher das also included information technology costs results das segment 2000 included operating results cincinnati proprietary directory business bell atlantic sales agency business get digital smart internet business equity losses chinabigcom limited “chinabig” dates transactions caused changes reporting respective business 2000 results das also include onetime operating income benefit 158 million restructuring extension cendon partnership see “ factors affecting comparability” information critical accounting policies certain amounts financial statements require management make assumptions estimates based best available information time actual results could vary estimates assumptions accounting policies involve assumptions estimates part could material effect results operations financial condition actual results differ assumptions estimates presented additional information accounting policies see note 1 consolidated financial statements item 8 principles consolidation consolidated financial statements include accounts rh donnelley corporation direct indirect wholly owned subsidiaries intercompany transactions balances eliminated dontech accounted equity method control ability exercise significant influence operating financial policies accordingly results dontech consolidated financial statements share net profits reported partnership joint venture income consolidated statements operations revenue recognition three years ended december 31 2002 earned sales commission revenue sale advertising behalf sprint fees prepress publishing services sales agent sprint recognized sales commission revenue time advertising contract executed customer sales commission revenue recorded net potential sales allowances estimated based historical experience advertiser satisfied yellow pages advertisement eg misspelled business name incorrect business address number etc publisher discretion adjust contract value since commissions earned based aggregate value advertising contracts commissions would also adjusted circumstances concurrent recognition sales commission revenue recorded sales allowance approximately 1 sales commission revenue based historical experience amount sales allowance recorded subsequently adjusted based actual results historically actual amount sales allowances consistent estimates significant adjustments made revenue prepress publishing operations recognized services performed recognized allowances prepress publishing services result acquisition recognize revenue sale directory advertising sprint yellow pages® directories certain related direct costs deferral amortization method whereby revenues direct costs recognized ratably life directory typically twelve months revenue recognition prepress publishing services remains unchanged trade receivables trade receivables represented sales commissions earned sale advertising behalf sprint fees earned prepress publishing services established allowance doubtful accounts sales commissions based upon historical experience contractual limitations sales agency agreement centel us limited exposure bad debts specified percentage sales actual bad debts cendon directories last three years exceeded maximum contractual exposure accordingly increase actual bad debt rate would directly impacted results operations financial condition central florida sales agency agreement exposure bad debts contractually limited estimated bad debt expense based historical experience made subsequent adjustments necessary based actual results receivables sales commissions billed publisher upon directory publication collected accordance contractual provisions typically month publication later nine months publication receivables prepress publishing services billed collected accordance terms applicable agreement generally monthly pro rata amount based annual contract value actual volumes exceeded contracted volumes additional amount billed publisher yearend although longer bill sprint services continue bill collect sbc end contract 2008 acquisition receivables advertising sales sprint yellow pages® directories represent full contract value advertisement opposed commission contract value rather spa trade debtor assumed direct billing relationship directory advertisers bill local advertisers monthly basis life directory see “concentration credit risk” “ forward looking information reliance extension credit small mediumsized businesses” sbc remains trade debtor respect sale advertising dontech markets pension postretirement benefits pension postretirement benefits represent estimated amounts paid employees future accounting benefits reflects recognition benefit costs employees’ approximate service period based terms plan investment funding decisions made determination benefit obligations net periodic pension postretirement benefit costs requires management make assumptions regarding discount rate return retirement plan assets increase future compensation health care cost trends changes assumptions significant impact projected benefit obligation funding requirement net periodic benefit cost assumed discount rate pension benefits could settled use rates aa corporate bonds basis determining discount rate assumption expected longterm rate return plan assets based mix assets held plan expected longterm rates return within asset class anticipated trend future health care costs based historical experience external factors see note 9 consolidated financial statements item 8 information regarding benefit plans effective january 1 2003 reduced rate return plan assets 975 825 result low investment returns last years well outlook longterm particularly equity securities determined assumed rate return 975 longer reflected best estimate future longterm returns based current investment environment pension plan’s asset allocation determined longterm rate return 825 better reflected expectations future longterm returns year ended december 31 2002 pension income 17 million assumed rate return plan assets 825 beginning 2002 pension income would approximately 06 million estimate pension expense approximately 12 million 2003 earnings per share basic earnings per common share eps generally calculated dividing income available common shareholders weighted average number common shares outstanding however preferred stock contains certain participation rights eitf topic d95 “effect participating securities computation basic earnings per share” “topic d95” requires dilutive effect securities included weighted average number shares outstanding furthermore topic d95 requires dilutive effect included basic eps may calculated using either ifconverted method twoclass method however dilutive effect preferred stock cannot less would result application twoclass method elected use ifconverted method calculating basic eps diluted eps calculated dividing net income weighted average common shares outstanding plus common share equivalents common share equivalents include stock options warrants dilutive effect calculated using treasury stock method preferred stock potential dilutive effect calculated using ifconverted method concentration credit risk maintain significant receivable balance sbc revenue participation income prepress publishing services revenue participation receivable subject adjustment based collections sbc individual advertisers however adjustment limited based contractual provisions receivables revenue participation prepress publishing services recorded net realizable value foresee material credit risk associated collection receivables although give assurance full payment continue received timely basis december 31 2002 also aggregate receivables spa commissions prepress publishing fees priority distribution income 433 million result acquisition receivables became intercompany items acquisition significant portion net revenue derived selling advertising local small mediumsized businesses advertisers enter twelvemonth advertising sales contracts typically make monthly payments term contract advertisers prepay full amount portion contract value advertisers including new advertisers subject credit review advertiser qualifies extend credit advertising purchase small mediumsized businesses tend fewer financial resources higher financial failure rates large businesses addition full collection delinquent accounts take extended period time involve increased costs believe extending credit local advertisers material adverse affect results operations financial condition assurances given require collateral advertisers although charge interest advertisers pay within specified due dates national advertising typically paid full within 30 days directory publication associated cmr employee stock options follow accounting principles board opinion 25 “accounting stock issued employees” related interpretations apb 25 accounting stock option plan accordingly compensation expense related issuance stock options employees nonemployee directors recognized three years ended december 31 2002 also grant stock options certain key employees dontech employees current accounting rules require recognize compensation expense vesting period based fair value options recognized compensation expense 02 million 07 million 02 million 2002 2001 2000 respectively 2002 options purchase 1486000 shares common stock “founders grant” granted certain employees contingent consummation spa acquisition apb 25 recognize expense 51 million next four years following table reflects pro forma net income earnings per share assuming applied fair value method sfas 123 “accounting stockbased compensation” pro forma disclosures shown necessarily representative effects income earnings per share future years fair value stock options used compute pro forma disclosures estimated using blackscholes optionpricing model following weighted average assumptions december 2002 financial accounting standards board “fasb” issued fas 148 “accounting stockbased compensation transition disclosure amendment fas 123” statement provides alternative methods transition voluntary change fair value method accounting stock based employee compensation addition statement amends disclosure requirements fas 123 require prominent disclosures annual interim financial statements method accounting stock based employee compensation effect reported results statement effective calendar year 2003 however time intend voluntarily adopt provisions fas 123 new accounting pronouncements april 2002 fasb issued fas 145 “rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections” statement among things changes way gains losses extinguishment debt reported previously gains losses extinguishment debt required reported extraordinary item net related tax effect fas 145 gains losses extinguishment debt reported part ongoing operations unless extinguishment debt unusual infrequent event entity previously reported extraordinary gains losses extinguishment debt unusual infrequent reclassified statement effective calendar year 2003 however permitted adopted statement end 2002 previously reported extraordinary losses extinguishment debt reclassified accordingly interest expense includes writeoff deferred financing costs associated prepayment debt 05 million 07 million 11 million 2002 2001 2000 respectively adoption statement impact previously reported net income june 2002 fasb issued fas 146 “accounting costs associated exit disposal activities” fas 146 addresses accounting reporting costs associated exit disposal activities nullifies emerging issues task force issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” statement effective transactions initiated december 31 2002 applied prospectively november 2002 fasb issued fasb interpretation 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” interpretation elaborates disclosures made guarantor financial statements obligations certain guarantees issued also clarifies guarantor required recognize inception guarantee liability fair value obligation undertaken issuing guarantee recognition measurement provisions applicable prospective basis guarantees issued modified december 31 2002 disclosure requirements effective financial statements periods ending december 15 2002 guarantee obligations third parties including dontech however indirect subsidiaries jointly severally fully unconditionally guarantee debt obligations rh donnelley inc see note 13 consolidated financial statements item 8 see note 1 consolidated financial statements item 8 additional information accounting policies results operations three years ended december 31 2002 factors affecting comparability 2000 following transactions resulted pretax net gain 865 million 535 million aftertax onetime operating income benefit 158 million • executed agreement affiliates bell atlantic corporation known verizon communications “bell atlantic” early termination sales agency agreements sold cincinnati proprietary operations ceased operations get digital smart internet business “gds” • restructured extended cendon sales agency relationship 2010 original relationship set expire 2004 • connection investment unaffiliated third party chinabig became passive investor longer recognized share losses chinabig disposition businesses related cost cutting actions april 27 2000 sold cincinnati proprietary directory business yellow book usa inc 8 million june 30 2000 entered agreement bell atlantic early termination directory services agreements amended “agency agreements” bell atlantic us pursuant agency agreements served exclusive sales agent bell atlantic directories covering substantially new york state agency agreements scheduled expire 2003 2005 terms agreement received termination payment 114 million commission payments sales occurred prior closing december 2000 ceased operations gds formally launched february 2000 miamift lauderdale market test economic viability providing variety products services designed deliver comprehensive package internet marketing ecommerce capabilities small mediumsized local businesses test demonstrated demand products services offered gds broadly capable providing adequate return investment within originally planned time horizon recognized onetime costs 29 million related shutdown business also implemented costcutting measures 2000 including headcount reductions prepress publishing facility raleigh corporate headquarters consistent new operating structure cendon partnership restructuring extension effective directories published june 30 2000 entered series agreements spa effectively restructured cendon partnership limited liability company extended sales agency arrangement 2010 “cendon restructuring” partnership agreement sales agency agreement set expire 2004 revised arrangement focused responsibilities sales certain prepress publishing services established us exclusive sales agent spa’s directory products markets previously covered partnership agreement spa assumed responsibility printing delivery directories previously performed cendon partnership related support services marketing customer service collections previously performed us revised arrangement spa managed cendon received sales commissions advertising sold consideration transferring control publishing functions spa also received priority distribution priority distribution designed allow us maintain level profitability would earned predecessor cendon partnership scheduled expiration date 2004 revised arrangement total payments cendon sales commission plus priority distribution expected average approximately 37 cendon advertising sales 2004 starting sales 2005 directories would received priority distribution would received supplemental sales commission sales 2005 2007 directories total payments cendon sales commission plus supplemental sales commission 2005 expected approximately 35 cendon advertising sales decline four percentage points per year 2007 sales 2008 2010 publications would received base 23 commission cendon advertising sales revised arrangement revenue related costs recognized time sale whereas previous cendon partnership shared responsibility publishing delivery functions revenue related costs recognized time directory publication accordingly onetime operating income benefit 158 million recorded 2000 related advertising sales made costs incurred prior effective date agreement directories published subsequent effective date agreement chinabig investment impairment charge presently nominal 18 interest chinabig publishes yellow pages directories offers internet directory services people’s republic china connection equity investment unaffiliated third party order facilitate raising additional capital provide greater flexibility june 15 2000 chinabig existing investor restructured existing joint venture agreement chinabig among things significantly reduce ability influence operations chinabig result became passive investor chinabig began account investment cost method prior june 15 2000 accounted investment equity method therefore subsequent june 15 2000 equity losses chinabig longer recognized consolidated statement operations november 2001 received independent third party valuation chinabig’s current business plan capital needs outlook profitability cash flow valuation conducted connection proposed equity financing results valuation provided range possible estimated fair values chinabig implied fair value investment substantially lower carrying value 134 million accordingly impairment charge 114 million recorded 2001 write investment amount believed best estimate current fair value investment time reviewing chinabig’s 2002 operating results determined sufficient evidence exist support carrying value investment probability realizing value investment foreseeable future remote accordingly additional impairment charge 20 million recorded write remaining book value investment 2002 restructuring special charge 2001 restructuring special charge 186 million recorded connection executive management employment transition arrangements expiration prepress publishing contract expected result elimination approximately 100 positions 2002 charge included • 99 million associated executive management transition arrangements including severance accrued pension benefits related costs • 33 million employee severance related costs • 44 million idle leased space raleigh publishing facility planned relocation corporate headquarters due excess capacity • 10 million professional fees writeoff assets longer considered useable result spa acquisition determined certain costs originally anticipated restructuring charge would incurred specifically idle leased space raleigh publishing facility utilized planned severance related costs significantly less corporate headquarters longer expected relocated accordingly income 64 million recognized 2002 reversal 67 million original reserve partially offset charge 03 million additional costs paid connection executive management transition adjusted results due disposition businesses 2000 onetime benefit cendon restructuring presented 2000 results reported basis adjusted basis facilitate comparisons 2001 2002 reported results adjusted information derived excluding reported amounts revenue advertising sales expenses bell atlantic cincinnati gds operations date disposition well onetime items cendon restructuring believe adjusted information indicative underlying financial operational performance better reflected results continuing businesses time adjusted information purport represent actual results would transactions occurred assumed dates project results operations financial condition future period historically presented reported results adjusted information 2000 described management’s discussion analysis financial condition results operations addition narrative discussion results underlying reasons variances one period another focused adjusted information management believed indicative underlying financial operating performance however response securities exchange commission’s recent adoption regulation g related rules discussion focuses underlying reasons causes variances reported amounts one period next maintained tabular presentation reported results adjusted information disclosure reconciling items comparative purposes net revenue reporting periods revenue derived entirely das segment exception 02 million revenue gds 2000 sales agent sprint earned commission revenue based annual billing value advertisements sold sprint directories period “sprint calendar sales” sales commission revenue recorded net estimate potential claims allowances also earned revenue providing prepress publishing services amount commission revenue recognized directly correlated sprint calendar sales recorded period managed sale advertising directorybydirectory basis organized directory sales campaign typical sales campaign lasts two five months ends approximately two months directory scheduled published therefore changes beginning ending dates sales campaign actual sales recorded point campaign vary one period next variations could caused sales commission revenue period materially different prior comparative period reported adjusted net revenue follows net revenue 738 million 767 million 1413 million 2002 2001 2000 respectively net commission revenue decreased 11 million 2002 compared 2001 primarily due reversal 14 million sales claims allowances 2001 fees prepress publishing services declined 18 million primarily due reduction volumes resulting expiration prepress publishing contract december 2002 net revenue 2001 declined 646 million 457 2000 primarily due loss revenue 2001 bell atlantic business revenue benefit 210 million 2000 cendon restructuring revenue bell atlantic 2000 428 million adjusted basis revenue 2000 773 million inline 2001 revenue calendar advertising sales commission revenue priority distribution income sprint revenue participation income sbc directly correlated value advertising sales made period table sets forth value advertising sold behalf sprint bell atlantic 2000 dontech sold behalf sbc periods noted dontech manages selling process manner similar manage selling process accordingly annual billing value advertisements sold sbc directories period “dontech calendar sales” vary one period next due changes beginning ending dates sales campaign actual sales recorded point campaign reported adjusted calendar sales segment follows calendar sales 5897 million 6079 million 8977 million 2002 2001 2000 respectively dontech calendar sales declined 47 2002 13 2001 decline 2002 dontech calendar sales reflects continued advertiser uncertainty weak economic conditions competition changes servicing sales campaigns call customers closer time directories publish decline 2001 reflects weakening economic environment began affecting dontech sales latter part 2001 increased competition chicago low consumer confidence resulting advertisers increasing advertising spending lower new business sales das calendar sales increased slightly 2002 compared 2001 began see signs markets may trending back towards historical growth levels das sales 2001 decreased 605 compared 2000 mainly due loss bell atlantic sales 1820 million onetime sales benefit 958 million cendon restructuring excluding items calendar sales declined 64 million 33 due weakening economy tighter credit standards light weakening economy increased uncertainty among advertisers certain sprint markets effects weakening economy increased uncertainty exacerbated touristbased markets las vegas orlando publication advertising sales management also reviews analyzes value advertising sales behalf sprint bell atlantic 2000 dontech behalf sbc directories published period “publication sales” compare publication sales period publication sales directories published prior year period “same store sales” type metric believe comparison publication sales one period another gives indication underlying sales growth directories metric removes timing factors associated sales campaign however publication sales direct correlation reported revenue profitability indicated period calendar sales drive revenue profitability occur prior publication dates reported adjusted publication sales segment follows publication sales 6029 million 6275 million 8619 million 2002 2001 2000 respectively 2002 publication sales dontech declined 36 publication sales das declined 45 compared 2001 declines due difficult economic conditions reduced spending advertisers uncertainty caution small business market following events september 11 2001 two largest sales campaigns sprint’s las vegas sbc’s chicago consumer directories peak selling period immediately september 11th directories published early 2002 advertising sales value 2002 publications substantially value 2001 publications however since revenue profitability driven calendar sales shortfall 2002 las vegas chicago consumer directories reflected 2001 results directly impact revenue profitability 2002 publication sales dontech 2001 relatively flat compared 2000 sales 2001 adversely affected weakening economy uncertainty among advertisers increased competition das publication sales declined 2379 million 551 mainly due loss publication sales bell atlantic business 2001 publication sales 2000 bell atlantic 2381 million publication sales sprint 2001 flat compared 2000 due weakening economy tighter credit standards light weakening economy increased uncertainty among advertisers especially tourist based market orlando expenses reported adjusted expenses follows operating expenses 464 million 478 million 1010 million 2002 2001 2000 respectively decrease 2002 operating expenses compared 2001 primarily due favorable settlement 11 million cendon partnership advertiser receivables “cendon settlement” reduced headcount attrition raleigh facility 2002 settled cendon partnership accounts receivable issues approximately 21 million less amount reserved financial statements cover potential losses remaining 10 million benefit recognized partnership income established reserves receivable issues time became aware relevant facts circumstances party cendon partnership reserves established offset partnership income subsequent cendon restructuring reserves established charged expense accordingly reversal reserves established recorded accounts original reserve recorded operating expenses 2001 decreased 532 million 527 compared prior year 2000 includes 401 million operating expenses bell atlantic cincinnati gds businesses onetime expenses 106 million cendon restructuring remaining decrease operating expenses 2001 due lower sales compensation related costs proportionate decrease sales full year effect cost savings initiatives implemented 2000 absence sales production costs associated cable television yellow pages product discontinued end 2000 general administrative ga expenses 164 million 166 million 252 million 2002 2001 2000 respectively ga expense benefited 2002 lower salary benefit costs due executive management transition savings offset 12 million expenses incurred connection spa acquisition majority acquisitionrelated expenses capitalized part transaction ga expenses 2001 decreased 86 million compared 2000 primarily due full year effect cost savings initiatives implemented 2000 due reduced headcount savings realized lower salary benefit costs lower facilities costs due consolidation staff elimination corporate planning international development efforts addition 27 million ga expenses bell atlantic cincinnati businesses incurred 2000 incurred 2001 see “factors affecting comparability restructuring special charge chinabig investment impairment charge” discussion amounts reflected table depreciation amortization expense 63 million 108 million 154 million 2002 2001 2000 respectively depreciation amortization expense steadily declining result reduced capital spending including software development writeoff assets disposition businesses significant software development costs incurred raleigh prepress publishing operation 1995 1996 becoming fully amortized 2000 2001 partnership joint venture income partnership joint venture income “partnership income” includes 50 share net income dontech revenue participation income sbc priority distribution membership interest cendon llc 2000 partnership income also included equity losses chinabig investment effective june 16 2000 began account investment cost method partnership income follows partnership income 1369 million 1400 million 1477 million 2002 2001 2000 respectively partnership income dontech decreased 53 million 2002 16 million 2001 primarily due decline dontech calendar sales 43 13 2002 2001 respectively previously stated dontech calendar sales declined due weakening economy low consumer confidence certain markets competition partnership income cendon increased 22 million 2002 partially due increase calendar sales coupled increase priority distribution rate 2002 129 132 partnership income 2002 also included 10 million benefit cendon settlement partnership income cendon 2001 decreased 72 million compared 2000 decrease mainly due benefit 54 million cendon restructuring 2000 lower sales 2001 operating income operating income dontech includes 50 share net profits dontech revenue participation income sbc operating income das includes results costs directly incurred constituent business unit less allocation certain shared expenses based estimated business usage general corporate represents overhead administrative costs allocated das business units reported adjusted operating income follows operating income 1460 million 1115 million 1474 million 2002 2001 2000 respectively operating income dontech decreased 53 million 2002 16 million 2001 see “partnership joint venture income” details decrease dontech operating income operating income das increased 53 million 2002 compared 2001 due higher sales sprint contractual increase priority distribution rate benefit cendon settlement increase partially offset reversal 14 million sales claims allowances 2001 das operating income also benefited lower software amortization expense significant amount investment software development made raleigh publishing facility 1995 1996 fully amortized 2000 2001 das operating income 2001 decreased 152 million compared 2000 operating income 2000 included onetime benefit 158 million cendon restructuring operating income 63 million bell atlantic cincinnati decrease 2001 operating income caused items partially offset lower information technology publishing costs due fullyear benefit cost cutting initiatives strategic actions taken 2000 plus higher sprint income cost management controls reversal prior period sales claims allowances general corporate costs consistent last year lower salary benefit costs executive management transition 2002 offset 12 million costs related acquisition spa general corporate costs decreased 20 million 2001 compared 2000 primarily due cost cutting initiatives headcount reductions resulted lower salary benefit costs lower rental costs elimination corporate planning international development efforts lower depreciation expense interest taxes interest expense 355 million 274 million 359 million 2002 2001 2000 respectively interest expense 2002 includes 127 million interest incurred 1825 million proceeds term loan b notes held escrow interest expense excluding interest funds escrow 228 million 46 million lower 2001 due lower outstanding borrowings lower interest rates interest income 2002 20 million includes 15 million income funds held escrow interest expense 2002 2001 benefited prepayments 65 million debt 2001 90 million debt 2000 effective tax rate 2002 2001 2000 400 419 382 respectively effective tax rate 2002 2001 impacted chinabig investment impairment charges deductible income tax purposes charges represent capital losses offset capital gains charges also gave rise deferred tax asset 61 million realized offsetting future capital gains given current business portfolio projections future results believe probability generating future capital gains realize asset remote accordingly valuation allowance full value asset established expense income expense income 2002 consisted 15 million charge related interest rate swap 10 million reversal remaining reserves related disposition businesses 2000 expense income 2000 consisted net gain disposition businesses result thenpending repayment existing variable rate debt connection spa acquisition interest rate swap longer qualified hedge accounting treatment december 31 2002 accordingly charge 15 million previously recognized accumulated comprehensive loss balance sheet taken earnings calculation gain recorded 2000 disposition businesses included certain reserves established connection termination agency agreements bell atlantic reserves based best information available us time transaction december 31 2002 believe sufficient time elapsed since transaction additional costs incurred accordingly remaining reserves 10 million reversed income net income net income available common shareholders net income 672 million 498 million 1248 million 2002 2001 2000 respectively dividend preferred stock whether paid cash allowed accrue reduces net income residual net income available common shareholders 2002 net income reduced preferred stock dividend 247 million derive net income available common shareholders 425 million amount preferred stock dividend includes stated 8 dividend 05 million pro rata period outstanding deemed dividend beneficial conversion feature “bcf” 242 million bcf function conversion price preferred stock 2405 fair value warrants 53 million based black scholes model exercise price 2628 fair market value underlying common stock date issuance 2992 full amount bcf treated deemed dividend 2002 preferred stock convertible common stock immediately issuance additional bcf 382 million resulted issuance 130000 additional shares preferred stock gs funds january 2003 recorded deemed dividend first quarter 2003 earnings per share basic earnings per common share eps generally calculated dividing income available common shareholders weighted average number common shares outstanding however preferred stock contains certain participation rights topic d95 requires dilutive effect securities included weighted average number shares outstanding furthermore topic d95 requires dilutive effect included basic eps may calculated using either ifconverted method twoclass method however dilutive effect preferred stock cannot less would result application twoclass method diluted eps calculated dividing net income weighted average common shares outstanding plus common share equivalents common share equivalents include stock options warrants dilutive effect calculated using treasury stock method preferred stock potential dilutive effect calculated using ifconverted method years ended december 31 2001 2000 basic earnings per share calculated dividing net income weighted average common shares outstanding year diluted earnings per share calculated dividing net income weighted average common shares outstanding plus potentially dilutive common shares primarily stock options calculated using treasury stock method eps years ended december 31 2002 2001 2000 presented conversion preferred stock reflected calculation diluted eps effect antidilutive liquidity capital resources spa acquisition financed borrowings new 1525 million credit facility issuance 325 million 8 78 notes 600 million 10 78 notes issuance 200 million preferred stock gs funds take advantage favorable market conditions ensure timely consummation spa acquisition december 2002 incurred debt received gross proceeds term loan b notes total proceeds 1825 million deposited held escrow pending closing spa acquisition additionally gs funds invested initial 70 million 200 million commitment purchase 70000 shares preferred stock warrants purchase 577500 shares common stock november 2002 issued preferred stock earlier anticipated order facilitate cure technical default indenture governing existing notes technical default resulted inadvertent failure cause certain subsidiaries added guarantors indenture 2000 net proceeds 693 million issuance preferred stock warrants used offset certain restricted payments made 2000 2001 result technical default cured december 31 2002 19365 million cash equivalents amount included proceeds 1825 million held escrow 693 million issuance preferred stock warrants 344 million 400 million drawn previous revolver accordingly 19287 million cash hand yearend restricted intended used finance spa acquisition repay existing debt pay transaction costs january 3 2003 borrowed 510 million consisting 500 million term loan proceeds 10 million revolver also received proceeds 1825 million held escrow gs funds purchased remaining 130 million preferred stock warrants purchase 1072500 shares common stock proceeds used acquire common stock spa repay existing debt pay transaction costs sources uses funds connection acquisition summarized follows 1 calculated prior application 1 closing payment fees connection tender offer exit consent solicitation 1288 million existing notes repurchased january 3 2003 borrowed initial 1410 million credit facility contingent upon repurchase entire 150 million aggregate principal amount existing notes proceeds used repurchase existing notes required repaid lenders credit facility accordingly 212 million representing amount existing notes remain outstanding following tender offer exit consent solicitation repaid lenders credit facility shortly consummation acquisition credit facility bears interest option either • highest base rate determined deutsche bank securities inc salomon smith barney inc bear sterns co inc ii threemonth certificate deposit rate plus 12 1 iii federal funds effective rate defined plus 12 1 • libor rate plus applicable margin may elect interest periods 1 2 3 6 12 months libor borrowings credit facility indentures governing notes contain usual customary negative covenants among things place limitations ability incur additional indebtedness including capital leases liens ii pay dividends repurchase capital stock iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock subsidiaries credit facility also contains financial covenants relating maximum leverage minimum interest coverage minimum fixed charge coverage maximum senior leverage revolver term loan mature december 2008 term loan b loan matures june 2010 substantially assets including capital stock subsidiaries pledged secure obligations credit facility preferred stock convertible time price 2405 cumulative dividend 8 compounded quarterly may paid cash allowed accrue option credit facility significantly limits ability pay preferred stock dividends cash 2004 warrants issued november 2002 exercise price 2628 warrants issued january 2003 exercise price 2862 warrants exercised time expire january 3 2008 intend issue treasury stock satisfy conversion preferred stock exercise warrants result acquisition significant amount debt service requirements significantly higher past aggregate outstanding debt january 3 2003 23562 million term loan term loan b require quarterly principal payments beginning first quarter 2003 addition 212 million repaid credit facility prepaid additional 75 million debt outstanding january 3 2003 march 17 2003 125 million borrowing capacity revolver following table sets forth commitments debt lease payments next five years thereafter 587 million required principal payments 2003 include scheduled principal payments credit facility include repayment existing debt january 3 2003 75 million prepayment new debt primary source liquidity continue cash flows operations well available borrowing capacity revolver cash flows operations consist mainly cash receipts advertisers sale advertising yellow pages directories revenue participation payments received directly sbc based value advertising sales sold dontech cash distributions dontech primary liquidity requirement principal interest payments debt ability meet debt service requirements depend ability generate cash flow future primary sources cash flow consist mainly cash receipts sale advertising yellow pages directories revenue participation payments cash distributions related dontech sources directly dependent value yellow pages advertising sold impacted among factors general economic conditions competition yellow pages directory publishers alternative products consumer confidence level demand yellow pages advertising believe cash flow operations along borrowing capacity revolver adequate fund operations meet debt service requirements least next 12 24 months however make assurances business generate sufficient cash flow operations sufficient borrowing available revolver enable us fund operations meet debt service requirements preacquisition liquidity cash flow operations 2002 500 million compared 869 million 2001 decrease 369 million mainly due payments cash flow operations 2001 increased 41 million compared 828 million 2000 payments accounts payable accrued liabilities decreased 537 million 2000 included significant payments severance taxes related bell atlantic cincinnati transactions cash receipts dontech partnership cendon joint venture excess income increased 96 million primarily due timing cash receipts relative recognition income dontech cendon recognized sales contract executed however cash received publisher bills advertiser therefore timing differences exist income recognized cash collected partially offsetting increases lower collections accounts receivable 410 million 2001 accounts receivable collections 2000 included collection outstanding bell atlantic receivables time buyout agency agreements cash used investing activities 2002 19324 million 19287 million represents increase restricted cash intended finance spa acquisition capital expenditures 37 million 2002 46 million 2001 also made final required investment chinabig 16 million currently material investment commitments cash provided investing activities 1094 million 2000 amount included 1220 million buyout bell atlantic agency agreements sale cincinnati operations capital expenditures 2001 31 million lower 2000 due lower capital requirements resulting reduction headcount disposition businesses cash provided financing activities 18756 million 2002 consisted primarily treasury stock repurchases 2002 suspended share repurchase programs first quarter 2002 analyzed various acquisition growth opportunities cash used financing activities 2001 1215 million consisted debt prepayments 650 million treasury stock repurchases 640 million proceeds option exercises 75 million cash used financing activities 2000 1391 million consisted debt prepayments 900 million scheduled principal repayment 30 million treasury stock repurchases 536 million proceeds option exercises 75 million item 7aitem 7 1 financial data year ended december 31 2003 include results former spa business january 3 2003 net revenue net loss available common shareholders reflect purchase accounting adjustments precluded recognition revenue certain expenses associated directories published spa prior acquisition including january 2003 published directories see item 7 “management’s discussion analysis financial condition results operations” discussion items 2 connection spa acquisition incurred significant amount debt take advantage favorable market conditions ensure timely consummation spa acquisition issued preferred stock november 2002 borrowed funds certain debt instruments december 2002 therefore cash debt balances unusually high december 31 2002 compared prior periods item 7 management’s discussion analysis financial condition results operations item read conjunction audited consolidated financial statements notes thereto included item 8 unless otherwise indicated terms “company” “donnelley” “rhd” “we” “us” “our” refer rh donnelley corporation direct indirect wholly owned subsidiaries corporate overview sixth largest directory publisher united states based revenue yellow pages business various capacities 100 years publish 260 sprintbranded revenuegenerating yellow pages directories 18 states total circulation approximately 18 million serving approximately 160000 local 4000 national advertisers dontech ii partnership “dontech” partnership affiliate sbc communications inc “sbc” sell advertising additional 129 sbcbranded directories illinois northwest indiana total circulation approximately 10 million serving approximately 100000 local advertisers many local advertisers rely yellow pages directories primary sole method advertising january 3 2003 acquired outstanding common stock various entities comprising sprint publishing advertising “spa” sprint corporation’s “sprint” directory publishing business see “spa acquisition” description acquisition transformed donnelley sales agent prepress vendor leading publisher yellow pages directories prior spa acquisition one largest independent sales agents prepress vendors yellow pages advertising united states commencing 2003 operating financial results reflect yellow pages publishing business rather former business sales agent prepress vendor yellow pages advertising behalf publishers including spa publisher report full value advertising sales certain direct costs deferral amortization method sales agent prepress vendor yellow pages advertising 2001 2002 revenue reflected sales commissions prepress fees transactions business partners including spa expenses charged earnings incurred dontech remained unchanged following spa acquisition financial presentation dontech consistent periods presented annual report forwardlooking information certain statements contained annual report form 10k regarding donnelley’s future operating results performance business plans prospects statements constituting historical fact “forwardlooking statements” subject safe harbor created private securities litigation reform act 1995 possible words “believe” “expect” “anticipate” “should” “will” “would” “planned” “estimates” “potential” “goal” “outlook” “may” “predicts” “could” negative words comparable expressions used identify forwardlooking statements actual events results may differ materially evaluating statements specially consider various factors including risks uncertainties discussed factors may cause actual results differ materially rhd’s forwardlooking statements forwardlooking statements attributable us person behalf expressly qualified entirety cautionary statement forwardlooking statements reflect current beliefs assumptions respect future results business plans prospects based solely information currently available us although believe expectations reflected forwardlooking statements reasonable cannot guarantee future results levels activity performance forwardlooking statements made date annual report except required federal securities laws rules regulations sec assume obligation update revise provide reasons actual results may differ risks uncertainties contingencies include without limitation following 1 ability meet substantial debt service obligations substantial amount debt significant debt service obligations 2004 thereafter december 31 2003 total outstanding debt 20921 million see “liquidity capital resources” details regarding debt obligations instruments result significant amount debt service obligations face increasing risks associated limited following • ability obtain additional financing excess borrowing capacity 125 million revolving credit facility “revolver” satisfactory terms fund working capital requirements capital expenditures acquisitions investments debt service requirements general corporate requirements limited • vulnerable general economic downturns competition industry conditions could place us competitive disadvantage compared competitors less leveraged • face increased exposure rising interest rates portion debt variable interest rates • reduced availability cash flow fund working capital requirements capital expenditures acquisitions investments general corporate requirements substantial portion cash flow needed service debt obligations • limited flexibility planning reacting changes business industry operate ability pay principal interest debt obligations depend upon future operating performance ability refinance debt unable service debt fund business may forced reduce delay capital expenditures seek additional debt financing equity capital restructure refinance debt sell assets cannot assure would able obtain additional financing refinance existing debt sell assets satisfactory terms 2 restrictive covenants debt preferred stock agreements indentures governing 8 78 senior notes “senior notes” due 2010 10 78 senior subordinated notes “subordinated notes” due 2012 collectively “notes” senior secured credit facility amended “credit facility” include number significant restrictive covenants see “liquidity capital resources” details regarding debt instruments covenants could adversely affect us limiting ability plan react market conditions meet capital needs covenants among things restrict ability subsidiaries • incur additional debt • pay dividends equity interests repurchase equity interests • make certain investments • enter certain types transactions affiliates • limit dividends payments restricted subsidiaries us • use assets security transactions • sell certain assets merge companies addition credit facility includes restrictive covenants prohibits us prepaying notes borrowings credit facility outstanding credit facility also requires us maintain certain financial ratios meet financial tests failure comply covenants could result event default cured waived could require us repay borrowings scheduled due date unable make repayment otherwise refinance borrowings lenders credit facility could foreclose assets substantially subjected security interests favor lenders credit facility addition lenders could elect declare amounts borrowed credit facility together accrued interest due payable instances would event default indentures governing notes unable refinance borrowings favorable terms results operations financial condition could adversely impacted increased costs less favorable terms including rates covenants future refinancing credit facility likely contain similar restrictive covenants furthermore terms purchase agreement respect redeemable convertible cumulative preferred stock “preferred stock” among things restricts ability subsidiaries • incur additional debt • enter major corporate transactions • pay dividends shares common stock repurchase shares common stock • enter certain types transactions affiliates • sell acquire certain assets failure comply terms would result breach agreement could material adverse effect business addition without consent holders preferred stock cannot issue shares common stock 18 months following spa acquisition could adversely affect liquidity see “ liquidity capital resources” description preferred stock 3 usage print yellow pages directories changes technology 1997 2000 overall references print yellow pages directories united states declined however overall references print yellow pages directories remained stable past three years believe past decline primarily result demographic shifts among consumers particularly increase households english primary language spoken also believe past decline attributable increased usage internetbased directory products particularly businesstobusiness retail categories well proliferation large retail stores consumers businesses may reference yellow pages declines usage could • impair ability maintain increase advertising prices • cause businesses purchase advertising yellow pages directories reduce discontinue purchases • discourage businesses purchase advertising yellow pages directories factors may contribute decline usage print directories combination could impair revenues material adverse effect business yellow pages directory advertising business subject changes arising developments technology including information distribution methods users’ technological preferences use internet consumers means transact commerce may result new technologies developed services provided could compete products services result factors growth future financial performance may depend ability develop market new products services create new distribution channels enhancing existing products services distribution channels incorporate latest technological advances accommodate changing user preferences including use internet cannot assure able provide services internet successfully able compete successfully internetbased directory services addition fail anticipate respond adequately changes technology user preferences unable finance capital expenditures necessary respond changes results operations financial condition could materially adversely affected 4 sbc’s dontech’s actions could adversely impact business dontech donnelley’s 5050 perpetual partnership affiliate sbc donnelley dontech variety perpetual contractual relationships sbc pursuant partnership agreement existing contractual arrangements dontech exclusive sales agent perpetuity 129 yellow pages directories published sbc illinois northwest indiana donnelley’s income respect dontech comprised two components 50 interest net profits dontech revenue participation income received affiliate sbc partnership income related dontech expected represent approximately 30 35 total operating income exclusive sales agent local advertising dontech responsible management sales force including compensation recruiting training salesrelated matters publisher sbc responsibility control matters including without limitation product development national advertising print distribution pricing scheduling marketing advertising billing collections credit customer service believe dontech economic interests generally aligned sbc respect sbc’s yellow pages directory operations sbc could implement policies decisions dontech would likely little participation influence andor perform obligations manner could material adverse effect results operations financial condition potentially relationship sbc cannot assure policies decisions would material adverse effect results operations financial condition relationship sbc also maintain large receivable balance sbc 935 million december 31 2003 liquidity difficulties sbc may experience could materially impact results operations financial condition liquidity dontech partnership agreement related sbc contractual arrangements perpetual terms arrangements terminate upon occurrence certain enumerated events including without limitation unremedied breaches certain material provisions thereof mutual agreement parties bankruptcy partner parent change control partner excluding change control ultimate parent company partner addition applicable law contractual arrangements potentially may remain effect perpetuity cannot assure dontech relationship remain full force effect perpetuity without material modification dontech sbc perform respective material obligations particularly payment obligations agreements sbc seek terminate arrangements event party seeks terminate contractual arrangements party may dispute attempted termination case court arbitrator may required determine appropriateness attempted termination cannot assure outcome proceeding termination material modification agreements failure sbc dontech perform respective material obligations would material adverse effect financial condition results operations 5 competition united states directory advertising industry highly competitive approximately 90 total united states directory advertising sales attributable regional bell operating company “rboc” directory publishers typically publish directories offer local phone service addition 240 independent publishers operating united states compete rboc publishers nearly markets compete one yellow pages directory publishers predominantly independent publishers markets compete limited basis rboc directory publishers adjacent markets one publishers verizon information services directory business affiliated verizon communications inc begun publish directories offer local internet directory services markets beyond verizon communications offers local phone service including certain markets publish directories effectively verizon information services competing independent publisher markets rboc publisher announced similar plans assurance given rboc publishers future many rboc publishers larger us greater financial resources assurances given able compete effectively publishers advertising sales acquisitions future also compete advertising sales media including newspapers magazines radio direct mail internet television additionally advances technology brought new participants new products new channels industry including increasing use electronic delivery traditional directory information eg yahoo yellow pages electronic search enginesservices eg google advertising medium cannot assure able compete successfully responding developments many competitors larger us greater financial resources addition telecommunications act 1996 opened local telephone markets increased competition may adversely impact market position telephone utilities including sprint sbc addition federal communication commission rules regarding local number portability advances communications technology wireless devices voice internet protocol demographic factors potential shifts younger generations away wireline telephone communications towards wireless communications technologies may erode market position telephone utilities including sprint sbc result cannot assure sprint sbc remain primary local telephone service provider local service areas sprint longer primary local telephone service provider particular local service area license exclusive publisher markets use sprint brand name directories markets may valuable presently anticipate may realize anticipated benefits commercial arrangements sprint sbc longer primary local telephone service provider dontech service area financial results recognize dontech could adversely affected 6 reliance extension credit small mediumsized businesses approximately 85 directory advertising revenue derived selling advertising small mediumsized businesses ordinary course yellow pages publishing business extend credit advertisers advertising purchases small mediumsized businesses however tend fewer financial resources higher failure rates large businesses proliferation large retail stores may continue harm small mediumsized businesses believe limitations significant contributing factors advertisers given year renew advertising following year addition full partial collection delinquent accounts take extended period time consequently could adversely affected dependence extension credit small mediumsized businesses 7 dependence third party providers printing distribution delivery services depend third parties printing distribution directories party two contracts rr donnelley printing directories printing one largest costs items accounting approximately 10 total operating general administrative expenses although contracts expire december 2005 december 2007 large print volume specialized binding directories limited number companies capable servicing printing needs accordingly inability unwillingness rr donnelley provide printing services us acceptable terms could material adverse effect business common ownership business affiliation exists rr donnelley us party contracts two companies distribution directories although contracts scheduled expire february 2007 either vendor may terminate contract us upon 120 days’ written notice limited number companies capable servicing delivery needs accordingly inability unwillingness current vendors provide delivery services us acceptable terms could material adverse effect business 8 general economic factors business results could adversely affected prolonged national regional economic recession derive substantially revenue sale advertising directories typically advertising revenues well yellow pages publishers general fluctuate widely economic cycles however prolonged national regional economic recession could material adverse effect business results operations financial condition result may experience lower expected revenues business future addition residual economic effects uncertainties regarding • general possibility express threat future occurrence similar terrorist related disruptive events • united states’ involvement military conflict especially respect major markets operate depend heavily upon travel tourism military could also adversely affect business 9 fluctuations price availability paper principal raw material paper currently one contract purchasing paper agreement effective december 31 2006 terminated either party material breach agreement occurs cured breaching party within 30 days written notice price paper set inception increases various dates term agreement market price paper drop set prices parties obligated negotiate good faith lower paper price subject delays receiving principal raw material changes supply demand paper could affect market prices delivery times paper one largest cost items accounting approximately 5 7 total operating general administrative expenses cannot assure available necessary raw materials reasonable prices increases paper costs would material adverse effect business results operations financial condition 10 sale advertising national accounts coordinated third parties control approximately 15 directory advertising revenues derived sale advertising national large regional companies rental car companies automobile repair shops pizza delivery businesses generally purchases advertising several directories substantially revenue derived national accounts serviced certified marketing representatives “cmrs” contract cmrs independent third parties act agents national companies design advertisements arrange placement advertisements directories provide billing services result relationships national advertisers depend significantly performance third party cmrs control although believe relationships cmrs mutually beneficial cmrs established relationships unable unwilling provide services us acceptable terms inability unwillingness could materially adversely affect business 2003 began acting cmr directly placing certain national advertising assurance given development adversely impact relationships cmrs expose us possible legal claims cmrs also subject credit risk cmrs contract 11 turnover among sales force key management ability achieve business plan depends significant extent ability identify hire train retain qualified sales personnel regions operate expend significant amount resources management time identifying training account executives ability attract retain qualified sales personnel depends numerous factors including outside control conditions local employment markets operate decrease number account executives could adversely affect results operations financial condition liquidity well ability service debt furthermore depend continued services key personnel including experienced senior management team well regional sales management personnel although believe could replace senior management team key employees within reasonable time period need arise loss key personnel could material adverse effect business 12 loss important intellectual property rights trademarks “sprint” “donnelley” brand names intellectual property rights important business rely upon combination copyright trademark laws well contractual arrangements including licensing agreements particularly respect sprint markets establish protect intellectual property rights required time bring lawsuits third parties protect intellectual property rights similarly time party proceedings whereby third parties challenge rights cannot sure lawsuits actions brought us successful found infringe intellectual property rights third parties although aware material infringements trademark rights significant business lawsuits regardless outcome could result substantial costs diversion resources could material adverse effect business financial condition results operations addition rights use sprint name diamond logo certain markets loss important intellectual property rights trademarks could material adverse effect upon business financial condition results operations 13 impact bankruptcy proceedings sprint affiliates term commercial arrangements contract rights directory services license agreement trademark license agreement noncompetition agreement sprint affiliates constitute substantial portion commercial arrangements sprint affiliates pursuant commercial arrangements exclusive directory publisher sprint markets sprint provided telephone service time agreements bankruptcy case commenced sprint possible part directory services license agreement andor noncompetition agreement could considered executory contract could therefore subject rejection sprint trustee appointed bankruptcy case pursuant section 365 section 1123 united states bankruptcy code one agreements rejected applicable agreement may specifically enforceable case would unsecured claim damages sprint breach contract resulting rejection directory services license agreement rejected would among things longer entitled sprint’s exclusive publisher telephone directories affected markets could also lose right enforce provisions agreement right license trademarks successor local exchange carriers sprint markets noncompetition agreement rejected specific enforcement available sprint would among things longer precluded publishing print telephone directories selling local directory advertising applicable restricted markets connection spa acquisition sprint created bankruptcy remote special purpose vehicle form limited liability company contributed assigned trademarks licensed us trademark license agreement limited liability company operating agreements limited liability company require among things board managers entity include one independent manager unaffiliated sprint consent independent manager required entity take certain actions including among things commencement bankruptcy proceeding trademarks contributed limited liability company rights trademark license agreement subject rejection event bankruptcy proceeding involving sprint unless also bankruptcy proceeding involving limited liability company although believe likelihood entity subject bankruptcy proceeding limited structure governing provisions operating agreement trademark license agreement rejected bankruptcy proceeding would lose right use sprint brand name former spa directories publish markets cannot assure loss rights certain arrangements sprint affiliates would material adverse effect financial condition results operations 14 inability enforce noncompetition agreement sprint connection spa acquisition sprint entered noncompetition agreement us noncompetition agreement prohibits sprint markets sprint provided local telephone service time transaction selling local directory advertising producing publishing distributing print directories certain limited exceptions however state federal law covenant compete enforceable • extent necessary protect legitimate business interest party seeking enforcement • unreasonably restrain party enforcement sought • contrary public interest enforceability noncompetition covenant determined court based facts circumstances specific case time enforcement sought reason possible us predict whether extent court enforce sprint’s covenants compete us term noncompetition agreement court determine noncompetition agreement unenforceable sprint could compete directly us directory publishing business previously restricted markets cannot assure inability enforce noncompetition agreement sprint would material adverse effect financial condition results operations spa acquisition january 3 2003 completed acquisition spa 223 billion cash including postacquisition working capital adjustments finance acquisition entered new 1525 million credit facility consisting 500 million term loan 900 million term loan b 125 million revolver also issued 325 million 8 78 senior notes 600 million 10 78 senior subordinated notes additionally issued 200 million preferred stock warrants purchase 1650000 shares common stock partnerships affiliated goldman sachs group inc collectively “gs funds” take advantage favorable market conditions ensure timely consummation spa acquisition issued notes borrowed term loan b december 2002 total gross proceeds 1825 million deposited held escrow pending spa acquisition closing issued 70 million preferred stock warrants purchase 577500 shares common stock exercise price 2628 per share november 2002 gs funds closing spa acquisition issued additional 130 million preferred stock warrants purchase 1072500 shares common stock exercise price 2862 per share gs funds additionally borrowed term loan 10 million revolver closing date connection transaction entered directory services license agreement trademark license agreement noncompetition agreement sprint directory services license agreement gives us exclusive right produce publish distribute directories sprint markets sprint provided local telephone service trademark license agreement gives us exclusive right use certain sprint trademarks including sprint diamond logo markets noncompetition agreement prohibits sprint markets selling local directory advertising producing publishing distributing print directories certain limited exceptions agreements interrelated initial terms 50 years subject earlier termination specified circumstances prior acquisition provided sales agency prepress publishing services spa received priority distribution cendon llc partnership us centel directory company “centel” affiliate sprint accordingly december 31 2002 aggregate receivable 433 million commissions prepress publishing fees priority distribution income spa result acquisition receivables became part purchase price also longterm liabilities december 31 2002 included amount due sprint 70 million paid cash closing acquisition accounted purchase business combination purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values acquisition date results former spa business included consolidated results january 3 2003 allocation purchase price fair value assets acquired liabilities assumed shown table purchase price allocation reflects initial allocation subsequent purchase price adjustments made 2003 segment reporting revised historical segment reporting first quarter 2003 reflect change business resulted spa acquisition reflect way management reviews analyzes business reportable operating segments donnelley dontech donnelley segment includes revenue 260 sprintbranded yellow pages directories prepress publishing services operating administrative expenses dontech segment includes revenue participation income 50 interest net profits dontech donnelley publisher yellow pages directories directory revenue recognized deferral amortization method based annual billing value advertisements sold directory “publication sales” subject provision sales claims allowances revenue sale advertising deferred directory published recognized ratably life directory typically 12 months certain costs directly related selling production directories also deferred incurred recognized ratably life directory costs include sales commissions print paper initial distribution costs also earn revenue prepress publishing billing services provided sbc yellow pages directories dontech sells advertising sbc salesrelated computer application services provided dontech fees received services included donnelley segment relate prepress publishing services dontech sales activities dontech 5050 perpetual partnership operating unit sbc dontech acts exclusive sales agent yellow pages directories published sbc illinois northwest indiana earns commission sbc time sales contract signed account investment dontech equity method record income dontech partnership income reported income dontech comprised 50 interest net profits dontech revenue participation income received directly affiliate sbc revenue participation income based percentage dontech advertising sales comprises approximately 80 85 total annual income related dontech total income dontech accounted 73 90 115 total operating income depreciation amortization years ended december 31 2003 2002 2001 respectively certain general administrative expenses incurred support business allocated dontech segment believe expenses material segment reporting prospectively acquisition dontech income expected represent approximately 30 35 total operating income dontech accounts significant portion operating income material decline advertising sales dontech would likely material adverse effect results operations financial condition also provide certain prepress publishing services sbc directories dontech sells advertising income included donnelley segment described dontech partnership considered separate operating segment among things partnership board directors employees dontech including officers managers employees spa transaction affect partnership sbc dontech continues act sales agent sbc consistently accounted partnership interest dontech equity method critical accounting estimates preparation financial statements accordance generally accepted accounting principles “gaap” requires management estimate effect various matters inherently uncertain date financial statements estimates varies regard level judgment involved potential impact company’s reported financial results estimates deemed critical different estimate could reasonably used changes estimate reasonably likely occur period could materially impact company’s financial condition changes financial condition results operations company’s significant accounting polices discussed note 2 consolidated financial statements included item 8 annual report critical estimates inherent accounting polices discussed allowance doubtful accounts sales claims record revenue net allowance sales claims addition record provision bad debts provision bad debts allowance sales claims estimated directory based historical experience also evaluate current condition customer balances bankruptcy filings historical chargeoff patterns recovery rates data determining allowance doubtful accounts reserve review estimates periodically assess whether additional adjustment needed based economic events circumstances including actual experience end billing collection cycle respect directory believe allowance doubtful accounts sales claims adequate cover anticipated losses current conditions however significant deterioration factors noted overall economy could materially change expectations provisions sales claims doubtful accounts estimated based percentage revenue accordingly additional 1 change either allowance percentages would impact net income approximately 3 million annually pension benefits pension plan obligations related assets defined benefit retirement plans presented note 11 consolidated financial statements plan assets consist primarily marketable equity debt instruments valued using market quotations plan obligations annual pension expense determined independent actuaries use number assumptions key assumptions measuring plan obligations include discount rate future salary increases longterm expected return plan assets determining discount rate look yields highquality fixedincome investments maturities corresponding anticipated timing benefit payments salary increase assumptions based upon historical experience anticipated future management actions asset returns based upon anticipated average rate earnings expected invested funds plan longrun december 31 2003 weightedaverage actuarial assumptions discount rate 60 longterm rate return plan assets 825 assumed salary increases 366 net periodic pension costs recognized 2003 11 million 1 change discount rate would affect net income approximately 05 million 1 change longterm rate return plan assets would affect net income approximately 04 million 1 change assumed salary increases would affect net income approximately 03 million intangible assets goodwill valuation amortization intangible assets consist directory service agreements company sprint established customer relationships trade names resulting spa acquisition intangible assets amortized period assets expected contribute cash flow company reflect expected pattern benefit recorded goodwill resulted spa acquisition subjected amortization intangible assets subject impairment test accordance statement financial accounting standards 144 “accounting impairment disposal longlived assets” “sfas 144” goodwill subject impairment test accordance statement financial accounting standards 142 “goodwill intangible assets” “sfas 142” company reviews carrying value intangible assets impairment least annually sooner whenever events circumstances indicate carrying amount may recoverable impairment test intangible assets performed comparing carrying amount intangible assets sum undiscounted expected future cash flows accordance sfas 144 impairment exists sum future undiscounted cash flows less carrying amount intangible asset related group assets impairment would result writedown intangible asset estimated fair value based discounted future cash flows goodwill tested impairment comparing carrying amount reporting unit assigned estimated fair value reporting unit accordance sfas 142 impairment exists carrying amount reporting unit less estimated fair value impairment would result writedown equal difference carrying amount estimated fair value reporting unit used certain estimates assumptions impairment evaluation including limited projected future cash flows revenue growth customer attrition levels estimated writeoffs december 31 2003 management believes impairment intangible assets goodwill however significant deterioration business assumptions underlying impairment evaluations overall economy could result impairment charges future reporting periods aggregate net book value intangible assets december 31 2003 impaired 1 net income would impacted approximately 110 million additionally management must assess whether remaining useful lives intangible assets represent period intangible assets expected contribute cash flow company assessment process used certain estimates assumptions including projected future cash flows customer attrition levels industry economic conditions accordance sfas 142 evaluate remaining useful lives annually determine whether events circumstances warrant revision remaining period amortization estimated remaining useful lives change remaining carrying amount intangible asset would amortized prospectively revised remaining useful life year ended december 31 2003 amortization intangible assets approximately 50 million remaining useful lives intangible assets shortened 10 net income would impacted approximately 30 million critical accounting estimates pertains donnelley segment described note 14 consolidated financial statements included item 8 annual report believe make critical accounting estimates respect dontech segment management believes current assumptions considerations used estimate amounts company’s consolidated financial statements appropriate new accounting pronouncements may 2003 financial accounting standards board “fasb” issued statement financial accounting standards 150 accounting certain financial instruments characteristics liabilities equity “sfas 150” statement established standards classification measurement certain financial instruments characteristics liabilities equity statement effective july 1 2003 preferred stock represents financial instrument characteristics liabilities equity applied provisions sfas 150 determined classification measurement preferred stock appropriate january 2003 fasb issued interpretation 46 consolidation variable interest entities “fin 46” general variable interest entity corporation partnership trust legal structure used business purposes either equity investors voting rights b equity investors provide sufficient financial resources entity support activities fin 46 requires certain variable interest entities consolidated primary beneficiary entity investors characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties consolidation requirements fin 46 apply immediately variable interest entities created january 31 2003 adopted provisions fin 46 effective february 1 2003 adoption material impact consolidated financial statements currently variable interest entities december 2003 fasb issued fin 46r respect variable interest entities created january 31 2003 among things revised implementation date first fiscal year interim period ending march 15 2004 exception special purpose entities “spe” consolidation requirements apply spes first fiscal year interim period ending december 15 2003 adopted provisions fin 46r effective december 2003 adoption material impact consolidated financial statements currently spes april 2003 fasb issued statement financial accounting standards 149 amendment statement 133 derivative instruments hedging activities “sfas 149” sfas 149 amends clarifies accounting derivative instruments including certain derivative instruments embedded contracts hedging activities sfas 133 sfas 149 effective contracts hedging relationships entered modified june 30 2003 adopted provisions sfas 149 effective june 30 2003 adoption material impact consolidated financial statements december 2002 fasb issued statement financial accounting standards 148 accounting stockbased compensation transition disclosure “sfas 148” sfas 148 amends transition provisions statement financial accounting standards 123 accounting stockbased compensation “sfas 123” entities voluntarily change fair value method accounting stockbased employee compensation currently intend change accounting fair value method sfas 148 also amends disclosure provisions sfas 123 require prominent disclosure effects reported net income entity’s accounting policy decisions respect stockbased employee compensation amends apb opinion 28 interim financial reporting “apb 28” require disclosures effects interim financial information adopted disclosure provisions sfas 148 first quarter 2003 december 8 2003 medicare prescription drug improvement modernization act 2003 “act” signed law act introduces prescription drug care benefits medicare also allows certain sponsors postretirement benefit plans drug benefit receive nontaxable federal subsidy certain criteria met response passage legislation january 12 2004 fasb issued fasb staff position “fsp” fas 1061 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 fsp permits employers sponsor postretirement benefit plans provide prescription drug benefits retirees make onetime election defer accounting effects act accordance fsp donnelley elected defer accounting effects act accordingly measures accumulated postretirement benefit obligation net periodic postretirement benefit cost financial statements disclosed note 11 benefits plans reflect effects act donnelley’s plans authoritative guidance accounting federal subsidy currently considered fasb issued could require us change previously reported information december 2003 fasb issued statement financial accounting standards “sfas” 132 revised 2003 employers’ disclosures pensions postretirement benefits sfas 132 revised 2003 amends disclosure requirements sfas 132 require complete information pension postretirement benefits change measurement recognition plans required sfas 87 employers’ accounting pensions sfas 88 employers’ accounting settlements curtailments defined benefit pension plans termination benefits sfas 106 employers’ accounting postretirement benefits pensions adopted disclosure provisions sfas 132 revised 2003 december 31 2003 results operations year ended december 31 2003 compared year ended december 31 2002 factors affecting comparability spa acquisition spa acquisition related financing associated accounting 2003 results prepared accordance gaap comparable 2002 gaap results previously reported also purchase accounting rules precluded us recognizing revenue certain expenses directories published prior acquisition including january 2003 published directories revenue certain expenses reported 2003 representative revenue certain expenses would reported 2003 absent purchase accounting adjustments accordingly addition discussion reported 2003 gaap results compared reported 2002 gaap results also providing comparison 2003 adjusted results among things exclude effect purchase accounting deferred revenue certain expenses 2002 adjusted pro forma results assumes acquisition occurred january 1 2002 detailed discussion 2003 adjusted revenue certain expenses versus 2002 adjusted pro forma revenue certain expenses comparable well detailed discussion advertising sales drive revenue see “ adjusted pro forma amounts nongaap measures” relocation integration charges 2003 expenses include severance moverelated charges 73 million relating relocation corporate offices cary north carolina 76 million consolidation postacquisition publishing technology operations sales offices administrative staff restructuring special charge results 2002 include net benefit 64 million reversal remaining restructuring reserves recorded 2001 restructuring actions completed 2002 additionally results 2002 include 20 million impairment charge writeoff remaining investment chinabigcom limited “chinabig” see “results operations year ended december 31 2002 compared year ended december 31 2001” description amounts net revenue components net revenue 2003 2002 follows revenue derived entirely donnelley segment since dontech accounted equity method subsequent acquisition spa revenue directory advertising sales recognized deferral amortization method whereby revenue advertising sales initially deferred directory published recognized ratably directory’s life typically 12 months prepress publishing fees revenue recognized earned total net revenue 2003 2564 million compared 754 million 2002 increase total net revenue 2003 result spa acquisition date acquisition january 3 2003 revenue earned primarily sale advertising yellow pages directories published 2003 totaling 2308 million net sales allowances result acquisition became publisher 260 sprintbranded directories publisher earn entire value sales contract advertiser subject allowance sales claims prior acquisition sales agent earned commission advertising sales contract recognized advertiser signed contract earned revenue 44 directories opposed 260 directories publish 2002 net revenue represented commissions earned sales agent advertising sales made behalf spa totaling 427 million net allowances sales claims revenue prepress publishing services 206 million 2003 compared 311 million 2002 decrease 105 million primarily due consolidation spa’s operating results beginning 2003 expiration contract third party directory publisher ceased outsourcing prepress publishing services us first quarter 2003 2002 earned 70 million fees prepress services provided spa earned 73 million third party prepress publishing contract expired continued provide transition services third party publisher march 2003 recognized 30 million revenue 2003 revenue 2003 2002 included fees salesrelated computer application services rendered dontech behalf sbc result spa acquisition 2003 also began recording revenue late fees paid outstanding customer balances sales directories fees telephone companies publishing information pages activities account difference revenue 2003 2002 expenses components total expenses 2003 2002 follows reported expenses derived entirely donnelley segment since dontech accounted equity method certain costs directly related selling production directories initially deferred recognized ratably life directory operating expenses total operating expenses 2003 1642 million compared 480 million 2002 increase operating expenses primarily result operating expenses spa business acquired 2003 operating expenses include results publisher 260 directories whereas 2002 expenses include expenses incurred prior role sales agent 44 directories expenses incur publisher directories significantly greater expenses incurred sales agent however due elimination spa’s deferred revenue deferred costs 2002 january 2003 directories required purchase accounting reported expenses 2003 include certain expenses associated directories therefore operating expenses prospectively higher 2003 addition direct sales costs 2003 459 million higher 2002 due increase number sales offices size local sales force national sales operations publisher also incur costs related printing distribution directories purchasing paper marketing advertising customer service incur sales agent 2002 2003 expenses functions 363 million higher 2002 publishing information technology expenses 2003 224 million higher 2002 due production additional spa directories related acquisition larger workforce addition 2003 expenses include 76 million costs related consolidation publishing technology operations sales offices administrative staff bad debt expense 2003 lower 2002 principally due better expected collections result significant process improvements billings collections partially offset bad debt expense recognized publisher general administrative expenses general administrative “ga” expenses 2003 480 million compared 120 million 2002 increase general administrative expenses primarily attributable incremental costs related former spa business 136 million costs relating relocation corporate offices cary north carolina 73 million higher corporate costs larger organization 85 million due higher insurance premiums compensation governance general administrative expenses 2002 reflect net benefit 64 million reversal remaining restructuring reserves initially recorded 2001 see “results operations year ended december 31 2002 compared year ended december 31 2001” description prior year amounts depreciation amortization depreciation amortization “da” 2003 658 million compared 63 million 2002 increase 2003 primarily result amortization totaling 500 million intangible assets acquired spa acquisition 2002 donnelley significant intangible assets therefore incur significant amortization expense depreciation fixed assets amortization computer software 158 million 2003 63 million 2002 increase due depreciation associated depreciable assets acquired spa acquisition partnership income partnership income 2003 includes 50 share net income dontech accounted equity method revenue participation income sbc sales agent sbc dontech earns commission revenue based annual value sales contracts executed period “calendar sales” also earn revenue participation income based amount calendar sales period partnership income 2002 also included priority distribution membership interest cendon llc “cendon” result spa acquisition acquired remaining membership interests cendon accordingly become sole owner cendon longer receive priority distribution income rather results cendon included consolidated statements operations partnership income 1141 million 2003 compared 1369 million 2002 1171 million dontech 198 million priority distribution income cendon time part das segment decrease partnership income dontech due slow economic recovery stagnant job growth competitive local media environment chicagoland markets operating income operating income segment years ended december 31 2003 2002 follows reported operating income 2003 925 million decreased 535 million compared operating income 1460 million 2002 decline operating income due largely higher operating ga expenses mentioned well higher da expense due amortization intangible assets resulting spa acquisition operating income also declined due decline income dontech 3 million interest expense net interest expense 2003 1800 million compared 335 million 2002 interest expense 2003 significantly higher result substantial debt incurred connection spa acquisition see liquidity capital resources” description debt obligations provisions related debt instruments interest expense 2003 includes 150 million noncash amortization deferred financing costs consisting 24 million deferred costs expensed connection preacquisition debt extinguished 2003 126 million amortized deferred costs related current outstanding debt 31 million related accelerated principal payments 2003 net interest expense 2002 335 million included 127 million interest incurred 1825 million debt raised contemplation spa acquisition excluding amount interest expense 208 million reflective outstanding preacquisition debt 2002 income expense net income 2003 represents 15 million gain hedging activities december 31 2002 75 million notional value interest rate swap qualify hedge accounting treatment due thenpending repayment existing variable rate debt connection spa acquisition december 2002 charge 15 million recorded reclassify earnings cumulative change fair value swap previously recognized accumulated comprehensive loss balance sheet due loss hedge accounting treatment gain 15 million recognized earnings 2003 time swap matured expense 2002 consists 15 million charge related interest rate swap agreement net 10 million reversal remaining reserves related disposition businesses 2000 see item 7a “qualitative quantitative disclosures market risk” additional information interest rate swap agreements benefit provision income taxes 2003 tax benefit based effective tax rate 418 results tax benefit generated 2003 attributable net operating loss approximately 176 million related tax deductions connection acquisition spa business 2003 effective tax rate reflects increase state local tax rate result acquisition spa combined favorable settlement 2003 certain prior year state local tax audits 2002 tax provision based effective tax rate 400 adversely impacted chinabig investment impairment charge deductible income tax purposes charge represents capital loss offset capital gains charge also gave rise deferred tax asset realized offsetting future capital gains given current business portfolio projections future results believe probability generating future capital gains realize asset remote accordingly valuation allowance deferred tax asset relating chinabig investment established net loss income loss income available common shareholders loss earnings per share net loss 2003 500 million compared net income 672 million 2002 operating results 2003 reflect lower operating income described previously higher interest expense da result spa acquisition dividend preferred stock increases net loss reduces net income resulting loss income available common shareholders earnings per share amounts calculated amount preferred stock dividend includes stated 8 dividend plus deemed dividend beneficial conversion feature “bcf” bcf function conversion price preferred stock 2405 fair value warrants issued preferred stock weighted average 1108 per warrant based blackscholes model exercise prices 2628 warrants issued november 2002 2862 warrants issued january 2003 fair market value common stock january 3 2003 date preferred stock issued 2992 full amount bcf treated deemed dividend preferred stock convertible common stock immediately issuance november 2002 january 2003 preferred stock dividend 2003 2002 584 million 247 million respectively consisted stated 8 dividend 165 million 05 million respectively bcf 419 million 242 million respectively resulting loss income available common shareholders 1083 million 425 million 2003 2002 respectively basic earnings per common share eps generally calculated dividing income available common shareholders weighted average number common shares outstanding however preferred stock contains certain participation rights eitf topic d95 “effect participating securities computation basic earnings per share” “topic d95” requires dilutive effect securities included weighted average number shares outstanding furthermore topic d95 requires dilutive effect included basic eps may calculated using either ifconverted method twoclass method however dilutive effect preferred stock cannot less would result application twoclass method elected use ifconverted method calculating basic eps however 2003 reported eps calculated using twoclass method less eps calculated using ifconverted method diluted eps equals income available common shareholders divided weighted average common shares outstanding plus common share equivalents common share equivalents include stock options warrants dilutive effect calculated using treasury stock method preferred stock potential dilutive effect calculated using ifconverted method calculation basic diluted eps 2003 2002 presented 1 december 31 2002 preferred stock convertible 2933888 shares common stock however since 70 million preferred stock issued november 2002 number common share equivalents included eps calculation weighted actual time preferred stock outstanding year 2 30683 8761 year ended december 31 2003 29643 281 year ended december 31 2002 3 basic eps calculated twoclass method loss 275 year ended december 31 2003 however net loss period application twoclass method antidilutive accordingly reported basic eps calculated loss available common shareholders divided weighted average basic shares outstanding 4 effect stock options 2003 assumed conversion preferred stock 2003 2002 antidilutive therefore included calculation diluted eps adjusted pro forma amounts nongaap measures result spa acquisition 2003 results prepared accordance gaap comparable 2002 reported gaap results deferral amortization revenue recognition method certain directories published 2002 would recognized revenue 2003 however purchase accounting considerations precluded us recognizing directory revenue certain expenses associated directories published prior acquisition including january 2003 published directories accordingly reported 2003 gaap results indicative underlying operations financial performance accordingly management presenting adjusted results 2003 among things eliminate purchase accounting impact revenue certain expenses adjusted pro forma information 2002 assumes acquisition related financing occurred january 1 2002 management believes presentation adjusted pro forma information help readers better easily compare current period underlying operating results combined company performance would likely comparable prior period following adjusted pro forma amounts nongaap measures reconciled comparable gaap measures 1 represents revenue directories published prior acquisition including january 2003 published directories would recognized period purchase accounting adjustments required gaap 2 represents expenses directories published prior acquisition including january 2003 published directories would recognized period purchase accounting adjustments required gaap effect differences application accounting policies legacy spa donnelley 3 represents revenue recognized spa 2002 5457 million less commission revenue prepress publishing revenue spa included reported gaap amounts 498 million would eliminated intercompany revenues acquisition occurred january 1 2002 4 represents expenses recognized spa 2002 2533 million less commission prepress publishing expenses services provided us 447 million would eliminated intercompany expenses acquisition occurred january 1 2002 plus additional expense 83 million related required purchase accounting adjustment recorded increase acquired deferred directory costs fair value adjusted pro forma amounts also exclude 64 million restructuring reserve reversal investment impairment charge 20 million 5 represents depreciation amortization expense recognized spa 2002 85 million plus amortization expense intangible assets acquired acquisition assuming occurred january 1 2002 500 million 6 represents income cendon recognized donnelley included reported gaap amounts would eliminated intercompany income acquisition occurred january 1 2002 2003 adjusted revenue expenses compared 2002 adjusted pro forma revenue expenses components 2003 adjusted revenue 2002 adjusted pro forma revenue follows total adjusted net revenue 2003 5723 million increase 10 million 02 adjusted pro forma net revenue 5713 million 2002 deferral amortization method revenue recognition revenue directory advertising sales initially deferred directory published recognized ratably life directory typically 12 months increase adjusted gross directory advertising revenue result higher advertiser renewal rates solid performance two major markets nevada southwest florida offset weaker performance military markets due iraqi conflict generally weak regional economic conditions much year addition due deferral amortization method sales growth published directories amortized revenue life directory delays recognition publication sales recorded revenue reduction sales claims allowances result improved processes sales organization prepress services decrease prepress publishing fees 35 million result expiration third party prepress publishing contract ceased providing services first quarter 2003 adjusted operating ga expenses 2003 2755 million 58 million 21 pro forma operating ga expenses 2813 million 2002 similar deferral amortization method revenue recognition certain costs directly related selling production directories initially deferred incurred recognized ratably life directory decrease adjusted expenses 2003 primarily due lower bad debt expense 137 million resulting better expected collections due certain process improvements synergy savings combination spa operations donnelley’s 2003 102 million lower print paper distribution costs 93 million due lower paper prices printing expenses vendor costs decreases offset 85 million increased corporate costs due higher insurance premiums compensation governance costs related larger organization 76 million costs achieve synergies consolidation publishing technology operations sales offices administrative functions 73 million related headquarters relocation 43 million due increased advertising order bring advertising levels sprintbranded directories back historical levels 2002 adjusted partnership income 2003 1141 million decrease 30 million 26 adjusted pro forma partnership income 2002 1171 million decrease partnership income reflects decrease income dontech previously discussed adjusted operating income 2003 3451 million increase 28 million 08 adjusted pro forma operating income 2002 3423 million donnelley advertising sales publication sales management reviews evaluates value advertising sales directories published period “publication sales” primary sales performance measure directory advertising revenue driven publication sales management believes comparison publication sales directories one period another gives better indication underlying sales trends economic conditions business confidence comparison directory revenue recognized using deferral amortization method recognize directory revenue ratably life directory amount revenue recognized period directly related sales trends economic conditions business confidence period publication sales comparable “samestore” sales measure utilized disclosed many directory publishers thus facilitating comparison sales performance among publishers publication sales 2003 donnelley segment 5482 million 65 million 12 pro forma publication sales donnelley segment 5417 million 2002 increase publication sales resulted higher advertiser renewal rates solid performance two major markets nevada southwest florida results partially offset regional economic weakness weaker performance several military markets due troop deployment connection iraqi conflict publication sales nongaap measure comparable gaap measure related donnelley segment net revenue reconciliation publication sales net revenue reported accordance gaap presented dontech advertising sales calendar publication sales calendar sales agent sbc dontech recognizes commission revenue based annual value sales contract calendar sales period contract executed management reviews calendar sales dontech primary driver income dontech manages sale advertising customers directorybydirectory basis project basis project consists two directories geographic area organizes sales directories sales campaign accordingly changes beginning ending dates sales campaign actual sales recorded point campaign vary one period next variations timing factors cause calendar sales thus partnership income materially different prior comparative period income dontech consisted following dontech partnership income 2003 1141 million decreased 30 million 26 1171 million 2002 mainly due lower calendar sales dontech calendar sales 2003 3949 million 20 lower calendar sales 2002 4029 million result continued weak economy midwest 2003 competition local media market share dontech’s net income decreased 11 million 185 million 174 million addition revenue participation income received sbc decreased 19 million 20 967 million 2003 986 million 2002 decreases direct result reduction dontech’s calendar sales share dontech’s net income revenue participation derived publication sales management also utilizes publication sales evaluate sales performance dontech management believes measure provides better indication underlying sales trends economic conditions business confidence dontech markets comparison partnership income dontech publication sales dontech represent annual billing value sbc directories published period dontech sells advertising publication sales 2003 4024 million 158 million 38 2002 publication sales 4182 million decrease result continued weak economy midwest stagnant job growth competition local media market calendar sales publication sales nongaap measures comparable gaap measures related dontech partnership income reconciliation publication sales calendar sales partnership income provided year ended december 31 2002 compared year ended december 31 2001 company prior spa acquisition discussion relates results company years ended december 31 2002 2001 period leading independent sales agent prepress vendor yellow pages advertising services united states business organized two reportable operating segments dontech partnership directory advertising services “das” dontech segment affected spa acquisition description dontech segment see “ segment reporting” historical directory advertising services within das segment sold yellow pages advertising affiliated entities sprint performed prepress publishing services yellow pages directories exclusive sales agent greater orlando florida market “central florida” operating unit sprint exclusive sales agent nevada florida virginia north carolina cendon joint venture centel subsidiary sprint affiliates sold yellow pages advertising markets states received sales commissions advertising sold sprint cendon priority distribution membership interest cendon amount priority distribution earned based percentage cendon advertising sales material decline advertising sales markets could material adverse effect results operations financial condition das segment also included prepress publishing services provided sbc sprint respective yellow pages directories sold advertising separately negotiated contracts agreement sbc extends 2008 prior spa acquisition agreement sprint scheduled expire 2003 also provided prepress publishing services unaffiliated third party agreement expired end 2002 provided transition services 30 million 2003 revenue prepress publishing services operation accounted approximately 42 43 total consolidated revenue 2002 2001 respectively das also included information technology costs factors affecting comparability chinabig investment impairment charge 9 interest chinabig publishes yellow pages directories offers internet directory services people’s republic china november 2001 received independent third party valuation chinabig’s current business plan capital needs outlook profitability cash flow report commissioned chinabig valuation conducted connection proposed equity financing results valuation provided range possible estimated fair values chinabig implied fair value investment substantially lower carrying value 134 million accordingly impairment charge 114 million recorded 2001 write investment amount believed best estimate current fair value investment time reviewing chinabig’s 2002 operating results determined sufficient evidence exist support carrying value investment probability realizing value investment foreseeable future remote accordingly 2002 additional impairment charge 20 million recorded writeoff remaining book value investment restructuring special charge 2001 restructuring special charge 186 million recorded connection executive management employment transition arrangements expiration prepress publishing contract expected result elimination approximately 100 positions 2002 charge included • 99 million associated executive management transition arrangements including severance accrued pension benefits related costs • 33 million employee severance related costs • 44 million idle leased space morrisville publishing facility planned relocation corporate headquarters due excess capacity • 10 million professional fees writeoff assets longer considered useable result spa acquisition determined certain costs originally anticipated restructuring charge would incurred specifically idle leased space morrisville publishing facility would subsequently utilized planned severance related costs would significantly less corporate headquarters expected time relocated accordingly income 64 million recognized 2002 reversal 67 million original reserve partially offset charge 03 million additional costs paid connection executive management transition net revenue 2002 2001 revenue derived entirely das segment sales agent sprint earned commission revenue based annual billing value advertisements sold sprint directories period “sprint calendar sales” sales commission revenue recorded net estimate potential claims allowances also earned revenue providing prepress publishing services amount commission revenue recognized directly correlated sprint calendar sales recorded period managed sale advertising directorybydirectory basis organized directory sales campaign typical sales campaign lasts two five months ends approximately two months directory scheduled published therefore changes beginning ending dates sales campaign actual sales recorded point campaign vary one period next variations could caused sales commission revenue period materially different prior comparative period components net revenue 2002 2001 follows net revenue 2002 754 million compared 802 million 2001 net commission revenue decreased 11 million 2002 compared 2001 primarily due reversal 14 million sales claims allowances 2001 fees prepress publishing services declined 18 million primarily due reduction volumes resulting expiration prepress publishing contract december 2002 revenue 2002 2001 included fees billing services provided sbc salesrelated computer application services provided dontech calendar advertising sales commission revenue priority distribution income sprint revenue participation income sbc directly correlated value advertising sales made period table sets forth value advertising sold behalf sprint dontech sold behalf sbc periods noted dontech manages selling process manner similar manage selling process accordingly annual billing value advertisements sold sbc directories period “dontech calendar sales” vary one period next due changes beginning ending dates sales campaign actual sales recorded point campaign see reconciliation calendar sales nongaap measure net revenue comparable gaap measure respect das results partnership income comparable gaap measure respect dontech results calendar advertising sales segment 2002 2001 follows calendar sales 2002 5897 million compared 6079 million 2001 dontech calendar sales declined 47 2002 decline 2002 dontech calendar sales reflected continued advertiser uncertainty weak economic conditions competition changes servicing sales campaigns call customers closer time directories publish das calendar sales increased slightly 2002 compared 2001 began see signs markets may trending back towards historical growth levels publication advertising sales 2001 2002 management also reviewed analyzed value advertising sales behalf sprint dontech behalf sbc directories published period compared publication sales period publication sales directories published prior year period “same store sales” type metric believed comparison publication sales one period another gave indication underlying sales growth directories metric removed timing factors associated sales campaign however publication sales direct correlation reported revenue profitability indicated period calendar sales drive revenue profitability occur prior publication dates see reconciliation publication sales nongaap measure net revenue comparable gaap measure respect das results partnership income comparable gaap measure respect dontech results publication advertising sales segment 2002 2001 follows publication sales 2002 6029 million compared 6275 million 2001 2002 publication sales dontech declined 36 publication sales das declined 45 compared 2001 declines due difficult economic conditions reduced spending advertisers uncertainty caution small business market following events september 11 2001 two largest sales campaigns sprint’s las vegas sbc’s chicago consumer directories peak selling period immediately september 11th directories published early 2002 advertising sales value 2002 publications substantially value 2001 publications however since revenue profitability driven calendar sales shortfall 2002 las vegas chicago consumer directories reflected 2001 results directly impact revenue profitability 2002 reconciliation advertising sales net revenue reported accordance gaap calendar advertising sales publication sales nongaap financial measures comparable gaap measure das calendar sales publication sales net revenue previously described net revenue priority distribution income reported 2001 2002 accordance gaap directly correlated das calendar sales publication sales hand give indication underlying growth directories direct correlation reported net revenue priority distribution income reconciliation das advertising sales net revenue das calendar sales partnership income comparable gaap measure dontech calendar sales publication sales partnership income previously described revenue participation income received sbc donnelley’s share dontech profits directly correlated dontech calendar sales publication sales hand give indication underlying growth directories direct correlation reported partnership income reconciliation dontech publication sales dontech calendar sales partnership income expenses 2002 2001 follows operating expenses 2002 480 million compared 513 million 2001 decrease 2002 operating expenses compared 2001 primarily due favorable settlement 11 million cendon partnership advertiser receivables “cendon settlement” reduced headcount attrition morrisville facility 2002 settled cendon partnership accounts receivable issues approximately 21 million less amount reserved financial statements cover potential losses remaining 10 million benefit recognized partnership income established reserves receivable issues time became aware relevant facts circumstances party cendon partnership reserves established offset partnership income subsequent cendon restructuring reserves established charged expense accordingly reversal reserves established recorded accounts original reserve recorded ga expenses 120 million 2002 compared 466 million 2001 ga expenses 2001 include restructuring special charge 186 million investment impairment charge 114 million ga expenses 2002 include net reversal previously recognized restructuring special charges 64 million additional investment impairment charge 20 million see “factors affecting comparability restructuring special charge chinabig investment impairment charge” discussion amounts excluding items ga expense 2002 164 million compared 166 million 2001 ga benefited 2002 lower salary benefit costs due executive management transition savings offset 12 million expenses incurred connection spa acquisition majority acquisition related expenses capitalized part acquisition depreciation amortization expense 63 million compared 108 million 2002 2001 respectively depreciation amortization expense steadily declining 2002 result reduced capital spending including software development writeoff assets disposition businesses significant software development costs incurred morrisville prepress publishing operation 1995 1996 becoming fully amortized 2001 partnership income 2001 2002 partnership income included 50 share net income dontech revenue participation income sbc priority distribution membership interest cendon partnership income follows partnership income 2002 1369 million compared 1400 million 2001 partnership income dontech decreased 53 million 2002 primarily due decline dontech calendar sales 47 year previously stated dontech calendar sales declined due weakening economy low consumer confidence certain markets competition partnership income cendon increased 22 million 2002 partially due increase calendar sales coupled increase priority distribution rate 2002 129 132 partnership income 2002 also included 10 million benefit cendon settlement operating income operating income dontech includes 50 share net profits dontech revenue participation income sbc operating income das included results costs directly incurred constituent business unit less allocation certain shared expenses based estimated business usage general corporate represents overhead administrative costs allocated das business units operating income segment 2002 2001 follows operating income 2002 1460 million compared 1115 million 2001 operating income dontech decreased 53 million 2002 16 million 2001 see “partnership income” details decrease dontech operating income operating income das increased 53 million 2002 compared 2001 due higher sales sprint contractual increase priority distribution rate benefit cendon settlement increase partially offset reversal 14 million sales claims allowances 2001 das operating income also benefited lower software amortization expense significant amount investment software development made morrisville publishing facility 1995 1996 fully amortized 2001 general corporate costs 2002 consistent 2001 lower salary benefit costs executive management transition 2002 offset 12 million costs related acquisition spa interest taxes net interest expense 335 million compared 256 million 2002 2001 respectively interest expense 2002 included 127 million interest incurred 1825 million proceeds term loan b notes held escrow december 2002 anticipation spa acquisition interest expense excluding interest funds escrow 208 million 48 million lower 2001 due lower outstanding borrowings lower interest rates interest income 2002 20 million included 15 million income funds held escrow interest expense 2002 2001 benefited prepayments 65 million debt 2001 90 million debt 2000 effective tax rate 2002 2001 400 419 respectively adversely impacted chinabig investment impairment charges deductible income tax purposes charges represented capital losses offset capital gains charges also gave rise deferred tax asset realized offsetting future capital gains given current business portfolio projections future results believed probability generating future capital gains realize asset remote accordingly valuation allowance deferred tax asset relating chinabig investment established expense income expense income 2002 consisted 15 million charge related interest rate swap 10 million reversal remaining reserves related disposition businesses 2000 result thenpending repayment existing variable rate debt connection spa acquisition interest rate swap longer qualified hedge accounting treatment december 31 2002 accordingly charge 15 million previously recognized accumulated comprehensive loss balance sheet taken earnings 2002 calculation gain recorded 2000 disposition businesses included certain reserves established connection termination certain agreements bell atlantic reserves based best information available us time transaction december 31 2002 believed sufficient time elapsed since transaction additional costs would incurred accordingly remaining reserves 10 million reversed income 2002 net income available common shareholders net income 672 million compared 498 million 2002 2001 respectively dividend preferred stock whether paid cash allowed accrue reduces net income resulting net income available common shareholders 2002 net income reduced preferred stock dividend 247 million derive income available common shareholders 425 million amount preferred stock dividend includes stated 8 dividend 05 million pro rata period outstanding deemed dividend beneficial conversion feature 242 million bcf function conversion price preferred stock 2405 fair value warrants 53 million based black scholes model exercise price 2628 fair market value underlying common stock date issuance 2992 full amount bcf treated deemed dividend 2002 preferred stock convertible common stock immediately issuance additional bcf 382 million resulted issuance 130000 additional shares preferred stock gs funds january 2003 recorded deemed dividend first quarter 2003 earnings per share basic earnings per common share generally calculated dividing income available common shareholders weighted average number common shares outstanding however preferred stock contains certain participation rights topic d95 requires dilutive effect securities included weighted average number shares outstanding furthermore topic d95 requires dilutive effect included basic eps may calculated using either ifconverted method twoclass method however dilutive effect preferred stock cannot less would result application twoclass method diluted eps calculated dividing net income weighted average common shares outstanding plus common share equivalents common share equivalents include stock options warrants dilutive effect calculated using treasury stock method preferred stock potential dilutive effect calculated using ifconverted method calculation eps year ended 2002 follows 1 december 31 2002 preferred stock convertible 2933888 shares common stock however since 70 million preferred stock issued november 2002 number common share equivalents included eps calculation weighted actual time preferred stock outstanding year 2 29643 281 3 conversion preferred stock reflected calculation diluted eps effect antidilutive year ended december 31 2001 basic earnings per share calculated dividing net income weighted average common shares outstanding year diluted earnings per share calculated dividing net income weighted average common shares outstanding plus potentially dilutive common shares primarily stock options calculated using treasury stock method calculation eps year ended december 31 2001 follows liquidity capital resources connection spa acquisition entered new 1525 million credit facility consisting 500 million term loan 900 million term loan b 125 million revolver issued 325 million 8 78 senior notes 600 million 10 78 senior subordinated notes issued 200 million preferred stock gs funds used acquire spa pay transaction costs repurchase portion existing 9 18 senior subordinated notes due 2008 “preacquisition notes” pursuant tender offer repay former term facilities take advantage favorable market conditions ensure timely consummation spa acquisition december 2002 incurred debt received gross proceeds term loan b notes total gross proceeds 1825 million deposited held escrow pending closing spa acquisition additionally november 2002 issued 70000 shares preferred stock warrants purchase 577500 shares common stock gs funds gross proceeds 70 million january 3 2003 borrowed additional 510 million consisting 500 million term loan proceeds 10 million revolver also received proceeds 1825 million held escrow issued gs funds remaining 130 million preferred stock warrants purchase 1072500 shares common stock proceeds used acquire common stock spa repay existing debt pay transaction costs sources uses funds connection acquisition summarized follows 1 calculated prior application 1 closing payment fees december 8 2003 amended credit facility accomplish following objectives • obtain favorable pricing variable rate debt • adjust nonfinancial covenants make less restrictive corporate operating flexibility • obtain cash resources consent us redeem remaining outstanding preacquisition notes • obtain consent new term loan c potential borrowings 400 million proceeds borrowed used fund acquisitions retirement notes redemption equity subject certain limitations amendment credit facility created new term loan a2 replacing initial term loan created new term loan b2 replacing initial term loan b connection amendment borrowed additional 32 million term loan b2 proceeds used redeem balance preacquisition notes pay transaction costs including prepayment premium 89 million representing 1 term loan b balance outstanding date amendment credit facility accounted modification underlying debt instruments weighted average interest rate outstanding debt credit facility 39 december 31 2003 former term facilities 67 2002 amended credit facility bears interest option either credit facility amended indentures governing notes contain usual customary negative covenants among things place limitations ability incur additional indebtedness including capital leases liens ii pay dividends repurchase capital stock iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock subsidiaries credit facility also contains financial covenants relating maximum consolidated leverage minimum interest coverage minimum fixed charge coverage maximum senior secured leverage defined therein revolver term loan a2 mature december 2008 term loan b2 matures june 2010 substantially assets including capital stock subsidiaries pledged secure obligations credit facility january 3 2003 connection tender offer exit consent solicitation 1288 million preacquisition notes repurchased borrowed initial 1410 million credit facility contingent upon repurchase entire 150 million aggregate principal amount preacquisition notes proceeds used repurchase preacquisition notes required repaid lenders credit facility accordingly 212 million representing amount preacquisition notes remained outstanding following tender offer exit consent solicitation repaid lenders credit facility shortly consummation acquisition february 6 2004 utilizing proceeds term loan b2 redeemed remaining aggregate principal amount preacquisition notes totaling 212 million redemption price 104563 principal amount thereof plus accrued unpaid interest loss approximately 12 million recorded first quarter 2004 consisting premium par value paid redemption 10 million plus writeoff 02 million deferred financing costs preferred stock convertible time price 2405 cumulative dividend 8 compounded quarterly consent majority holders convertible preferred stock may pay dividends cash prior october 1 2005 subsequent october 1 2005 dividends preferred stock may paid cash subject limitations credit facility allowed accrue option credit facility may significantly limit ability pay dividends preferred stock cash warrants issued november 2002 exercise price 2628 warrants issued january 2003 exercise price 2862 warrants exercised time expire january 3 2008 intend issue treasury stock satisfy conversion preferred sock exercise warrants may redeem preferred stock cash time january 3 2006 market price defined common stock exceeds 200 conversion price 30 45 trading days preferred stock redeemable cash us time january 3 2013 preferred stock redeemable cash option gs funds event change control defined december 31 2003 redemption value preferred stock 2170 million convertible 9022798 shares common stock result spa acquisition significant amount debt service requirements significantly higher prior years aggregate outstanding debt december 31 2003 20921 million term loans a2 b2 require quarterly principal interest payments maturity notes require semiannual interest payments year ended december 31 2003 made scheduled principal payments 494 million prepaid additional 1935 million principal credit facility management’s present intention continue utilize excess free cash flow pay accelerated basis debt obligations credit facility year ended december 31 2003 aggregate cash interest payments 1677 million december 31 2003 77 million cash equivalents checks yet presented payment 67 million available borrowings revolver 1250 million 2003 periodically utilized revolver financing resource balance timing periodic accelerated payments made credit facility interest payments notes timing cash receipts operations present intention repay borrowings revolver timely manner keep outstanding amounts minimum primary source liquidity continue cash flows operations well available borrowing capacity revolver primary liquidity requirement fund operations principal interest payments debt ability meet debt service requirements depend ability generate cash flow future primary sources cash flow consist mainly cash receipts sale advertising yellow pages directories revenue participation payments cash distributions related dontech sources directly dependent value yellow pages advertising sold impacted among factors general economic conditions competition yellow pages directory publishers alternative products consumer confidence level demand yellow pages advertising believe cash flows operations along borrowing capacity revolver adequate fund operations capital expenditures meet debt service requirements least next 12 24 months however make assurances business generate sufficient cash flow operations sufficient borrowing available revolver enable us fund operations capital expenditures meet debt service requirements purposes cash provided operating activities 2003 2486 million increase 1986 million cash provided operating activities 500 million prior year increase primarily result spa acquisition publisher 260 revenuegenerating directories cash flows operating activities significantly increased 2003 key contributors cash flows operating activities 2003 include following • 2939 million decrease accounts receivable increase deferred directory revenue analyze change deferred revenue accounts receivable together directory published annual billing value directory initially deferred unbilled accounts receivable established month thereafter onetwelfth billing value recognized revenue billed customers connection spa acquisition record unrecognized revenue directories published prior acquisition january 2003 due purchase accounting acquire associated unbilled receivables rights bill collect receivables totaled approximately 250 million components adding generating cash flows include lower bad debts sales claims well improvements collection past due balances • 102 million increase cash received partnerships excess recorded partnership income representing source cash partnership income cash received 2003 consists 50 interest dontech’s net income revenue participation income sbc receive cash dontech sbc subsequent time record associated partnership income therefore periods declining dontech partnership income cash received related prior periods exceed income recognized current period partially offsetting sources cash following uses cash • 320 million increase assets primarily comprised deferred directory costs deferred directory costs represent cash payments certain costs associated publication directories since deferred directory costs initially deferred incurred cash payments made prior expense recognized cash used investing activities 2003 3779 million consists following • 22596 million cash payments acquire spa pay transaction costs see table detailing sources uses funds connection spa acquisition presented • 126 million used purchase fixed assets primarily computer equipment computer software cash provided financing activities 2003 1293 million includes following • 3124 million principal payments debt borrowed credit facility amount 494 million represents scheduled quarterly payments 1935 million represents principal payments made accelerated basis option excess cash flow generated operations • 214 million proceeds exercise employee stock options contractual obligations table presented sets forth annual commitments december 31 2003 principal payments debt well cash obligations next five years thereafter debt repayments presented table include scheduled principal payments current debt agreements include anticipated prepayments interest charges payment due period 1 included longterm debt amounts owed credit facility notes preacquisition notes preacquisition notes redeemed full february 6 2004 borrowings explained note 6 consolidated financial statements included item 8 annual report 2 enter operating leases normal course business substantially lease agreements fixed payment terms based passage time lease agreements provide us renewal early termination options future operating lease obligations would change exercised renewal early termination options entered additional operating lease agreements amounts table assume exercise renewal early termination options see note 12 consolidated financial statements included item 8 annual report 3 unconditional purchase obligation one vendor regarding purchase paper extends end 2006 purchase obligations based annual minimum quantities preestablished pricing amounts table reflect pricing minimum quantities contract market price paper drop preestablished pricing vendor obligated negotiate us lower paper price quantities used contractual minimums would increase payment obligations contractual obligations beyond 2006 4 defined benefit plan covering substantially employees funding policy contribute amount least equal minimum legal funding requirement contributions required threeyear period ended december 31 2003 based past performance uncertainty dollar amounts paid excluded amounts table unfunded postretirement plan provides certain healthcare life insurance benefits fulltime employees reach retirement age working company expected future benefit payments including administrative expenses net employee contributions included table item 7aitem 7 “management’s discussion analysis financial condition results operations” discussion items 2 financial data years ended december 31 2004 2003 include results spa directory business january 3 2003 net revenue net income loss income loss available common shareholders reflect purchase accounting adjustments precluded recognition revenue certain expenses associated directories published spa prior acquisition including january 2003 published directories see item 7 “management’s discussion analysis financial condition results operations” discussion items 3 connection sbc directory acquisition september 1 2004 spa acquisition january 3 2003 incurred significant amount debt issued preferred stock november 2002 borrowed funds certain debt instruments december 2002 therefore cash debt balances periods higher prior periods 4 eps amounts eps three months ended december 31 2004 differ reported current report form 8k filed sec february 25 2005 resulting update twoclass method used compute earnings per share item 7 management’s discussion analysis financial condition results operations item read conjunction audited consolidated financial statements notes thereto included item 8 unless otherwise indicated terms “company” “donnelley” “rhd” “we” “us” “our” refer rh donnelley corporation direct indirect wholly owned subsidiaries corporate overview leading yellow pages publisher directional media company directional media consumers search find sells goods services ready purchase publish sprint®branded yellow pages directories 18 states major markets including las vegas nevada orlando lee county florida total distribution approximately 18 million serving approximately 160000 local national advertisers also publish sbc®branded yellow pages directories illinois northwest indiana total distribution approximately 10 million serving approximately 100000 local national advertisers also offer online city guides search web sites major sprint markets best red yellow pages® brand wwwbestredypcom chicagoland area wwwchicagolandypcom also sell local advertising illinois northwest indiana onto wwwsmartpagescom sbc’s internet yellow pages platform september 1 2004 completed acquisition directory publishing business “sbc directory business” sbc communications inc “sbc” illinois northwest indiana including sbc’s interests dontech ii partnership “dontech” 5050 general partnership us sbc collectively “sbc directory acquisition” see “acquisitions sbc directory acquisition” description acquisition january 3 2003 completed acquisition directory publishing business “spa directory business” sprint corporation “sprint” acquiring outstanding common stock various entities comprising sprint publishing advertising “spa” collectively “spa acquisition” see “acquisitions spa acquisition” description acquisition acquisitions transformed donnelley leading publisher yellow pages directories prior spa acquisition one largest independent sales agents prepress vendors yellow pages advertising united states time 2002 revenue reflected sales commissions prepress fees transactions business partners including sprint sbc commencing 2003 following spa acquisition operating financial results reflect yellow pages publishing business rather former business sales agent prepress vendor yellow pages advertising behalf publishers publisher report full value advertising sales certain direct costs deferral amortization method dontech remained unchanged following spa acquisition investment dontech eliminated connection sbc directory acquisition september 1 2004 2003 2004 sbc directory acquisition continued earn revenue providing prepress publishing ancillary services relating sbc directory business continued report partnership income investment dontech third quarter 2004 following sbc directory acquisition revised historical segment reporting reflect change business reflect way management reviews analyzes business publishing yellow pages directories conducted one reportable operating segment prepress publishing services ancillary services previously performed behalf publishers performed entirely behalf directories publish result sbc directory acquisition sbc ceased paying us revenue participation income consolidate profits dontech partnership investment eliminated consequently partnership income longer reported commencing september 1 2004 accordingly previously reported dontech operating segment longer applicable see note 13 company’s audited consolidated financial statements included item 8 annual report “ segment reporting” information regarding company’s segments forwardlooking information certain statements contained annual report form 10k regarding donnelley’s future operating results performance business plans prospects statements constituting historical fact “forwardlooking statements” subject safe harbor created private securities litigation reform act 1995 possible words “believe” “expect” “anticipate” “should” “will” “would” “planned” “estimates” “potential” “goal” “outlook” “may” “predicts” “could” negative words comparable expressions used identify forwardlooking statements actual events results may differ materially evaluating statements specifically consider various factors including risks uncertainties discussed factors may cause actual results differ materially rhd’s forwardlooking statements forwardlooking statements attributable us person behalf expressly qualified entirety cautionary statement forwardlooking statements reflect current beliefs assumptions respect future results business plans prospects based solely information currently available us although believe expectations reflected forwardlooking statements reasonable cannot guarantee future results levels activity performance forwardlooking statements made date annual report except required federal securities laws rules regulations sec assume obligation update revise provide reasons actual results may differ risks uncertainties contingencies include without limitation following 1 ability meet substantial debt service obligations substantial amount debt significant debt service obligations due large part financings related sbc directory acquisition spa acquisition december 31 2004 total outstanding debt 31273 million 1338 million available revolver portion senior secured credit facility amended date “credit facility” january 14 2005 issued 300 million 6875 senior notes due 2013 “holdco notes” finance repurchase approximately 50 preferred stock certain investment partnerships affiliated goldman sachs group inc “gs funds” result significant amount debt service obligations face increased risks regarding among things following • ability obtain additional financing excess borrowing capacity 175 million revolving credit facility andor 400 million incremental borrowings potentially available term loans satisfactory terms fund working capital requirements capital expenditures acquisitions investments debt service requirements general corporate requirements limited • vulnerable general economic downturns competition industry conditions could place us competitive disadvantage compared competitors may less leveraged • face increased exposure rising interest rates portion debt variable interest rates • reduced availability cash flow fund working capital requirements capital expenditures acquisitions strategic initiatives investments general corporate requirements substantial portion cash flow needed service debt obligations • limited flexibility planning reacting changes business industry operate • agreements governing debt substantially limit ability access cash flow value subsidiaries therefore make payments debt • could material adverse effect business financial condition unable service debt obtain additional financing needed ability pay principal interest debt obligations depend upon future operating performance ability refinance debt unable service debt fund business may forced reduce delay capital expenditures defer refuse pursue certain strategic initiatives seek additional debt financing equity capital restructure refinance debt sell assets may able obtain additional financing refinance existing debt sell assets satisfactory terms 2 restrictive covenants debt preferred stock agreements indentures governing 325 million 8875 senior notes “senior notes” due 2010 600 million 10875 senior subordinated notes “subordinated notes” due 2012 holdco notes together senior notes subordinated notes collectively “notes” credit facility include number significant restrictive covenants could adversely affect us limiting ability obtain funds subsidiaries plan react market conditions meet capital needs covenants among things restrict ability subsidiaries • incur additional debt • pay dividends equity interests repurchase equity interests • make certain investments • enter certain types transactions affiliates • expand unrelated businesses • use assets security transactions • sell certain assets merge companies addition credit facility includes restrictive covenants prohibits us prepaying notes borrowings credit facility outstanding credit facility also requires us maintain certain financial ratios meet financial tests failure comply covenants could result event default cured waived could require us repay borrowings scheduled due date unable make repayment otherwise refinance borrowings lenders credit facility holders senior notes became secured connection amendment restatement credit facility sbc directory acquisition could foreclose substantially assets addition lenders could elect declare amounts borrowed credit facility together accrued interest due payable instances would event default indentures governing notes unable refinance borrowings favorable terms results operations financial condition could adversely impacted increased costs less favorable terms including higher interest rates restrictive covenants future refinancing credit facility likely contain similar restrictive covenants furthermore terms purchase agreement respect preferred stock restrict ability subsidiaries among things • incur additional debt • enter major corporate transactions • pay dividends shares common stock repurchase shares common stock • enter certain types transactions affiliates • sell acquire certain assets failure comply terms would result breach agreement could material adverse effect business 3 competition united states directory advertising industry highly competitive approximately 80 total united states directory advertising sales attributable regional bell operating company “rboc” incumbent directory publishers collectively rboc directory publishers incumbent publishers” typically publish directories licensors affiliates offer local phone service 240 independent yellow pages directory publishers operating united states compete incumbent publishers represent remaining market share nearly markets compete one yellow pages directory publishers predominantly independent publishers us business yell group ltd transwestern publishing company llc white publishing company believe acting exclusive official incumbent publisher directories incumbent local telephone company sbc sprint markets provides us competitive advantage independent publisher competitors see “business competition” discussion reasons believe competitive advantage independent publishers markets also compete incumbent publishers overlapping adjacent markets independent publishers many incumbent publishers compete larger us greater financial resources may able compete effectively publishers advertising sales acquisitions future also compete advertising sales traditional media including newspapers magazines radio direct mail telemarketing billboards television believe also sustain competitive advantage many competitors see “business competition” discussion reasons believe competitive advantage traditional media competitors many traditional media competitors larger us greater financial resources may able compete effectively companies advertising sales acquisitions future internet emerged new medium advertisers advances technology brought likely continue bring new participants new products new channels industry including increasing use electronic delivery traditional directory information electronic search enginesservices yellow pages directory advertising business subject changes arising developments technology including information distribution methods users’ preferences use internet wireless devices consumers means transact commerce may result new technologies developed services provided could compete traditional products services national search companies google yahoo focusing placing large priorities local commercial search initiatives growth future financial performance may depend ability develop market new products services create new distribution channels enhancing existing products services distribution channels incorporate latest technological advances accommodate changing user preferences including use internet wireless devices may able respond successfully developments online city guides “look feel” electronic directories search web sites also compete internet yellow pages directories independent incumbent directory publishers internet sites including available wireless applications provide classified directory information switchboardcom citysearchcom zagatcom search engines portals yahoo google msn others entered affiliate agreements major directory publishers may able compete effectively companies greater resources advertising sales acquisitions future addition market position telephone utilities including relationships may adversely impacted telecommunications act 1996 effectively opened local telephone markets increased competition addition federal communication commission rules regarding local number portability advances communications technology wireless devices voice internet protocol demographic factors potential shifts younger generations away wireline telephone communications towards wireless communications technologies may erode market position telephone utilities including sprint sbc result possible sprint andor sbc remain primary local telephone service provider local service areas either sprint sbc longer primary local telephone service provider particular local service area license exclusive publisher market use sprint sbc brand name case may directories market may valuable presently anticipate may realize existing benefits commercial arrangements sprint sbc sprint recently announced may spin local telephone operations merger nextel communications consummated contractual arrangements sprint provide successor local telephone business must enter substantially similar arrangements us remaining term agreement sprint possible spinoff could material adverse effect results operations financial condition spunoff business perform well would remained part larger company sbc’s proposed acquisition att yet raised issues regarding value contractual relationship sbc cannot assure form ramifications transaction would material adverse effect financial condition results operations 4 usage printed yellow pages directories changes technology 1997 2000 overall references print yellow pages directories united states declined however overall references print yellow pages directories remained relatively stable 2000 2004 believe past decline primarily result demographic shifts among consumers particularly increase households english primary language spoken also believe past decline attributable increased usage internetbased directory products particularly businesstobusiness retail categories well proliferation large retail stores consumers businesses may reference yellow pages believe next several years references print yellow pages directories may gradually decline users may increasingly turn digital interactive media delivery devices local commercial search information decline usage could • impair ability maintain increase advertising prices • cause businesses purchase advertising yellow pages directories reduce discontinue purchases • discourage businesses purchase advertising yellow pages directories factors may contribute decline usage print directories combination could impair revenues material adverse effect business yellow pages directory advertising business subject changes arising developments technology including information distribution methods users’ technological preferences use internet consumers means transact commerce may result new technologies developed services provided could compete products services result factors growth future financial performance may depend ability develop market new products services create new distribution channels enhancing existing products services distribution channels incorporate latest technological advances accommodate changing user preferences including use internet may able provide services internet successfully compete successfully internetbased directory services addition fail anticipate respond adequately changes technology user preferences unable finance capital expenditures necessary respond changes results operations financial condition could materially adversely affected 5 integration sbc directory business operations integration sbc directory business operations involves number risks including • difficulty integrating operations • diversion management attention • potential disruption ongoing business unknown reactions combination acquired business donnelley vendors customers key constituencies • difficulties assimilating employees technologies services products acquired business • inability retain key personnel • inability successfully incorporate acquired business components existing infrastructure • inability maintain uniform standards controls procedures policies intend invest significantly sbc directory business could reduce future earnings cash flow funds invest sbc directory business may sufficient improve operating performance business historical levels despite completed transition billing collection functions possible advertisers may confused change billing party andor less likely pay us directory advertising pay provider local phone service accordingly cannot provide assurance bad debt levels increase result billing collection transition unable effectively integrate operations timely efficient manner may realize benefits expected sbc directory acquisition failure overcome risks problems encountered connection sbc directory acquisition could slow growth andor lower quality services could reduce customer demand 6 impact bankruptcy proceedings sprint sbc term respective commercial arrangements contract rights directory services license agreement trademark license agreement noncompetition agreement sprint affiliates directory services license agreement noncompetition agreement sbc affiliates constitute substantial portion commercial arrangements sprint sbc case may pursuant commercial arrangements exclusive directory publisher sprint markets sprint provided telephone service time relevant agreements sbc illinois northwest indiana bankruptcy case commenced sprint sbc case may possible part applicable agreements could considered executory contract could therefore subject rejection sprint sbc case may trustee appointed bankruptcy case pursuant section 365 section 1123 united states bankruptcy code one agreements rejected applicable agreement may specifically enforceable case would unsecured claim damages sprint sbc case may breach contract resulting rejection applicable directory services license agreement rejected would among things longer entitled sprint’s sbc’s case may exclusive publisher telephone directories affected markets could also lose right use sprint’s andor sbc’s name logo case may enforce provisions applicable agreements right license trademarks successor local exchange carriers sprint sbc markets case may applicable noncompetition agreement rejected specific enforcement available sprint sbc case may would among things longer precluded publishing print telephone directories selling certain advertising respective applicable restricted markets connection spa acquisition sprint created bankruptcy remote special purpose vehicle form limited liability company contributed assigned trademarks licensed us trademark license agreement limited liability company operating agreements limited liability company require among things board managers entity include one independent manager unaffiliated sprint consent independent manager required entity take certain actions including among things commencement bankruptcy proceeding trademarks contributed limited liability company rights trademark license agreement subject rejection event bankruptcy proceeding involving sprint unless also bankruptcy proceeding involving limited liability company although believe likelihood entity subject bankruptcy proceeding limited structure governing provisions operating agreement trademark license agreement rejected bankruptcy proceeding would lose right use sprint brand name former spa directories publish markets sbc directory acquisition bankruptcy remote special purpose vehicles established relatively susceptible bankruptcy risk respect commercial arrangement sbc affiliates although management believes sbc’s credit rating financial position significantly better sprint time spa acquisition loss rights arrangements sprint affiliates sbc affiliates may material adverse effect financial condition results operations 7 inability enforce noncompetition agreements sprint sbc connection spa acquisition sbc directory acquisition sprint sbc entered noncompetition agreement us sprint noncompetition agreement prohibits sprint markets sprint provided local telephone service time transaction selling local directory advertising producing publishing distributing print directories certain limited exceptions sbc noncompetition agreement prohibits sbc producing publishing distributing print directories illinois northwest indiana selling local national directory advertising directories selling local internet yellow pages advertising certain internet yellow pages directories licensing certain sbc marks third party purpose subject limited exceptions however state federal law covenant compete enforceable • extent necessary protect legitimate business interest party seeking enforcement • unreasonably restrain party enforcement sought • contrary public interest enforceability noncompetition covenant determined court based facts circumstances specific case time enforcement sought reason possible us predict whether extent court would enforce either sprint sbc’s covenants compete us term noncompetition agreement court determine noncompetition agreement unenforceable sprint sbc case may could compete directly us previously restricted markets inability enforce noncompetition agreement sprint sbc could material adverse effect financial condition results operations 8 early termination commercial arrangements sprint sbc commercial arrangements sprint sbc initial term 50 years subject specified automatic renewal early termination provisions commercial arrangements sprint sbc may terminated prior stated term certain specified circumstances times may beyond reasonable control andor may require extraordinary efforts incurrence material excess costs part order avoid breach applicable agreement possible arrangements remain place full stated term may unable avoid potential breaches defaults commercial arrangements remedy exercised sprint sbc case may arrangements sprint sbc could material adverse effect financial condition results operations 9 future changes directory publishing obligations illinois northwest indiana pursuant directory services license agreement sbc required discharge sbc’s regulatory obligation publish white pages directories covering service territory illinois indiana markets acquired sbc directory business staff state public utility commission illinois indiana impose additional changed legal requirements service territories respect obligation would obligated comply requirements behalf sbc even compliance increase publishing costs pursuant directory services agreement sbc generally obligated reimburse us increase costs publishing directories satisfy sbc’s publishing obligations results operations relative competing directory publishers could adversely affected able increase revenues cover unreimbursed compliance costs directory services license agreement sprint generally provides sprint reimburse us material increases costs relating complying sprint’s directory publishing obligations sprint markets 10 transition services arrangements sbc connection sbc directory acquisition entered transition services agreement sbc affiliates sbc continue perform certain functions behalf sbc directory business primary transition services provided sbc affiliates agreement include certain information technology support certain marketing services certain prepress publishing distribution services certain customer service billing collection services substantially functions assumed us various times third quarter 2005 certain performance standards estimated costs specified transition services agreement expect sbc appropriately discharge obligations agreement consistent specified standards estimated costs control sbc assurance functions successfully executed timely basis expend extraordinary efforts material costs excess estimated transition services agreement interruption services extraordinary efforts costs could material adverse effect financial condition results operations one critical functions performed sbc transition services agreement related billing collection agreement local sbc telephone company billed collected local advertising customers illinois northwest indiana directories remitted collections net specified holdback us early 2005 monthly basis commencing september 1 2004 sbc provided advance us related receivables recorded advance sbc decreased sbc collected advertisers thus satisfying liability early 2005 assumed responsibility billing collections settled remaining amounts sbc despite completed transition billing collection functions possible advertisers may confused change billing party andor less likely pay us directory advertising pay provider local phone service accordingly cannot provide assurance bad debt levels increase result billing collection transition 11 reliance extension credit small mediumsized businesses approximately 85 directory advertising revenue derived selling advertising small mediumsized businesses ordinary course yellow pages publishing business extend credit advertisers advertising purchases small mediumsized businesses however tend fewer financial resources higher failure rates large businesses proliferation large retail stores may continue harm small mediumsized businesses believe limitations significant contributing factors advertisers given year renew advertising following year addition full partial collection delinquent accounts take extended period time consequently could adversely affected dependence extension credit smalland mediumsized businesses 12 dependence thirdparty providers printing distribution delivery services depend third parties printing distribution directories party two contracts rr donnelley printing directories printing one largest costs items accounting approximately 10 total operating general administrative expenses although contracts expire december 2005 december 2007 large print volume specialized binding directories limited number companies capable servicing printing needs accordingly inability unwillingness rr donnelley provide printing services us acceptable terms could material adverse effect business common ownership business affiliation exists rr donnelley us party contracts three companies distribution directories although contracts scheduled expire various times may 2005 february 2007 vendors may terminate contract us upon 120 days’ written notice limited number companies capable servicing delivery needs accordingly inability unwillingness current vendors provide delivery services us acceptable terms could material adverse effect business 13 fluctuations price availability paper principal raw material paper currently contract four vendors purchasing paper agreements expire various times december 31 2005 december 31 2006 pursuant contract obtain great majority paper extends december 31 2006 price paper set inception increases various dates term agreement market price paper drop set prices contract parties obligated negotiate good faith lower paper price subject delays receiving principal raw material changes supply demand paper could affect market prices delivery times paper one largest cost items accounting approximately 5 7 total operating general administrative expenses cannot assure available necessary raw materials reasonable prices increases paper costs would material adverse effect business results operations financial condition 14 sale advertising national accounts coordinated third parties control approximately 15 directory advertising revenues derived sale advertising national large regional companies rental car companies automobile repair shops pizza delivery businesses generally purchases advertising several directories substantially revenue derived national accounts serviced certified marketing representatives “cmrs” contract cmrs independent third parties act agents national companies design advertisements arrange placement advertisements directories provide billing services result relationships national advertisers depend significantly performance third party cmrs control although believe relationships cmrs mutually beneficial cmrs established relationships unable unwilling business us acceptable terms inability unwillingness could materially adversely affect business 2003 began acting cmr directly placing certain national advertising possible development could adversely impact relationships cmrs expose us possible legal claims cmrs also subject credit risk cmrs contract 15 general economic factors business results could adversely affected prolonged national regional economic recession derive substantially net revenue sale advertising directories typically advertising revenues well yellow pages publishers general fluctuate widely economic cycles however prolonged national regional economic recession could material adverse effect business operating results financial condition result may experience lower expected revenues business future addition residual economic effects uncertainties regarding • general possibility express threat future occurrence terrorist related disruptive events • united states’ continuing expanded involvement war especially respect major markets operate depend heavily upon travel tourism military could adversely affect business including operations sbc directory business expect approximately 45 net revenues derived sale sbcbranded directory advertising related products services illinois northwest indiana midwest economy particularly chicago relatively slower recover economic recession many parts country many markets especially many nevada florida markets sbc directory acquisition moderated dependence risk associated heavily touristdriven economies increased exposure risk associated slower growth midwest economy result may experience lower previously expected revenue growth future 16 turnover among sales force key management ability achieve business plan depends significant extent ability identify hire train retain qualified sales personnel regions operate expend significant amount resources management time identifying training sales representatives sales managers ability attract retain qualified sales personnel depends numerous factors including factors outside control conditions local employment markets operate decrease number sales representatives sales managers could adversely affect results operations financial condition liquidity well ability service debt furthermore depend continued services key personnel including experienced senior management team well regional sales management personnel although believe could replace senior management team key employees within reasonable time period need arise loss key personnel could material adverse effect business 17 loss important intellectual property rights trademarks “sprint” “sbc” “donnelley” brand names intellectual property rights important business rely upon combination copyright trademark laws well contractual arrangements including licensing agreements particularly respect sprint sbc markets establish protect intellectual property rights required time bring lawsuits third parties protect intellectual property rights similarly time party proceedings whereby third parties challenge rights cannot sure lawsuits actions brought us successful found infringe intellectual property rights third parties although aware material infringements trademark rights significant business lawsuits regardless outcome could result substantial costs diversion resources could material adverse effect business financial condition results operations addition rights use sprint sbc name logos certain markets loss important intellectual property rights trademarks could material adverse effect upon business financial condition results operations 18 information technology modernization effort process upgrading modernizing legacy amdocs process management infrastructure amdocs’ igen platform integrated webbased fully scalable set business applications expect modernization effort permit us advance digital local commercial search integrated media strategy effectively efficiently capturing organizing local market content modernization effort complicated expected take next 15 18 months fully implement modernization effort may experience disruption business cannot assure disruption caused modernization effort materially adversely affect business addition expect incur approximately 20 million capital expenditures approximately 5 million expenses next 18 months connection modernization effort higher historical levels capital expenditures represents funds would otherwise available repay debt strategic general corporate purposes acquisitions sbc directory acquisition september 1 2004 completed sbc directory acquisition 141 billion cash working capital adjustments settlement 30 million liquidation preference owed us related dontech finance acquisition amended restated credit facility consists 700 million term loan a2 1650 million term loan b2 175 million revolving credit facility “revolver” aggregate facility 2525 million connection transaction entered directory services license agreement noncompetition agreement smartpages reseller agreement directory publishing listing agreement collectively “sbc directory services agreements” certain affiliates sbc directory services license agreement designates us official exclusive provider yellow pages directory services sbc successors illinois northwest indiana “territory” grants us exclusive license obligation specified agreement produce publish distribute white pages directories territory sbc’s agent grants us exclusive license obligation specified agreement use sbc brand logo print directories territory noncompetition agreement prohibits sbc affiliates successors certain limited exceptions 1 producing publishing distributing yellow white pages print directories territory 2 soliciting selling local internet yellow pages advertising inclusion directories 3 soliciting selling local internet yellow pages advertising certain internet yellow pages directories territory licensing sbc marks third party purpose smartpages reseller agreement gives us exclusive right sell local internet yellow pages advertising nonexclusive right sell internet yellow pages advertising respect geographies outside territory advertiser excluding national advertisers located inside territory onto sbc’s smartpagescom platform successor products specified agreement directory publishing listing license agreement gives us right purchase use basic sbc subscriber listing information updates purpose publishing directories sbc directory services agreements interrelated smartpages reseller agreement initial term 50 years subject automatic renewal early termination specified circumstances smartpages reseller agreement term 5 years sbc directory acquisition accounted purchase business combination purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values acquisition date results sbc business included consolidated results september 1 2004 allocation purchase price fair value assets acquired liabilities assumed shown table purchase price allocation reflects initial allocation subsequent purchase price adjustments made 2004 anticipate significant changes fair value net assets acquired additional information could come attention may require us revise purchase price allocation spa acquisition january 3 2003 completed spa acquisition 223 billion cash including postacquisition working capital adjustments finance acquisition entered new 1525 million credit facility consisting 500 million term loan 900 million term loan b 125 million revolver also issued senior notes senior subordinated notes additionally issued 200 million preferred stock warrants purchase 1650000 shares common stock gs funds take advantage favorable market conditions ensure timely consummation spa acquisition issued senior notes senior subordinated notes borrowed term loan b december 2002 total gross proceeds 1825 million deposited held escrow pending spa acquisition closing issued 70 million preferred stock warrants purchase 577500 shares common stock exercise price 2628 per share november 2002 gs funds closing spa acquisition issued remaining 130 million preferred stock warrants purchase 1072500 shares common stock exercise price 2862 per share gs funds additionally borrowed term loan 10 million revolver closing date connection spa acquisition entered directory services license agreement trademark license agreement noncompetition agreement sprint collectively “spa directory services agreements” directory services license agreement grants us exclusive license obligation specified agreement produce publish distribute directories sprint successors markets sprint provided local telephone service trademark license agreement grants us exclusive license obligation specified agreement use certain sprint trademarks including sprint diamond logo markets noncompetition agreement prohibits sprint affiliates successors markets selling local directory advertising producing publishing distributing print directories certain limited exceptions spa directory services agreements interrelated initial term 50 years subject automatic renewal early termination specified circumstances spa acquisition accounted purchase business combination purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values acquisition date results spa business included consolidated results january 3 2003 allocation purchase price fair value assets acquired liabilities assumed shown table purchase price allocation reflects initial allocation subsequent purchase price adjustments made 2003 segment reporting revised historical segment reporting reflect change business resulted sbc directory acquisition reflect management reviews analyzes business publishing yellow pages directories conducted one reportable operating segment prepress publishing services ancillary services previously performed behalf others performed entirely behalf directories publish result sbc directory acquisition sbc ceased paying us revenue participation income consolidate net profits dontech partnership investment eliminated consequently partnership income longer reported commencing september 1 2004 accordingly previously reported dontech operating segment longer applicable 2003 reportable segments donnelley dontech donnelley segment included revenue sprintbranded yellow pages directories prepress publishing services contract sbc operating administrative expenses dontech segment included revenue participation income sbc 50 interest net profits dontech critical accounting estimates preparation financial statements accordance generally accepted accounting principles “gaap” requires management estimate effect various matters inherently uncertain date financial statements estimates varies regard level judgment involved potential impact company’s reported financial results estimates deemed critical different estimate could reasonably used changes estimate reasonably likely occur period could materially impact company’s financial condition changes financial condition results operations company’s significant accounting polices discussed note 2 consolidated financial statements included item 8 annual report critical estimates inherent accounting polices discussed management believes current assumptions considerations used estimate amounts company’s consolidated financial statements appropriate allowance doubtful accounts sales claims record revenue net allowance sales claims addition record provision bad debts provision bad debts allowance sales claims estimated directory based historical experience also evaluate current condition customer balances bankruptcy filings change credit policy historical chargeoff patterns recovery rates data determining allowance doubtful accounts reserve review estimates periodically assess whether additional adjustment needed based economic events circumstances including actual experience end billing collection cycle respect directory believe allowance doubtful accounts sales claims adequate cover anticipated losses current conditions however significant deterioration factors noted overall economy could materially change expectations provisions sales claims doubtful accounts estimated based percentage revenue accordingly additional 1 change allowance percentages would impacted 2004 gaap net income approximately 36 million 2004 adjusted pro forma net income 63 million see “adjusted pro forma amounts nongaap measures” description reconciliation adjusted pro forma net income reported gaap net income pension benefits pension plan obligations related assets company’s defined benefit retirement plans related dontech employees sbc directory business presented note 10 consolidated financial statements plan assets consist primarily marketable equity debt instruments valued using market quotations plan obligations annual pension expense determined independent actuaries use number assumptions key assumptions measuring plan obligations include discount rate future salary increases longterm expected return plan assets determining discount rate consider yields highquality fixedincome investments maturities corresponding anticipated timing benefit payments salary increase assumptions based upon historical experience anticipated future management actions asset returns based upon anticipated average rate earnings expected invested funds plan longrun december 31 2004 weightedaverage actuarial assumptions discount rate 575 longterm rate return plan assets 825 assumed salary increases 366 net periodic pension costs recognized 2004 40 million 1 change discount rate would affect net income approximately 08 million 1 change longterm rate return plan assets would affect net income approximately 07 million 1 change assumed salary increases would affect net income approximately 04 million intangible assets goodwill valuation amortization intangible assets consist directory services agreements company sprint sbc respectively established customer relationships trademarks trade names resulting spa acquisition sbc directory acquisition intangible assets amortized period assets expected contribute cash flow company reflect expected pattern benefit recorded goodwill resulted spa acquisition sbc directory acquisition subject amortization intangible assets subject impairment test accordance statement financial accounting standards 144 accounting impairment disposal longlived assets “sfas 144” goodwill subject impairment test accordance statement financial accounting standards 142 goodwill intangible assets “sfas 142” company reviews carrying value intangible assets impairment least annually frequently whenever events circumstances indicate carrying amount may recoverable impairment test intangible assets performed comparing carrying amount intangible assets sum undiscounted expected future cash flows accordance sfas 144 impairment exists sum future undiscounted cash flows less carrying amount intangible asset related group assets impairment would result writedown intangible asset estimated fair value based discounted future cash flows goodwill tested impairment comparing carrying amount reporting unit assigned estimated fair value reporting unit accordance sfas 142 impairment exists carrying amount reporting unit less estimated fair value impairment would result writedown equal difference carrying amount estimated fair value reporting unit used certain estimates assumptions impairment evaluation including limited projected future cash flows revenue growth customer attrition levels estimated writeoffs december 31 2004 management believes impairment intangible assets goodwill however significant deterioration business assumptions underlying impairment evaluations overall economy could result impairment charges future reporting periods aggregate net book value intangible assets goodwill december 31 2004 impaired 1 net income reported gaap adjusted pro forma basis 2004 would adversely impacted approximately 195 million see “adjusted pro forma amounts nongaap measures” description reconciliation adjusted pro forma net income reported gaap net income additionally management must assess whether remaining useful lives intangible assets represent period intangible assets expected contribute cash flow assessment process used certain estimates assumptions including projected future cash flows customer attrition levels industry economic conditions accordance sfas 142 evaluate remaining useful lives annually determine whether events circumstances warrant revision remaining period amortization estimated remaining useful lives change remaining carrying amount intangible asset would amortized prospectively revised remaining useful life year ended december 31 2004 amortization intangible assets approximately 573 million remaining useful lives intangible assets shortened 10 net income reported gaap adjusted pro forma basis 2004 would adversely impacted approximately 30 million 51 million respectively see “adjusted pro forma amounts nongaap measures” description reconciliation adjusted pro forma net income reported gaap net income new accounting pronouncements new accounting pronouncements december 16 2004 fasb issued fasb statement 123 revised 2004 “sharebased payment” “fas 123r” fas 123r requires companies calculate fair value stock options granted employees amortize amount vesting period expense income statement accounting provisions fas 123r effective interim periods beginning june 15 2005 companies choice transition methods modified prospective modified retrospective early adoption company presently evaluating transition method effective date transition fas 123r 2005 impact adoption fas 123r may company may 2004 financial accounting standards board issued financial staff position “fsp” fas 1062 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 provides guidance accounting effects medicare prescription drug improvement modernization act 2003 employers sponsor postretirement healthcare plans provide drug benefits act introduces prescription drug care benefits medicare also allows certain sponsors postretirement benefit plans drug benefit receive nontaxable federal subsidy certain criteria met fsp requires interim annual period financial statements beginning june 15 2004 include effect subsidy measurement net periodic postretirement benefit costs adopted provisions fsp fourth quarter 2004 resulted decrease accumulated postretirement benefit obligation approximately 43 million results operations year ended december 31 2004 compared year ended december 31 2003 factors affecting comparability acquisitions result sbc directory acquisition spa acquisition related financings associated purchase accounting 2004 reported gaap results comparable 2003 reported gaap results additionally considerations respect sbc directory acquisition also affect comparability 2004 2005 reported gaap results deferral amortization method revenue recognition billable value directories published recognized revenue subsequent reporting periods however purchase accounting precluded us recognizing directory revenue certain expenses associated directories published prior acquisition including directories published month acquisition completed thus reported 2004 2003 gaap results indicative underlying operating financial performance accordingly management presenting adjusted pro forma information among things eliminates purchase accounting impact revenue expenses acquisition assumes sbc directory acquisition related financing occurred beginning 2003 management believes presentation adjusted pro forma information help financial statement users better easily compare current period underlying operating results combined company performance would likely comparable prior period adjusted pro forma amounts disclosed caption “adjusted pro forma amounts nongaap measures” elsewhere nongaap measures reconciled comparable gaap measures caption believe adjusted pro forma results reasonably represent results businesses combined full years 2003 2004 differences application accounting policies practices company acquired entities management believe adjusted pro forma amounts strictly comparable necessarily indicative results future periods sbc directory acquisition reported 50 share dontech net income partnership income consolidated statement operations partnership income also included revenue participation income sbc revenue participation income based dontech advertising sales recognized sales contract executed customer upon sbc directory acquisition sbc ceased paying us revenue participation income consolidate net profits dontech partnership investment eliminated consequently commencing september 1 2004 longer report partnership income 2003 2004 sbc directory acquisition earned revenue prepress publishing ancillary services related sbc directory business continued report partnership income investment dontech relocation integration charges 2004 expenses include 73 million related relocation corporate offices cary north carolina 25 million related acquisition integration sbc directory business 11 million sales offices relocation expenses related spa acquisition 2003 expenses include severance moverelated charges 73 million relating relocation corporate offices cary north carolina 76 million consolidation publishing technology operations sales offices administrative staff connection spa acquisition gaap reported results net revenue components net revenue 2004 2003 follows following sbc directory acquisition substantially revenue derived directory publishing business sbc directory acquisition dontech accounted equity method directory advertising revenue earned primarily sale advertising yellow pages directories publish net sales allowances revenue directory advertising sales recognized deferral amortization method whereby revenue advertising sales initially deferred directory published recognized ratably directory’s life typically 12 months sbc directory acquisition also earned prepress publishing fees respect services rendered behalf sbc sbcbranded directories publish fees income recognized earned total net revenue 2004 6031 million compared 2564 million 2003 primary increase total net revenue 2004 result purchase accounting related spa acquisition adversely impacted 2003 results due purchase accounting directory revenue year ended december 31 2003 excluded amortization publication sales sprintbranded directories published february 2003 deferral amortization method totaling 3159 million would reported 2003 absent purchase accounting total revenue 2004 also includes 291 million net revenue sbcbranded directories published following sbc directory acquisition purchase accounting related sbc directory acquisition also negatively impacted 2004 results transaction closed september 1 2004 impact material 2004 results purchase accounting related spa acquisition 2003 results purchase accounting related sbc directory acquisition continue adversely impact reported revenue 2005 additionally expect net revenue 2005 significantly higher 2004 due full year results acquired sbc directory business revenue prepress publishing salesrelated computer application services 2004 130 million compared 222 million 2003 decrease prepress publishing fees result company longer providing services sbc following sbc directory acquisition support internally sbcbranded directories publish additionally prepress publishing fees 2003 totaling 25 million reflect fees earned third party prepress publishing contract ceased providing services first half 2003 comparable revenue earned 2004 revenue includes late fees paid outstanding customer balances commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain products fees telephone companies publishing information pages increase revenue primarily due sbc directory acquisition expenses components total expenses 2004 2003 follows substantially expenses derived directory publishing business sbc directory acquisition dontech accounted equity method began recognizing expenses related sbc directory business september 1 2004 certain costs directly related selling production directories initially deferred recognized ratably life directory costs include sales commissions print paper initial distribution costs expenses recognized incurred operating expenses total operating expenses 2004 2632 million compared 1592 million 2003 primary components 1040 million increase operating expenses 2004 compared 2003 follows increase operating expenses 2004 primarily result purchase accounting impacts 2003 related spa acquisition precluded reporting revenue related spa directories published february 2003 similar deferral amortization method revenue recognition certain costs directly related selling production directories initially deferred incurred recognized ratably life directory due elimination spa’s deferred costs directories published preacquisition including january 2003 required purchase accounting reported operating expenses 2003 include certain expenses associated directories totaling approximately 745 million year ended december 31 2003 due adjustments directory expenses year december 31 2003 include amortization deferred directory costs relating directories published beginning february 2003 2004 operating expenses also impacted sbc transaction result sbc directory acquisition completed september 1 2004 incurred incremental selling manufacturing indirect expenses approximately 242 million last four months 2004 support operations newly acquired business purchase accounting related sbc directory acquisition also impacted 2004 results transaction closed september 1 2004 impact material 2004 results purchase accounting related spa acquisition 2003 results result purchase accounting required gaap recorded deferred directory costs related directories scheduled publish subsequent spa acquisition sbc directory acquisition fair value determined estimated billable value published directory less b expected costs complete directories plus c normal profit margin refer purchase accounting entry “cost uplift” fair value costs 2004 determined 813 million 148 million sbc directory acquisition spa acquisition respectively costs amortized operating expenses terms applicable directories amortization totaled 142 million 2004 related sbc directory acquisition spa acquisition amortized 36 million cost uplift 2004 compares 112 million 2003 related spa acquisition decrease 76 million year ended december 31 2004 also incurred approximately 54 million additional selling expenses compared 2003 due improved sales results spa markets additional expenses primarily included commissions sales person costs sales management costs 2004 incurred additional marketing advertising costs 33 million compared 2003 support spa sbc businesses advertising expense year ended december 31 2004 includes 11 million advertising costs pertain 2003 partially offsetting cost increases net publishing information technology costs lower approximately 100 million 2004 primarily due elimination duplicate facility associated operational costs resulting integration spa acquisition majority duplicative costs eliminated second half 2003 purchase accounting resulting sbc directory acquisition continue impact reported expenses 2005 expect operating expenses 2005 significantly higher 2004 due full year results acquired sbc directory business general administrative expenses general administrative “ga” expenses 2004 595 million compared 530 million 2003 increase 65 million primary components 65 million increase ga expenses 2004 compared 2003 follows 65 million increase ga expenses primary impacted 72 million incremental ga expense support acquired sbc directory business consisted increased billing credit collection expenses 32 million 40 million ga expenses including financial services human resources administration services ga expenses also impacted 19 million costs related compliance sarbanesoxley initiatives comparable expenses 2003 increases offset 37 million lower severance relocation expenses associated spa sbc directory acquisitions expenses related relocation company’s corporate headquarters 2004 compared 2003 recorded 70 million expenses 2004 related relocation corporate offices cary north carolina compared 73 million 2003 2004 ga expenses also included 25 million acquisition integrationrelated costs sbc transaction offsetting increased costs 2003 included 70 million charge related shutdown duplicative facilities resulting spa acquisition compared similar charges 11 million 2004 related relocation sprint sales offices expect ga expenses 2005 significantly higher 2004 due full year results acquired sbc directory business depreciation amortization depreciation amortization “da” 2004 666 million compared 658 million 2003 amortization intangible assets 573 million 2004 compared 498 million 2003 increase amortization expense due increase intangible assets resulting sbc directory acquisition expect amortization expense 2005 significantly higher 2004 due full year impact related intangible assets acquired connection sbc directory acquisition depreciation fixed assets amortization computer software 93 million 2004 compared 160 million 2003 decrease primarily due acceleration depreciation certain fixed assets computer software acquired connection spa acquisition 2003 partnership income 2004 2003 partnership income related 50 share net income dontech accounted equity method revenue participation income sbc sales agent sbc dontech earned commission revenue based annual value local sales contracts executed period “calendar sales” also earned revenue participation income sbc based amount dontech calendar sales period result sbc directory acquisition sbc ceased paying us revenue participation income consolidate net profits dontech thus dontech partnership investment eliminated accordingly commencing september 1 2004 longer report partnership income partnership income 780 million 2004 compared 1141 million 2003 decrease partnership income 2004 primarily result longer recognizing partnership income following sbc directory acquisition operating income result sbc directory acquisition company one operating segment management views evaluates one segment sole source ebitda operating income company need allocate resources among different segments operating income 2004 2003 follows operating income 2004 2917 million increased 1992 million operating income 925 million 2003 increase due primarily effects spa acquisition related purchase accounting revenues expenses described net revenue 2003 2564 primarily resulting spa acquisition offset operating expenses 2003 2780 million also primarily result spa acquisition primary reason costs relating acquired spa business increased revenue 2003 directory advertising revenue deferred deferral amortization method portion total costs related publication directories deferred deferral amortization method therefore purchase accounting entire balance deferred revenue deferred directory costs eliminated time spa acquisition disproportionately higher impact revenue expenses accordingly adjustments required purchase accounting operating expenses 2003 disproportionately higher related revenue effects purchase accounting eliminated adjusted operating income 2003 would substantially higher relatively proportional 2003 net revenues see “ adjusted pro forma amounts nongaap measures” additionally reasons described partnership income decreased 361 million 2004 purchase accounting related sbc directory acquisition also negatively impacted 2004 results transaction closed september 1 2004 impact material 2004 results purchase accounting related spa acquisition 2003 results purchase accounting sbc directory acquisition continue adversely impact reported results 2005 additionally expect operating income significantly higher 2005 2004 due full year results acquired sbc directory business interest expense net interest expense 2004 1755 million compared 1800 million 2003 decrease net interest expense 45 million result lower outstanding debt balances first eight months 2004 combined lower interest rates 2004 2003 partially offset substantial increase debt incurred connection sbc directory acquisition september 1 2004 impact interest expense associated additional borrowings used finance sbc directory acquisition expected greater 2005 due impact additional borrowings entire period interest expense 2004 also includes 12 million charge resulting redemption 2004 remaining 9125 senior subordinated notes due 2008 see “ liquidity capital resources” description debt obligations provisions related debt instruments net interest expense 2004 includes 136 million noncash amortization deferred financing costs compared 150 million noncash amortization deferred financing costs 2003 income expense net december 2002 charge 15 million recorded reclassify earnings cumulative change fair value swap previously recognized accumulated comprehensive loss balance sheet due loss hedge accounting treatment 2003 recognized corresponding gain 15 million swap matured june 2003 see item 7a “qualitative quantitative disclosures market risk” additional information interest rate swap agreements provision benefit income taxes 2004 provision income taxes 459 million comprised current tax benefit 256 million deferred tax provision 715 million 2004 current tax benefit based effective tax rate 395 net operating losses approximately 724 million related tax deductions connection spa acquisition sbc directory acquisition 2004 deferred tax provision 715 million primarily related difference amortization expense recorded tax purposes compared book purposes respect intangible assets acquired connection spa acquisition sbc directory acquisition remaining federal net operating loss carryforward 734 million begin expire 2023 remaining state net operating loss carryforwards 2490 million begin expire 2008 2003 tax benefit 360 million comprised current tax provision 42 million deferred tax benefit 402 million 2003 tax benefit 360 million based effective tax rate 418 net operating losses approximately 1760 million related tax deductions connection spa acquisition 2003 deferred tax benefit primarily related tax benefit recognized respect tax net operating loss generated 2003 partially offset deferred tax provision related difference amortization recorded tax purposes compared book purposes respect intangible assets acquired connection spa acquisition net income loss income loss available common shareholders earnings loss per share net income 2004 703 million compared net loss 500 million 2003 results 2003 adversely affected purchase accounting precluded us recognizing deferred revenue certain expenses associated directories published prior spa acquisition including january 2003 published directories purchase accounting related sbc directory acquisition also negatively impacted 2004 results transaction closed september 1 2004 impact material 2004 results purchase accounting related spa acquisition 2003 results purchase accounting sbc directory acquisition continue adversely impact reported results 2005 dividend 8 redeemable convertible cumulative preferred stock “preferred stock” reduces net income increases net loss resulting income loss available common shareholders earnings per share amounts calculated amount preferred stock dividend includes stated 8 dividend plus deemed dividend beneficial conversion feature “bcf” bcf function conversion price preferred stock fair value related warrants issued preferred stock fair market value underlying common stock date issuance preferred stock connection issuance preferred stock subsequent quarterly accrued dividend bcf recorded fair value underlying common stock time issuance preferred stock greater conversion price preferred stock full amount bcf treated deemed dividend preferred stock convertible common stock immediately issuance january 2003 preferred stock dividend 2004 2003 218 million 584 million respectively consisted stated 8 dividend 179 million 165 million respectively bcf 39 million 419 million respectively bcf recorded 2003 significant bcf amounts recorded subsequent periods reflecting issuance preferred stock related warrants january 2003 resulting income loss available common shareholders 485 million 2004 compared 1084 million 2003 march 2004 emerging issues task force “eitf” reached final consensus eitf issue 036 participating securities twoclass method fasb statement 128 “eitf 036” established standards regarding computation earnings per share “eps” companies issued securities common stock contractually entitle holder participate dividends earnings company eitf 036 effective interim periods ending june 30 2004 calendar year companies adopted provisions eitf 036 first quarter 2004 eitf 036 requires earnings available common shareholders period deduction preferred stock dividends allocated common preferred shareholders based respective rights receive dividends basic eps calculated dividing income loss allocable common shareholders weighted average number shares outstanding eitf 036 require presentation basic diluted eps securities common stock therefore following eps amounts pertain common stock guidance eitf 036 diluted eps calculated dividing income loss allocable common shareholders weighted average common shares outstanding plus dilutive potential common stock potential common stock includes stock options warrants dilutive effect calculated using treasury stock method preferred stock dilutive effect calculated using converted method calculation basic diluted eps years ended december 31 2004 2003 presented 1 31268 9483 year ended december 31 2004 computing basic eps using twoclass method allocated loss available common shareholders year ended december 31 2003 common preferred shareholders since preferred shareholders contractual obligation share net loss 2 934 stock options 2003 assumed conversion preferred stock 9767 9023 shares common stock 2004 2003 respectively antidilutive therefore included calculation diluted eps 3 eps amounts differ reported current report form 8k filed sec february 25 2005 resulting update twoclass method used compute earnings per share adjusted pro forma amounts nongaap measures result sbc directory acquisition spa acquisition related financings associated purchase accounting 2004 reported gaap results comparable 2003 reported gaap results additionally considerations respect sbc directory acquisition also affect comparability 2004 2005 reported gaap results deferral amortization method revenue recognition billable value directories published recognized revenue subsequent reporting periods however purchase accounting precluded us recognizing directory revenue certain expenses associated directories published prior acquisition including directories published month acquisition completed thus reported 2004 2003 gaap results indicative underlying operating financial performance accordingly management presenting adjusted pro forma information among things eliminates purchase accounting impact revenue expenses acquisition assumes sbc directory acquisition related financing occurred beginning 2003 management believes presentation adjusted pro forma information help financial statement users better easily compare current period underlying operating results combined company performance would likely comparable prior period adjusted pro forma amounts disclosed elsewhere nongaap measures reconciled comparable gaap measures believe adjusted pro forma results reasonably represent results businesses combined full years 2003 2004 differences application accounting policies practices company acquired entities management believe adjusted pro forma amounts strictly comparable necessarily indicative results future periods 1 represents revenue sbcbranded directories published prior sbc directory acquisition plus september 2004 published directories would recognized period purchase accounting required gaap 2 represents expenses sbcbranded directories published prior sbc directory acquisition plus september 2004 published directories would recognized period purchase accounting required gaap b dontech’s selling operational expenses prior september 1 2004 eliminated consolidation upon sbc directory acquisition c certain differences application accounting policies practices rhd acquired entities additionally result purchase accounting recorded deferred directory costs related directories scheduled publish subsequent sbc directory acquisition fair value impact costs also removed 3 represents additional depreciation amortization expense related tangible identifiable intangible assets acquired sbc directory acquisition estimated useful lives 4 represents elimination equity accounting used account rhd’s 50 ownership dontech revenue participation income sbc recognized prior sbc directory acquisition 5 represents revenue sprintbranded directories published prior spa acquisition plus january 2003 published directories would recognized period purchase accounting required gaap 6 represents expenses sprintbranded directories published prior spa acquisition plus january 2003 published directories would recognized period purchase accounting required gaap also includes effect differences application accounting policies practices legacy spa company additionally result purchase accounting recorded deferred directory costs related directories scheduled publish subsequent spa acquisition fair value impact costs also removed 2004 adjusted pro forma revenue compared 2003 adjusted pro forma revenue components 2004 adjusted pro forma revenue 2003 adjusted pro forma revenue follows 1 represents gross revenue sales claims allowances directories published prior sbcbranded directory acquisition plus september 2004 published directories would recognized period purchase accounting required gaap 2 represents elimination prepress publishing fees reported prior sbc directory acquisition eliminated consolidation upon sbc directory acquisition 3 represents revenue primarily consisting commissions earned sales contracts published publishers’ directories yellow pages internetbased advertising product revenue recognized earned 4 represents gross revenue sales claims allowances sprintbranded directories published prior spa acquisition plus january 2003 published directories would recognized period purchase accounting required gaap total adjusted pro forma net revenue 2004 10339 million increase 11 million 01 adjusted pro forma net revenue 10328 million 2003 deferral amortization method revenue recognition revenue directory advertising sales initially deferred directory published recognized ratably life directory typically 12 months modest decrease adjusted gross directory advertising revenue result higher revenue sprint directories particularly nevada florida offset decline revenue sbc directories due past declines publication sales amortizing revenue current periods due deferral amortization method billable value published directories amortized revenue life directory delays recognition publication sales recorded revenue gaap basis reduction sales claims allowances primarily result 20 million favorable reduction claims allowances recognized sbc prior sbc directory acquisition due improved experience 2004 adjusted pro forma expenses operating income compared 2003 adjusted pro forma expenses operating income year ended december 31 2004 adjusted pro forma operating ga expenses decreased 154 million 36 4172 million adjusted pro forma operating ga expenses 4326 million 2003 primary components 154 million decrease adjusted pro forma expenses 2004 compared 2003 follows adjusted pro forma bad debt expense 121 million lower 2003 due primarily improved collections experience relating sbcbranded directories 100 million combined 21 million additional favorable adjustments sprintbranded directories compared 2003 publishing information technology costs 100 million lower 2004 primarily due elimination duplicate facilities associated operational costs 2003 resulting integration spa acquisition additionally 2003 sbc directory business recorded 84 million allocations corporaterelated administration costs included 2004 expenses due sbc directory acquisition print paper costs sbcbranded directories 19 million lower 2004 compared 2003 due lower print volumes adjusted pro forma expenses relocation severance integration costs 37 million lower 2004 compared 2003 adjusted pro forma expenses 2004 included 70 million related relocation corporate offices cary north carolina compared 73 million 2003 2004 adjusted pro forma expenses also included 25 million acquisition integrationrelated costs sbc transaction offsetting increased costs 2003 adjusted pro forma expenses included 70 million charge related shutdown duplicative facilities resulted spa acquisition compared similar charges 11 million 2004 related relocation sprint sales offices offsetting lower 2004 expenses 134 million adjustment resulting lower operating expense 2003 compared 2004 due elimination consolidated adjusted pro forma results sales agency expense paid sbc dontech recorded revenue sbc deferred expense recognized life publications related dontech recorded revenue period revenue resulting timing difference due different accounting treatment sbc dontech resulted net reduction 2003 operating expense 134 million eliminate sales agency expense pro forma adjusted expenses additionally 2004 adjusted pro forma sales expenses 54 million higher 2003 primarily due better sales performance sprint directories certain larger markets sarbanesoxley compliance 2004 also resulted approximately 19 million expenses corresponding expense 2003 expect adjusted operating ga expenses higher 2005 adjusted pro forma operating ga expenses 2004 due increased investments online directories digital initiatives increased advertising promotional activities illinois expected adoption sfas 123r increase compensation expense 2005 adjusted pro forma depreciation amortization “da” 2004 854 million compared 954 million 2003 depreciation fixed assets amortization computer software lower 2004 66 million due acceleration depreciation certain fixed assets computer software acquired connection spa acquisition 2003 adjusted pro forma operating income 2004 5313 million increase 265 million 52 adjusted pro forma operating income 2003 5048 million reflecting expense decreases advertising sales publication sales management reviews evaluates value advertising sales directories published period “publication sales” primary sales performance measure management believes comparison publication sales directories one period next gives better indication underlying sales trends economic conditions business confidence comparison directory revenue recognized using deferral amortization method recognize directory revenue ratably life directory deferral amortization amount revenue recognized period directly related sales trends economic conditions business confidence period publication sales similar “samestore” sales measure events occur current period affect comparability publication sales prior year period changes directory publication dates prior year publication sales amounts adjusted conform current period presentation publication sales sprintbranded directories 2004 5672 million 147 million 27 publication sales 5525 million 2003 publication sales sbcbranded directories 2004 4632 million 21 publication sales 4731 million 2003 increase sprintbranded publication sales resulted higher recurring advertising major sprint markets directories published 2004 results partially offset weaker performance certain smaller sprint markets decrease sbcbranded publication sales resulted continued softness chicago area economy lessthanoptimal execution investment sbc directory business result dontech structure prior sbc directory acquisition due timing sales campaign cycles determine publication sales substantially 2004 sbcbranded publication sales substantial portion first quarter 2005 sbcbranded publication sales completed prior sbc directory acquisition publication sales nongaap measure comparable gaap measure net revenue reconciliation publication sales net revenue reported accordance gaap presented year ended december 31 2003 compared year ended december 31 2002 factors affecting comparability spa acquisition spa acquisition related financing associated accounting 2003 results prepared accordance gaap comparable 2002 gaap results previously reported also purchase accounting rules precluded us recognizing revenue certain expenses directories published prior acquisition including january 2003 published directories revenue certain expenses reported 2003 representative revenue certain expenses would reported 2003 absent purchase accounting adjustments accordingly addition discussion reported 2003 gaap results compared reported 2002 gaap results also providing comparison 2003 adjusted results among things exclude effect purchase accounting deferred revenue certain expenses 2002 adjusted pro forma results assumes acquisition occurred january 1 2002 detailed discussion 2003 adjusted revenue certain expenses versus 2002 adjusted pro forma revenue certain expenses comparable well detailed discussion advertising sales drive revenue see “ adjusted pro forma amounts nongaap measures” relocation integration charges 2003 expenses included severance moverelated charges 73 million relating relocation corporate offices cary north carolina 76 million consolidation postacquisition publishing technology operations sales offices administrative staff restructuring special charge results 2002 included net benefit 67 million reversal remaining restructuring reserves recorded 2001 restructuring actions completed 2002 additionally results 2002 included 20 million impairment charge writeoff remaining investment chinabigcom limited “chinabig” net revenue components net revenue 2003 2002 follows revenue derived entirely donnelley segment since dontech accounted equity method subsequent spa acquisition revenue directory advertising sales recognized deferral amortization method whereby revenue advertising sales initially deferred directory published recognized ratably directory’s life typically 12 months prepress publishing fees revenue recognized earned total net revenue 2003 2564 million compared 754 million 2002 increase total net revenue 2003 result spa acquisition date acquisition january 3 2003 revenue earned primarily sale advertising yellow pages directories published 2003 totaling 2308 million net sales allowances result acquisition became publisher 260 sprintbranded directories publisher earn entire value sales contract advertiser subject allowance sales claims prior acquisition sales agent earned commission advertising sales contract recognized advertiser signed contract earned revenue 44 directories opposed 260 directories published 2003 2002 net revenue represented commissions earned sales agent advertising sales made behalf spa totaling 427 million net allowances sales claims revenue prepress publishing services 222 million 2003 compared 311 million 2002 decrease 89 million primarily due consolidation spa’s operating results beginning 2003 expiration contract third party directory publisher ceased outsourcing prepress publishing services us first quarter 2003 2002 earned 70 million fees prepress services provided spa earned 73 million third party prepress publishing contract expired continued provide transition services third party publisher march 2003 recognized 30 million revenue 2003 revenue 2003 2002 included fees salesrelated computer application services rendered dontech behalf sbc result spa acquisition 2003 also began recording revenue late fees paid outstanding customer balances sales directories fees telephone companies publishing information pages activities accounted difference revenue 2003 2002 expenses components total expenses 2003 2002 follows reported expenses derived entirely donnelley segment since dontech accounted equity method certain costs directly related selling production directories initially deferred recognized ratably life directory operating expenses total operating expenses 2003 1592 million compared 480 million 2002 increase operating expenses primarily result operating expenses spa business acquired 2003 operating expenses included results publisher 260 directories whereas 2002 expenses included expenses incurred prior role sales agent 44 directories expenses incur publisher directories significantly greater expenses incurred sales agent however due elimination spa’s deferred revenue deferred costs 2002 january 2003 directories required purchase accounting reported expenses 2003 include certain expenses associated directories therefore operating expenses prospectively higher 2003 addition direct sales costs 2003 459 million higher 2002 due increase number sales offices size local sales force national sales operations publisher also incur costs related printing distribution directories purchasing paper marketing advertising customer service incur sales agent 2002 expenses 2003 functions 363 million higher 2002 publishing information technology expenses 2003 224 million higher 2002 due production additional spa directories related acquisition larger workforce bad debt expense 2003 lower 2002 principally due better expected collections result significant process improvements billings collections partially offset bad debt expense recognized publisher general administrative expenses general administrative “ga” expenses 2003 530 million compared 120 million 2002 increase general administrative expenses primarily attributable incremental costs related former spa business 136 million costs relating relocation corporate offices cary north carolina 73 million higher corporate costs larger organization 85 million due higher insurance premiums compensation governance costs addition 2003 expenses included 51 million costs related consolidation publishing technology operations sales offices administrative staff general administrative expenses 2002 reflect net benefit 64 million reversal remaining restructuring reserves initially recorded 2001 depreciation amortization depreciation amortization “da” 2003 658 million compared 63 million 2002 increase 2003 primarily result amortization totaling 500 million intangible assets acquired spa acquisition 2002 donnelley significant intangible assets therefore incur significant amortization expense depreciation fixed assets amortization computer software 160 million 2003 62 million 2002 increase primarily due acceleration depreciation certain fixed assets acquired spa acquisition partnership income partnership income 2003 included 50 share net income dontech accounted equity method revenue participation income sbc sales agent sbc dontech earned commission revenue based annual value sales contracts executed period “calendar sales” also earn revenue participation income based amount calendar sales period partnership income 2002 also included priority distribution membership interest cendon llc “cendon” result spa acquisition acquired remaining membership interests cendon accordingly became sole owner cendon longer receive priority distribution income rather results cendon included consolidated statements operations partnership income 1141 million 2003 compared 1369 million 2002 1171 million dontech 198 million priority distribution income cendon time part das segment decrease partnership income dontech due slow economic recovery stagnant job growth competitive local media environment chicagoland markets operating income operating income segment years ended december 31 2003 2002 follows reported operating income 2003 925 million decreased 535 million operating income 1460 million 2002 decrease due primarily effects spa acquisition related purchase accounting revenues expenses described net revenue increased 2003 1810 million 2002 net revenue primarily resulting spa acquisition offsetting increase net revenue increase operating expenses 2003 2117 million also primarily result spa acquisition primary reason costs relating acquired business increased 2003 revenues directory advertising revenue deferred deferral amortization method portion total costs related publication directories deferred deferral amortization method therefore purchase accounting entire balance deferred revenue deferred directory costs eliminated time spa acquisition disproportionately higher impact revenues expenses accordingly adjustments required purchase accounting operating expenses 2003 disproportionately higher related revenue effects purchase accounting eliminated adjusted operating income 2003 would substantially higher relatively proportional increase net revenues compared gaap operating income 2002 see “adjusted pro forma amounts nongaap measures” additionally acquired spa business also resulted increased general administrative costs 410 million depreciation amortization 595 million 2003 compared 2002 including amortization acquired intangible assets also contributing lower operating income 2003 compared 2002 decrease partnership income described interest expense net interest expense 2003 1800 million compared 335 million 2002 interest expense 2003 significantly higher result substantial debt incurred connection spa acquisition see “ liquidity capital resources” description debt obligations provisions related debt instruments interest expense 2003 includes 150 million noncash amortization deferred financing costs consisting 24 million deferred costs expensed connection preacquisition debt extinguished 2003 126 million amortized deferred costs related current outstanding debt 31 million related accelerated principal payments 2003 net interest expense 2002 335 million included 127 million interest incurred 1825 million debt raised contemplation spa acquisition excluding amount interest expense 208 million reflective outstanding preacquisition debt 2002 income expense net income 2003 represents 15 million gain hedging activities december 31 2002 75 million notional value interest rate swap qualify hedge accounting treatment due thenpending repayment existing variable rate debt connection spa acquisition december 2002 charge 15 million recorded reclassify earnings cumulative change fair value swap previously recognized accumulated comprehensive loss balance sheet due loss hedge accounting treatment gain 15 million recognized earnings 2003 time swap matured expense 2002 consists 15 million charge related interest rate swap agreement net 10 million reversal remaining reserves related disposition businesses 2000 see item 7aitem 7 “management’s discussion analysis financial condition results operations” discussion items 3 connection att directory acquisition september 1 2004 spa acquisition january 3 2003 incurred significant amount debt issued preferred stock november 2002 borrowed funds certain debt instruments december 2002 therefore cash debt balances periods higher prior periods 4 january 14 2005 repurchased 100303 shares outstanding preferred stock gs funds 2772 million cash connection preferred stock repurchase recorded reduction income available common shareholders consolidated statements operations 1337 million reflect loss repurchase shares year ended december 31 2005 5 october 3 2005 entered agreement repurchase remaining shares preferred stock held gs funds connection agreement accreted carrying value preferred stock redemption value 3341 million december 31 2005 accretion preferred stock totaling 2110 million recorded increase loss available common shareholders consolidated statements operations year ended december 31 2005 january 27 2006 repurchased remaining 100301 shares preferred stock gs funds 3361 million cash including accrued cash dividends interest 6 total assets well certain balance sheet amounts reported press release dated february 22 2006 preliminary subject change pending filing annual report differ amounts included annual report resulting reclassification deferred tax accounts press release included exhibit current report form 8k furnished sec february 22 2006 item 7 management’s discussion analysis financial condition results operations item read conjunction audited consolidated financial statements notes thereto included item 8 unless otherwise indicated terms “company” “donnelley” “rhd” “we” “us” “our” refer rh donnelley corporation direct indirect wholly owned subsidiaries significant business developments january 31 2006 acquired outstanding common stock dex media inc “dex media” purchase price 41 billion consisting 36547381 shares common stock valued 22 billion 19 billion cash “dex media merger” also assumed dex media’s outstanding indebtedness fair value 57 billion dex media exclusive publisher “official” yellow pages white pages directories qwest communications international inc “qwest” qwest primary local exchange carrier “lec” prior dex media merger dex media leading directory publisher united states see “acquisitionsdex media merger” description merger purpose dex media merger take step transformation rhd leading publisher yellow pages directories well combine complementary strengths companies january 27 2006 conjunction stock purchase support agreement signed october 3 2005 repurchased remaining 100301 shares outstanding 8 convertible cumulative preferred stock “preferred stock” investment partnerships affiliated goldman sachs group inc “gs funds” 3361 million cash including accrued cash dividends interest “gs repurchase” based terms stock purchase support agreement repurchase preferred stock became probable event october 3 2005 requiring recorded value preferred stock accreted redemption value accretion redemption value 2005 totaled 2110 million recorded increase net loss available common shareholders consolidated statements operations year ended december 31 2005 subsequent gs repurchase outstanding shares preferred stock see item 8 “financial statements supplementary data note 17 subsequent events” description gs repurchase january 2005 repurchased 100303 shares outstanding preferred stock gs funds 2772 million cash connection preferred stock repurchase recorded reduction earnings available common shareholders consolidated statements operations comprehensive income 1337 million reflect loss repurchase shares yearended december 31 2005 corporate overview following closing dex media merger third largest print online directory publisher united states based revenue 2006 expect total annual distribution approximately 80 million serving 600000 local national advertisers 625 directories 28 states 2005 dex media published 293 directories printed approximately 52 million copies directories distribution virtually business residential customers throughout following dex media states arizona colorado idaho iowa minnesota montana nebraska new mexico north dakota oregon south dakota utah washington wyoming dex media’s internetbased directory dexonlinecom tm bundled dex media’s print product provide webbased access dex media’s directories expands distribution dex media’s advertiser content addition acquired dex media directory business publish sprintbranded directories 18 states major markets including las vegas nevada orlando lee county florida total distribution approximately 18 million serving approximately 160000 local national advertisers also publish att formerly known “sbc”branded directories illinois northwest indiana total distribution approximately 10 million serving approximately 100000 local national advertisers also offer online city guides search web sites sprint markets best red yellow pages brand wwwbestredypcom chicagoland area wwwchicagolandypcom forwardlooking information certain statements contained annual report form 10k regarding donnelley’s future operating results performance business plans prospects statements constituting historical fact “forwardlooking statements” subject safe harbor created private securities litigation reform act 1995 possible words “believe” “expect” “anticipate” “should” “will” “would” “planned” “estimates” “potential” “goal” “outlook” “may” “predicts” “could” negative words comparable expressions used identify forwardlooking statements actual events results may differ materially evaluating statements specifically consider various factors including risks uncertainties discussed factors may cause actual results differ materially rhd’s forwardlooking statements forwardlooking statements attributable us person behalf expressly qualified entirety cautionary statement forwardlooking statements reflect current beliefs assumptions respect future results business plans prospects based solely information currently available us although believe expectations reflected forwardlooking statements reasonable cannot guarantee future results levels activity performance forwardlooking statements made date annual report except required federal securities laws rules regulations sec assume obligation update revise provide reasons actual results may differ risks uncertainties contingencies include items disclosed item 1a annual report acquisitions dex media merger january 31 2006 completed dex media merger purchasing outstanding common stock dex media purchase price 41 billion pursuant merger agreement issued outstanding share dex media common stock converted 1230 cash 024154 share rhd common stock resulting aggregate cash value 19 billion aggregate stock value 22 billion based 36547381 newly issued shares rhd common stock additionally assumed dex media’s outstanding indebtedness january 31 2006 fair value 57 billion acquired dex media directory business operates dex media inc one direct wholly owned subsidiaries finance dex media merger issued 660 million 6875 senior discount notes due january 15 2013 gross proceeds 6005 million 1210 million 8875 senior notes due january 15 2016 pay cash portion purchase price dex media stockholders connection dex media merger assumed operation law 1 publishing agreement term 50 years commencing november 8 2002 subject automatic renewal additional oneyear terms grants us right exclusive official directory publisher listings classified advertisements qwest’s telephone customers geographic areas dex media states qwest provides local telephone services 2 noncompetition agreement term 40 years commencing november 8 2002 pursuant qwest agreed sell directory products consisting principally listings classified advertisements subscribers geographic areas dex media states qwest provides local telephone service 3 advertising agreement whereby qwest agreed purchase aggregate 20 million advertising per year 2017 us pricing terms least favorable offered similar large customers 4 intellectual property contribution agreement pursuant qwest assigned licensed us qwest intellectual property previously used qwest directory services business 5 trademark license agreement pursuant qwest license granted us right november 2007 use qwest dex qwest dex advantage marks connection directory products related marketing material dex media states right use marks connection dexonlinecom dex media merger accounted purchase business combination first quarter 2006 purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values january 31 2006 results dex media business included consolidated results commencing february 1 2006 purchase accounting rules assume deferred revenue balance dex media january 31 2006 amount represented revenue would recognized 2006 deferral amortization revenue recognition method dex media merger occurred accordingly never record revenue associated directories published prior dex media merger although deferred revenue balance eliminated retain rights associated collection amounts due obligations advertising contracts executed prior dex media merger result dex media’s accounts receivable balances remain assets also purchase accounting rules assume deferred directory costs january 31 2006 related directories published prior dex media merger costs represented operating expenses would recognized 2006 deferral amortization method dex media merger occurred att directory acquisition september 1 2004 completed att directory acquisition 141 billion cash working capital adjustments settlement 30 million liquidation preference owed us related dontech finance acquisition amended restated credit facility consisting 700 million term loan a2 1650 million term loan b2 175 million revolving credit facility “revolver” aggregate facility 2525 million connection att directory acquisition entered directory services license agreement noncompetition agreement internet yellow pages reseller agreement directory publishing listing agreement collectively “att directory services agreements” certain affiliates att directory services license agreement designates us official exclusive provider yellow pages directory services att successors illinois northwest indiana “territory” grants us exclusive license obligation specified agreement produce publish distribute white pages directories territory att’s agent grants us exclusive license obligation specified agreement use att brand logo print directories territory noncompetition agreement prohibits att affiliates successors certain limited exceptions 1 producing publishing distributing yellow white pages print directories territory 2 soliciting selling local national yellow white pages advertising inclusion directories 3 soliciting selling local internet yellow pages advertising certain internet yellow pages directories territory licensing att marks third party purpose internet yellow pages reseller agreement gives us exclusive right sell local internet yellow pages advertising nonexclusive right sell internet yellow pages advertising respect geographies outside territory advertiser excluding national advertisers located inside territory onto yellowpagescom platform successor products specified agreement directory publishing listing license agreement gives us right purchase use basic att subscriber listing information updates purpose publishing directories att directory services agreements interrelated internet yellow pages reseller agreement initial term 50 years subject automatic renewal early termination specified circumstances internet yellow pages reseller agreement term 5 years att directory acquisition accounted purchase business combination purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values acquisition date results att business included consolidated results september 1 2004 allocation purchase price fair value assets acquired liabilities assumed shown table purchase price allocation reflects initial allocation subsequent purchase price adjustments made 2005 spa acquisition january 3 2003 completed spa acquisition 223 billion cash including postacquisition working capital adjustments finance acquisition entered new 1525 million credit facility consisting 500 million term loan 900 million term loan b 125 million revolver also issued senior notes senior subordinated notes additionally issued 200 million preferred stock warrants purchase 165 million shares common stock gs funds connection spa acquisition entered directory services license agreement trademark license agreement noncompetition agreement collectively “spa directory services agreements” sprint directory services license agreement grants us exclusive license obligation specified agreement produce publish distribute yellow white pages directories sprint successors markets 18 states sprint provided local telephone service time transaction trademark license agreement grants us exclusive license obligation specified agreement use certain sprint trademarks including sprint diamond logo markets noncompetition agreement prohibits sprint affiliates successors markets selling local directory advertising producing publishing distributing print directories certain limited exceptions spa directory services agreements interrelated initial term 50 years subject automatic renewal early termination specified circumstances spa directory services agreements may assigned comparable agreements may entered connection proposed separation sprint nextel corporation local telephone company expected occur second quarter 2006 spa acquisition accounted purchase business combination purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values acquisition date results spa business included consolidated results january 3 2003 allocation purchase price fair value assets acquired liabilities assumed shown table purchase price allocation reflects initial allocation subsequent purchase price adjustments made 2003 segment reporting based plan integrate evaluate performance allocate resources newly acquired dex media operations management currently believes business publishing yellow pages directories remain one reportable operating segment 2004 revised historical segment reporting reflect change business resulted att directory acquisition reflect management reviews analyzes business publishing yellow pages directories conducted one reportable operating segment prepress publishing services ancillary services previously performed behalf publishers performed entirely behalf directories publish result att directory acquisition att ceased paying us revenue participation income consolidate net profits dontech eliminated partnership investment dontech consequently partnership income longer reported commencing september 1 2004 accordingly previously reported dontech operating segment longer applicable critical accounting estimates preparation financial statements accordance generally accepted accounting principles “gaap” requires management estimate effect various matters inherently uncertain date financial statements estimates varies regard level judgment involved potential impact company’s reported financial results estimates deemed critical different estimate could reasonably used changes estimate reasonably likely occur period could materially impact company’s financial condition changes financial condition results operations company’s significant accounting polices december 31 2005 discussed note 2 consolidated financial statements included item 8 annual report critical estimates inherent accounting polices december 31 2005 discussed management believes current assumptions considerations used estimate amounts company’s consolidated financial statements appropriate allowance doubtful accounts sales claims record revenue net allowance sales claims addition record provision bad debts provision bad debts allowance sales claims estimated directory based historical experience also evaluate current condition customer balances bankruptcy filings change credit policy historical chargeoff patterns recovery rates data determining allowance doubtful accounts reserve review estimates periodically assess whether additional adjustment needed based economic events circumstances including actual experience end billing collection cycle respect directory believe allowance doubtful accounts sales claims adequate cover anticipated losses current conditions however significant deterioration factors noted overall economy could materially change expectations provisions sales claims doubtful accounts estimated based percentage revenue accordingly additional 1 change allowance percentages would impacted 2005 gaap net income approximately 61 million 2005 adjusted net income 64 million see “adjusted pro forma amounts nongaap measures” description reconciliation adjusted pro forma net income reported gaap net income pension benefits pension plan obligations related assets company’s defined benefit retirement plans presented note 10 consolidated financial statements plan assets consist primarily marketable equity debt instruments valued using market quotations plan obligations annual pension expense determined independent actuaries use number assumptions key assumptions measuring plan obligations include discount rate future salary increases longterm expected return plan assets methodology used determine discount rate 2005 changed methodology discounts projected plan cash flows measurement date using spot rates provided citigroup pension discount curve single discount rate computed present value benefit cash flows using single rate equals present value computed using citigroup pension discount curve company changed approach 2005 better reflect specific cash flows plans determining discount rate prior years discount rates developed reference moody’s longterm aa corporate bond yield plan’s measurement date consideration plan’s duration relative duration moody’s aa corporate bond portfolio salary increase assumptions based upon historical experience anticipated future management actions asset returns based upon anticipated average rate earnings expected invested funds plan longrun december 31 2005 weightedaverage actuarial assumptions discount rate 55 longterm rate return plan assets 825 assumed salary increases 366 net periodic pension costs recognized 2005 46 million 1 change discount rate would affect net income approximately 14 million 1 change longterm rate return plan assets would affect net income approximately 10 million 1 change assumed salary increases would affect net income approximately 07 million december 31 2005 benefit plan assets liability associated dex media merger intangible assets goodwill valuation amortization intangible assets consist directory services agreements company sprint att respectively established customer relationships trademarks trade names resulting spa acquisition att directory acquisition intangible assets amortized period assets expected contribute cash flow company reflect expected pattern benefit recorded goodwill resulted spa acquisition att directory acquisition subject amortization december 31 2005 owned intangible assets associated dex media merger intangible assets subject impairment test accordance statement financial accounting standards 144 accounting impairment disposal longlived assets “sfas 144” goodwill subject impairment test accordance statement financial accounting standards 142 goodwill intangible assets “sfas 142” company reviews carrying value intangible assets impairment least annually frequently whenever events circumstances indicate carrying amount may recoverable impairment test intangible assets performed comparing carrying amount intangible assets sum undiscounted expected future cash flows accordance sfas 144 impairment exists sum future undiscounted cash flows less carrying amount intangible asset related group assets impairment would result writedown intangible asset estimated fair value based discounted future cash flows goodwill tested impairment comparing carrying amount reporting unit assigned estimated fair value reporting unit accordance sfas 142 impairment exists carrying amount reporting unit less estimated fair value impairment would result writedown equal difference carrying amount estimated fair value reporting unit used certain estimates assumptions impairment evaluation including limited projected future cash flows revenue growth customer attrition levels estimated writeoffs december 31 2005 management believes impairment intangible assets goodwill however significant deterioration business assumptions underlying impairment evaluations overall economy could result impairment charges future reporting periods aggregate net book value intangible assets goodwill december 31 2005 impaired 1 net income reported gaap adjusted basis 2005 would adversely impacted approximately 192 million see “adjusted pro forma amounts nongaap measures” description reconciliation adjusted pro forma net income reported gaap net income additionally management must assess whether remaining useful lives intangible assets represent period intangible assets expected contribute cash flow assessment process used certain estimates assumptions including projected future cash flows customer attrition levels industry economic conditions accordance sfas 144 evaluate remaining useful lives annually determine whether events circumstances warrant revision remaining period amortization estimated remaining useful lives change remaining carrying amount intangible asset would amortized prospectively revised remaining useful life year ended december 31 2005 amortization intangible assets approximately 721 million remaining useful lives intangible assets shortened 10 net income reported gaap adjusted basis 2005 would adversely impacted approximately 81 million see “adjusted pro forma amounts nongaap measures” description reconciliation adjusted pro forma net income reported gaap net income new accounting pronouncements december 16 2004 financial accounting standards board “fasb” issued sfas 123r revision sfas 123 accounting stockbased compensation sfas 123r supersedes apb opinion 25 accounting stock issued employees approach sfas 123r similar approach described sfas 123 however sfas 123r requires companies calculate fair value sharebased payments employees including grants employee stock options amortize amount vesting period expense statement operations pro forma disclosure allowed sfas 123 longer permitted alternative sfas 123r offers choice transition methods including modified prospective modified retrospective prior periods interim periods year adoption april 14 2005 securities exchange commission “sec” announced adoption new rule amends compliance dates sfas 123r sec’s new rule allows companies implement sfas 123r beginning next fiscal year instead next reporting period begins june 15 2005 company adopted sfas 123r effective january 1 2006 using modified prospective application method upon adoption sfas 123r company anticipates recognize compensation expense approximately 47 million related equity awards 2006 approximately 35 million relates modification existing equity awards issuance new awards conjunction dex media merger may 2005 fasb issued statement financial accounting standards 154 accounting changes error corrections replacement apb opinion 20 fasb statement 3 “sfas 154” statement applies voluntary changes accounting principle changes requirements accounting reporting change accounting principle sfas 154 requires retrospective application prior periods’ financial statements voluntary changes accounting principle unless impracticable determine either periodspecific effects cumulative effect change apb opinion 20 previously required voluntary changes accounting principle recognized including net income period change cumulative effect changing new accounting principle statement carries forward without change guidance contained apb opinion 20 reporting correction error previously issued financial statements change accounting estimate sfas 154 effective accounting changes corrections errors made fiscal years beginning december 15 2005 accordingly company adopt sfas 154 effective january 1 2006 company expect adoption sfas 154 material impact consolidated financial position results operations cash flows company reviewed new accounting standards identified believe new standards material impact company’s financial position operating results operations year ended december 31 2005 compared year ended december 31 2004 factors affecting comparability acquisitions result att directory acquisition spa acquisition related financings associated purchase accounting 2005 reported gaap results comparable 2004 reported gaap results deferral amortization method revenue recognition billable value directories published recognized revenue subsequent reporting periods however purchase accounting precluded us recognizing directory revenue certain expenses associated directories published prior acquisition including directories published month acquisition completed thus reported 2005 2004 gaap results indicative underlying operating financial performance accordingly management presenting 2005 adjusted 2004 adjusted pro forma information among things eliminates purchase accounting impact revenue certain expenses acquisition assumes att directory acquisition related financing occurred beginning 2004 management believes presentation 2005 adjusted 2004 adjusted pro forma information help financial statement users better easily compare current period underlying operating results combined company performance would likely comparable prior period 2005 adjusted 2004 adjusted pro forma amounts disclosed caption “adjusted pro forma amounts nongaap measures” elsewhere nongaap measures reconciled comparable gaap measures caption believe 2005 adjusted 2004 adjusted pro forma results reasonably represent results businesses combined since january 1 2004 differences application accounting policies practices company acquired entities management believe adjusted pro forma amounts strictly comparable necessarily indicative results future periods following results operations disclosure give pro forma effect dex media merger consummated january 31 2006 att directory acquisition reported 50 share dontech net income partnership income consolidated statement operations partnership income also included revenue participation income att revenue participation income based dontech advertising sales recognized sales contract executed customer upon att directory acquisition att ceased paying us revenue participation income consolidate net profits dontech eliminated partnership investment dontech consequently commencing september 1 2004 longer report partnership income 2004 att directory acquisition earned revenue prepress publishing ancillary services related att directory business continued report partnership income investment dontech relocation integration charges 2005 expenses included 24 million related acquisition integration att directory business 14 million related relocation corporate offices cary north carolina 04 million sales office lease expenses related spa acquisition 2004 expenses included 73 million related relocation corporate offices cary north carolina 25 million related acquisition integration att directory business 11 million sales offices relocation expenses related spa acquisition gaap reported results net revenue components net revenue 2005 2004 follows following att directory acquisition substantially revenue derived directory publishing business att directory acquisition dontech accounted equity method recognize revenue respect att directory business directory advertising revenue earned primarily sale advertising yellow pages directories publish net sales allowances revenue directory advertising sales recognized deferral amortization method whereby revenue advertising sales initially deferred directory published recognized ratably directory’s life typically 12 months att directory acquisition also earned prepress publishing related fees respect services rendered behalf att attbranded directories publish fees revenue recognized earned total net revenue 2005 9566 million representing increase 3535 million total net revenue reported 2004 6031 million primary increase total net revenue 2005 2004 due recognizing full year results acquired att directory business total revenue 2005 2004 includes 3723 million 291 million respectively net revenue attbranded directories published following att directory acquisition due purchase accounting directory revenue year ended december 31 2005 2004 excluded amortization advertising sales attbranded directories published october 2004 deferral amortization method totaling 850 million 4297 million respectively would reported absent purchase accounting purchase accounting related att directory acquisition longer adversely impact reported revenue 2005 additionally expect 2006 reported revenue higher 2005 due adverse impact purchase accounting 2005 revenues 2006 reported revenue also considerably higher 2005 due dex media merger increase net revenue also resulted higher recurring advertising major sprint markets partially offset decline results att markets decline results att markets primarily due chicagoland business primarily result three major changes announced second quarter 2005 including 1 removing advertising covers directories strengthen brand awareness 2 realigning coverage areas publications better reflect shopping patterns 3 tightening credit standards match disciplined approach employed sprint markets build stable account base time revenue prepress publishing related services 130 million 2004 comparable revenue 2005 decrease prepress publishing fees result company longer providing services att following att directory acquisition support internally attbranded directories publish revenue 2005 totaled 110 million representing increase 39 million revenue reported 2004 71 million revenue recognized earned includes late fees paid outstanding customer balances commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain products fees telephone companies publishing information pages increase revenue primarily due att directory acquisition expenses components total expenses 2005 2004 follows substantially expenses derived directory publishing business att directory acquisition dontech accounted equity method began recognizing expenses related att directory business september 1 2004 certain costs directly related selling production directories initially deferred recognized ratably life directory costs include sales commissions print paper initial distribution costs expenses recognized incurred operating expenses total operating expenses 2005 4361 million compared 2632 million 2004 primary components 1729 million increase operating expenses 2005 compared 2004 follows operating expenses 2005 increased 1729 million compared 2004 primarily result recognizing full year expenses acquired att directory business 2005 expenses increased 950 million 2004 support att directory business including bad debt commissions salesperson expenses printing distribution marketing advertising operating expenses similar deferral amortization method revenue recognition certain costs directly related selling production directories initially deferred incurred recognized ratably life directory due elimination deferred costs preacquisition including september 2004 att directories required purchase accounting reported operating expenses 2005 2004 include certain expenses associated directories totaling approximately 499 million 980 million respectively due adjustments attbranded directory expenses 2005 include amortization deferred directory costs relating attbranded directories published beginning october 2004 purchase accounting related att directory acquisition longer adversely impact reported expenses 2005 except unamortized cost uplift defined 21 million december 31 2005 expensed 2006 additionally expect 2006 reported expenses higher 2005 due adverse impact purchase accounting 2005 expenses 2006 reported expenses also considerably higher 2005 due dex media merger also result purchase accounting required gaap recorded deferred directory costs related directories scheduled publish subsequent att directory acquisition spa acquisition fair value determined estimated billable value published directory less expected costs complete directories b normal profit margin refer purchase accounting entry “cost uplift” fair value costs determined 813 million 148 million att directory business spa business respectively costs amortized operating expenses terms applicable directories amortization totaled 650 million 2005 relating att directory acquisition representing increase 508 million 142 million recorded 2004 36 million 2004 relating spa business comparable expense 2005 sales costs including commissions sales person costs sales management costs 156 million higher 2005 compared 2004 primarily due favorable sales performances many sprint markets increased sales headcount sales bonus payouts plus increased investment att markets digital initiative costs 89 million higher 2005 compared 2004 reflects continued commitment increase investment internet products distribution due additional internet costs associated att directory business bad debt expense higher 2005 primarily due higher amount favorable bad debt trueups taken 2004 compared 2005 combined increased provision expense associated increased recognized revenue compared prior year resulted net increase bad debt expense 86 million 2005 compared 2004 excluding impact purchase accounting general administrative expenses general administrative “ga” expenses 2005 602 million compared 595 million 2004 increase 07 million primary components 07 million increase ga expenses 2005 compared 2004 follows increase ga expenses 07 million 2005 2004 primarily due increased billing credit collection expenses 90 million relating att directory business increase noncash compensation expense related stock appreciation rights “sars” 28 million primarily due increase company’s stock price additional grants made 2005 increases partially offset expenses related relocation corporate headquarters related severance costs associated att directory acquisition 104 million recorded 2004 depreciation amortization depreciation amortization “da” 2005 851 million compared 666 million 2004 representing increase 185 million amortization intangible assets 721 million 2005 compared 573 million 2004 increase amortization expense primarily due full year impact related intangible assets acquired connection att directory acquisition depreciation fixed assets amortization computer software 130 million 2005 compared 93 million 2004 increase depreciation expense primarily due increased depreciation associated computer software additions partnership income partnership income 780 million 2004 corresponding amount 2005 2004 partnership income related 50 share net income dontech accounted equity method revenue participation income att sales agent att dontech earned commission revenue based annual value local sales contracts executed period “calendar sales” also earned revenue participation income att based amount dontech calendar sales period result att directory acquisition att ceased paying us revenue participation income consolidate net profits dontech thus dontech partnership investment eliminated accordingly commencing september 1 2004 longer report partnership income operating income result att directory acquisition company one operating segment management views evaluates one operating segment sole source earnings interest taxes depreciation amortization “ebitda” operating income company need allocate resources among different segments operating income 2005 2004 follows operating income 2005 3752 million increased 835 million operating income 2917 million 2004 increase operating income 2005 compared 2004 primarily result recognizing full period results att directory business total net revenue increased 2005 3535 million net revenue 2004 partially offsetting increase net revenue increase total operating expenses 2005 1729 million primarily relating att directory business described addition increase operating income resulted higher recurring advertising major sprint markets partially offset decline results att markets increased depreciation amortization noted 2004 2005 results adversely affected related purchase accounting impact precluded us recognizing revenues certain expenses directories published prior att directory acquisition including september 2004 published directories purchase accounting entire balance deferred revenue deferred directory costs eliminated time att directory acquisition elimination disproportionately higher impact revenues expenses accordingly adjustments required purchase accounting operating expenses 2004 disproportionately higher related revenue interest expense net interest expense 2005 2645 million compared 1755 million 2004 increase net interest expense 890 million result higher outstanding debt balances associated att directory acquisition issuance 300 million 6875 senior notes january 14 2005 “holdco notes” utilized finance repurchase 100303 shares outstanding preferred stock gs funds january 2005 combined higher interest rates compared prior year increase net interest expense also attributable 253 million call premium payment writeoff unamortized deferred financing costs 74 million associated december 20 2005 tender offer exit consent solicitation 8875 senior notes interest expense 2004 includes 12 million charge resulting redemption remaining 9125 senior subordinated notes due 2008 see “liquidity capital resources” description debt obligations provisions related debt instruments net interest expense 2005 includes 236 million noncash amortization deferred financing costs including writeoff unamortized deferred financing costs 74 million noted compared 136 million noncash amortization deferred financing costs 2004 provision benefit income taxes 2005 provision income taxes 432 million comprised deferred tax provision due taxable loss generated current period 2005 deferred tax provision resulted effective tax rate 390 net operating losses approximately 1686 million related tax deductions amortization expense recorded tax purposes compared book purposes respect intangible assets acquired connection spa acquisition att directory acquisition 2005 effective tax rate reflects decrease state local tax rate due integration spa acquisition att directory acquisition federal net operating loss carryforward approximately 3425 million begin expire 2023 state net operating loss carryforwards approximately 6500 million begin expire 2008 2004 provision income taxes 459 million comprised current tax benefit 256 million deferred tax provision 715 million 2004 current tax benefit resulted effective tax rate 395 net operating losses approximately 724 million related tax deductions connection spa acquisition att directory acquisition 2004 deferred tax provision 715 million primarily related difference amortization expense recorded tax purposes compared book purposes respect intangible assets acquired connection spa acquisition att directory acquisition 2004 effective tax rate reflects decrease state local tax rate due integration spa acquisition att directory acquisition company currently federal tax audit internal revenue service taxable years 2003 2004 company believes adequate provisions made respect federal tax audit company believes resolution audit material adverse effect company’s financial position results operations cash flows addition certain state tax returns examination various regulatory authorities continuously review issues raised connection ongoing examinations open tax years evaluate adequacy reserves believe accrued tax liabilities adequate cover probable us federal state income tax loss contingencies net income loss income available common shareholders loss earnings per share net income 2005 675 million compared 703 million 2004 decrease 28 million net income result increase operating income described offset increases interest expense da also described 8 dividend preferred stock reduces net income increases net loss resulting loss income available common shareholders loss earnings per share amounts calculated amount preferred stock dividend includes stated 8 dividend plus deemed dividend beneficial conversion feature “bcf” bcf function conversion price preferred stock fair value related warrants issued connection preferred stock fair market value underlying common stock date issuance preferred stock connection issuance preferred stock subsequent quarterly dividend date september 30 2005 bcf recorded fair value underlying common stock time issuance preferred stock greater conversion price preferred stock full amount bcf treated deemed dividend preferred stock convertible gs funds common stock immediately issuance january 2003 commencing october 3 2005 preferred stock longer convertible common stock therefore bcf longer recognized preferred stock dividend 2005 117 million consisted stated 8 dividend 101 million including 25 million accrued cash dividends recognized fourth quarter 2005 bcf 16 million preferred stock dividend 2004 218 million consisted stated 8 dividend 179 million bcf 39 million january 14 2005 repurchased 100303 shares outstanding preferred stock gs funds 2772 million cash connection preferred stock repurchase recorded reduction income available common shareholders 1337 million reflect loss repurchase shares 2005 excess cash paid gs funds carrying amount repurchased preferred stock plus amount previously recognized bcf associated shares recognized loss repurchase amount represents return gs funds therefore treated manner similar treatment preferred stock dividend january 27 2006 repurchased remaining 100301 shares outstanding preferred stock gs funds 3361 million cash including accrued cash dividends interest result gs repurchase becoming probable event terms stock purchase support agreement dated october 3 2005 accreted carrying value preferred stock redemption value 3341 million december 31 2005 accretion preferred stock totaling 2110 million recorded increase loss available common shareholders consolidated statements operations year ended december 31 2005 resulting loss income available common shareholders 2889 million 2005 compared 485 million 2004 account earnings per share accordance emerging issues task force issue 036 participating securities twoclass method fasb statement 128 “eitf 036” established standards regarding computation earnings per share “eps” companies issued securities common stock contractually entitle holder participate dividends earnings company eitf 036 requires earnings available common shareholders period deduction preferred stock dividends allocated common preferred shareholders based respective rights receive dividends basic eps calculated dividing loss income allocable common shareholders weighted average number shares outstanding eitf 036 require presentation basic diluted eps securities common stock therefore following eps amounts pertain common stock guidance eitf 036 diluted eps calculated dividing loss income allocable common shareholders weighted average common shares outstanding plus dilutive potential common stock potential common stock includes stock options stock appreciation rights “sars” warrants dilutive effect calculated using treasury stock method 8 preferred stock dilutive effect calculated using “ifconverted” method calculation basic diluted loss earnings per share years ended december 31 2005 2004 respectively presented 1 31268 9483 year ended december 31 2004 computing basic eps using twoclass method allocated loss available common shareholders year ended december 31 2005 common preferred shareholders since preferred shareholders contractual obligation share net loss 2 60 stock options 2005 assumed conversion preferred stock 5132 9767 shares common stock 2005 2004 respectively antidilutive therefore included calculation diluted eps adjusted pro forma amounts nongaap measures result att directory acquisition spa acquisition related financings associated purchase accounting 2005 reported gaap results comparable 2004 reported gaap results deferral amortization method revenue recognition billable value directories published recognized revenue subsequent reporting periods however purchase accounting precluded us recognizing directory revenue certain expenses associated directories published prior acquisition including directories published month acquisition completed thus reported 2005 2004 gaap results indicative underlying operating financial performance accordingly management presenting 2005 adjusted 2004 adjusted pro forma information among things eliminates purchase accounting impact revenue certain expenses acquisition assumes att directory acquisition related financing occurred beginning 2004 management believes presentation 2005 adjusted 2004 adjusted pro forma information help financial statement users better easily compare current period underlying operating results combined company performance would likely comparable prior period 2005 adjusted 2004 adjusted pro forma amounts disclosed elsewhere nongaap measures reconciled comparable gaap measures believe 2005 adjusted 2004 adjusted pro forma results reasonably represent results businesses combined full years 2005 2004 differences application accounting policies practices company acquired entities management believe 2005 adjusted 2004 adjusted pro forma amounts strictly comparable necessarily indicative results future periods discussion adjusted pro forma amounts nongaap measures give pro forma effect dex media merger consummated january 31 2006 1 represents revenue attbranded directories published prior att directory acquisition plus september 2004 published directories would recognized period purchase accounting required gaap 2 represents expenses attbranded directories published prior att directory acquisition including september 2004 published directories would recognized period purchase accounting required gaap pro forma adjustments also include 2004 dontech’s selling operational expenses prior september 1 2004 eliminated consolidation upon att directory acquisition b 2004 2005 certain differences application accounting policies practices rhd acquired entities additionally result purchase accounting recorded deferred directory costs related directories scheduled publish subsequent att directory acquisition fair value impact cost uplift also removed 3 represents additional depreciation amortization expense related tangible identifiable intangible assets acquired att directory acquisition estimated useful lives 4 represents elimination equity accounting used account rhd’s 50 ownership dontech revenue participation income att recognized prior att directory acquisition 5 represents revenue sprintbranded directories published prior spa acquisition including january 2003 published directories would recognized period purchase accounting required gaap 6 represents expenses sprintbranded directories published prior spa acquisition including january 2003 published directories would recognized period purchase accounting required gaap also includes effect differences application accounting policies practices legacy spa company additionally result purchase accounting recorded deferred directory costs related directories scheduled publish subsequent spa acquisition fair value impact cost uplift also removed revenue adjusted revenue compared 2004 revenue adjusted pro forma revenue components 2005 revenue adjusted revenue 2004 revenue adjusted pro forma revenue follows 1 represents gross revenue sales claims allowances attbranded directories published prior att directory acquisition including september 2004 published directories would recognized period purchase accounting required gaap 2 represents elimination prepress publishing related fees recognized prior att directory acquisition eliminated consolidation upon att directory acquisition 3 represents revenue associated att directory business primarily consisting commissions earned sales contracts published publishers’ directories yellow pages internetbased advertising product revenue recognized earned 4 represents gross revenue sales claims allowances sprintbranded directories published prior spa acquisition including january 2003 published directories would recognized period purchase accounting required gaap total adjusted net revenue 2005 10416 million increase 77 million 07 adjusted pro forma net revenue 10339 million 2004 increase adjusted net revenue 2005 due increased amortization revenue primarily major sprint markets due continued strong customer renewal rates increased new business partially offset decrease amortized net revenue att markets due decline publication value att directories illinois northwest indiana due lower renewal rates partially offset new business collection late fees deferral amortization method revenue recognition revenue directory advertising sales initially deferred directory published recognized ratably life directory typically 12 months due deferral amortization method billable value published directories amortized revenue life directory delays recognition publication sales recorded revenue gaap basis adjusted expenses compared 2004 adjusted pro forma expenses 2005 adjusted operating income compared 2004 adjusted pro forma operating income year ended december 31 2005 adjusted operating ga expenses increased 292 million 70 4464 million adjusted pro forma operating ga expenses 4172 million 2004 primary components 292 million increase adjusted expenses 2005 follows similar deferral amortization method revenue recognition certain costs directly related selling production directories initially deferred incurred recognized ratably life directory adjusted commission salesperson expenses 99 million higher 2005 compared 2004 due favorable sales performances certain sprint markets increased sales headcount sales bonus payouts increased investment certain att markets adjusted marketing advertising costs 93 million higher 2005 compared 2004 due increased competitive responses increased market investment particularly att markets adjusted digital initiative costs 89 million higher 2005 compared 2004 reflects commitment increase investment internet products distribution due additional internetrelated costs att directory business increased costs support att directory business 79 million 2005 compared 2004 primarily include increased headcount billing credit collection administrative costs higher primarily due additional investment att directory business compared prior owner’s level investment business adjusted bad debt expense 59 million higher 2005 compared 2004 primarily reflecting favorable bad debt adjustments recorded att directory business prior acquisition 2004 increases offset 104 million expenses 2004 associated relocation corporate headquarters cary north carolina related severance costs adjusted depreciation amortization 851 million year ended december 31 2005 compared adjusted pro forma depreciation amortization 854 million year ended december 31 2004 adjusted operating income 2005 5101 million representing decrease 212 million 40 adjusted pro forma operating income 2004 5313 million reflecting variances revenues expenses period described advertising sales publication sales management reviews evaluates value advertising sales directories published period “publication sales” primary sales performance measure management believes comparison publication sales directories one period next gives better indication underlying sales trends economic conditions business confidence comparison directory revenue recognized using deferral amortization method recognize directory revenue ratably life directory deferral amortization method amount revenue recognized period directly related sales trends economic conditions business confidence period publication sales similar “samestore” sales measure events occur current period affect comparability publication sales prior year period changes directory publication dates prior year publication sales amounts adjusted conform current period presentation publication sales sprintbranded directories 2005 5935 million 257 million 45 publication sales 5678 million 2004 publication sales attbranded directories 2005 4334 million 125 million 28 publication sales 4459 million 2004 increase sprintbranded publication sales resulted continued strong customer renewal rates increased spending existing advertisers increased new business many sprint markets directories published 2005 decrease attbranded publication sales primarily attributable lower customer renewals result ongoing efforts improve strength brand including realignment directories improvement credit quality customer base publication sales nongaap measure comparable gaap measure net revenue reconciliation publication sales net revenue reported accordance gaap presented year ended december 31 2004 compared year ended december 31 2003 factors affecting comparability acquisitions result att directory acquisition spa acquisition related financings associated purchase accounting 2004 reported gaap results comparable 2003 reported gaap results additionally considerations respect att directory acquisition also affect comparability 2004 2005 reported gaap results deferral amortization method revenue recognition billable value directories published recognized revenue subsequent reporting periods however purchase accounting precluded us recognizing directory revenue certain expenses associated directories published prior acquisition including directories published month acquisition completed thus reported 2004 2003 gaap results indicative underlying operating financial performance accordingly management presenting adjusted pro forma information among things eliminates purchase accounting impact revenue expenses acquisition assumes att directory acquisition related financing occurred beginning 2003 management believes presentation adjusted pro forma information help financial statement users better easily compare current period underlying operating results combined company performance would likely comparable prior period adjusted pro forma amounts disclosed caption “adjusted pro forma amounts nongaap measures” elsewhere nongaap measures reconciled comparable gaap measures caption believe adjusted pro forma results reasonably represent results businesses combined full years 2003 2004 differences application accounting policies practices company acquired entities management believe adjusted pro forma amounts strictly comparable necessarily indicative results future periods att directory acquisition reported 50 share dontech net income partnership income consolidated statement operations partnership income also included revenue participation income att revenue participation income based dontech advertising sales recognized sales contract executed customer upon att directory acquisition att ceased paying us revenue participation income consolidate net profits dontech eliminated partnership investment consequently commencing september 1 2004 longer report partnership income 2003 2004 att directory acquisition earned revenue prepress publishing ancillary services related att directory business continued report partnership income investment dontech relocation integration charges 2004 expenses include 73 million related relocation corporate offices cary north carolina 25 million related acquisition integration att directory business 11 million sales offices relocation expenses related spa acquisition 2003 expenses include severance moverelated charges 73 million relating relocation corporate offices cary north carolina 76 million consolidation publishing technology operations sales offices administrative staff connection spa acquisition gaap reported results net revenue components net revenue 2004 2003 follows following att directory acquisition substantially revenue derived directory publishing business att directory acquisition dontech accounted equity method directory advertising revenue earned primarily sale advertising yellow pages directories publish net sales allowances revenue directory advertising sales recognized deferral amortization method whereby revenue advertising sales initially deferred directory published recognized ratably directory’s life typically 12 months att directory acquisition also earned prepress publishing fees respect services rendered behalf att attbranded directories publish fees income recognized earned total net revenue 2004 6031 million compared 2564 million 2003 primary increase total net revenue 2004 result purchase accounting related spa acquisition adversely impacted 2003 results due purchase accounting directory revenue year ended december 31 2003 excluded amortization publication sales sprintbranded directories published february 2003 deferral amortization method totaling 3159 million would reported 2003 absent purchase accounting total revenue 2004 also includes 291 million net revenue attbranded directories published following att directory acquisition purchase accounting related att directory acquisition also negatively impacted 2004 results transaction closed september 1 2004 impact material 2004 results purchase accounting related spa acquisition 2003 results purchase accounting related att directory acquisition continue adversely impact reported revenue 2005 additionally expect net revenue 2005 significantly higher 2004 due full year results acquired att directory business revenue prepress publishing salesrelated computer application services 2004 130 million compared 222 million 2003 decrease prepress publishing fees result company longer providing services att following att directory acquisition support internally attbranded directories publish additionally prepress publishing fees 2003 totaling 25 million reflect fees earned third party prepress publishing contract ceased providing services first half 2003 comparable revenue earned 2004 revenue includes late fees paid outstanding customer balances commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain products fees telephone companies publishing information pages increase revenue primarily due att directory acquisition expenses components total expenses 2004 2003 follows substantially expenses derived directory publishing business att directory acquisition dontech accounted equity method began recognizing expenses related att directory business september 1 2004 certain costs directly related selling production directories initially deferred recognized ratably life directory costs include sales commissions print paper initial distribution costs expenses recognized incurred operating expenses total operating expenses 2004 2632 million compared 1592 million 2003 primary components 1040 million increase operating expenses 2004 compared 2003 follows increase operating expenses 2004 primarily result purchase accounting impacts 2003 related spa acquisition precluded reporting revenue related spa directories published february 2003 similar deferral amortization method revenue recognition certain costs directly related selling production directories initially deferred incurred recognized ratably life directory due elimination spa’s deferred costs directories published preacquisition including january 2003 required purchase accounting reported operating expenses 2003 include certain expenses associated directories totaling approximately 745 million year ended december 31 2003 due adjustments directory expenses year december 31 2003 include amortization deferred directory costs relating directories published beginning february 2003 2004 operating expenses also impacted att transaction result att directory acquisition completed september 1 2004 incurred incremental selling manufacturing indirect expenses approximately 242 million last four months 2004 support operations newly acquired business purchase accounting related att directory acquisition also impacted 2004 results transaction closed september 1 2004 impact material 2004 results purchase accounting related spa acquisition 2003 results result purchase accounting required gaap recorded deferred directory costs related directories scheduled publish subsequent spa acquisition att directory acquisition fair value determined estimated billable value published directory less b expected costs complete directories plus c normal profit margin refer purchase accounting entry “cost uplift” fair value costs 2004 determined 813 million 148 million att directory acquisition spa acquisition respectively costs amortized operating expenses terms applicable directories amortization totaled 142 million 2004 related att directory acquisition spa acquisition amortized 36 million cost uplift 2004 compares 112 million 2003 related spa acquisition decrease 76 million year ended december 31 2004 also incurred approximately 54 million additional selling expenses compared 2003 due improved sales results spa markets additional expenses primarily included commissions sales person costs sales management costs 2004 incurred additional marketing advertising costs 33 million compared 2003 support spa att businesses advertising expense year ended december 31 2004 includes 11 million advertising costs pertain 2003 partially offsetting cost increases net publishing information technology costs lower approximately 100 million 2004 primarily due elimination duplicate facility associated operational costs resulting integration spa acquisition majority duplicative costs eliminated second half 2003 purchase accounting resulting att directory business continue impact reported expenses 2005 expect operating expenses 2005 significantly higher 2004 due full year results acquired att directory business general administrative expenses general administrative “ga” expenses 2004 595 million compared 530 million 2003 increase 65 million primary components 65 million increase ga expenses 2004 compared 2003 follows 65 million increase ga expenses primary impacted 72 million incremental ga expense support acquired att directory business consisted increased billing credit collection expenses 32 million 40 million ga expenses including financial services human resources administration services ga expenses also impacted 19 million costs related compliance sarbanesoxley initiatives comparable expenses 2003 increases offset 37 million lower severance relocation expenses associated spa att directory acquisitions expenses related relocation company’s corporate headquarters 2004 compared 2003 recorded 70 million expenses 2004 related relocation corporate offices cary north carolina compared 73 million 2003 2004 ga expenses also included 25 million acquisition integrationrelated costs att transaction offsetting increased costs 2003 included 70 million charge related shutdown duplicative facilities resulting spa acquisition compared similar charges 11 million 2004 related relocation sprint sales offices expect ga expenses 2005 significantly higher 2004 due full year results acquired att directory business depreciation amortization depreciation amortization “da” 2004 666 million compared 658 million 2003 amortization intangible assets 573 million 2004 compared 498 million 2003 increase amortization expense due increase intangible assets resulting att directory acquisition expect amortization expense 2005 significantly higher 2004 due full year impact related intangible assets acquired connection att directory acquisition depreciation fixed assets amortization computer software 93 million 2004 compared 160 million 2003 decrease primarily due acceleration depreciation certain fixed assets computer software acquired connection spa acquisition 2003 partnership income 2004 2003 partnership income related 50 share net income dontech accounted equity method revenue participation income att sales agent att dontech earned commission revenue based annual value local sales contracts executed period “calendar sales” also earned revenue participation income att based amount dontech calendar sales period result att directory acquisition att ceased paying us revenue participation income consolidate net profits dontech thus dontech partnership investment eliminated accordingly commencing september 1 2004 longer report partnership income partnership income 780 million 2004 compared 1141 million 2003 decrease partnership income 2004 primarily result longer recognizing partnership income following att directory acquisition operating income result att directory acquisition company one operating segment management views evaluates one segment sole source ebitda operating income company need allocate resources among different segments operating income 2004 2003 follows operating income 2004 2917 million increased 1992 million operating income 925 million 2003 increase due primarily effects spa acquisition related purchase accounting revenues expenses described net revenue 2003 2564 primarily resulting spa acquisition offset operating expenses 2003 2780 million also primarily result spa acquisition primary reason costs relating acquired spa business increased revenue 2003 directory advertising revenue deferred deferral amortization method portion total costs related publication directories deferred deferral amortization method therefore purchase accounting entire balance deferred revenue deferred directory costs eliminated time spa acquisition disproportionately higher impact revenue expenses accordingly adjustments required purchase accounting operating expenses 2003 disproportionately higher related revenue effects purchase accounting eliminated adjusted operating income 2003 would substantially higher relatively proportional 2003 net revenues see “adjusted pro forma amounts nongaap measures” additionally reasons described partnership income decreased 361 million 2004 purchase accounting related att directory acquisition also negatively impacted 2004 results transaction closed september 1 2004 impact material 2004 results purchase accounting related spa acquisition 2003 results purchase accounting att directory acquisition continue adversely impact reported results 2005 additionally expect operating income significantly higher 2005 2004 due full year results acquired att directory business interest expense net interest expense 2004 1755 million compared 1800 million 2003 decrease net interest expense 45 million result lower outstanding debt balances first eight months 2004 combined lower interest rates 2004 2003 partially offset substantial increase debt incurred connection att directory acquisition september 1 2004 impact interest expense associated additional borrowings used finance att directory acquisition expected greater 2005 due impact additional borrowings entire period interest expense 2004 also includes 12 million charge resulting redemption 2004 remaining 9125 senior subordinated notes due 2008 see “liquidity capital resources” description debt obligations provisions related debt instruments net interest expense 2004 includes 136 million noncash amortization deferred financing costs compared 150 million noncash amortization deferred financing costs 2003 income expense net december 2002 charge 15 million recorded reclassify earnings cumulative change fair value swap previously recognized accumulated comprehensive loss balance sheet due loss hedge accounting treatment 2003 recognized corresponding gain 15 million swap matured june 2003 see item 7a “quantitative qualitative disclosures market risk” additional information interest rate swap agreements provision benefit income taxes 2004 provision income taxes 459 million comprised current tax benefit 256 million deferred tax provision 715 million 2004 current tax benefit based effective tax rate 395 net operating losses approximately 724 million related tax deductions connection spa acquisition att directory acquisition 2004 deferred tax provision 715 million primarily related difference amortization expense recorded tax purposes compared book purposes respect intangible assets acquired connection spa acquisition att directory acquisition federal net operating loss carryforward approximately 734 million begin expire 2023 state net operating loss carryforwards approximately 2490 million begin expire 2008 2003 tax benefit 360 million comprised current tax provision 42 million deferred tax benefit 402 million 2003 tax benefit 360 million based effective tax rate 418 net operating losses approximately 1760 million related tax deductions connection spa acquisition 2003 deferred tax benefit primarily related tax benefit recognized respect tax net operating loss generated 2003 partially offset deferred tax provision related difference amortization recorded tax purposes compared book purposes respect intangible assets acquired connection spa acquisition net income loss income loss available common shareholders earnings loss per share net income 2004 703 million compared net loss 500 million 2003 results 2003 adversely affected purchase accounting precluded us recognizing deferred revenue certain expenses associated directories published prior spa acquisition including january 2003 published directories purchase accounting related att directory acquisition also negatively impacted 2004 results transaction closed september 1 2004 impact material 2004 results purchase accounting related spa acquisition 2003 results purchase accounting att directory acquisition continue adversely impact reported results 2005 dividend 8 preferred stock reduces net income increases net loss resulting income loss available common shareholders earnings loss per share amounts calculated amount preferred stock dividend includes stated 8 dividend plus deemed dividend bcf function conversion price preferred stock fair value related warrants issued preferred stock fair market value underlying common stock date issuance preferred stock connection issuance preferred stock subsequent quarterly accrued dividend bcf recorded fair value underlying common stock time issuance preferred stock greater conversion price preferred stock full amount bcf treated deemed dividend preferred stock convertible common stock immediately issuance january 2003 preferred stock dividend 2004 2003 218 million 584 million respectively consisted stated 8 dividend 179 million 165 million respectively bcf 39 million 419 million respectively bcf recorded 2003 significant bcf amounts recorded subsequent periods reflecting issuance preferred stock related warrants january 2003 resulting income loss available common shareholders 485 million 2004 compared 1084 million 2003 march 2004 eitf reached final consensus eitf issue 036 participating securities two class method fasb statement 128 “eitf 036” established standards regarding computation eps companies issued securities common stock contractually entitle holder participate dividends earnings company eitf 036 effective interim periods ending june 30 2004 calendar year companies adopted provisions eitf 036 first quarter 2004 eitf 036 requires earnings available common shareholders period deduction preferred stock dividends allocated common preferred shareholders based respective rights receive dividends basic eps calculated dividing income loss allocable common shareholders weighted average number shares outstanding eitf 036 require presentation basic diluted eps securities common stock therefore following eps amounts pertain common stock guidance eitf 036 diluted eps calculated dividing income loss allocable common shareholders weighted average common shares outstanding plus dilutive potential common stock potential common stock includes stock options warrants dilutive effect calculated using treasury stock method preferred stock dilutive effect calculated using ifconverted method calculation basic diluted eps years ended december 31 2004 2003 presented 1 31268 9483 year ended december 31 2004 computing basic eps using twoclass method allocated loss available common shareholders year ended december 31 2003 common preferred shareholders since preferred shareholders contractual obligation share net loss 2 934 stock options 2003 assumed conversion preferred stock 9767 9023 shares common stock 2004 2003 respectively antidilutive therefore included calculation diluted eps adjusted pro forma amounts nongaap measures result att directory acquisition spa acquisition related financings associated purchase accounting 2004 reported gaap results comparable 2003 reported gaap results deferral amortization method revenue recognition billable value directories published recognized revenue subsequent reporting periods however purchase accounting precluded us recognizing directory revenue certain expenses associated directories published prior acquisition including directories published month acquisition completed thus reported 2004 2003 gaap results indicative underlying operating financial performance accordingly management presenting adjusted pro forma information among things eliminates purchase accounting impact revenue expenses acquisition assumes att directory acquisition related financing occurred beginning 2003 management believes presentation adjusted pro forma information help financial statement users better easily compare current period underlying operating results combined company performance would likely comparable prior period adjusted pro forma amounts disclosed elsewhere nongaap measures reconciled comparable gaap measures believe adjusted pro forma results reasonably represent results businesses combined full years 2003 2004 differences application accounting policies practices company acquired entities management believe adjusted pro forma amounts strictly comparable necessarily indicative results future periods 1 represents revenue attbranded directories published prior att directory acquisition plus september 2004 published directories would recognized period purchase accounting required gaap 2 represents expenses attbranded directories published prior att directory acquisition plus september 2004 published directories would recognized period purchase accounting required gaap b dontech’s selling operational expenses prior september 1 2004 eliminated consolidation upon att directory acquisition c certain differences application accounting policies practices rhd acquired entities additionally result purchase accounting recorded deferred directory costs related directories scheduled publish subsequent att directory acquisition fair value impact costs also removed 3 represents additional depreciation amortization expense related tangible identifiable intangible assets acquired att directory acquisition estimated useful lives 4 represents elimination equity accounting used account rhd’s 50 ownership dontech revenue participation income att recognized prior att directory acquisition 5 represents revenue sprintbranded directories published prior spa acquisition plus january 2003 published directories would recognized period purchase accounting required gaap 6 represents expenses sprintbranded directories published prior spa acquisition plus january 2003 published directories would recognized period purchase accounting required gaap also includes effect differences application accounting policies practices legacy spa company additionally result purchase accounting recorded deferred directory costs related directories scheduled publish subsequent spa acquisition fair value impact costs also removed adjusted pro forma revenue compared 2003 adjusted pro forma revenue components 2004 adjusted pro forma revenue 2003 adjusted pro forma revenue follows 1 represents gross revenue sales claims allowances directories published prior attbranded directory acquisition plus september 2004 published directories would recognized period purchase accounting required gaap 2 represents elimination prepress publishing fees reported prior att directory acquisition eliminated consolidation upon att directory acquisition 3 represents revenue primarily consisting commissions earned sales contracts published publishers’ directories yellow pages internetbased advertising product revenue recognized earned 4 represents gross revenue sales claims allowances sprintbranded directories published prior spa acquisition plus january 2003 published directories would recognized period purchase accounting required gaap total adjusted pro forma net revenue 2004 10339 million increase 11 million 01 adjusted pro forma net revenue 10328 million 2003 deferral amortization method revenue recognition revenue directory advertising sales initially deferred directory published recognized ratably life directory typically 12 months modest decrease adjusted gross directory advertising revenue result higher revenue sprint directories particularly nevada florida offset decline revenue att directories due past declines publication sales amortizing revenue current periods due deferral amortization method billable value published directories amortized revenue life directory delays recognition publication sales recorded revenue gaap basis reduction sales claims allowances primarily result 20 million favorable reduction claims allowances recognized att prior att directory acquisition due improved experience adjusted pro forma expenses operating income compared 2003 adjusted pro forma expenses operating income year ended december 31 2004 adjusted pro forma operating ga expenses decreased 154 million 36 4172 million adjusted pro forma operating ga expenses 4326 million 2003 primary components 154 million decrease adjusted pro forma expenses 2004 compared 2003 follows adjusted pro forma bad debt expense 121 million lower 2003 due primarily improved collections experience relating attbranded directories 100 million combined 21 million additional favorable adjustments sprintbranded directories compared 2003 publishing information technology costs 100 million lower 2004 primarily due elimination duplicate facilities associated operational costs 2003 resulting integration spa acquisition additionally 2003 att directory business recorded 84 million allocations corporaterelated administration costs included 2004 expenses due att directory acquisition print paper costs attbranded directories 19 million lower 2004 compared 2003 due lower print volumes adjusted pro forma expenses relocation severance integration costs 37 million lower 2004 compared 2003 adjusted pro forma expenses 2004 included 70 million related relocation corporate offices cary north carolina compared 73 million 2003 2004 adjusted pro forma expenses also included 25 million acquisition integrationrelated costs att transaction offsetting increased costs 2003 adjusted pro forma expenses included 70 million charge related shutdown duplicative facilities resulted spa acquisition compared similar charges 11 million 2004 related relocation sprint sales offices offsetting lower 2004 expenses 134 million adjustment resulting lower operating expense 2003 compared 2004 due elimination consolidated adjusted pro forma results sales agency expense paid att dontech recorded revenue att deferred expense recognized life publications related dontech recorded revenue period revenue resulting timing difference due different accounting treatment att dontech resulted net reduction 2003 operating expense 134 million eliminate sales agency expense pro forma adjusted expenses additionally 2004 adjusted pro forma sales expenses 54 million higher 2003 primarily due better sales performance sprint directories certain larger markets sarbanesoxley compliance 2004 also resulted approximately 19 million expenses corresponding expense 2003 expect adjusted operating ga expenses higher 2005 adjusted pro forma operating ga expenses 2004 due increased investments online directories digital initiatives increased advertising promotional activities illinois adjusted pro forma da 2004 854 million compared 954 million 2003 depreciation fixed assets amortization computer software lower 2004 66 million due acceleration depreciation certain fixed assets computer software acquired connection spa acquisition 2003 adjusted pro forma operating income 2004 5313 million increase 265 million 52 adjusted pro forma operating income 2003 5048 million reflecting expense decreases advertising sales publication sales management reviews evaluates value advertising sales directories published period “publication sales” primary sales performance measure management believes comparison publication sales directories one period next gives better indication underlying sales trends economic conditions business confidence comparison directory revenue recognized using deferral amortization method recognize directory revenue ratably life directory deferral amortization amount revenue recognized period directly related sales trends economic conditions business confidence period publication sales similar “samestore” sales measure events occur current period affect comparability publication sales prior year period changes directory publication dates prior year publication sales amounts adjusted conform current period presentation publication sales sprintbranded directories 2004 5672 million 147 million 27 publication sales 5525 million 2003 publication sales attbranded directories 2004 4632 million 21 publication sales 4731 million 2003 increase sprintbranded publication sales resulted higher recurring advertising major sprint markets directories published 2004 results partially offset weaker performance certain smaller sprint markets decrease attbranded publication sales resulted continued softness chicago area economy lessthanoptimal execution investment att directory business result dontech structure prior att directory acquisition due timing sales campaign cycles determine publication sales substantially 2004 attbranded publication sales substantial portion first quarter 2005 attbranded publication sales completed prior att directory acquisition publication sales nongaap measure comparable gaap measure net revenue reconciliation publication sales net revenue reported accordance gaap presented liquidity capital resources december 31 2005 credit facility consists 3134 million term loan a2 1160 million term loan a3 14295 million term loan 3500 million term loan d1 1750 million revolving credit facility “revolver” aggregate credit facility 23839 million term loans require quarterly principal interest payments credit facility provides new term loan c potential borrowings 400 million proceeds borrowed used fund acquisitions retirement notes defined december 31 2005 outstanding balances term loans a2 a3 d1 2846 million 1055 million 14258 million 3500 million respectively 50 million outstanding revolver term loan a2 term loan a3 mature december 2009 term loans d1 mature june 2011 weighted average interest rate outstanding debt credit facility 621 432 december 31 2005 2004 respectively increase weighted average interest rate primarily reflects increase libor rate 2005 december 31 2005 restated credit facility bears interest option either • higher base rate determined administrative agent deutsche bank trust company americas plus 100 margin revolver term loan a2 075 margin term loan a3 term loan term loan d1 ii federal funds effective rate defined plus 050 plus 100 margin revolver term loan a2 075 margin term loan a3 term loan term loan d1 • libor rate plus 200 margin revolver term loan a2 175 margin term loan a3 term loan 150 margin term loan d1 may elect interest periods 1 2 3 6 9 12 months libor borrowings credit facility indentures governing notes defined contain usual customary negative covenants among things place limitations ability incur additional indebtedness including capital leases liens ii pay dividends repurchase capital stock iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock subsidiaries vi engage transactions affiliates credit facility also contains financial covenants relating maximum consolidated leverage minimum interest coverage maximum senior secured leverage defined therein substantially assets including capital stock subsidiaries pledged collateralize obligation credit facility senior notes defined effective interest rate total outstanding debt including interest rate swaps twelve months ended december 31 2005 677 september 1 2004 connection att directory acquisition amended restated credit facility consisted 700 million term loan a2 1650 million term loan b2 175 million revolver aggregate facility 2525 million december 6 2004 amended restated credit facility accomplish following objectives • obtain favorable pricing variable rate debt • provide new term loan a3 new term loan replacing term loan b2 • adjust nonfinancial covenants make less restrictive corporate operating flexibility • obtain consent carve designated additional debt required mandatory prepayments december 13 2005 amended credit facility accomplish following objectives • provide new 350 million term loan d1 fund repurchase 8875 senior notes due 2010 pay transaction prepayment costs • adjust nonfinancial covenants make less restrictive corporate operating flexibility • obtain consent dex media merger gs repurchase connection spa acquisition issued 325 million 8875 senior notes due 2010 “senior notes” 600 million 10875 senior subordinated notes due 2012 “subordinated notes” collectively senior notes “notes” interest paid notes semiannually june 15 december 15 december 20 2005 repurchased tender offer exit consent solicitation 3171 million senior notes considering among alternatives redemption remaining 79 million senior notes 2006 proceeds term loan d1 credit facility 350 million used fund repurchase fund call premium 253 million pay transaction costs partial repurchase senior notes accounted extinguishment debt 327 million recorded interest expense year ended december 31 2005 consisting 253 million call premium writeoff 74 million unamortized deferred financing costs series transactions related spa acquisition november 2002 january 2003 issued private placement 200604 shares preferred stock warrants purchase 1650000 shares common stock gs funds gross proceeds 200 million exercise prices related warrants range 2628 2862 exercisable time fiveyear term preferred stock accrued unpaid dividends convertible gs funds common stock time issuance price 2405 per share earned cumulative dividend 8 compounded quarterly could pay cash dividends preferred stock september 30 2005 time dividend accreted december 31 2005 preferred stock dividends paid cash gs funds company january 14 2005 repurchased 100303 shares preferred stock gs funds 2772 million cash order fund repurchase pay transaction costs repay debt associated credit facility january 14 2005 issued 300 million 6875 senior notes “holdco notes” interest payable holdco notes semiannually arrears january 15 july 15 year commencing july 15 2005 holdco notes unsecured obligations company mature january 15 2013 connection issuance holdco notes completed exchange offer june 2005 january 27 2006 repurchased remaining 100301 shares outstanding preferred stock gs funds 3361 million cash including accrued cash dividends interest “gs repurchase” pursuant terms stock purchase support agreement dated october 3 2005 order fund cash portion dex media merger gs repurchase address general corporate needs including payment fees expenses january 27 2006 issued 365 million aggregate principal amount maturity 3321 million gross proceeds 6875 series a1 senior discount notes due january 15 2013 660 million aggregate principal amount maturity 6005 million gross proceeds 6875 series a2 senior discount notes due january 15 2013 1210 million principal amount 8875 series a3 senior notes due january 15 2016 interest payable semiannually series a1 a2 senior discount notes series a3 senior notes sources uses funds connection dex media merger gs repurchase summarized follows 1 represents shortterm interest income series a2 senior discount notes series a3 senior notes january 27 2006 issuance date notes january 31 2006 closing dex media merger 2 used cash hand 95 million fund portion 1 dex media merger related financings 2 gs repurchase related financings 3 includes fees expenses relating 1 dex media merger related financings 2 gs repurchase related financings following dex media merger dex media wholly owned subsidiary rhd primary source liquidity continue cash flow generated operations well available borrowing capacity revolver dex media revolvers associated dex media’s credit facilities expect primary liquidity requirements fund operations debt service indebtedness including dex media’s subsidiaries’ indebtedness ability meet debt service requirements dependent ability generate sufficient cash operations make additional borrowings combined company’s credit facilities primary sources cash flow consist mainly cash receipts sale advertising yellow pages directories impacted among factors general economic conditions competition yellow pages directory publishers alternative products consumer confidence level demand yellow pages advertising believe cash flows operations along borrowing capacity revolver dex media’s revolvers adequate fund operations capital expenditures meet debt service requirements least next 12 24 months however make assurances business generate sufficient cash flow operations sufficient borrowing available revolver dex media’s revolvers term loan c enable us fund operations capital expenditures meet debt service requirements pursue strategic initiatives purposes result dex media merger accordance sfas 141 business combinations “sfas 141” required record dex media’s consolidated outstanding debt fair value following table illustrates book value fair value dex media’s consolidated outstanding debt january 31 2006 primarily result business combinations preferred stock repurchase transactions significant amount debt service aggregate outstanding debt december 31 2005 january 31 2006 30788 million 108891 million including fair value adjustments required purchase accounting 2356 million respectively completion dex media merger triggered change control offers dex media outstanding notes requiring us make offers repurchase notes march 1 2006 2913 million 5875 senior notes 03 million 9875 dex west senior subordinated notes 01 million 9875 dex media east senior notes 02 million 9 dex media inc senior discount notes tendered applicable change control offer repurchased us twelve months ended december 31 2005 made scheduled principal payments 1152 million prepaid additional 2300 million principal credit facility additionally made revolver payments 3042 million offset revolver borrowings 2680 million credit facility year ended december 31 2005 made aggregate cash interest payments 2067 million december 31 2005 78 million cash equivalents checks yet presented payment 75 million available borrowings revolver 1700 million 2005 periodically utilized revolver financing resource balance timing periodic accelerated payments made credit facility interest payments senior notes senior subordinated notes timing cash receipts operations may use revolver dex media’s revolvers similar fashion 2006 present intention repay borrowings revolvers timely manner keep outstanding amounts minimum cash flow provided operating activities 3921 million year ended december 31 2005 key contributors operating cash flow 2005 include following • 675 million net income • 2024 million net noncash charges reflecting source cash primarily consisting 851 million depreciation amortization 300 million bad debt provision 327 million loss extinguishment debt 432 million deferred taxes 114 million noncash charges • 502 million net source cash 820 million increase deferred directory revenue offset increase accounts receivable 318 million analyze change deferred revenue accounts receivable together directory published annual billing value directory initially deferred unbilled accounts receivable established month thereafter typically onetwelfth billing value recognized revenue billed customers • 525 million net source cash decrease assets reflecting net decrease deferred directory costs 488 million consisting increase deferred directory costs 162 million offset 650 million amortization deferred directory costs relating directories scheduled publish subsequent att directory acquisition 37 million decrease current noncurrent assets deferred directory costs represent cash payments certain costs associated publication directories since deferred directory costs initially deferred incurred cash payments made prior expense recognized • 195 million net source cash increase accounts payable accrued liabilities primarily reflecting 106 million increase accrued interest payable outstanding debt 92 million increase accounts payable increase noncurrent liabilities 32 million offset 35 million decrease accrued liabilities cash used investing activities year ended december 31 2005 381 million includes following • 316 million used purchase fixed assets primarily computer equipment software • 65 million cash payments fees associated dex media merger cash used financing activities year ended december 31 2005 3570 million includes following • 8776 million net borrowings consisting 300 million 6875 holdco notes used finance january 2005 repurchase 100303 shares outstanding preferred stock 350 million credit facility’s term loan d1 used fund tender offer exit solicitation 8875 senior notes 2680 million borrowings revolver associated credit facility net transaction costs call premium payments 404 million • 6494 million principal payments debt borrowed credit facility amount 1152 million represents scheduled principal payments 2300 million represents principal payments made accelerated basis option excess cash flow generated operations 3042 million represents principal payments revolver • 3171 million fund tender offer exit solicitation 8875 senior notes • 2772 million used repurchase 100303 shares outstanding preferred stock january 2005 • 74 million proceeds exercise employee stock options • 17 million increased value checks yet presented payment cash flow provided operating activities 4063 million year ended december 31 2004 key contributors operating cash flow 2004 include following • 703 million net income • 1699 million net noncash charges primarily consisting 666 million depreciation amortization 149 million bad debt provision 169 million noncash charges 715 million deferred taxes • 1131 million net source cash 1649 million increase deferred directory revenue offset increase accounts receivable 518 million analyze change deferred revenue accounts receivable together directory published annual billing value directory initially deferred unbilled accounts receivable established month thereafter typically onetwelfth billing value recognized revenue billed customers connection att directory acquisition record unrecognized revenue directories published prior acquisition september 2004 due purchase accounting acquire associated unbilled receivables rights bill collect receivables totaled approximately 2073 million • 499 million net use cash increase assets reflecting 834 million increase deferred directory costs offset decrease 335 million current noncurrent assets deferred directory costs represent cash payments certain costs associated publication directories since deferred directory costs initially deferred incurred cash payments made prior expense recognized • 324 million net source cash increase accounts payable accrued liabilities reflecting 23 million increase accrued interest payable outstanding debt decrease 206 million federal income tax refunds received additionally accounts payable accrued liabilities includes 42 million advance att transition services agreement relating accounts receivable billing collection services offset timing invoices received compared invoices paid year ended december 31 2004 • 732 million net source cash increase noncurrent liabilities reflecting 589 million tax refund pertained company’s election carryback federal net operating loss connection spa acquisition cash flow operations reflects normal operations business excludes impact incremental assets liabilities acquired result att directory acquisition september 1 2004 impact reflected cash flow investing activities cash used investing activities year ended december 31 2004 14316 million includes following • 14136 million cash payments connection att directory acquisition • 180 million used purchase fixed assets primarily computer equipment software leasehold improvements cash provided financing activities year ended december 31 2004 10283 million includes following • 13189 million net borrowings credit facility consisting 6005 million 7318 million borrowings terms loans a2 b2 respectively net transaction costs 134 million funds received credit facility used finance att directory acquisition • 4214 million principal payments debt borrowed credit facility amount 671 million represents scheduled principal payments 2500 million represents principal payments made accelerated basis option excess cash flow generated operations 1043 million represents principal payments revolver • 212 million principal payments redeem remaining 9125 senior subordinated notes due 2008 • 1455 million borrowings revolver • 09 million decreased value checks yet presented payment • 74 million proceeds exercise employee stock options offbalance sheet arrangements company offbalance sheet arrangements material results operations financial condition liquidity contractual obligations contractual obligations table presented sets forth annual commitments december 31 2005 principal interest payments debt well cash obligations next five years thereafter debt repayments presented table include scheduled principal payments current debt agreements include anticipated prepayments rhd actual contractual obligation table presented sets forth annual commitments december 31 2005 principal interest payments debt well cash obligations next five years thereafter pro forma adjusted basis reflect gs repurchase related financing dex media merger related financings debt repayments presented table include scheduled principal payments debt agreements include anticipated prepayments rhd pro forma adjusted 1 included longterm debt amounts owed credit facility notes weighted average interest rate credit facility 621 december 31 2005 senior notes senior subordinated notes bear interest 8875 10875 respectively holdco notes bear interest 6875 2 interest debt represents cash interest payment obligations assuming indebtedness december 31 2005 paid accordance contractual maturity assumes interest rates variable interest debt december 31 2005 remain unchanged future periods 3 enter operating leases normal course business substantially lease agreements fixed payment terms based passage time lease agreements provide us renewal early termination options future operating lease obligations would change exercised renewal early termination options entered additional operating lease agreements amounts table assume exercise renewal early termination options 4 unconditional purchase obligations three vendors regarding purchase paper expire various times december 31 2005 december 31 2006 purchase obligations based annual minimum quantities preestablished pricing amounts table reflect pricing minimum quantities contract market price paper drop preestablished pricing vendor obligated negotiate us lower paper price quantities used contractual minimums would increase payment obligations contractual obligations beyond 2006 connection software system modernization ongoing support services related amdocs software system obligated pay amdocs approximately 402 million periods 2006 2009 connection att directory acquisition entered internet yellow pages reseller agreement whereby obligated pay att 154 million 5year term agreement 5 defined benefit plan covering substantially employees funding policy contribute amount least equal minimum legal funding requirement contributions required threeyear period ended december 31 2005 based past performance uncertainty dollar amounts paid excluded amounts table unfunded postretirement plan provides certain healthcare life insurance benefits fulltime employees reach retirement age working company expected future benefit payments including administrative expenses net employee contributions included table expect make contributions approximately 01 million 09 million nonqualified retirement plan postretirement plan respectively 2006 6 longterm debt includes amounts owed rhd subsidiaries including dex media subsidiaries december 31 2005 pro forma adjusted basis 7 interest debt represents cash interest payment obligations assuming indebtedness rhd subsidiaries including dex media subsidiaries december 31 2005 pro forma adjusted basis paid accordance contractual maturity assumes interest rates variable interest debt december 31 2005 remain unchanged future periods 8 addition contractual obligations rhd described note 4 purchase obligations also include amounts contractually owed dex media ongoing support services related amdocs software system completed 2004 well certain information technology communications billing collection services provided qwest although dex media expects incur significant charges related publication printed directories including printing paper distribution costs dex media’s contractual agreements providers services include fixed minimum quantities purchased therefore included table item 7aitem 7 management’s discussion analysis financial condition results operations item read conjunction audited consolidated financial statements notes thereto included item 8 unless otherwise indicated terms “company” “donnelley” “rhd” “we” “us” “our” refer rh donnelley corporation direct indirect whollyowned subsidiaries corporate overview one nation’s largest yellow pages online local commercial search companies based revenue publish distribute advertiser content utilizing three highly recognizable brands industry dex embarq formerly known sprint att formerly known sbc “tripleplay” integrated marketing solutions assist advertisers attracting large volumes readytobuy consumers combination print directories internet yellow pages “iyp” search engine marketing “sem” search engine optimization “seo” services 2006 print online solutions helped 600000 national local businesses 28 states reach consumers actively seeking purchase products services approximately 1900 sales representatives work daily basis help bring local businesses consumers together satisfy mutual objectives utilizing “triple play” products services 2006 published distributed 80 million print directories many country’s attractive growth markets including albuquerque denver las vegas orlando phoenix print directories provide comprehensive local information consumers facilitating active search products services offered local merchants online products services iyp sem seo provide merchants additional reach connect consumers actively seeking purchase products services internet powerful offerings distribute local advertisers’ content proprietary iyp sites extend major online search platforms including google® yahoo® msn® providing additional qualified leads advertisers also help local businesses take advantage expanding online market assisting determine optimal display information iyp profile right combination sem seo tactics prominent appearance internet compelling set “triple play” products services turn generates among strongest returns advertisers advertising media available today strong advertiser return uniquely positions rhd 1900 sales representatives trusted advisors marketing support service local markets serve significant business developments january 31 2006 acquired dex media inc “dex media” equity purchase price 41 billion consisting 36547381 shares common stock valued 22 billion 19 billion cash “dex media merger” also assumed dex media’s subsidiaries’ outstanding indebtedness fair value 55 billion together costs total aggregate purchase price 98 billion dex media indirect parent dex media east llc “dex media east” dex media west llc “dex media west” dex media exclusive publisher “official” yellow pages white pages directories qwest communications international inc “qwest” qwest primary incumbent local exchange carrier “ilec” november 2002 dex media east operates directory business following states colorado iowa minnesota nebraska new mexico north dakota south dakota collectively “dex east states” dex media west operates directory business following states arizona idaho montana oregon utah washington wyoming collectively “dex west states” together dex east states collectively “dex media states” prior dex media merger dex media leading directory publisher united states purpose dex media merger take step transformation rhd leading publisher yellow pages directories well combine complementary strengths companies acquired business dex media subsidiaries “dex media business” operates dex media inc one rhd’s direct whollyowned subsidiaries results dex media business included company’s operating results commencing february 1 2006 see “acquisitions dex media merger” description dex media merger january 27 2006 conjunction dex media merger repurchased remaining 100301 shares outstanding 8 convertible cumulative preferred stock “preferred stock” investment partnerships affiliated goldman sachs group inc “gs funds” 3361 million cash including accrued cash dividends interest “gs repurchase” preferred stock issued gs funds partially fund embarq acquisition defined subsequent gs repurchase outstanding shares preferred stock see item 8 “financial statements supplementary data” note 8 “redeemable preferred stock warrants” description financial impact preferred stock gs repurchase see “acquisitions embarq acquisition” discussion transaction september 6 2006 acquired “local launch acquisition” local launch inc “local launch” local launch leading local search products platform fulfillment provider enables resellers sell internet advertising solutions local advertisers local launch specializes search publishing distribution directory organic marketing solutions purpose local launch acquisition support expansion current local sem seo offerings provide new innovative solutions enhance local sem seo capabilities results local launch business included consolidated results commencing september 6 2006 local launch business operates direct whollyowned subsidiary rhd see “acquisitions local launch acquisition” description local launch acquisition november 2 2006 repurchased outstanding warrants purchase 165 million shares common stock gs funds aggregate purchase price approximately 531 million november 9 2006 certain affiliates carlyle group welsh carson anderson stowe “selling shareholders” sold 9424360 shares 9424359 shares respectively rhd common stock selling shareholders former shareholders dex media became shareholders rhd conjunction dex media merger sale selling shareholders longer hold shares rhd common stock acquired connection dex media merger receive proceeds transaction forwardlooking information certain statements contained annual report form 10k regarding donnelley’s future operating results performance business plans prospects statements constituting historical fact “forwardlooking statements” subject safe harbor created private securities litigation reform act 1995 possible words “believe” “expect” “anticipate” “should” “will” “would” “planned” “estimates” “potential” “goal” “outlook” “may” “predicts” “could” negative words comparable expressions used identify forwardlooking statements actual events results may differ materially evaluating statements specifically consider various factors including risks uncertainties contingencies disclosed item 1a annual report form 10k factors may cause actual results differ materially rhd’s forwardlooking statements forwardlooking statements attributable us person behalf expressly qualified entirety cautionary statement forwardlooking statements reflect current beliefs assumptions respect future results business plans prospects based solely information currently available us although believe expectations reflected forwardlooking statements reasonable cannot guarantee future results levels activity performance forwardlooking statements made date annual report except required federal securities laws rules regulations united states securities exchange commission “sec” assume obligation update revise provide reasons actual results may differ acquisitions dex media merger january 31 2006 completed dex media merger equity purchase price 41 billion pursuant agreement plan merger dated october 3 2005 “merger agreement” issued outstanding share dex media common stock converted 1230 cash 024154 share rhd common stock resulting aggregate cash value 19 billion aggregate stock value 22 billion based 36547381 newly issued shares rhd common stock valued 6182 per share 6182 share price used value common shares issued dex media merger based average closing price rhd’s common stock two business days announcement dex media merger october 3 2005 accordance eitf 9519 determination measurement date market price securities issued purchase business combination additionally assumed dex media’s outstanding indebtedness january 31 2006 fair value 55 billion total allocable purchase price also includes transaction costs 267 million directly related dex media merger severance related costs certain dex media employees 176 million dex media vested equity awards outstanding january 31 2006 estimated fair value 774 million total aggregate purchase price 98 billion upon completion dex media merger company’s stockholders dex media’s former stockholders owned approximately 47 53 company’s common stock respectively results dex media business included company’s operating results commencing february 1 2006 finance dex media merger issued 660 million 6875 senior discount notes due january 15 2013 gross proceeds 6005 million 1210 million 8875 senior notes due january 15 2016 pay cash portion purchase price dex media stockholders connection dex media merger acquired directory services agreements collectively “dex directory services agreements” dex media entered qwest including 1 publishing agreement term 50 years commencing november 8 2002 subject automatic renewal additional oneyear terms grants us right exclusive official directory publisher listings classified advertisements qwest’s telephone customers geographic areas dex media states qwest successors provided local telephone services november 8 2002 well exclusive right use certain qwest branding directories markets 2 noncompetition agreement term 40 years commencing november 8 2002 pursuant qwest behalf affiliates successors agreed sell directory products consisting principally listings classified advertisements subscribers geographic areas dex media states qwest provided local telephone service november 8 2002 directed primarily consumers geographic areas fair value assigned dex media directory services agreements 73 billion based multiperiod excess earnings method amortized straightline method 42 years multiperiod excess earnings method projected cash flows intangible asset computed indirectly means future cash flows projected deductions made recognize returns appropriate contributory assets leaving excess residual net cash flow indicative intangible asset fair value result dex media merger also acquired 1 advertising commitment agreement whereby qwest agreed purchase aggregate 20 million advertising per year 2017 us pricing terms least favorable offered similar large customers 2 intellectual property contribution agreement pursuant qwest assigned licensed us qwest intellectual property previously used qwest directory services business along 3 trademark license agreement pursuant qwest granted us right november 2007 use qwest dex qwest dex advantage marks connection directory products related marketing material dex media states right use marks connection dexonlinecom® intangible assets 2 3 collectively “trade names” fair value assigned dex media advertising commitment based multiperiod excess earnings method amortized straightline method 12 years fair value acquired trade names based relief royalty method values trade names based estimated amount company would pay arms length transaction use trade names assets amortized straightline method 15 years dex media merger accounted purchase business combination purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values january 31 2006 purchase accounting rules assumed deferred revenue balance related directories published dex media january 31 2006 amount represented revenue would recognized 2006 2007 deferral amortization revenue recognition method absence purchase accounting dex media merger accordingly never record revenue associated directories published prior dex media merger although deferred revenue balance eliminated retained rights associated collection amounts due obligations advertising contracts executed prior dex media merger also purchase accounting rules assume deferred directory costs dex media january 31 2006 related directories published prior dex media merger costs represented operating expenses would recognized dex media 2006 2007 deferral amortization method dex media merger occurred allocation purchase price fair value assets acquired liabilities assumed shown table change goodwill year ended december 31 2006 primarily related dex media merger att directory acquisition september 1 2004 completed acquisition directory publishing business “att directory business” att inc “att” formerly known sbc communications inc “sbc” illinois northwest indiana including att’s interests dontech ii partnership “dontech” 5050 general partnership us att collectively “att directory acquisition” 141 billion cash working capital adjustments settlement 30 million liquidation preference owed us related dontech result att directory acquisition became publisher att branded yellow pages directories illinois northwest indiana transaction consummated pursuant purchase agreement dated july 28 2004 amended among rhd ameritech corporation “ameritech” direct whollyowned subsidiary att ameritech publishing inc “api” direct whollyowned subsidiary ameritech results att directory business included consolidated results commencing september 1 2004 acquired att directory business operates rh donnelley publishing advertising illinois partnership one indirect whollyowned subsidiaries finance att directory acquisition amended restated rhd inc’s credit facility consisting 700 million term loan a2 1650 million term loan b2 175 million revolving credit facility “revolver” aggregate facility 2525 million directory services agreements att company include directory services license agreement noncompetition agreement internet yellow pages reseller agreement directory publishing listing agreement collectively “att directory services agreements” certain affiliates att directory services license agreement designates us official exclusive provider yellow pages directory services att successors illinois northwest indiana “territory” grants us exclusive license obligation specified agreement produce publish distribute white pages directories territory att’s agent grants us exclusive license obligation specified agreement use att brand logo print directories territory noncompetition agreement prohibits att affiliates successors certain limited exceptions 1 producing publishing distributing yellow white pages print directories territory 2 soliciting selling local national yellow white pages advertising inclusion directories 3 soliciting selling local internet yellow pages advertising certain internet yellow pages directories territory licensing att marks third party purpose internet yellow pages reseller agreement grants us exclusive right sell local advertisers within illinois northwest indiana internet yellow pages advertising focused upon products services offered within territory b nonexclusive right sell local excluding national advertisers within illinois northwest indiana internet yellow pages advertising focused upon products services offered outside territory case onto yellowpagescom platform directory publishing listing agreement gives us right purchase use basic att subscriber listing information updates purpose publishing directories att directory services agreements internet yellow pages reseller agreement initial terms 50 years subject automatic renewal early termination specified circumstances internet yellow pages reseller agreement term 5 years fair value assigned att directory services agreements internet yellow pages reseller agreement 9500 million 25 million respectively based present value estimated future cash flows amortized straightline method 50 years 5 years respectively att directory acquisition accounted purchase business combination purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values september 1 2004 embarq acquisition january 3 2003 completed acquisition directory business “embarq directory business” sprint nextel corporation “sprint” formerly known sprint corporation acquiring outstanding capital stock various entities comprising sprint publishing advertising collectively “embarq acquisition” 223 billion cash result publisher embarq formerly sprint branded yellow pages directories 18 states may 2006 sprint spunoff local telephone business embarq corporation “embarq” connection spinoff entered new agreements embarq replaced related agreements sprint except sprint remains bound certain noncompetition obligations results embarq directory business included consolidated results commencing january 3 2003 embarq directory business operates rh donnelley publishing advertising inc one indirect whollyowned subsidiaries finance embarq acquisition rhd inc entered new 1525 million credit facility consisting 500 million term loan 900 million term loan b 125 million revolver also issued 8875 senior notes 10875 senior subordinated notes additionally issued 200 million preferred stock warrants purchase 165 million shares common stock gs funds directory services agreements embarq company executed may 2006 conjunction sprint’s spinoff local telephone business include directory services license agreement trademark license agreement noncompetition agreement certain affiliates embarq well noncompetition agreement sprint entered january 2003 collectively “embarq directory services agreements” embarq directory services agreements replaced previously existing analogous agreements sprint except sprint remained bound noncompetition agreement directory services license agreement grants us exclusive license obligation specified agreement produce publish distribute yellow white pages directories embarq successors 18 states embarq provided local telephone service time agreement trademark license agreement grants us exclusive license obligation specified agreement use certain specified embarq trademarks markets noncompetition agreements prohibit embarq sprint respective affiliates successors markets selling local directory advertising certain limited exceptions producing publishing distributing print directories embarq directory services agreements initial terms 50 years commencing january 2003 subject automatic renewal early termination specified circumstances fair value embarq directory services agreements 16 billion determined based present value estimated future cash flows time embarq acquisition january 2003 amortized straightline method 50 years embarq acquisition accounted purchase business combination purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values january 3 2003 local launch acquisition september 6 2006 acquired local launch local launch leading local search products platform fulfillment provider enables resellers sell internet advertising solutions local advertisers local launch specializes search publishing distribution directory organic marketing solutions purpose local launch acquisition support expansion current local sem seo offerings provide new innovative solutions enhance local sem seo capabilities results local launch business included consolidated results commencing september 6 2006 local launch business operates direct whollyowned subsidiary rhd connection local launch acquisition identified recorded certain intangible assets estimated fair value including 1 local customer relationships 2 noncompete agreements 3 technology 4 tradenames intangible assets amortized straightline method remaining useful lives ranging 3 7 years local launch acquisition accounted purchase business combination purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values september 6 2006 purpose acquisitions transform rhd leading publisher yellow pages directories provider online local commercial search services well support expansion current local sem seo offerings provide new innovative solutions enhance local sem seo capabilities acquisitions accounted purchase business combinations purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values acquisition date segment reporting management reviews analyzes business publishing yellow pages directories related local commercial search one operating segment critical accounting estimates preparation financial statements accordance generally accepted accounting principles “gaap” requires management estimate effect various matters inherently uncertain date financial statements estimates varies regard level judgment involved potential impact company’s reported financial results estimates deemed critical different estimate could reasonably used changes estimate reasonably likely occur period could materially impact company’s financial condition changes financial condition results operations company’s significant accounting polices december 31 2006 discussed note 2 notes consolidated financial statements included item 8 annual report critical estimates inherent accounting polices december 31 2006 discussed management believes current assumptions considerations used estimate amounts company’s consolidated financial statements appropriate allowance doubtful accounts sales claims record revenue net allowance sales claims addition record provision bad debts provision bad debts allowance sales claims estimated directory based historical experience also evaluate current condition customer balances bankruptcy filings change credit policy historical chargeoff patterns recovery rates data determining allowance doubtful accounts reserve review estimates periodically assess whether additional adjustment needed based economic events circumstances including actual experience end billing collection cycle respect directory believe allowance doubtful accounts sales claims adequate cover anticipated losses current conditions however significant deterioration factors noted overall economy could materially change expectations provisions sales claims doubtful accounts estimated based percentage revenue accordingly additional 1 change allowance percentages would impacted 2006 gaap net loss approximately 153 million 2006 adjusted pro forma net income 190 million see “adjusted pro forma combined adjusted amounts nongaap measures” pension benefits pension plan obligations related assets company’s defined benefit pension plans presented note 11 consolidated financial statements plan assets consist primarily marketable equity debt instruments valued using market quotations determination plan obligations annual pension expense requires management make number assumptions key assumptions measuring plan obligations include discount rate future salary increases longterm expected return plan assets 2006 adopted citigroup pension liability index appropriate discount rate defined benefit pension plans index widely used companies throughout united states considered one preferred standards establishing discount rate 2005 discount rate determined using methodology discounts projected plan cash flows measurement date using spot rates provided citigroup pension discount curve single discount rate computed present value benefit cash flows using single rate equaled present value computed using citigroup pension discount curve prior years discount rates developed reference moody’s longterm aa corporate bond yield plan’s measurement date consideration plan’s duration relative duration moody’s aa corporate bond portfolio salary increase assumptions based upon historical experience anticipated future management actions asset returns based upon anticipated average rate earnings expected invested funds plan longrun december 31 2006 weightedaverage actuarial assumptions discount rate 590 longterm rate return plan assets 825 rhd plans 90 dex media plans assumed salary increases 366 net periodic pension costs recognized 2006 120 million 1 increase discount rate would affect 2006 gaap net loss adjusted pro forma net income approximately 32 million 1 decrease discount rate would affect 2006 gaap net loss adjusted pro forma net income approximately 30 million 1 change longterm rate return plan assets would affect 2006 gaap net loss adjusted pro forma net income approximately 23 million 1 change assumed salary increases would affect 2006 gaap net loss adjusted pro forma net income approximately 10 million see “adjusted pro forma combined adjusted amounts nongaap measures” intangible assets goodwill valuation amortization intangible assets consist directory services agreements company qwest att embarq respectively noncompetition agreement company sprint established customer relationships trademarks trade names advertising commitment technology resulting dex media merger att directory acquisition embarq acquisition local launch acquisition intangible assets amortized period assets expected contribute cash flow company reflect expected pattern benefit recorded goodwill resulted dex media merger att directory acquisition embarq acquisition local launch acquisition subject amortization however subject annual impairment testing intangible assets subject impairment test accordance statement financial accounting standards “sfas” 144 accounting impairment disposal longlived assets “sfas 144” goodwill subject impairment test accordance sfas 142 goodwill intangible assets “sfas 142” company reviews carrying value intangible assets impairment whenever events circumstances indicate carrying amount may recoverable impairment test intangible assets performed comparing carrying amount intangible assets sum undiscounted expected future cash flows relating assets accordance sfas 144 impairment exists sum future undiscounted cash flows less carrying amount intangible asset related group assets impairment would result writedown intangible asset estimated fair value based discounted future cash flows goodwill tested impairment comparing carrying amount reporting unit estimated fair value reporting unit accordance sfas 142 impairment may exist carrying amount reporting unit less estimated fair value impairment would result writedown equal difference carrying amount estimated fair value reporting unit goodwill used certain estimates assumptions impairment evaluation including limited projected future cash flows revenue growth customer attrition levels estimated writeoffs december 31 2006 management believes impairment intangible assets goodwill however significant deterioration business assumptions underlying impairment evaluations overall economy could result impairment charges future reporting periods aggregate net book value intangible assets goodwill december 31 2006 impaired 1 net loss reported gaap basis net income adjusted pro forma basis 2006 would adversely impacted approximately 887 million see “adjusted pro forma combined adjusted amounts nongaap measures” additionally management must assess whether remaining useful lives intangible assets represent period intangible assets expected contribute cash flow assessment process used certain estimates assumptions including projected future cash flows customer attrition levels industry economic conditions accordance sfas 144 evaluate remaining useful lives intangible assets whenever events circumstances indicate revision remaining period amortization warranted estimated remaining useful lives change remaining carrying amount intangible asset would amortized prospectively revised remaining useful life year ended december 31 2006 amortization intangible assets approximately 2775 million remaining useful lives intangible assets shortened 10 net loss reported gaap basis net income adjusted pro forma basis 2006 would adversely impacted approximately 488 million see “adjusted pro forma combined adjusted amounts nongaap measures” stockbased compensation january 1 2006 adopted sfas 123r sharebased payment “sfas 123r” using modified prospective method required record compensation expense consolidated statement operations employee stockbased awards granted modified settled date adoption unvested portion previously granted stock awards remain outstanding beginning period adoption based grant date fair values sfas 123r fair value stockbased awards calculated using blackscholes model time stockbased awards granted sfas 123r use blackscholes model requires significant judgment use estimates particularly assumptions expected volatility riskfree interest rates expected lives value stockbased awards forfeiture rates recognize stockbased compensation following assumptions used valuing stockbased awards recognition stockbased compensation year ended december 31 2006 estimate expected volatility based historical volatility price common stock expected life stockbased awards expected life represents period time stockbased awards granted expected outstanding based historical experience use historical data estimate stockbased award exercises employee terminations riskfree interest rate based applicable us treasury yields approximate expected life stockbased awards granted also use historical data estimate forfeiture rate estimated forfeitures adjusted extent actual forfeitures differ expected materially differ estimates assumptions reflect best estimates involve inherent uncertainties based certain conditions generally outside control company result assumptions used total stockbased compensation determined accordance sfas 123r could materially impacted furthermore use different assumptions future grants stockbased compensation could materially impacted future periods new accounting pronouncements february 2007 financial accounting standards board “fasb” issued sfas 159 fair value option financial assets financial liabilities including amendment fasb statement 115 “sfas 159” sfas 159 permits companies choose measure many financial instruments certain items fair value currently required measured fair value objective sfas 159 provide opportunities mitigate volatility reported earnings caused measuring related assets liabilities differently without apply hedge accounting provisions sfas 159 also establishes presentation disclosure requirements designed facilitate comparisons companies choose different measurement attributes similar types assets liabilities sfas 159 effective fiscal years beginning november 15 2007 assess impact adoption sfas 159 consolidated financial position results operations 2007 september 2006 fasb issued sfas 157 fair value measurements “sfas 157” defines fair value establishes framework measuring fair value gaap expands disclosures fair value measurements sfas 157 effective fiscal years beginning november 15 2007 interim periods within fiscal years currently assessing impact adoption sfas 157 consolidated financial position results operations september 2006 sec issued staff accounting bulletin 108 considering effects prior year misstatements quantifying misstatements current year financial statements “sab 108” sab 108 provides guidance effects carryover reversal prior year financial statement misstatements considered quantifying current year misstatement sab 108 describes two approaches assessing materiality misstatements “rollover” approach quantifies misstatements based amount error originating current year income statement “iron curtain” approach quantifies misstatements based effects correcting cumulative effect existing balance sheet end current year either approach misstatements deemed material company required adjust financial statements including correcting prior year financial statements even correction continues immaterial prior year financial statements sab 108 effective fiscal years ending november 15 2006 adopted fiscal year ended december 31 2006 recognized adjustments resulting adoption sab 108 year ended december 31 2006 june 2006 fasb issued interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” interpretation clarifies accounting uncertainty income taxes recognized entity’s financial statements accordance sfas 109 accounting income taxes fin 48 prescribes recognition threshold measurement principles financial statement recognition measurement tax positions taken expected taken tax return interpretation effective fiscal years beginning december 15 2006 adopt fin 48 january 1 2007 upon adoption fin 48 anticipate disclosing tax liability 800 million 1000 million uncertain tax positions resulting increase shareholders’ equity january 1 2007 approximately 30 million currently assessing final impact adoption fin 48 consolidated financial position results operations reviewed new accounting standards identified believe new standards material impact financial position operating results operations year ended december 31 2006 compared year ended december 31 2005 factors affecting comparability acquisitions result dex media merger att directory acquisition related financings associated purchase accounting 2006 results reported accordance gaap comparable 2005 reported gaap results deferral amortization method revenue recognition billable value directories published recognized revenue subsequent reporting periods however purchase accounting precluded us recognizing directory revenue certain expenses associated directories published prior acquisition including directories published month acquisition completed thus reported 2006 2005 gaap results indicative underlying operating financial performance accordingly management presenting 1 2006 adjusted pro forma information among things eliminates purchase accounting impact revenue certain expenses related dex media merger assumes dex media merger occurred beginning 2006 2 2005 combined adjusted information reflecting sum rhd’s 2005 adjusted results reflecting adjustments relating att directory acquisition b dex media’s reported gaap results period management believes presentation adjusted pro forma combined adjusted information help financial statement users better easily compare current period underlying operating results combined company performance would likely comparable prior period adjusted pro forma combined adjusted amounts disclosed caption “adjusted pro forma combined adjusted amounts nongaap measures” elsewhere nongaap measures reconciled comparable gaap measures caption adjusted pro forma combined adjusted results exclude effects purchase accounting certain nonrecurring items better reflect underlying operating results respective periods differences rhd dex media att respective predecessor accounting policies adjusted pro forma combined adjusted results strictly comparable treated sfas 123r year ended december 31 2006 company recognized 433 million stockbased compensation expense accordance sfas 123r related stockbased awards granted various employee nonemployee stock incentive plans expense comparable basis 2005 gaap reported results net revenue components net revenue 2006 2005 follows directory advertising revenue earned primarily sale advertising yellow pages directories publish net sales claims allowances directory advertising revenue also includes revenue internetbased advertising products bundled print advertising including certain iyp products internetbased advertising products bundled print advertising sem seo services directory advertising revenue affected several factors including changes quantity size advertisements sold defectors new advertisers well proportion premium advertisements sold changes pricing advertising changes quantity mix advertising purchased per account introduction additional products generate incremental revenue respect print advertising internetbased advertising products bundled print advertising recognized deferral amortization method whereby revenue initially deferred directory published recognized ratably directory’s life typically 12 months revenue respect internetbased advertising bundled print advertising recognized ratably period advertisement appears site revenue respect products services sem seo services recognized delivered fulfilled total net revenue 2006 18959 million representing increase 9393 million total net revenue reported 2005 9566 million increase total net revenue 2006 primarily result dex media merger well lesser extent purchase accounting resulting att directory acquisition total net revenue 2006 includes 8572 million net revenue dex mediabranded directories comparable revenue 2005 due purchase accounting total net revenue 2006 excluded amortization advertising revenue dex mediabranded directories published february 2006 deferral amortization method totaling 6491 million would reported period absent purchase accounting purchase accounting related dex media merger adversely impact reported revenue 2007 purchase accounting resulting att directory acquisition negatively impacted net revenue 2005 850 million respect attbranded directories published prior att directory acquisition would recognized 2005 purchase accounting required gaap purchase accounting related att directory acquisition adversely impact reported revenue 2006 increase total net revenue also resulted higher recurring advertising major embarq markets improved sales performance certain att markets increase total net revenue offset declines att markets due realignment coverage areas publications better reflect shopping patterns well tightening credit standards build stable account base time revenue 2006 totaled 339 million representing increase 229 million revenue reported 2005 110 million increase revenue 2006 primarily result dex media merger revenue includes barter revenue late fees paid outstanding customer balances commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain print products advertising sales statistical measure consists sales advertising print directories distributed period internetbased products services respect advertising first appeared publicly period important distinguish advertising sales net revenue recognized deferral amortization method advertising sales years ended december 31 2006 2005 26482 million 26951 million respectively assumes dex media merger occurred january 1 2005 469 million decrease advertising sales primarily result transition integration dex media business including higher customer sales claims allowances resulting prior legacy dex media systems conversion led declines advertising sales certain dex media markets decrease advertising sales also resulted declines national sales associated rescoping consolidation products att markets declines partially offset continued growth associated products embarq markets decrease advertising sales adversely impact amortization directory advertising revenues next four quarters revenue respect print advertising internetbased advertising products bundled print advertising recognized deferral amortization method whereby revenue initially deferred directory published recognized ratably directory’s life typically 12 months revenue respect internetbased advertising bundled print advertising recognized ratably period advertisement appears site revenue respect products services sem seo services recognized delivered fulfilled expenses components total expenses 2006 2005 follows substantially expenses derived directory publishing business certain costs directly related selling production directories initially deferred recognized ratably life directory costs specifically identifiable particular directory include sales commissions print paper initial distribution costs sales commissions include commissions paid employees sales local advertisers certified marketing representatives “cmrs” act channel national advertisers expenses sales person salaries sales manager compensation sales office occupancy publishing information technology services specifically identifiable particular directory recognized incurred costs recognized reporting period consist costs incurred period fully recognized period ii costs incurred prior period portion amortized recognized current period iii costs incurred current period portion amortized recognized current period balance deferred future periods consequently difference costs recognized given period costs incurred given period may significant deferred costs related sale production directories recognized ratably life directory deferral amortization method accounting cost recognition commencing month directory distribution cost revenue total cost revenue 2006 9871 million compared 4361 million 2005 primary components 5510 million increase cost revenue 2006 compared 2005 follows cost revenue 2006 increased 5510 million compared 2005 primarily result dex media merger expenses 4375 million incurred support dex media business 2006 include bad debt commissions salesperson expenses printing publishing distribution advertising internet production distribution cost revenue comparable expenses 2005 similar deferral amortization method revenue recognition certain costs directly related selling production directories initially deferred incurred recognized ratably life directory result purchase accounting required gaap deferred commissions print delivery costs totaling 451 million net cost uplift defined reported 2006 related directories published prior dex media merger directory expenses incurred 2006 include amortization deferred directory costs relating dex mediabranded directories published beginning february 2006 addition 151 million deferred commissions print delivery costs directories published prior att directory acquisition reported 2005 due purchase accounting purchase accounting related att directory acquisition adversely impacted cost revenue 2006 21 million due remaining amortization cost uplift result purchase accounting required gaap recorded deferred directory costs related directories scheduled publish subsequent dex media merger att directory acquisition embarq acquisition fair value determined estimated billable value published directory less b expected costs complete directories plus c normal profit margin refer purchase accounting entry “cost uplift” fair value costs determined 1577 million 813 million 148 million dex media merger att directory acquisition embarq acquisition respectively costs amortized cost revenue terms applicable directories amortization totaled 1240 million 2006 relating dex media merger att directory acquisition represents increase cost uplift 590 million 650 million recorded 2005 relating att directory acquisition december 31 2006 balance 358 million related cost uplift remains unamortized conjunction dex media merger sole impact purchase accounting cost revenue 2007 2006 company incurred additional expenses 161 million related internet production distribution expanded digital product line offerings cost revenue 2006 also included 155 million noncash stockbased compensation expense resulting sfas 123r company adopted effective january 1 2006 expense comparable basis 2005 2006 48 million noncash stockbased compensation expense resulted modifications stockbased awards due acceleration vesting terms result dex media merger cost revenue includes noncash stockbased compensation expense employees whose wages classified cost revenue also 2006 incurred approximately 68 million additional selling expenses including commission salesperson costs compared 2005 due initiatives improve sales results certain markets general administrative expenses general administrative “ga” expenses 2006 1424 million compared 602 million 2005 representing increase 822 million primary components 822 million increase ga expenses 2006 compared 2005 follows ga expenses 2006 included 582 million increased ga expenses primarily support acquired dex media business comparable expense 2005 ga expenses include billing credit collection financial services human resources administrative services ga expenses 2006 also included 278 million noncash stockbased compensation expense resulting sfas 123r adopted effective january 1 2006 expense comparable basis 2005 2006 86 million noncash stockbased compensation expense resulted modifications stockbased awards due acceleration vesting terms result dex media merger ga expenses include noncash stockbased compensation expense employees whose wages classified ga expenses depreciation amortization depreciation amortization “da” expenses 2006 totaled 3236 million compared 851 million 2005 representing increase 2385 million amortization intangible assets 2775 million 2006 compared 721 million 2005 increase amortization expense due increase intangible assets resulting dex media merger depreciation fixed assets amortization computer software 461 million 2006 compared 130 million 2005 increase depreciation expense primarily due depreciable assets acquired dex media merger operating income subsequent dex media merger company continues one operating segment management views evaluates one operating segment sole source earnings interest taxes depreciation amortization “ebitda” operating income company need allocate resources among different segments operating income 2006 2005 follows operating income 2006 4428 million increased 676 million 2005 operating income 3752 million primarily result dex media merger results 2006 2005 adversely affected purchase accounting precluded us recognizing deferred revenue certain expenses associated directories published prior dex media merger att directory acquisition including directories published month acquisition completed total net revenue 2006 increased 9393 million total net revenue 2005 primarily resulting dex media merger offsetting increase total net revenue increase total expenses 2006 8717 million also primarily result dex media merger 2005 purchase accounting impact att directory acquisition since deferred net revenue related directories published prior dex media merger att directory acquisition eliminated purchase accounting certain direct expenses related directories eliminated purchase accounting purchase accounting disproportionate adverse effect reported revenues month subsequent dex media merger impact purchase accounting expires revenue increase higher rate related expenses compared prior year addition impact purchase accounting total expenses 2006 reflect noncash stockbased compensation expense recognized result adoption sfas 123r expense comparable basis 2005 additionally 2006 cost revenue reflects increase deferred cost uplift amortization described effects purchase accounting eliminated adjusted pro forma operating income 2006 substantially higher compared gaap operating income 2005 see “adjusted pro forma combined adjusted amounts nongaap measures” operating income 2007 impacted solely cost uplift aspect purchase accounting related dex media merger approximately 358 million interest expense net interest expense 2006 7651 million compared 2645 million 2005 increase net interest expense 5006 million 2006 result dramatically higher outstanding debt balances associated dex media merger combined higher interest rates see “liquidity capital resources” description debt obligations provisions related debt instruments net interest expense 2005 includes 253 million call premium payment writeoff unamortized deferred financing costs 74 million associated december 20 2005 tender offer exit consent solicitation subsidiaries’ 8875 senior notes due 2016 net interest expense 2006 includes 219 million noncash amortization deferred financing costs compared 236 million noncash amortization deferred financing costs 2005 including writeoff unamortized deferred financing costs 74 million noted conjunction dex media merger result purchase accounting required gaap recorded dex media’s debt fair value january 31 2006 recognize offset interest expense period amortization corresponding fair value adjustment life respective debt offset interest expense 2006 264 million benefit provision income taxes 2006 income tax benefit 845 million comprised federal deferred tax benefit 1129 million resulting current period taxable loss offset state tax provision 284 million 2006 state tax provision 284 million primarily resulted modification apportioned taxable income loss among various states net operating loss approximately 2163 million generated 2006 primarily result tax amortization expense recorded respect intangible assets acquired dex media merger att directory acquisition embarq acquisition december 31 2006 company federal state net operating loss carryforwards approximately 7128 million net carryback 7823 million respectively begin expire 2023 2008 respectively company also 36 million federal alternative minimum tax amt credit carryforward expire 2005 provision income taxes 432 million comprised deferred tax provision due taxable loss generated current period 2005 deferred tax provision resulted effective tax rate 390 net operating losses approximately 1686 million related tax deductions amortization expense recorded tax purposes compared book purposes respect intangible assets acquired embarq acquisition att directory acquisition 2005 effective tax rate reflects decrease state local tax rate due integration embarq acquisition att directory acquisition currently federal tax audit internal revenue service taxable years 2003 2004 believe adequate provisions made respect federal tax audit believe resolution audit material adverse effect financial position results operations cash flows addition certain state tax returns examination various regulatory authorities continuously review issues raised connection ongoing examinations open tax years evaluate adequacy reserves believe accrued tax liabilities adequate cover probable us federal state income tax loss contingencies net loss income loss available common shareholders loss per share net loss 2006 2377 million compared net income 675 million 2005 results 2006 2005 adversely affected purchase accounting precluded us recognizing deferred revenue certain expenses associated directories published prior dex media merger att directory acquisition including directories published month acquisition completed net loss recorded 2006 also reflects increased interest expense associated dramatically higher outstanding debt balances associated dex media merger combined higher interest rates well increase amortization expense associated intangible assets acquired dex media merger purchase accounting resulting dex media merger impact reported results 2007 cost uplift aspect purchase accounting described approximately 358 million offset interest expense related fair value adjustment dex media’s debt described approximately 313 million prior gs repurchase january 2006 8 dividend preferred stock reduced earnings available common shareholders earnings per share amounts calculated amount preferred stock dividend included stated 8 dividend plus deemed dividend beneficial conversion feature “bcf” bcf function conversion price preferred stock fair value related warrants issued preferred stock fair market value underlying common stock date issuance preferred stock connection issuance preferred stock subsequent quarterly accrued dividend october 3 2005 bcf recorded fair value underlying common stock time issuance preferred stock greater conversion price preferred stock full amount bcf treated deemed dividend preferred stock convertible common stock immediately issuance january 2003 preferred stock dividend 2005 117 million consisted 8 dividend 101 million including 25 million accrued cash dividends recognized fourth quarter 2005 bcf 16 million january 14 2005 repurchased 100303 shares outstanding preferred stock gs funds 2772 million cash connection preferred stock repurchase recorded increase loss available common shareholders 1337 million reflect loss repurchase shares excess cash paid gs funds carrying amount repurchased preferred stock plus amount previously recognized bcf associated shares recognized loss repurchase january 27 2006 completed gs repurchase whereby repurchased remaining 100301 shares outstanding preferred stock gs funds 3361 million cash result gs repurchase becoming probable event terms stock purchase agreement october 3 2005 see item 8 “financial statements supplementary data” note 8 “redeemable preferred stock warrants” recorded value preferred stock accreted redemption value 3341 million december 31 2005 3361 million january 27 2006 accretion redemption value 2110 million 20 million represented accrued dividends interest years ended december 31 2005 2006 respectively recorded increase loss available common shareholders consolidated statements operations conjunction gs repurchase also reversed previously recorded bcf related shares recorded decrease loss available common shareholders consolidated statement operations approximately 312 million year ended december 31 2006 resulting loss available common shareholders 2085 million 2006 compared 2889 million 2005 years ended december 31 2006 january 27 2006 closing date gs repurchase 2005 accounted loss earnings per share accordance emerging issues task force issue 036 participating securities twoclass method fasb statement 128 “eitf 036” established standards regarding computation loss earnings per share “eps” companies issued securities common stock contractually entitle holder participate dividends earnings company eitf 036 requires earnings available common shareholders period deduction preferred stock dividends allocated common preferred shareholders based respective rights receive dividends basic eps calculated dividing loss income allocable common shareholders weighted average number shares outstanding eitf 036 require presentation basic diluted eps securities common stock therefore following eps amounts pertain common stock guidance eitf 036 diluted eps calculated dividing loss income allocable common shareholders weighted average common shares outstanding plus dilutive potential common stock potential common stock includes stock options stock appreciation rights “sars” restricted stock warrants dilutive effect calculated using treasury stock method prior gs repurchase 8 preferred stock dilutive effect calculated using “ifconverted” method subsequent gs repurchase account eps accordance sfas 128 earnings per share longer utilize twoclass method eps computations calculation basic diluted loss per share years ended december 31 2006 2005 respectively presented 1 computing eps using twoclass method allocated net loss reported years ended december 31 2006 2005 respectively common preferred shareholders since preferred shareholders contractual obligation share net loss 2 due loss allocable common shareholders reported years ended december 31 2006 2005 respectively effect stockbased awards warrants assumed conversion preferred stock antidilutive therefore included calculation diluted eps years ended december 31 2006 2005 2263 shares 60 shares respectively stockbased awards exercise prices exceeded average market price company’s common stock respective periods years ended december 31 2006 2005 assumed conversion preferred stock 391 shares 5132 shares respectively common stock antidilutive therefore included calculation diluted eps adjusted pro forma combined adjusted amounts nongaap measures result dex media merger att directory acquisition related financings associated purchase accounting 2006 results reported accordance gaap comparable 2005 reported gaap results deferral amortization method revenue recognition billable value directories published recognized revenue subsequent reporting periods however purchase accounting precluded us recognizing directory revenue certain expenses associated directories published prior acquisition including directories published month acquisition completed thus reported 2006 2005 gaap results indicative underlying operating financial performance accordingly management presenting 1 2006 adjusted pro forma information among things eliminates purchase accounting impact revenue certain expenses related dex media merger assumes dex media merger occurred beginning 2006 2 2005 combined adjusted information reflecting sum rhd’s 2005 adjusted results reflecting adjustments relating att directory acquisition b dex media’s reported gaap results period management believes presentation adjusted pro forma combined adjusted information help financial statement users better easily compare current period underlying operating results combined company performance would likely comparable prior period adjusted pro forma combined adjusted amounts disclosed elsewhere nongaap measures reconciled comparable gaap measures caption adjusted pro forma combined adjusted results exclude effects purchase accounting certain nonrecurring items better reflect underlying operating results respective periods differences rhd dex media att respective predecessor accounting policies adjusted pro forma combined adjusted results strictly comparable treated 1 represents deferred revenue dex media directories published prior dex media merger would recognized period absent purchase accounting required gaap adjustments also include revenue january 2006 reported dex media 2 represents certain deferred expenses dex media directories published prior dex media merger would recognized period absent purchase accounting required gaap b expenses january 2006 reported dex media c exclusion transaction expenses reported dex media january 2006 directly related dex media merger exclusion cost uplift recorded purchase accounting att acquisition dex media merger 3 represents additional amortization expense related identifiable intangible assets acquired dex media merger estimated useful lives assuming dex media merger consummated january 1 2006 4 represents deferred revenue directories published prior att directory acquisition would recognized period purchase accounting required gaap 5 represents elimination cost uplift att acquisition net certain deferred expenses att directories published prior att directory acquisition would recognized period purchase accounting required gaap 6 represents net revenue expenses depreciation amortization reported dex media gaap basis twelve months ended december 31 2005 adjusted pro forma revenue compared 2005 combined adjusted revenue components 2006 adjusted pro forma revenue 2005 combined adjusted revenue follows 1 represents gross directory advertising revenue sales claims allowances dex media directories published prior dex media merger would recognized period purchase accounting required gaap adjustments also include results january 2006 reported dex media 2 revenue includes barter revenue late fees paid outstanding customer balances commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain print internet products 3 represents gross directory advertising revenue sales claims allowances att directories published prior att directory acquisition would recognized period purchase accounting required gaap 4 represents 2005 reported results dex media prior dex media merger dex media reported directory advertising revenue net sales claims allowances adjusted pro forma net revenue 2006 26851 million representing decrease 149 million 06 combined adjusted net revenue 27000 million 2005 deferral amortization method revenue recognition revenue directory advertising sales initially deferred directory published recognized ratably life directory typically 12 months adjusted pro forma net directory advertising revenue 2006 decreased combined adjusted net directory advertising revenue 2005 primarily due unfavorable sales claims allowance experience primarily dex media markets resulting customer claims associated prior legacy dex media systems conversion well declines att markets due rescoping consolidation products offset amortization revenue favorable sales performances certain larger markets prior four quarters adjusted pro forma expenses compared 2005 combined adjusted expenses adjusted pro forma cost revenue ga expenses 2006 12383 million increased 347 million 29 combined adjusted cost revenue ga expenses 12036 million 2005 primary components 347 million increase shown adjusted pro forma cost revenue ga expenses 2006 impacted 433 million noncash stockbased compensation expense resulting sfas 123r company adopted effective january 1 2006 expense comparable basis 2005 2006 134 million reported 433 million noncash stockbased compensation expense resulted modifications stockbased awards outstanding due acceleration vesting terms result dex media merger adjusted pro forma cost revenue 2006 increased 188 million 2005 combined adjusted cost revenue due increased internet production distribution costs expanded digital product line offerings includes acquired dex media business adjusted pro forma advertising costs 2006 160 million greater compared combined adjusted advertising expenses 2005 due increased market investment competitive responses adjusted pro forma general corporate expenses 296 million lower marketing costs 108 million lower 2006 compared combined adjusted expenses 2005 reductions adjusted pro forma cost revenue ga expenses relate partially achieving economies accompany scale subsequent dex media merger well companywide efforts reduce certain expenses throughout 2006 adjusted pro forma da 2006 3441 million includes incremental da dex media merger occurred january 1 2006 combined adjusted da 2005 4623 million represents da reported rhd dex media decrease adjusted pro forma da 2006 1182 million combined adjusted da 2005 primarily related differences rhd dex media’s valuation useful life assumptions utilized amortization dex media’s intangible assets adjusted pro forma operating income compared 2005 combined adjusted operating income adjusted pro forma operating income 2006 11027 million representing increase 686 million 66 combined adjusted operating income 2005 10341 million reflecting variances revenues expenses period described year ended december 31 2005 compared year ended december 31 2004 factors affecting comparability acquisitions result att directory acquisition embarq acquisition related financings associated purchase accounting 2005 reported gaap results comparable 2004 reported gaap results deferral amortization method revenue recognition billable value directories published recognized revenue subsequent reporting periods however purchase accounting precluded us recognizing directory revenue certain expenses associated directories published prior acquisition including directories published month acquisition completed thus reported 2005 2004 gaap results indicative underlying operating financial performance accordingly management presenting 2005 adjusted 2004 adjusted pro forma information among things eliminates purchase accounting impact revenue certain expenses acquisition assumes att directory acquisition related financing occurred beginning 2004 management believes presentation 2005 adjusted 2004 adjusted pro forma information help financial statement users better easily compare current period underlying operating results combined company performance would likely comparable prior period 2005 adjusted 2004 adjusted pro forma amounts disclosed caption “adjusted pro forma amounts nongaap measures” elsewhere nongaap measures reconciled comparable gaap measures caption believe 2005 adjusted 2004 adjusted pro forma results reasonably represent results businesses combined since january 1 2004 differences application accounting policies practices company acquired entities management believe adjusted pro forma amounts strictly comparable necessarily indicative results future periods following results operations disclosure give pro forma effect dex media merger consummated january 31 2006 att directory acquisition reported 50 share dontech net income partnership income consolidated statement operations partnership income also included revenue participation income att revenue participation income based dontech advertising sales recognized sales contract executed customer upon att directory acquisition att ceased paying us revenue participation income consolidate net profits dontech eliminated partnership investment dontech consequently commencing september 1 2004 longer report partnership income 2004 att directory acquisition earned revenue prepress publishing ancillary services related att directory business continued report partnership income investment dontech relocation integration charges 2005 expenses included 24 million related acquisition integration att directory business 14 million related relocation corporate offices cary north carolina 04 million sales office lease expenses related embarq acquisition 2004 expenses included 73 million related relocation corporate offices cary north carolina 25 million related acquisition integration att directory business 11 million sales offices relocation expenses related embarq acquisition gaap reported results net revenue components net revenue 2005 2004 follows following att directory acquisition substantially revenue derived directory publishing business att directory acquisition dontech accounted equity method recognize revenue respect att directory business directory advertising revenue earned primarily sale advertising yellow pages directories publish net sales allowances revenue respect print advertising internetbased advertising products bundled print advertising recognized deferral amortization method whereby revenue initially deferred directory published recognized ratably directory’s life typically 12 months revenue respect internetbased advertising bundled print advertising recognized ratably period advertisement appears site att directory acquisition also earned prepress publishing related fees respect services rendered behalf att attbranded directories publish fees revenue recognized earned total net revenue 2005 9566 million representing increase 3535 million total net revenue reported 2004 6031 million primary increase total net revenue 2005 2004 due recognizing full year results acquired att directory business total revenue 2005 2004 includes 3723 million 291 million respectively net revenue attbranded directories published following att directory acquisition due purchase accounting directory revenue year ended december 31 2005 2004 excluded amortization advertising sales attbranded directories published october 2004 deferral amortization method totaling 850 million 4297 million respectively would reported absent purchase accounting purchase accounting related att directory acquisition longer adversely impact reported revenue 2005 additionally expect 2006 reported revenue higher 2005 due adverse impact purchase accounting 2005 revenues 2006 reported revenue also considerably higher 2005 due dex media merger increase net revenue also resulted higher recurring advertising major embarq markets partially offset decline results att markets decline results att markets primarily due chicagoland business primarily result three major changes announced second quarter 2005 including 1 removing advertising covers directories strengthen brand awareness 2 realigning coverage areas publications better reflect shopping patterns 3 tightening credit standards match disciplined approach employed embarq markets build stable account base time revenue prepress publishing related services 130 million 2004 comparable revenue 2005 decrease prepress publishing fees result company longer providing services att following att directory acquisition support internally attbranded directories publish revenue 2005 totaled 110 million representing increase 39 million revenue reported 2004 71 million revenue recognized earned includes late fees paid outstanding customer balances commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain products fees telephone companies publishing information pages increase revenue primarily due att directory acquisition advertising sales statistical measure consists sales advertising print directories distributed period internetbased products services respect advertising first appeared publicly period important distinguish advertising sales net revenue recognized deferral amortization method advertising sales years ended december 31 2005 2004 10269 million 10137 million respectively 132 million increase advertising sales due continued strong customer renewal rates increased spending existing advertisers increased new business many embarq markets directories published 2005 offset lower customer renewals certain att markets result ongoing efforts improve strength att brand including realignment directories improvement credit quality customer base revenue respect print advertising internetbased advertising products bundled print advertising recognized deferral amortization method whereby revenue initially deferred directory published recognized ratably directory’s life typically 12 months revenue respect internetbased advertising bundled print advertising recognized ratably period advertisement appears site expenses components total expenses 2005 2004 follows substantially expenses derived directory publishing business att directory acquisition dontech accounted equity method began recognizing expenses related att directory business september 1 2004 certain costs directly related selling production directories initially deferred recognized ratably life directory costs include sales commissions print paper initial distribution costs expenses recognized incurred cost revenue total cost revenue 2005 4361 million compared 2632 million 2004 primary components 1729 million increase cost revenue 2005 compared 2004 follows cost revenue 2005 increased 1729 million compared 2004 primarily result recognizing full year expenses acquired att directory business 2005 expenses increased 950 million 2004 support att directory business including bad debt commissions salesperson expenses printing distribution marketing advertising operating expenses similar deferral amortization method revenue recognition certain costs directly related selling production directories initially deferred incurred recognized ratably life directory due elimination deferred costs preacquisition including september 2004 att directories required purchase accounting reported cost revenue 2005 2004 include certain expenses associated directories totaling approximately 499 million 980 million respectively due adjustments attbranded directory expenses 2005 include amortization deferred directory costs relating attbranded directories published beginning october 2004 purchase accounting related att directory acquisition longer adversely impact reported expenses 2005 except unamortized cost uplift defined 21 million december 31 2005 expensed 2006 additionally expect 2006 reported expenses higher 2005 due adverse impact purchase accounting 2005 expenses 2006 reported expenses also considerably higher 2005 due dex media merger also result purchase accounting required gaap recorded deferred directory costs related directories scheduled publish subsequent att directory acquisition embarq acquisition fair value determined estimated billable value published directory less expected costs complete directories b normal profit margin refer purchase accounting entry “cost uplift” fair value costs determined 813 million 148 million att directory business embarq business respectively costs amortized cost revenue terms applicable directories amortization totaled 650 million 2005 relating att directory acquisition representing increase 508 million 142 million recorded 2004 36 million 2004 relating embarq business comparable expense 2005 sales costs including commissions sales person costs sales management costs 156 million higher 2005 compared 2004 primarily due favorable sales performances many embarq markets increased sales headcount sales bonus payouts plus increased investment att markets digital initiative costs 89 million higher 2005 compared 2004 reflects continued commitment increase investment internet products distribution due additional internet costs associated att directory business bad debt expense higher 2005 primarily due higher amount favorable bad debt trueups taken 2004 compared 2005 combined increased provision expense associated increased recognized revenue compared prior year resulted net increase bad debt expense 86 million 2005 compared 2004 excluding impact purchase accounting general administrative expenses general administrative “ga” expenses 2005 602 million compared 595 million 2004 increase 07 million primary components 07 million increase ga expenses 2005 compared 2004 follows increase ga expenses 07 million 2005 2004 primarily due increased billing credit collection expenses 90 million relating att directory business increase noncash compensation expense related stock appreciation rights “sars” 28 million primarily due increase company’s stock price additional grants made 2005 increases partially offset expenses related relocation corporate headquarters related severance costs associated att directory acquisition 104 million recorded 2004 depreciation amortization depreciation amortization “da” 2005 851 million compared 666 million 2004 representing increase 185 million amortization intangible assets 721 million 2005 compared 573 million 2004 increase amortization expense primarily due full year impact related intangible assets acquired connection att directory acquisition depreciation fixed assets amortization computer software 130 million 2005 compared 93 million 2004 increase depreciation expense primarily due increased depreciation associated computer software additions partnership income partnership income 780 million 2004 corresponding amount 2005 2004 partnership income related 50 share net income dontech accounted equity method revenue participation income att sales agent att dontech earned commission revenue based annual value local sales contracts executed period “calendar sales” also earned revenue participation income att based amount dontech calendar sales period result att directory acquisition att ceased paying us revenue participation income consolidate net profits dontech thus dontech partnership investment eliminated accordingly commencing september 1 2004 longer report partnership income operating income result att directory acquisition company one operating segment management views evaluates one operating segment sole source earnings interest taxes depreciation amortization “ebitda” operating income company need allocate resources among different segments operating income 2005 2004 follows operating income 2005 3752 million increased 835 million operating income 2917 million 2004 increase operating income 2005 compared 2004 primarily result recognizing full period results att directory business total net revenue increased 2005 3535 million net revenue 2004 partially offsetting increase net revenue increase total cost revenue 2005 1729 million primarily relating att directory business described addition increase operating income resulted higher recurring advertising major embarq markets partially offset decline results att markets increased depreciation amortization noted 2004 2005 results adversely affected related purchase accounting impact precluded us recognizing revenues certain expenses directories published prior att directory acquisition including september 2004 published directories purchase accounting entire balance deferred revenue deferred directory costs eliminated time att directory acquisition elimination disproportionately higher impact revenues expenses accordingly adjustments required purchase accounting cost revenue 2004 disproportionately higher related revenue interest expense net interest expense 2005 2645 million compared 1755 million 2004 increase net interest expense 890 million result higher outstanding debt balances associated att directory acquisition issuance 300 million 6875 senior notes january 14 2005 “holdco notes” utilized finance repurchase 100303 shares outstanding preferred stock gs funds january 2005 combined higher interest rates compared prior year increase net interest expense also attributable 253 million call premium payment writeoff unamortized deferred financing costs 74 million associated december 20 2005 tender offer exit consent solicitation 8875 senior notes interest expense 2004 includes 12 million charge resulting redemption remaining 9125 senior subordinated notes due 2008 see “liquidity capital resources” description debt obligations provisions related debt instruments net interest expense 2005 includes 236 million noncash amortization deferred financing costs including writeoff unamortized deferred financing costs 74 million noted compared 136 million noncash amortization deferred financing costs 2004 provision benefit income taxes 2005 provision income taxes 432 million comprised deferred tax provision due taxable loss generated current period 2005 deferred tax provision resulted effective tax rate 390 net operating losses approximately 1686 million related tax deductions amortization expense recorded tax purposes compared book purposes respect intangible assets acquired connection embarq acquisition att directory acquisition 2005 effective tax rate reflects decrease state local tax rate due integration embarq acquisition att directory acquisition federal net operating loss carryforward approximately 3425 million begin expire 2023 state net operating loss carryforwards approximately 6500 million begin expire 2008 2004 provision income taxes 459 million comprised current tax benefit 256 million deferred tax provision 715 million 2004 current tax benefit resulted effective tax rate 395 net operating losses approximately 724 million related tax deductions connection embarq acquisition att directory acquisition 2004 deferred tax provision 715 million primarily related difference amortization expense recorded tax purposes compared book purposes respect intangible assets acquired connection embarq acquisition att directory acquisition 2004 effective tax rate reflects decrease state local tax rate due integration embarq acquisition att directory acquisition company currently federal tax audit internal revenue service taxable years 2003 2004 company believes adequate provisions made respect federal tax audit company believes resolution audit material adverse effect company’s financial position results operations cash flows addition certain state tax returns examination various regulatory authorities continuously review issues raised connection ongoing examinations open tax years evaluate adequacy reserves believe accrued tax liabilities adequate cover probable us federal state income tax loss contingencies net income loss income available common shareholders loss earnings per share net income 2005 675 million compared 703 million 2004 decrease 28 million net income result increase operating income described offset increases interest expense da also described 8 dividend preferred stock reduces net income increases net loss resulting loss income available common shareholders loss earnings per share amounts calculated amount preferred stock dividend includes stated 8 dividend plus deemed dividend beneficial conversion feature “bcf” bcf function conversion price preferred stock fair value related warrants issued connection preferred stock fair market value underlying common stock date issuance preferred stock connection issuance preferred stock subsequent quarterly dividend date september 30 2005 bcf recorded fair value underlying common stock time issuance preferred stock greater conversion price preferred stock full amount bcf treated deemed dividend preferred stock convertible gs funds common stock immediately issuance january 2003 commencing october 3 2005 preferred stock longer convertible common stock therefore bcf longer recognized preferred stock dividend 2005 117 million consisted stated 8 dividend 101 million including 25 million accrued cash dividends recognized fourth quarter 2005 bcf 16 million preferred stock dividend 2004 218 million consisted stated 8 dividend 179 million bcf 39 million january 14 2005 repurchased 100303 shares outstanding preferred stock gs funds 2772 million cash connection preferred stock repurchase recorded increase loss available common shareholders 1337 million reflect loss repurchase shares 2005 excess cash paid gs funds carrying amount repurchased preferred stock plus amount previously recognized bcf associated shares recognized loss repurchase amount represents return gs funds therefore treated manner similar treatment preferred stock dividend january 27 2006 repurchased remaining 100301 shares outstanding preferred stock gs funds 3361 million cash including accrued cash dividends interest result gs repurchase becoming probable event terms stock purchase support agreement dated october 3 2005 accreted carrying value preferred stock redemption value 3341 million december 31 2005 accretion preferred stock totaling 2110 million recorded increase loss available common shareholders consolidated statements operations year ended december 31 2005 resulting loss income available common shareholders 2889 million 2005 compared 485 million 2004 account earnings per share accordance emerging issues task force issue 036 participating securities twoclass method fasb statement 128 “eitf 036” established standards regarding computation earnings per share “eps” companies issued securities common stock contractually entitle holder participate dividends earnings company eitf 036 requires earnings available common shareholders period deduction preferred stock dividends allocated common preferred shareholders based respective rights receive dividends basic eps calculated dividing loss income allocable common shareholders weighted average number shares outstanding eitf 036 require presentation basic diluted eps securities common stock therefore following eps amounts pertain common stock guidance eitf 036 diluted eps calculated dividing loss income allocable common shareholders weighted average common shares outstanding plus dilutive potential common stock potential common stock includes stock options stock appreciation rights “sars” warrants dilutive effect calculated using treasury stock method 8 preferred stock dilutive effect calculated using “ifconverted” method calculation basic diluted loss earnings per share years ended december 31 2005 2004 respectively presented 1 amount allocable common shareholders 77 year ended december 31 2004 determined follows 31268 9483 computing basic eps using twoclass method allocated loss available common shareholders year ended december 31 2005 common preferred shareholders since preferred shareholders contractual obligation share net loss 2 60 stock options 2005 assumed conversion preferred stock 5132 9767 shares common stock 2005 2004 respectively antidilutive therefore included calculation diluted eps adjusted pro forma amounts nongaap measures result att directory acquisition embarq acquisition related financings associated purchase accounting 2005 reported gaap results comparable 2004 reported gaap results deferral amortization method revenue recognition billable value directories published recognized revenue subsequent reporting periods however purchase accounting precluded us recognizing directory revenue certain expenses associated directories published prior acquisition including directories published month acquisition completed thus reported 2005 2004 gaap results indicative underlying operating financial performance accordingly management presenting 2005 adjusted 2004 adjusted pro forma information among things eliminates purchase accounting impact revenue certain expenses acquisition assumes att directory acquisition related financing occurred beginning 2004 management believes presentation 2005 adjusted 2004 adjusted pro forma information help financial statement users better easily compare current period underlying operating results combined company performance would likely comparable prior period 2005 adjusted 2004 adjusted pro forma amounts disclosed elsewhere nongaap measures reconciled comparable gaap measures believe 2005 adjusted 2004 adjusted pro forma results reasonably represent results businesses combined full years 2005 2004 differences application accounting policies practices company acquired entities management believe 2005 adjusted 2004 adjusted pro forma amounts strictly comparable necessarily indicative results future periods discussion adjusted pro forma amounts nongaap measures give pro forma effect dex media merger consummated january 31 2006 1 represents revenue attbranded directories published prior att directory acquisition plus september 2004 published directories would recognized period purchase accounting required gaap 2 represents expenses attbranded directories published prior att directory acquisition including september 2004 published directories would recognized period purchase accounting required gaap pro forma adjustments also include 2004 dontech’s selling operational expenses prior september 1 2004 eliminated consolidation upon att directory acquisition b 2004 2005 certain differences application accounting policies practices rhd acquired entities additionally result purchase accounting recorded deferred directory costs related directories scheduled publish subsequent att directory acquisition fair value impact cost uplift also removed 3 represents additional depreciation amortization expense related tangible identifiable intangible assets acquired att directory acquisition estimated useful lives 4 represents elimination equity accounting used account rhd’s 50 ownership dontech revenue participation income att recognized prior att directory acquisition 5 represents revenue embarqbranded directories published prior embarq acquisition including january 2003 published directories would recognized period purchase accounting required gaap 6 represents expenses embarqbranded directories published prior embarq acquisition including january 2003 published directories would recognized period purchase accounting required gaap also includes effect differences application accounting policies practices legacy embarq company additionally result purchase accounting recorded deferred directory costs related directories scheduled publish subsequent embarq acquisition fair value impact cost uplift also removed revenue adjusted revenue compared 2004 revenue adjusted pro forma revenue components 2005 revenue adjusted revenue 2004 revenue adjusted pro forma revenue follows 1 represents gross revenue sales claims allowances attbranded directories published prior att directory acquisition including september 2004 published directories would recognized period purchase accounting required gaap 2 represents elimination prepress publishing related fees recognized prior att directory acquisition eliminated consolidation upon att directory acquisition 3 represents revenue associated att directory business primarily consisting commissions earned sales contracts published publishers’ directories yellow pages internetbased advertising product revenue recognized earned 4 represents gross revenue sales claims allowances embarqbranded directories published prior embarq acquisition including january 2003 published directories would recognized period purchase accounting required gaap total adjusted net revenue 2005 10416 million increase 77 million 07 adjusted pro forma net revenue 10339 million 2004 increase adjusted net revenue 2005 due increased amortization revenue primarily major embarq markets due continued strong customer renewal rates increased new business partially offset decrease amortized net revenue att markets due decline publication value att directories illinois northwest indiana due lower renewal rates partially offset new business collection late fees deferral amortization method revenue recognition revenue directory advertising sales initially deferred directory published recognized ratably life directory typically 12 months due deferral amortization method billable value published directories amortized revenue life directory delays recognition publication sales recorded revenue gaap basis adjusted expenses compared 2004 adjusted pro forma expenses 2005 adjusted operating income compared 2004 adjusted pro forma operating income year ended december 31 2005 adjusted cost revenue ga expenses increased 292 million 70 4464 million adjusted pro forma cost revenue ga expenses 4172 million 2004 primary components 292 million increase adjusted expenses 2005 follows similar deferral amortization method revenue recognition certain costs directly related selling production directories initially deferred incurred recognized ratably life directory adjusted commission salesperson expenses 99 million higher 2005 compared 2004 due favorable sales performances certain embarq markets increased sales headcount sales bonus payouts increased investment certain att markets adjusted marketing advertising costs 93 million higher 2005 compared 2004 due increased competitive responses increased market investment particularly att markets adjusted digital initiative costs 89 million higher 2005 compared 2004 reflects commitment increase investment internet products distribution due additional internetrelated costs att directory business increased costs support att directory business 79 million 2005 compared 2004 primarily include increased headcount billing credit collection administrative costs higher primarily due additional investment att directory business compared prior owner’s level investment business adjusted bad debt expense 59 million higher 2005 compared 2004 primarily reflecting favorable bad debt adjustments recorded att directory business prior acquisition 2004 increases offset 104 million expenses 2004 associated relocation corporate headquarters cary north carolina related severance costs adjusted depreciation amortization 851 million year ended december 31 2005 compared adjusted pro forma depreciation amortization 854 million year ended december 31 2004 adjusted operating income 2005 5101 million representing decrease 212 million 40 adjusted pro forma operating income 2004 5313 million reflecting variances revenues expenses period described liquidity capital resources longterm debt company december 31 2006 including fair value adjustments required gaap result dex media merger december 31 2005 consisted following debt balances acquired result dex media merger obligations rhd december 31 2005 credit facilities rhdi december 31 2006 rhdi’s senior secured credit facility amended restated “rhdi credit facility” consists 3234 million term loan a4 350 million term loan d1 14220 million term loan d2 1750 million revolving credit facility “rhdi revolver” aggregate rhdi credit facility 22704 million term loans require quarterly principal interest payments rhdi credit facility provides new term loan c potential borrowings 400 million proceeds borrowed used fund acquisitions refinance certain indebtedness make certain restricted payments december 31 2006 outstanding balances term loans a4 d1 d2 totaled 18911 million comprised 1586 million 3417 million 13908 million respectively 554 million outstanding rhdi revolver additional 04 million utilized standby letter credit rhdi revolver term loan a4 mature december 2009 term loans d1 d2 mature june 2011 weighted average interest rate outstanding debt rhdi credit facility 686 621 december 31 2006 december 31 2005 respectively amended december 31 2006 rhdi’s credit facility bears interest option either • higher base rate determined administrative agent deutsche bank trust company americas ii federal funds effective rate defined plus 050 case plus 025 margin rhdi revolver term loan a4 050 margin term loan d1 term loan d2 • libor rate plus 125 margin rhdi revolver term loan a4 150 margin term loan d1 term loan d2 may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings dex media east december 31 2006 dex media east credit facility amended restated connection dex media merger consists revolving loan commitments “dex media east revolver” term loan commitments dex media east term loans consist tranche term loan initial total principal amount 6900 million tranche b term loan initial total principal amount 4290 million dex media east revolver consists total principal amount 1000 million available general corporate purposes subject certain conditions december 31 2006 principal amounts owing tranche b term loans totaled 6291 million comprised approximately 2259 million 4032 million respectively 275 million outstanding dex media east revolver additional 14 million utilized two standby letters credit dex media east revolver tranche term loan mature november 2008 tranche b term loan mature may 2009 weighted average interest rate outstanding debt dex media east credit facility 685 december 31 2006 amended december 31 2006 dex media east credit facility bears interest option either • higher base rate determined administrative agent jp morgan chase bank na ii federal funds effective rate defined plus 050 case plus 025 margin dex media east revolver term loan 050 margin term loan b • libor rate plus 125 margin dex media east revolver term loan 150 margin term loan b may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings dex media west december 31 2006 dex media west credit facility amended restated connection dex media merger consists revolving loan commitments “dex media west revolver” term loan commitments dex media west term loans consist tranche term loan total principal amount 9600 million tranche b1 term loan total principal amount 5030 million tranche b2 term loan total available principal amount 8343 million dex media west revolver consists total principal amount 1000 million available general corporate purposes subject certain conditions december 31 2006 principal amounts owed tranche b1 tranche b2 term loans totaled 14509 million comprised approximately 2733 million 4063 million 7713 million respectively amounts outstanding dex media west revolver tranche b1 term loan amount 4442 million utilized redeem dex media west’s senior notes put dex media west connection change control offer associated dex media merger fund portion cash consideration paid dex media inc’s stockholders connection dex media merger remaining 588 million longer available tranche term loan dex media west revolver mature september 2009 tranche b1 b2 term loans mature march 2010 weighted average interest rate outstanding debt dex media west credit facility 683 december 31 2006 amended december 31 2006 dex media west credit facility bears interest option either • higher base rate determined administrative agent jp morgan chase bank na ii federal funds effective rate defined plus 050 case plus 025 margin dex media west revolver term loan 050 margin term loan b1 term loan b2 • libor rate plus 125 margin dex media west revolver term loan 150 margin term loan b1 term loan b2 may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings company’s credit facilities indentures governing notes contain usual customary affirmative negative covenants among things place limitations ability incur additional indebtedness ii pay dividends repurchase capital stock iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock subsidiaries vi engage transactions affiliates vii make investments loans advances company’s credit facilities also contain financial covenants relating maximum consolidated leverage minimum interest coverage maximum senior secured leverage defined therein substantially rhdi’s subsidiaries assets including capital stock rhdi subsidiaries pledged secure obligation rhdi credit facility substantially assets dex media east dex media west subsidiaries including equity interests pledged secure obligations respective credit facilities notes preferred stock warrants rhd issued 300 million 6875 senior notes due january 15 2013 “holdco notes” proceeds used redeem 100303 shares outstanding preferred stock gs funds pay transaction costs repay debt associated rhdi’s credit facility interest payable holdco notes semiannually arrears january 15th july 15th year commencing july 15 2005 order fund cash portion dex media merger purchase price issued 660 million aggregate principal amount maturity 6005 million gross proceeds 6875 series a2 senior discount notes due january 15 2013 1210 million principal amount 8875 series a3 senior notes due january 15 2016 interest payable semiannually january 15th july 15th year series a2 senior discount notes series a3 senior notes commencing july 15 2006 also issued 365 million aggregate principal amount maturity 3321 million gross proceeds 6875 series a1 senior discount notes due january 15 2013 fund gs repurchase interest payable semiannually january 15th july 15th year commencing july 15 2006 notes unsecured obligations rhd senior right payment future senior subordinated indebtedness rhd structurally subordinated indebtedness subsidiaries may 30 2006 rhd redeemed outstanding preferred stock purchase rights issued pursuant company’s stockholder rights plan redemption price one cent per right total redemption payment 07 million payment recorded charge retained earnings year ended december 31 2006 november 2 2006 repurchased outstanding warrants purchase 165 million shares common stock gs funds aggregate purchase price approximately 531 million rhdi connection embarq acquisition rhdi issued 325 million 8875 senior notes due 2010 “senior notes” 600 million 10875 senior subordinated notes due 2012 “subordinated notes” company direct indirect whollyowned subsidiaries rhdi jointly severally fully unconditionally guarantee notes unsecured obligations rhdi interest paid notes semiannually june 15th december 15th december 20 2005 repurchased tender offer exit consent solicitation 3171 million senior notes proceeds rhdi credit facility’s 350 million term loan d1 used fund partial repurchase senior notes call premium 253 million pay transaction costs tender offer partial repurchase senior notes accounted extinguishment debt dex media inc dex media inc issued 500 million aggregate principal amount 8 senior notes due 2013 senior notes unsecured obligations dex media inc interest payable may 15th november 15th year december 31 2006 500 million aggregate principal amount outstanding excluding fair value adjustments dex media inc issued 750 million aggregate principal amount 9 senior discount notes due 2013 two indentures first indenture totaling 389 million aggregate principal amount 9 senior discount notes issued original issue discount interest accruing 9 per annum compounded semiannually senior discount notes unsecured obligations dex media inc interest accrues form increased accreted value november 15 2008 “full accretion date” time accreted value equal full principal amount maturity second indenture totaling 361 million aggregate principal amount interest accrues 837 per annum compounded semiannually creates premium full accretion date amortized remainder term november 15 2008 9 senior discount notes bear cash interest 9 per annum payable semiannually may 15th november 15th year senior discount notes unsecured obligations dex media inc cash interest accrue discount notes prior full accretion date december 31 2006 7499 million aggregate principal amount outstanding excluding fair value adjustments dex media east dex media east issued 450 million aggregate principal amount 9875 senior notes due 2009 senior notes unsecured obligations dex media east interest payable may 15th november 15th year december 31 2006 4497 million aggregate principal amount outstanding excluding fair value adjustments dex media east issued 525 million aggregate principal amount 12125 senior subordinated notes due 2012 senior subordinated notes unsecured obligations dex media east interest payable may 15th november 15th year december 31 2006 3413 million aggregate principal amount outstanding excluding fair value adjustments dex media west dex media west issued 385 million aggregate principal amount 85 senior notes due 2010 senior notes unsecured obligations dex media west interest payable february 15th august 15th year december 31 2006 385 million aggregate principal amount outstanding excluding fair value adjustments dex media west issued 300 million aggregate principal amount 5875 senior notes due 2011 senior notes unsecured obligations dex media west interest payable may 15th november 15th year december 31 2006 87 million aggregate principal amount outstanding excluding fair value adjustments dex media west issued 780 million aggregate principal amount 9875 senior subordinated notes due 2013 senior subordinated notes unsecured obligations dex media west interest payable february 15th august 15th year december 31 2006 7617 million aggregate principal amount outstanding excluding fair value adjustments sources uses funds connection dex media merger gs repurchase summarized follows 1 represents shortterm interest income proceeds series a2 senior discount notes series a3 senior notes january 27 2006 issuance date notes january 31 2006 closing dex media merger 2 giving effect 1 dex media merger related financings 2 gs repurchase related financings 215 million paid cash hand 3 includes fees expenses relating 1 dex media merger related financings 2 gs repurchase related financings following dex media merger dex media whollyowned subsidiary rhd primary source liquidity continue cash flow generated operations well available borrowing capacity rhdi revolver dex media east revolver dex media west revolver expect primary liquidity requirements fund operations debt service company’s indebtedness ability meet debt service requirements dependent ability generate sufficient cash operations make additional borrowings company’s credit facilities primary sources cash flow consist mainly cash receipts sale advertising yellow pages online products services impacted among factors general economic conditions competition yellow pages directory publishers alternative products consumer confidence level demand advertising products services believe cash flows operations along borrowing capacity company’s revolvers adequate fund operations capital expenditures meet debt service requirements least next 12 24 months however make assurances business generate sufficient cash flow operations sufficient borrowing available company’s revolvers term loan c enable us fund operations capital expenditures meet debt service requirements pursue strategic initiatives purposes result dex media merger accordance sfas 141 business combinations “sfas 141” required record dex media’s consolidated outstanding debt fair value date dex media merger fair value adjustment established january 31 2006 fair value adjustment amortized reduction interest expense remaining term respective debt agreements using effective interest method impact future scheduled interest principal payments amortization fair value adjustment included reduction interest expense 264 million 2006 total premium 2223 million recorded upon consummation dex media merger 1959 million remains unamortized december 31 2006 following table illustrates book value fair value dex media’s consolidated outstanding debt january 31 2006 initial fair value adjustment january 31 2006 unamortized fair value adjustment december 31 2006 primarily result business combinations preferred stock repurchase transactions significant amount debt service aggregate outstanding debt december 31 2006 104032 million including fair value adjustments required gaap result dex media merger completion dex media merger triggered change control offers dex media’s subsidiaries outstanding notes requiring us make offers repurchase notes 2913 million 5875 dex media west senior notes due 2011 03 million 9875 dex media east senior notes due 2009 02 million 9875 dex media west senior subordinated notes due 2013 01 million 9 dex media inc senior discount notes due 2013 tendered applicable change control offer repurchased us year ended december 31 2006 made scheduled principal payments 2821 million prepaid additional 2950 million principal rhdi dex media east dex media west credit facilities together 2919 million note repurchases noted debt repayments totaled 8690 million twelve months ended december 31 2006 additionally made revolver payments 8690 million offset revolver borrowings 9349 million rhdi dex media east dex media west credit facilities year ended december 31 2006 made aggregate cash interest payments 6637 million december 31 2006 1562 million cash equivalents checks yet presented payment 182 million combined available borrowings revolvers 2921 million 2006 periodically utilized revolvers financing resource balance timing periodic accelerated payments made credit facilities interest payments senior notes senior subordinated notes timing cash receipts operations present intention repay borrowings revolvers timely manner keep outstanding amounts minimum cash provided operating activities 7683 million year ended december 31 2006 key contributors operating cash flow include following • 2377 million net loss • 3922 million net source cash noncash charges primarily consisting 3236 million depreciation amortization 711 million bad debt provision 433 million stockbased compensation expense 394 million noncash charges primarily consists amortization related fair value adjustments required gaap result dex media merger offset 852 million deferred tax benefit • 5598 million net source cash 6357 million increase deferred directory revenue offset increase accounts receivable 759 million change deferred revenue accounts receivable analyzed together given fact directory published annual billable value directory initially deferred unbilled accounts receivable established month thereafter typically one twelfth billing value recognized revenue billed customers additionally purchase accounting rules deferred revenue recorded directories published prior dex media merger however retained rights associated collection amounts due advertising contracts executed prior dex media merger • 230 million net use cash increase assets reflecting 247 million increase prepaid expenses current noncurrent assets primarily relating changes fair value company’s interest rate swap agreements offset decrease deferred directory costs 17 million consisting decrease deferred directory costs 236 million offset 219 million amortization deferred directory costs relating directories scheduled publish subsequent dex media merger deferred directory costs represent cash payments certain costs associated publication directories since deferred directory costs initially deferred incurred cash payments made prior expense recognized • 630 million net source cash increase accounts payable accrued liabilities primarily reflecting 693 million increase accrued interest payable outstanding debt 04 million increase trade accounts payable offset 67 million decrease accrued liabilities including accrued salaries related bonuses • 140 million net source cash increase noncurrent liabilities including pension postretirement longterm liabilities cash used investing activities year ended december 31 2006 19800 million includes following • 785 million used purchase fixed assets primarily computer equipment software leasehold improvements • 19015 million cash payments primarily connection dex media merger including merger fees net cash received dex media well local launch acquisition cash provided financing activities year ended december 31 2006 13602 million includes following • 25144 million net borrowings consisting 21425 million related series a2 senior discount notes series a3 senior notes used fund cash portion dex media merger series a1 senior discount notes used fund gs repurchase net borrowings also consist 4442 million dex media west tranche b1 term loan 1500 million used fund cash portion dex media merger 2942 million used fund purchase 5875 dex media west senior notes 9875 dex media west senior subordinated notes 9 dex media inc senior discount notes conjunction change control offers borrowings net financing costs 723 million • 17380 million principal payments debt amount 2821 million represents scheduled principal payments 2950 million represents principal payments made accelerated basis option available cash flow generated operations 2919 million represents dex media senior notes tendered repurchase company 8690 million represents principal payments revolvers • 3368 million used gs repurchase redemption preferred stock purchase rights stockholder rights plan • 9349 million borrowings revolvers • 531 million used repurchase outstanding warrants gs funds • 316 million proceeds exercise employee stock options • 72 million increased balance checks yet presented payment cash flow provided operating activities 3921 million year ended december 31 2005 key contributors operating cash flow 2005 include following • 675 million net income • 2024 million net noncash charges reflecting source cash primarily consisting 851 million depreciation amortization 300 million bad debt provision 327 million loss extinguishment debt 432 million deferred taxes 57 million stockbased compensation expense 57 million noncash charges • 502 million net source cash 820 million increase deferred directory revenue offset increase accounts receivable 318 million analyze change deferred revenue accounts receivable together directory published annual billing value directory initially deferred unbilled accounts receivable established month thereafter typically onetwelfth billing value recognized revenue billed customers • 525 million net source cash decrease assets reflecting net decrease deferred directory costs 488 million consisting increase deferred directory costs 162 million offset 650 million amortization deferred directory costs relating directories scheduled publish subsequent att directory acquisition 37 million decrease current noncurrent assets deferred directory costs represent cash payments certain costs associated publication directories since deferred directory costs initially deferred incurred cash payments made prior expense recognized • 195 million net source cash increase accounts payable accrued liabilities primarily reflecting 106 million increase accrued interest payable outstanding debt 92 million increase accounts payable increase noncurrent liabilities 32 million offset 35 million decrease accrued liabilities cash used investing activities year ended december 31 2005 381 million includes following • 316 million used purchase fixed assets primarily computer equipment software • 65 million cash payments fees associated dex media merger cash used financing activities year ended december 31 2005 3570 million includes following • 8776 million net borrowings consisting 300 million 6875 holdco notes used finance january 2005 repurchase 100303 shares outstanding preferred stock 350 million credit facility’s term loan d1 used fund tender offer exit solicitation 8875 senior notes 2680 million borrowings revolver associated credit facility net transaction costs call premium payments 404 million • 6494 million principal payments debt borrowed credit facility amount 1152 million represents scheduled principal payments 2300 million represents principal payments made accelerated basis option excess cash flow generated operations 3042 million represents principal payments revolver • 3171 million fund tender offer exit solicitation 8875 senior notes • 2772 million used repurchase 100303 shares outstanding preferred stock january 2005 • 74 million proceeds exercise employee stock options • 17 million increased value checks yet presented payment offbalance sheet arrangements company offbalance sheet arrangements material results operations financial condition liquidity contractual obligations contractual obligations table presented sets forth annual commitments december 31 2006 principal interest payments debt well cash obligations next five years thereafter debt repayments presented table include scheduled principal payments current debt agreements include anticipated prepayments debt repayments also exclude fair value adjustments required purchase accounting adjustments impact payment obligations 1 included longterm debt principal amounts owed credit facilities senior notes senior subordinated notes including current portion longterm debt 2 interest debt represents cash interest payment obligations assuming indebtedness december 31 2006 paid accordance contractual maturity assumes interest rates variable interest debt december 31 2006 remain unchanged future periods weighted average interest rates rhdi dex media east dex media west credit facilities 686 685 683 respectively december 31 2006 please refer “liquidity capital resources” interest rates senior notes senior subordinated notes 3 enter operating leases normal course business substantially lease agreements fixed payment terms lease agreements provide us renewal early termination options future operating lease obligations would change exercised renewal early termination options entered additional operating lease agreements amounts table assume exercise renewal early termination options 4 connection software system modernization ongoing support services related amdocs software system obligated pay amdocs approximately 886 million years 2007 2010 connection att directory acquisition entered internet yellow pages reseller agreement whereby obligated pay att 154 million 5year term agreement conjunction dex media merger obligated pay qwest approximately 172 million years 2007 2009 certain information technology communications billing collection services 5 defined benefit plans covering substantially employees funding policy contribute amount least equal minimum legal funding requirement contributions required threeyear period ended december 31 2006 based past performance uncertainty dollar amounts paid excluded amounts table also unfunded postretirement plans provide certain healthcare life insurance benefits fulltime employees reach retirement age working company expected future benefit payments including administrative expenses net employee contributions included table expect make contributions approximately 169 million 55 million pension plans postretirement plans respectively 2007 item 7aitem 7 management’s discussion analysis financial condition results operations item read conjunction audited consolidated financial statements notes thereto included item 8 unless otherwise indicated context may otherwise indicate terms “company” “rhd” “we” “us” “our” refer rh donnelley corporation direct indirect whollyowned subsidiaries prior effective date defined financial information set forth annual report unless otherwise indicated context may otherwise indicate reflects consolidated results operations financial position rhd year ended december 31 2009 dex one corporation “dex one” “successor registrant” “company” “we” “us” “our” subsequent effective date became successor registrant rhd upon emergence chapter 11 relief title 11 united states code “bankruptcy code” january 29 2010 “effective date” references dex one successor registrant annual report pertain periods subsequent effective date corporate overview leading marketing services company helps local businesses reach win keep readytobuy consumers highly skilled locally based marketing consultants offer wide range marketing products services help businesses get found actively shopping consumers offer local businesses personalized marketing consulting services exposure across broad network local marketing products including print online mobile yellow pages search solutions well major search engines marketing products help clients grow businesses provide marketing products help get found readytobuy consumers provide dex® advantage integrated offering ensures local clients’ business information published marketed single profile distributed via variety owned operated products local search products expands distribution clients’ content messages wherever whenever however consumers choose search helping get found dex advantage spans multiple media platforms local advertisers including print dex published directories cobrand recognizable brands industry qwest centurylink formerly embarq att online mobile devices dexknowscom ® voiceactivated directory search 1800calldextm digital affiliate provided solutions powered dexnettm leverages network partners including premier search engines google® yahoo ® leading online sites believe dex advantage offers highly effective set marketing tools local businesses operate markets serve marketing services marketing products help local businesses get found readytobuy consumers marketing services designed help businesses get chosen competitors growing list marketing services include local business market analysis message image creation target market identification advertising digital profile creation keyword search engine optimization strategies programs distribution strategies social strategies tracking reporting competitive position believe ability effectively compete industry supported number advantages • owned printed digital products deliver large segment active buying market local businesses • marketing consultants locallybased marketing consultants direct relationship local businesses serving trusted advisors marketing consultants work closely clients first discover business goals marketing needs assess unique situations recommend customized costeffective set marketing products services help businesses grow • publishing agreements incumbent local exchange carriers cobranding relationships incumbent local exchange carriers markets adds credibility allows us serve “official” directory provider • exclusive partnership agreements addition proprietary products partnerships enable clients expand distribution information major search engines leading online mobile local search solutions • content unique local business information locally based marketing consultants relationships local businesses able collect update content filing voluntary petitions chapter 11 may 28 2009 “petition date” company subsidiaries listed collectively company “debtors” filed voluntary petitions chapter 11 relief bankruptcy code united states bankruptcy court district delaware “bankruptcy court” • rh donnelley inc “rhdi” • dontech holdings llc • dontech ii partnership • rh donnelley publishing advertising illinois holdings llc • rh donnelley publishing advertising illinois partnership • rh donnelley publishing advertising inc • get digital smartcom inc • rh donnelley apil inc • rhd service llc • dex media inc • dex media east inc • dex media east llc “dex media east” • dex media east finance co • dex media west inc • dex media west llc “dex media west” • dex media west finance co • dex media service llc • businesscom inc • workcom inc confirmed plan reorganization emergence chapter 11 proceedings january 12 2010 bankruptcy court entered findings fact conclusions law order confirming joint plan reorganization company subsidiaries “confirmation order” effective date joint plan reorganization company subsidiaries “plan” became effective accordance terms petition date effective date debtors operated businesses debtorsinpossession accordance bankruptcy code chapter 11 cases debtors collectively “chapter 11 cases” jointly administered caption rh donnelley corporation case 0911833 kg bankr del 2009 restructuring part restructuring conducted connection debtors’ emergence bankruptcy debtors merged consolidated dissolved terminated shortly effective date certain whollyowned subsidiaries set forth • dontech holdings llc rh donnelley publishing advertising illinois holdings llc merged sole member rhdi • dontech ii partnership rh donnelley publishing advertising illinois partnership technically terminated respective partnership agreements due loss second partner • dex media east finance co merged dex media east • dex media west finance co merged dex media west • workcom inc merged businesscom inc • getdigitalsmartcom inc merged rhdi • dex media east merged dex media east inc “dme inc” • dex media west merged dex media west inc “dmw inc” • rh donnelley publishing advertising inc merged rhdi effectuating restructuring transactions dex one became ultimate parent company following surviving subsidiaries rhdi ii dex media inc iii dme inc iv dmw inc v dex media service llc vi dex one service llc subsequently converted delaware corporation name dex one service inc effective march 1 2010 vii businesscom inc viii rh donnelley apil inc consummation plan distributions pursuant plan since effective date company substantially consummated various transactions contemplated confirmed plan particular march 1 2010 company made substantially distributions cash stock securities required made plan date creditors parties allowed claims including limited following plan distributions • effective date accordance plan company issued following number shares dex one common stock approximately 105 million shares representing 210 total outstanding common stock holders notes issued rhd ii approximately 1165 million shares representing 233 total outstanding common stock holders notes issued dex media inc iii approximately 129 million shares representing 258 total outstanding common stock holders notes issued rhdi iv approximately 65 million shares representing 130 total outstanding common stock holders senior notes issued dex media west v approximately 845 million shares representing 169 total outstanding common stock holders senior subordinated notes issued dex media west • effective date accordance terms plan holders dex media west 85 senior notes due 2010 5875 senior notes due 2011 also received pro rata share dex one’s 3000 million aggregate principal amount 1214 senior subordinated notes due 2017 “dex one senior subordinated notes” • march 1 2010 pursuant plan company made distributions cash account substantially allowed claims general unsecured creditors allowed claims general unsecured creditors paid march 1 2010 paid 2010 pursuant terms plan company also obligated make certain additional payments certain creditors including certain distributions may become due owing subsequent initial distribution date certain payments holders administrative expense priority claims fees earned professional advisors chapter 11 cases discharge releases injunctions pursuant plan confirmation order plan confirmation order also contain various discharges injunctive provisions releases became operative upon effective date provisions summarized sections confirmation order fully described article x plan impact longterm debt upon emergence chapter 11 proceedings effective date accordance plan 61 billion senior notes senior discount notes senior subordinated notes collectively “notes default” exchanged 100 reorganized dex one equity b issued 3000 million dex one senior subordinated notes holders dex media west 85 senior notes due 2010 5875 senior notes due 2011 pro rata basis addition share reorganized dex one equity effective date aggregate outstanding debt 34 billion comprised 31 billion outstanding amended restated credit facilities 3000 million dex one senior subordinated notes see item 7 “management’s discussion analysis financial condition results operations liquidity capital resources” details longterm debt result emergence chapter 11 proceedings company expects reduce interest expense longterm debt year ended december 31 2010 5000 million compared contractually owed company year ended december 31 2009 recent trends related business experiencing lower advertising sales primarily result declines new recurring business including renewal incremental sales existing advertisers mainly driven 1 declines overall advertising spending businesses 2 significant impact weaker economy smaller businesses markets business 3 increase competition fragmentation local business search market factors along filing chapter 11 petitions primary drivers impairment charges 2009 assisted calculating discounted expected future cash flows used determine impairment charges addition factors along significant decline trading value debt equity securities 2008 primary drivers impairment charges 2008 assisted calculating discounted expected future cash flows used determine impairment charges company currently projects future operating results cash flow liquidity negatively impacted aforementioned conditions year ended december 31 2009 rhd experienced 4144 million 158 decline total net revenues prior corresponding period year ended december 31 2009 excluding effects filing chapter 11 petitions rhd also experienced decrease operating cash flow prior corresponding period addition rhd experiencing adverse bad debt trends attributable many economic challenges markets company expects economic challenges continue markets advertising sales bad debt experience operating results continue adversely impacted foreseeable future result company’s historical operating results indicative future operating performance although longterm financial forecast currently anticipates gradual improvement economy commencing second half 2010 fully described item 7 “management’s discussion analysis financial condition results operations net revenues” method recognizing revenue deferral amortization method results delayed recognition declining advertising sales whereby recognized revenues reflect amortization advertising sales consummated prior periods well advertising sales consummated current period accordingly company’s projected decline advertising sales result decline revenue recognized future periods company expects negative trends continue foreseeable future response economic challenges continue actively manage expenses considering acting upon host initiatives streamline operations contain costs time improving value deliver clients expanding number platforms media deliver message consumers also committing sales force focus selling value provided local businesses expanded platforms including dex published directories online mobile devices voiceactivated directory search well network owned operated partner online search sites addition company continues invest future initiatives overall digital product service offerings sales force automation client self service system portal new mobile voice search platforms associated employee training economic conditions recover markets believe investments drive future revenue growth climate change growing concern global climate change contribution emissions greenhouse gases including significantly carbon dioxide concern led increased interest legislative andor regulatory actions well litigation relating greenhouse gas emissions cannot predict impact legislation final believe proposed regulations andor current litigation related global climate change reasonably likely material impact business future financial position results operations cash flow current financial projections include impact proposed regulations andor current litigation related global climate change labor unions november 6 2009 dex media agreed new three year collective bargaining agreement communications workers america “cwa” collective bargaining agreement cwa expires september 2012 june 12 2009 dex media agreed new three year collective bargaining agreement international brotherhood electrical workers america “ibew” collective bargaining agreement ibew expires may 2012 accounting matters resulting chapter 11 proceedings filing chapter 11 petitions constituted event default indentures governing company’s notes default debt obligations instruments became automatically immediately due payable although actions enforce payment obligations automatically stayed applicable bankruptcy law based bankruptcy petitions notes default included liabilities subject compromise consolidated balance sheet december 31 2009 see item 8 “financial statements supplementary data” note 1 “business presentation accounting matters” additional information regarding notes default accounting matters going concern december 31 2009 total outstanding debt 96 billion 61 billion pertains notes default identified liabilities subject compromise 35 billion pertains existing credit facilities excluded liabilities subject compromise consolidated balance sheet december 31 2009 effective date accordance plan notes default exchanged 100 reorganized dex one equity 300 million dex one senior subordinated notes addition terms conditions existing credit facilities amended restated see “liquidity capital resources” detail regarding debt obligations result emergence chapter 11 proceedings restructuring outstanding debt believe company generate sufficient cash flow operations satisfy debt obligations according applicable terms conditions reasonable period time see item 8 “financial statements supplementary data” note 16 “subsequent events” information analysis emergence chapter 11 proceedings pro forma impact financial position fresh start accounting company adopt fresh start accounting reporting effective february 1 2010 “fresh start reporting date” accordance financial accounting standards board “fasb” accounting standards codification “asc” 852 reorganizations “fasb asc 852” holders existing voting shares immediately confirmation plan received less 50 emerging entity reorganization value company’s assets less postpetition liabilities allowed claims consolidated financial statements included herein applicable include effect changes rhd’s capital structure changes fair value assets liabilities result fresh start accounting see item 8 “financial statements supplementary data” note 16 “subsequent events” unaudited proforma presentation impact emergence reorganization fresh start accounting financial position significant financing developments may 28 2009 conjunction plan company repaid aggregate 2000 million principal outstanding balances owed credit facilities follows may 14 2009 company exercised 30day grace period 783 million interest payments due following senior notes senior discount notes april 15 2009 company exercised 30day grace period 546 million interest payments due 8875 series a4 senior notes due 2017 “series a4 senior notes” may 14 2009 company entered forbearance agreements certain noteholders bank lenders “forbearance agreements” respect consequences expiration 30day grace period series a4 senior notes forbearance agreements expired may 28 2009 company make interest payments prior filing chapter 11 petitions exercising grace period constitute event default bond indentures company’s subsidiaries’ debt agreements company make interest payments prior filing chapter 11 petitions result exercising 30day grace period respect series a4 senior notes april 15 2009 certain existing interest rate swaps associated dex media east credit facility notional amount 3500 million required settled may 28 2009 cash settlement payments 264 million made second quarter 2009 associated interest rate swaps result decline certain credit ratings existing interest rate swap associated dex media west credit facility notional amount 500 million required settled april 23 2009 cash settlement payment 05 million made second quarter 2009 associated interest rate swap february 13 2009 company borrowed unused portions rhdi revolving credit facility “rhdi revolver” dex media east revolving credit facility “dex media east revolver” dex media west revolving credit facility “dex media west revolver” totaling 1740 million 970 million 900 million respectively company made borrowings various revolving credit facilities preserve financial flexibility light continuing uncertainty global credit markets employee retirement savings pension retiree health care life insurance plans based ratification new collective bargaining agreements cwa november 6 2009 ibew june 12 2009 conjunction comprehensive redesign company’s employee retirement savings pension plans approved compensation benefits committee company’s board directors october 21 2008 following plan changes approved cwa ibew represented employees • effective december 31 2009 company froze dex media inc pension plan covering cwa ibew represented employees connection freeze pension plan benefit accruals cwa ibew plan participants cease december 31 2009 however plan balances remain intact interest credits participant account balances account balance formula well service credits vesting retirement eligibility continue accordance terms plan addition supplemental transition credits provided certain plan participants nearing retirement would otherwise lose portion anticipated pension benefit age 65 result freezing current plan • elimination access retiree health care life insurance benefits ibew represented employees retiring may 8 2009 cwa represented employees retiring october 2 2009 • elimination retiree life insurance benefits effective january 1 2010 • phase subsidized retiree health care benefits twoyear period beginning january 1 2010 • elimination retiree health care benefits retirees effective january 1 2012 result implementing freeze dex media inc pension plan covering cwa ibew represented employees recognized onetime net curtailment gain 42 million year ended december 31 2009 entirely offset losses incurred plan assets previously unrecognized prior service costs charged accumulated comprehensive loss result eliminating retiree health care life insurance benefits cwa ibew represented employees recognized onetime curtailment gain 520 million included general administrative expenses consolidated statement operations year ended december 31 2009 result actions longer incur funding expenses administrative costs associated retiree health care life insurance plans cwa ibew represented employees segment reporting management reviews analyzes business providing marketing products marketing services one operating segment critical accounting estimates preparation financial statements accordance generally accepted accounting principles “gaap” requires management estimate effect various matters inherently uncertain date financial statements estimates varies regard level judgment involved potential impact company’s reported financial results estimates deemed critical different estimate could reasonably used changes estimate reasonably likely occur period could materially impact company’s financial condition changes financial condition results operations company’s significant accounting polices december 31 2009 discussed note 2 “summary significant accounting policies” notes consolidated financial statements included item 8 annual report critical estimates inherent accounting polices december 31 2009 discussed management believes current assumptions considerations used estimate amounts company’s consolidated financial statements appropriate intangible assets goodwill valuation amortization intangible assets consist directory services agreements company qwest att centurylink respectively b established customer relationships resulting prior acquisitions c noncompetition agreement company sprint trademarks trade names advertising commitment resulting prior acquisition e third party contract trademarks tradenames technology network platforms resulting prior acquisition intangible assets amortized estimated useful lives manner best reflects economic benefit derived assets excess purchase price resulting acquisitions net tangible identifiable intangible assets acquired recorded goodwill impaired 2008 noted prior goodwill impairment charges goodwill amortized subject impairment testing annual basis frequently believed indicators impairment existed company reviews carrying value intangible assets impairment whenever events circumstances indicate carrying amount may recoverable significant negative industry economic trends including market price common stock fair market value debt disruptions business unexpected significant changes planned changes use intangible assets longlived assets mergers acquisitions could result impairment charge intangible assets longlived assets impairment test intangible assets performed comparing carrying amount intangible assets sum undiscounted expected future cash flows relating assets impairment exists sum undiscounted expected future cash flows less carrying amount intangible asset related group assets longlived assets impairment exists impairment charge recognized equal amount carrying value intangible asset related group assets longlived assets exceeds fair value based upon discounted expected future cash flows december 31 2009 net carrying value intangible assets totaled approximately 22 billion amortization expense related intangible assets years ended december 31 2009 2008 2007 5146 million 4159 million 3883 million respectively result filing chapter 11 petitions company performed impairment tests definitelived intangible assets longlived assets year ended december 31 2009 fourth quarter 2009 conjunction filing amended plan amended disclosure statement company finalized extensive analysis associated emergence chapter 11 company utilized following information assumptions obtained analysis complete impairment evaluation • historical financial information including revenue profit margins customer attrition data price premiums enjoyed relative competing independent publishers • longterm financial projections including limited revenue trends profit margin trends • intangible asset carrying values result impairment tests company recognized impairment charge 73 billion fourth quarter 2009 associated directory services agreements advertiser relationships third party contracts network platforms acquired prior acquisitions fair values intangible assets derived discounted cash flow analysis using discount rate indicative risk market participant would willing accept analysis included review relevant financial metrics peers within industry aggregate net book value intangible assets december 31 2009 impaired incremental 1 net loss 2009 would adversely impacted approximately 189 million company evaluates remaining useful lives intangible assets whenever events circumstances indicate revision remaining period amortization warranted estimated remaining useful lives change remaining carrying amount intangible asset would amortized prospectively revised remaining useful life connection impairment testing 2009 company also evaluated remaining useful lives definitelived intangible assets longlived assets considering among things effects obsolescence demand competition takes consideration price premium benefit company competing independent publishers markets result directory services agreements acquired prior acquisitions economic factors including stability industry operate known technological advances legislative actions result uncertain changing regulatory environment expected changes distribution channels december 31 2009 company determined due compression price premium benefit competing independent publishers markets well decline market share year ended december 31 2009 remaining useful lives directory services agreements acquired prior acquisitions reduced 33 years weighted average remaining useful lives 25 years dex media east 26 years dex media west 29 years att 28 years centurylink effective january 1 2010 based assessment future estimated cash flows increased attrition rates impact longterm financial projections remaining useful lives third party contracts advertiser relationships network platforms acquired prior acquisition reduced 1 5 9 years respectively effective january 1 2010 reduction remaining useful lives necessary order better reflect period intangible assets expected contribute future cash flow remaining useful lives intangible assets shortened 10 net loss 2009 would adversely impacted approximately 344 million company anticipates decrease amortization expense 2010 3299 million resulting significantly reduced book values directory services agreements subsequent impairment charges fourth quarter 2009 partially offset increased amortization expense resulting reduction remaining useful lives associated directory services agreements result decline trading value debt equity securities 2008 continuing negative industry economic trends directly affected business performed impairment tests goodwill definitelived intangible assets longlived assets used estimates assumptions impairment evaluations including limited projected future cash flows revenue growth customer attrition rates based upon impairment test goodwill recognized goodwill impairment charges 25 billion 6602 million three months ended march 31 2008 june 30 2008 respectively total goodwill impairment charges 31 billion year ended december 31 2008 result impairment charges recorded goodwill december 31 2008 addition result tests company recognized impairment charge 7440 million fourth quarter 2008 associated local national customer relationships acquired prior acquisitions lastly connection launch next version dexknowscom tradenames technology acquired prior acquisition discontinued resulted impairment charge 22 million fourth quarter 2008 total impairment charges related intangible assets excluding goodwill 7462 million year ended december 31 2008 connection impairment testing definitelived intangible assets longlived assets december 31 2008 evaluated remaining useful lives intangible assets evaluating relevant factors noted based evaluation company recognized reduction remaining useful lives directory services agreements associated prior acquisitions due compression price premium benefit competing independent publishers markets well decline market share year ended december 31 2008 result remaining useful lives directory services agreements reduced 33 years effective january 1 2009 order better reflect period intangible assets expected contribute future cash flow increase amortization expense year ended december 31 2009 direct result reducing remaining useful lives associated directory services agreements partially offset reduction amortization expense associated revision carrying values local national customer relationships subsequent impairment charges recorded fourth quarter 2008 year ended december 31 2007 recorded intangible asset impairment charge 200 million associated tradenames acquired prior acquisition impairment charge resulted change branding strategy utilize new dex market brand print online products across entire footprint discontinued use tradenames acquired prior acquisition impairment charges impact current future operating cash flow compliance debt covenants tax attributes see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies identifiable intangible assets goodwill” additional information regarding intangible assets goodwill impairment charges recorded years ended december 31 2009 2008 2007 respectively industry economic conditions markets continue deteriorate resulting declines advertising sales operating results trading value debt equity securities decline required assess recoverability useful lives longlived assets intangible assets could result additional impairment charges reduction remaining useful lives acceleration amortization expense liabilities subject compromise liabilities subject compromise generally refer prepetition obligations secured unsecured may impaired plan reorganization fasb asc 852 requires liabilities including became known filing chapter 11 petitions reported amounts expected allowed even may settled lesser amounts liabilities represent estimated amount expected resolved known potential claims chapter 11 process remain subject future adjustments negotiated settlements actions bankruptcy court nonacceptance certain executory contracts unexpired leases liabilities subject compromise also includes items may assumed plan reorganization may subsequently reclassified liabilities subject compromise company classified notes default liabilities subject compromise liabilities subject compromise also include certain prepetition liabilities including accrued interest accounts payable accrued liabilities tax related liabilities lease related liabilities bankruptcy process likelihood settlement potential settlement outcomes considered evaluating whether potential obligations probable estimable end reporting period prepetition obligations evaluated determine whether potential liability probable assessment based information available made whether potential liability estimable liability recorded probable estimable estimates used determine amounts reported liabilities subject compromise reflect best estimates involve uncertainties based certain conditions generally outside control company instances control bankruptcy court result estimates used material amounts presented liabilities subject compromise consolidated balance sheet december 31 2009 may presented liabilities subject compromise reclass amounts could also impacted amounts reported reorganization items net consolidated statement operations year ended december 31 2009 connection emergence chapter 11 substantially claims relating prepetition matters satisfied discharged plan payment cash issuance dex one’s common stock satisfaction claims see item 8 “financial statements supplementary data” note 3 “reorganization items net liabilities subject compromise” additional information well items included liabilities subject compromise consolidated balance sheet december 31 2009 income taxes account income taxes asset liability method accordance fasb asc 740 income taxes “fasb asc 740” deferred income tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred income tax assets based upon available evidence likely deferred income tax assets realized fasb asc 740 also prescribes recognition threshold measurement principles financial statement recognition measurement tax positions taken expected taken tax return fasb asc 740 impact uncertain income tax position income tax return must recognized largest amount likely sustained upon audit relevant taxing authority uncertain income tax position recognized less 50 likelihood sustained additionally fasb asc 740 provides guidance derecognition classification interest penalties accounting interim periods disclosures transition requirements see item 8 “financial statements supplementary data” note 7 “income taxes” information regarding provision benefit income taxes ordinary course business may many transactions calculations ultimate tax outcome uncertain calculation tax liabilities involves dealing uncertainties application complex tax laws recognize potential liabilities anticipated tax audit issues based estimate ultimate resolution whether extent additional taxes due although believe estimates reasonable assurance given final outcome matters different reflected historical income tax provisions accruals part financial reporting process must assess likelihood deferred income tax assets recovered unless recovery likely provision taxes must increased recording reserve form valuation allowance deferred income tax assets estimated ultimately recoverable process certain relevant criteria evaluated including existence deferred income tax liabilities used absorb deferred income tax assets taxable income future years judgment regarding future taxable income may change due future market conditions changes us tax laws factors changes may require material adjustments deferred income tax assets accompanying reduction increase net income loss period determinations made addition operate within multiple taxing jurisdictions subject audit jurisdictions audits involve complex issues may require extended period time resolve maintain liability estimate potential income tax exposure opinion adequate provision income taxes made years allowance doubtful accounts sales claims record revenue net allowance sales claims addition record provision bad debts provision bad debts allowance sales claims estimated based historical experience also evaluate current condition client balances bankruptcy filings change credit policy historical chargeoff patterns recovery rates data determining allowance doubtful accounts reserve review estimates periodically assess whether additional adjustment needed based economic events circumstances including actual experience end billing collection cycle believe allowance doubtful accounts sales claims adequate cover anticipated losses current conditions however significant deterioration factors noted overall economy could materially change expectations provisions sales claims doubtful accounts estimated based percentage revenue accordingly additional 1 change either allowance percentages would impacted 2009 net loss approximately 196 million pension benefits pension plan obligations related assets defined benefit pension plans presented note 9 consolidated financial statements plan assets consist primarily marketable equity debt instruments valued using market quotations determination plan obligations annual pension expense requires management make number assumptions key assumptions measuring plan obligations include discount rate future salary increases longterm expected return plan assets 2009 utilized mercer pension discount yield curve determine appropriate discount rate defined benefit pension plans company changed mercer pension discount yield curve 2009 better reflect specific cash flows plans determining discount rate 2008 2007 utilized citigroup pension liability index appropriate discount rate defined benefit pension plans salary increase assumptions based upon historical experience anticipated future management actions asset returns based upon longterm anticipated average rate earnings expected invested funds plan december 31 2009 weightedaverage actuarial assumptions december 31 2008 weightedaverage actuarial assumptions net periodic pension costs recognized 2009 78 million 1 increase decrease discount rate would affect 2009 net loss approximately 01million 1 increase decrease longterm rate return plan assets would affect 2009 net loss approximately 21 million based ratification new collective bargaining agreements cwa november 6 2009 ibew june 12 2009 conjunction comprehensive redesign company’s employee retirement savings pension plans approved compensation benefits committee company’s board directors october 21 2008 company froze current defined benefit plans covering cwa ibew represented employees curtailed retiree health care life insurance benefits covering cwa ibew represented employees october 2008 company froze current defined benefit plans covering nonunion employees curtailed nonunion retiree health care life insurance benefits see item 8 “financial statements supplementary data” note 9 “benefit plans” information regarding benefit plans stockbased compensation fair value stockbased awards calculated using blackscholes model time stockbased awards granted use blackscholes model requires significant judgment use estimates particularly assumptions expected volatility riskfree interest rates expected lives value stockbased awards well forfeiture rates recognize stockbased compensation expense company grant stockbased awards year ended december 31 2009 april 2009 company increased estimated forfeiture rate determining stockbased compensation expense 8 102 adjustment based review historical forfeiture information resulted reduction compensation expense 04 million year ended december 31 2009 following assumptions used valuing stockbased awards recognition stockbased compensation expense years ended december 31 2008 2007 estimate expected volatility based historical volatility price common stock expected life stockbased awards expected life represents period time stockbased awards granted expected outstanding estimate expected life using simplified method permitted staff accounting bulletin 110 use simplified method developing expected term share options stockbased awards satisfy “plain vanilla” criteria simplified method calculates expected life average vesting contractual terms award riskfree interest rate based applicable us treasury yields approximate expected life stockbased awards granted also use historical data estimate forfeiture rate estimated forfeitures adjusted extent actual forfeitures differ expected materially differ estimates assumptions reflect best estimates involve inherent uncertainties based certain conditions generally outside control company result assumptions used total stockbased compensation expense could materially impacted furthermore use different assumptions future grants stockbased compensation expense could materially impacted future periods upon emergence chapter 11 pursuant plan outstanding equity securities company including stock options sars restricted stock cancelled see item 8 “financial statements supplementary data” note 16 “subsequent events” information regarding dex one’s new equity incentive plan “eip” fair value financial instruments december 31 2009 2008 fair value cash equivalents accounts receivable accounts payable accrued liabilities approximated carrying value based shortterm nature instruments result filing chapter 11 petitions plan believe meaningful present fair market value longterm debt december 31 2009 item 8 “financial statements supplementary data” note 5 “longterm debt credit facilities notes” fasb asc 820 fair value measurements disclosures “fasb asc 820” defines fair value establishes fair value hierarchy prioritizes inputs valuation techniques used measure fair value expands disclosures fair value measurements fasb asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy gives highest priority quoted prices active markets comprised following three levels level 1 unadjusted quoted market prices active markets identical assets liabilities level 2 observable inputs level 1 inputs level 2 inputs would typically include quoted prices markets active financial instruments significant inputs observable either directly indirectly level 3 prices valuations require inputs significant measurement unobservable following tables represent assets liabilities measured fair value recurring basis december 31 2009 level within fair value hierarchy fair value measurements included interest rate swaps december 31 2009 company interest rate swaps notional amount 2000 million continue measured fair value recurring basis conjunction classification credit facilities interest rate swap liabilities excluded liabilities subject compromise consolidated balance sheet december 31 2009 credit facilities interest rate swaps fully collateralized fair value collateral exceeded carrying value credit facilities interest rate swaps valuation techniques interest rate swaps fair value marketbased measure considered perspective market participant holds asset owes liability rather entityspecific measure therefore even market assumptions readily available company’s assumptions set reflect market participants would use pricing asset liability measurement date company uses prices inputs current measurement date fair value derivative instruments derived using pricing models pricing models take account relevant observable market inputs market participants would use pricing asset liability pricing models used determine fair value incorporate contract terms including maturity well inputs including limited interest rate yield curves creditworthiness counterparty impact credit rating also considered measuring fair value liabilities credit rating could material impact fair value derivative instruments results operations financial condition particular reporting period year ended december 31 2009 impact applying credit rating determining fair value derivative instruments reduction interest rate swap liability 05 million many pricing models entail material subjectivity methodologies employed necessitate significant judgment pricing inputs observed actively quoted markets case derivative instruments pricing models used company widely accepted financial services industry noted derivative instruments categorized within level 2 fair value hierarchy fair value control processes interest rate swaps company employs control processes validate fair value derivative instruments derived pricing models control processes designed assure values used financial reporting based observable inputs wherever possible event observable inputs available control processes designed assure valuation approach utilized appropriate consistently applied assumptions reasonable benefit plan assets effective january 1 2009 dex media pension plan began participate rhd retirement account master trust “master trust” previously established investment assets rhd retirement plan fair value assets held master trust december 31 2009 asset category follows category includes investments us government bonds government mortgagebacked securities indexlinked government bonds guaranteed commercial paper shortterm treasury bills notes fair value assets determined using bid evaluation process observable market based inputs effective last business day plan year b category includes investments two commoncollective funds 79 invested stocks comprising russell 1000 equity index remaining 21 comprised shortterm investments fair value assets determined based contract value based provisions underlying guaranteed investment contracts c category includes investments corporate bonds commercial mortgagebacked assetbacked securities collateralized mortgage obligations commercial paper fair value assets determined using bid evaluation process observable market based inputs effective last business day plan year category includes investments small cap stocks u issuers across diverse industries fair value assets determined using quoted market prices recognized securities exchange last reported trading price last business day plan year e category comprised two mutual funds one invests valueoriented international stocks across diverse industries one invests intermediate term fixed income instruments treasuries high grade corporate bonds fair value assets determined using quoted market prices recognized securities exchange last reported trading price last business day plan year f category comprised healthcare real estate investment trust fair value assets determined based traded market prices g category includes investments combination 5 10 30 year us treasury bond futures credit default swaps fair value assets determined based either settlement prices recognized securities exchange midbid evaluation process using observable market based inputs asset management committee “amc” appointed compensation benefits committee company’s board directors named fiduciary plan matters relating plan investments asset management amc authority appoint retain monitor remove custodian investment manager responsible establishing maintaining funding investment policy master trust see item 8 “financial statements supplementary data” note 9 “benefit plans” information regarding benefit plans effective january 1 2009 company adopted provisions fasb asc 820 associated nonfinancial assets liabilities initially measured fair value prior business combinations including intangible assets goodwill fresh start accounting company adopt fresh start accounting reporting fresh start reporting date february 1 2010 accordance fasb asc 852 holders existing voting shares immediately confirmation plan received less 50 emerging entity reorganization value company’s assets less postpetition liabilities allowed claims fasb asc 852 reorganization value represents fair value entity considering liabilities approximates amount willing buyer would pay assets company immediately restructuring reorganization value allocated respective fair value assets excess reorganization value fair value identified tangible intangible assets recorded goodwill liabilities deferred taxes stated present values amounts expected paid fair values assets liabilities represent best estimates based independent appraisals valuations foregoing available industry data trends references relevant market rates transactions used estimates assumptions subject significant uncertainties beyond reasonable control addition market value common stock may differ materially fresh start equity valuation see item 8 “financial statements supplementary data” note 16 “subsequent events” unaudited proforma presentation impact emergence reorganization fresh start accounting financial position new accounting pronouncements september 2009 emerging issues task force “eitf” reached final consensus eitf issue 081 revenue arrangements multiple deliverables “eitf 081” eitf 081 yet incorporated fasb’s codification however currently identified accounting standards update 200913 revenue recognition eitf 081 updates current guidance pertaining multipleelement revenue arrangements included fasb asc 60525 originated eitf 0021 revenue arrangements multiple deliverables eitf 081 addresses determine whether arrangement involving multiple deliverables contains one unit accounting arrangement consideration allocated among separate units accounting eitf 081 effective company annual reporting period beginning january 1 2011 eitf 081 may applied retrospectively prospectively early adoption permitted company expect adoption eitf 081 impact financial position results operations cash flows disclosures june 2009 fasb issued fasb asc 10510 generally accepted accounting principles “fasb asc 105” fasb asc 105 establishes single source authoritative nongovernmental gaap superseding existing fasb american institute certified public accountants “aicpa” eitf related accounting literature fasb asc 105 amend replace rules interpretive releases securities exchange commission “sec” sources authoritative gaap sec registrants fasb asc 105 effective interim annual periods ending september 15 2009 company adopted fasb asc 105 september 30 2009 may 2009 fasb issued fasb asc 855 subsequent events “fasb asc 855” objective establish general standards accounting disclosure events occur balance sheet date financial statements issued available issued particular fasb asc 855 sets forth 1 period balance sheet date management reporting entity evaluate events transactions may occur potential recognition disclosure financial statements 2 circumstances entity recognize events transactions occurring balance sheet date financial statements 3 disclosures entity make events transactions occurred balance sheet date fasb asc 855 effective interim annual financial periods ending june 15 2009 adopted fasb asc 855 june 30 2009 reviewed accounting pronouncements issued december 31 2009 company yet adopted believe pronouncements material impact financial position operating results operations year ended december 31 2009 compared year ended december 31 2008 net revenues components net revenues years ended december 31 2009 2008 follows advertising revenues earned primarily sale advertising yellow pages directories publish net sales claims allowances advertising revenues also include revenues internetbased advertising products including online directories dexknowscom dexnet advertising revenues affected several factors including changes quantity size advertisements acquisition new clients renewal rates existing clients premium advertisements sold changes advertisement pricing introduction new products increase competition fragmentation local business search market general economic factors revenues respect print advertising internetbased advertising products sold print advertising recognized deferral amortization method revenues related print advertising initially deferred directory published recognized ratably directory’s life typically 12 months revenues respect internetbased advertising products sold print advertising initially deferred service delivered fulfilled recognized ratably life contract revenues respect internetbased services sold print advertising dexnet recognized delivered fulfilled result deferral amortization method revenue recognition recognized gross advertising revenues reflect amortization advertising sales consummated prior periods well advertising sales consummated current period noted advertising sales continued deteriorate due overall economic instability well increase competition fragmentation local business search market result lower recognized advertising revenues future periods noted revenues recognized ratably directory’s life gross advertising revenues year ended december 31 2009 decreased 4080 million 155 year ended december 31 2008 decline gross advertising revenues year ended december 31 2009 primarily due declines advertising sales past twelve months primarily result declines new recurring business mainly driven 1 declines overall advertising spending businesses 2 significant impact weaker economy smaller businesses markets business 3 increase competition fragmentation local business search market revenues year ended december 31 2009 decreased 79 million 208 year ended december 31 2008 revenues include late fees received outstanding client balances barter revenues commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain advertisingrelated products advertising sales nongaap statistical measure consists sales advertising print directories distributed period internetbased products services respect advertising first appeared publicly period important distinguish advertising sales net revenues gaap recognized deferral amortization method advertising sales year ended december 31 2009 20286 million compared 25476 million year ended december 31 2008 5190 million 204 decrease advertising sales year ended december 31 2009 result declines new recurring business mainly driven 1 declines overall advertising spending businesses 2 significant impact weaker economy smaller businesses markets business 3 increase competition fragmentation local business search market advertising sales current periods recognized gross advertising revenues future periods result deferral amortization method revenue recognition expenses components total expenses years ended december 31 2009 2008 follows certain costs directly related selling production directories initially deferred recognized ratably life directory deferral amortization method accounting match revenue recognized relating directories cost recognition commencing month directory distribution substantially complete costs specifically identifiable particular directory include sales commissions print paper initial distribution costs sales commissions include amounts paid employees sales local clients certified marketing representatives “cmrs” act channel national clients expenses sales person salaries sales manager compensation sales office occupancy publishing information technology services specifically identifiable particular directory recognized incurred costs recognized reporting period consist costs incurred period fully recognized period ii costs incurred prior period portion amortized recognized current period iii costs incurred current period portion amortized recognized current period balance deferred future periods consequently difference costs recognized given period costs incurred given period may significant production distribution expenses total production distribution expenses year ended december 31 2009 3507 million compared 4182 million year ended december 31 2008 primary components 675 million 161 decrease production distribution expenses year ended december 31 2009 follows year ended december 31 2009 print paper distribution costs declined 284 million compared year ended december 31 2008 decline primarily due lower page volumes associated declines print advertisements negotiated price reductions print paper expenses refinement distribution scope across markets year ended december 31 2009 internet production distribution costs declined 243 million compared year ended december 31 2008 primarily due reduction headcount outside contractor services year ended december 31 2009 production distribution related expenses declined 75 million compared year ended december 31 2008 decline primarily due higher spending associated infrastructure support products services enhancements technical support multiple production systems year ended december 31 2008 compared year ended december 31 2009 selling support expenses total selling support expenses year ended december 31 2009 6636 million compared 7297 million year ended december 31 2008 primary components 661 million 91 decrease selling support expenses year ended december 31 2009 follows year ended december 31 2009 commissions salesperson costs decreased 537 million compared year ended december 31 2008 primarily due lower advertising sales effect variablebased commissions well headcount reductions consolidation responsibilities year ended december 31 2009 directory publishing costs decreased 117 million compared year ended december 31 2008 primarily due lower page volumes associated declines print advertisements well reduction headcount related expenses resulting consolidation publishing graphics operations year ended december 31 2009 selling support related incentive compensation expense declined 66 million compared year ended december 31 2008 primarily due fact company grant stockbased awards year ended december 31 2009 partially offset compensation expense associated company’s 2009 longterm incentive program “2009 ltip” year ended december 31 2009 billing credit collection expenses decreased 55 million compared year ended december 31 2008 primarily due lower costs resulting change vendors later part 2008 lower billing volumes associated declines advertisers print advertisements well headcount reductions consolidation responsibilities year ended december 31 2009 occupancy costs decreased 40 million compared year ended december 31 2008 primarily due lease renegotiations associated filing chapter 11 petitions year ended december 31 2009 advertising expenses increased 110 million compared year ended december 31 2008 primarily due increased costs associated traffic purchased distributed multiple advertiser landing pages year ended december 31 2009 bad debt expense increased 82 million 59 compared year ended december 31 2008 primarily due deterioration accounts receivable aging categories increased writeoffs resulting adverse impact clients instability overall economy tightening credit markets year ended december 31 2009 bad debt expense represented 67 net revenue compared 53 year ended december 31 2008 clients fail pay within specified credit terms may cancel advertising future directories could impact ability collect past due amounts well adversely impact advertising sales revenue trends expect economic challenges continue markets bad debt experience continue adversely impacted foreseeable future general administrative expenses general administrative “ga” expenses year ended december 31 2009 690 million compared 1209 million year ended december 31 2008 primary components 519 million 429 decrease ga expenses year ended december 31 2009 follows year ended december 31 2009 restructuring expenses decreased 215 million compared year ended december 31 2008 primarily due lower costs associated outside consultants headcount reductions consolidation responsibilities vacated leased facilities well reclassification certain previously recognized expenses associated filing chapter 11 petitions reorganization items consolidated statement operations year ended december 31 2009 year ended december 31 2009 company recognized onetime net curtailment gains 520 million associated elimination certain retiree health care life insurance benefits union employees year ended december 31 2008 recognized onetime net curtailment gains 380 million associated elimination certain retiree health care life insurance benefits nonunion employees net increase curtailment gains 140 million year ended december 31 2009 presented table year ended december 31 2009 general corporate expenses declined 113 million compared year ended december 31 2008 primarily due declines legal fees associated filing chapter 11 petitions declines benefitrelated expenses fees associated outside contractor services year ended december 31 2009 ga related incentive compensation expense declined 51 million compared year ended december 31 2008 primarily due fact company grant stockbased awards year ended december 31 2009 partially offset compensation expense associated company’s 2009 ltip depreciation amortization depreciation amortization expense year ended december 31 2009 5788 million compared 4833 million year ended december 31 2008 amortization intangible assets 5146 million year ended december 31 2009 compared 4159 million year ended december 31 2008 increase amortization expense year ended december 31 2009 direct result reducing remaining useful lives associated directory services agreements acquired prior acquisitions 33 years effective january 1 2009 partially offset reduction amortization expense associated revision carrying values local national customer relationships subsequent impairment charges recorded fourth quarter 2008 depreciation fixed assets amortization computer software 643 million year ended december 31 2009 compared 674 million year ended december 31 2008 decrease depreciation expense year ended december 31 2009 primarily due accelerated amortization year ended december 31 2008 associated software projects retired prior initial estimated service life impairment charges result filing chapter 11 petitions company performed impairment tests definitelived intangible assets longlived assets year ended december 31 2009 fourth quarter 2009 conjunction filing amended plan amended disclosure statement company finalized extensive analysis associated emergence chapter 11 company utilized following information assumptions obtained analysis complete impairment evaluation • historical financial information including revenue profit margins customer attrition data price premiums enjoyed relative competing independent publishers • longterm financial projections including limited revenue trends profit margin trends • intangible asset carrying values result impairment tests company recognized impairment charge 73 billion fourth quarter 2009 associated directory services agreements advertiser relationships third party contracts network platforms acquired prior acquisitions fair values intangible assets derived discounted cash flow analysis using discount rate indicative risk market participant would willing accept analysis included review relevant financial metrics peers within industry connection impairment testing 2009 company also evaluated remaining useful lives definitelived intangible assets longlived assets considering among things effects obsolescence demand competition takes consideration price premium benefit company competing independent publishers markets result directory services agreements acquired prior acquisitions economic factors including stability industry operate known technological advances legislative actions result uncertain changing regulatory environment expected changes distribution channels december 31 2009 company determined due compression price premium benefit competing independent publishers markets well decline market share year ended december 31 2009 remaining useful lives directory services agreements acquired prior acquisitions reduced 33 years weighted average remaining useful lives 25 years dex media east 26 years dex media west 29 years att 28 years centurylink effective january 1 2010 based assessment future estimated cash flows increased attrition rates impact longterm financial projections remaining useful lives third party contracts advertiser relationships network platforms acquired prior acquisition reduced 1 5 9 years respectively effective january 1 2010 reduction remaining useful lives necessary order better reflect period intangible assets expected contribute future cash flow company anticipates decrease amortization expense 2010 3299 million resulting significantly reduced book values directory services agreements subsequent impairment charges fourth quarter 2009 partially offset increased amortization expense resulting reduction remaining useful lives associated directory services agreements result decline trading value debt equity securities 2008 continuing negative industry economic trends directly affected business performed impairment tests goodwill definitelived intangible assets longlived assets used estimates assumptions impairment evaluations including limited projected future cash flows revenue growth customer attrition rates based upon impairment test goodwill recognized goodwill impairment charges 25 billion 6602 million three months ended march 31 2008 june 30 2008 respectively total goodwill impairment charges 31 billion year ended december 31 2008 result impairment charges recorded goodwill december 31 2008 addition result tests company recognized impairment charge 7440 million fourth quarter 2008 associated local national customer relationships acquired prior acquisitions lastly connection launch next version dexknowscom tradenames technology acquired prior acquisition discontinued resulted impairment charge 22 million fourth quarter 2008 total impairment charges related intangible assets excluding goodwill 7462 million year ended december 31 2008 industry economic conditions markets continue deteriorate resulting declines advertising sales operating results trading value debt equity securities decline required assess recoverability useful lives longlived assets intangible assets could result additional impairment charges reduction remaining useful lives acceleration amortization expense operating loss operating loss years ended december 31 2009 2008 follows nm meaningful operating loss year ended december 31 2009 68 billion compares operating loss 30 billion year ended december 31 2008 change operating loss year ended december 31 2009 operating loss year ended december 31 2008 primarily due significant 2009 intangible asset impairment charges noted well revenue expense trends described partially offset 2008 impairment charges interest expense net contractual interest expense would appeared consolidated statement operations filing chapter 11 petitions 8024 million year ended december 31 2009 net interest expense year ended december 31 2009 4895 million includes 275 million noncash amortization deferred financing costs net interest expense year ended december 31 2008 8355 million includes 290 million noncash amortization deferred financing costs interest expense year ended december 31 2009 includes noncash charge 56 million associated change fair value dex media east interest rate swaps longer deemed financial instruments result filing chapter 11 petitions interest expense year ended december 31 2009 also includes noncash charge 96 million resulting amounts previously charged accumulated comprehensive loss related interest rate swaps amounts previously charged accumulated comprehensive loss related dex media east interest rate swaps amortized interest expense remaining life interest rate swaps based future interest payments probable forecasted transactions occur accordance fresh start accounting reporting unamortized amounts previously charged accumulated comprehensive loss eliminated fresh start reporting date result change fair value interest rate swaps associated amendment rhdi credit facility refinancing former dex media west credit facility june 6 2008 settlement termination certain interest rate swaps second quarter 2009 interest expense includes reduction 107 million year ended december 31 2009 compared noncash charge 37 million year ended december 31 2008 interest expense year ended december 31 2008 also includes noncash charge 210 million resulting amounts previously charged accumulated comprehensive loss related interest rate swaps conjunction acquisition dex media january 31 2006 “dex media merger” result purchase accounting required gaap recorded dex media’s debt fair value january 31 2006 recognized offset interest expense period subsequent dex media merger may 28 2009 amortization corresponding fair value adjustment offset interest expense 77 million year ended december 31 2009 compared 176 million year ended december 31 2008 offset interest expense recognized life respective debt however due filing chapter 11 petitions unamortized fair value adjustments may 28 2009 785 million writtenoff recognized reorganization item consolidated statement operations year ended december 31 2009 decrease net interest expense 3460 million 414 year ended december 31 2009 primarily due 1 ceasing interest expense notes default result filing chapter 11 petitions 2 noncash charge 210 million year ended december 31 2008 resulting amounts previously charged accumulated comprehensive loss noted 3 reduction outstanding debt prior corresponding period due financing transactions conducted later half 2008 decrease net interest expense year ended december 31 2009 offset 1 noncash charges associated change fair value dex media east interest rate swaps amounts previously charged accumulated comprehensive loss related dex media east interest rate swaps noted 2 reduction interest income associated interest rate swaps due decline interest rates 3 additional interest expense associated borrowing unused portions revolving credit facilities february 13 2009 4 decline offset interest expense associated fair value adjustment dex media’s debt noted gain debt transactions net result voluntary prepayments made rhdi credit facility fourth quarter 2008 recognized gain 200 million year ended december 31 2008 consisting difference face amount term loans repaid voluntary prepayments made offset writeoff unamortized deferred financing costs result debt repurchases october 2008 recorded gain 136 million year ended december 31 2008 consisting difference par value purchase price senior notes offset writeoff unamortized deferred financing costs result debt repurchases september 2008 recorded gain 724 million year ended december 31 2008 representing difference accreted value par value applicable purchase price senior notes senior discount notes offset writeoff unamortized deferred financing costs result exchange senior notes senior discount notes “rhd notes” rhdi’s 1175 senior notes due may 15 2015 “rhdi senior notes” june 25 2008 recorded gain 1613 million year ended december 31 2008 representing difference accreted value par value applicable extinguished rhd notes rhdi senior notes offset writeoff unamortized deferred financing costs related extinguished rhd notes accounted extinguishment debt year ended december 31 2008 recognized charge 22 million writeoff unamortized deferred financing costs associated refinancing former dex media west credit facility portions amended rhdi credit facility accounted extinguishments debt result debt transactions recorded net noncash gain 2652 million year ended december 31 2008 see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies gain loss debt transactions net” additional information reorganization items net year ended december 31 2009 company recorded 948 million reorganization items separate line item consolidated statement operations reorganization items represent charges directly associated process reorganizing business chapter 11 bankruptcy code following table displays details reorganization items year ended december 31 2009 company incurred professional fees associated filing chapter 11 petitions 774 million year ended december 31 2009 676 million paid cash professional fees include financial legal valuation services directly associated reorganization process writeoff unamortized deferred financing costs 645 million unamortized net premiums discounts 349 million unamortized fair value adjustments required gaap result dex media merger 785 million may 28 2009 relate longterm debt classified liabilities subject compromise december 31 2009 company recognized 35 million year ended december 31 2009 associated rejected leases abandoned property approved bankruptcy court december 31 2009 part chapter 11 cases december 31 2009 company received operating cash receipts resulting filing chapter 11 petitions benefit income taxes effective tax rate loss income taxes 126 year ended december 31 2009 compares effective tax rate 357 loss income taxes year ended december 31 2008 significant change effective tax rate year ended december 31 2009 compared year ended december 31 2008 primarily due valuation allowance recorded december 31 2009 noted well tax consequences section 382 limitation recorded year ended december 31 2009 partially offset impairment charges recorded year ended december 31 2008 change effective tax rate year ended december 31 2009 also attributable estimates nondeductible reorganization costs changes estimates state tax apportionment factors impact effective state tax rates 2009 income tax benefit 9285 million comprised federal tax benefit 7835 million state tax benefit 1450 million 2009 federal tax benefit comprised current tax benefit 29 million primarily related decrease federal tax accrual due amended return filings deferred tax benefit 7807 million primarily related noncash intangible asset impairment charges 2009 offset part valuation allowance discussed 2009 state tax benefit 1450 million comprised current tax benefit 118 million relates favorable settlement prior year state tax audits 2009 reversal associated state liabilities deferred tax benefit 1332 million primarily related noncash intangible asset impairment charges 2009 offset part valuation allowance discussed december 31 2009 company federal state net operating loss carryforwards approximately 13154 million net carryback 16859 million respectively begin expire 2020 2010 respectively amounts include consideration net operating losses expected expire unused due internal revenue code section 382 “section 382” limitation changes ownership company believes occurred march 6 2009 section 382 potential limitations triggered ownership change generally defined greater 50 change stock ownership value threeyear period change ownership restrict company’s ability use certain net operating losses corporate tax attributes future however ownership change constitute change control company’s debt agreements contracts provided full valuation allowances state federal net operating loss tax credit carryforwards extent likely deferred tax benefits realized december 31 2009 accordance fasb asc 740 upon evaluation future reversals existing taxable differences taxable income net operating loss carryback years liabilities required asc 740 recorded valuation allowance 15319 million deferred tax assets december 2009 effectively settled issues consideration department finance new york state audit tax years 2000 2006 department revenue north carolina audit tax years 2003 2008 result settlements unrecognized tax benefit associated uncertain state tax positions decreased 76 million new york state 97 million north carolina year ended december 31 2009 decrease unrecognized tax benefits decreased effective tax rate year ended december 31 2009 unrecognized tax benefits impacted new york state north carolina audits primarily related apportionment allocation income among legal entities 2009 company increased liability unrecognized tax benefits 2764 million reflecting uncertainty whether ownership change section 382 discussed occurred prior date elected modify tax classification two subsidiaries date change ownership question balance sheet date company able confirm actual date ownership change sec forms 13g filed stockholders forty five days following end calendar year file forms sec based due date actual ownership change date confirmed february 15 2010 addition increased liability unrecognized tax benefits 15 million relating uncertainty surrounding deductibility certain accrued expenses reasonably possible amount unrecognized tax benefits could decrease within next twelve months previously mentioned increased liability unrecognized tax benefits 2764 million section 382 limitations actual date ownership change irc section 382 resolved within next twelve months total amount unrecognized tax benefits could decrease 2764 million 2008 income tax benefit 12777 million comprised federal tax benefit 11287 million state tax benefit 1490 million 2008 federal tax benefit comprised current tax provision 239 million primarily related increase fin 48 liability offset deferred income tax benefit 11526 million primarily related goodwill impairment charges 2008 state tax benefit 1490 million comprised current tax provision 103 million relates taxes due states subsidiaries company file separate tax returns well increase fin 48 liability offset deferred income tax benefit 1593 million primarily related goodwill impairment charges 2008 company utilized federal net operating losses income tax purposes 41 million primarily resulting taxable gains associated certain financing activities conducted 2008 income tax benefit includes income tax benefit 203 million correcting overstated income tax expense fiscal years 2004 2007 evaluated materiality correction concluded material current prior year financial statements accordingly recorded correction fourth quarter 2008 september 2008 effectively settled issues consideration department finance new york city related audit taxable year 2000 result settlement unrecognized tax benefits associated uncertain state tax positions decreased 09 million year ended december 31 2008 decrease unrecognized tax benefits decreased effective tax rate year ended december 31 2008 unrecognized tax benefits impacted new york city audit primarily related allocation income among legal entities net loss per share net loss year ended december 31 2009 65 billion compares net loss 23 billion year ended december 31 2008 change net loss year ended december 31 2009 compared year ended december 31 2008 primarily due impairment charges noted well revenue expense trends described partially offset impact reorganization items year ended december 31 2009 calculation basic diluted earnings loss per share “eps” presented 1 due net loss reported years ended december 31 2009 2008 effect stockbased awards antidilutive therefore included calculation diluted eps years ended december 31 2009 2008 46 million shares 41 million shares respectively stockbased awards exercise prices exceeded average market price company’s common stock respective periods year ended december 31 2008 compared year ended december 31 2007 factors affecting comparability acquisitions august 23 2007 acquired businesscom leading business search engine directory performance based advertising network results businesscom included consolidated results commencing august 23 2007 therefore consolidated results year ended december 31 2008 include full period results businesscom compared four months results businesscom year ended december 31 2007 impact purchase accounting result dex media merger associated purchase accounting required gaap recorded deferred directory costs print paper delivery commissions related directories scheduled publish subsequent dex media merger fair value determined estimated billable value published directory less b expected costs complete directories plus c normal profit margin refer purchase accounting entry “cost uplift” cost uplift associated print paper delivery costs amortized terms applicable directories production publication distribution expenses whereas cost uplift associated commissions amortized terms applicable directories selling support expenses cost uplift amortized production publication distribution expenses selling support expenses totaled 153 million 136 million respectively year ended december 31 2007 comparable expense year ended december 31 2008 reclassifications year ended december 31 2007 recorded net loss debt transactions 263 million included interest expense consolidated statements operations 2007 annual report form 10k “2007 10k” order conform current period’s presentation net loss reclassified gain loss debt transactions net consolidated statements operations see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies gain loss debt transactions net” note 5 “longterm debt credit facilities notes” additional information year ended december 31 2007 recorded intangible asset impairment charge 200 million included depreciation amortization consolidated statements operations 2007 10k order conform current period’s presentation amount reclassified impairment charges consolidated statements operations see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies identifiable intangible assets goodwill” additional information net revenue components net revenues years ended december 31 2008 2007 follows directory advertising revenues earned primarily sale advertising yellow pages directories publish net sales claims allowances directory advertising revenues also include revenues internetbased advertising products including online directories dexknowscom dex search network directory advertising revenues affected several factors including changes quantity size advertisements acquisition new clients renewal rates existing clients premium advertisements sold changes advertisement pricing introduction new products increase competition fragmentation local business search space general economic factors revenues respect print advertising internetbased advertising products sold print advertising recognized deferral amortization method revenues related print advertising initially deferred directory published recognized ratably directory’s life typically 12 months revenues respect internetbased advertising products sold print advertising initially deferred service delivered fulfilled recognized ratably life contract revenues respect internetbased services sold print advertising dex search network recognized delivered fulfilled result deferral amortization method revenue recognition recognized gross directory advertising revenues reflect amortization advertising sales consummated prior periods well advertising sales consummated current period noted advertising sales continued deteriorate due overall economic instability result lower recognized advertising revenues future periods noted revenues recognized ratably directory’s life gross directory advertising revenues year ended december 31 2008 decreased 732 million 27 year ended december 31 2007 decline gross directory advertising revenues year ended december 31 2008 primarily due declines advertising sales past twelve months primarily result declines recurring business mainly driven reduced consumer confidence cautious client spending markets given clients’ perception economic health respective markets well increase competition fragmentation local business search space declines partially offset full year revenues 2008 businesscom compared four months revenues 2007 sales claims allowances year ended december 31 2008 decreased 95 million 173 year ended december 31 2007 decrease sales claims allowances year ended december 31 2008 primarily due improved quality lower claims experience due process improvements qwest markets 87 million revenues year ended december 31 2008 increased 02 million 05 year ended december 31 2007 revenues include late fees received outstanding client balances barter revenues commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain advertisingrelated products advertising sales statistical measure consists sales advertising print directories distributed period internetbased products services respect advertising first appeared publicly period important distinguish advertising sales net revenues gaap recognized deferral amortization method advertising sales year ended december 31 2008 25183 million compared 27457 million year ended december 31 2007 advertising sales year ended december 31 2007 include 275 million advertising sales assuming businesscom acquisition occurred january 1 2007 2274 million 83 decrease advertising sales year ended december 31 2008 result declines new recurring business mainly driven weaker economic trends reduced consumer confidence cautious client spending markets advertising sales also impacted increase competition fragmentation local business search space declines partially offset increases businesscom advertising sales advertising sales current periods recognized gross directory advertising revenues future periods result deferral amortization method revenue recognition expenses components total expenses years ended december 31 2008 2007 follows nm meaningful expenses years ended december 31 2008 2007 include costs associated triple play strategy focus online products services across markets costs relate continued launch dex market brand uniform resource locator “url” dexknowscom across entire footprint costs associated traffic purchased distributed multiple advertiser landing pages continued introduction plus companion directories centurylink att markets well associated marketing advertising campaigns employee training associated modernization consolidation platform expect expenses drive future advertising sales revenue improvements economic conditions improve markets certain costs directly related selling production directories initially deferred recognized ratably life directory deferral amortization method accounting cost recognition commencing month directory distribution substantially complete costs specifically identifiable particular directory include sales commissions print paper initial distribution costs sales commissions include amounts paid employees sales local clients certified marketing representatives “cmrs” act channel national clients expenses sales person salaries sales manager compensation sales office occupancy publishing information technology services specifically identifiable particular directory recognized incurred costs recognized reporting period consist costs incurred period fully recognized period ii costs incurred prior period portion amortized recognized current period iii costs incurred current period portion amortized recognized current period balance deferred future periods consequently difference costs recognized given period costs incurred given period may significant production publication distribution expenses total production publication distribution expenses year ended december 31 2008 4182 million compared 4503 million year ended december 31 2007 primary components 321 million 71 decrease production publication distribution expenses year ended december 31 2008 follows year ended december 31 2008 print paper distribution costs declined 253 million compared year ended december 31 2007 decline primarily due improved efficiencies display client content print products refinement distribution scope across markets negotiated price reductions print expenses amortization cost uplift year ended december 31 2007 totaled 153 million comparable expense year ended december 31 2008 year ended december 31 2008 production publication distribution related expenses declined 106 million compared year ended december 31 2007 primarily due full period cost savings resulting lower rates associated new contract became effective july 2007 decline partially offset additional spending associated infrastructure support triple play products services enhancements technical support multiple production systems integrated consolidated platform year ended december 31 2008 incurred 159 million additional expenses related internet production distribution costs due full period expenses businesscom compared four months expenses year ended december 31 2007 increased operations distribution costs traffic purchased generate usage clients’ business associated increased revenues online products services selling support expenses total selling support expenses year ended december 31 2008 7297 million compared 7163 million reported year ended december 31 2007 primary components 134 million 19 increase selling support expenses year ended december 31 2008 follows year ended december 31 2008 bad debt expense increased 575 million 711 compared year ended december 31 2007 primarily due higher bad debt provision rates deterioration accounts receivable aging categories increased writeoffs resulting adverse impact clients instability overall economy tightening credit markets year ended december 31 2008 bad debt expense represented 53 net revenue compared 30 year ended december 31 2007 clients fail pay within specified credit terms may cancel advertising future directories could impact ability collect past due amounts well adversely impact advertising sales revenue growth trends expect economic challenges continue markets bad debt experience continue adversely impacted foreseeable future advertising expense year ended december 31 2008 includes 398 million costs associated traffic purchased distributed multiple advertiser landing pages compared 78 million year ended december 31 2007 included four months costs associated businesscom increase year ended december 31 2008 also due adopting businesscom’s performance based advertising “pba” platform 2008 exclusive costs associated purchased traffic year ended december 31 2008 advertising branding expenses declined 148 million compared year ended december 31 2007 decrease primarily due additional advertising branding costs incurred 2007 promote dex brand name print online products across entire footprint well use dexknowscom new url across entire footprint year ended december 31 2008 commissions salesperson costs decreased 277 million compared year ended december 31 2007 primarily due lower advertising sales well headcount reductions consolidation responsibilities amortization cost uplift year ended december 31 2007 totaled 136 million comparable expense year ended december 31 2008 year ended december 31 2008 directory publishing support costs decreased 80 million compared year ended december 31 2007 primarily due reduction headcount related expenses resulting consolidation publishing graphics operations year ended december 31 2008 marketing expenses decreased 48 million compared year ended december 31 2007 primarily due headcount reductions consolidation responsibilities year ended december 31 2008 billing credit collection expenses decreased 32 million compared year ended december 31 2007 primarily due lower costs resulting change vendors well headcount reductions consolidation responsibilities year ended december 31 2008 selling support related incentive compensation expense declined 28 million compared year ended december 31 2007 primarily due additional expense related vesting awards granted retirement early retirement eligible employees year ended december 31 2007 addition incentive compensation expense declined year ended december 31 2008 due increase forfeiture rate estimate general administrative expenses general administrative “ga” expenses year ended december 31 2008 1209 million compared 1456 million year ended december 31 2007 primary components 247 million 170 decrease ga expenses year ended december 31 2008 follows year ended december 31 2008 recognized onetime net curtailment gains 380 million associated freeze company’s defined benefit plans elimination nonunion retiree health care life insurance benefits noted year ended december 31 2008 ga related incentive compensation expense declined 109 million compared year ended december 31 2007 primarily due additional expense related vesting awards granted retirement early retirement eligible employees year ended december 31 2007 addition incentive compensation expense declined year ended december 31 2008 due increase forfeiture rate estimate year ended december 31 2008 ga related expenses declined 76 million compared year ended december 31 2007 primarily due full period cost savings resulting lower rates associated contract became effective july 2007 decline partially offset additional spending associated infrastructure support triple play products services year ended december 31 2008 restructuring expenses increased 306 million primarily due outside consulting fees headcount reductions consolidation responsibilities vacated leased facilities depreciation amortization depreciation amortization expense year ended december 31 2008 4833 million compared 4431 million year ended december 31 2007 amortization intangible assets 4159 million year ended december 31 2008 compared 3883 million year ended december 31 2007 increase amortization expense year ended december 31 2008 primarily due recognizing additional 130 million amortization expense intangible assets acquired businesscom acquisition compared four months amortization expense year ended december 31 2007 also due recognizing full period amortization expense related local customer relationships intangible asset acquired dex media merger 75 million commenced february 2007 depreciation fixed assets amortization computer software 674 million year ended december 31 2008 compared 548 million year ended december 31 2007 increase depreciation expense year ended december 31 2008 primarily due recognizing depreciation expense related capital projects placed service 2007 impairment charges result decline trading value debt equity securities continuing negative industry economic trends directly affected business recognized goodwill impairment charges 25 billion 6602 million first second quarters 2008 respectively together totaling 31 billion year ended december 31 2008 result impairment charges recorded goodwill december 31 2008 impairment losses recorded related goodwill year ended december 31 2007 given ongoing global credit liquidity crisis significant negative impact financial markets overall economy continued decline advertising sales operating results downward revisions forecasted results recent downgrade certain credit ratings continued decline trading value debt equity securities recent suspension trading common stock nyse performed impairment tests definitelived intangible assets longlived assets december 31 2008 result tests company recognized impairment charge 7440 million fourth quarter 2008 associated local national customer relationships acquired prior acquisitions addition connection launch next version proprietary online search site dexknowscom tradenames technology acquired prior acquisition discontinued resulted impairment charge 22 million fourth quarter 2008 total impairment charges related intangible assets excluding goodwill 7462 million year ended december 31 2008 see “critical accounting estimates intangible assets goodwill valuation amortization” additional information regarding impairment testing analysis results related goodwill definitelived intangible assets longlived assets year ended december 31 2008 retired certain computer software fixed assets resulted impairment charge 04 million year ended december 31 2007 recorded intangible asset impairment charge 200 million associated tradenames acquired prior acquisition impairment charge resulted change branding strategy utilize new dex market brand print online products across entire footprint discontinued use tradenames acquired prior acquisition impairment charge determined using relief royalty valuation method impairment charge impairment losses recorded related definitelived intangible assets longlived assets year ended december 31 2007 industry economic conditions markets continue deteriorate trading value debt equity securities decline required assess recoverability useful lives longlived assets intangible assets could result additional impairment charges reduction remaining useful lives acceleration amortization expense operating income loss operating income loss years ended december 31 2008 2007 follows operating income loss year ended december 31 2008 30 billion compares operating income 9050 million year ended december 31 2007 change operating loss year ended december 31 2008 operating income year ended december 31 2007 primarily due impairment charges noted well revenue expense trends described nonoperating income year ended december 31 2007 recognized nonoperating gain sale investment 18 million interest expense net interest expense year ended december 31 2008 8355 million includes 290 million noncash amortization deferred financing costs net interest expense year ended december 31 2007 8046 million includes 232 million noncash amortization deferred financing costs result amendment rhdi credit facility refinancing former dex media west credit facility interest rate swaps associated credit facilities deemed ineffective june 6 2008 interest expense year ended december 31 2008 includes noncash charge 210 million resulting amounts charged accumulated comprehensive loss related interest rate swaps prior june 6 2008 interest expense year ended december 31 2008 also includes noncash charge 37 million resulting change fair value interest rate swaps june 6 2008 december 31 2008 increase net interest expense 309 million 38 year ended december 31 2008 primarily due additional interest expense associated ineffective interest rate swaps noted increase partially offset lower interest rates associated company’s refinancing transactions conducted fourth quarter 2007 lower interest rates variable rate debt period compared corresponding prior period lower outstanding debt resulting debt repaid debt repurchases see “liquidity capital resources” detail regarding debt obligations conjunction dex media merger result purchase accounting required gaap recorded dex media’s debt fair market value january 31 2006 recognize offset interest expense period amortization corresponding fair value adjustment life respective debt offset interest expense 176 million year ended december 31 2008 compared 299 million year ended december 31 2007 result redeeming dex media east’s outstanding 9875 senior notes 12125 senior subordinated notes november 26 2007 fair value adjustment related notes remained unamortized december 31 2007 therefore contributing decline offset interest expense year ended december 31 2008 gain loss debt transactions net result voluntary prepayments made rhdi credit facility fourth quarter 2008 recognized gain 200 million year ended december 31 2008 consisting difference face amount term loans repaid voluntary prepayments made offset writeoff unamortized deferred financing costs result debt repurchases october 2008 recorded gain 136 million year ended december 31 2008 consisting difference par value purchase price senior notes offset writeoff unamortized deferred financing costs result debt repurchases september 2008 recorded gain 724 million year ended december 31 2008 representing difference accreted value par value applicable purchase price senior notes senior discount notes offset writeoff unamortized deferred financing costs result exchange senior notes senior discount notes “rhd notes” rhdi’s 1175 senior notes due may 15 2015 “rhdi senior notes” june 25 2008 recorded gain 1613 million year ended december 31 2008 representing difference accreted value par value applicable extinguished rhd notes rhdi senior notes offset writeoff unamortized deferred financing costs related extinguished rhd notes accounted extinguishment debt year ended december 31 2008 recognized charge 22 million writeoff unamortized deferred financing costs associated refinancing former dex media west credit facility portions amended rhdi credit facility accounted extinguishments debt result financing activities noted recorded gain 2652 million year ended december 31 2008 year ended december 31 2007 recorded loss debt transactions 263 million resulting tender redemption premium payments 717 million writeoff unamortized deferred financing costs 168 million associated refinancing transactions conducted fourth quarter 2007 offset accelerated amortization fair value adjustment directly attributable redemption dex media east’s outstanding 9875 senior notes 12125 senior subordinated notes november 26 2007 622 million accounted extinguishment debt see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies gain loss debt transactions net” additional information benefit provision income taxes effective tax rate income loss income taxes 357 year ended december 31 2008 compares effective tax rate 383 income taxes year ended december 31 2007 result goodwill impairment charge 31 billion recorded year ended december 31 2008 recognized decrease deferred income tax liability 11 billion directly impacted deferred income tax benefit change effective tax rate year ended december 31 2008 primarily due tax consequences goodwill impairment charges change effective tax rate year ended december 31 2008 also attributable changes estimates state tax apportionment factors impact effective state tax rates 2008 income tax benefit 12777 million comprised federal tax benefit 11287 million state tax benefit 1490 million 2008 federal tax benefit comprised current tax provision 239 million primarily related increase fin 48 liability offset deferred income tax benefit 11526 million primarily related goodwill impairment charges 2008 state tax benefit 1490 million comprised current tax provision 103 million relates taxes due states subsidiaries company file separate tax returns well increase fin 48 liability offset deferred income tax benefit 1593 million primarily related goodwill impairment charges 2008 company utilized federal net operating losses income tax purposes 41 million primarily resulting taxable gains associated certain financing activities conducted 2008 income tax benefit includes income tax benefit 203 million correcting overstated income tax expense fiscal years 2004 2007 evaluated materiality correction concluded material current prior year financial statements accordingly recorded correction fourth quarter 2008 december 31 2008 company federal state net operating loss carryforwards approximately 6228 million net carryback 5676 million respectively begin expire 2026 2009 respectively amounts include consideration net operating losses expected expire unused due internal revenue code section 382 limitation ownership changes related businesscom occurred prior businesscom acquisition september 2008 effectively settled issues consideration department finance new york city related audit taxable year 2000 result settlement unrecognized tax benefits associated uncertain state tax positions decreased 09 million year ended december 31 2008 decrease unrecognized tax benefits decreased effective tax rate year ended december 31 2008 unrecognized tax benefits impacted new york city audit primarily related allocation income among legal entities 2007 provision income taxes 290 million comprised federal tax provision 275 million resulting current tax provision 118 million relating internal revenue service “irs” settlement deferred income tax provision 157 million resulting current year taxable loss 2007 state tax provision 15 million results current tax provision 85 million relating taxes due states subsidiaries company file separate company returns offset deferred state tax benefit 70 million relating apportioned taxable income loss among various states federal net operating loss income tax purposes approximately 3033 million generated 2007 primarily result tax amortization expense recorded respect intangible assets acquired prior acquisitions july 2007 effectively settled issues consideration irs related audit taxable years 2003 2004 therefore tax years 2005 2007 still subject examination irs certain state tax returns examination various regulatory authorities continuously review issues raised connection ongoing examinations open tax years evaluate adequacy reserves believe accrued tax liabilities fin 48 adequate cover uncertain tax positions related us federal state income taxes net income loss earnings loss per share net income loss year ended december 31 2008 23 billion compares net income 469 million year ended december 31 2007 change net loss year ended december 31 2008 net income year ended december 31 2007 primarily due impairment charges noted well revenue expense trends described offset gain recognized financing activities 2008 noted calculation basic diluted earnings loss per share “eps” presented 1 due net loss reported year ended december 31 2008 effect stockbased awards antidilutive therefore included calculation diluted eps years ended december 31 2008 2007 41 million shares 26 million shares respectively stockbased awards exercise prices exceeded average market price company’s common stock respective periods liquidity capital resources impact longterm debt upon emergence chapter 11 proceedings effective date accordance plan 61 billion notes default presented longterm debt subject compromise table exchanged 100 reorganized dex one equity b issued 3000 million dex one senior subordinated notes holders dex media west 85 senior notes due 2010 5875 senior notes due 2011 pro rata basis addition share reorganized dex one equity accordance plan company’s existing credit facilities amended restated effective date terms conditions amended restated credit facilities noted effective date aggregate outstanding debt 34 billion comprised 31 billion outstanding amended restated credit facilities 3000 million dex one senior subordinated notes following table presents carrying value longterm debt december 31 2009 2008 result filing chapter 11 petitions unamortized fair value adjustments required gaap result dex media merger 785 million unamortized net premiums discounts 349 million may 28 2009 writtenoff recognized reorganization items consolidated statement operations year ended december 31 2009 therefore carrying value longterm debt december 31 2009 represents par value carrying value longterm debt december 31 2008 includes 862 million unamortized fair value adjustments result filing chapter 11 petitions plan believe meaningful present fair market value longterm debt december 31 2009 credit facilities may 28 2009 conjunction plan company repaid aggregate 2000 million principal outstanding balances owed rhdi dex media east dex media west credit facilities comprised 777 million 596 million 627 million respectively february 13 2009 company borrowed unused portions rhdi revolver dex media east revolver dex media west revolver totaling 1740 million 970 million 900 million respectively company made borrowings various revolving credit facilities preserve financial flexibility light continuing uncertainty global credit markets rhdi december 31 2009 outstanding balances rhdi credit facility totaled 14240 million comprised 2528 million term loan d1 10062 million term loan d2 1650 million rhdi revolver rhdi credit facility provided uncommitted term loan c potential borrowings 4000 million weighted average interest rate outstanding debt rhdi credit facility 672 677 december 31 2009 2008 respectively december 31 2009 prior amendment restatement terms conditions rhdi credit facility consisted following • term loans required quarterly principal interest payments • interest payments made option either • highest base rate determined administrative agent deutsche bank trust company americas ii federal funds effective rate defined plus 050 iii 40 case plus 250 margin rhdi revolver 275 margin term loan d1 term loan d2 • higher libor rate ii 30 case plus 350 margin new rhdi revolver 375 margin term loan d1 term loan d2 may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings • term loans d1 d2 required accelerated amortization beginning 2010 final maturity june 2011 • 750 million rhdi revolver matured december 2009 1000 million rhdi revolver would matured june 2011 terms conditions amended restated rhdi credit facility “rhdi amended restated credit facility” consist following • balances existing term loan d1 term loan d2 rhdi revolver well 136 million associated unsettled outstanding interest rate swap liabilities converted new tranche term loans provides initial prepayment loans effective date aggregate outstanding balance term loans rhdi amended restated credit facility 12249 million • rhdi amended restated credit facility requires quarterly principal interest payments matures october 24 2014 • interest payments made option either • highest subject floor 400 prime rate ii federal funds effective rate plus 050 z one month libor plus 100 case plus interest rate margin base rate loans interest rate margin base rate loans initially 525 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 525 per annum rhdi’s consolidated leverage ratio greater equal 425 100 equal 500 per annum rhdi’s consolidated leverage ratio less 425 100 • higher libor rate ii 300 case plus interest rate margin libor loans interest rate margin libor loans initially 625 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 625 per annum rhdi’s consolidated leverage ratio greater equal 425 100 equal 600 per annum rhdi’s consolidated leverage ratio less 425 100 rhdi may elect interest periods 1 2 3 6 months libor borrowings dex media east december 31 2009 outstanding balances dex media east credit facility totaled 10394 million comprised 5727 million term loan 3747 million term loan b 920 million dex media east revolver exclusive 26 million utilized three standby letters credit dex media east credit facility also consisted 2000 million aggregate principal amount uncommitted incremental facility dex media east would right subject obtaining commitments incremental loans one occasions increase term loan term loan b dex media east revolver amount weighted average interest rate outstanding debt dex media east credit facility 208 383 december 31 2009 2008 respectively december 31 2009 prior amendment restatement terms conditions dex media east credit facility consisted following • term loans required quarterly principal interest payments • interest payments made option either • higher base rate determined administrative agent jp morgan chase bank na ii federal funds effective rate defined plus 050 case plus 075 050 leverage ratio less 2 1 margin dex media east revolver term loan 100 margin term loan b • libor rate plus 175 150 leverage ratio less 2 1 margin dex media east revolver term loan 200 margin term loan b may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings • dex media east revolver term loan would matured october 2013 term loan b would matured october 2014 terms conditions amended restated dex media east credit facility “dex media east amended restated credit facility” consist following • balances existing term loan term loan b dex media east revolver well 267 million associated unsettled outstanding interest rate swap liabilities converted new tranche term loans provides initial prepayment loans effective date aggregate outstanding balance term loans dex media east amended restated credit facility 9562 million • dex media east amended restated credit facility requires quarterly principal interest payments matures october 24 2014 • interest payments made option either • highest prime rate ii federal funds effective rate plus 050 z one month libor plus 100 case plus interest rate margin base rate loans interest rate margin base rate loans initially 150 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 150 per annum dme inc’s consolidated leverage ratio greater equal 275 100 equal 125 per annum dme inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 100 per annum dme inc’s consolidated leverage ratio less 250 100 • libor rate plus interest rate margin libor loans interest rate margin libor loans initially 250 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 250 per annum dme inc’s consolidated leverage ratio greater equal 275 100 equal 225 per annum dme inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 200 per annum dme inc’s consolidated leverage ratio less 250 100 dme inc may elect interest periods 1 2 3 6 months libor borrowings dex media west december 31 2009 outstanding balances dex media west credit facility totaled 10913 million comprised 1138 million term loan 8923 million term loan b 852 million dex media west revolver event 250 million dex media west’s 9875 senior subordinated notes due 2013 refinancing replacement thereof outstanding dex media west revolver term loan term loan b would matured date three months prior final maturity notes dex media west credit facility included 4000 million uncommitted incremental facility “incremental facility” could incurred additional revolving loans additional term loans subject obtaining commitments loans incremental facility fully available used refinance dex media west 85 senior notes due 2010 however limited 2000 million used purpose weighted average interest rate outstanding debt dex media west credit facility 695 710 december 31 2009 2008 respectively december 31 2009 prior amendment restatement terms conditions dex media west credit facility consisted following • term loans required quarterly principal interest payments • interest payments made option either • highest base rate determined administrative agent jp morgan chase bank na ii federal funds effective rate defined plus 050 iii 40 case plus 275 250 leverage ratio less 300 100 margin dex media west revolver term loan 30 margin term loan b • higher libor rate ii 30 plus 375 350 leverage ratio less 300 100 margin dex media west revolver term loan 40 margin term loan b may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings • dex media west revolver term loan would matured october 2013 term loan b would matured october 2014 terms conditions amended restated dex media west credit facility “dex media west amended restated credit facility” consist following • balances existing term loan term loan b dex media west revolver well 10 million associated unsettled outstanding interest rate swap liabilities converted new tranche term loans provides initial prepayment loans effective date aggregate outstanding balance term loans dex media west amended restated credit facility 9037 million • dex media west amended restated credit facility requires quarterly principal interest payments matures october 24 2014 • interest payments made option either • highest subject floor 400 prime rate ii federal funds effective rate plus 050 z one month libor plus 100 case plus interest rate margin base rate loans interest rate margin base rate loans initially 350 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 350 per annum dmw inc’s consolidated leverage ratio greater equal 275 100 equal 325 per annum dmw inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 300 per annum dmw inc’s consolidated leverage ratio less 250 100 • higher libor rate ii 300 case plus interest rate margin libor loans interest rate margin libor loans initially 450 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 450 per annum dmw inc’s consolidated leverage ratio greater equal 275 100 equal 425 per annum dmw inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 400 per annum dmw inc’s consolidated leverage ratio less 250 100 dmw inc may elect interest periods 1 2 3 6 months libor borrowings company’s amended restated credit facilitates includes uncommitted revolving credit facility available borrowings 400 million availability uncommitted revolving credit facility subject certain conditions including prepayment term loans amended restated credit facilities amount equal revolving credit facility amended restated credit facilities contain provisions prepayment net proceeds asset dispositions equity issuances debt issuances subject certain exceptions ratable portion net proceeds received company asset dispositions company subject certain exceptions portion excess cash flow company’s amended restated credit facilities contain certain covenants subject exceptions limit restrict borrower subsidiaries’ incurrence liens investments including acquisitions sales assets indebtedness payment dividends distributions payments certain indebtedness sale leaseback transactions swap transactions affiliate transactions capital expenditures mergers liquidations consolidations amended restated credit facility also contains certain covenants subject exceptions limit restrict borrowers incurrence liens indebtedness ownership assets sales assets payment dividends distributions modifications dex one senior subordinated notes borrower required maintain compliance consolidated leverage ratio covenant rhdi dmw inc also required maintain compliance consolidated interest coverage ratio covenant dmw inc also required maintain compliance consolidated senior secured leverage ratio covenant dex media west amended restated credit agreement includes option additional covenant relief senior secured leverage covenant fourth quarter 2011 subject increased amortization loans first quarter 2012 increase excess cash flow sweep 2010 2011 payment 25 basis point fee ratably lenders dex media west amended restated credit agreement obligations amended restated credit facilitates guaranteed subsidiaries borrower secured lien substantially borrower’s subsidiaries’ tangible intangible assets including pledge stock respective subsidiaries well mortgage certain real property pursuant shared guaranty collateral agreement subject intercreditor agreement among administrative agents amended restated credit facilitates company subject certain exceptions certain subsidiaries company guaranty obligations amended restated credit facilitates obligations secured lien substantially guarantors’ tangible intangible assets including pledge stock respective subsidiaries well mortgage certain real property notes issued upon emergence chapter 11 proceedings effective date accordance plan notes default exchanged 100 reorganized dex one equity b issued 3000 million dex one senior subordinated notes holders dex media west 85 senior notes due 2010 5875 senior notes due 2011 pro rata basis addition share reorganized dex one equity dex one effective date issued 3000 million dex one senior subordinated notes interest dex one senior subordinated notes payable semiannually march 31st september 30th year commencing march 31 2010 january 2017 dex one senior subordinated notes accrue interest annual rate 12 cash interest payments 14 company elects paidinkind “pik” interest payments company may elect prior start interest payment period whether make interest payment dex one senior subordinated notes entirely cash ii 50 cash 50 pik interest capitalized incremental additional senior secured notes interest rate dex one senior subordinated notes may subject adjustment event company incurs certain specified debt higher effective yield maturity yield maturity dex one senior subordinated notes dex one senior subordinated notes unsecured obligations company effectively subordinated right payment company’s existing future secured debt including dex one’s guarantee borrowings amended restated credit facilities structurally subordinated existing future liabilities including trade payables direct indirect subsidiaries dex one senior subordinated notes contain certain covenants subject certain exceptions among things limit restrict company’s certain cases company’s restricted subsidiaries’ incurrence indebtedness making certain restricted payments incurrence liens entry transactions affiliates conduct business merger consolidation sale substantially property dex one senior subordinated notes also require company offer repurchase dex one senior subordinated notes par certain changes control involving company sale substantially assets company holders dex one senior subordinated notes also may cause company repurchase dex one senior subordinated notes price 101 principal amount upon incurrence company certain acquisition indebtedness december 31 2009 total outstanding notes 60718 million comprised 32536 million outstanding rhd notes 4129 million outstanding rhdi notes 12499 million outstanding dex media inc notes 11554 million outstanding dex media west notes default eliminated upon emergence chapter 11 proceedings rhd december 31 2009 rhd total outstanding notes 32536 million comprised 2068 million 6875 senior notes 3209 million 6875 series a1 senior discount notes 4833 million 6875 series a2 senior discount notes 10128 million 8875 series a3 senior notes 12298 million 8875 series a4 senior notes december 31 2009 issued 15 billion aggregate principal amount 8875 series a4 senior notes due 2017 interest series a4 notes payable semiannually april 15th october 15th year commencing april 15 2008 series a4 notes senior unsecured obligations rhd senior right payment rhd’s existing future senior subordinated debt future subordinated obligations ranked equally rhd’s existing future senior unsecured debt series a4 notes effectively subordinated rhd’s secured debt including rhd’s guarantee borrowings rhdi credit facility structurally subordinated existing future liabilities including trade payables direct indirect subsidiaries december 31 2009 issued 3000 million 6875 senior notes due january 15 2013 “holdco notes” interest payable holdco notes semiannually arrears january 15th july 15th year commencing july 15 2005 december 31 2009 issued 6600 million aggregate principal amount maturity 6005 million gross proceeds 6875 series a2 senior discount notes due january 15 2013 121 billion principal amount 8875 series a3 senior notes due january 15 2016 interest payable semiannually january 15th july 15th year series a2 senior discount notes series a3 senior notes commencing july 15 2006 december 31 2009 also issued 3650 million aggregate principal amount maturity 3321 million gross proceeds 6875 series a1 senior discount notes due january 15 2013 interest payable semiannually january 15th july 15th year commencing july 15 2006 notes unsecured obligations rhd senior right payment future senior subordinated indebtedness rhd structurally subordinated indebtedness subsidiaries rhdi june 25 2008 rhdi exchanged 5942 million 5857 million accreted value applicable certain rhd senior notes senior discount notes collectively referred “rhd notes” 4129 million aggregate principal amount rhdi 1175 senior notes due may 15 2015 “rhdi senior notes” interest rhdi senior notes payable semiannually may 15th november 15th year commencing november 15 2008 rhdi senior notes senior unsecured obligations rhdi ranked equally rhdi’s senior unsecured indebtedness rhdi senior notes fully unconditionally guaranteed rhd rhdi’s subsidiaries guarantee obligations rhdi credit facility general senior unsecured basis rhdi senior notes effectively subordinated right payment rhdi’s existing future secured debt extent value assets securing debt rhdi senior notes also structurally subordinated existing future liabilities including trade payables rhdi’s existing future subsidiaries guarantee rhdi senior notes rhd guarantee respect rhdi senior notes structurally subordinated liabilities rhd’s subsidiaries rhdi subsidiaries guarantee obligations rhdi senior notes claims respect rhdi senior notes structurally senior claims respect outstanding rhd notes dex media inc december 31 2009 dex media inc total outstanding notes 12499 million comprised 5000 million 8 senior notes 7499 million 9 senior discount notes december 31 2009 dex media inc issued 5000 million aggregate principal amount 8 senior notes due 2013 senior notes unsecured obligations dex media inc interest payable may 15th november 15th year december 31 2009 5000 million aggregate principal amount outstanding december 31 2009 dex media inc issued 750 million aggregate principal amount 9 senior discount notes due 2013 two indentures first indenture totaling 3890 million aggregate principal amount 9 senior discount notes issued original issue discount interest accruing 9 per annum compounded semiannually senior discount notes unsecured obligations dex media inc interest accrued form increased accreted value november 15 2008 “full accretion date” time accreted value equal full principal amount maturity second indenture totaling 3610 million aggregate principal amount interest accrued 837 per annum compounded semiannually created premium full accretion date would amortized remainder term november 15 2008 9 senior discount notes bore cash interest 9 per annum payable semiannually may 15th november 15th year senior discount notes unsecured obligations dex media inc cash interest accrued discount notes prior full accretion date december 31 2009 750 million aggregate principal amount outstanding dex media west december 31 2009 dex media west total outstanding notes 11554 million comprised 3850 million 85 senior notes 87 million 5875 senior notes 7617 million senior subordinated notes december 31 2009 dex media west issued 3850 million aggregate principal amount 85 senior notes due 2010 senior notes unsecured obligations dex media west interest payable february 15th august 15th year december 31 2009 3850 million aggregate principal amount outstanding december 31 2009 dex media west issued 3000 million aggregate principal amount 5875 senior notes due 2011 senior notes unsecured obligations dex media west interest payable may 15th november 15th year december 31 2009 87 million aggregate principal amount outstanding december 31 2009 dex media west issued 780 million aggregate principal amount 9875 senior subordinated notes due 2013 senior subordinated notes unsecured obligations dex media west interest payable february 15th august 15th year december 31 2009 7617 million aggregate principal amount outstanding impact dex media merger result dex media merger adjustment established record acquired debt fair value january 31 2006 fair value adjustment amortized reduction interest expense using effective interest method may 28 2009 impact future scheduled interest principal payments amortization fair value adjustment included reduction interest expense loss debt transactions applicable 77 million 176 million 921 million including 622 million related redemption dex media east’s senior notes senior subordinated notes 2007 recorded loss debt transactions years ended december 31 2009 2008 2007 respectively offset interest expense recognized life respective debt however due filing chapter 11 petitions unamortized fair value adjustments 785 million may 28 2009 writtenoff recognized reorganization item consolidated statement operations year ended december 31 2009 liquidity cash flows subsequent effective date company’s primary sources liquidity existing cash hand cash flows generated operations company’s primary liquidity requirements fund operations service indebtedness dex one’s ability meet debt service requirements dependent ability generate sufficient cash flows operations primary sources cash flows consist mainly cash receipts sale marketing products marketing services impacted among factors general economic conditions increase competition fragmentation local business search market consumer confidence level demand advertising products services based current financial projections company expects able continue generate cash flows operations amounts sufficient fund operations capital expenditures well meet debt service requirements satisfy interest principal payment obligations however assurances made business generate sufficient cash flows operations enable us fund prospective cash requirements see item 1a “risk factors” additional information regarding risks uncertainties associated business see item 7 “management’s discussion analysis financial condition results operations” “recent trends related business” additional information related trends uncertainties respect business year ended december 31 2009 made principal payments 2901 million credit facilities year ended december 31 2009 made revolver borrowings 3610 million offset revolver payments 187 million resulting net increase 3423 million revolver portions credit facilities year ended december 31 2009 made aggregate net cash interest payments 3881 million december 31 2009 6659 million cash equivalents checks yet presented payment 108 million cash flow activities cash provided operating activities 5158 million year ended december 31 2009 key contributors operating cash flow include following • 64533 million net loss includes impact intangible asset impairment charges • 64239 million net noncash items consisting intangible asset impairment charges 73378 million offset 9139 million deferred income taxes includes tax impact intangible asset impairment charges • 7899 million net noncash items primarily consisting 5788 million depreciation amortization 1465 million bad debt provision 251 million noncash items primarily related amortization deferred financing costs 176 million associated net reorganization items 114 million stockbased compensation expense increase interest expense 105 million associated change fair value interest rate swaps • 1716 million net use cash decrease deferred directory revenues 2263 million primarily due lower advertising sales offset net decrease accounts receivable 547 million comprised decrease accounts receivable 2012 million offset provision bad debts 1465 million 2009 company experienced deterioration accounts receivable aging categories driven weaker economic conditions change deferred revenues accounts receivable analyzed together given fact directory published annual billable value directory initially deferred unbilled accounts receivable established month thereafter typically one twelfth billing value recognized revenues billed clients • 392 million net source cash decrease assets consisting 412 million decrease current noncurrent assets primarily relating deferred commissions print paper delivery costs changes fair value company’s interest rate swap agreements offset 20 million increase prepaid directory costs resulting publication seasonality • 102 million net source cash increase accounts payable accrued liabilities primarily resulting increase accrued interest payable 651 million 150 million increase accrued liabilities offset 699 million decrease trade accounts payable changes comprise items included liabilities subject compromise consolidated balance sheet december 31 2009 source cash increase accounts payable accrued liabilities direct result filing chapter 11 petitions whereby payment prepetition obligations delayed • 1225 million decrease noncurrent liabilities primarily resulting deferred taxes change pension postretirement longterm liabilities change fair value interest rate swaps cash used investing activities year ended december 31 2009 334 million includes following • 334 million used purchase fixed assets primarily computer equipment software leasehold improvements cash provided financing activities year ended december 31 2009 523 million includes following • 2901 million principal payments term loans secured credit facilities • 3610 million borrowings revolvers company made borrowings various revolving credit facilities preserve financial flexibility light continuing uncertainty global credit markets • 187 million principal payments revolvers cash provided operating activities 5487 million year ended december 31 2008 key contributors operating cash flow include following • 22983 million net loss includes impact goodwill impairment charges • 25585 million net noncash items consisting impairment charges 38704 million offset 13119 million deferred income taxes includes tax impact goodwill impairment charges • 2652 million net gain debt transactions • 6809 million net noncash items primarily consisting 4833 million depreciation amortization 1384 million bad debt provision 364 million relates change net accounts receivable 295 million stockbased compensation expense 247 million net additional interest expense associated ineffective interest rate swaps 50 million noncash items primarily consisting 651 million related accretion discounted debt 290 million related amortization deferred financing costs offset 325 million associated change fair value interest rate swaps 380 million associated freeze company’s defined benefit plans elimination retiree health care life insurance benefits 176 million associated amortization fair value adjustments required gaap result dex media merger reduced interest expense • 1977 million net use cash decrease deferred directory revenues 958 million due lower advertising sales increase accounts receivable 1019 million representing increase accounts receivable net provision bad debts 1383 million due increase days outstanding client balances deterioration accounts receivable aging categories driven extension writeoff policy qwest markets conform legacy rhd markets weaker economic conditions transition inhouse billing collection services certain local clients qwest markets previously performed qwest behalf change deferred revenues accounts receivable analyzed together given fact directory published annual billable value directory initially deferred unbilled accounts receivable established month thereafter typically one twelfth billing value recognized revenues billed clients • 450 million net source cash decrease assets consisting 287 million decrease prepaid directory costs resulting publication seasonality well 163 million decrease current noncurrent assets primarily relating deferred commissions print paper delivery costs changes fair value company’s interest rate swap agreements • 254 million net use cash decrease accounts payable accrued liabilities primarily reflecting 395 million decrease trade accounts payable resulting timing invoice processing versus payment thereon 177 million decrease accrued interest payable outstanding debt offset 318 million increase accrued liabilities • 509 million increase noncurrent liabilities including pension postretirement longterm liabilities cash used investing activities year ended december 31 2008 663 million includes following • 706 million used purchase fixed assets primarily computer equipment software leasehold improvements • 43 million cash proceeds disposition equity investment fourth quarter 2007 received january 2008 cash used financing activities year ended december 31 2008 3972 million includes following • 10172 million proceeds net costs borrowings new dex media west credit facility used refinance former dex media west credit facility pay related fees expenses • 12817 million principal payments term loans credit facilities notes regard credit facilities 607 million represents scheduled principal payments 12210 million represents principal payments made accelerated basis option proceeds received new dex media west credit facility available cash flow generated operations • 3981 million borrowings revolvers used primarily fund temporary working capital requirements • 4221 million principal payments revolvers • 921 million associated october 2008 debt repurchases september 2008 debt repurchases • 105 million fees associated issuance rhdi senior notes voluntary prepayments made rhdi credit facility accounted noncash financing activities • 61 million used repurchase common stock use cash pertains common stock repurchases made 2007 settled january 2008 • 01 million decreased balance checks yet presented payment • 01 million proceeds exercise employee stock options offbalance sheet arrangements company offbalance sheet arrangements contractual obligations contractual obligations table presented sets forth dex one’s annual commitments principal interest payments debt effective date well cash obligations next five years thereafter december 31 2009 debt repayments presented table include scheduled principal payments current debt agreements 1 included longterm debt principal amounts owed amended restated credit facilities dex one senior subordinated notes including current portion longterm debt effective date result emergence chapter 11 effective date believe meaningful present contractual amounts longterm debt december 31 2009 2 interest debt represents cash interest payment obligations assuming indebtedness effective date paid accordance contractual maturity assumes interest rates variable interest debt effective date remain unchanged future periods please refer “liquidity capital resources” interest rates amended restated credit facilities dex one senior subordinated notes 3 enter operating leases normal course business substantially lease agreements fixed payment terms lease agreements provide us renewal early termination options future operating lease obligations would change exercised renewal early termination options entered additional operating lease agreements amounts table assume exercise renewal early termination options 4 connection software system modernization ongoing support services related amdocs software system obligated pay amdocs approximately 683 million years 2010 2012 effective january 1 2010 amended restated internet yellow pages reseller agreement whereby obligated pay att 318 million years 2010 2012 entered directory advertisement agreement cmr cover advertising placed company cmr behalf qwest agreement obligated pay cmr approximately 65 million commissions years 2010 2014 5 defined benefit plans covering substantially employees funding policy contribute amount least equal minimum legal funding requirement based past performance uncertainty dollar amounts paid excluded amounts table see item 8 “financial statements supplementary data” note 9 “benefit plans” changes made defined benefit plans effective january 1 2010 expected future benefit payments including administrative expenses net employee contributions included table dex one expects make contributions approximately 36 million 29 million pension plans postretirement plan respectively 2010 subsequent events see item 8 “financial statements supplementary data” note 16 “subsequent events” unaudited proforma presentation impact emergence reorganization fresh start accounting financial position issuance new common stock upon emergence chapter 11 pursuant plan issued outstanding shares rhd common stock outstanding equity securities rhd including stock options stock appreciation rights restricted stock cancelled effective date dex one issued aggregate amount 50000001 shares new common stock par value 001 per share registration rights agreement effective date pursuant plan company entered registration rights agreement “agreement” requiring company register sec certain shares common stock andor dex one senior subordinated notes upon request one eligible holders defined agreement accordance terms conditions set forth therein company also required pursuant agreement file shelf registration statement covering resale registerable securities defined within 30 days company’s filing annual report form 10k year ended december 31 2009 use commercially reasonable efforts cause shelf registration statement become effective within 75 days filing agreement also provides eligible holders certain piggyback registration rights connection registration securities company item 7aitem 7 management’s discussion analysis financial condition results operations item read conjunction audited consolidated financial statements notes thereto included item 8 “financial statements supplementary data” unless otherwise indicated context may otherwise indicate terms “dex one” “successor company” “company” “parent company” “we” “us” “our” refer dex one corporation direct indirect whollyowned subsidiaries subsequent effective date defined financial information set forth annual report unless otherwise indicated context may otherwise indicate reflects consolidated results operations financial position dex one eleven months ended december 31 2010 dex one became successor registrant rh donnelley corporation “rhd” “predecessor company” “we” “us” “our” operations prior january 29 2010 “effective date” upon emergence chapter 11 proceedings title 11 united states code “chapter 11” effective date financial information set forth annual report unless otherwise indicated context may otherwise indicate reflects consolidated results operations financial position rhd one month ended january 31 2010 years two year period ended december 31 2009 see item 8 “financial statements supplementary data” note 1 “business basis presentation” detailed information following matters associated chapter 11 proceedings • predecessor company’s filing voluntary positions chapter 11 • confirmed joint plan reorganization “plan” emergence chapter 11 proceedings • restructuring conducted connection emergence chapter 11 proceedings • consummation plan • impact longterm debt upon emergence chapter 11 proceedings • accounting matters resulting chapter 11 proceedings recent trends developments related business results operations discussed “results operations” experiencing lower advertising sales primarily result declines new recurring business including renewal incremental sales existing advertisers mainly driven 1 customer attrition 2 declines overall advertising spending clients 3 significant impact weak local business conditions consumer spending clients’ markets 4 increase competition fragmentation local business search evidenced continued decline net revenues cash flows year ended december 31 2010 compared prior year apart impact net revenues result fresh start accounting discussed company currently projects challenging conditions continue foreseeable future advertising sales operating results cash flow liquidity continue adversely impacted therefore company’s historical operating results indicative future operating performance although longterm financial forecast currently anticipates gradual improvement local business conditions clients’ markets commencing second half 2011 fully described “results operations net revenues” method recognizing revenue deferral amortization method results delayed recognition advertising sales whereby recognized revenues reflect amortization advertising sales consummated prior periods well advertising sales consummated current period accordingly company’s projected decline advertising sales result decline revenue recognized future periods addition improvements local business conditions anticipated longterm financial forecast noted significant immediate impact revenues plan fully described item 1 “business” marketing solutions company helps local businesses generate leads manage presence among consumers ever changing complex fragmented markets serve proprietary marketing solutions include dex published yellow pages directories internet yellow pages site dexknowscom ® mobile application dex mobile ® digital affiliate marketing solutions powered search engine marketing product dexnet™ extends clients’ reach leading internet mobile partners attract consumers searching local products services within markets response challenges noted working improve value deliver clients expanding number platforms media deliver message consumers growing list marketing solutions include local business market analysis message image creation target market identification advertising digital profile creation keyword search engine optimization strategies programs distribution strategies social strategies voice search platforms tracking reporting continue invest future initiatives sales force automation client selfservice system portal also training directing locally based marketing consultants focus selling value provided local businesses expanded platforms company process transitioning competeandcollaborate business model anticipate affiliate provided solutions grow faster rate proprietary solutions light increasing fragmentation within markets serve model allow us aggregate leads clients markets anticipate expanding breadth affiliate provided solutions areas website creation web hosting reputation management local business conditions recover markets believe investments help us drive future revenue response challenges also continue actively manage expenses considering acting upon various initiatives opportunities streamline operations reduce cost structure commenced significant initiative fourth quarter 2010 implementing restructuring plan realigns internal resources better support base business ensure organizational structure optimized compete rapidly evolving marketplace restructuring plan continue 2011 includes headcount reductions consolidation responsibilities vacating leased facilities result restructuring plan approximately 600 employees notified termination company recorded restructuring charge 186 million fourth quarter 2010 related severance cash payments associated restructuring charge made 2011 company anticipates additional charges earnings related severance charges earnings associated vacating leased facilities conjunction restructuring plan 2011 amounts determined time see item 8 “financial statements supplementary data” note 5 “restructuring charges” additional information liquidity going concern analysis fully described “liquidity capital resources” company’s primary sources liquidity existing cash hand cash flows generated operations primary liquidity requirements fund operations service indebtedness company’s projected decline advertising sales result decline cash flows future periods improvements local business conditions anticipated longterm financial forecast noted significant impact cash flows however despite projected decline advertising sales cash flows result emergence chapter 11 proceedings restructuring predecessor company’s outstanding debt based current financial projections used going concern analysis december 31 2010 company expects able continue generate cash flows operations amounts sufficient fund operations meet debt service requirements next 1215 months see item 8 “financial statements supplementary data” note 3 “fresh start accounting” information analysis emergence chapter 11 proceedings impact financial position company’s goodwill nongoodwill intangible asset impairment charges eleven months ended december 31 2010 noted affect ability continue going concern permitted exclude charges debt covenant evaluations fresh start accounting company adopted fresh start accounting reporting february 1 2010 “fresh start reporting date” net revenues operating results continue significantly impacted adoption fresh start accounting fresh start reporting date twelve month period ending january 31 2011 see “results operations factors affecting comparability” additional information impact fresh start accounting company’s presentation combined adjusted results impairment charges second third quarters 2010 company concluded indicators impairment based upon 1 decline trading value debt equity securities 2 departure chairman chief executive officer may 28 2010 3 adverse impact local business conditions current future advertising sales operating results cash flows discussed therefore addition annual impairment test goodwill required perform impairment tests goodwill definitelived intangible assets longlived assets september 30 2010 june 30 2010 resulted total impairment charge 11593 million eleven months ended december 31 2010 see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies identifiable intangible assets goodwill” additional information new chief executive officer president departure former chairman chief executive officer september 6 2010 company’s board directors “board” appointed alfred mockett chief executive officer president dex one well member board effective september 13 2010 effective may 28 2010 former chairman chief executive officer david c swanson left company see item 8 “financial statements supplementary data” note 1 “business basis presentation new chief executive officer president” “business basis presentation departure former chairman chief executive officer” additional information labor unions unionized employees represented either international brotherhood electrical workers america “ibew” communication workers america “cwa” dex media’s collective bargaining agreement ibew expires may 2012 dex media’s collective bargaining agreement cwa expires september 2012 climate change growing concern global climate change emissions carbon dioxide concern led possibility federal climate change legislation well litigation relating greenhouse gas emissions cannot predict impact proposed legislation final believe current regulation litigation related global climate change likely material impact business future financial position results operations cash flow accordingly current financial projections include impact climate change regulation litigation healthcare reform legislation march 2010 patient protection affordable care act healthcare education reconciliation act 2010 signed law significant impact financial position results operations cash flows result new legislation 2010 anticipate significant impact foreseeable future segment reporting management reviews analyzes business providing marketing solutions one operating segment new accounting pronouncements july 2010 financial accounting standards board “fasb” issued accounting standards update “asu” 201020 disclosures credit quality financing receivables allowance credit losses “asu 201020” asu 201020 improves disclosures entity provides credit quality financing receivables related allowance credit losses objective enhancing disclosures improve financial statement users’ understanding nature entity’s credit risk associated financing receivables entity’s assessment risk estimating allowance credit losses well changes allowance reasons changes enhanced disclosure requirements provided asu 201020 required shortterm receivables maturity dates less one year credit card receivables public entities disclosures end reporting period effective interim annual reporting periods ending december 15 2010 disclosures activity occurs reporting period effective interim annual reporting periods beginning december 15 2010 company adopted disclosure provisions asu 201020 effective interim annual reporting periods ending december 15 2010 excluding credit card receivables immaterial operations financing receivables maturity dates less one year therefore certain enhanced disclosure requirements asu 201020 applicable company provided january 2010 fasb issued asu 201006 improving disclosures fair value measurements “asu 201006” asu 201006 amends fasb accounting standards codification “asc” 820 clarify existing disclosure requirements require additional disclosure fair value measurements asu 201006 clarifies existing fair value disclosures level disaggregation presented inputs valuation techniques used measure fair value measurements fall either level 2 level 3 fair value hierarchy additional disclosure requirements include disclosure regarding amounts reasons significant transfers level 1 level 2 fair value hierarchy separate presentation purchases sales issuances settlements items within level 3 fair value hierarchy asu 201006 effective interim annual reporting periods beginning december 15 2009 except disclosures level 3 activity purchases sales issuances settlements effective interim annual reporting periods beginning december 15 2010 effective january 1 2010 adopted disclosure provisions asu 201006 effective interim annual reporting periods beginning december 15 2009 disclosures required provided prospective basis september 2009 fasb issued asu 200913 revenue recognition topic 605 multipledeliverable revenue arrangements consensus fasb emerging issues task force “asu 200913” updates current guidance pertaining multipleelement revenue arrangements included fasb asc 60525 revenue recognition multiple element arrangements asu 200913 addresses determine whether arrangement involving multiple deliverables contains one unit accounting arrangement consideration allocated among separate units accounting asu 200913 effective company annual reporting period beginning january 1 2011 asu 200913 may applied retrospectively prospectively early adoption permitted company expect adoption asu 200913 impact financial position results operations cash flows reviewed accounting pronouncements issued december 31 2010 company yet adopted believe pronouncements material impact financial position operating results critical accounting estimates preparation financial statements accordance generally accepted accounting principles “gaap” requires management estimate effect various matters inherently uncertain date financial statements estimates varies regard level judgment involved potential impact company’s predecessor company’s reported financial results estimates deemed critical different estimate could reasonably used changes estimate reasonably likely occur period could materially impact company’s predecessor company’s financial condition changes financial condition results operations company’s significant accounting policies december 31 2010 discussed note 2 “summary significant accounting policies” notes consolidated financial statements included item 8 annual report critical estimates inherent accounting policies december 31 2010 discussed management believes current assumptions considerations used estimate amounts company’s consolidated financial statements appropriate intangible assets goodwill valuation amortization goodwill 21 billion recorded connection company’s adoption fresh start accounting discussed item 8 “financial statements supplementary data” note 3 “fresh start accounting” represented excess reorganization value dex one fair value identified tangible intangible assets goodwill amortized subject impairment testing annual basis october 31st frequently indicators potential impairment exist goodwill tested impairment reporting unit level represents one level operating segment december 31 2010 company’s reporting units rh donnelley inc “rhdi” dex media east inc “dme inc” dex media west inc “dmw inc” intangible assets consist directory services agreements company qwest att centurylink respectively b established customer relationships resulting prior acquisitions c noncompetition agreement company sprint trademarks trade names advertising commitment resulting prior acquisition intangible assets amortized estimated useful lives manner best reflects economic benefit derived assets company predecessor company review carrying value goodwill definitelived intangible assets longlived assets whenever events circumstances indicate carrying amount may recoverable following information estimates assumptions analyzed determine indicators impairment exist • historical financial information including revenue profit margins customer attrition data price premiums enjoyed relative competing independent publishers • longterm financial projections including limited revenue trends profit margin trends • intangible asset longlived asset carrying values changes current future use • trading values debt equity securities • industry economic trends • companyspecific predecessor companyspecific information based upon decline trading value debt equity securities departure chairman chief executive officer may 28 2010 among indicators company performed impairment tests goodwill definitelived intangible assets longlived assets september 30 2010 june 30 2010 result impairment tests recognized nongoodwill intangible asset impairment charge associated trade names trademarks technology local customer relationships former businesscom reporting unit 216 million goodwill impairment charge 11376 million total impairment charge 11593 million eleven months ended december 31 2010 change carrying amount goodwill eleven months ended december 31 2010 follows three months ended december 31 2010 company recognized reduction goodwill 1584 million related finalization cancellation indebtedness income “codi” tax attribute reduction calculations required performed december 31 2010 associated fresh start accounting december 31 2010 net carrying value goodwill totaled 8011 million allocated among reporting units follows result annual impairment test goodwill determined reporting unit’s fair value exceeded carrying amount assets liabilities therefore second step goodwill impairment test required performed following table presents dollar amount percentage reporting unit’s fair value exceeded carrying amount assets liabilities october 31 2010 discounted cash flows used determine fair value rhdi dme inc dmw inc reporting units october 31 2010 lower 125 25 15 respectively step one annual impairment test goodwill would failed reporting unit requiring us proceed second step goodwill impairment test result filing chapter 11 petitions finalizing extensive analysis associated emergence chapter 11 predecessor company performed impairment tests definitelived intangible assets longlived assets 2009 result impairment tests predecessor company recognized nongoodwill intangible asset impairment charge 73378 million year ended december 31 2009 associated directory services agreements advertiser relationships third party contracts network platforms acquired prior acquisitions result decline trading value predecessor company’s debt equity securities decline operating results predecessor company performed impairment tests goodwill definitelived intangible assets longlived assets 2008 result impairment tests predecessor company recognized goodwill impairment charge 31238 million year ended december 31 2008 predecessor company recognized nongoodwill intangible asset impairment charge 7440 million year ended december 31 2008 associated local national customer relationships acquired prior acquisitions addition result predecessor company’s decision discontinue use tradenames technology acquired prior acquisition predecessor company recognized nongoodwill intangible asset impairment charge 22 million year ended december 31 2008 total impairment charges related predecessor company’s intangible assets goodwill longlived assets 38704 million year ended december 31 2008 see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies identifiable intangible assets goodwill” information company’s predecessor company’s impairment testing goodwill definitelived intangible assets longlived assets critical estimates assumptions methodologies used impairment testing impairment charges recognized eleven months ended december 31 2010 years ended december 31 2009 2008 impairment charges impact current future operating cash flow compliance debt covenants tax attributes december 31 2010 net carrying value intangible assets totaled 23692 million amortization expense related intangible assets eleven months ended december 31 2010 1670 million amortization expense predecessor company one month ended january 31 2010 years ended december 31 2009 2008 156 million 5146 million 4159 million respectively aggregate net book value intangible assets december 31 2010 impaired incremental 1 net loss eleven months ended december 31 2010 would adversely impacted approximately 142 million company predecessor company evaluate remaining useful lives identifiable intangible assets longlived assets whenever events circumstances indicate revision remaining period amortization warranted estimated remaining useful lives change remaining carrying amount intangible assets longlived assets would amortized prospectively revised remaining useful life conjunction impairment testing eleven months ended december 31 2010 company evaluated remaining useful lives identifiable intangible assets longlived assets considering among things effects obsolescence demand competition takes consideration price premium benefit competing independent publishers markets result directory services agreements acquired prior acquisitions economic factors including stability industry operate known technological advances legislative actions result uncertain changing regulatory environment expected changes distribution channels addition conjunction adoption fresh start accounting determination fair value assets liabilities first quarter 2010 evaluated remaining useful lives identifiable intangible assets longlived assets considering factors noted company determined combined weighted average useful life identifiable intangible assets december 31 2010 21 years weighted average useful lives amortization methodology identifiable intangible assets december 31 2010 shown following table weighted average intangible asset useful lives amortization methodology directory services agreements 26 years income forecast method 1 local customer relationships 14 years income forecast method 1 national customer relationships 25 years income forecast method 1 trade names trademarks 14 years straightline method technology advertising commitments 8 years income forecast method 1 identifiable intangible assets amortized income forecast method assumes value derived intangible assets greater earlier years steadily declines time remaining useful lives intangible assets shortened 10 net loss eleven months ended december 31 2010 would adversely impacted approximately 177 million industry local business conditions markets deteriorate excess current estimates potentially resulting declines advertising sales operating results trading value debt equity securities decline significantly required assess recoverability goodwill addition annual evaluation recoverability useful lives intangible assets longlived assets factors including changes assumptions used impairment analysis result factors could result future impairment charges reduction remaining useful lives associated intangible assets longlived assets acceleration amortization expense fresh start accounting company adopted fresh start accounting reporting fresh start reporting date accordance fasb asc 852 reorganizations “fasb asc 852” holders existing voting shares immediately confirmation plan received less 50 voting shares emerging entity reorganization value company’s assets immediately date confirmation less postpetition liabilities allowed claims fasb asc 852 reorganization value represents fair value entity considering liabilities approximates amount willing buyer would pay assets company immediately restructuring reorganization value allocated respective fair value assets excess reorganization value fair value identified tangible intangible assets recorded goodwill liabilities deferred taxes stated present values amounts expected paid fair values assets liabilities represented best estimates based independent appraisals valuations foregoing available industry data trends references relevant market rates transactions used estimates assumptions subject significant uncertainties beyond reasonable control see item 8 “financial statements supplementary data” note 3 “fresh start accounting” presentation critical estimates assumptions methodologies used determining fair values assets liabilities fresh start accounting impact emergence reorganization fresh start accounting financial position results operations cash flows liabilities subject compromise liabilities subject compromise generally refer prepetition obligations secured unsecured may impaired plan reorganization fasb asc 852 requires liabilities including became known filing chapter 11 petitions reported amounts expected allowed even may settled lesser amounts liabilities represent estimated amount expected resolved known potential claims chapter 11 process remain subject future adjustments negotiated settlements actions bankruptcy court nonacceptance certain executory contracts unexpired leases liabilities subject compromise also includes items may assumed plan reorganization may subsequently reclassified liabilities subject compromise predecessor company classified 61 billion senior notes senior discount notes senior subordinated notes collectively “notes default” liabilities subject compromise december 31 2009 liabilities subject compromise also included certain prepetition liabilities including accrued interest accounts payable accrued liabilities tax related liabilities lease related liabilities bankruptcy process likelihood settlement potential settlement outcomes considered evaluating whether potential obligations probable estimable end reporting period prepetition obligations evaluated determine whether potential liability probable assessment based information available made whether potential liability estimable liability recorded probable estimable estimates used determine amounts reported liabilities subject compromise reflected best estimates involved uncertainties based certain conditions generally outside control predecessor company instances control bankruptcy court result estimates used material amounts presented liabilities subject compromise predecessor company’s consolidated balance sheet december 31 2009 may presented liabilities subject compromise reclass amounts could also impacted amounts reported reorganization items net consolidated statement operations year ended december 31 2009 one month ended january 31 2010 see item 8 “financial statements supplementary data” note 3 “fresh start accounting” note 4 “reorganization items net liabilities subject compromise” additional information amounts presented liabilities subject compromise income taxes company predecessor company account income taxes asset liability method accordance fasb asc 740 income taxes “fasb asc 740” deferred income tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred income tax assets based upon available evidence likely deferred income tax assets realized fasb asc 740 also prescribes recognition threshold measurement principles financial statement recognition measurement tax positions taken expected taken tax return fasb asc 740 impact uncertain income tax position income tax return must recognized largest amount likely sustained upon audit relevant taxing authority uncertain income tax position recognized less 50 likelihood sustained additionally fasb asc 740 provides guidance derecognition classification interest penalties accounting interim periods disclosures transition requirements see item 8 “financial statements supplementary data” note 8 “income taxes” information regarding company’s predecessor company’s provision benefit income taxes ordinary course business may many transactions calculations ultimate tax outcome uncertain calculation tax liabilities involves dealing uncertainties application complex tax laws company predecessor company recognize potential liabilities anticipated tax audit issues based estimate ultimate resolution whether extent additional taxes due although company predecessor company believe estimates reasonable assurance given final outcome matters different reflected historical income tax provisions accruals part company’s predecessor company’s financial reporting process must assess likelihood deferred income tax assets recovered unless recovery likely provision taxes must increased recording reserve form valuation allowance deferred income tax assets estimated ultimately recoverable process certain relevant criteria evaluated including existence deferred income tax liabilities used absorb deferred income tax assets taxable income future years company’s predecessor company’s judgment regarding future taxable income may change due future market conditions changes us tax laws factors changes may require material adjustments deferred income tax assets accompanying reduction increase net income loss period determinations made addition company predecessor company operate within multiple taxing jurisdictions subject audit jurisdictions audits involve complex issues may require extended period time resolve company predecessor company maintain liability estimate potential income tax exposure opinion adequate provision income taxes made years allowance doubtful accounts sales claims company predecessor company record revenue net allowance sales claims addition company predecessor company record provision bad debts provision bad debts allowance sales claims estimated based historical experience company predecessor company also evaluate current condition client balances bankruptcy filings change credit policy historical chargeoff patterns recovery rates data determining allowance doubtful accounts reserve company predecessor company review estimates periodically assess whether additional adjustment needed based economic events circumstances including actual experience end billing collection cycle company predecessor company believe allowance doubtful accounts sales claims adequate cover anticipated losses current conditions however significant deterioration factors noted overall economy could materially change expectations provisions sales claims doubtful accounts estimated based percentage revenue accordingly additional 1 change either allowance percentages would impacted net loss eleven months ended december 31 2010 approximately 50 million pension benefits company’s predecessor company’s pension plan obligations related assets defined benefit pension plans presented item 8 “financial statements supplementary data” note 10 “benefit plans” plan assets consist primarily marketable equity debt instruments valued using market quotations determination plan obligations annual pension expense requires management make number assumptions key assumptions measuring plan obligations include discount rate longterm expected return plan assets eleven months ended december 31 2010 company utilized outsource provider’s yield curve determine appropriate discount rate defined benefit pension plans based individual plans’ expected future cash flows january 2010 year ended december 31 2009 predecessor company utilized outsource provider’s yield curve determine appropriate discount rate defined benefit pension plans year ended december 31 2008 predecessor company utilized citigroup pension liability index appropriate discount rate defined benefit pension plans predecessor company changed outsource provider’s yield curve 2009 better reflect specific cash flows plans determining discount rate asset returns based upon longterm anticipated average rate earnings expected invested funds plan salary increase assumptions based upon historical experience anticipated future management actions december 31 2010 weightedaverage actuarial assumptions used determining company’s net periodic benefit expense january 31 2010 weightedaverage actuarial assumptions used determining predecessor company’s net periodic benefit expense december 31 2009 weightedaverage actuarial assumptions used determining predecessor company’s net periodic benefit expense net periodic pension income recognized company predecessor company eleven months ended december 31 2010 one month ended january 31 2010 35 million 01 million respectively 1 increase decrease discount rate would affect net income loss eleven months ended december 31 2010 one month ended january 31 2010 approximately 07 million 01 million respectively 1 increase decrease longterm rate return plan assets would affect net income loss eleven months ended december 31 2010 one month ended january 31 2010 approximately 15 million 02 million respectively second quarter 2010 recognized onetime curtailment gain 38 million associated departure company’s former chief executive officer 2009 predecessor company froze current defined benefit plans covering cwa ibew represented employees curtailed retiree health care life insurance benefits covering cwa ibew represented employees result implementing freeze defined benefit plans covering cwa ibew represented employees predecessor company recognized onetime net curtailment gain 42 million year ended december 31 2009 entirely offset losses incurred plan assets previously unrecognized prior service costs charged accumulated comprehensive loss result eliminating retiree health care life insurance benefits cwa ibew represented employees predecessor company recognized onetime curtailment gain 520 million year ended december 31 2009 2008 predecessor company froze current defined benefit plans covering nonunion employees curtailed nonunion retiree health care life insurance benefits result implementing freeze defined benefit plans covering nonunion employees predecessor company recognized onetime net curtailment loss 16 million year ended december 31 2008 consisting curtailment gain 136 million entirely offset losses incurred plan assets recognition previously unrecognized prior service costs charged accumulated comprehensive loss result eliminating retiree health care life insurance benefits nonunion employees predecessor company recognized onetime curtailment gain 396 million year ended december 31 2008 stockbased compensation fair value company’s predecessor company’s stock options stock appreciation rights “sars” market condition calculated using blackscholes model time stockbased awards granted fair value company’s stock options sars market condition calculated using monte carlo model time stockbased awards granted use blackscholes monte carlo models require significant judgment use estimates particularly assumptions expected volatility riskfree interest rates expected lives value stockbased awards well forfeiture rates recognize stockbased compensation expense derived service periods allocation stockbased compensation expense associated stockbased awards market condition company granted 21 million stock options sars 02 million shares restricted stock eleven months ended december 31 2010 predecessor company grant stock options sars restricted stock one month ended january 31 2010 year ended december 31 2009 company used estimated weighted average forfeiture rate determining stockbased compensation expense 89 eleven months ended december 31 2010 predecessor company used estimated forfeiture rate determining stockbased compensation expense 80 first quarter 2009 102 remainder 2009 january 2010 year ended december 31 2008 predecessor company utilized estimated forfeiture rate 8 determining stockbased compensation expense following assumptions used valuing stockbased awards recognition allocation stockbased compensation expense eleven months ended december 31 2010 year ended december 31 2008 since company recently emerged bankruptcy sufficient companyspecific historical data order determine certain assumptions used valuing stockbased awards company utilized data industry sources peer competitive company data order estimate expected volatility assumption used valuing stockbased awards eleven months ended december 31 2010 predecessor company estimated expected volatility based historical volatility price common stock expected life stockbased awards expected life represents period time stockbased awards granted expected outstanding company predecessor company estimated expected life using simplified method permitted staff accounting bulletin 110 use simplified method developing expected term share options stockbased awards satisfied “plain vanilla” criteria simplified method calculates expected life average vesting contractual terms award riskfree interest rate company predecessor company based applicable us treasury yields approximate expected life stockbased awards granted company predecessor company eleven months ended december 31 2010 company used actual voluntary turnover data first quarter 2010 estimate weighted average forfeiture rate predecessor company used historical data estimate forfeiture rate one month ended january 31 2010 years ended december 31 2009 2008 estimated forfeitures adjusted extent actual forfeitures differ expected materially differ estimates derived service periods associated stockbased awards market condition calculated determining average time company’s stock price reached given exercise price across monte carlo simulations stock price reach exercise price company excluded paths assumptions reflect company’s predecessor company’s best estimates involve inherent uncertainties based certain conditions generally outside control company predecessor company result assumptions used total stockbased compensation expense could materially impacted furthermore use different assumptions future grants stockbased compensation expense could materially impacted future periods upon emergence chapter 11 pursuant plan outstanding equity securities predecessor company including stock options sars restricted stock cancelled see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies “stockbased awards” information regarding dex one’s new equity incentive plan “eip” fair value financial instruments december 31 2010 2009 fair value cash equivalents accounts receivable accounts payable accrued liabilities approximated carrying value based net shortterm nature instruments discussed item 8 “financial statements supplementary data” note 3 “fresh start accounting” company’s assets liabilities fair valued fresh start reporting date connection adoption fresh start accounting company utilized quoted market prices available compute fair market value longterm debt december 31 2010 disclosed item 8 “financial statements supplementary data” note 6 “longterm debt credit facilities notes” estimates fair value may affected assumptions made accordingly necessarily indicative amounts company could realize current market exchange result filing chapter 11 petitions plan predecessor company believe meaningful present fair market value longterm debt december 31 2009 fasb asc 820 fair value measurements disclosures “fasb asc 820” defines fair value establishes fair value hierarchy prioritizes inputs valuation techniques used measure fair value expands disclosures fair value measurements fasb asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy gives highest priority quoted prices active markets comprised following three levels level 1 unadjusted quoted market prices active markets identical assets liabilities level 2 observable inputs level 1 inputs quoted prices similar assets liabilities quoted prices markets insufficient volume infrequent transactions modelderived valuations significant inputs observable derived principally corroborated observable market data substantially full term assets liabilities level 3 prices valuations require inputs significant measurement unobservable required fasb asc 820 assets liabilities classified based lowest level input significant fair value measurement company’s predecessor company’s assessment significance particular input fair value measurement requires judgment may affect valuation fair value assets liabilities placement within fair value hierarchy levels company predecessor company interest rate swaps notional amount 5000 million 2000 million december 31 2010 2009 respectively measured fair value recurring basis december 31 2010 company interest rate caps notional amount 4000 million measured fair value recurring basis following table presents company’s predecessor company’s assets liabilities measured fair value recurring basis december 31 2010 2009 respectively level within fair value hierarchy fair value measurements included transfers assets liabilities level 2 eleven months ended december 31 2010 one month ended january 31 2010 year ended december 31 2009 company established policy recognizing transfers levels fair value hierarchy end reporting period conjunction classification predecessor company’s credit facilities december 31 2009 interest rate swap liabilities excluded liabilities subject compromise consolidated balance sheet december 31 2009 predecessor company’s credit facilities interest rate swaps fully collateralized fair value collateral exceeded carrying value credit facilities interest rate swaps valuation techniques interest rate swaps interest rate caps fair value marketbased measure considered perspective market participant holds asset owes liability rather entityspecific measure therefore even market assumptions readily available company’s predecessor company’s assumptions set reflect market participants would use pricing asset liability measurement date company predecessor company use prices inputs current measurement date fair value derivative instruments derived using pricing models based market approach pricing models take account relevant observable market inputs market participants would use pricing asset liability pricing models used determine fair value derivative instruments incorporate specific contract terms valuation inputs including effective dates maturity dates interest rate swap pay rates interest rate cap rates notional amounts disclosed presented item 8 “financial statements supplementary data” note 7 “derivative financial instruments” interest rate yield curves creditworthiness counterparty company counterparty credit risk company’s credit risk could material impact fair value derivative instruments results operations financial condition particular reporting period december 31 2010 impact applying counterparty credit risk determining fair value derivative instruments increase derivative instruments liability less 01 million december 31 2010 impact applying company’s credit risk determining fair value derivative instruments decrease derivative instruments liability 12 million many pricing models entail material subjectivity methodologies employed necessitate significant judgment pricing inputs observed actively quoted markets case derivative instruments pricing models used company predecessor company widely accepted financial services industry noted derivative instruments categorized within level 2 fair value hierarchy fair value control processes interest rate swaps interest rate caps company predecessor company employ control processes validate fair value derivative instruments derived pricing models control processes designed assure values used financial reporting based observable inputs wherever possible event observable inputs available control processes designed assure valuation approach utilized appropriate consistently applied assumptions reasonable benefit plan assets fair value assets held dex one retirement account master trust “master trust” december 31 2010 2009 asset category follows category includes investments us government bonds government mortgagebacked securities indexlinked government bonds guaranteed commercial paper shortterm treasury bills notes fair value assets determined using bid evaluation process observable market based inputs effective last business day plan year b category includes investments two commoncollective funds 89 invested stocks comprising russell 1000 equity index remaining 11 comprised shortterm investments december 31 2010 fair value assets determined based contract value based provisions underlying guaranteed investment contracts c category includes investments corporate bonds commercial mortgagebacked assetbacked securities collateralized mortgage obligations commercial paper fair value assets determined using bid evaluation process observable market based inputs effective last business day plan year category includes investments small cap stocks u issuers across diverse industries fair value assets determined using quoted market prices recognized securities exchange last reported trading price last business day plan year e category comprised two mutual funds one fund invests valueoriented international stocks across diverse industries one invests intermediate term fixed income instruments treasuries high grade corporate bonds fair value assets determined using quoted market prices recognized securities exchange last reported trading price last business day plan year f category comprised healthcare real estate investment trust fair value assets determined based traded market prices g category includes investments combination 5 10 30 year us treasury notes bond futures credit default swaps fair value assets determined based either settlement prices recognized securities exchange midbid evaluation process using observable market based inputs h category includes investments passively managed funds composed international stocks across diverse industries fair value assets calculated based upon compilation observable market information asset management committee “amc” appointed compensation benefits committee company’s board directors named fiduciary plan matters relating plan investments asset management amc authority appoint retain monitor remove custodian investment manager responsible establishing maintaining funding investment policy master trust see item 8 “financial statements supplementary data” note 10 “benefit plans” information regarding benefit plans results operations factors affecting comparability fresh start accounting adjustments company adopted fresh start accounting reporting effective february 1 2010 fresh start reporting date financial statements fresh start reporting date report results dex one beginning retained earnings accumulated deficit presentation dex one represents financial position results operations new reporting entity comparable prior periods presented predecessor company financial statements periods ended prior fresh start reporting date include effect changes predecessor company’s capital structure changes fair value assets liabilities result fresh start accounting provided us gaap analysis company’s results operations eleven months ended december 31 2010 predecessor company’s results operations one month ended january 31 2010 gaap analysis includes discussion results individual reporting periods however provide comparison individual reporting periods respective prior year reporting periods due reasons discussed result deferral amortization method revenue recognition recognized gross advertising revenues reflect amortization advertising sales consummated prior periods well current period adoption fresh start accounting significant impact financial position results operations company commencing fresh start reporting date consistent predecessor company’s historical application purchase method accounting business combinations included fasb asc 805 business combinations fresh start accounting precludes us recognizing advertising revenue certain expenses associated advertising sales fulfilled prior fresh start reporting date thus reported results eleven months ended december 31 2010 indicative underlying operating financial performance comparable prior period presentation adoption fresh start accounting impact cash flows operations accordingly addition providing gaap analysis management also provided nongaap analysis entitled “nongaap financial information combined adjusted results” nongaap financial information combined adjusted results 1 combines gaap results company eleven months ended december 31 2010 gaap results predecessor company one month ended january 31 2010 2 adjusts combined amounts eliminate fresh start accounting impact revenue certain related expenses noted ii exclude costuplift defined recorded fresh start accounting deferred directory costs included prepaid expenses current assets consolidated balance sheet print paper distribution commissions relate directories yet published deferred directory costs recorded fair value determined estimated billable value published directory less b expected costs complete directory plus c normal profit margin incremental fresh start accounting adjustment step recorded value deferred directory costs fair value hereby referred “costuplift” costuplift amortized terms applicable directories exceed twelve months allocated production distribution expenses selling support expenses based upon category deferred directory costs fair valued management’s nongaap analysis compares nongaap financial information combined adjusted results predecessor company’s gaap results year ended december 31 2009 operating income management believes presentation nongaap financial information combined adjusted results help financial statement users better understand material impact fresh start accounting company’s results operations eleven months ended december 31 2010 also offers nongaap normalized comparison gaap results predecessor company year ended december 31 2009 nongaap financial information combined adjusted results presented reconciled comparable gaap measures nongaap financial information combined adjusted results exclude effects fresh start accounting certain items must noted nongaap financial information combined adjusted results comparable predecessor company’s gaap results year ended december 31 2009 treated impairment charges company excluded goodwill nongoodwill intangible asset impairment charges totaling 11593 million eleven months ended december 31 2010 combined adjusted results predecessor company excluded nongoodwill intangible asset impairment charges totaling 73378 million adjusted results year ended december 31 2009 reclassifications certain prior period amounts included consolidated statements operations reclassified conform current period’s presentation purchased traffic costs incurred direct traffic online properties reclassified advertising expense component selling support expenses production distribution expenses consolidated statements operations addition information technology expenses reclassified production distribution expenses general administrative expenses consolidated statements operations reclassifications impact operating loss net loss years ended december 31 2009 2008 tables summarize reclassifications gaap reported results successor company eleven months ended december 31 2010 net revenues components net revenues eleven months ended december 31 2010 follows advertising revenues earned primarily sale advertising yellow pages directories publish advertising revenues also include revenues internetbased advertising products including online directories dexknowscom dexnet advertising revenues affected several factors including changes quantity size advertisements acquisition new clients renewal rates existing clients premium advertisements sold changes advertisement pricing introduction new products increase competition fragmentation local business search market general economic factors revenues respect print advertising internetbased advertising products sold print advertising recognized deferral amortization method revenues related print advertising internetbased advertising products sold print advertising initially deferred directory published net sales claims allowances recognized ratably directory’s life typically 12 months revenues respect internetbased services sold standalone dexnet recognized delivered fulfilled revenues respect advertising products nonperformance based recognized ratably life contract commencing first delivered fulfilled revenues respect advertising products performancebased recognized service delivered fulfilled adoption fresh start accounting significant impact results operations company commencing fresh start reporting date result deferral amortization method revenue recognition recognized gross advertising revenues reflect amortization advertising sales consummated prior periods well current period fresh start accounting precludes us recognizing advertising revenue certain expenses associated advertising sales fulfilled prior fresh start reporting date thus reported results eleven months ended december 31 2010 indicative underlying operating financial performance comparable prior period presentation gross advertising revenues 8244 million eleven months ended december 31 2010 exclude 7993 million gross advertising revenues resulting adoption fresh start accounting gross advertising revenues continue impacted declines advertising sales primarily result declines new recurring business mainly driven 1 customer attrition 2 declines overall advertising spending clients 3 significant impact weak local business conditions consumer spending clients’ markets 4 increase competition fragmentation local business search sales claims allowances 99 million eleven months ended december 31 2010 exclude 140 million sales claims allowances resulting adoption fresh start accounting sales claims allowances affected lower claims experience due process improvements operating efficiencies improved print copy quality certain markets well lower advertising sales volume revenues 164 million eleven months ended december 31 2010 exclude 56 million revenues resulting adoption fresh start accounting revenues include late fees received outstanding customer balances barter revenues commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain advertisingrelated products expenses components total expenses eleven months ended december 31 2010 follows certain costs directly related selling production directories initially deferred amortized ratably life directories deferral amortization method accounting match revenue recognized relating directories cost recognition commencing month directory distribution substantially complete costs specifically identifiable particular directory include sales commissions print paper initial distribution costs sales commissions include amounts paid employees sales local clients certified marketing representatives “cmrs” act channel national clients expenses sales person salaries sales manager compensation sales office occupancy publishing information technology services specifically identifiable particular directory recognized incurred except certain expenses associated advertising sales fulfilled prior fresh start reporting date fresh start accounting precludes us recognizing costs recognized reporting period consist costs incurred period fully recognized period ii costs incurred prior period portion amortized recognized current period iii costs incurred current period portion amortized recognized current period balance deferred future periods consequently difference costs recognized given period costs incurred given period may significant production distribution expenses total production distribution expenses 2230 million eleven months ended december 31 2010 production distribution expenses comprised items print paper distribution expenses internet production distribution expenses amortization costuplift associated print paper distribution expenses resulting adoption fresh start accounting result adoption fresh start accounting production distribution expenses eleven months ended december 31 2010 exclude amortization deferred directory costs deferral amortization method directories published fresh start reporting date totaling 888 million include amortization costuplift 75 million print paper distribution expenses continue impacted lower page volumes associated declines print advertisements negotiated price reductions print paper expenses internet production distribution expenses affected reduction dexnet customers purchasing efficiencies lower headcount partially offset increased purchased traffic costs incurred direct traffic online properties selling support expenses total selling support expenses 3788 million eleven months ended december 31 2010 selling support expenses comprised items bad debt expense commissions salesperson expenses directory publishing expenses billing credit collection expense occupancy expenses advertising expense amortization cost uplift associated commissions resulting adoption fresh start accounting due adoption fresh start accounting selling support expenses eleven months ended december 31 2010 exclude amortization deferred directory costs deferral amortization method directories published fresh start reporting date totaling 838 million include amortization costuplift 48 million bad debt expense impacted lower writeoff experience resulting effective credit collections practices driven improvement accounts receivable portfolio well lower billing volumes associated declines advertisers partially offset increase bad debt provision delinquent balances associated cmr clients fail pay within specified credit terms may cancel advertising future directories could impact ability collect past due amounts well adversely impact advertising sales revenue trends commissions salesperson expenses affected lower advertising sales effect variablebased commissions well lower headcount directory publishing expenses continue affected declines print advertisements lower headcount occupancy expenses impacted renegotiation leased properties reduction amount leased square footage bankruptcy process general administrative expenses general administrative “ga” expenses 1464 million eleven months ended december 31 2010 ga expenses comprised items restructuring expenses general corporate expenses incentive compensation expense information technology “it” expenses ga related incentive compensation expense pertains expense associated stock appreciation rights “sars” grant made march 1 2010 certain employees including executive officers common stock issued members company’s board directors march 1 2010 common stock issued members executive oversight committee september 13 2010 stock based awards granted mr mockett september 13 2010 compensation expense associated company’s longterm incentive program “2009 ltip” includes accelerated compensation expense associated departure former chief executive officer depreciation amortization depreciation amortization expense 2177 million eleven months ended december 31 2010 amortization intangible assets 1670 million eleven months ended december 31 2010 impacted increase fair value intangible assets establishment estimated useful lives resulting adoption fresh start accounting company expects recognize amortization expense associated intangible assets 1528 million year ended december 31 2011 depreciation fixed assets amortization computer software 507 million eleven months ended december 31 2010 affected increase fair value fixed assets computer software resulting adoption fresh start accounting well capital projects placed service eleven months ended december 31 2010 impairment charges based upon decline trading value debt equity securities departure chairman chief executive officer may 28 2010 among indicators company performed impairment tests goodwill definitelived intangible assets longlived assets september 30 2010 june 30 2010 testing results definitelived intangible assets longlived assets resulted impairment charge associated trade names trademarks technology local customer relationships former businesscom reporting unit 43 million 173 million three months ended september 30 2010 june 30 2010 respectively total nongoodwill intangible asset impairment charge 216 million eleven months ended december 31 2010 testing results goodwill resulted impairment charge 3853 million 7523 million three months ended september 30 2010 june 30 2010 respectively total goodwill impairment charge 11376 million eleven months ended december 31 2010 sum goodwill nongoodwill intangible asset impairment charges totaled 11593 million eleven months ended december 31 2010 see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies identifiable intangible assets goodwill” additional information operating loss operating loss 12943 million eleven months ended december 31 2010 fresh start accounting deferred net revenues related directories published prior fresh start reporting date eliminated however certain deferred direct expenses related directories eliminated expenses directly associated net revenues directories continue recognized period expenses subsequent fresh start reporting date fresh start accounting disproportionate adverse effect reported net revenues versus expenses determining operating loss eleven months ended december 31 2010 month subsequent fresh start reporting date impact fresh start accounting expires first quarter 2011 ratio reported net revenue expense increase operating loss eleven months ended december 31 2010 directly impacted goodwill nongoodwill intangible asset impairment charges noted significant effects fresh start accounting well revenue expense trends described interest expense net interest expense 2495 million eleven months ended december 31 2010 conjunction adoption fresh start accounting reporting fresh start reporting date adjustment established record outstanding debt fair value fresh start reporting date fair value adjustment amortized increase interest expense remaining term respective debt agreements using effective interest method impact future scheduled interest principal payments amortization fair value adjustment included increase interest expense 293 million eleven months ended december 31 2010 connection amendment restatement dex media east rhdi credit facilities effective date entered interest rate swap interest rate cap agreements first quarter 2010 designated cash flow hedges company’s interest expense eleven months ended december 31 2010 includes expense 82 million resulting change fair value interest rate swaps interest rate caps income taxes effective tax rate loss income taxes 402 eleven months ended december 31 2010 effective tax rate benefit 402 higher federal statutory tax rate 350 primarily due increases income tax benefits recognition unrecognized tax position offset part increase income tax expense related nondeductible impairment charge 2009 predecessor company accrued unrecognized tax benefit uncertainty surrounding potential ownership change internal revenue code “irc” section 382 “section 382” occurred prior date made “checkthebox” election two subsidiaries date change ownership question since december 31 2009 balance sheet date predecessor company unable confirm actual date ownership change sec forms 13g filed however based upon closing sec filing period schedules 13g review schedules filed february 15 2010 company determined likely certain “checkthebox” elections effective prior date 2009 ownership change section 382 result company recorded tax benefit reversal liability unrecognized tax benefit 3523 million company’s statement operations eleven months ended december 31 2010 significantly impacted effective tax rate period result goodwill nongoodwill intangible asset impairment charges eleven months ended december 31 2010 recognized nondeductible adjustment effective tax rate 195 2999 million income tax benefit 6201 million eleven months ended december 31 2010 comprised federal tax benefit 5677 million state tax benefit 524 million federal tax benefit 5677 million comprised current tax provision 13 million primarily related unrecognized tax benefits deferred tax benefit 5690 million primarily related current year net operating loss recognition unrecognized tax position goodwill impairment charges eleven months ended december 31 2010 state tax benefit 524 million comprised current tax benefit 38 million primarily related expected state tax refunds deferred tax benefit 486 million primarily related recognition unrecognized tax position eleven months ended december 31 2010 see item 8 “financial statements supplementary data” note 8 “income taxes” additional information net loss per share net loss 9236 million eleven months ended december 31 2010 directly impacted goodwill nongoodwill intangible asset impairment charges noted well significant effects fresh start accounting revenue expense trends described offset income tax benefit recorded eleven months ended december 31 2010 noted calculation basic diluted earnings loss per share “eps” presented 1 due net loss reported eleven months ended december 31 2010 effect stockbased awards antidilutive therefore included calculation diluted eps eleven months ended december 31 2010 13 million shares company’s stockbased awards exercise prices exceeded average market price company’s common stock period predecessor company one month ended january 31 2010 net revenues components predecessor company’s net revenues one month ended january 31 2010 follows gross advertising revenues 1614 million one month ended january 31 2010 gross advertising revenues continue impacted declines advertising sales past twelve months primarily result declines new recurring business mainly driven 1 customer attrition 2 declines overall advertising spending clients 3 significant impact weak local business conditions consumer spending clients’ markets 4 increase competition fragmentation local business search sales claims allowances 35 million one month ended january 31 2010 sales claims allowances affected lower claims experience due process improvements operating efficiencies improved print copy quality certain markets well lower advertising sales volume revenues 25 million one month ended january 31 2010 revenues include late fees received outstanding customer balances barter revenues commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain advertisingrelated products expenses components predecessor company’s total expenses one month ended january 31 2010 follows production distribution expenses total production distribution expenses 272 million one month ended january 31 2010 production distribution expenses comprised items print paper distribution expenses internet production distribution expenses print paper distribution expenses continue impacted lower page volumes associated declines print advertisements negotiated price reductions print paper expenses favorable paper inventory expenses internet production distribution expenses affected reduction dexnet customers purchasing efficiencies lower headcount partially offset increased purchased traffic costs incurred direct traffic online properties selling support expenses total selling support expenses 407 million one month ended january 31 2010 selling support expenses comprised items bad debt expense commissions salesperson expenses directory publishing expenses billing credit collection expense occupancy expenses advertising expense bad debt expense impacted effective credit collections practices driven improvement accounts receivable portfolio well lower billing volumes associated declines advertisers directory publishing expenses continue affected declines print advertisements lower headcount billing credit collections expense impacted lower billing volumes associated declines advertisers advertisements occupancy expenses impacted renegotiation leased properties reduction amount leased square footage bankruptcy process general administrative expenses ga expenses 82 million one month ended january 31 2010 ga expenses comprised items restructuring expenses general corporate expenses incentive compensation expense expenses restructuring expenses impacted lower severance expense fees associated outside consultant services ga related incentive compensation expense includes remaining unrecognized compensation expense related stockbased awards cancelled upon emergence chapter 11 pursuant plan compensation expense associated predecessor company’s 2009 ltip reversal accrual associated predecessor company’s incentive compensation plan depreciation amortization depreciation amortization expense 202 million one month ended january 31 2010 amortization intangible assets 156 million one month ended january 31 2010 impacted reduced carrying values intangible assets resulting impairment charges recorded predecessor company fourth quarter 2009 associated reduction remaining useful lives effective january 1 2010 depreciation fixed assets amortization computer software 46 million one month ended january 31 2010 depreciation fixed assets amortization computer software impacted capital projects placed service one month ended january 31 2010 operating income operating income 641 million one month ended january 31 2010 determined based revenue expense trends described interest expense net contractual interest expense would appeared predecessor company’s consolidated statement operations filing chapter 11 petitions 659 million one month ended january 31 2010 net interest expense one month ended january 31 2010 197 million includes 18 million noncash amortization deferred financing costs predecessor company’s interest expense one month ended january 31 2010 includes expense 08 million associated change fair value dex media east llc interest rate swaps longer deemed financial instruments result filing chapter 11 petitions predecessor company’s interest expense one month ended january 31 2010 also includes expense 11 million resulting amounts previously charged accumulated comprehensive loss related interest rate swaps amounts previously charged accumulated comprehensive loss related dex media east llc interest rate swaps amortized interest expense remaining life interest rate swaps based future interest payments probable forecasted transactions would occur accordance fresh start accounting reporting unamortized amounts previously charged accumulated comprehensive loss related interest rate swaps eliminated fresh start reporting date result amendment rhdi credit facility refinancing former dex media west llc credit facility june 6 2008 predecessor company’s interest rate swaps associated two debt arrangements longer highly effective offsetting changes cash flows accordingly cash flow hedge accounting treatment longer permitted addition result filing chapter 11 petitions interest rate swaps required settled terminated 2009 result change fair value interest rate swaps prior effective date predecessor company’s interest expense includes expense 04 million one month ended january 31 2010 reorganization items net reorganization items directly associated process reorganizing business chapter 11 recorded separate line item consolidated statement operations predecessor company recorded 78 billion reorganization items one month ended january 31 2010 comprised 45 billion gain reorganization settlement liabilities subject compromise fresh start accounting adjustments 33 billion following table displays details reorganization items one month ended january 31 2010 see item 8 “financial statements supplementary data” note 3 “fresh start accounting” information gain reorganization settlement liabilities subject compromise fresh start accounting adjustments presented income taxes effective tax rate income taxes 117 one month ended january 31 2010 effective tax rate provision 117 lower statutory federal tax rate 350 primarily due decreases income tax expense nontaxable fresh start adjustments release valuation allowance offset part increases income tax expense estimated loss tax attributes due cancellation debt income emergence impact state taxes discharge debt conjunction emergence chapter 11 resulted tax gain 50166 million generally discharge debt obligation amount less adjusted issue price creates cancellation indebtedness income “codi” must included company’s taxable income however recognition codi limited taxpayer debtor reorganization case discharge granted bankruptcy court pursuant plan reorganization approved bankruptcy court plan enabled predecessor company qualify bankruptcy exclusion rule exclude gain settlement debt obligations derivative liabilities taxable income irc section 108 company reduced tax attributes primarily net operating loss carryforwards intangible asset basis stock basis income tax provision 9175 million one month ended january 31 2010 comprised federal tax provision 7928 million state tax provision 1248 million federal tax provision comprised current tax provision 06 million primarily related increase federal tax accrual related unrecognized tax benefits deferred tax provision 7922 million primarily related reduction predecessor company’s tax attributes accordance irc section 108 state tax provision 1248 million comprised current tax provision less 01 million deferred tax provision 1247 million primarily related reduction predecessor company’s tax attributes accordance irc section 108 see item 8 “financial statements supplementary data” note 8 “income taxes” additional information net income earnings per share net income 69200 million one month ended january 31 2010 primarily due gain reorganization fresh start accounting adjustments comprise reorganization items net addition net income one month ended january 31 2010 determined based revenue expense trends income taxes described calculation basic diluted eps presented one month ended january 31 2010 46 million shares predecessor company’s stockbased awards exercise prices exceeded average market price predecessor company’s common stock period nongaap financial information combined adjusted results management believes presentation nongaap financial information combined adjusted results help financial statement users better understand material impact fresh start accounting company’s results operations eleven months ended december 31 2010 also offers nongaap normalized comparison gaap results predecessor company year ended december 31 2009 nongaap financial information combined adjusted results presented reconciled comparable gaap measures nongaap financial information combined adjusted results exclude effects fresh start accounting certain items goodwill nongoodwill intangible asset impairment charges eleven months ended december 31 2010 must noted nongaap financial information combined adjusted results comparable predecessor company’s gaap results year ended december 31 2009 adjusted results year ended december 31 2009 exclude effects nongoodwill intangible asset impairment charges 2009 treated successor company combined adjusted results year ended december 31 2010 predecessor company gaap adjusted results year ended december 31 2009 net revenues components combined adjusted net revenues year ended december 31 2010 predecessor company gaap net revenues year ended december 31 2009 follows 1 represents gross advertising revenues sales claims allowances revenues advertising sales fulfilled prior fresh start reporting date would recognized eleven months ended december 31 2010 absent adoption fresh start accounting required gaap combined adjusted gross advertising revenues year ended december 31 2010 decreased 4348 million 196 predecessor company year ended december 31 2009 decline combined adjusted gross advertising revenues year ended december 31 2010 primarily due declines advertising sales past twelve months primarily result declines new recurring business mainly driven 1 customer attrition 2 declines overall advertising spending clients 3 significant impact weak local business conditions consumer spending clients’ markets 4 increase competition fragmentation local business search combined adjusted sales claims allowances year ended december 31 2010 decreased 164 million 374 predecessor company year ended december 31 2009 decline combined adjusted sales claims allowances year ended december 31 2010 primarily due lower claims experience result process improvements operating efficiencies improved print copy quality certain markets well lower advertising sales volume expenses components combined adjusted total expenses year ended december 31 2010 predecessor company adjusted total expenses year ended december 31 2009 follows 1 represents certain deferred expenses advertising sales fulfilled prior fresh start reporting date would recognized eleven months ended december 31 2010 absent adoption fresh start accounting required gaap b exclusion costuplift recorded fresh start accounting 2 depreciation amortization expense adjusted increase fair value intangible assets fixed assets computer software result adoption fresh start accounting reduced carrying values intangible assets resulting impairment charges recorded predecessor company fourth quarter 2009 associated reduction remaining useful lives effective january 1 2010 3 goodwill nongoodwill intangible asset impairment charges eleven months ended december 31 2010 excluded combined adjusted year ended december 31 2010 nongoodwill intangible asset impairment charges year ended december 31 2009 excluded adjusted year ended december 31 2009 production distribution expenses total combined adjusted production distribution expenses year ended december 31 2010 3315 million compared 3753 million predecessor company year ended december 31 2009 primary components 438 million 117 decrease combined adjusted production distribution expenses year ended december 31 2010 follows combined adjusted print paper distribution expenses year ended december 31 2010 declined 306 million compared predecessor company year ended december 31 2009 decline primarily due lower page volumes associated declines print advertisements negotiated price reductions print paper expenses timing publication deliveries compared prior year period favorable paper inventory expenses combined adjusted internet production distribution expenses year ended december 31 2010 declined 106 million compared predecessor company year ended december 31 2009 primarily due purchasing efficiencies lower headcount reduction dexnet customers partially offset increased purchased traffic costs incurred direct traffic online properties selling support expenses total combined adjusted selling support expenses year ended december 31 2010 4985 million compared 6103 million predecessor company year ended december 31 2009 primary components 1118 million 183 decrease combined adjusted selling support expenses year ended december 31 2010 follows combined adjusted bad debt expense year ended december 31 2010 declined 812 million compared predecessor company year ended december 31 2009 primarily due lower writeoff experience resulting effective credit collections practices driven improvement accounts receivable portfolio well lower billing volumes associated declines advertisers partially offset increase bad debt provision delinquent balances associated cmr combined adjusted bad debt expense year ended december 31 2010 represented 37 net revenue compared 67 predecessor company year ended december 31 2009 combined adjusted commissions salesperson expenses year ended december 31 2010 decreased 223 million compared predecessor company year ended december 31 2009 primarily due lower advertising sales effect variablebased commissions well lower headcount combined adjusted occupancy expenses year ended december 31 2010 decreased 50 million compared predecessor company year ended december 31 2009 primarily due renegotiation leased properties reduction amount leased square footage bankruptcy process combined adjusted directory publishing expenses year ended december 31 2010 decreased 49 million compared predecessor company year ended december 31 2009 primarily due declines print advertisements lower headcount general administrative expenses combined adjusted ga expenses year ended december 31 2010 1546 million compared 977 million predecessor company year ended december 31 2009 primary components 569 million 582 increase combined adjusted ga expenses year ended december 31 2010 follows combined adjusted year ended december 31 2010 recognized onetime net curtailment gain 38 million associated departure company’s former chief executive officer represents decrease 482 million net curtailment gains year ended december 31 2009 recognized 520 million associated elimination certain union retiree health care life insurance benefits combined adjusted year ended december 31 2010 recognized onetime expenses 95 million associated departure company’s former chief executive officer fourth quarter 2010 commenced restructuring plan included headcount reductions consolidation responsibilities result restructuring plan company recorded restructuring charge 186 million fourth quarter 2010 year ended december 31 2009 predecessor company recognized restructuring charge 146 million related restructuring plan implemented 2009 represents increase restructuring expenses 40 million combined adjusted year ended december 31 2010 combined adjusted general corporate expenses year ended december 31 2010 decreased 46 million compared predecessor company year ended december 31 2009 due lower director officer insurance premiums result contract renegotiations changes coverage limits associated emergence chapter 11 depreciation amortization combined depreciation amortization expense year ended december 31 2010 2378 million compared 5788 million predecessor company year ended december 31 2009 combined amortization intangible assets 1825 million year ended december 31 2010 compared 5146 million predecessor company year ended december 31 2009 decrease combined amortization expense year ended december 31 2010 result reduced carrying values intangible assets subsequent impairment charges recorded predecessor company fourth quarter 2009 partially offset increased amortization expense resulting increase fair value intangible assets result adoption fresh start accounting reduction remaining useful lives intangible assets associated impairment charges recorded predecessor company fourth quarter 2009 combined depreciation fixed assets amortization computer software 553 million year ended december 31 2010 compared 642 million predecessor company year ended december 31 2009 decrease combined depreciation expense year ended december 31 2010 primarily due acceleration depreciation fixed assets longer service year ended december 31 2009 partially offset increase depreciation expense combined year ended december 31 2010 result increase fair value fixed assets computer software conjunction adoption fresh start accounting operating income loss combined adjusted operating income year ended december 31 2010 predecessor company adjusted operating income year ended december 31 2009 follows 1 represents net effect eliminating gross advertising revenues sales claims allowances revenues certain deferred expenses advertising sales fulfilled prior fresh start reporting date would recognized eleven months ended december 31 2010 absent adoption fresh start accounting required gaap b exclusion costuplift recorded fresh start accounting c excludes goodwill nongoodwill intangible asset impairment charges eleven months ended december 31 2010 2 excludes nongoodwill intangible asset impairment charges year ended december 31 2009 combined adjusted operating income year ended december 31 2010 5597 million compares adjusted operating income 5403 million predecessor company year ended december 31 2009 increase combined adjusted operating income year ended december 31 2010 due significant decline amortization expense associated intangible assets lower operating expenses described partially offset declines net revenues described nongaap statistical measures advertising sales nongaap statistical measure consists sales advertising print directories distributed period internetbased products services respect advertising first appeared publicly period important distinguish advertising sales net revenues gaap recognized deferral amortization method advertising sales current periods recognized gross advertising revenues future periods result deferral amortization method revenue recognition combined advertising sales year ended december 31 2010 16710 million representing decline 3205 million 161 advertising sales 19915 million predecessor company year ended december 31 2009 order provide visibility company book revenue future introduced nongaap statistical measure called bookings represent sales activity associated print directories internetbased products services period bookings associated local customers represent signed contracts period bookings associated national customers represent published fulfilled period combined bookings year ended december 31 2010 15667 million representing decline 2831 million 153 bookings 18498 million predecessor company year ended december 31 2009 decrease combined advertising sales combined bookings year ended december 31 2010 result declines new recurring business mainly driven 1 customer attrition 2 declines overall advertising spending clients 3 significant impact weak local business conditions consumer spending clients’ markets 4 increase competition fragmentation local business search decrease combined adjusted advertising sales combined bookings year ended december 31 2010 also result excluding advertising sales bookings associated cmr expect collect recognize revenue 2011 year ended december 31 2009 compared year ended december 31 2008 net revenues components net revenues years ended december 31 2009 2008 follows gross advertising revenues year ended december 31 2009 decreased 4086 million 155 year ended december 31 2008 decline gross advertising revenues year ended december 31 2009 primarily due declines advertising sales past twelve months primarily result declines new recurring business mainly driven 1 declines overall advertising spending businesses 2 significant impact weaker economy smaller businesses markets business 3 increase competition fragmentation local business search market revenues year ended december 31 2009 decreased 73 million 217 year ended december 31 2008 revenues include late fees received outstanding client balances barter revenues commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain advertisingrelated products nongaap statistical measures advertising sales year ended december 31 2009 20286 million compared 25476 million year ended december 31 2008 5190 million 204 decrease advertising sales year ended december 31 2009 result declines new recurring business mainly driven 1 declines overall advertising spending businesses 2 significant impact weaker economy smaller businesses markets business 3 increase competition fragmentation local business search market expenses components total expenses years ended december 31 2009 2008 follows production distribution expenses total production distribution expenses year ended december 31 2009 3753 million compared 4219 million year ended december 31 2008 primary components 466 million 111 decrease production distribution expenses year ended december 31 2009 follows year ended december 31 2009 print paper distribution costs declined 284 million compared year ended december 31 2008 decline primarily due lower page volumes associated declines print advertisements negotiated price reductions print paper expenses refinement distribution scope across markets year ended december 31 2009 internet production distribution costs declined 99 million compared year ended december 31 2008 primarily due reduction headcount outside contractor services partially offset increased costs associated traffic purchased distributed multiple advertiser landing pages selling support expenses total selling support expenses year ended december 31 2009 6103 million compared 6875 million year ended december 31 2008 primary components 772 million 112 decrease selling support expenses year ended december 31 2009 follows year ended december 31 2009 commissions salesperson costs decreased 534 million compared year ended december 31 2008 primarily due lower advertising sales effect variablebased commissions well headcount reductions consolidation responsibilities year ended december 31 2009 directory publishing costs decreased 117 million compared year ended december 31 2008 primarily due lower page volumes associated declines print advertisements well reduction headcount related expenses resulting consolidation publishing graphics operations year ended december 31 2009 selling support related incentive compensation expense declined 66 million compared year ended december 31 2008 primarily due fact company grant stockbased awards year ended december 31 2009 partially offset compensation expense associated 2009 ltip year ended december 31 2009 billing credit collection expenses decreased 55 million compared year ended december 31 2008 primarily due lower costs resulting change vendors later part 2008 lower billing volumes associated declines advertisers print advertisements well headcount reductions consolidation responsibilities year ended december 31 2009 occupancy costs decreased 40 million compared year ended december 31 2008 primarily due lease renegotiations associated filing chapter 11 petitions year ended december 31 2009 bad debt expense increased 82 million 59 compared year ended december 31 2008 primarily due deterioration accounts receivable aging categories increased writeoffs resulting adverse impact clients instability overall economy tightening credit markets year ended december 31 2009 bad debt expense represented 67 net revenue compared 53 year ended december 31 2008 clients fail pay within specified credit terms may cancel advertising future directories could impact ability collect past due amounts well adversely impact advertising sales revenue trends expect economic challenges continue markets bad debt experience continue adversely impacted foreseeable future general administrative expenses ga expenses year ended december 31 2009 977 million compared 1595 million year ended december 31 2008 primary components 618 million 388 decrease ga expenses year ended december 31 2009 follows year ended december 31 2009 restructuring expenses decreased 215 million compared year ended december 31 2008 primarily due lower costs associated outside consultants headcount reductions consolidation responsibilities vacated leased facilities well reclassification certain previously recognized expenses associated chapter 11 proceedings consolidated statement operations year ended december 31 2009 year ended december 31 2009 company recognized onetime net curtailment gains 520 million associated elimination certain retiree health care life insurance benefits union employees year ended december 31 2008 recognized onetime net curtailment gains 380 million associated elimination certain retiree health care life insurance benefits nonunion employees net increase curtailment gains 140 million year ended december 31 2009 presented table year ended december 31 2009 general corporate expenses declined 113 million compared year ended december 31 2008 primarily due declines legal fees associated chapter 11 proceedings declines benefitrelated expenses fees associated outside contractor services year ended december 31 2009 expenses declined 86 million compared year ended december 31 2008 decline primarily due higher spending associated infrastructure support products services enhancements technical support multiple production systems year ended december 31 2008 compared year ended december 31 2009 year ended december 31 2009 ga related incentive compensation expense declined 51 million compared year ended december 31 2008 primarily due fact company grant stockbased awards year ended december 31 2009 partially offset compensation expense associated 2009 ltip depreciation amortization depreciation amortization expense year ended december 31 2009 5788 million compared 4833 million year ended december 31 2008 amortization intangible assets 5146 million year ended december 31 2009 compared 4159 million year ended december 31 2008 increase amortization expense year ended december 31 2009 direct result reducing remaining useful lives associated directory services agreements acquired prior acquisitions 33 years effective january 1 2009 partially offset reduction amortization expense associated revision carrying values local national customer relationships subsequent impairment charges recorded fourth quarter 2008 depreciation fixed assets amortization computer software 643 million year ended december 31 2009 compared 674 million year ended december 31 2008 decrease depreciation expense year ended december 31 2009 primarily due accelerated amortization year ended december 31 2008 associated software projects retired prior initial estimated service life impairment charges result filing chapter 11 petitions company performed impairment tests definitelived intangible assets longlived assets year ended december 31 2009 fourth quarter 2009 conjunction filing amended plan amended disclosure statement company finalized extensive analysis associated emergence chapter 11 company utilized following information assumptions obtained analysis complete impairment evaluation • historical financial information including revenue profit margins customer attrition data price premiums enjoyed relative competing independent publishers • longterm financial projections including limited revenue trends profit margin trends • intangible asset carrying values result impairment tests company recognized impairment charge 73 billion fourth quarter 2009 associated directory services agreements advertiser relationships third party contracts network platforms acquired prior acquisitions fair values intangible assets derived discounted cash flow analysis using discount rate indicative risk market participant would willing accept analysis included review relevant financial metrics peers within industry connection impairment testing 2009 company also evaluated remaining useful lives definitelived intangible assets longlived assets considering among things effects obsolescence demand competition takes consideration price premium benefit company competing independent publishers markets result directory services agreements acquired prior acquisitions economic factors including stability industry operate known technological advances legislative actions result uncertain changing regulatory environment expected changes distribution channels december 31 2009 company determined due compression price premium benefit competing independent publishers markets well decline market share year ended december 31 2009 remaining useful lives directory services agreements acquired prior acquisitions reduced 33 years weighted average remaining useful lives 25 years dex media east 26 years dex media west 29 years att 28 years centurylink effective january 1 2010 based assessment future estimated cash flows increased attrition rates impact longterm financial projections remaining useful lives third party contracts advertiser relationships network platforms acquired prior acquisition reduced 1 5 9 years respectively effective january 1 2010 reduction remaining useful lives necessary order better reflect period intangible assets expected contribute future cash flow result decline trading value debt equity securities 2008 continuing negative industry economic trends directly affected business performed impairment tests goodwill definitelived intangible assets longlived assets used estimates assumptions impairment evaluations including limited projected future cash flows revenue growth customer attrition rates based upon impairment test goodwill recognized goodwill impairment charges 25 billion 6602 million three months ended march 31 2008 june 30 2008 respectively total goodwill impairment charges 31 billion year ended december 31 2008 result impairment charges recorded goodwill december 31 2008 addition result tests company recognized impairment charge 7440 million fourth quarter 2008 associated local national customer relationships acquired prior acquisitions lastly connection launch next version dexknowscom tradenames technology acquired prior acquisition discontinued resulted impairment charge 22 million fourth quarter 2008 total impairment charges related intangible assets excluding goodwill 7462 million year ended december 31 2008 operating loss operating loss years ended december 31 2009 2008 follows nm meaningful operating loss year ended december 31 2009 68 billion compares operating loss 30 billion year ended december 31 2008 change operating loss year ended december 31 2009 operating loss year ended december 31 2008 primarily due significant 2009 intangible asset impairment charges noted well revenue expense trends described partially offset 2008 impairment charges interest expense net contractual interest expense would appeared consolidated statement operations filing chapter 11 petitions 8024 million year ended december 31 2009 net interest expense year ended december 31 2009 4895 million includes 275 million noncash amortization deferred financing costs net interest expense year ended december 31 2008 8355 million includes 290 million noncash amortization deferred financing costs interest expense year ended december 31 2009 includes noncash charge 56 million associated change fair value dex media east interest rate swaps longer deemed financial instruments result filing chapter 11 petitions interest expense year ended december 31 2009 also includes noncash charge 96 million resulting amounts previously charged accumulated comprehensive loss related interest rate swaps amounts previously charged accumulated comprehensive loss related dex media east interest rate swaps amortized interest expense remaining life interest rate swaps based future interest payments probable forecasted transactions occur accordance fresh start accounting reporting unamortized amounts previously charged accumulated comprehensive loss eliminated fresh start reporting date result change fair value interest rate swaps associated amendment rhdi credit facility refinancing former dex media west credit facility june 6 2008 settlement termination certain interest rate swaps second quarter 2009 interest expense includes reduction 107 million year ended december 31 2009 compared noncash charge 37 million year ended december 31 2008 interest expense year ended december 31 2008 also includes noncash charge 210 million resulting amounts previously charged accumulated comprehensive loss related interest rate swaps conjunction acquisition dex media january 31 2006 “dex media merger” result purchase accounting required gaap recorded dex media’s debt fair value january 31 2006 recognized offset interest expense period subsequent dex media merger may 28 2009 amortization corresponding fair value adjustment offset interest expense 77 million year ended december 31 2009 compared 176 million year ended december 31 2008 offset interest expense recognized life respective debt however due filing chapter 11 petitions unamortized fair value adjustments may 28 2009 785 million writtenoff recognized reorganization item consolidated statement operations year ended december 31 2009 decrease net interest expense 3460 million 414 year ended december 31 2009 primarily due 1 ceasing interest expense notes default result filing chapter 11 petitions 2 noncash charge 210 million year ended december 31 2008 resulting amounts previously charged accumulated comprehensive loss noted 3 reduction outstanding debt prior corresponding period due financing transactions conducted latter half 2008 decrease net interest expense year ended december 31 2009 offset 1 noncash charges associated change fair value dex media east interest rate swaps amounts previously charged accumulated comprehensive loss related dex media east interest rate swaps noted 2 reduction interest income associated interest rate swaps due decline interest rates 3 additional interest expense associated borrowing unused portions revolving credit facilities february 13 2009 4 decline offset interest expense associated fair value adjustment dex media’s debt noted gain debt transactions net result voluntary prepayments made rhdi credit facility fourth quarter 2008 recognized gain 200 million year ended december 31 2008 consisting difference face amount term loans repaid voluntary prepayments made offset writeoff unamortized deferred financing costs result debt repurchases october 2008 recorded gain 136 million year ended december 31 2008 consisting difference par value purchase price senior notes offset writeoff unamortized deferred financing costs result debt repurchases september 2008 recorded gain 724 million year ended december 31 2008 representing difference accreted value par value applicable purchase price senior notes senior discount notes offset writeoff unamortized deferred financing costs result exchange senior notes senior discount notes “rhd notes” rhdi’s 1175 senior notes due may 15 2015 “rhdi senior notes” june 25 2008 recorded gain 1613 million year ended december 31 2008 representing difference accreted value par value applicable extinguished rhd notes rhdi senior notes offset writeoff unamortized deferred financing costs related extinguished rhd notes accounted extinguishment debt year ended december 31 2008 recognized charge 22 million writeoff unamortized deferred financing costs associated refinancing former dex media west credit facility portions amended rhdi credit facility accounted extinguishments debt result debt transactions recorded net noncash gain 2652 million year ended december 31 2008 see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies gain loss debt transactions net” additional information reorganization items net year ended december 31 2009 company recorded 948 million reorganization items separate line item consolidated statement operations reorganization items represent charges directly associated process reorganizing business chapter 11 following table displays details reorganization items year ended december 31 2009 company incurred professional fees associated filing chapter 11 petitions 774 million year ended december 31 2009 676 million paid cash professional fees include financial legal valuation services directly associated reorganization process writeoff unamortized deferred financing costs 645 million unamortized net premiums discounts 349 million unamortized fair value adjustments required gaap result dex media merger 785 million may 28 2009 relate longterm debt classified liabilities subject compromise december 31 2009 company recognized 35 million year ended december 31 2009 associated rejected leases abandoned property approved bankruptcy court december 31 2009 part chapter 11 cases 2009 company receive operating cash receipts resulting filing chapter 11 petitions benefit income taxes effective tax rate loss income taxes 126 year ended december 31 2009 compares effective tax rate 357 loss income taxes year ended december 31 2008 significant change effective tax rate year ended december 31 2009 compared year ended december 31 2008 primarily due valuation allowance recorded december 31 2009 noted well tax consequences section 382 limitation recorded year ended december 31 2009 partially offset impairment charges recorded year ended december 31 2008 change effective tax rate year ended december 31 2009 also attributable estimates nondeductible reorganization costs changes estimates state tax apportionment factors impact effective state tax rates 2009 income tax benefit 9285 million comprised federal tax benefit 7835 million state tax benefit 1450 million 2009 federal tax benefit comprised current tax benefit 29 million primarily related decrease federal tax accrual due amended return filings deferred tax benefit 7807 million primarily related noncash intangible asset impairment charges 2009 offset part valuation allowance discussed 2009 state tax benefit 1450 million comprised current tax benefit 118 million relates favorable settlement prior year state tax audits 2009 reversal associated state liabilities deferred tax benefit 1332 million primarily related noncash intangible asset impairment charges 2009 offset part valuation allowance discussed december 31 2009 company federal state net operating loss carryforwards approximately 13154 million net carryback 16859 million respectively begin expire 2020 2010 respectively amounts include consideration net operating losses expected expire unused due internal revenue code section 382 “section 382” limitation changes ownership company believes occurred march 6 2009 section 382 potential limitations triggered ownership change generally defined greater 50 change stock ownership value threeyear period change ownership restrict company’s ability use certain net operating losses corporate tax attributes future however ownership change constitute change control company’s debt agreements contracts provided full valuation allowances state federal net operating loss tax credit carryforwards extent likely deferred tax benefits realized december 31 2009 accordance fasb asc 740 upon evaluation future reversals existing taxable differences taxable income net operating loss carryback years liabilities required asc 740 recorded valuation allowance 15319 million deferred tax assets december 2009 effectively settled issues consideration department finance new york state audit tax years 2000 2006 department revenue north carolina audit tax years 2003 2008 result settlements unrecognized tax benefit associated uncertain state tax positions decreased 76 million new york state 97 million north carolina year ended december 31 2009 decrease unrecognized tax benefits decreased effective tax rate year ended december 31 2009 unrecognized tax benefits impacted new york state north carolina audits primarily related apportionment allocation income among legal entities 2009 company increased liability unrecognized tax benefits 2764 million reflecting uncertainty whether ownership change section 382 discussed occurred prior date elected modify tax classification two subsidiaries date change ownership question balance sheet date company able confirm actual date ownership change sec forms 13g filed stockholders forty five days following end calendar year file forms sec based due date actual ownership change date confirmed february 15 2010 addition increased liability unrecognized tax benefits 15 million relating uncertainty surrounding deductibility certain accrued expenses 2008 income tax benefit 12777 million comprised federal tax benefit 11287 million state tax benefit 1490 million 2008 federal tax benefit comprised current tax provision 239 million primarily related increase fin 48 liability offset deferred income tax benefit 11526 million primarily related goodwill impairment charges 2008 state tax benefit 1490 million comprised current tax provision 103 million relates taxes due states subsidiaries company file separate tax returns well increase fin 48 liability offset deferred income tax benefit 1593 million primarily related goodwill impairment charges 2008 company utilized federal net operating losses income tax purposes 41 million primarily resulting taxable gains associated certain financing activities conducted 2008 income tax benefit includes income tax benefit 203 million correcting overstated income tax expense fiscal years 2004 2007 evaluated materiality correction concluded material current prior year financial statements accordingly recorded correction fourth quarter 2008 september 2008 effectively settled issues consideration department finance new york city related audit taxable year 2000 result settlement unrecognized tax benefits associated uncertain state tax positions decreased 09 million year ended december 31 2008 decrease unrecognized tax benefits decreased effective tax rate year ended december 31 2008 unrecognized tax benefits impacted new york city audit primarily related allocation income among legal entities net loss per share net loss year ended december 31 2009 65 billion compares net loss 23 billion year ended december 31 2008 change net loss year ended december 31 2009 compared year ended december 31 2008 primarily due impairment charges noted well revenue expense trends described partially offset impact reorganization items year ended december 31 2009 calculation basic diluted earnings loss per share “eps” presented 1 due net loss reported years ended december 31 2009 2008 effect stockbased awards antidilutive therefore included calculation diluted eps years ended december 31 2009 2008 46 million shares 41 million shares respectively stockbased awards exercise prices exceeded average market price company’s common stock respective periods liquidity capital resources following table presents fair market value longterm debt december 31 2010 based quoted market prices date well carrying value longterm debt december 31 2010 includes 910 million unamortized fair value discount adjustments required gaap connection company’s adoption fresh start accounting fresh start reporting date see item 8 “financial statements supplementary data” note 3 “fresh start accounting” additional information credit facilities rhdi amended restated credit facility december 31 2010 outstanding balance amended restated rhdi credit facility “rhdi amended restated credit facility” totaled 10145 million rhdi amended restated credit facility requires quarterly principal interest payments option either rhdi amended restated credit facility matures october 24 2014 weighted average interest rate outstanding debt rhdi amended restated credit facility 90 december 31 2010 dex media east amended restated credit facility december 31 2010 outstanding balance amended restated dex media east credit facility “dex media east amended restated credit facility” totaled 7391 million dex media east amended restated credit facility requires quarterly principal interest payments option either • highest prime rate defined dex media east amended restated credit facility ii federal funds effective rate defined dex media east amended restated credit facility plus 050 iii one month libor plus 100 case plus interest rate margin base rate loans interest rate margin base rate loans initially 150 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 150 per annum dme inc’s consolidated dex media east amended restated credit facility matures october 24 2014 weighted average interest rate outstanding debt dex media east amended restated credit facility 28 december 31 2010 dex media west amended restated credit facility december 31 2010 outstanding balance amended restated dex media west credit facility “dex media west amended restated credit facility” totaled 6836 million dex media west amended restated credit facility requires quarterly principal interest payments option either dex media west amended restated credit facility matures october 24 2014 weighted average interest rate outstanding debt dex media west amended restated credit facility 70 december 31 2010 amended restated credit facilities described includes uncommitted revolving credit facility available borrowings 400 million availability uncommitted revolving credit facility subject certain conditions including prepayment term loans amended restated credit facilities amount equal revolving credit facility amended restated credit facilities contain provisions prepayment net proceeds asset dispositions equity issuances debt issuances subject certain exceptions ratable portion net proceeds received company asset dispositions company subject certain exceptions portion excess cash flow amended restated credit facilities described contain certain covenants subject exceptions limit restrict borrower subsidiaries’ incurrence liens investments including acquisitions sales assets indebtedness payment dividends distributions payments certain indebtedness sale leaseback transactions swap transactions affiliate transactions capital expenditures mergers liquidations consolidations amended restated credit facility also contains certain covenants subject exceptions limit restrict borrower’s incurrence liens indebtedness ownership assets sales assets payment dividends distributions modifications 3000 million aggregate principal amount 1214 senior subordinated notes due 2017 “dex one senior subordinated notes” borrower required maintain compliance consolidated leverage ratio covenant rhdi dmw inc also required maintain compliance consolidated interest coverage ratio covenant dmw inc also required maintain compliance consolidated senior secured leverage ratio covenant dex media west amended restated credit agreement includes option additional covenant relief senior secured leverage covenant fourth quarter 2011 subject increased amortization loans first quarter 2012 increase excess cash flow sweep 2011 payment 25 basis point fee ratably lenders dex media west amended restated credit agreement march 31 2010 company exercised senior secured leverage ratio election defined dex media west amended restated credit agreement company incurred fee 21 million exercise option obligations amended restated credit facilities guaranteed subsidiaries secured lien substantially subsidiaries’ tangible intangible assets including pledge stock respective subsidiaries well mortgage certain real property pursuant shared guaranty collateral agreement subject intercreditor agreement among administrative agents amended restated credit facilities company subject certain exceptions certain subsidiaries company guaranty obligations amended restated credit facilities obligations secured lien substantially guarantors’ tangible intangible assets company’s subsidiary businesscom including pledge stock respective subsidiaries well mortgage certain real property notes dex one senior subordinated notes effective date issued 3000 million dex one senior subordinated notes exchange dex media west 85 senior notes due 2010 5875 senior notes due 2011 interest dex one senior subordinated notes payable semiannually march 31st september 30th year commencing march 31 2010 january 2017 dex one senior subordinated notes accrue interest annual rate 12 cash interest payments 14 company elects paidinkind “pik” interest payments company may elect prior start interest payment period whether make interest payment dex one senior subordinated notes entirely cash ii 50 cash 50 pik interest capitalized incremental additional senior secured notes eleven months ended december 31 2010 company elected make interest payments entirely cash interest rate dex one senior subordinated notes may subject adjustment event company incurs certain specified debt higher effective yield maturity yield maturity dex one senior subordinated notes dex one senior subordinated notes unsecured obligations company effectively subordinated right payment company’s existing future secured debt including dex one’s guarantee borrowings amended restated credit facilities structurally subordinated existing future liabilities including trade payables direct indirect subsidiaries indenture governing dex one senior subordinated notes contains certain covenants subject certain exceptions among things limit restrict company’s certain cases company’s restricted subsidiaries’ incurrence indebtedness making certain restricted payments incurrence liens entry transactions affiliates conduct business merger consolidation sale substantially property indenture governing dex one senior subordinated notes also requires company offer repurchase dex one senior subordinated notes par certain changes control involving company sale substantially assets company holders dex one senior subordinated notes also may cause company repurchase dex one senior subordinated notes price 101 principal amount upon incurrence company certain acquisition indebtedness dex one senior subordinated notes remaining face value 3000 million december 31 2010 redeemable option beginning 2011 following prices percentage face value item 8 “financial statements supplementary data” note 6 “longterm debt credit facilities notes” additional information longterm debt impact fresh start accounting conjunction adoption fresh start accounting adjustment established record outstanding debt fair value fresh start reporting date company required record amended restated credit facilities discount result fair value fresh start reporting date therefore carrying amount debt obligations lower principal amount due maturity total discount 1202 million recorded upon adoption fresh start accounting associated amended restated credit facilities 910 million remains unamortized december 31 2010 shown following table see item 8 “financial statements supplementary data” note 3 “fresh start accounting” presentation impact emergence reorganization fresh start accounting financial position results operations cash flows issuance new common stock upon emergence chapter 11 pursuant plan issued outstanding shares predecessor company’s common stock outstanding equity securities predecessor company including stock options sars restricted stock cancelled effective date company issued aggregate amount 50000001 shares new common stock par value 001 per share see item 8 “financial statements supplementary data” note 15 “capital stock” additional information regarding new common stock registration rights agreement effective date pursuant plan company entered registration rights agreement “agreement” requiring company register securities exchanges commission “sec” certain shares common stock andor dex one senior subordinated notes upon request one eligible holders defined agreement accordance terms conditions set forth therein april 8 2010 pursuant agreement company filed shelf registration statement register resale franklin advisers inc certain affiliates 15262488 shares common stock 1166 million aggregate principal amount dex one senior subordinated notes securities registered pursuant agreement permit sale securities time fixed prices prevailing market prices times sale prices related prevailing market prices varying prices determined times sale negotiated prices shelf registration statement became effective april 16 2010 liquidity cash flows company’s primary sources liquidity existing cash hand cash flows generated operations company’s primary liquidity requirements fund operations service indebtedness company’s ability meet debt service requirements dependent ability generate sufficient cash flows operations primary sources cash flows consist mainly cash receipts sale marketing solutions impacted among factors general local business conditions increase competition fragmentation local business search market consumer confidence level demand advertising products services conjunction going concern analysis december 31 2010 based current financial projections event next 1215 months company expects able continue generate cash flows operations amounts sufficient fund operations capital expenditures well meet debt service requirements company’s financial projections also include excess cash flow used fund additional debt repayments resulting cash flow sweep requirements amended restated credit facilities however assurances made business generate sufficient cash flows operations enable us fund prospective cash requirements since current information used going concern analysis december 31 2010 could change future result changes estimates assumptions well risks noted item 1a “risk factors” provided amended restated credit facilities company’s operating subsidiaries permitted fund share parent company’s interest obligations dex one senior subordinated notes addition operating subsidiaries permitted send 5 million annually parent company use unrestricted basis funds based percentage operating subsidiaries’ excess cash flow defined credit agreement may provided parent company fund specific activities acquisitions lastly operating subsidiaries fund proportionate basis expenses paid parent company fund daily operations operating subsidiaries excluding limited exceptions noted net assets company subsidiaries restricted paid dividends third party subsidiaries restricted paying dividends loans advances us terms amended restated credit facilities company currently believes limitations restrictions imposed amended restated credit facilities noted impact ability fund operations capital expenditures well meet debt service requirements specifically parent company level however assurances made limitations restrictions impact ability fund operations capital expenditures well meet debt service requirements specifically parent company level future see item 1a “risk factors” additional information regarding risks uncertainties associated business could significant impact future liquidity cash flows see item 7 “management’s discussion analysis financial condition results operations” “recent trends developments related business” additional information related trends uncertainties respect business could significant impact future liquidity cash flows successor company aggregate outstanding debt december 31 2010 27372 million includes fair value adjustments 910 million required gaap connection company’s adoption fresh start accounting eleven months ended december 31 2010 made scheduled accelerated principal payments 1676 million 3890 million respectively total principal payments 5566 million amended restated credit facilities eleven months ended december 31 2010 made aggregate net cash interest payments 1822 million december 31 2010 1279 million cash equivalents checks yet presented payment 172 million cash provided operating activities 5124 million eleven months ended december 31 2010 key components operating cash flow include following • 9236 million net loss includes goodwill nongoodwill intangible asset impairment charges offset impact tax benefit recognized eleven months ended december 31 2010 • 5417 million net noncash items consisting goodwill nongoodwill intangible asset impairment charges 11593 million offset 6176 million deferred income taxes includes tax impact goodwill nongoodwill intangible asset impairment charges • 1584 million noncash reduction goodwill related finalization cancellation indebtedness income tax attribute reduction calculations associated fresh start accounting • 2887 million net noncash items primarily consisting 2177 million depreciation amortization 241 million noncash items primarily associated amortization debt fair value adjustments resulting adoption fresh start accounting 178 million restructuring expenses 164 million bad debt provision increase interest expense 82 million associated change fair value interest rate swaps caps 45 million stockbased compensation expense • 7638 million net source cash increase deferred directory revenues 7016 million primarily due elimination predecessor company’s deferred directory revenues fresh start accounting recording deferred directory revenues company directories published subsequent fresh start reporting date decrease accounts receivable 622 million change deferred revenues accounts receivable analyzed together given fact directory published annual billable value directory initially deferred unbilled accounts receivable established month thereafter typically one twelfth billing value recognized revenues billed clients • 1423 million net use cash increase assets consisting 1565 million increase current noncurrent assets primarily due elimination predecessor company’s deferred commissions print paper delivery costs fresh start accounting recording deferred commissions print paper delivery costs company directories published subsequent fresh start reporting date well changes fair value company’s interest rate caps offset 142 million decrease prepaid directory costs resulting publication seasonality • 50 million net use cash decrease accounts payable accrued liabilities resulting 331 million decrease accrued liabilities primarily associated change fair value interest rate swaps 28 million decrease trade accounts payable offset increase accrued interest payable 309 million • 1693 million decrease noncurrent liabilities primarily resulting deferred income taxes change fair value interest rate swaps cash used investing activities eleven months ended december 31 2010 356 million relates purchase fixed assets primarily computer equipment software leasehold improvements 365 million offset proceeds sale assets 09 million cash used financing activities eleven months ended december 31 2010 5484 million includes following • 5566 million principal payments amended restated credit facilities • 12 million debt issuance costs financing items net • 95 million increased balance checks yet presented payment predecessor company one month ended january 31 2010 predecessor company made principal payments 5113 million credit facilities accordance plan conjunction emergence chapter 11 made aggregate net cash interest payments 155 million cash provided operating activities 717 million one month ended january 31 2010 key components operating cash flow include following • 69200 million net income includes gain reorganization fresh start accounting adjustments 77931 million • 78301 million noncash reorganization items net • 9450 million net noncash items primarily consisting 9169 million deferred income taxes 202 million depreciation amortization 78 million bad debt provision increase interest expense 23 million associated change fair value predecessor company’s interest rate swaps 06 million stockbased compensation expense 28 million noncash items primarily related predecessor company’s pension adjustments • 170 million net use cash decrease deferred directory revenues 368 million primarily due lower advertising sales offset net decrease accounts receivable 198 million comprised decrease accounts receivable 276 million offset provision bad debts 78 million change deferred revenues accounts receivable analyzed together given fact directory published annual billable value directory initially deferred unbilled accounts receivable established month thereafter typically one twelfth billing value recognized revenues billed clients • 107 million net source cash decrease assets consisting 70 million decrease prepaid directory costs resulting publication seasonality 37 million decrease current noncurrent assets primarily relating deferred commissions print paper delivery costs • 96 million net source cash increase accounts payable accrued liabilities primarily resulting increase 220 million trade accounts payable increase accrued interest payable 03 million partially offset 127 million decrease accrued liabilities changes comprise items reclassified liabilities subject compromise consolidated balance sheet january 31 2010 source cash increase accounts payable accrued liabilities direct result filing chapter 11 petitions whereby payment prepetition obligations delayed • 334 million increase noncurrent liabilities primarily resulting deferred taxes change fair value predecessor company’s interest rate swaps well change pension postretirement longterm liabilities cash used investing activities one month ended january 31 2010 18 million relates purchase fixed assets primarily computer equipment software leasehold improvements cash used financing activities one month ended january 31 2010 5365 million includes following • 5113 million principal payments term loans predecessor company’s credit facilities accordance plan conjunction emergence chapter 11 • 221 million costs associated issuance dex one senior subordinated notes financing related costs • 31 million decreased balance checks yet presented payment cash provided operating activities 5158 million year ended december 31 2009 key components operating cash flow include following • 64533 million net loss includes impact intangible asset impairment charges • 64239 million net noncash items consisting intangible asset impairment charges 73378 million offset 9139 million deferred income taxes includes tax impact intangible asset impairment charges • 7912 million net noncash items primarily consisting 5788 million depreciation amortization 1465 million bad debt provision 251 million noncash items primarily related amortization deferred financing costs 176 million associated net reorganization items 114 million stockbased compensation expense increase interest expense 105 million associated change fair value interest rate swaps 13 million restructuring expenses • 1716 million net use cash decrease deferred directory revenues 2263 million primarily due lower advertising sales offset net decrease accounts receivable 547 million comprised decrease accounts receivable 2012 million offset provision bad debts 1465 million 2009 company experienced deterioration accounts receivable aging categories driven weaker economic conditions change deferred revenues accounts receivable analyzed together given fact directory published annual billable value directory initially deferred unbilled accounts receivable established month thereafter typically one twelfth billing value recognized revenues billed clients • 392 million net source cash decrease assets consisting 412 million decrease current noncurrent assets primarily relating deferred commissions print paper delivery costs changes fair value company’s interest rate swap agreements offset 20 million increase prepaid directory costs resulting publication seasonality • 89 million net source cash increase accounts payable accrued liabilities primarily resulting increase accrued interest payable 651 million 137 million increase accrued liabilities offset 699 million decrease trade accounts payable changes comprise items included liabilities subject compromise consolidated balance sheet december 31 2009 source cash increase accounts payable accrued liabilities direct result filing chapter 11 petitions whereby payment prepetition obligations delayed • 1225 million decrease noncurrent liabilities primarily resulting deferred taxes change pension postretirement longterm liabilities change fair value interest rate swaps cash used investing activities year ended december 31 2009 334 million relates purchase fixed assets primarily computer equipment software leasehold improvements cash provided financing activities year ended december 31 2009 523 million includes following • 2901 million principal payments term loans secured credit facilities • 3610 million borrowings revolvers company made borrowings various revolving credit facilities preserve financial flexibility light continuing uncertainty global credit markets • 187 million principal payments revolvers offbalance sheet arrangements company offbalance sheet arrangements contractual obligations contractual obligations table presented sets forth annual commitments principal interest payments debt well cash obligations next five years thereafter december 31 2010 debt repayments presented table include scheduled principal payments current debt agreements well estimate additional debt repayments resulting cash flow sweep requirements amended restated credit facilities amended restated credit facilities require certain percentage annual excess cash flow defined debt agreements used repay amounts amended restated credit facilities debt repayments exclude fair value adjustments required gaap result adoption fresh start accounting 910 million adjustments impact payment obligations 1 included longterm debt principal amounts owed amended restated credit facilities dex one senior subordinated notes including current portion longterm debt estimate additional debt repayments resulting cash flow sweep requirements amended restated credit facilities december 31 2010 2 interest debt represents cash interest payment obligations assuming indebtedness december 31 2010 paid accordance contractual maturity assumes interest rates variable interest debt december 31 2010 remain unchanged future periods please refer “liquidity capital resources” interest rates amended restated credit facilities dex one senior subordinated notes 3 enter operating leases normal course business substantially lease agreements fixed payment terms lease agreements provide us renewal early termination options future operating lease obligations would change exercised renewal early termination options entered additional operating lease agreements amounts table assume exercise renewal early termination options 4 connection software system modernization ongoing support services obligated pay outsource service provider approximately 450 million years 2011 2012 effective january 1 2010 internet yellow pages reseller agreement amended restated whereby obligated pay att 218 million years 2011 2012 entered directory advertisement agreement cmr cover advertising placed company cmr behalf qwest agreement obligated pay cmr approximately 52 million commissions years 2011 2014 5 defined benefit plans covering substantially employees funding policy contribute amount least equal minimum legal funding requirement based past performance uncertainty dollar amounts paid excluded amounts table see item 8 “financial statements supplementary data” note 10 “benefit plans” information related benefit plans expected future benefit payments including administrative expenses net employee contributions included table expect make contributions approximately 160 million 11 million pension plans postretirement plan respectively 2011 item 7aitem 7 managements discussion analysis financial condition results operations item read conjunction audited consolidated financial statements notes thereto included item 8 “financial statements supplementary data” unless otherwise indicated context may otherwise indicate terms “dex one” “successor company” “company” “parent company” “we” “us” “our” refer dex one corporation direct indirect whollyowned subsidiaries subsequent effective date defined financial information set forth annual report unless otherwise indicated context may otherwise indicate reflects consolidated results operations financial position dex one year ended december 31 2011 eleven months ended december 31 2010 dex one became successor registrant rh donnelley corporation “rhd” “predecessor company” “we” “us” “our” operations prior january 29 2010 “effective date” upon emergence chapter 11 proceedings title 11 united states code “chapter 11” effective date financial information set forth annual report unless otherwise indicated context may otherwise indicate reflects consolidated results operations financial position rhd one month ended january 31 2010 year ended december 31 2009 may 28 2009 predecessor company subsidiaries filed voluntary petitions chapter 11 relief united states bankruptcy court district delaware “bankruptcy court” january 12 2010 bankruptcy court entered findings fact conclusions law order confirming joint plan reorganization predecessor company subsidiaries “plan” plan became effective accordance terms effective date see annual report form 10k year ended december 31 2010 detailed information following matters associated chapter 11 proceedings • predecessor company’s filing voluntary positions chapter 11 • confirmed plan emergence chapter 11 proceedings • restructuring conducted connection emergence chapter 11 proceedings • consummation plan • impact longterm debt upon emergence chapter 11 proceedings • accounting matters resulting chapter 11 proceedings recent trends developments related business results operations discussed “results operations” continue experience lower advertising sales related print products primarily result declines new recurring business including renewal incremental sales existing advertisers mainly driven 1 customer attrition 2 declines overall advertising spending customers 3 significant impact weak local business conditions consumer spending customers’ markets 4 increase competition fragmentation local business search 5 migration customers digital marketing solutions evidenced continued decline net revenues cash flows year ended december 31 2011 compared prior year apart impact net revenues result fresh start accounting discussed despite challenges associated print products seen growth digital advertising sales driven new partnerships entered 2011 focus providing targeted solution bundled packages customers new digital products services introduced 2011 well migration customers digital marketing solutions advancements helped partially offset decline print advertising sales company currently projects challenging conditions associated print products continue foreseeable future print advertising sales operating results cash flow liquidity continue adversely impacted therefore company’s historical operating results indicative future operating performance although longterm financial forecast currently anticipates material improvement local business conditions markets 2013 earliest fully described “results operations net revenues” method recognizing revenue deferral amortization method results delayed recognition advertising sales whereby recognized revenues reflect amortization advertising sales consummated prior periods well advertising sales consummated current period accordingly company’s projected decline print advertising sales result decline revenue recognized future periods addition improvements local business conditions anticipated longterm financial forecast significant immediate impact revenues plan fully described item 1 “business” marketing solutions company helps local businesses consumers connect proprietary affiliate provided marketing solutions combine multiple media platforms help drive large volumes consumer leads customers assist customers managing presence among consumers proprietary marketing solutions include dex published yellow pages directories internet yellow pages site dexknowscom mobile applications dex mobile citycentral digital lead generation solutions powered search engine marketing product dexnet extends customers’ reach leading internet mobile partners attract consumers searching local businesses products services within markets response challenges noted working improve value deliver customers 1 providing targeted solution bundles combine offline online media platforms included launch dex guaranteed actions dga program 2011 2 expanding number platforms media deliver message consumers growing list marketing solutions includes local business market analysis message image creation target market identification advertising digital profile creation web sites mobile web sites reputation management online video development promotion keyword optimization strategies programs distribution strategies social strategies tracking reporting addition company process transitioning competeandcollaborate business model believe partnerships enable us offer broader robust array products services customers would able proprietary basis without risks capital investment ongoing maintenance associated development house also continue invest business people strategic programs initiatives technology 1 dex one account management system provides ability customers log make realtime changes online marketing well view realtime performance data also enables marketing consultants construct proposals mobile devices wherever may 2 dex one sales academy provides initial training ongoing knowledge skills enhancement additional support marketing consultants throughout business 3 digital media learning program introduced 2011 marketing consultants obtain google sales certification 4 sales force technology introduction webex virtual sales presentations telephone marketing consultants purchase ipads premise marketing consultants recently made strategic change centralize telephone marketing consultants local markets three inside sales center locations overland park kansas denver colorado omaha nebraska locations able leverage scale resources allow greater efficiency focus equally across geography serve well market opportunities also able utilize state art telephone technology increase reach contact rates efficiencies overland park center completed 2011 anticipate transition denver omaha completed first second quarters 2012 respectively local business conditions recover markets believe strategic investments help us drive incremental revenue time also continue actively manage expenses considering acting upon various initiatives opportunities streamline operations reduce cost structure commenced significant initiative fourth quarter 2010 implementing restructuring plan realigns internal resources better support base business ensure organizational structure optimized compete rapidly evolving marketplace “restructuring actions” restructuring actions continued throughout 2011 include headcount reductions consolidation responsibilities vacating leased facilities result restructuring actions company recorded restructuring charge earnings 186 million fourth quarter 2010 related severance 07 million paid cash year ended december 31 2011 company recorded additional restructuring charge earnings 250 million made cash payments 319 million related severance vacating leased facilities related restructuring activities see item 8 “financial statements supplementary data” note 4 “restructuring charges” additional information company continues evaluate options reducing leverage extending maturities credit facilities reducing refinancing risk strategic alternatives response challenging industry environment companys strategic objective build existing strengths assets maximize value shareholders constituents alternatives include potential modifications credit facilities addition joint ventures partnerships acquisitions business combinations within industry complementary industries liquidity going concern analysis fully described “liquidity capital resources” company’s primary sources liquidity existing cash hand cash flows generated operations primary liquidity requirements fund operations service indebtedness company’s projected decline advertising sales result decline cash flows future periods addition improvements local business conditions anticipated longterm financial forecast improvements significant impact cash flows however despite projected decline advertising sales cash flows result emergence chapter 11 proceedings restructuring predecessor company’s outstanding debt based current financial projections company expects able continue generate cash flows operations amounts sufficient fund operations meet debt service requirements least next 1215 months company’s goodwill impairment charge second quarter 2011 noted affect ability continue going concern permitted exclude charges debt covenant evaluations impairment analysis company reviews carrying value goodwill definitelived intangible assets longlived assets whenever events circumstances indicate carrying amount may recoverable company concluded triggering events measure impairment three months ended december 31 2011 september 30 2011 one month ended june 30 2011 three months ended march 31 2011 respectively based upon continued decline trading value debt equity securities revisions made longterm forecast changes management company concluded indicators impairment may 31 2011 result performed impairment tests goodwill definitelived intangible assets longlived assets may 31 2011 impairment testing results recoverability definitelived intangible assets longlived assets indicated recoverable thus impairment test required may 31 2011 based upon testing results goodwill determined remaining goodwill assigned reporting units fully impaired thus recognized aggregate goodwill impairment charge 8011 million second quarter 2011 recorded reporting units december 31 2011 company recorded goodwill reporting units see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies identifiable intangible assets goodwill” additional information see “results operations factors affecting comparability” company’s presentation nongaap adjusted results 2011 industry local business conditions markets deteriorate excess current estimates potentially resulting declines advertising sales operating results trading value debt equity securities continue decline significantly required assess recoverability useful lives intangible assets longlived assets factors including changes assumptions used impairment analysis result factors could result future impairment charges reduction remaining useful lives associated intangible assets longlived assets acceleration amortization expense fresh start accounting company adopted fresh start accounting reporting february 1 2010 “fresh start reporting date” net revenues operating results significantly impacted 2010 adoption fresh start accounting fresh start reporting date see “results operations factors affecting comparability” additional information impact fresh start accounting company’s presentation nongaap combined adjusted results 2010 labor unions unionized employees represented either international brotherhood electrical workers america “ibew” communication workers america “cwa” dex media’s collective bargaining agreement ibew expires may 2012 dex media’s collective bargaining agreement cwa expires september 2012 climate change growing concern global climate change emissions carbon dioxide concern led possibility federal climate change legislation well litigation relating greenhouse gas emissions cannot predict impact proposed legislation final believe current regulation litigation related global climate change likely material impact business future financial position results operations cash flow accordingly current financial projections include impact climate change regulation litigation healthcare reform legislation march 2010 patient protection affordable care act healthcare education reconciliation act 2010 signed law significant impact financial position results operations cash flows result new legislation anticipate significant impact foreseeable future segment reporting periods covered annual report management reviews analyzes business providing marketing solutions one operating segment new accounting pronouncements september 2011 financial accounting standards board “fasb” issued accounting standards update “asu” 201108 intangibles goodwill topic 350 testing goodwill impairment “asu 201108” asu 201108 simplifies entities test goodwill impairment permitting entities first assess qualitative factors determine whether likely fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test described topic 350 likely threshold defined likelihood 50 percent entity required calculate fair value reporting unit unless entity determines based qualitative assessment likely fair value less carrying amount asu 201108 also improves previous guidance expanding upon examples events circumstances entity consider annual impairment tests determining whether likely fair value reporting unit less carrying amount asu 201108 effective annual interim goodwill impairment tests performed fiscal years beginning december 15 2011 early adoption permitted company’s goodwill fully impaired second quarter 2011 time adoption asu 201108 impact financial position result operations june 2011 fasb issued asu 201105 comprehensive income topic 220 presentation comprehensive income “asu 201105” asu 201105 allows entity option present total comprehensive income components net income components comprehensive income either single continuous statement comprehensive income two separate consecutive statements choices entity required present component net income along total net income component comprehensive income along total comprehensive income total amount comprehensive income asu 201105 eliminates option present components comprehensive income part statement changes shareholders equity asu 201105 change items must reported comprehensive income item comprehensive income must reclassified net income asu 201105 applied retrospectively effective fiscal years interim periods within years beginning december 15 2011 december 2011 fasb issued asu 201112 comprehensive income topic 220 deferral effective date amendments presentation reclassifications items accumulated comprehensive income accounting standards update 201105 asu 201112 asu 201112 defers effective date provisions included asu 201105 require entities present reclassification adjustments accumulated comprehensive income component statement net income presented statement comprehensive income presented interim annual financial statements asu 201112 states entities must continue report reclassification adjustments accumulated comprehensive income consistent presentation requirements effect asu 201105 adoption asu 201105 affect reporting information noted impact financial position result operations company currently evaluating presentation alternatives noted asu 201105 monitoring fasbs deliberations regarding asu 201112 may 2011 fasb issued asu 201104 fair value measurement topic 820 amendments achieve common fair value measurement disclosure requirements us gaap ifrss “asu 201104’ asu 201104 issued provide consistent definition fair value ensure fair value measurement disclosure requirements similar us generally accepted accounting principles “gaap” international financial reporting standards asu 201104 clarifies fasb’s intent application existing fair value measurement disclosure requirements changes certain fair value measurement principles enhances fair value disclosure requirements asu 201104 effective interim annual reporting periods beginning december 15 2011 applied prospectively company expect adoption asu 201104 impact financial position results operations reviewed accounting pronouncements issued december 31 2011 company yet adopted believe pronouncements material impact financial position operating results critical accounting estimates preparation financial statements accordance gaap requires management estimate effect various matters inherently uncertain date financial statements estimates varies regard level judgment involved potential impact company’s predecessor company’s reported financial results estimates deemed critical different estimate could reasonably used changes estimate reasonably likely occur period could materially impact company’s predecessor company’s financial condition changes financial condition results operations company’s significant accounting policies december 31 2011 discussed item 8 “financial statements supplementary data” note 2 “summary significant accounting policies” critical estimates inherent accounting policies december 31 2011 discussed management believes current assumptions considerations used estimate amounts company’s consolidated financial statements appropriate intangible assets goodwill valuation amortization goodwill 21 billion recorded connection company’s adoption fresh start accounting discussed item 8 “financial statements supplementary data” note 3 “fresh start accounting reorganization items net” represented excess reorganization value dex one fair value identified tangible intangible assets goodwill amortized subject impairment testing annual basis october 31st frequently indicators potential impairment exist goodwill tested impairment reporting unit level represents one level operating segment accordance fasb accounting standards codification “asc” 350 intangibles goodwill “fasb asc 350” december 31 2011 company’s reporting units rhdi dex media east inc “dme inc” dex media west inc “dmw inc” intangible assets originated prior acquisitions consist directory services agreements b local national customer relationships c trademarks trade names technology advertising commitments intangible assets amortized estimated useful lives manner best reflects economic benefit derived assets company reviews carrying value goodwill definitelived intangible assets longlived assets whenever events circumstances indicate carrying amount may recoverable company reviewed following information estimates assumptions determine indicators impairment existed year ended december 31 2011 • historical financial information including revenue profit margins customer attrition data price premiums enjoyed relative competing independent publishers • longterm financial projections including limited revenue trends profit margin trends • intangible asset longlived asset carrying values changes current future use • trading values debt equity securities • companyspecific information company concluded triggering events measure impairment three months ended december 31 2011 september 30 2011 one month ended june 30 2011 three months ended march 31 2011 respectively based upon continued decline trading value debt equity securities revisions made longterm forecast changes management company concluded indicators impairment may 31 2011 result identifying indicators impairment performed impairment test goodwill accordance fasb asc 350 impairment recoverability test definitelived intangible assets longlived assets accordance fasb asc 360 property plant equipment “fasb asc 360” may 31 2011 testing results definitelived intangible assets longlived assets indicated recoverable thus impairment test required may 31 2011 based upon testing results goodwill determined remaining goodwill assigned reporting units fully impaired thus recognized aggregate goodwill impairment charge 8011 million second quarter 2011 goodwill impairment charge recorded reporting units follows goodwill impairment charge impact current future operating cash flow compliance debt covenants since remaining goodwill assigned reporting units fully impaired second quarter 2011 annual impairment test goodwill performed october 31 2011 december 31 2011 company recorded goodwill reporting units based upon decline trading value debt equity securities changes management among indicators company performed impairment tests goodwill definitelived intangible assets longlived assets september 30 2010 june 30 2010 result impairment tests recognized nongoodwill intangible asset impairment charge associated trade names trademarks technology local customer relationships former businesscom reporting unit 216 million goodwill impairment charge 11376 million total impairment charge 11593 million eleven months ended december 31 2010 fourth quarter 2010 company recognized reduction goodwill 1584 million related finalization cancellation indebtedness income tax attribute reduction calculations required performed december 31 2010 associated fresh start accounting change carrying amount goodwill since established fresh start accounting fresh start reporting date follows result filing chapter 11 petitions finalizing extensive analysis associated emergence chapter 11 predecessor company performed impairment tests definitelived intangible assets longlived assets 2009 result impairment tests predecessor company recognized nongoodwill intangible asset impairment charge 73378 million year ended december 31 2009 associated directory services agreements advertiser relationships third party contracts network platforms acquired prior acquisitions see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies identifiable intangible assets goodwill” annual report form 10k year ended december 31 2010 information company’s predecessor company’s impairment testing goodwill definitelived intangible assets longlived assets critical estimates assumptions methodologies used impairment testing impairment charges recognized year ended december 31 2011 eleven months ended december 31 2010 year ended december 31 2009 december 31 2011 net carrying value intangible assets totaled 21821 million amortization expense related company’s intangible assets 1871 million year ended december 31 2011 1670 million eleven months ended december 31 2010 amortization expense predecessor company one month ended january 31 2010 year ended december 31 2009 156 million 5146 million respectively aggregate net book value intangible assets december 31 2011 impaired incremental 1 net loss year ended december 31 2011 would adversely impacted approximately 176 million see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies identifiable intangible assets goodwill” additional information intangible assets combined weighted average useful life identifiable intangible assets december 31 2011 20 years weighted average useful lives amortization methodology identifiable intangible assets december 31 2011 shown following table 1 identifiable intangible assets amortized income forecast method assumes value derived intangible assets greater earlier years steadily declines time company evaluates remaining useful lives identifiable intangible assets longlived assets whenever events circumstances indicate revision remaining period amortization warranted estimated remaining useful lives change remaining carrying amount intangible assets longlived assets would amortized prospectively revised remaining useful life company evaluated remaining useful lives identifiable intangible assets longlived assets year ended december 31 2011 considering among things effects obsolescence demand competition takes consideration price premium benefit competing independent publishers markets result directory services agreements acquired prior acquisitions economic factors including stability industry operate known technological advances legislative actions result uncertain changing regulatory environment expected changes distribution channels based evaluation december 31 2011 company determined estimated useful lives intangible assets presented reflect period expected contribute future cash flows therefore deemed appropriate conjunction impairment testing may 31 2011 evaluation remaining useful lives identifiable intangible assets longlived assets company determined estimated useful lives intangible assets continued deemed appropriate however revisions longterm forecast used impairment testing may 31 2011 direct impact timing amortization expense associated intangible assets amortized using income forecast method company experienced increase amortization expense 343 million 2011 resulting changes remaining useful lives intangible assets shortened 10 net loss year ended december 31 2011 would adversely impacted 157 million industry local business conditions markets deteriorate excess current estimates potentially resulting declines advertising sales operating results trading value debt equity securities continue decline significantly required assess recoverability useful lives intangible assets longlived assets factors including changes assumptions used impairment analysis result factors could result future impairment charges reduction remaining useful lives associated intangible assets longlived assets acceleration amortization expense fresh start accounting company adopted fresh start accounting reporting fresh start reporting date accordance fasb asc 852 reorganizations “fasb asc 852” holders existing voting shares immediately confirmation plan received less 50 voting shares emerging entity reorganization value company’s assets immediately date confirmation less postpetition liabilities allowed claims fasb asc 852 reorganization value represents fair value entity considering liabilities approximates amount willing buyer would pay assets company immediately restructuring reorganization value allocated respective fair value assets excess reorganization value fair value identified tangible intangible assets recorded goodwill liabilities deferred taxes stated present values amounts expected paid fair values assets liabilities represented best estimates based independent appraisals valuations foregoing available industry data trends references relevant market rates transactions used estimates assumptions subject significant uncertainties beyond reasonable control see annual report form 10k year ended december 31 2010 detailed information critical estimates assumptions methodologies used determining company’s enterprise value reorganization value fair values assets liabilities fresh start accounting well impact emergence reorganization fresh start accounting financial position results operations cash flows income taxes account income taxes asset liability method accordance fasb asc 740 income taxes “fasb asc 740” deferred income tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting adjust deferred income tax liabilities assets appropriate reflect changes tax rates expected effect temporary differences reverse establish valuation allowance offset deferred income tax assets based available evidence likely deferred income tax assets realized recognize uncertain income tax positions taken expected taken tax returns largest amount likely sustained upon audit relevant taxing authority uncertain income tax position recognized less 50 likelihood sustained company’s policy recognize interest penalties related unrecognized tax benefits income tax expense see item 8 “financial statements supplementary data” note 7 “income taxes” information regarding provision benefit income taxes ordinary course business may many transactions calculations ultimate tax outcome uncertain calculation tax liabilities involves uncertainties application complex tax laws company recognizes potential liabilities anticipated tax audit issues based estimate ultimate resolution whether extent additional taxes due although company believes estimates reasonable assurance given final outcome matters different reflected historical income tax provisions accruals part company’s financial reporting process must assess likelihood deferred income tax assets recovered unless recovery likely provision taxes must increased recording reserve form valuation allowance deferred income tax assets likely recovered process certain relevant criteria evaluated including existence deferred income tax liabilities used absorb deferred income tax assets taxable income future years company’s judgment regarding future taxable income may change due future market conditions changes us tax laws factors changes may require material adjustments deferred income tax assets accompanying adjustment net income loss period determinations made addition company operates multiple taxing jurisdictions subject audit jurisdictions audits involve complex issues may require extended period time resolve company maintains liability estimated income tax exposures opinion adequate provision income taxes made years allowance doubtful accounts sales claims company records revenue net allowance sales claims addition company records provision bad debts provision bad debts allowance sales claims estimated based historical experience company also evaluates current condition client balances bankruptcy filings change credit policy historical chargeoff patterns recovery rates data determining allowance doubtful accounts reserve company reviews estimates periodically assess whether additional adjustment needed based economic events circumstances including actual experience end billing collection cycle company believes allowance doubtful accounts sales claims adequate cover anticipated losses current conditions however significant deterioration factors noted overall economy could materially change expectations provisions sales claims doubtful accounts estimated based percentage revenue accordingly additional 1 change either allowance percentages would impacted net loss year ended december 31 2011 approximately 121 million pension benefits company’s pension plan obligations related assets defined benefit pension plans presented item 8 “financial statements supplementary data” note 9 “benefit plans” plan assets consist primarily marketable equity debt instruments valued using market quotations determination plan obligations annual pension expense requires management make number assumptions key assumptions measuring plan obligations include discount rate longterm expected return plan assets year ended december 31 2011 eleven months ended december 31 2010 one month ended january 31 2010 year ended december 31 2009 company predecessor company utilized outsource provider’s yield curve determine appropriate discount rate defined benefit pension plans based individual plans’ expected future cash flows asset returns based upon longterm anticipated average rate earnings expected invested funds plan salary increase assumptions based upon historical experience anticipated future management actions following assumptions used determining company’s net periodic benefit expense income dex one retirement plan dex media pension plan following assumptions used determining predecessor company’s net periodic benefit expense income dex one retirement plan dex media pension plan net periodic pension expense recognized company year ended december 31 2011 10 million 1 increase discount rate would affect net loss year ended december 31 2011 approximately 08 million 1 decrease discount rate would affect net loss year ended december 31 2011 approximately 01 million 1 increase decrease longterm rate return plan assets would affect net loss year ended december 31 2011 approximately 15 million net periodic pension income expense recognized company predecessor company eleven months ended december 31 2010 one month ended january 31 2010 year ended december 31 2009 35 million 01 million 78 million respectively december 31 2011 settlements dex one retirement plan dex media pension plan dex one pension benefit equalization plan occurred may 31 2011 settlements dex media pension plan occurred times lump sum payments participants exceeded sum service cost plus interest cost components net periodic benefit expense year settlements resulted recognition actuarial losses 27 million year ended december 31 2011 second quarter 2010 recognized onetime curtailment gain 38 million associated departure company’s former chief executive officer 2009 predecessor company froze current defined benefit plans covering cwa ibew represented employees curtailed retiree health care life insurance benefits covering cwa ibew represented employees result implementing freeze defined benefit plans covering cwa ibew represented employees predecessor company recognized onetime net curtailment gain 42 million year ended december 31 2009 entirely offset losses incurred plan assets previously unrecognized prior service costs charged accumulated comprehensive loss result eliminating retiree health care life insurance benefits cwa ibew represented employees predecessor company recognized onetime curtailment gain 520 million year ended december 31 2009 stockbased compensation fair value stock options stock appreciation rights “sars” market condition calculated using blackscholes model time stockbased awards granted fair value stock options sars market condition calculated using monte carlo model time stockbased awards granted use blackscholes monte carlo models require significant judgment use estimates particularly assumptions expected volatility riskfree interest rates expected lives value stockbased awards forfeiture rates recognize stockbased compensation expense derived service periods allocation stockbased compensation expense associated stockbased awards market condition company granted 18 million stock options sars 06 million shares restricted stock year ended december 31 2011 company granted 21 million stock options sars 02 million shares restricted stock eleven months ended december 31 2010 predecessor company grant stock options sars restricted stock one month ended january 31 2010 year ended december 31 2009 company used estimated weighted average forfeiture rate determining stockbased compensation expense 63 89 year ended december 31 2011 eleven months ended december 31 2010 respectively predecessor company used estimated weighted average forfeiture rate determining stockbased compensation expense 80 first quarter 2009 102 remainder 2009 january 2010 following assumptions used valuing stockbased awards recognition allocation stockbased compensation expense year ended december 31 2011 eleven months ended december 31 2010 since company recently emerged bankruptcy sufficient companyspecific historical data order determine certain assumptions used valuing stockbased awards company utilized data industry sources peer competitive company data order estimate expected volatility assumption used valuing stockbased awards year ended december 31 2011 eleven months ended december 31 2010 expected life represents period time stockbased awards granted expected outstanding company estimated expected life using simplified method permitted staff accounting bulletin 110 use simplified method developing expected term share options stockbased awards satisfied “plain vanilla” criteria simplified method calculates expected life average vesting contractual terms award riskfree interest rate based applicable us treasury yields approximate expected life stockbased awards granted company year ended december 31 2011 eleven months ended december 31 2010 company used actual voluntary turnover data estimate weighted average forfeiture rate predecessor company used historical data estimate weighted average forfeiture rate one month ended january 31 2010 year ended december 31 2009 estimated forfeitures adjusted extent actual forfeitures differ expected materially differ estimates derived service periods associated stockbased awards market condition calculated determining average time company’s stock price reached given exercise price across monte carlo simulations stock price reach exercise price company excluded paths assumptions reflect best estimates involve inherent uncertainties based certain conditions generally outside control result assumptions used total stockbased compensation expense could materially impacted furthermore use different assumptions future grants stockbased compensation expense could materially impacted future periods see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies stockbased awards” note 8 “stock incentive plans” additional information fair value financial instruments december 31 2011 2010 fair value cash equivalents accounts receivable net accounts payable accrued liabilities approximated carrying value based net shortterm nature instruments company’s assets liabilities fair valued fresh start reporting date connection adoption fresh start accounting see annual report form 10k year ended december 31 2010 detailed information methodology assumptions used value assets liabilities conjunction adoption fresh start accounting estimates fair value may affected assumptions made accordingly necessarily indicative amounts company could realize current market exchange fasb asc 820 fair value measurements disclosures “fasb asc 820” defines fair value establishes fair value hierarchy prioritizes inputs valuation techniques used measure fair value expands disclosures fair value measurements fasb asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy gives highest priority quoted prices active markets comprised following three levels level 1 unadjusted quoted market prices active markets identical assets liabilities level 2 observable inputs level 1 inputs quoted prices similar assets liabilities quoted prices markets insufficient volume infrequent transactions modelderived valuations significant inputs observable derived principally corroborated observable market data substantially full term assets liabilities level 3 prices valuations require inputs significant measurement unobservable required fasb asc 820 assets liabilities classified based lowest level input significant fair value measurement company’s assessment significance particular input fair value measurement requires judgment may affect valuation fair value assets liabilities placement within fair value hierarchy levels company interest rate swaps notional amount 5000 million interest rate caps notional amount 4000 million december 31 2011 2010 measured fair value recurring basis following table presents company’s assets liabilities measured fair value recurring basis december 31 2011 2010 respectively level within fair value hierarchy fair value measurements included transfers assets liabilities levels 1 2 3 year ended december 31 2011 eleven months ended december 31 2010 company established policy recognizing transfers levels fair value hierarchy end reporting period company’s longterm debt obligations measured fair value recurring basis however present fair value dex one senior subordinated notes defined “liquidity capital resources” amended restated credit facilities item 8 “financial statements supplementary data” note 5 “longterm debt credit facilities notes” company utilized quoted market prices available compute fair market value longterm debt obligations december 31 2011 2010 dex one senior subordinated notes categorized within level 1 fair value hierarchy amended restated credit facilities categorized within level 2 fair value hierarchy valuation techniques interest rate swaps interest rate caps fair value marketbased measure considered perspective market participant holds asset owes liability rather entityspecific measure therefore even market assumptions readily available company’s assumptions set reflect market participants would use pricing asset liability measurement date company uses prices inputs current measurement date fair value derivative instruments derived using pricing models based market approach pricing models take account relevant observable market inputs market participants would use pricing asset liability pricing models used determine fair value derivative instruments incorporate specific contract terms valuation inputs including effective dates maturity dates interest rate swap pay rates interest rate cap rates notional amounts disclosed presented item 8 “financial statements supplementary data” note 6 “derivative financial instruments” interest rate yield curves creditworthiness counterparty company counterparty credit risk company’s credit risk could material impact fair value derivative instruments results operations financial condition particular reporting period december 31 2011 impact applying counterparty credit risk determining fair value derivative instruments increase derivative instruments liability less 01 million december 31 2011 impact applying company’s credit risk determining fair value derivative instruments decrease derivative instruments liability 11 million many pricing models entail material subjectivity methodologies employed necessitate significant judgment pricing inputs observed actively quoted markets case derivative instruments pricing models used company widely accepted financial services industry noted derivative instruments categorized within level 2 fair value hierarchy fair value control processes interest rate swaps interest rate caps company employs control processes validate fair value derivative instruments derived pricing models control processes designed assure values used financial reporting based observable inputs wherever possible event observable inputs available control processes designed assure valuation approach utilized appropriate consistently applied assumptions reasonable benefit plan assets fair value assets held dex one retirement account master trust “master trust” december 31 2011 2010 asset category follows category includes investments us government bonds government mortgagebacked securities indexlinked government bonds guaranteed commercial paper shortterm treasury bills notes fair value assets determined using bid evaluation process observable market based inputs effective last business day plan year b category includes investments two commoncollective funds 82 invested stocks comprising russell 1000 equity index remaining 18 comprised shortterm investments december 31 2011 89 invested stocks comprising russell 1000 equity index remaining 11 comprised shortterm investments december 31 2010 fair value assets calculated based upon compilation observable market information c category includes investments corporate bonds commercial mortgagebacked assetbacked securities collateralized mortgage obligations commercial paper fair value assets determined using bid evaluation process observable market based inputs effective last business day plan year category includes investments small cap stocks across diverse industries fair value assets determined using quoted market prices recognized securities exchange last reported trading price last business day plan year e category comprised one mutual fund invests intermediate term fixed income instruments treasuries high grade corporate bonds fair value assets determined using quoted market prices recognized securities exchange last reported trading price last business day plan year f category comprised healthcare real estate investment trust fair value assets determined based exchange traded market prices g category includes investments combination 5 10 20 year us treasury bond futures equity index futures credit default swaps fair value assets determined based either settlement prices recognized securities exchange midbid evaluation process using observable market based inputs h category includes investments passively managed funds composed international stocks across diverse industries fair value assets calculated based upon compilation observable market information asset management committee “amc” appointed compensation benefits committee company’s board directors named fiduciary plan matters relating plan investments asset management amc authority appoint retain monitor remove custodian investment manager responsible establishing maintaining funding investment policy master trust see item 8 “financial statements supplementary data” note 9 “benefit plans” information regarding benefit plans results operations factors affecting comparability fresh start accounting adjustments nongaap analysis successor company adopted fresh start accounting reporting fresh start reporting date financial statements fresh start reporting date report results dex one beginning retained earnings accumulated deficit presentation dex one represents financial position results operations new reporting entity comparable prior periods presented predecessor company financial statements periods ended prior fresh start reporting date include effect changes predecessor company’s capital structure changes fair value assets liabilities result fresh start accounting result deferral amortization method revenue recognition recognized gross advertising revenues reflect amortization advertising sales consummated prior periods well current period adoption fresh start accounting significant impact financial position results operations successor company commencing fresh start reporting date consistent predecessor company’s historical application purchase method accounting business combinations included fasb asc 805 business combinations fresh start accounting precluded us recognizing advertising revenue certain expenses associated advertising sales fulfilled prior fresh start reporting date thus reported results eleven months ended december 31 2010 indicative underlying operating financial performance comparable current period presentation adoption fresh start accounting impact cash flows operations accordingly management provided nongaap analysis compares net revenues depreciation amortization expenses consolidated statements operations following periods • gaap results successor company year ended december 31 2011 nongaap combined adjusted results year ended december 31 2010 • nongaap combined adjusted results year ended december 31 2010 predecessor company’s gaap results year ended december 31 2009 nongaap combined adjusted results 1 combines gaap results successor company eleven months ended december 31 2010 gaap results predecessor company one month ended january 31 2010 2 adjusts combined amounts eliminate fresh start accounting impact revenue certain related expenses noted ii exclude costuplift recorded fresh start accounting deferred directory costs included prepaid expenses current assets consolidated balance sheet print paper distribution commissions relate directories yet published deferred directory costs recorded fair value determined estimated billable value published directory less b expected costs complete directory plus c normal profit margin incremental fresh start accounting adjustment step recorded value deferred directory costs fair value hereby referred “costuplift” costuplift amortized terms applicable directories exceed twelve months allocated production distribution expenses selling support expenses based upon category deferred directory costs fair valued fresh start accounting immaterial impact results operations year ended december 31 2011 therefore adjusted gaap results period nongaap analysis management believes presentation nongaap combined adjusted results help financial statement users better understand material impact fresh start accounting successor company’s results operations eleven months ended december 31 2010 also offers nongaap normalized comparison gaap results successor company year ended december 31 2011 gaap results predecessor company year ended december 31 2009 nongaap combined adjusted results presented reconciled comparable gaap measures nongaap combined adjusted results exclude effects fresh start accounting must noted nongaap combined adjusted results comparable successor company’s gaap results year ended december 31 2011 predecessor company’s gaap results year ended december 31 2009 treated impairment charges nongaap analysis successor company removed goodwill impairment charge recognized second quarter 2011 totaling 8011 million gaap results year ended december 31 2011 presenting nongaap adjusted results impairment charges operating income loss consolidated statement operations period successor company also removed goodwill nongoodwill intangible asset impairment charges totaling 11593 million gaap results eleven months ended december 31 2010 presenting nongaap combined adjusted results impairment charges operating income loss consolidated statement operations period predecessor company removed nongoodwill intangible asset impairment charge totaling 73378 million gaap results year ended december 31 2009 presenting nongaap adjusted results impairment charges operating income loss consolidated statement operations period gaap analysis order emphasize importance gaap results management also provided separate gaap analysis following periods • gaap results successor company predecessor company line items operating income loss consolidated statements operations years ended december 31 2011 2009 respectively management believes line items combined compared nongaap analysis noted based upon distinct differences composition successor company predecessor company reporting periods presented • gaap results successor company predecessor company eleven months ended december 31 2010 one month ended january 31 2010 respectively line items operating income loss consolidated statements operations comprise nongaap combined adjusted results included nongaap analysis noted line items operating income loss combined compared reasons discussed gaap analysis includes discussion results individual reporting period however provide comparison results individual reporting periods due reasons discussed reclassifications conjunction restructuring actions commenced fourth quarter 2010 resulting changes organizational structure certain prior period amounts included consolidated statements operations reclassified conform current period’s presentation see item 8 “financial statements supplementary data” note 4 “restructuring charges” additional information reclassifications impact operating income loss net income loss eleven months ended december 31 2010 one month ended january 31 2010 year ended december 31 2009 gaap results net revenues depreciation amortization expenses nongaap adjusted results impairment charges operating income loss year ended december 31 2011 compared nongaap combined adjusted results year ended december 31 2010 net revenues components gaap net revenues year ended december 31 2011 nongaap combined adjusted net revenues year ended december 31 2010 follows 1 represents gross advertising revenues sales claims allowances revenues advertising sales fulfilled prior fresh start reporting date would recognized eleven months ended december 31 2010 absent adoption fresh start accounting required gaap advertising revenues earned primarily sale advertising yellow pages directories publish advertising revenues also include revenues internetbased marketing solutions including online directories dexknowscom dexnet advertising revenues affected several factors including changes quantity size characteristics advertisements acquisition new customers renewal rates existing customers premium advertisements sold changes advertisement pricing introduction new marketing solutions increase competition fragmentation local business search market general economic factors revenues respect print advertising internetbased marketing solutions sold print advertising recognized deferral amortization method whereby revenues initially deferred directory published net sales claims allowances recognized ratably directory’s life typically 12 months revenues respect internetbased marketing solutions sold standalone dexnet recognized ratably life contract commencing first delivered fulfilled revenues respect marketing solutions performancebased recognized service delivered fulfilled commencing late 2011 company began offer customers ability purchase digital marketing solutions shorter time frames standard one year contract gaap gross advertising revenues year ended december 31 2011 decreased 3101 million 174 nongaap combined adjusted gross advertising revenues year ended december 31 2010 decline gaap gross advertising revenues year ended december 31 2011 related print products primarily result continuing declines new recurring business mainly driven 1 customer attrition 2 declines overall advertising spending customers 3 significant impact weak local business conditions consumer spending customers’ markets 4 increase competition fragmentation local business search 5 migration customers digital marketing solutions decline gaap gross advertising revenues also result recognizing approximately one month revenues businesscom 2011 compared full year revenues 2010 due sale substantially net assets businesscom february 2011 well recognizing revenues 2011 associated certified marketing representative “cmr” financial distress winding operations declines gaap print advertising revenues partially offset increased gaap advertising revenues associated digital marketing solutions driven new partnerships entered 2011 focus providing targeted solution bundled packages customers new digital products services introduced 2011 well migration customers digital marketing solutions gaap sales claims allowances year ended december 31 2011 decreased 115 million 420 nongaap combined adjusted sales claims allowances year ended december 31 2010 decline gaap sales claims allowances year ended december 31 2011 primarily due lower claims experience result process improvements operating efficiencies improved print copy quality certain markets well lower advertising sales volume expenses components gaap nongaap adjusted expenses year ended december 31 2011 nongaap combined adjusted expenses year ended december 31 2010 follows 1 represents certain deferred expenses advertising sales fulfilled prior fresh start reporting date would recognized eleven months ended december 31 2010 absent adoption fresh start accounting required gaap b exclusion costuplift recorded fresh start accounting 2 goodwill impairment charge removed gaap results year ended december 31 2011 goodwill nongoodwill intangible asset impairment charges removed gaap results eleven months ended december 31 2010 certain costs directly related selling production directories initially deferred amortized ratably life directories deferral amortization method accounting match revenue recognized relating directories cost recognition commencing month directory distribution substantially complete costs specifically identifiable particular directory include sales commissions print paper initial distribution costs sales commissions include amounts paid employees sales local customers cmrs act channel national customers expenses sales person salaries sales manager compensation sales office occupancy publishing information technology services specifically identifiable particular directory recognized incurred except certain expenses associated advertising sales fulfilled prior fresh start reporting date fresh start accounting precluded us recognizing costs recognized reporting period consist costs incurred period fully recognized period ii costs incurred prior period portion amortized recognized current period iii costs incurred current period portion amortized recognized current period balance deferred future periods consequently difference costs recognized given period costs incurred given period may significant production distribution expenses gaap production distribution expenses year ended december 31 2011 2872 million compared nongaap combined adjusted production distribution expenses 3215 million year ended december 31 2010 primary components 343 million 107 decrease gaap production distribution expenses year ended december 31 2011 follows gaap internet production distribution expenses year ended december 31 2011 declined 239 million compared nongaap combined adjusted internet production distribution expenses year ended december 31 2010 decline gaap internet production distribution expenses primarily result recognizing approximately one month expenses businesscom 2011 compared full year expenses 2010 due sale substantially net assets businesscom february 2011 declines partially offset increased purchased traffic costs direct traffic website driven higher cost per click rates gaap print paper distribution expenses year ended december 31 2011 declined 108 million compared nongaap combined adjusted print paper distribution expenses year ended december 31 2010 primarily due lower page volumes associated declines print advertisements selling support expenses gaap selling support expenses year ended december 31 2011 4268 million compared nongaap combined adjusted selling support expenses 5060 million year ended december 31 2010 primary components 792 million 157 decrease gaap selling support expenses year ended december 31 2011 follows gaap commissions salesperson expenses year ended december 31 2011 decreased 217 million compared nongaap combined adjusted commissions salesperson expenses year ended december 31 2010 primarily due lower advertising sales effect variablebased commissions lower headcount declines commissions associated cmr financial distress winding operations partially offset increase salesperson training expenses gaap marketing expenses year ended december 31 2011 declined 193 million compared nongaap combined adjusted marketing expenses year ended december 31 2010 due lower headcount reduced interactive marketing spend primarily related sale substantially net assets businesscom february 2011 noted gaap bad debt expense year ended december 31 2011 declined 130 million compared nongaap combined adjusted bad debt expense year ended december 31 2010 primarily due effective credit collections practices driven improvement accounts receivable portfolio well lower billing volumes associated declines advertisers advertising sales partially offset writeoff experience associated cmr referenced impact allowance factors gaap bad debt expense year ended december 31 2011 represented 35 net revenue compared 37 nongaap combined adjusted year ended december 31 2010 gaap advertising expenses year ended december 31 2011 decreased 111 million compared nongaap combined adjusted advertising expenses year ended december 31 2010 primarily due reduction media spend 2011 gaap directory publishing expenses year ended december 31 2011 declined 65 million compared nongaap combined adjusted directory publishing expenses year ended december 31 2011 primarily due declines print advertisements lower headcount gaap billing credit collection expenses year ended december 31 2011 declined 47 million compared nongaap combined adjusted billing credit collection expenses year ended december 31 2011 primarily due lower headcount general administrative expenses gaap general administrative “ga” expenses year ended december 31 2011 1441 million compared nongaap combined adjusted ga expenses 1571 million year ended december 31 2010 primary components 130 million 83 decrease gaap ga expenses year ended december 31 2011 follows nongaap combined adjusted year ended december 31 2010 recognized expenses 95 million associated departure former chief executive officer comparable expenses recognized year ended december 31 2011 gaap expenses year ended december 31 2011 declined 50 million compared nongaap combined adjusted expenses year ended december 31 2010 primarily due lower headcount fourth quarter 2010 commenced restructuring actions continued throughout 2011 result restructuring actions company recognized restructuring charge 250 million year ended december 31 2011 fourth quarter 2010 company recorded restructuring charge 186 million associated restructuring actions represents increase restructuring expenses 64 million year ended december 31 2011 decrease net year ended december 31 2011 49 million primarily due declines general corporate expenses primarily related lower headcount lower professional dues fees depreciation amortization expenses gaap depreciation amortization expenses year ended december 31 2011 2518 million compared combined depreciation amortization expenses 2379 million year ended december 31 2010 gaap amortization intangible assets 1871 million year ended december 31 2011 compared combined amortization intangible assets 1826 million year ended december 31 2010 increase gaap intangible asset amortization expense year ended december 31 2011 primarily result additional amortization expense associated revisions longterm forecast direct impact timing amortization expense associated intangible assets amortized using income forecast method see additional information income forecast amortization methodology assumes value derived intangible assets associated amortization expense greater earlier years steadily declines time increase gaap intangible asset amortization expense offset recognizing amortization expense businesscom intangible assets 2011 intangible assets fully impaired 2010 well impact income forecast amortization methodology discussed conjunction impairment testing may 31 2011 company evaluated remaining useful lives identifiable intangible assets longlived assets based evaluation company determined estimated useful lives intangible assets continued deemed appropriate may 31 2011 however revisions longterm forecast used impairment testing may 31 2011 direct impact timing amortization expense associated intangible assets amortized using income forecast method company experienced increase amortization expense 343 million 2011 resulting changes see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies identifiable intangible assets goodwill” additional information gaap depreciation fixed assets amortization computer software 647 million year ended december 31 2011 compared combined depreciation 553 million year ended december 31 2010 increase gaap depreciation expense year ended december 31 2011 primarily due software development capital projects placed service later part 2010 first half 2011 well accelerated depreciation expense related facilities abandoned result restructuring actions impairment charges based upon continued decline trading value debt equity securities revisions made longterm forecast changes management company concluded indicators impairment may 31 2011 result performed impairment tests goodwill definitelived intangible assets longlived assets may 31 2011 impairment testing results recoverability definitelived intangible assets longlived assets indicated recoverable thus impairment test required may 31 2011 based upon testing results goodwill determined remaining goodwill assigned reporting units fully impaired thus recognized aggregate goodwill impairment charge 8011 million second quarter 2011 recorded reporting units december 31 2011 company recorded goodwill reporting units three months ended september 30 2010 june 30 2010 company concluded indicators impairment result performed impairment tests goodwill definitelived intangible assets longlived assets september 30 2010 june 30 2010 testing results definitelived intangible assets longlived assets resulted nongoodwill intangible asset impairment charge 43 million 173 million three months ended september 30 2010 june 30 2010 respectively total nongoodwill intangible asset impairment charge 216 million eleven months ended december 31 2010 associated trade names trademarks technology local customer relationships former businesscom reporting unit company also recognized goodwill impairment charge 3853 million 7523 million three months ended september 30 2010 june 30 2010 respectively total goodwill impairment charge 11376 million eleven months ended december 31 2010 resulting impairment testing recorded reporting units sum goodwill nongoodwill intangible asset impairment charges totaled 11593 million eleven months ended december 31 2010 see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies identifiable intangible assets goodwill” additional information impairment charges operating income loss nongaap adjusted operating income loss year ended december 31 2011 nongaap combined adjusted operating income loss year ended december 31 2010 follows 1 represents net effect eliminating gross advertising revenues sales claims allowances revenues certain deferred expenses advertising sales fulfilled prior fresh start reporting date would recognized eleven months ended december 31 2010 absent adoption fresh start accounting required gaap b exclusion costuplift recorded fresh start accounting c exclusion goodwill nongoodwill intangible asset impairment charges eleven months ended december 31 2010 2 goodwill impairment charge removed gaap results year ended december 31 2011 nongaap adjusted operating income year ended december 31 2011 3707 million compares nongaap combined adjusted operating income 5597 million year ended december 31 2010 decrease nongaap adjusted operating income year ended december 31 2011 primarily due continuing declines print revenue well increase depreciation amortization expenses described partially offset operating expense trends also described gaap results year ended december 31 2011 eleven months ended december 31 2010 successor company one month ended january 31 2010 predecessor company successor company year ended december 31 2011 gain sale assets february 14 2011 completed sale substantially net assets businesscom including longlived assets domain names trademarks brands intellectual property related content technology platform result recognized gain sale assets 134 million year ended december 31 2011 interest expense net interest expense company 2268 million year ended december 31 2011 net interest expense trending downward due lower outstanding debt result mandatory accelerated debt repayments conjunction adoption fresh start accounting reporting fresh start reporting date adjustment established record outstanding debt fair value fresh start reporting date fair value adjustment amortized increase interest expense remaining term respective debt agreements using effective interest method impact future scheduled interest principal payments amortization fair value adjustment included increase interest expense 278 million year ended december 31 2011 first quarter 2010 entered interest rate swap interest rate cap agreements designated cash flow hedges company’s interest expense includes income 34 million year ended december 31 2011 resulting change fair value interest rate swaps interest rate caps income taxes year ended december 31 2011 recorded income tax benefit 1248 million represents effective tax rate 194 effective tax rate year ended december 31 2011 differs federal statutory rate 350 primarily due state income taxes nondeductible goodwill impairment changes deferred tax liabilities related stock basis subsidiaries internal revenue code irc section 1245 recapture changes recorded valuation allowances decreases liability unrecognized tax benefits adjustments related filing consolidated federal income tax return income tax benefit 1248 million year ended december 31 2011 comprised federal tax benefit 929 million state tax benefit 318 million federal tax benefit 929 million comprised current tax benefit 189 million primarily related decreases liability unrecognized tax benefits deferred tax benefit 740 million due changes temporary differences related goodwill impairment changes deferred tax liabilities relating stock basis subsidiaries irc section 1245 recapture changes recorded valuation allowances year ended december 31 2011 state tax benefit 318 million comprised current tax provision 29 million primarily related suspension net operating loss carryforwards certain states deferred tax benefit 347 million primarily due changes temporary differences related goodwill impairment changes liabilities relating stock basis subsidiaries year ended december 31 2011 company recorded goodwill impairment charge 8011 million second quarter 2011 4572 million related nondeductible goodwill impairment nondeductible goodwill reduced income tax benefit impairment 1772 million decreased effective tax rate 275 year ended december 31 2011 goodwill impairment charge recognized second quarter 2011 gave rise deferred tax asset whose realization meet morelikelythannot threshold therefore requiring valuation allowance addition changes deferred tax assets liabilities primarily related filing 2010 consolidated federal tax return resulted increases valuation allowance year ended december 31 2011 resulting increase income tax expense year ended december 31 2011 512 million decreased effective tax rate 80 year ended december 31 2011 upon emergence bankruptcy company recorded deferred tax liabilities related excess financial statement carrying amount tax basis investments certain subsidiaries irc section 1245 recapture goodwill impairment charge reduced financial statement carrying amount investments certain subsidiaries also caused reduction deferred tax liabilities resulting reduction income tax expense year ended december 31 2011 related change deferred tax liabilities 811 million increased effective tax rate 126 year ended december 31 2011 june 15 2011 federal statute limitations closed tax year prior uncertain tax position related revenue recognition established result company decreased liability unrecognized tax benefits associated federal state uncertain tax position 282 million recorded tax benefit 240 million year ended december 31 2011 increased effective tax rate 37 year ended december 31 2011 year ended december 31 2011 company increased liability unrecognized tax benefits 52 million primarily related uncertainty realization certain tax attributes available reduction irc section 108 reduced income tax benefit 51 million decreased effective tax rate 08 year ended december 31 2011 third quarter 2011 company increased liability unrecognized tax benefits 18 million related exclusion nonbusiness income state illinois fourth quarter 2011 company reached settlement state illinois eliminated related liability unrecognized tax benefits net loss per share net loss 5190 million year ended december 31 2011 directly impacted goodwill impairment charge revenue expense trends described partially offset income tax benefit described basic diluted earnings loss per share “eps” 1035 year ended december 31 2011 see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies earnings loss per share” details computations basic diluted eps nongaap statistical measures advertising sales nongaap statistical measure consists sales advertising print directories distributed period internetbased products services respect advertising first appeared publicly period important distinguish advertising sales net revenues gaap recognized deferral amortization method advertising sales current periods recognized gross advertising revenues future periods result deferral amortization method revenue recognition advertising sales year ended december 31 2011 13899 million representing decline 2343 million 144 combined advertising sales 16242 million year ended december 31 2010 order provide visibility company book revenue future presenting additional nongaap statistical measure called bookings represent sales activity associated print directories internetbased marketing solutions period bookings associated local customers represent signed contracts period bookings associated national customers represent published fulfilled period bookings year ended december 31 2011 12939 million representing decline 2261 million 149 combined bookings 15200 million year ended december 31 2010 decrease advertising sales bookings year ended december 31 2011 related print products result continuing declines new recurring business mainly driven 1 customer attrition 2 declines overall advertising spending customers 3 significant impact weak local business conditions consumer spending customers’ markets 4 increase competition fragmentation local business search 5 migration customers digital marketing solutions declines print advertising sales partially offset increased advertising sales associated digital marketing solutions driven new partnerships entered 2011 focus providing targeted solution bundled packages customers new digital products services introduced 2011 well migration customers digital marketing solutions successor company eleven months ended december 31 2010 net revenues components net revenues eleven months ended december 31 2010 follows gross advertising revenues 8244 million eleven months ended december 31 2010 exclude 7993 million gross advertising revenues resulting adoption fresh start accounting gross advertising revenues impacted continuing declines advertising sales related print products primarily result declines new recurring business mainly driven 1 customer attrition 2 declines overall advertising spending customers 3 significant impact weak local business conditions consumer spending customers’ markets 4 increase competition fragmentation local business search 5 migration customers digital marketing solutions sales claims allowances 99 million eleven months ended december 31 2010 exclude 140 million sales claims allowances resulting adoption fresh start accounting sales claims allowances affected lower claims experience due process improvements operating efficiencies improved print copy quality certain markets well lower advertising sales volume revenues 164 million eleven months ended december 31 2010 exclude 56 million revenues resulting adoption fresh start accounting revenues include late fees received outstanding customer balances barter revenues commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain advertisingrelated products expenses components total expenses eleven months ended december 31 2010 follows production distribution expenses total production distribution expenses 2133 million eleven months ended december 31 2010 production distribution expenses comprised items print paper distribution expenses internet production distribution expenses amortization costuplift associated print paper distribution expenses resulting adoption fresh start accounting result adoption fresh start accounting production distribution expenses eleven months ended december 31 2010 exclude amortization deferred directory costs deferral amortization method directories published fresh start reporting date totaling 888 million include amortization costuplift 75 million print paper distribution expenses impacted lower page volumes associated declines print advertisements negotiated price reductions print paper expenses internet production distribution expenses affected reduction dexnet customers purchasing efficiencies lower headcount partially offset increased purchased traffic costs incurred direct traffic online properties selling support expenses total selling support expenses 3861 million eleven months ended december 31 2010 selling support expenses comprised items bad debt expense commissions salesperson expenses directory publishing expenses billing credit collection expense occupancy expenses advertising expense amortization cost uplift associated commissions resulting adoption fresh start accounting due adoption fresh start accounting selling support expenses eleven months ended december 31 2010 exclude amortization deferred directory costs deferral amortization method directories published fresh start reporting date totaling 838 million include amortization costuplift 48 million bad debt expense impacted lower writeoff experience resulting effective credit collections practices driven improvement accounts receivable portfolio well lower billing volumes associated declines advertisers partially offset increase bad debt provision delinquent balances associated cmr customers fail pay within specified credit terms may cancel advertising future directories could impact ability collect past due amounts well adversely impact advertising sales revenue trends commissions salesperson expenses affected lower advertising sales effect variablebased commissions well lower headcount directory publishing expenses affected declines print advertisements lower headcount occupancy expenses impacted renegotiation leased properties reduction amount leased square footage bankruptcy process general administrative expenses ga expenses 1488 million eleven months ended december 31 2010 ga expenses comprised items restructuring expenses general corporate expenses incentive compensation expense expenses ga related incentive compensation expense pertains expense associated sars grant made march 1 2010 certain employees including executive officers common stock issued members company’s board directors march 1 2010 common stock issued members executive oversight committee september 13 2010 stock based awards granted mr mockett september 13 2010 compensation expense associated company’s longterm incentive program “2009 ltip” includes accelerated compensation expense associated departure former chief executive officer depreciation amortization depreciation amortization expense 2177 million eleven months ended december 31 2010 amortization intangible assets 1670 million eleven months ended december 31 2010 impacted increase fair value intangible assets establishment estimated useful lives resulting adoption fresh start accounting depreciation fixed assets amortization computer software 507 million eleven months ended december 31 2010 affected increase fair value fixed assets computer software resulting adoption fresh start accounting well capital projects placed service eleven months ended december 31 2010 impairment charges based upon decline trading value debt equity securities changes management among indicators company performed impairment tests goodwill definitelived intangible assets longlived assets september 30 2010 june 30 2010 testing results definitelived intangible assets longlived assets resulted impairment charge associated trade names trademarks technology local customer relationships former businesscom reporting unit 43 million 173 million three months ended september 30 2010 june 30 2010 respectively total nongoodwill intangible asset impairment charge 216 million eleven months ended december 31 2010 testing results goodwill resulted impairment charge 3853 million 7523 million three months ended september 30 2010 june 30 2010 respectively total goodwill impairment charge 11376 million eleven months ended december 31 2010 sum goodwill nongoodwill intangible asset impairment charges totaled 11593 million eleven months ended december 31 2010 operating loss operating loss 12943 million eleven months ended december 31 2010 fresh start accounting deferred net revenues related directories published prior fresh start reporting date eliminated however certain deferred direct expenses related directories eliminated expenses directly associated net revenues directories continue recognized period expenses subsequent fresh start reporting date fresh start accounting disproportionate adverse effect reported net revenues versus expenses determining operating loss eleven months ended december 31 2010 month subsequent fresh start reporting date impact fresh start accounting expires first quarter 2011 ratio reported net revenue expense increase operating loss eleven months ended december 31 2010 directly impacted goodwill nongoodwill intangible asset impairment charges noted significant effects fresh start accounting well revenue expense trends described interest expense net interest expense 2495 million eleven months ended december 31 2010 conjunction adoption fresh start accounting reporting fresh start reporting date adjustment established record outstanding debt fair value fresh start reporting date fair value adjustment amortized increase interest expense remaining term respective debt agreements using effective interest method impact future scheduled interest principal payments amortization fair value adjustment included increase interest expense 293 million eleven months ended december 31 2010 first quarter 2010 entered interest rate swap interest rate cap agreements designated cash flow hedges company’s interest expense eleven months ended december 31 2010 includes expense 82 million resulting change fair value interest rate swaps interest rate caps income taxes effective tax rate loss income taxes 402 eleven months ended december 31 2010 effective tax rate benefit 402 higher federal statutory tax rate 350 primarily due increases income tax benefits recognition unrecognized tax position offset part increase income tax expense related nondeductible impairment charge income tax benefit 6201 million eleven months ended december 31 2010 comprised federal tax benefit 5677 million state tax benefit 524 million federal tax benefit 5677 million comprised current tax provision 13 million primarily related unrecognized tax benefits deferred tax benefit 5690 million primarily related current year net operating loss recognition unrecognized tax position goodwill impairment charges eleven months ended december 31 2010 state tax benefit 524 million comprised current tax benefit 38 million primarily related expected state tax refunds deferred tax benefit 486 million primarily related recognition unrecognized tax position eleven months ended december 31 2010 2009 predecessor company accrued unrecognized tax benefit uncertainty surrounding potential ownership change irc section 382 occurred prior date made “checkthebox” election two subsidiaries date change ownership question since december 31 2009 balance sheet date predecessor company unable confirm actual date ownership change sec forms 13g filed however based upon closing sec filing period schedules 13g review schedules filed february 15 2010 company determined likely certain “checkthebox” elections effective prior date 2009 ownership change section 382 result company recorded tax benefit reversal liability unrecognized tax benefit 3523 million company’s statement operations eleven months ended december 31 2010 significantly impacted effective tax rate period result goodwill nongoodwill intangible asset impairment charges eleven months ended december 31 2010 recognized nondeductible adjustment effective tax rate 195 2999 million see item 8 “financial statements supplementary data” note 7 “income taxes” additional information net loss per share net loss 9236 million eleven months ended december 31 2010 directly impacted goodwill nongoodwill intangible asset impairment charges noted well significant effects fresh start accounting revenue expense trends described partially offset income tax benefit recorded eleven months ended december 31 2010 noted basic diluted eps 1846 eleven months ended december 31 2010 see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies earnings loss per share” details computations basic diluted eps predecessor company one month ended january 31 2010 net revenues components predecessor company’s net revenues one month ended january 31 2010 follows gross advertising revenues 1614 million one month ended january 31 2010 gross advertising revenues impacted continuing declines advertising sales related print products primarily result declines new recurring business mainly driven 1 customer attrition 2 declines overall advertising spending customers 3 significant impact weak local business conditions consumer spending customers’ markets 4 increase competition fragmentation local business search 5 migration customers digital marketing solutions sales claims allowances 35 million one month ended january 31 2010 sales claims allowances affected lower claims experience due process improvements operating efficiencies improved print copy quality certain markets well lower advertising sales volume revenues 25 million one month ended january 31 2010 revenues include late fees received outstanding customer balances barter revenues commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain advertisingrelated products expenses components predecessor company’s total expenses one month ended january 31 2010 follows production distribution expenses total production distribution expenses 269 million one month ended january 31 2010 production distribution expenses comprised items print paper distribution expenses internet production distribution expenses print paper distribution expenses impacted lower page volumes associated declines print advertisements negotiated price reductions print paper expenses favorable paper inventory expenses internet production distribution expenses affected reduction dexnet customers purchasing efficiencies lower headcount partially offset increased purchased traffic costs incurred direct traffic online properties selling support expenses total selling support expenses 409 million one month ended january 31 2010 selling support expenses comprised items bad debt expense commissions salesperson expenses directory publishing expenses billing credit collection expense occupancy expenses advertising expense bad debt expense impacted effective credit collections practices driven improvement accounts receivable portfolio well lower billing volumes associated declines advertisers directory publishing expenses affected declines print advertisements lower headcount billing credit collections expense impacted lower billing volumes associated declines advertisers advertisements occupancy expenses impacted renegotiation leased properties reduction amount leased square footage bankruptcy process general administrative expenses ga expenses 83 million one month ended january 31 2010 ga expenses comprised items restructuring expenses general corporate expenses incentive compensation expense expenses restructuring expenses impacted lower severance expense fees associated outside consultant services ga related incentive compensation expense includes remaining unrecognized compensation expense related stockbased awards cancelled upon emergence chapter 11 pursuant plan compensation expense associated predecessor company’s 2009 ltip reversal accrual associated predecessor company’s incentive compensation plan depreciation amortization depreciation amortization expense 202 million one month ended january 31 2010 amortization intangible assets 156 million one month ended january 31 2010 impacted reduced carrying values intangible assets resulting impairment charges recorded predecessor company fourth quarter 2009 associated reduction remaining useful lives effective january 1 2010 depreciation fixed assets amortization computer software 46 million one month ended january 31 2010 depreciation fixed assets amortization computer software impacted capital projects placed service one month ended january 31 2010 operating income operating income 641 million one month ended january 31 2010 determined based revenue expense trends described interest expense net contractual interest expense would appeared predecessor company’s consolidated statement operations filing chapter 11 petitions 659 million one month ended january 31 2010 net interest expense one month ended january 31 2010 197 million includes 18 million noncash amortization deferred financing costs predecessor company’s interest expense one month ended january 31 2010 includes expense 08 million associated change fair value dex media east llc interest rate swaps longer deemed financial instruments result filing chapter 11 petitions predecessor company’s interest expense one month ended january 31 2010 also includes expense 11 million resulting amounts previously charged accumulated comprehensive loss related interest rate swaps amounts previously charged accumulated comprehensive loss related dex media east llc interest rate swaps amortized interest expense remaining life interest rate swaps based future interest payments probable forecasted transactions would occur accordance fresh start accounting reporting unamortized amounts previously charged accumulated comprehensive loss related interest rate swaps eliminated fresh start reporting date result amendment rhdi credit facility refinancing former dex media west llc credit facility june 6 2008 predecessor company’s interest rate swaps associated two debt arrangements longer highly effective offsetting changes cash flows accordingly cash flow hedge accounting treatment longer permitted addition result filing chapter 11 petitions interest rate swaps required settled terminated 2009 result change fair value interest rate swaps prior effective date predecessor company’s interest expense includes expense 04 million one month ended january 31 2010 reorganization items net reorganization items directly associated process reorganizing business chapter 11 recorded separate line item consolidated statement operations predecessor company recorded 78 billion reorganization items one month ended january 31 2010 comprised 45 billion gain reorganization settlement liabilities subject compromise fresh start accounting adjustments 33 billion following table displays details reorganization items one month ended january 31 2010 income taxes effective tax rate income taxes 117 one month ended january 31 2010 effective tax rate provision 117 lower statutory federal tax rate 350 primarily due decreases income tax expense nontaxable fresh start adjustments release valuation allowance offset part increases income tax expense estimated loss tax attributes due cancellation debt income emergence impact state taxes income tax provision 9175 million one month ended january 31 2010 comprised federal tax provision 7928 million state tax provision 1248 million federal tax provision comprised current tax provision 06 million primarily related increase federal tax accrual related unrecognized tax benefits deferred tax provision 7922 million primarily related reduction predecessor company’s tax attributes accordance irc section 108 state tax provision 1248 million comprised current tax provision less 01 million deferred tax provision 1247 million primarily related reduction predecessor company’s tax attributes accordance irc section 108 discharge debt conjunction emergence chapter 11 resulted tax gain 50166 million generally discharge debt obligation amount less adjusted issue price creates cancellation indebtedness income “codi” must included company’s taxable income however recognition codi limited taxpayer debtor reorganization case discharge granted bankruptcy court pursuant plan reorganization approved bankruptcy court plan enabled predecessor company qualify bankruptcy exclusion rule exclude gain settlement debt obligations derivative liabilities taxable income irc section 108 company reduced tax attributes primarily net operating loss carryforwards intangible asset basis stock basis see item 8 “financial statements supplementary data” note 7 “income taxes” additional information net income earnings per share net income 69200 million one month ended january 31 2010 primarily due gain reorganization fresh start accounting adjustments comprise reorganization items net addition net income one month ended january 31 2010 determined based revenue expense trends income taxes described basic eps 10027 diluted eps 10021 one month ended january 31 2010 see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies earnings loss per share” details computations basic diluted eps nongaap combined adjusted results year ended december 31 2010 compared predecessor company gaap results net revenues depreciation amortization expenses nongaap adjusted results impairment charges operating income loss year ended december 31 2009 net revenues components nongaap combined adjusted net revenues year ended december 31 2010 predecessor company gaap net revenues year ended december 31 2009 follows 1 represents gross advertising revenues sales claims allowances revenues advertising sales fulfilled prior fresh start reporting date would recognized eleven months ended december 31 2010 absent adoption fresh start accounting required gaap nongaap combined adjusted gross advertising revenues year ended december 31 2010 decreased 4348 million 196 predecessor company year ended december 31 2009 decline nongaap combined adjusted gross advertising revenues year ended december 31 2010 primarily due continuing declines advertising sales related print products primarily result declines new recurring business mainly driven 1 customer attrition 2 declines overall advertising spending customers 3 significant impact weak local business conditions consumer spending customers’ markets 4 increase competition fragmentation local business search 5 migration customers digital marketing solutions nongaap combined adjusted sales claims allowances year ended december 31 2010 decreased 164 million 374 predecessor company year ended december 31 2009 decline nongaap combined adjusted sales claims allowances year ended december 31 2010 primarily due lower claims experience result process improvements operating efficiencies improved print copy quality certain markets well lower advertising sales volume expenses components nongaap combined adjusted total expenses year ended december 31 2010 predecessor company gaap nongaap adjusted total expenses year ended december 31 2009 follows 1 represents certain deferred expenses advertising sales fulfilled prior fresh start reporting date would recognized eleven months ended december 31 2010 absent adoption fresh start accounting required gaap b exclusion costuplift recorded fresh start accounting 2 depreciation amortization expense adjusted increase fair value intangible assets fixed assets computer software result adoption fresh start accounting reduced carrying values intangible assets resulting impairment charges recorded predecessor company fourth quarter 2009 associated reduction remaining useful lives effective january 1 2010 3 goodwill nongoodwill intangible asset impairment charges eleven months ended december 31 2010 excluded gaap results nongoodwill intangible asset impairment charges year ended december 31 2009 excluded gaap results production distribution expenses total nongaap combined adjusted production distribution expenses year ended december 31 2010 3215 million compared 3706 million predecessor company year ended december 31 2009 primary components 491 million 132 decrease nongaap combined adjusted production distribution expenses year ended december 31 2010 follows nongaap combined adjusted print paper distribution expenses year ended december 31 2010 declined 308 million compared predecessor company year ended december 31 2009 decline primarily due lower page volumes associated declines print advertisements negotiated price reductions print paper expenses timing publication deliveries compared prior year period favorable paper inventory expenses nongaap combined adjusted internet production distribution expenses year ended december 31 2010 declined 152 million compared predecessor company year ended december 31 2009 primarily due purchasing efficiencies lower headcount reduction dexnet customers partially offset increased purchased traffic costs incurred direct traffic online properties selling support expenses total nongaap combined adjusted selling support expenses year ended december 31 2010 5060 million compared 6138 million predecessor company year ended december 31 2009 primary components 1078 million 176 decrease nongaap combined adjusted selling support expenses year ended december 31 2010 follows nongaap combined adjusted bad debt expense year ended december 31 2010 declined 812 million compared predecessor company year ended december 31 2009 primarily due lower writeoff experience resulting effective credit collections practices driven improvement accounts receivable portfolio well lower billing volumes associated declines advertisers partially offset increase bad debt provision delinquent balances associated cmr nongaap combined adjusted bad debt expense year ended december 31 2010 represented 37 net revenue compared 67 predecessor company year ended december 31 2009 nongaap combined adjusted commissions salesperson expenses year ended december 31 2010 decreased 207 million compared predecessor company year ended december 31 2009 primarily due lower advertising sales effect variablebased commissions well lower headcount nongaap combined adjusted occupancy expenses year ended december 31 2010 decreased 50 million compared predecessor company year ended december 31 2009 primarily due renegotiation leased properties reduction amount leased square footage bankruptcy process nongaap combined adjusted directory publishing expenses year ended december 31 2010 decreased 49 million compared predecessor company year ended december 31 2009 primarily due declines print advertisements lower headcount general administrative expenses nongaap combined adjusted ga expenses year ended december 31 2010 1571 million compared 989 million predecessor company year ended december 31 2009 primary components 582 million 588 increase nongaap combined adjusted ga expenses year ended december 31 2010 follows nongaap combined adjusted year ended december 31 2010 recognized onetime net curtailment gain 38 million associated departure company’s former chief executive officer represents decrease 482 million net curtailment gains year ended december 31 2009 recognized 520 million associated elimination certain union retiree health care life insurance benefits nongaap combined adjusted year ended december 31 2010 recognized onetime expenses 95 million associated departure company’s former chief executive officer fourth quarter 2010 commenced restructuring plan included headcount reductions consolidation responsibilities result restructuring plan company recorded restructuring charge 186 million fourth quarter 2010 year ended december 31 2009 predecessor company recognized restructuring charge 146 million related restructuring plan implemented 2009this represents increase restructuring expenses 40 million nongaap combined adjusted year ended december 31 2010 nongaap combined adjusted general corporate expenses year ended december 31 2010 decreased 46 million compared predecessor company year ended december 31 2009 due lower director officer insurance premiums result contract renegotiations changes coverage limits associated emergence chapter 11 depreciation amortization nongaap combined depreciation amortization expense year ended december 31 2010 2379 million compared 5788 million predecessor company year ended december 31 2009 nongaap combined amortization intangible assets 1826 million year ended december 31 2010 compared 5146 million predecessor company year ended december 31 2009 decrease nongaap combined amortization expense year ended december 31 2010 result reduced carrying values intangible assets subsequent impairment charges recorded predecessor company fourth quarter 2009 partially offset increased amortization expense resulting increase fair value intangible assets result adoption fresh start accounting reduction remaining useful lives intangible assets associated impairment charges recorded predecessor company fourth quarter 2009 nongaap combined depreciation fixed assets amortization computer software 553 million year ended december 31 2010 compared 642 million predecessor company year ended december 31 2009 decrease nongaap combined depreciation expense year ended december 31 2010 primarily due acceleration depreciation fixed assets longer service year ended december 31 2009 partially offset increase depreciation expense nongaap combined year ended december 31 2010 result increase fair value fixed assets computer software conjunction adoption fresh start accounting operating income loss nongaap combined adjusted operating income year ended december 31 2010 predecessor company nongaap adjusted operating income year ended december 31 2009 follows 1 represents net effect eliminating gross advertising revenues sales claims allowances revenues certain deferred expenses advertising sales fulfilled prior fresh start reporting date would recognized eleven months ended december 31 2010 absent adoption fresh start accounting required gaap b exclusion costuplift recorded fresh start accounting c exclusion goodwill nongoodwill intangible asset impairment charges eleven months ended december 31 2010 2 excludes nongoodwill intangible asset impairment charge year ended december 31 2009 nongaap combined adjusted operating income year ended december 31 2010 5597 million compares nongaap adjusted operating income 5403 million predecessor company year ended december 31 2009 increase nongaap combined adjusted operating income year ended december 31 2010 due significant decline amortization expense associated intangible assets lower operating expenses described partially offset declines net revenues described gaap results year ended december 31 2009 predecessor company interest expense net contractual interest expense would appeared consolidated statement operations filing chapter 11 petitions 8024 million year ended december 31 2009 net interest expense year ended december 31 2009 4895 million includes 275 million noncash amortization deferred financing costs interest expense year ended december 31 2009 includes noncash charge 56 million associated change fair value dex media east llc interest rate swaps longer deemed financial instruments result filing chapter 11 petitions interest expense year ended december 31 2009 also includes noncash charge 96 million resulting amounts previously charged accumulated comprehensive loss related interest rate swaps result change fair value interest rate swaps associated amendment rhdi credit facility refinancing former dex media west credit facility june 6 2008 settlement termination certain interest rate swaps second quarter 2009 interest expense includes reduction 107 million year ended december 31 2009 conjunction predecessor company’s acquisition dex media january 31 2006 “dex media merger” result purchase accounting required gaap recorded dex media’s debt fair value january 31 2006 recognized offset interest expense period subsequent dex media merger may 28 2009 amortization corresponding fair value adjustment offset interest expense 77 million year ended december 31 2009 offset interest expense recognized life respective debt however due filing chapter 11 petitions unamortized fair value adjustments may 28 2009 785 million writtenoff recognized reorganization item consolidated statement operations year ended december 31 2009 reorganization items net year ended december 31 2009 predecessor company recorded 948 million reorganization items separate line item consolidated statement operations reorganization items represent charges directly associated process reorganizing business chapter 11 following table displays details reorganization items year ended december 31 2009 predecessor company incurred professional fees associated filing chapter 11 petitions 774 million year ended december 31 2009 676 million paid cash professional fees included financial legal valuation services directly associated reorganization process writeoff unamortized deferred financing costs 645 million unamortized net premiums discounts 349 million unamortized fair value adjustments required gaap result dex media merger 785 million may 28 2009 relate longterm debt classified liabilities subject compromise december 31 2009 predecessor company recognized 35 million year ended december 31 2009 associated rejected leases abandoned property approved bankruptcy court december 31 2009 predecessor company receive operating cash receipts resulting filing chapter 11 petitions benefit income taxes 2009 effective tax rate benefit 126 lower statutory federal tax rate 350 primarily due recording valuation allowance deferred tax assets irc section 382 limitation loss carryforwards offset part impact state taxes 2009 income tax benefit 9285 million comprised federal tax benefit 7835 million state tax benefit 1450 million 2009 federal tax benefit comprised current tax benefit 29 million primarily related decrease federal tax accrual due amended return filings deferred tax benefit 7807 million primarily related noncash intangible asset impairment charges 2009 offset part valuation allowance discussed 2009 state tax benefit 1450 million comprised current tax benefit 118 million relates favorable settlement prior year state tax audits 2009 reversal associated state liabilities deferred tax benefit 1332 million primarily related noncash intangible asset impairment charges 2009 offset part valuation allowance discussed provided full valuation allowances state federal net operating loss tax credit carryforwards extent likely deferred tax benefits realized december 31 2009 accordance fasb asc 740 upon evaluation future reversals existing taxable differences taxable income net operating loss carryback years liabilities required asc 740 recorded valuation allowance 15319 million deferred tax assets december 2009 effectively settled issues consideration department finance new york state audit tax years 2000 2006 department revenue north carolina audit tax years 2003 2008 result settlements unrecognized tax benefit associated uncertain state tax positions decreased 76 million new york state 97 million north carolina year ended december 31 2009 decrease unrecognized tax benefits decreased effective tax rate year ended december 31 2009 unrecognized tax benefits impacted new york state north carolina audits primarily related apportionment allocation income among legal entities 2009 predecessor company increased liability unrecognized tax benefits 2764 million reflecting uncertainty whether ownership change section 382 occurred prior date elected modify tax classification two subsidiaries date change ownership question balance sheet date predecessor company able confirm actual date ownership change sec forms 13g filed stockholders forty five days following end calendar year file forms sec based due date actual ownership change date confirmed february 15 2010 addition increased liability unrecognized tax benefits 15 million relating uncertainty surrounding deductibility certain accrued expenses net loss per share net loss year ended december 31 2009 65 billion direct result impairment charge noted well revenue expense trends described partially offset impact reorganization items year ended december 31 2009 basic diluted eps 9367 year ended december 31 2009 see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies earnings loss per share” details computations basic diluted eps liquidity capital resources following table presents fair market value longterm debt december 31 2011 2010 based quoted market prices dates well carrying value longterm debt december 31 2011 2010 includes 632 million 910 million respectively unamortized fair value discount adjustments required gaap connection company’s adoption fresh start accounting fresh start reporting date credit facilities rhdi amended restated credit facility december 31 2011 outstanding balance amended restated rhdi credit facility “rhdi amended restated credit facility” totaled 9472 million rhdi amended restated credit facility requires quarterly principal interest payments option either ◦ highest subject floor 400 prime rate defined rhdi amended restated credit facility ii federal funds effective rate defined rhdi amended restated credit facility plus 050 iii one month libor plus 100 case plus interest rate margin base rate loans interest rate margin base rate loans initially 525 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 525 per annum rhdi’s consolidated leverage ratio greater equal 425 100 equal 500 per annum rhdi’s consolidated leverage ratio less 425 100 ◦ higher libor rate ii 300 case plus interest rate margin eurodollar loans interest rate margin eurodollar loans initially 625 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 625 per annum rhdi’s consolidated leverage ratio greater equal 425 100 equal 600 per annum rhdi’s consolidated leverage ratio less 425 100 rhdi may elect interest periods one two three six months libor borrowings rhdi amended restated credit facility matures october 24 2014 weighted average interest rate outstanding debt rhdi amended restated credit facility 90 december 31 2011 dex media east amended restated credit facility december 31 2011 outstanding balance amended restated dex media east credit facility “dex media east amended restated credit facility” totaled 6516 million dex media east amended restated credit facility requires quarterly principal interest payments option either ◦ highest prime rate defined dex media east amended restated credit facility ii federal funds effective rate defined dex media east amended restated credit facility plus 050 iii one month libor plus 100 case plus interest rate margin base rate loans interest rate margin base rate loans initially 150 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 150 per annum dme inc’s consolidated leverage ratio greater equal 275 100 equal 125 per annum dme inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 100 per annum dme inc’s consolidated leverage ratio less 250 100 ◦ libor rate plus interest rate margin eurodollar loans interest rate margin eurodollar loans initially 250 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 250 per annum dme inc’s consolidated leverage ratio greater equal 275 100 equal 225 per annum dme inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 200 per annum dme inc’s consolidated leverage ratio less 250 100 dme inc may elect interest periods one two three six months libor borrowings dex media east amended restated credit facility matures october 24 2014 weighted average interest rate outstanding debt dex media east amended restated credit facility 30 december 31 2011 dex media west amended restated credit facility december 31 2011 outstanding balance amended restated dex media west credit facility “dex media west amended restated credit facility” totaled 6116 million dex media west amended restated credit facility requires quarterly principal interest payments option either ◦ highest subject floor 400 prime rate defined dex media west amended restated credit facility ii federal funds effective rate defined dex media west amended restated credit facility plus 050 iii one month libor plus 100 case plus interest rate margin base rate loans interest rate margin base rate loans initially 350 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 350 per annum dmw inc’s consolidated leverage ratio greater equal 275 100 equal 325 per annum dmw inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 300 per annum dmw inc’s consolidated leverage ratio less 250 100 ◦ higher libor rate ii 300 case plus interest rate margin eurodollar loans interest rate margin eurodollar loans initially 450 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 450 per annum dmw inc’s consolidated leverage ratio greater equal 275 100 equal 425 per annum dmw inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 400 per annum dmw inc’s consolidated leverage ratio less 250 100 dmw inc may elect interest periods one two three six months libor borrowings dex media west amended restated credit facility matures october 24 2014 weighted average interest rate outstanding debt dex media west amended restated credit facility 72 december 31 2011 amended restated credit facilities described includes uncommitted revolving credit facility available borrowings 400 million availability uncommitted revolving credit facility subject certain conditions including prepayment term loans amended restated credit facilities amount equal revolving credit facility amended restated credit facilities contain provisions prepayment net proceeds asset dispositions equity issuances debt issuances subject certain exceptions ratable portion net proceeds received company asset dispositions company subject certain exceptions portion excess cash flow amended restated credit facilities described contain certain covenants subject exceptions limit restrict borrower subsidiaries’ incurrence liens investments including acquisitions sales assets indebtedness payment dividends distributions payments certain indebtedness sale leaseback transactions swap transactions affiliate transactions capital expenditures mergers liquidations consolidations amended restated credit facility also contains certain covenants subject exceptions limit restrict borrower’s incurrence liens indebtedness ownership assets sales assets payment dividends distributions modifications dex one senior subordinated notes defined borrower required maintain compliance consolidated leverage ratio covenant rhdi dmw inc also required maintain compliance consolidated interest coverage ratio covenant dmw inc also required maintain compliance consolidated senior secured leverage ratio covenant dex media west amended restated credit agreement includes option additional covenant relief senior secured leverage covenant fourth quarter 2011 subject increased amortization loans first quarter 2012 increase excess cash flow sweep 2011 payment 25 basis point fee ratably lenders dex media west amended restated credit agreement march 31 2010 company exercised senior secured leverage ratio election defined dex media west amended restated credit agreement company incurred fee 21 million exercise option obligations amended restated credit facilities guaranteed subsidiaries secured lien substantially subsidiaries’ tangible intangible assets including pledge stock respective subsidiaries well mortgage certain real property pursuant shared guaranty collateral agreement subject intercreditor agreement among administrative agents amended restated credit facilities company subject certain exceptions certain subsidiaries company guaranty obligations amended restated credit facilities obligations secured lien substantially guarantors’ tangible intangible assets company’s subsidiary dex one digital including pledge stock respective subsidiaries well mortgage certain real property notes dex one senior subordinated notes effective date issued 3000 million aggregate principal amount 1214 senior subordinated notes due 2017 “dex one senior subordinated notes” exchange dex media west 85 senior notes due 2010 5875 senior notes due 2011 interest dex one senior subordinated notes payable semiannually march 31st september 30th year commencing march 31 2010 january 29 2017 dex one senior subordinated notes accrue interest annual rate 12 cash interest payments 14 company elects paidinkind “pik” interest payments company may elect later two business days prior beginning semiannual interest period whether make interest payment dex one senior subordinated notes entirely cash ii 50 cash 50 pik interest capitalized incremental additional senior subordinated notes year ended december 31 2011 company made interest payments entirely cash september 2011 company elected pay interest amounts dex one senior subordinated notes 50 cash 50 pik interest lieu making interest payments entirely cash semiannual interest period ending march 31 2012 permitted indenture governing dex one senior subordinated notes subsequent semiannual interest periods company may make election within prescribed timeframe noted absence election subsequent semiannual interest period interest dex one senior subordinated notes payable form interest payment semiannual interest period immediately preceding subsequent semiannual interest period interest rate dex one senior subordinated notes may subject adjustment event company incurs certain specified debt higher effective yield maturity yield maturity dex one senior subordinated notes dex one senior subordinated notes unsecured obligations company effectively subordinated right payment company’s existing future secured debt including dex one’s guarantee borrowings amended restated credit facilities structurally subordinated existing future liabilities including trade payables direct indirect subsidiaries indenture governing dex one senior subordinated notes contains certain covenants subject certain exceptions among things limit restrict company’s certain cases company’s restricted subsidiaries’ incurrence indebtedness making certain restricted payments incurrence liens entry transactions affiliates conduct business merger consolidation sale substantially property indenture governing dex one senior subordinated notes also requires company offer repurchase dex one senior subordinated notes par certain changes control involving company sale substantially assets company holders dex one senior subordinated notes also may cause company repurchase dex one senior subordinated notes price 101 principal amount upon incurrence company certain acquisition indebtedness dex one senior subordinated notes remaining face value 3000 million december 31 2011 redeemable option following prices percentage face value impact fresh start accounting conjunction adoption fresh start accounting adjustment established record outstanding debt fair value fresh start reporting date company required record amended restated credit facilities discount result fair value fresh start reporting date therefore carrying amount debt obligations lower principal amount due maturity total discount 1202 million recorded upon adoption fresh start accounting associated amended restated credit facilities 632 million remains unamortized december 31 2011 shown following table liquidity cash flows company’s primary sources liquidity existing cash hand cash flows generated operations company’s primary liquidity requirements fund operations service indebtedness company’s ability meet debt service requirements dependent ability generate sufficient cash flows operations primary sources cash flows consist mainly cash receipts sale marketing solutions impacted among factors general local business conditions continuing decline use print products increase competition fragmentation local business search market consumer confidence level demand advertising products services based current financial projections least next 1215 months company expects able continue generate cash flows operations amounts sufficient fund operations capital expenditures well meet debt service requirements company’s financial projections also include excess cash flow used fund accelerated debt repayments resulting cash flow sweep requirements amended restated credit facilities however assurances made business generate sufficient cash flows operations enable us fund prospective cash requirements since current information used financial projections could change future result changes estimates assumptions well risks noted item 1a “risk factors” provided amended restated credit facilities company’s operating subsidiaries permitted fund share parent company’s interest obligations dex one senior subordinated notes funds based percentage operating subsidiaries’ excess cash flow defined credit agreement may provided parent company fund specific activities acquisitions addition operating subsidiaries permitted send 5 million annually parent company lastly operating subsidiaries fund proportionate basis expenses paid parent company fund daily operations operating subsidiaries except certain limited situations including noted amended restated credit facilities restrict ability company subsidiaries dividend assets third party subsidiaries pay dividends loans advances us company currently believes limitations restrictions imposed amended restated credit facilities noted impact ability fund operations capital expenditures well meet debt service requirements specifically parent company level however assurances made limitations restrictions impact ability fund operations capital expenditures well meet debt service requirements specifically parent company level future company pursuing modifications amended restated credit facilities would provide greater flexibility repurchase dex one senior subordinated notes amounts outstanding amended restated credit facilities modifications may time seek retire purchase dex one senior subordinated notes cash purchases open market purchases privately negotiated transactions otherwise subject applicable securities laws regulations may also time seek purchase amounts outstanding amended restated credit facilities purchases depend prevailing market conditions liquidity requirements contractual restrictions factors amounts involved may material amended restated credit facilities require significant balloon payments upon maturity october 2014 company unable extend maturity significantly reduce outstanding indebtedness prior maturity either obtaining modifications amended restated credit facilities noted obtaining additional financing andor refinancing existing indebtedness able generate cash flows operations amounts sufficient fund operations capital expenditures andor satisfy debt service requirements time addition company become noncompliant restrictive covenants debt agreements prior october 2014 default provisions would triggered amended restated credit facilities outstanding balances could become due immediately company continues monitor assess available options opportunities would allow us accomplish financing initiatives however assurances made financing initiatives attained see item 7 “management’s discussion analysis financial condition results operations” contractual obligations quantitative presentation principal interest payments associated longterm debt period see item 1a “risk factors” additional information regarding risks uncertainties associated business could significant impact future liquidity cash flows see item 7 “management’s discussion analysis financial condition results operations” “recent trends developments related business” additional information related trends uncertainties respect business could significant impact future liquidity cash flows successor company year ended december 31 2011 aggregate outstanding debt december 31 2011 25104 million includes fair value adjustments 632 million required gaap connection company’s adoption fresh start accounting year ended december 31 2011 made scheduled accelerated principal payments 1806 million 740 million respectively total principal payments 2546 million amended restated credit facilities year ended december 31 2011 made aggregate net cash interest payments 2041 million december 31 2011 2579 million cash equivalents checks yet presented payment 07 million cash provided operating activities 4133 million year ended december 31 2011 key components operating cash flow include following • 5190 million net loss includes goodwill impairment charge offset impact tax benefit recognized year ended december 31 2011 • 6924 million net noncash items consisting goodwill impairment charge 8011 million offset 1087 million deferred income taxes includes tax impact goodwill impairment charge • 3348 million net noncash items primarily consisting 2518 million depreciation amortization 523 million bad debt provision 250 million restructuring expenses 43 million items primarily consisting amortization debt fair value adjustments resulting adoption fresh start accounting 278 million partially offset adjustments related pension plans 217 million 48 million stockbased compensation expense decrease interest expense 34 million associated change fair value interest rate swaps caps • 134 million gain sale substantially net assets businesscom • 613 million net use cash decrease deferred directory revenues 785 million offset decrease accounts receivable 172 million primarily due lower advertising sales change deferred revenues accounts receivable analyzed together given fact directory published annual billable value directory initially deferred unbilled accounts receivable established month thereafter typically one twelfth billing value recognized revenues billed customers • 380 million net source cash decrease assets consisting 247 million decrease prepaid directory costs resulting publication seasonality 133 million decrease current noncurrent assets primarily relating deferred commissions print paper delivery costs well changes fair value interest rate caps • 279 million net use cash decrease accounts payable accrued liabilities consisting 304 million decrease accrued liabilities primarily due payments associated restructuring actions change fair value interest rate swaps well decrease accrued interest payable 17 million offset 42 million increase trade accounts payable • 303 million decrease noncurrent liabilities primarily resulting deferred income taxes change fair value interest rate swaps cash used investing activities year ended december 31 2011 125 million relates purchase fixed assets primarily computer equipment software leasehold improvements 281 million offset proceeds sale substantially net assets businesscom assets 156 million cash used financing activities year ended december 31 2011 2707 million includes following • 2546 million principal payments amended restated credit facilities • 05 million provided net financing items • 166 million decreased balance checks yet presented payment eleven months ended december 31 2010 eleven months ended december 31 2010 made scheduled accelerated principal payments 1676 million 3890 million respectively total principal payments 5566 million amended restated credit facilities eleven months ended december 31 2010 made aggregate net cash interest payments 1822 million december 31 2010 1279 million cash equivalents checks yet presented payment 172 million cash provided operating activities 5124 million eleven months ended december 31 2010 key components operating cash flow include following • 9236 million net loss includes goodwill nongoodwill intangible asset impairment charges offset impact tax benefit recognized eleven months ended december 31 2010 • 5417 million net noncash items consisting goodwill nongoodwill intangible asset impairment charges 11593 million offset 6176 million deferred income taxes includes tax impact goodwill nongoodwill intangible asset impairment charges • 1584 million noncash reduction goodwill related finalization cancellation indebtedness income tax attribute reduction calculations associated fresh start accounting • 2887 million net noncash items primarily consisting 2177 million depreciation amortization 241 million noncash items primarily associated amortization debt fair value adjustments resulting adoption fresh start accounting 178 million restructuring expenses 164 million bad debt provision increase interest expense 82 million associated change fair value interest rate swaps caps 45 million stockbased compensation expense • 7638 million net source cash increase deferred directory revenues 7016 million primarily due elimination predecessor company’s deferred directory revenues fresh start accounting recording deferred directory revenues company directories published subsequent fresh start reporting date decrease accounts receivable 622 million change deferred revenues accounts receivable analyzed together given fact directory published annual billable value directory initially deferred unbilled accounts receivable established month thereafter typically one twelfth billing value recognized revenues billed customers • 1423 million net use cash increase assets consisting 1565 million increase current noncurrent assets primarily due elimination predecessor company’s deferred commissions print paper delivery costs fresh start accounting recording deferred commissions print paper delivery costs company directories published subsequent fresh start reporting date well changes fair value company’s interest rate caps offset 142 million decrease prepaid directory costs resulting publication seasonality • 50 million net use cash decrease accounts payable accrued liabilities resulting 331 million decrease accrued liabilities primarily associated change fair value interest rate swaps 28 million decrease trade accounts payable offset increase accrued interest payable 309 million • 1693 million decrease noncurrent liabilities primarily resulting deferred income taxes change fair value interest rate swaps cash used investing activities eleven months ended december 31 2010 356 million relates purchase fixed assets primarily computer equipment software leasehold improvements 365 million offset proceeds sale assets 09 million cash used financing activities eleven months ended december 31 2010 5484 million includes following • 5566 million principal payments amended restated credit facilities • 12 million debt issuance costs financing items net • 95 million increased balance checks yet presented payment predecessor company one month ended january 31 2010 one month ended january 31 2010 predecessor company made principal payments 5113 million credit facilities accordance plan conjunction emergence chapter 11 made aggregate net cash interest payments 155 million cash provided operating activities 717 million one month ended january 31 2010 key components operating cash flow include following • 69200 million net income includes gain reorganization fresh start accounting adjustments 77931 million • 78301 million noncash reorganization items net • 9450 million net noncash items primarily consisting 9169 million deferred income taxes 202 million depreciation amortization 78 million bad debt provision increase interest expense 23 million associated change fair value predecessor company’s interest rate swaps 06 million stockbased compensation expense 28 million noncash items primarily related predecessor company’s pension adjustments • 170 million net use cash decrease deferred directory revenues 368 million primarily due lower advertising sales offset net decrease accounts receivable 198 million comprised decrease accounts receivable 276 million offset provision bad debts 78 million change deferred revenues accounts receivable analyzed together given fact directory published annual billable value directory initially deferred unbilled accounts receivable established month thereafter typically one twelfth billing value recognized revenues billed customers • 107 million net source cash decrease assets consisting 70 million decrease prepaid directory costs resulting publication seasonality 37 million decrease current noncurrent assets primarily relating deferred commissions print paper delivery costs • 96 million net source cash increase accounts payable accrued liabilities primarily resulting increase 220 million trade accounts payable increase accrued interest payable 03 million partially offset 127 million decrease accrued liabilities changes comprise items reclassified liabilities subject compromise consolidated balance sheet january 31 2010 source cash increase accounts payable accrued liabilities direct result filing chapter 11 petitions whereby payment prepetition obligations delayed • 334 million increase noncurrent liabilities primarily resulting deferred taxes change fair value predecessor company’s interest rate swaps well change pension postretirement longterm liabilities cash used investing activities one month ended january 31 2010 18 million relates purchase fixed assets primarily computer equipment software leasehold improvements cash used financing activities one month ended january 31 2010 5365 million includes following • 5113 million principal payments term loans predecessor company’s credit facilities accordance plan conjunction emergence chapter 11 • 221 million costs associated issuance dex one senior subordinated notes financing related costs • 31 million decreased balance checks yet presented payment offbalance sheet arrangements company offbalance sheet arrangements contractual obligations contractual obligations table presented sets forth annual commitments principal interest payments debt well cash obligations next five years thereafter december 31 2011 debt repayments related interest payments presented table include 1 scheduled principal interest payments current debt agreements 2 estimate additional debt repayments related impact interest payments resulting cash flow sweep requirements amended restated credit facilities 3 assumes issuance additional dex one senior subordinated notes related impact interest payments result companys election make pik interest payments commencing semiannual interest period ending march 31 2012 maturity amended restated credit facilities require certain percentage annual excess cash flow defined debt agreements used repay amounts amended restated credit facilities debt repayments exclude fair value adjustments required gaap result adoption fresh start accounting 632 million adjustments impact payment obligations 1 included longterm debt scheduled principal amounts owed amended restated credit facilities dex one senior subordinated notes december 31 2011 including current portion longterm debt estimate additional debt repayments resulting cash flow sweep requirements amended restated credit facilities assumes issuance additional dex one senior subordinated notes result companys election make pik interest payments commencing semiannual interest period ending march 31 2012 maturity 2 interest debt represents cash interest payment obligations assuming indebtedness december 31 2011 paid accordance contractual maturity assumes interest rates variable interest debt december 31 2011 remain unchanged future periods reflects impact interest payments resulting estimate additional debt repayments due cash flow sweep requirements amended restated credit facilities well impact interest payments result companys election make pik interest payments commencing semiannual interest period ending march 31 2012 maturity please refer “liquidity capital resources” interest rates amended restated credit facilities dex one senior subordinated notes 3 enter operating leases normal course business substantially lease agreements fixed payment terms lease agreements provide us renewal early termination options future operating lease obligations would change exercised renewal early termination options entered additional operating lease agreements amounts table assume exercise renewal early termination options 4 connection ongoing support services associated software system obligated pay outsource service provider approximately 56 million 2012 internet yellow pages reseller agreement obligated pay att 112 million 2012 entered commercial agreement outsource service provider various telecommunications hosting services whereby obligated pay approximately 13 million 2012 5 defined benefit plans covering substantially employees funding policy contribute amount least equal minimum legal funding requirement based past performance uncertainty dollar amounts paid excluded amounts table see item 8 “financial statements supplementary data” note 9 “benefit plans” information related benefit plans expected future benefit payments including administrative expenses net employee contributions included table expect make contributions approximately 125 million pension plans 2012 item 7aitem 7 managements discussion analysis financial condition results operations item read conjunction audited consolidated financial statements notes thereto included item 8 “financial statements supplementary data” unless otherwise indicated context may otherwise indicate terms “dex one” “successor company” “company” “parent company” “we” “us” “our” refer dex one corporation direct indirect whollyowned subsidiaries subsequent effective date defined financial information set forth annual report unless otherwise indicated context may otherwise indicate reflects consolidated results operations financial position dex one years ended december 31 2012 2011 eleven months ended december 31 2010 dex one became successor registrant rh donnelley corporation “rhd” “predecessor company” “we” “us” “our” operations prior january 29 2010 “effective date” upon emergence chapter 11 proceedings title 11 us bankruptcy code “chapter 11” bankruptcy code effective date financial information set forth annual report unless otherwise indicated context may otherwise indicate reflects consolidated results operations financial position rhd one month ended january 31 2010 may 28 2009 predecessor company subsidiaries filed voluntary petitions chapter 11 relief united states bankruptcy court district delaware “bankruptcy court” january 12 2010 bankruptcy court entered findings fact conclusions law order confirming joint plan reorganization predecessor company subsidiaries “plan” plan became effective accordance terms effective date see annual report form 10k year ended december 31 2010 detailed information matters associated chapter 11 proceedings recent trends developments related business agreement plan merger august 20 2012 dex one entered agreement plan merger “merger agreement” supermedia inc “supermedia” newdex inc direct wholly owned subsidiary company newdex spruce acquisition sub inc direct wholly owned subsidiary newdex “merger sub” collectively merger entities providing business combination dex one supermedia merger agreement provides upon terms subject conditions set forth therein dex one merge newdex surviving entity “dex merger” ii immediately following consummation dex merger sub merge supermedia surviving entity becoming direct wholly owned subsidiary newdex “supermedia merger” together dex merger “mergers” result mergers newdex successor dex one renamed dex media inc “dex media” become newly listed company december 5 2012 merger entities entered amended restated agreement plan merger “amended restated merger agreement” upholds basic economic terms strategic merits mergers included original merger agreement among things extends date party may unilaterally terminate amended restated merger agreement december 31 2012 june 30 2013 ii reduces number directors dex media effectiveness mergers eleven ten iii provides either dex one supermedia unable obtain requisite consents mergers stockholders contemplated amendments respective financing agreements senior secured lenders mergers may effected voluntary prepackaged plans chapter 11 bankruptcy code unable obtain requisite consents contemplated amendments financing agreements senior secured lenders effectuate mergers company voluntarily filed prepackaged bankruptcy chapter 11 march 18 2013 see filing voluntary petitions chapter 11 completion mergers subject certain conditions stated amended restated merger agreement see item 8 financial statements supplementary data note 1 business basis presentation agreement plan merger summarized information amended restated merger agreement addition please refer amended restated merger agreement filed current report form 8k securities exchange commission sec december 6 2012 detailed information terms conditions amended restated merger agreement see item 1a rick factors” risks uncertainties associated proposed merger support limited waiver agreement december 5 2012 dex one also entered support limited waiver agreement “support agreement” certain lenders administrative agents collateral agents senior secured credit facilities support agreement dex one agreed consistent obligations amended restated merger agreement take reasonably necessary appropriate actions furtherance mergers financing amendments senior secured credit facilities ii distribute disclosure statement lenders senior secured credit facilities solicit votes accept dex ones prepackaged plan reorganization iii dex one elects effect mergers financing amendments chapter 11 case file chapter 11 seek confirmation prepackaged plan bankruptcy court see item 8 financial statements supplementary data note 1 business basis presentation support limited waiver agreement summarized information support agreement addition please refer support agreement filed current report form 8k sec december 6 2012 detailed information terms conditions support agreement filing voluntary petitions chapter 11 march 18 2013 petition date dex one certain subsidiaries collectively “debtors” filed voluntary petitions bankruptcy court seeking chapter 11 relief provisions bankruptcy code chapter 11 cases jointly administered caption dex one corporation et al “chapter 11 cases” debtors continue operate businesses manage properties debtors possession jurisdiction bankruptcy court accordance applicable provisions bankruptcy code connection chapter 11 cases company made information available website wwwdexonecom including proposed plan reorganization disclosure statement describing terms plan reorganization information concerning company filing chapter 11 cases triggered event default rendered remaining financial obligations companys 3000 million initial aggregate principal amount 1214 senior subordinated notes due 2017 “dex one senior subordinated notes” senior secured credit facilities automatically immediately due payable debtors believe efforts enforce financial obligations dex one senior subordinated notes senior secured credit facilities stayed result filing chapter 11 cases bankruptcy court anticipate confirmation plan reorganization bankruptcy court emergence chapter 11 proceedings consummation mergers occur first half 2013 although assurance objectives occur within expected timeframe see item 1a rick factors” risks uncertainties associated prepackaged bankruptcy plans bankruptcy law considerations going concern item 8 financial statements supplementary data note 1 business basis presentation going concern” contains statement indicating certain events could impact ability continue going concern assessment ability continue going concern made management considering among factors 1 companys voluntary chapter 11 bankruptcy filing march 18 2013 impact could outstanding debt 2 companys highly leveraged capital structure current maturity date senior secured credit facilities october 24 2014 3 significant negative impact operating results cash flows associated print products primarily result customer attrition ii declines overall advertising spending customers iii significant impact weak local business conditions consumer spending clients markets iv increase competition fragmentation local business search v migration customers digital marketing solutions circumstances events raise substantial doubt whether company able continue going concern reasonable period time since filing chapter 11 done solely effectuate contemplated amendments financing agreements mergers expect unsecured creditors company impacted result filing chapter 11 stated plan reorganization anticipate filing chapter 11 significantly impact financial position results operations cash flows chapter 11 proceedings bankruptcy courts stay acceleration provisions outstanding debt remains effect emergence chapter 11 expected current financial projections indicate management expects able continue generate cash flows operations amounts sufficient fund operations meet debt service requirements chapter 11 proceedings least next 1215 months managements objectives proposed merger contemplated amendments financing agreements position company operate going concern upon emergence chapter 11 reasonable period time thereafter however assurances made objectives attained see item 1a rick factors” risks uncertainties associated companys ability continue going concern significant financing developments march 20 2012 company announced commencement cash tender offer purchase maximum aggregate principal amount outstanding dex one senior subordinated notes 260 million see item 8 financial statements supplementary data note 1 business basis presentation significant financing developments additional information cash tender offer repurchase dex one senior subordinated notes april 19 2012 terms conditions offer purchase company utilized cash hand 265 million repurchase 982 million aggregate principal amount dex one senior subordinated notes representing 27 par value note repurchases note repurchases accounted extinguishment debt resulting noncash pretax gain 708 million year ended december 31 2012 consisting difference par value purchase price dex one senior subordinated notes offset fees associated note repurchases following table provides calculation net gain note repurchases year ended december 31 2012 march 9 2012 rh donnelley inc rhdi dex media east inc dme inc dex media west inc dmw inc entered first amendment amendments amended restated rhdi credit facility “rhdi amended restated credit facility” amended restated dme inc credit facility “dex media east amended restated credit facility” amended restated dmw inc credit facility “dex media west amended restated credit facility” collectively credit facilities respectively certain financial institutions amendments permit rhdi dme inc dmw inc make open market repurchases retire loans respective credit facilities discount par december 31 2013 provided discount acceptable lenders choose participate see item 8 financial statements supplementary data note 1 business basis presentation significant financing developments additional information amendments offers repurchase loans respective credit facilities march 23 2012 rhdi dme inc dmw inc collectively utilized cash hand 695 million repurchase loans credit facilities 1421 million credit facility repurchases credit facility repurchases accounted extinguishment debt resulting noncash pretax gain 688 million year ended december 31 2012 consisting difference par value purchase price credit facilities offset accelerated amortization fair value adjustments credit facilities recognized conjunction adoption fresh start accounting fees associated credit facility repurchases following table provides detail credit facility repurchases calculation net gain credit facility repurchases year ended december 31 2012 note repurchases credit facility repurchases hereby collectively referred debt repurchases net gains debt repurchases year ended december 31 2012 1396 million results operations discussed “results operations” continue experience lower revenues advertising sales bookings related print products primarily result declines new recurring business including renewal incremental sales existing advertisers mainly driven 1 customer attrition 2 declines overall advertising spending customers 3 significant impact weak local business conditions consumer spending clients’ markets 4 increase competition fragmentation local business search 5 migration customers digital marketing solutions however despite challenges associated print products seen growth digital revenues advertising sales bookings driven new partnerships focus providing targeted solution bundled packages customers new digital products services migration customers digital marketing solutions advancements helped partially offset decline print revenues advertising sales bookings company currently projects challenging conditions associated print products continue foreseeable future print revenues advertising sales bookings well overall operating results cash flow liquidity continue adversely impacted therefore company’s historical operating results indicative future operating performance addition longterm financial forecast anticipate material improvements local business conditions near future fully described “results operations net revenues” method recognizing print revenue deferral amortization method results delayed recognition advertising sales whereby recognized revenues reflect amortization advertising sales consummated prior periods well advertising sales consummated current period accordingly company’s projected decline print advertising sales result decline print revenues recognized future periods addition improvements local business conditions significant immediate impact print revenues plan fully described item 1 “business” marketing solutions company helps local businesses consumers connect proprietary affiliate provided marketing solutions combine multiple media platforms drive large volumes consumer leads customers assist customers managing messaging consumers proprietary marketing solutions include dex published yellow pages directories internet yellow pages site dexknowscom mobile application dex mobile digital lead generation solutions powered search engine marketing product dexnet extends customers’ reach leading internet mobile partners attract consumers searching local businesses products services within markets conjunction companys continuous evaluation strategic alternatives response challenging industry economic environment face august 2012 announced proposed merger dex one supermedia purpose proposed transaction increase market share improve competitive position benefiting improved operating scale significant service cost synergies enhanced cash flow preserving access tax attributes offset future taxable income better position combined entity retire debt amended extended credit facilities see recent trends developments related business agreement plan merger” additional information proposed merger company continues work improving value deliver customers 1 providing targeted solution bundles combine offline online media platforms includes dex guaranteed actions dga program 2 expanding number platforms media deliver message consumers growing list marketing solutions includes local business market analysis message image creation target market identification advertising digital profile creation web sites mobile web sites reputation management network display ads online video development promotion keyword optimization strategies programs distribution strategies social media marketing tracking reporting addition company continues transition competeandcollaborate business model believe partnerships enable us offer broader robust array products services customers without risks capital investment ongoing maintenance associated inhouse development also continue invest business people strategic programs initiatives technology 1 dex one account management system provides ability customers log make realtime changes online marketing well view realtime performance data also enables marketing consultants construct proposals mobile devices wherever may 2 dex one sales academy provides initial training ongoing knowledge skills enhancement additional support marketing consultants throughout business 3 digital mastery training program focuses advanced product knowledge selling strategies provides additional development marketing consultants 4 digital media learning program provides marketing consultants resources needed obtain google sales certification 5 sales force technology use webex virtual sales presentations telephone marketing consultants purchase ipads premise marketing consultants recently made strategic change centralize telephone marketing consultants local markets three inside sales center locations overland park kansas denver colorado omaha nebraska locations expect able leverage scale resources greater efficiency focus equally across geography serve well market opportunities also expect able utilize state art telephone technology increase reach contact rates efficiencies overland park center fully staffed 2011 denver omaha centers fully staffed 2012 believe strategic investments help us drive incremental revenue time continue actively manage expenses considering acting upon various initiatives opportunities streamline operations reduce cost structure one initiative centers around print product optimization ppo evaluation print related expenses processes focus ppo includes initiatives transforming print products design content well distribution optimization believe ppo drive significant savings annual print costs continuing provide valuable products quality service customers also continue assess organizational structure ensure properly supports base business optimized compete rapidly evolving marketplace companys strategic objective build existing strengths assets maximize value shareholders constituents despite challenging industry economic environment face company taken significant steps towards reducing leverage obtaining amendments credit facilities march 2012 resulted repurchase 1421 million loans credit facilities purchase price 695 million addition april 2012 repurchased 982 million aggregate principal amount dex one senior subordinated notes purchase price 265 million retain option making additional repurchases outstanding debt par future permitted impairment useful life analysis company reviews carrying value definitelived intangible assets longlived assets whenever events circumstances indicate carrying amount may recoverable based evaluation year ended december 31 2012 concluded carrying amounts definitelived intangible assets longlived assets recoverable company evaluates remaining useful lives definitelived intangible assets longlived assets whenever events circumstances indicate revision remaining period amortization warranted estimated remaining useful lives change remaining carrying amount intangible assets longlived assets would amortized prospectively revised remaining useful life company evaluated remaining useful lives definitelived intangible assets longlived assets december 31 2012 considering among things effects obsolescence demand competition takes consideration price premium benefit competing independent publishers markets result directory services agreements acquired prior acquisitions economic factors including stability industry operate known technological advances legislative actions result uncertain changing regulatory environment expected changes distribution channels based evaluation factors december 31 2012 company determined estimated useful lives intangible assets presented item 8 “financial statements supplementary data” note 2 “summary significant accounting policies identifiable intangible assets goodwill” reflect period expected contribute future cash flows therefore deemed appropriate first quarter 2012 company performed evaluation remaining useful lives definitelived intangible assets longlived assets based evaluation factors first quarter 2012 company determined estimated useful lives directory services agreements local national customer relationships tradenames trademarks longer reflected period expected contribute future cash flows therefore company reduced estimated useful lives intangible assets result reducing estimated useful lives intangible assets noted company experienced increase amortization expense 1616 million 2012 industry local business conditions markets deteriorate excess current estimates potentially resulting declines advertising sales operating results trading value debt equity securities continue decline significantly required assess recoverability useful lives intangible assets longlived assets factors including changes assumptions used impairment analysis result factors could result future impairment charges reduction remaining useful lives associated intangible assets longlived assets acceleration amortization expense fresh start accounting company adopted fresh start accounting reporting february 1 2010 “fresh start reporting date” net revenues operating results significantly impacted 2010 adoption fresh start accounting fresh start reporting date see “results operations factors affecting comparability” additional information impact fresh start accounting company’s presentation nongaap combined adjusted results 2010 labor unions unionized employees represented either international brotherhood electrical workers america “ibew” communication workers america “cwa” dex media’s collective bargaining agreement ibew expires may 2015 dex media’s collective bargaining agreement cwa expires march 2016 climate change growing concern global climate change emissions carbon dioxide concern led possibility federal climate change legislation well litigation relating greenhouse gas emissions cannot predict impact proposed legislation final believe current regulation litigation related global climate change likely material impact business future financial position results operations cash flow accordingly current financial projections include impact climate change regulation litigation healthcare reform legislation march 2010 patient protection affordable care act healthcare education reconciliation act 2010 signed law significant impact financial position results operations cash flows result new legislation anticipate significant impact foreseeable future segment reporting periods covered annual report management reviews analyzes business providing marketing solutions one operating segment new accounting pronouncements june 2011 financial accounting standards board fasb issued accounting standards update asu 201105 comprehensive income topic 220 presentation comprehensive income “asu 201105” asu 201105 allows entity option present total comprehensive income components net income components comprehensive income either single continuous statement comprehensive income two separate consecutive statements choices entity required present component net income along total net income component comprehensive income along total comprehensive income total amount comprehensive income asu 201105 eliminates option present components comprehensive income part statement changes shareholders equity asu 201105 change items must reported comprehensive income item comprehensive income must reclassified net income december 2011 fasb issued asu 201112 comprehensive income topic 220 deferral effective date amendments presentation reclassifications items accumulated comprehensive income accounting standards update 201105 asu 201112 asu 201112 defers effective date provisions included asu 201105 require entities present reclassification adjustments accumulated comprehensive income component statement net income presented statement comprehensive income presented interim annual financial statements asu 201112 states entities must continue report reclassification adjustments accumulated comprehensive income consistent presentation requirements effect asu 201105 effective january 1 2012 company adopted applicable provisions included asu 201105 elected present single continuous statement comprehensive income february 2013 fasb issued asu 201302 comprehensive income topic 220 reporting amounts reclassified accumulated comprehensive income asu 201302 asu 201302 change current requirements reporting net income comprehensive income financial statements however asu 201302 requires entity provide information amounts reclassified accumulated comprehensive income component addition entity required present either face statement net income presented separate disclosure notes financial statements provided information presented single location significant amounts reclassified accumulated comprehensive income respective line items net income amount reclassified required us generally accepted accounting principles gaap reclassified net income entirety reporting period amounts required gaap reclassified entirety net income entity required crossreference disclosures required gaap provide additional detail amounts asu 201302 effective interim annual reporting periods beginning december 15 2012 company adopt asu effective january 1 2013 may 2011 fasb issued asu 201104 fair value measurement topic 820 amendments achieve common fair value measurement disclosure requirements us gaap ifrs “asu 201104’ asu 201104 issued provide consistent definition fair value ensure fair value measurement disclosure requirements similar gaap international financial reporting standards asu 201104 clarifies fasb’s intent application existing fair value measurement disclosure requirements changes certain fair value measurement principles enhances fair value disclosure requirements effective january 1 2012 company adopted disclosure provisions included asu 201104 adoption asu 201104 impact financial position results operations reviewed accounting pronouncements issued december 31 2012 company yet adopted believe pronouncements material impact financial position operating results critical accounting estimates preparation financial statements accordance gaap requires management estimate effect various matters inherently uncertain date financial statements estimates varies regard level judgment involved potential impact company’s predecessor company’s reported financial results estimates deemed critical different estimate could reasonably used changes estimate reasonably likely occur period could materially impact company’s predecessor company’s financial condition changes financial condition results operations company’s significant accounting policies december 31 2012 discussed item 8 “financial statements supplementary data” note 2 “summary significant accounting policies” critical estimates inherent accounting policies december 31 2012 discussed management believes current assumptions considerations used estimate amounts company’s consolidated financial statements appropriate identifiable intangible assets goodwill identifiable intangible assets intangible assets originated prior acquisitions consist directory services agreements b local national customer relationships c trademarks trade names technology advertising commitments intangible assets amortized estimated useful lives manner best reflects economic benefit derived assets company reviews carrying value definitelived intangible assets longlived assets whenever events circumstances indicate carrying amount may recoverable company reviewed following information estimates assumptions year ended december 31 2012 determine carrying amounts definitelived intangible assets longlived assets recoverable • historical financial information including revenue profit margins customer attrition data price premiums enjoyed relative competing independent publishers • longterm financial projections including limited revenue trends profit margin trends • intangible asset longlived asset carrying values changes current future use • trading values debt equity securities • companyspecific information based evaluation year ended december 31 2012 concluded carrying amounts definitelived intangible assets longlived assets recoverable december 31 2012 net carrying value intangible assets totaled 18327 million amortization expense related company’s intangible assets 3494 million 1871 million 1670 million years ended december 31 2012 2011 eleven months ended december 31 2010 respectively amortization expense predecessor company one month ended january 31 2010 156 million aggregate net book value intangible assets december 31 2012 impaired 1 net income year ended december 31 2012 would adversely impacted approximately 202 million see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies identifiable intangible assets goodwill” additional information intangible assets combined weighted average useful life identifiable intangible assets december 31 2012 9 years weighted average useful lives amortization methodology identifiable intangible assets december 31 2012 shown following table 1 identifiable intangible assets amortized income forecast method assumes value derived intangible assets greater earlier years steadily declines time company evaluates remaining useful lives definitelived intangible assets longlived assets whenever events circumstances indicate revision remaining period amortization warranted estimated remaining useful lives change remaining carrying amount intangible assets longlived assets would amortized prospectively revised remaining useful life company evaluated remaining useful lives definitelived intangible assets longlived assets december 31 2012 considering among things effects obsolescence demand competition takes consideration price premium benefit competing independent publishers markets result directory services agreements acquired prior acquisitions economic factors including stability industry operate known technological advances legislative actions result uncertain changing regulatory environment expected changes distribution channels based evaluation factors december 31 2012 company determined estimated useful lives intangible assets presented reflect period expected contribute future cash flows therefore deemed appropriate remaining useful lives intangible assets shortened 10 net income year ended december 31 2012 would adversely impacted 265 million first quarter 2012 company performed evaluation remaining useful lives definitelived intangible assets longlived assets based evaluation factors first quarter 2012 company determined estimated useful lives directory services agreements local national customer relationships tradenames trademarks longer reflected period expected contribute future cash flows therefore company reduced estimated useful lives intangible assets see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies identifiable intangible assets goodwill” additional information result reducing estimated useful lives intangible assets noted company experienced increase amortization expense 1616 million 2012 goodwill 21 billion recorded connection company’s adoption fresh start accounting discussed item 8 “financial statements supplementary data” note 3 “fresh start accounting reorganization items net” represented excess reorganization value dex one fair value identified tangible intangible assets december 31 2012 company recorded goodwill reporting units historically goodwill amortized subject impairment testing annual basis october 31st frequently indicators potential impairment existed goodwill tested impairment reporting unit level represents one level operating segment accordance fasb accounting standards codification asc 350 intangibles goodwill “fasb asc 350” december 31 2012 company’s reporting units rhdi dme inc dmw inc impairment evaluation second quarter 2011 company concluded indicators impairment result performed impairment test goodwill impairment recoverability test definitelived intangible assets longlived assets testing results definitelived intangible assets longlived assets indicated recoverable thus impairment test required based upon testing results goodwill determined remaining goodwill assigned reporting units fully impaired thus recognized aggregate goodwill impairment charge 8011 million year ended december 31 2011 please refer annual report 10k year ended december 31 2011 additional information including methodology estimates assumptions used impairment testing three months ended september 30 2010 june 30 2010 company concluded indicators impairment result performed impairment tests goodwill definitelived intangible assets longlived assets september 30 2010 june 30 2010 testing results definitelived intangible assets longlived assets resulted nongoodwill intangible asset impairment charge 43 million 173 million three months ended september 30 2010 june 30 2010 respectively total nongoodwill intangible asset impairment charge 216 million eleven months ended december 31 2010 associated trade names trademarks technology local customer relationships former businesscom reporting unit company also recognized goodwill impairment charge 3853 million 7523 million three months ended september 30 2010 june 30 2010 respectively total goodwill impairment charge 11376 million eleven months ended december 31 2010 resulting impairment testing recorded reporting units sum goodwill nongoodwill intangible asset impairment charges totaled 11593 million eleven months ended december 31 2010 please refer annual report form 10k year ended december 31 2010 additional information including methodology estimates assumptions used impairment testing periods well annual impairment test goodwill october 31 2010 fourth quarter 2010 company recognized reduction goodwill 1584 million related finalization cancellation indebtedness income tax attribute reduction calculations required performed december 31 2010 associated fresh start accounting change carrying amount goodwill since established fresh start accounting fresh start reporting date follows industry local business conditions markets deteriorate excess current estimates potentially resulting declines advertising sales operating results trading value debt equity securities continue decline significantly required assess recoverability useful lives intangible assets longlived assets factors including changes assumptions used impairment analysis result factors could result future impairment charges reduction remaining useful lives associated intangible assets longlived assets acceleration amortization expense fresh start accounting company adopted fresh start accounting reporting fresh start reporting date accordance fasb asc 852 reorganizations “fasb asc 852” holders existing voting shares immediately confirmation plan received less 50 voting shares emerging entity reorganization value company’s assets immediately date confirmation less postpetition liabilities allowed claims fasb asc 852 reorganization value represents fair value entity considering liabilities approximates amount willing buyer would pay assets company immediately restructuring reorganization value allocated respective fair value assets excess reorganization value fair value identified tangible intangible assets recorded goodwill liabilities deferred taxes stated present values amounts expected paid fair values assets liabilities represented best estimates based independent appraisals valuations foregoing available industry data trends references relevant market rates transactions used estimates assumptions subject significant uncertainties beyond reasonable control see annual report form 10k year ended december 31 2010 detailed information critical estimates assumptions methodologies used determining company’s enterprise value reorganization value fair values assets liabilities fresh start accounting well impact emergence reorganization fresh start accounting financial position results operations cash flows income taxes account income taxes asset liability method accordance fasb asc 740 income taxes “fasb asc 740” deferred income tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting adjust deferred income tax liabilities assets appropriate reflect changes tax rates expected effect temporary differences reverse establish valuation allowance offset deferred income tax assets based available evidence likely deferred income tax assets realized recognize uncertain income tax positions taken expected taken tax returns largest amount likely sustained upon audit relevant taxing authority uncertain income tax position recognized less 50 likelihood sustained company’s policy recognize interest penalties related unrecognized tax benefits income tax expense see item 8 “financial statements supplementary data” note 7 “income taxes” information regarding provision benefit income taxes ordinary course business may many transactions calculations ultimate tax outcome uncertain calculation tax liabilities involves uncertainties application complex tax laws company recognizes potential liabilities anticipated tax audit issues based estimate ultimate resolution whether extent additional taxes due although company believes estimates reasonable assurance given final outcome matters different reflected historical income tax provisions accruals part company’s financial reporting process must assess likelihood deferred income tax assets recovered unless recovery likely provision taxes must increased recording reserve form valuation allowance deferred income tax assets likely recovered process certain relevant criteria evaluated including existence deferred income tax liabilities used absorb deferred income tax assets taxable income future years company’s judgment regarding future taxable income may change due future market conditions changes us tax laws factors changes may require material adjustments deferred income tax assets accompanying adjustment net income loss period determinations made addition company operates multiple taxing jurisdictions subject audit jurisdictions audits involve complex issues may require extended period time resolve company maintains liability estimated income tax exposures opinion adequate provision income taxes made years allowance doubtful accounts sales claims company records revenue net allowance sales claims addition company records provision bad debts provision bad debts allowance sales claims estimated based historical experience company also evaluates current condition customer balances bankruptcy filings change credit policy historical chargeoff patterns recovery rates data determining allowance doubtful accounts reserve company reviews estimates periodically assess whether additional adjustment needed based economic events circumstances including actual experience end billing collection cycle company believes allowance doubtful accounts sales claims adequate cover anticipated losses current conditions however significant deterioration factors noted overall economy could materially change expectations provisions sales claims doubtful accounts estimated based percentage revenue accordingly additional 1 change either allowance percentages would impacted net income year ended december 31 2012 approximately 144 million pension benefits company’s pension plan obligations related assets defined benefit pension plans presented item 8 “financial statements supplementary data” note 9 “benefit plans” plan assets consist primarily marketable equity debt instruments valued using market quotations determination plan obligations annual pension expense requires management make number assumptions key assumptions measuring plan obligations include discount rate longterm expected return plan assets years ended december 31 2012 2011 eleven months ended december 31 2010 one month ended january 31 2010 company predecessor company utilized yield curve determine appropriate discount rate defined benefit pension plans based individual plans’ expected future cash flows asset returns based upon longterm anticipated average rate earnings expected invested funds plan following assumptions used determining company’s net periodic benefit expense income dex one retirement plan dex media pension plan defined item 8 financial statements supplementary data note 9 benefit plans following assumptions used determining predecessor company’s net periodic benefit income dex one retirement plan dex media pension plan net periodic pension expense recognized company year ended december 31 2012 19 million 1 increase discount rate would affect net income year ended december 31 2012 less 01 million 1 decrease discount rate would affect net income year ended december 31 2012 approximately 18 million 1 increase decrease longterm rate return plan assets would affect net income year ended december 31 2012 approximately 20 million net periodic pension expense income recognized company predecessor company year ended december 31 2011 eleven months ended december 31 2010 one month ended january 31 2010 10 million 35 million 01 million respectively december 31 2012 april 30 2012 settlements dex media pension plan dex one pension benefit equalization plan pbep occurred result restructuring activities time yeartodate lump sum payments participants exceeded sum service cost plus interest cost components net periodic benefit cost period settlements resulted recognition actuarial loss 37 million year ended december 31 2012 december 31 2011 settlements dex one retirement plan dex media pension plan occurred may 31 2011 settlements dex media pension plan occurred settlements resulted recognition actuarial losses 27 million year ended december 31 2011 second quarter 2010 recognized onetime curtailment gain 38 million associated departure company’s former chief executive officer stockbased compensation fair value stock options stock appreciation rights “sars” market condition calculated using blackscholes model time stockbased awards granted fair value stock options sars market condition calculated using monte carlo model time stockbased awards granted use blackscholes monte carlo models require significant judgment use estimates particularly assumptions expected volatility riskfree interest rates expected lives value stockbased awards forfeiture rates recognize stockbased compensation expense derived service periods allocation stockbased compensation expense associated stockbased awards market condition company granted 04 million 18 million 21 million stock options sars years ended december 31 2012 2011 eleven months ended december 31 2010 respectively company granted 07 million 06 million 02 million shares restricted stock andor restricted stock units years ended december 31 2012 2011 eleven months ended december 31 2010 respectively predecessor company grant stock options sars restricted stock one month ended january 31 2010 company used estimated weighted average forfeiture rate determining stockbased compensation expense 64 63 89 years ended december 31 2012 2011 eleven months ended december 31 2010 respectively predecessor company used estimated weighted average forfeiture rate determining stockbased compensation expense 102 january 2010 following assumptions used valuing stockbased awards recognition allocation stockbased compensation expense years ended december 31 2012 2011 eleven months ended december 31 2010 respectively since company recently emerged bankruptcy sufficient companyspecific historical data order determine certain assumptions used valuing stockbased awards company utilized companyspecific historical data well peer competitive company data order estimate expected volatility assumption used valuing stockbased awards years ended december 31 2012 2011 eleven months ended december 31 2010 expected life represents period time stockbased awards granted expected outstanding company estimated expected life using simplified method permitted staff accounting bulletin 110 use simplified method developing expected term share options stockbased awards satisfied “plain vanilla” criteria simplified method calculates expected life average vesting contractual terms award riskfree interest rate based applicable us treasury yields approximate expected life stockbased awards granted company years ended december 31 2012 2011 eleven months ended december 31 2010 company used actual voluntary turnover data estimate weighted average forfeiture rate predecessor company used historical data estimate weighted average forfeiture rate one month ended january 31 2010 estimated forfeitures adjusted extent actual forfeitures differ expected materially differ estimates derived service periods associated stockbased awards market condition calculated determining average time company’s stock price reached given exercise price across monte carlo simulations stock price reach exercise price company excluded paths assumptions reflect best estimates involve inherent uncertainties based certain conditions generally outside control result assumptions used total stockbased compensation expense could materially impacted furthermore use different assumptions future grants stockbased compensation expense could materially impacted future periods see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies stockbased awards” note 8 “stock incentive plans” additional information fair value financial instruments december 31 2012 2011 fair value cash equivalents accounts receivable net accounts payable accrued liabilities approximated carrying value based net shortterm nature instruments company’s assets liabilities fair valued fresh start reporting date connection adoption fresh start accounting see annual report form 10k year ended december 31 2010 detailed information methodology assumptions used value assets liabilities conjunction adoption fresh start accounting estimates fair value may affected assumptions made accordingly necessarily indicative amounts company could realize current market exchange fasb asc 820 fair value measurements disclosures “fasb asc 820” defines fair value establishes fair value hierarchy prioritizes inputs valuation techniques used measure fair value expands disclosures fair value measurements fasb asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy gives highest priority quoted prices active markets comprised following three levels level 1 unadjusted quoted market prices active markets identical assets liabilities level 2 observable inputs level 1 inputs quoted prices similar assets liabilities quoted prices markets insufficient volume infrequent transactions modelderived valuations significant inputs observable derived principally corroborated observable market data substantially full term assets liabilities level 3 prices valuations require inputs significant measurement unobservable required fasb asc 820 assets liabilities classified based lowest level input significant fair value measurement company’s assessment significance particular input fair value measurement requires judgment may affect valuation fair value assets liabilities placement within fair value hierarchy levels company interest rate swaps notional amount 3000 million 5000 million december 31 2012 2011 respectively interest rate caps notional amount 2000 million 4000 million december 31 2012 2011 respectively measured fair value recurring basis following table presents company’s assets liabilities measured fair value recurring basis december 31 2012 2011 respectively level within fair value hierarchy fair value measurements included transfers assets liabilities levels 1 2 3 years ended december 31 2012 2011 company established policy recognizing transfers levels fair value hierarchy end reporting period company’s longterm debt obligations measured fair value recurring basis however present fair value dex one senior subordinated notes credit facilities item 8 “financial statements supplementary data” note 5 “longterm debt” company utilized quoted market prices available compute fair market value longterm debt obligations december 31 2012 2011 dex one senior subordinated notes categorized within level 1 fair value hierarchy credit facilities categorized within level 2 fair value hierarchy valuation techniques interest rate swaps interest rate caps fair value marketbased measure considered perspective market participant holds asset owes liability rather entityspecific measure therefore even market assumptions readily available company’s assumptions set reflect market participants would use pricing asset liability measurement date company uses prices inputs current measurement date fair value derivative instruments derived using pricing models based market approach pricing models take account relevant observable market inputs market participants would use pricing asset liability pricing models used determine fair value derivative instruments incorporate specific contract terms valuation inputs including effective dates maturity dates interest rate swap pay rates interest rate cap rates notional amounts disclosed presented item 8 “financial statements supplementary data” note 6 “derivative financial instruments” interest rate yield curves creditworthiness counterparty company counterparty credit risk company’s credit risk could material impact fair value derivative instruments results operations financial condition particular reporting period december 31 2012 impact applying counterparty credit risk andor companys credit risk determining fair value derivative instruments material many pricing models entail material subjectivity methodologies employed necessitate significant judgment pricing inputs observed actively quoted markets case derivative instruments pricing models used company widely accepted financial services industry noted derivative instruments categorized within level 2 fair value hierarchy fair value control processes interest rate swaps interest rate caps company employs control processes validate fair value derivative instruments derived pricing models control processes designed assure values used financial reporting based observable inputs wherever possible event observable inputs available control processes designed assure valuation approach utilized appropriate consistently applied assumptions reasonable benefit plan assets fair value assets held dex one retirement account master trust “master trust” december 31 2012 2011 asset category follows category includes investments us government bonds government mortgagebacked securities indexlinked government bonds guaranteed commercial paper shortterm treasury bills notes fair value assets determined using bid evaluation process observable market based inputs effective last business day plan year b category includes investments two commoncollective funds 78 invested stocks comprising russell 1000 equity index remaining 22 comprised shortterm investments december 31 2012 82 invested stocks comprising russell 1000 equity index remaining 18 comprised shortterm investments december 31 2011 fair value assets calculated based upon compilation observable market information c category includes investments corporate bonds commercial mortgagebacked assetbacked securities collateralized mortgage obligations fair value assets determined using bid evaluation process observable market based inputs effective last business day plan year category includes investments small cap stocks across diverse industries fair value assets determined using quoted market prices recognized securities exchange last reported trading price last business day plan year e category comprised one mutual fund invests intermediate term fixed income instruments treasuries high grade corporate bonds fair value assets determined using quoted market prices recognized securities exchange last reported trading price last business day plan year f category comprised healthcare real estate investment trust fair value assets determined based traded market prices g category includes investments 5 10 20 year us treasury bond futures equity index futures fair value assets determined based settlement prices recognized active market exchange h category includes investments credit default swaps fair value assets determined based mid evaluation process using observable market based inputs category includes investments passively managed funds composed international stocks across diverse industries fair value assets calculated based upon compilation observable market information asset management committee “amc” appointed compensation benefits committee company’s board directors named fiduciary plan matters relating plan investments asset management amc authority appoint retain monitor remove custodian investment manager responsible establishing maintaining funding investment policy master trust see item 8 “financial statements supplementary data” note 9 “benefit plans” information regarding benefit plans results operations year ended december 31 2012 compared year ended december 31 2011 net revenues components net revenues years ended december 31 2012 2011 follows advertising revenues earned primarily sale advertising yellow pages directories publish advertising revenues also include revenues internetbased marketing solutions including online directories dexknowscom dexnet advertising revenues affected several factors including changes quantity size characteristics advertisements acquisition new clients renewal rates existing clients premium advertisements sold changes advertisement pricing introduction new marketing solutions increase competition fragmentation local business search market general economic factors revenues respect print advertising internetbased marketing solutions sold print advertising recognized deferral amortization method whereby revenues initially deferred directory published net sales claims allowances recognized ratably directory’s life typically 12 months revenues respect internetbased marketing solutions sold standalone dexnet recognized ratably life contract commencing first delivered fulfilled revenues respect marketing solutions performancebased recognized service delivered fulfilled gross advertising revenues 12942 million year ended december 31 2012 declined 1808 million 123 gross advertising revenues 14750 million year ended december 31 2011 decline gross advertising revenues year ended december 31 2012 related print products primarily result continuing declines new recurring business mainly driven 1 customer attrition 2 declines overall advertising spending customers 3 significant impact weak local business conditions consumer spending customers’ markets 4 increase competition fragmentation local business search 5 migration customers digital marketing solutions decline gross advertising revenues also result recognizing approximately one month revenues businesscom 2011 comparable revenues 2012 declines print advertising revenues partially offset increased advertising revenues associated digital marketing solutions driven new partnerships focus providing targeted solution bundled packages customers new digital products services migration customers digital marketing solutions expenses components expenses years ended december 31 2012 2011 follows certain costs directly related selling production directories initially deferred amortized ratably life directories deferral amortization method accounting match revenue recognized relating directories cost recognition commencing month directory distribution substantially complete costs specifically identifiable particular directory include sales commissions print paper initial distribution costs sales commissions include amounts paid employees sales local customers certified marketing representatives cmrs act channel national clients expenses sales person salaries sales manager compensation sales office occupancy publishing information technology services specifically identifiable particular directory recognized incurred costs recognized reporting period consist costs incurred period fully recognized period ii costs incurred prior period portion amortized recognized current period iii costs incurred current period portion amortized recognized current period balance deferred future periods consequently difference costs recognized given period costs incurred given period may significant production distribution expenses production distribution expenses year ended december 31 2012 2837 million compared production distribution expenses 2872 million year ended december 31 2011 primary components 35 million 12 decrease production distribution expenses year ended december 31 2012 follows print paper distribution expenses year ended december 31 2012 declined 250 million compared print paper distribution expenses year ended december 31 2011 primarily due lower page volumes associated declines print advertisements well ongoing ppo initiatives reduce printrelated costs internet production distribution expenses year ended december 31 2012 increased 274 million compared internet production distribution expenses year ended december 31 2011 primarily due increased dexnet traffic costs driven higher sales volume cost per click rates increase internet production distribution expenses also attributable higher volume digital products services decrease net year ended december 31 2012 59 million primarily due declines printrelated expenses resulting ongoing ppo initiatives selling support expenses selling support expenses year ended december 31 2012 3445 million compared selling support expenses 4268 million year ended december 31 2011 primary components 823 million 193 decrease selling support expenses year ended december 31 2012 follows commissions salesperson expenses year ended december 31 2012 declined 322 million compared commissions salesperson expenses year ended december 31 2011 primarily due lower print advertising sales effect variablebased commissions well lower headcount related expenses bad debt expense year ended december 31 2012 declined 197 million compared bad debt expense year ended december 31 2011 primarily due effective credit collections practices driven improvements accounts receivable portfolio well lower billing volumes associated declines advertisers advertising sales advertising expenses year ended december 31 2012 declined 92 million compared advertising expenses year ended december 31 2011 primarily due reduction media spend directory publishing expenses year ended december 31 2012 declined 68 million compared directory publishing expenses year ended december 31 2011 primarily due declines print advertisements lower headcount marketing expenses year ended december 31 2012 declined 54 million compared marketing expenses year ended december 31 2011 primarily due lower headcount billing credit collection expenses year ended december 31 2012 declined 37 million compared billing credit collection expenses year ended december 31 2011 primarily due lower headcount general administrative expenses general administrative “ga” expenses year ended december 31 2012 1274 million compared ga expenses 1441 million year ended december 31 2011 primary components 167 million 116 decrease ga expenses year ended december 31 2012 follows fourth quarter 2010 company initiated restructuring plan included headcount reductions consolidation responsibilities vacating leased facilities continued 2011 “restructuring actions” result restructuring actions company recognized restructuring charge 250 million year ended december 31 2011 restructuring charges recognized conjunction restructuring actions year ended december 31 2012 general corporate expenses year ended december 31 2012 declined 97 million compared general corporate expenses year ended december 31 2011 due lower headcount related expenses lower professional fees year ended december 31 2012 company recognized merger transaction integration expenses 118 million related proposed merger dex one supermedia year ended december 31 2012 company recognized severance related expenses 60 million unrelated restructuring actions depreciation amortization expenses depreciation amortization expenses year ended december 31 2012 4187 million compared depreciation amortization expenses 2518 million year ended december 31 2011 amortization intangible assets 3494 million year ended december 31 2012 compared 1871 million year ended december 31 2011 significant increase intangible asset amortization expense year ended december 31 2012 result accelerated amortization expense due reduction estimated useful lives directory services agreements local national customer relationships tradenames trademarks first quarter 2012 see item 8 financial statements supplementary data note 2 summary significant accounting policies identifiable intangible assets goodwill additional information depreciation fixed assets amortization computer software 692 million year ended december 31 2012 compared 647 million year ended december 31 2011 increase depreciation fixed assets amortization computer software year ended december 31 2012 primarily due software development capital projects placed service 2012 well accelerated depreciation expense associated closure facilities disposal assets 2012 impairment charges second quarter 2011 company concluded indicators impairment result performed impairment test goodwill impairment recoverability test definitelived intangible assets longlived assets testing results definitelived intangible assets longlived assets indicated recoverable thus impairment test required based upon testing results goodwill determined remaining goodwill assigned reporting units fully impaired thus recognized aggregate goodwill impairment charge 8011 million year ended december 31 2011 please refer annual report 10k year ended december 31 2011 additional information including methodology estimates assumptions used impairment testing operating income loss operating income loss 1257 million year ended december 31 2012 compared 4304 million year ended december 31 2011 change operating income loss year ended december 31 2012 primarily due goodwill impairment charge recognized second quarter 2011 change operating income loss year ended december 31 2012 also result continuing declines print revenues well increase depreciation amortization expenses described partially offset declines operating expenses also described gain debt repurchases net result debt repurchases recognized noncash pretax gains 1396 million year ended december 31 2012 see item 8 financial statements supplementary data note 1 business basis presentation significant financing developments additional information gain sale assets net february 14 2011 completed sale substantially net assets businesscom including longlived assets domain names trademarks brands intellectual property related content technology platform result recognized gain sale assets 134 million year ended december 31 2011 interest expense net interest expense company 1960 million year ended december 31 2012 compared 2268 million year ended december 31 2011 decrease net interest expense year ended december 31 2012 primarily due lower outstanding debt result mandatory accelerated debt repayments partially offset increase net interest expense result companys election make paidinkind pik interest payments dex one senior subordinated notes semiannual interest periods ending september 30 2012 march 31 2012 certain costs associated credit facility repurchases capitalized included noncurrent assets consolidated balance sheets costs amortized interest expense terms related debt agreements using effective interest method amortization deferred financing costs included interest expense 17 million year ended december 31 2012 conjunction adoption fresh start accounting reporting fresh start reporting date adjustment established record outstanding debt fair value fresh start reporting date fair value adjustment amortized increase interest expense remaining term respective debt agreements using effective interest method impact future scheduled interest principal payments amortization fair value adjustment included increase interest expense 245 million 278 million years ended december 31 2012 2011 respectively first quarter 2010 entered interest rate swap interest rate cap agreements designated cash flow hedges company’s interest expense includes income 23 million 34 million years ended december 31 2012 2011 respectively resulting change fair value interest rate swaps interest rate caps income taxes quarterly income tax provision benefit income taxes measured using estimated annual effective tax rate period adjusted discrete items occurred within periods presented year ended december 31 2012 recorded income tax provision 69 million represents effective tax rate 10 effective tax rate year ended december 31 2012 differs federal statutory rate 350 primarily due changes recorded valuation allowances impact state income taxes changes deferred tax liabilities related stock basis subsidiaries irc section 1245 recapture impact nondeductible interest expense related credit facilities adjustments related filing consolidated tax return income tax provision 69 million year ended december 31 2012 comprised federal tax benefit 14 million state tax provision 83 million federal tax benefit 14 million comprised current tax benefit 47 million primarily related alternative minimum tax relief deferred tax provision 33 million primarily due changes deferred tax liabilities relating stock basis subsidiaries internal revenue code irc section 1245 recapture year ended december 31 2012 state tax provision 83 million comprised current tax provision 45 million primarily related suspension net operating loss carryforwards certain states deferred tax provision 38 million primarily due changes liabilities relating stock basis subsidiaries irc section 1245 recapture year ended december 31 2012 debt repurchases resulted tax gain 1415 million year ended december 31 2012 generally discharge debt obligation amount less adjusted issue price creates cancellation debt income codi must included taxpayers taxable income however accordance irc section 108 lieu recognizing taxable income codi company required reduce existing tax attributes result company recognized estimated decrease deferred tax assets relating net operating losses basis amortizable depreciable property approximately 546 million year ended december 31 2012 decreases offset decrease recorded valuation allowance year ended december 31 2012 company recorded decrease valuation allowance year ended december 31 2012 result debt repurchases discussed addition valuation allowance decreased year ended december 31 2012 result reduction estimated useful lives certain intangible assets change circumstances resulted change judgment companys ability realize deferred tax assets future years resulting change income tax expense allocated year ended december 31 2012 relating changes valuation allowance decrease 389 million reduces effective tax rate year ended december 31 2012 approximately 562 company recorded deferred tax liabilities related change excess financial statement carrying amount tax basis investments certain subsidiaries irc section 1245 recapture result debt repurchases reduction existing tax attributes discussed resulting increase income tax expense year ended december 31 2012 100 million increased effective tax rate 145 company recorded income tax provision 56 million related nondeductible interest expense associated credit facilities year ended december 31 2012 increased effective tax rate 81 year ended december 31 2011 recorded income tax benefit 1248 million represents effective tax rate 194 effective tax rate year ended december 31 2011 differs federal statutory rate 350 primarily due state income taxes nondeductible goodwill impairment changes deferred tax liabilities related stock basis subsidiaries irc section 1245 recapture changes recorded valuation allowances decreases liability unrecognized tax benefits adjustments related filing consolidated federal income tax return income tax benefit 1248 million year ended december 31 2011 comprised federal tax benefit 929 million state tax benefit 318 million federal tax benefit 929 million comprised current tax benefit 190 million primarily related decreases liability unrecognized tax benefits deferred tax benefit 740 million due changes temporary differences related goodwill impairment changes deferred tax liabilities relating stock basis subsidiaries irc section 1245 recapture changes recorded valuation allowances year ended december 31 2011 state tax benefit 318 million comprised current tax provision 29 million primarily related suspension net operating loss carryforwards certain states deferred tax benefit 347 million primarily due changes temporary differences related goodwill impairment changes liabilities relating stock basis subsidiaries irc section 1245 recapture year ended december 31 2011 company recorded goodwill impairment charge 8011 million second quarter 2011 4572 million related nondeductible goodwill impairment nondeductible goodwill reduced income tax benefit impairment 1772 million decreased effective tax rate 275 year ended december 31 2011 goodwill impairment charge recognized second quarter 2011 gave rise deferred tax asset whose realization meet morelikelythannot threshold therefore requiring valuation allowance addition changes deferred tax assets liabilities primarily related filing 2010 consolidated federal tax return resulted increases valuation allowance year ended december 31 2011 resulting increase income tax expense year ended december 31 2011 512 million decreased effective tax rate 80 year ended december 31 2011 upon emergence bankruptcy company recorded deferred tax liabilities related excess financial statement carrying amount tax basis investments certain subsidiaries irc section 1245 recapture goodwill impairment charge reduced financial statement carrying amount investments certain subsidiaries also caused reduction deferred tax liabilities resulting reduction income tax expense year ended december 31 2011 related change deferred tax liabilities 811 million increased effective tax rate 126 year ended december 31 2011 june 15 2011 federal statute limitations closed tax year prior uncertain tax position related revenue recognition established result company decreased liability unrecognized tax benefits associated federal state uncertain tax position 282 million recorded tax benefit 240 million year ended december 31 2011 increased effective tax rate 37 year ended december 31 2011 year ended december 31 2011 company increased liability unrecognized tax benefits 52 million primarily related uncertainty realization certain tax attributes available reduction irc section 108 reduced income tax benefit 51 million decreased effective tax rate 08 year ended december 31 2011 third quarter 2011 company increased liability unrecognized tax benefits 18 million related exclusion nonbusiness income state illinois fourth quarter 2011 company reached settlement state illinois eliminated related liability unrecognized tax benefits net income loss earnings loss per share net income loss 624 million year ended december 31 2012 compared 5190 million year ended december 31 2011 change net income loss year ended december 31 2012 primarily due goodwill impairment charge corresponding income tax benefit recognized second quarter 2011 change net income loss year ended december 31 2012 also result net gains debt repurchases declines operating expenses described offset continuing declines print revenues well increase depreciation amortization expenses described basic diluted earnings loss per share “eps” 123 1035 years ended december 31 2012 2011 respectively see item 8 financial statements supplementary data note 2 “summary significant accounting policies earnings loss per share” details computations basic diluted eps nongaap statistical measures advertising sales nongaap statistical measure consists sales advertising print directories distributed period internetbased products services respect advertising first appeared publicly period important distinguish advertising sales net revenues gaap recognized deferral amortization method advertising sales current periods recognized gross advertising revenues future periods result deferral amortization method revenue recognition advertising sales year ended december 31 2012 11943 million representing decline 1956 million 141 advertising sales 13899 million year ended december 31 2011 order provide visibility company book revenue future presenting additional nongaap statistical measure called bookings represent sales activity associated print directories internetbased marketing solutions period bookings associated local customers represent signed contracts period bookings associated national customers represent published fulfilled period bookings year ended december 31 2012 11226 million representing decline 1714 million 132 bookings 12940 million year ended december 31 2011 decrease advertising sales bookings year ended december 31 2012 related print products result continuing declines new recurring business mainly driven 1 customer attrition 2 declines overall advertising spending customers 3 significant impact weak local business conditions consumer spending customers’ markets 4 increase competition fragmentation local business search 5 migration customers digital marketing solutions declines print advertising sales bookings partially offset increased advertising sales bookings associated digital marketing solutions driven new partnerships focus providing targeted solution bundled packages customers new digital products services migration customers digital marketing solutions 2011 compared 2010 factors affecting comparability fresh start accounting adjustments nongaap analysis successor company adopted fresh start accounting reporting fresh start reporting date financial statements fresh start reporting date report results dex one beginning retained earnings accumulated deficit presentation dex one represents financial position results operations new reporting entity comparable prior period presented predecessor company financial statements one month ended january 31 2010 include effect changes predecessor company’s capital structure changes fair value assets liabilities result fresh start accounting result deferral amortization method revenue recognition recognized gross advertising revenues reflect amortization advertising sales consummated prior periods well current period adoption fresh start accounting significant impact financial position results operations successor company commencing fresh start reporting date consistent predecessor company’s historical application acquisition method accounting business combinations included fasb asc 805 business combinations fresh start accounting precluded us recognizing advertising revenue certain expenses associated advertising sales fulfilled prior fresh start reporting date thus reported results eleven months ended december 31 2010 indicative underlying operating financial performance comparable current period presentation adoption fresh start accounting impact cash flows operations accordingly management provided nongaap analysis compares gaap results successor company year ended december 31 2011 nongaap combined adjusted results year ended december 31 2010 net revenues depreciation amortization expenses consolidated statements comprehensive income loss nongaap combined adjusted results 1 combines gaap results successor company eleven months ended december 31 2010 gaap results predecessor company one month ended january 31 2010 2 adjusts combined amounts eliminate fresh start accounting impact revenue certain related expenses noted ii exclude costuplift recorded fresh start accounting deferred directory costs included prepaid expenses current assets consolidated balance sheet print paper distribution commissions relate directories yet published deferred directory costs recorded fair value determined estimated billable value published directory less b expected costs complete directory plus c normal profit margin incremental fresh start accounting adjustment step recorded value deferred directory costs fair value hereby referred “costuplift” costuplift amortized terms applicable directories exceed twelve months allocated production distribution expenses selling support expenses based upon category deferred directory costs fair valued fresh start accounting immaterial impact results operations year ended december 31 2011 therefore adjusted gaap results period nongaap analysis management believes presentation nongaap combined adjusted results help financial statement users better understand material impact fresh start accounting successor company’s results operations eleven months ended december 31 2010 also offers nongaap normalized comparison gaap results successor company year ended december 31 2011 nongaap combined adjusted results presented reconciled comparable gaap measures nongaap combined adjusted results exclude effects fresh start accounting must noted nongaap combined adjusted results comparable successor company’s gaap results year ended december 31 2011 treated impairment charges nongaap analysis successor company removed goodwill impairment charge recognized second quarter 2011 totaling 8011 million gaap results year ended december 31 2011 presenting nongaap adjusted results impairment charges operating income loss consolidated statement comprehensive income loss period successor company also removed goodwill nongoodwill intangible asset impairment charges totaling 11593 million gaap results eleven months ended december 31 2010 presenting nongaap combined adjusted results impairment charges operating income loss consolidated statement comprehensive income loss period gaap analysis order emphasize importance gaap results management also provided separate gaap analysis following periods • gaap results successor company line items operating income loss consolidated statements comprehensive income loss year ended december 31 2011 management believes line items combined compared nongaap analysis noted based upon distinct differences composition successor company predecessor company reporting periods presented • gaap results successor company predecessor company eleven months ended december 31 2010 one month ended january 31 2010 respectively line items operating income loss consolidated statements comprehensive income loss comprise nongaap combined adjusted results included nongaap analysis noted line items operating income loss combined compared reasons discussed gaap analysis includes discussion results individual reporting period however provide comparison results individual reporting periods due reasons discussed gaap results net revenues depreciation amortization expenses nongaap adjusted results impairment charges operating income loss year ended december 31 2011 compared nongaap combined adjusted results year ended december 31 2010 net revenues components gaap net revenues year ended december 31 2011 nongaap combined adjusted net revenues year ended december 31 2010 follows 1 represents gross advertising revenues sales claims allowances revenues advertising sales fulfilled prior fresh start reporting date would recognized eleven months ended december 31 2010 absent adoption fresh start accounting required gaap gross advertising revenues year ended december 31 2011 decreased 3101 million 174 nongaap combined adjusted gross advertising revenues year ended december 31 2010 decline gaap gross advertising revenues year ended december 31 2011 related print products primarily result continuing declines new recurring business mainly driven 1 customer attrition 2 declines overall advertising spending customers 3 significant impact weak local business conditions consumer spending customers’ markets 4 increase competition fragmentation local business search 5 migration customers digital marketing solutions decline gaap gross advertising revenues also result recognizing approximately one month revenues businesscom 2011 compared full year revenues 2010 due sale substantially net assets businesscom february 2011 well recognizing revenues 2011 associated certified marketing representative “cmr” financial distress winding operations declines gaap print advertising revenues partially offset increased gaap advertising revenues associated digital marketing solutions driven new partnerships entered 2011 focus providing targeted solution bundled packages customers new digital products services introduced 2011 well migration customers digital marketing solutions gaap sales claims allowances year ended december 31 2011 decreased 115 million 420 nongaap combined adjusted sales claims allowances year ended december 31 2010 decline gaap sales claims allowances year ended december 31 2011 primarily due lower claims experience result process improvements operating efficiencies improved print copy quality certain markets well lower advertising sales volume expenses components gaap nongaap adjusted expenses year ended december 31 2011 nongaap combined adjusted expenses year ended december 31 2010 follows 1 represents certain deferred expenses advertising sales fulfilled prior fresh start reporting date would recognized eleven months ended december 31 2010 absent adoption fresh start accounting required gaap b exclusion costuplift recorded fresh start accounting 2 goodwill impairment charge removed gaap results year ended december 31 2011 goodwill nongoodwill intangible asset impairment charges removed gaap results eleven months ended december 31 2010 production distribution expenses gaap production distribution expenses year ended december 31 2011 2872 million compared nongaap combined adjusted production distribution expenses 3215 million year ended december 31 2010 primary components 343 million 107 decrease gaap production distribution expenses year ended december 31 2011 follows gaap internet production distribution expenses year ended december 31 2011 declined 239 million compared nongaap combined adjusted internet production distribution expenses year ended december 31 2010 decline gaap internet production distribution expenses primarily result recognizing approximately one month expenses businesscom 2011 compared full year expenses 2010 due sale substantially net assets businesscom february 2011 declines partially offset increased purchased traffic costs direct traffic website driven higher cost per click rates gaap print paper distribution expenses year ended december 31 2011 declined 108 million compared nongaap combined adjusted print paper distribution expenses year ended december 31 2010 primarily due lower page volumes associated declines print advertisements selling support expenses gaap selling support expenses year ended december 31 2011 4268 million compared nongaap combined adjusted selling support expenses 5060 million year ended december 31 2010 primary components 792 million 157 decrease gaap selling support expenses year ended december 31 2011 follows gaap commissions salesperson expenses year ended december 31 2011 decreased 217 million compared nongaap combined adjusted commissions salesperson expenses year ended december 31 2010 primarily due lower advertising sales effect variablebased commissions lower headcount declines commissions associated cmr financial distress winding operations partially offset increase salesperson training expenses gaap marketing expenses year ended december 31 2011 declined 193 million compared nongaap combined adjusted marketing expenses year ended december 31 2010 due lower headcount reduced interactive marketing spend primarily related sale substantially net assets businesscom february 2011 noted gaap bad debt expense year ended december 31 2011 declined 130 million compared nongaap combined adjusted bad debt expense year ended december 31 2010 primarily due effective credit collections practices driven improvement accounts receivable portfolio well lower billing volumes associated declines advertisers advertising sales partially offset writeoff experience associated cmr referenced impact allowance factors gaap bad debt expense year ended december 31 2011 represented 35 net revenue compared 37 nongaap combined adjusted year ended december 31 2010 gaap advertising expenses year ended december 31 2011 decreased 111 million compared nongaap combined adjusted advertising expenses year ended december 31 2010 primarily due reduction media spend 2011 gaap directory publishing expenses year ended december 31 2011 declined 65 million compared nongaap combined adjusted directory publishing expenses year ended december 31 2011 primarily due declines print advertisements lower headcount gaap billing credit collection expenses year ended december 31 2011 declined 47 million compared nongaap combined adjusted billing credit collection expenses year ended december 31 2011 primarily due lower headcount general administrative expenses gaap ga expenses year ended december 31 2011 1441 million compared nongaap combined adjusted ga expenses 1571 million year ended december 31 2010 primary components 130 million 83 decrease gaap ga expenses year ended december 31 2011 follows nongaap combined adjusted year ended december 31 2010 recognized expenses 95 million associated departure former chief executive officer comparable expenses recognized year ended december 31 2011 gaap expenses year ended december 31 2011 declined 50 million compared nongaap combined adjusted expenses year ended december 31 2010 primarily due lower headcount fourth quarter 2010 commenced restructuring actions continued throughout 2011 result restructuring actions company recognized restructuring charge 250 million year ended december 31 2011 fourth quarter 2010 company recorded restructuring charge 186 million associated restructuring actions represents increase restructuring expenses 64 million year ended december 31 2011 decrease net year ended december 31 2011 49 million primarily due declines general corporate expenses primarily related lower headcount lower professional dues fees depreciation amortization expenses gaap depreciation amortization expenses year ended december 31 2011 2518 million compared combined depreciation amortization expenses 2379 million year ended december 31 2010 gaap amortization intangible assets 1871 million year ended december 31 2011 compared combined amortization intangible assets 1826 million year ended december 31 2010 increase gaap intangible asset amortization expense year ended december 31 2011 primarily result additional amortization expense associated revisions longterm forecast direct impact timing amortization expense associated intangible assets amortized using income forecast method see additional information income forecast amortization methodology assumes value derived intangible assets associated amortization expense greater earlier years steadily declines time increase gaap intangible asset amortization expense offset recognizing amortization expense businesscom intangible assets 2011 intangible assets fully impaired 2010 well impact income forecast amortization methodology discussed conjunction impairment testing may 31 2011 company evaluated remaining useful lives identifiable intangible assets longlived assets based evaluation company determined estimated useful lives intangible assets continued deemed appropriate may 31 2011 however revisions longterm forecast used impairment testing may 31 2011 direct impact timing amortization expense associated intangible assets amortized using income forecast method company experienced increase amortization expense 343 million 2011 resulting changes gaap depreciation fixed assets amortization computer software 647 million year ended december 31 2011 compared combined depreciation 553 million year ended december 31 2010 increase gaap depreciation expense year ended december 31 2011 primarily due software development capital projects placed service later part 2010 first half 2011 well accelerated depreciation expense related facilities abandoned result restructuring actions impairment charges based upon continued decline trading value debt equity securities revisions made longterm forecast changes management company concluded indicators impairment may 31 2011 result performed impairment tests goodwill definitelived intangible assets longlived assets may 31 2011 impairment testing results recoverability definitelived intangible assets longlived assets indicated recoverable thus impairment test required may 31 2011 based upon testing results goodwill determined remaining goodwill assigned reporting units fully impaired thus recognized aggregate goodwill impairment charge 8011 million second quarter 2011 recorded reporting units december 31 2011 company recorded goodwill reporting units three months ended september 30 2010 june 30 2010 company concluded indicators impairment result performed impairment tests goodwill definitelived intangible assets longlived assets september 30 2010 june 30 2010 testing results definitelived intangible assets longlived assets resulted nongoodwill intangible asset impairment charge 43 million 173 million three months ended september 30 2010 june 30 2010 respectively total nongoodwill intangible asset impairment charge 216 million eleven months ended december 31 2010 associated trade names trademarks technology local customer relationships former businesscom reporting unit company also recognized goodwill impairment charge 3853 million 7523 million three months ended september 30 2010 june 30 2010 respectively total goodwill impairment charge 11376 million eleven months ended december 31 2010 resulting impairment testing recorded reporting units sum goodwill nongoodwill intangible asset impairment charges totaled 11593 million eleven months ended december 31 2010 please refer annual reports form 10k year ended december 31 2011 year ended december 31 2010 additional information including methodology estimates assumptions used impairment testing periods operating income loss nongaap adjusted operating income loss year ended december 31 2011 nongaap combined adjusted operating income loss year ended december 31 2010 follows 1 represents net effect eliminating gross advertising revenues sales claims allowances revenues certain deferred expenses advertising sales fulfilled prior fresh start reporting date would recognized eleven months ended december 31 2010 absent adoption fresh start accounting required gaap b exclusion costuplift recorded fresh start accounting c exclusion goodwill nongoodwill intangible asset impairment charges eleven months ended december 31 2010 2 goodwill impairment charge removed gaap results year ended december 31 2011 nongaap adjusted operating income year ended december 31 2011 3707 million compares nongaap combined adjusted operating income 5597 million year ended december 31 2010 decrease nongaap adjusted operating income year ended december 31 2011 primarily due continuing declines print revenue well increase depreciation amortization expenses described partially offset operating expense trends also described gaap results year ended december 31 2011 eleven months ended december 31 2010 successor company one month ended january 31 2010 predecessor company successor company year ended december 31 2011 gain sale assets february 14 2011 completed sale substantially net assets businesscom including longlived assets domain names trademarks brands intellectual property related content technology platform result recognized gain sale assets 134 million year ended december 31 2011 interest expense net interest expense company 2268 million year ended december 31 2011 net interest expense trending downward due lower outstanding debt result mandatory accelerated debt repayments conjunction adoption fresh start accounting reporting fresh start reporting date adjustment established record outstanding debt fair value fresh start reporting date fair value adjustment amortized increase interest expense remaining term respective debt agreements using effective interest method impact future scheduled interest principal payments amortization fair value adjustment included increase interest expense 278 million year ended december 31 2011 first quarter 2010 entered interest rate swap interest rate cap agreements designated cash flow hedges company’s interest expense includes income 34 million year ended december 31 2011 resulting change fair value interest rate swaps interest rate caps income taxes year ended december 31 2011 recorded income tax benefit 1248 million represents effective tax rate 194 effective tax rate year ended december 31 2011 differs federal statutory rate 350 primarily due state income taxes nondeductible goodwill impairment changes deferred tax liabilities related stock basis subsidiaries internal revenue code irc section 1245 recapture changes recorded valuation allowances decreases liability unrecognized tax benefits adjustments related filing consolidated federal income tax return income tax benefit 1248 million year ended december 31 2011 comprised federal tax benefit 929 million state tax benefit 318 million federal tax benefit 929 million comprised current tax benefit 189 million primarily related decreases liability unrecognized tax benefits deferred tax benefit 740 million due changes temporary differences related goodwill impairment changes deferred tax liabilities relating stock basis subsidiaries irc section 1245 recapture changes recorded valuation allowances year ended december 31 2011 state tax benefit 318 million comprised current tax provision 29 million primarily related suspension net operating loss carryforwards certain states deferred tax benefit 347 million primarily due changes temporary differences related goodwill impairment changes liabilities relating stock basis subsidiaries year ended december 31 2011 company recorded goodwill impairment charge 8011 million second quarter 2011 4572 million related nondeductible goodwill impairment nondeductible goodwill reduced income tax benefit impairment 1772 million decreased effective tax rate 275 year ended december 31 2011 goodwill impairment charge recognized second quarter 2011 gave rise deferred tax asset whose realization meet morelikelythannot threshold therefore requiring valuation allowance addition changes deferred tax assets liabilities primarily related filing 2010 consolidated federal tax return resulted increases valuation allowance year ended december 31 2011 resulting increase income tax expense year ended december 31 2011 512 million decreased effective tax rate 80 year ended december 31 2011 upon emergence bankruptcy company recorded deferred tax liabilities related excess financial statement carrying amount tax basis investments certain subsidiaries irc section 1245 recapture goodwill impairment charge reduced financial statement carrying amount investments certain subsidiaries also caused reduction deferred tax liabilities resulting reduction income tax expense year ended december 31 2011 related change deferred tax liabilities 811 million increased effective tax rate 126 year ended december 31 2011 june 15 2011 federal statute limitations closed tax year prior uncertain tax position related revenue recognition established result company decreased liability unrecognized tax benefits associated federal state uncertain tax position 282 million recorded tax benefit 240 million year ended december 31 2011 increased effective tax rate 37 year ended december 31 2011 year ended december 31 2011 company increased liability unrecognized tax benefits 52 million primarily related uncertainty realization certain tax attributes available reduction irc section 108 reduced income tax benefit 51 million decreased effective tax rate 08 year ended december 31 2011 third quarter 2011 company increased liability unrecognized tax benefits 18 million related exclusion nonbusiness income state illinois fourth quarter 2011 company reached settlement state illinois eliminated related liability unrecognized tax benefits net loss per share net loss 5190 million year ended december 31 2011 directly impacted goodwill impairment charge revenue expense trends described partially offset income tax benefit described basic diluted earnings loss per share “eps” 1035 year ended december 31 2011 see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies earnings loss per share” details computations basic diluted eps successor company eleven months ended december 31 2010 net revenues components net revenues eleven months ended december 31 2010 follows gross advertising revenues 8244 million eleven months ended december 31 2010 exclude 7993 million gross advertising revenues resulting adoption fresh start accounting gross advertising revenues impacted continuing declines advertising sales related print products primarily result declines new recurring business mainly driven 1 customer attrition 2 declines overall advertising spending customers 3 significant impact weak local business conditions consumer spending customers’ markets 4 increase competition fragmentation local business search 5 migration customers digital marketing solutions sales claims allowances 99 million eleven months ended december 31 2010 exclude 140 million sales claims allowances resulting adoption fresh start accounting sales claims allowances affected lower claims experience due process improvements operating efficiencies improved print copy quality certain markets well lower advertising sales volume revenues 164 million eleven months ended december 31 2010 exclude 56 million revenues resulting adoption fresh start accounting revenues include late fees received outstanding customer balances barter revenues commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain advertisingrelated products expenses components total expenses eleven months ended december 31 2010 follows production distribution expenses total production distribution expenses 2133 million eleven months ended december 31 2010 production distribution expenses comprised items print paper distribution expenses internet production distribution expenses amortization costuplift associated print paper distribution expenses resulting adoption fresh start accounting result adoption fresh start accounting production distribution expenses eleven months ended december 31 2010 exclude amortization deferred directory costs deferral amortization method directories published fresh start reporting date totaling 888 million include amortization costuplift 75 million print paper distribution expenses impacted lower page volumes associated declines print advertisements negotiated price reductions print paper expenses internet production distribution expenses affected reduction dexnet customers purchasing efficiencies lower headcount partially offset increased purchased traffic costs incurred direct traffic online properties selling support expenses total selling support expenses 3861 million eleven months ended december 31 2010 selling support expenses comprised items bad debt expense commissions salesperson expenses directory publishing expenses billing credit collection expense occupancy expenses advertising expense amortization cost uplift associated commissions resulting adoption fresh start accounting due adoption fresh start accounting selling support expenses eleven months ended december 31 2010 exclude amortization deferred directory costs deferral amortization method directories published fresh start reporting date totaling 838 million include amortization costuplift 48 million bad debt expense impacted lower writeoff experience resulting effective credit collections practices driven improvement accounts receivable portfolio well lower billing volumes associated declines advertisers partially offset increase bad debt provision delinquent balances associated cmr customers fail pay within specified credit terms may cancel advertising future directories could impact ability collect past due amounts well adversely impact advertising sales revenue trends commissions salesperson expenses affected lower advertising sales effect variablebased commissions well lower headcount directory publishing expenses affected declines print advertisements lower headcount occupancy expenses impacted renegotiation leased properties reduction amount leased square footage bankruptcy process general administrative expenses ga expenses 1488 million eleven months ended december 31 2010 ga expenses comprised items restructuring expenses general corporate expenses incentive compensation expense expenses ga related incentive compensation expense pertains expense associated sars grant made march 1 2010 certain employees including executive officers common stock issued members company’s board directors march 1 2010 common stock issued members executive oversight committee september 13 2010 stock based awards granted mr mockett september 13 2010 compensation expense associated company’s longterm incentive program “2009 ltip” includes accelerated compensation expense associated departure former chief executive officer depreciation amortization depreciation amortization expense 2177 million eleven months ended december 31 2010 amortization intangible assets 1670 million eleven months ended december 31 2010 impacted increase fair value intangible assets establishment estimated useful lives resulting adoption fresh start accounting depreciation fixed assets amortization computer software 507 million eleven months ended december 31 2010 affected increase fair value fixed assets computer software resulting adoption fresh start accounting well capital projects placed service eleven months ended december 31 2010 impairment charges based upon decline trading value debt equity securities changes management among indicators company performed impairment tests goodwill definitelived intangible assets longlived assets september 30 2010 june 30 2010 testing results definitelived intangible assets longlived assets resulted impairment charge associated trade names trademarks technology local customer relationships former businesscom reporting unit 43 million 173 million three months ended september 30 2010 june 30 2010 respectively total nongoodwill intangible asset impairment charge 216 million eleven months ended december 31 2010 testing results goodwill resulted impairment charge 3853 million 7523 million three months ended september 30 2010 june 30 2010 respectively total goodwill impairment charge 11376 million eleven months ended december 31 2010 sum goodwill nongoodwill intangible asset impairment charges totaled 11593 million eleven months ended december 31 2010 operating loss operating loss 12943 million eleven months ended december 31 2010 fresh start accounting deferred net revenues related directories published prior fresh start reporting date eliminated however certain deferred direct expenses related directories eliminated expenses directly associated net revenues directories continue recognized period expenses subsequent fresh start reporting date fresh start accounting disproportionate adverse effect reported net revenues versus expenses determining operating loss eleven months ended december 31 2010 month subsequent fresh start reporting date impact fresh start accounting expires first quarter 2011 ratio reported net revenue expense increase operating loss eleven months ended december 31 2010 directly impacted goodwill nongoodwill intangible asset impairment charges noted significant effects fresh start accounting well revenue expense trends described interest expense net interest expense 2495 million eleven months ended december 31 2010 conjunction adoption fresh start accounting reporting fresh start reporting date adjustment established record outstanding debt fair value fresh start reporting date fair value adjustment amortized increase interest expense remaining term respective debt agreements using effective interest method impact future scheduled interest principal payments amortization fair value adjustment included increase interest expense 293 million eleven months ended december 31 2010 first quarter 2010 entered interest rate swap interest rate cap agreements designated cash flow hedges company’s interest expense eleven months ended december 31 2010 includes expense 82 million resulting change fair value interest rate swaps interest rate caps income taxes effective tax rate loss income taxes 402 eleven months ended december 31 2010 effective tax rate benefit 402 higher federal statutory tax rate 350 primarily due increases income tax benefits recognition unrecognized tax position offset part increase income tax expense related nondeductible impairment charge income tax benefit 6201 million eleven months ended december 31 2010 comprised federal tax benefit 5677 million state tax benefit 524 million federal tax benefit 5677 million comprised current tax provision 13 million primarily related unrecognized tax benefits deferred tax benefit 5690 million primarily related current year net operating loss recognition unrecognized tax position goodwill impairment charges eleven months ended december 31 2010 state tax benefit 524 million comprised current tax benefit 38 million primarily related expected state tax refunds deferred tax benefit 486 million primarily related recognition unrecognized tax position eleven months ended december 31 2010 2009 predecessor company accrued unrecognized tax benefit uncertainty surrounding potential ownership change irc section 382 occurred prior date made “checkthebox” election two subsidiaries date change ownership question since december 31 2009 balance sheet date predecessor company unable confirm actual date ownership change sec forms 13g filed however based upon closing sec filing period schedules 13g review schedules filed february 15 2010 company determined likely certain “checkthebox” elections effective prior date 2009 ownership change section 382 result company recorded tax benefit reversal liability unrecognized tax benefit 3523 million company’s statement comprehensive income loss eleven months ended december 31 2010 significantly impacted effective tax rate period result goodwill nongoodwill intangible asset impairment charges eleven months ended december 31 2010 recognized nondeductible adjustment effective tax rate 195 2999 million see item 8 “financial statements supplementary data” note 7 “income taxes” additional information net loss per share net loss 9236 million eleven months ended december 31 2010 directly impacted goodwill nongoodwill intangible asset impairment charges noted well significant effects fresh start accounting revenue expense trends described partially offset income tax benefit recorded eleven months ended december 31 2010 noted basic diluted eps 1846 eleven months ended december 31 2010 see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies earnings loss per share” details computations basic diluted eps predecessor company one month ended january 31 2010 net revenues components predecessor company’s net revenues one month ended january 31 2010 follows gross advertising revenues 1614 million one month ended january 31 2010 gross advertising revenues impacted continuing declines advertising sales related print products primarily result declines new recurring business mainly driven 1 customer attrition 2 declines overall advertising spending customers 3 significant impact weak local business conditions consumer spending customers’ markets 4 increase competition fragmentation local business search 5 migration customers digital marketing solutions sales claims allowances 35 million one month ended january 31 2010 sales claims allowances affected lower claims experience due process improvements operating efficiencies improved print copy quality certain markets well lower advertising sales volume revenues 25 million one month ended january 31 2010 revenues include late fees received outstanding customer balances barter revenues commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain advertisingrelated products expenses components predecessor company’s total expenses one month ended january 31 2010 follows production distribution expenses total production distribution expenses 269 million one month ended january 31 2010 production distribution expenses comprised items print paper distribution expenses internet production distribution expenses print paper distribution expenses impacted lower page volumes associated declines print advertisements negotiated price reductions print paper expenses favorable paper inventory expenses internet production distribution expenses affected reduction dexnet customers purchasing efficiencies lower headcount partially offset increased purchased traffic costs incurred direct traffic online properties selling support expenses total selling support expenses 409 million one month ended january 31 2010 selling support expenses comprised items bad debt expense commissions salesperson expenses directory publishing expenses billing credit collection expense occupancy expenses advertising expense bad debt expense impacted effective credit collections practices driven improvement accounts receivable portfolio well lower billing volumes associated declines advertisers directory publishing expenses affected declines print advertisements lower headcount billing credit collections expense impacted lower billing volumes associated declines advertisers advertisements occupancy expenses impacted renegotiation leased properties reduction amount leased square footage bankruptcy process general administrative expenses ga expenses 83 million one month ended january 31 2010 ga expenses comprised items restructuring expenses general corporate expenses incentive compensation expense expenses restructuring expenses impacted lower severance expense fees associated outside consultant services ga related incentive compensation expense includes remaining unrecognized compensation expense related stockbased awards cancelled upon emergence chapter 11 pursuant plan compensation expense associated predecessor company’s 2009 ltip reversal accrual associated predecessor company’s incentive compensation plan depreciation amortization depreciation amortization expense 202 million one month ended january 31 2010 amortization intangible assets 156 million one month ended january 31 2010 impacted reduced carrying values intangible assets resulting impairment charges recorded predecessor company fourth quarter 2009 associated reduction remaining useful lives effective january 1 2010 depreciation fixed assets amortization computer software 46 million one month ended january 31 2010 depreciation fixed assets amortization computer software impacted capital projects placed service one month ended january 31 2010 operating income operating income 641 million one month ended january 31 2010 determined based revenue expense trends described interest expense net contractual interest expense would appeared predecessor company’s consolidated statement comprehensive income loss filing chapter 11 petitions 659 million one month ended january 31 2010 net interest expense one month ended january 31 2010 197 million includes 18 million noncash amortization deferred financing costs predecessor company’s interest expense one month ended january 31 2010 includes expense 08 million associated change fair value dex media east llc interest rate swaps longer deemed financial instruments result filing chapter 11 petitions predecessor company’s interest expense one month ended january 31 2010 also includes expense 11 million resulting amounts previously charged accumulated comprehensive loss related interest rate swaps amounts previously charged accumulated comprehensive loss related dex media east llc interest rate swaps amortized interest expense remaining life interest rate swaps based future interest payments probable forecasted transactions would occur accordance fresh start accounting reporting unamortized amounts previously charged accumulated comprehensive loss related interest rate swaps eliminated fresh start reporting date result amendment rhdi credit facility refinancing former dex media west llc credit facility june 6 2008 predecessor company’s interest rate swaps associated two debt arrangements longer highly effective offsetting changes cash flows accordingly cash flow hedge accounting treatment longer permitted addition result filing chapter 11 petitions interest rate swaps required settled terminated 2009 result change fair value interest rate swaps prior effective date predecessor company’s interest expense includes expense 04 million one month ended january 31 2010 reorganization items net reorganization items directly associated process reorganizing business chapter 11 recorded separate line item consolidated statement comprehensive income loss predecessor company recorded 78 billion reorganization items one month ended january 31 2010 comprised 45 billion gain reorganization settlement liabilities subject compromise fresh start accounting adjustments 33 billion following table displays details reorganization items one month ended january 31 2010 income taxes effective tax rate income taxes 117 one month ended january 31 2010 effective tax rate provision 117 lower statutory federal tax rate 350 primarily due decreases income tax expense nontaxable fresh start adjustments release valuation allowance offset part increases income tax expense estimated loss tax attributes due cancellation debt income emergence impact state taxes income tax provision 9175 million one month ended january 31 2010 comprised federal tax provision 7928 million state tax provision 1248 million federal tax provision comprised current tax provision 06 million primarily related increase federal tax accrual related unrecognized tax benefits deferred tax provision 7922 million primarily related reduction predecessor company’s tax attributes accordance irc section 108 state tax provision 1248 million comprised current tax provision less 01 million deferred tax provision 1247 million primarily related reduction predecessor company’s tax attributes accordance irc section 108 discharge debt conjunction emergence chapter 11 resulted tax gain 50166 million generally discharge debt obligation amount less adjusted issue price creates codi must included company’s taxable income however recognition codi limited taxpayer debtor reorganization case discharge granted bankruptcy court pursuant plan reorganization approved bankruptcy court plan enabled predecessor company qualify bankruptcy exclusion rule exclude gain settlement debt obligations derivative liabilities taxable income irc section 108 company reduced tax attributes primarily net operating loss carryforwards intangible asset basis stock basis see item 8 “financial statements supplementary data” note 7 “income taxes” additional information net income earnings per share net income 69200 million one month ended january 31 2010 primarily due gain reorganization fresh start accounting adjustments comprise reorganization items net addition net income one month ended january 31 2010 determined based revenue expense trends income taxes described basic eps 10027 diluted eps 10021 one month ended january 31 2010 see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies earnings loss per share” details computations basic diluted eps liquidity capital resources following table presents fair market value longterm debt december 31 2012 2011 based quoted market prices date well carrying value longterm debt december 31 2012 2011 includes 1 unamortized fair value adjustments connection company’s adoption fresh start accounting fresh start reporting date 367 million 632 million december 31 2012 2011 respectively 2 year ended december 31 2012 issuance additional 74 million 105 million dex one senior subordinated notes result companys election make paidinkind pik interest payments semiannual interest periods ending september 30 2012 march 31 2012 respectively 3 impact debt repurchases year ended december 31 2012 see item 7 “managements discussion analysis financial condition results operations recent trends developments related business significant financing developments” additional information debt repurchases companys voluntary filing chapter 11 march 18 2013 triggered event default rendered remaining financial obligations dex one senior subordinated notes credit facilities automatically immediately due payable although believe efforts enforce acceleration financial obligations stayed result filing chapter 11 cases bankruptcy court classified dex one senior subordinated notes credit facilities current obligations consolidated balance sheet december 31 2012 see item 8 financial statements supplementary data note 1 business basis presentation going concern additional information credit facilities rhdi amended restated credit facility conjunction credit facility repurchases rhdi repurchased 920 million loans rhdi amended restated credit facility rate 435 par december 31 2012 outstanding balance rhdi amended restated credit facility totaled 7760 million rhdi amended restated credit facility requires quarterly principal interest payments option either ◦ highest subject floor 400 prime rate defined rhdi amended restated credit facility ii federal funds effective rate defined rhdi amended restated credit facility plus 050 iii one month libor plus 100 case plus interest rate margin base rate loans interest rate margin base rate loans initially 525 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 525 per annum rhdi’s consolidated leverage ratio greater equal 425 100 equal 500 per annum rhdi’s consolidated leverage ratio less 425 100 ◦ higher libor rate ii 300 case plus interest rate margin eurodollar loans interest rate margin eurodollar loans initially 625 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 625 per annum rhdi’s consolidated leverage ratio greater equal 425 100 equal 600 per annum rhdi’s consolidated leverage ratio less 425 100 rhdi may elect interest periods one two three six months libor borrowings rhdi amended restated credit facility matures october 24 2014 weighted average interest rate outstanding debt rhdi amended restated credit facility 90 december 31 2012 dex media east amended restated credit facility conjunction credit facility repurchases dme inc repurchased 236 million loans dex media east amended restated credit facility rate 530 par december 31 2012 outstanding balance dex media east amended restated credit facility totaled 5158 million dex media east amended restated credit facility requires quarterly principal interest payments option either ◦ highest prime rate defined dex media east amended restated credit facility ii federal funds effective rate defined dex media east amended restated credit facility plus 050 iii one month libor plus 100 case plus interest rate margin base rate loans interest rate margin base rate loans initially 150 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 150 per annum dme inc’s consolidated leverage ratio greater equal 275 100 equal 125 per annum dme inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 100 per annum dme inc’s consolidated leverage ratio less 250 100 ◦ libor rate plus interest rate margin eurodollar loans interest rate margin eurodollar loans initially 250 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 250 per annum dme inc’s consolidated leverage ratio greater equal 275 100 equal 225 per annum dme inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 200 per annum dme inc’s consolidated leverage ratio less 250 100 dme inc may elect interest periods one two three six months libor borrowings dex media east amended restated credit facility matures october 24 2014 weighted average interest rate outstanding debt dex media east amended restated credit facility 28 december 31 2012 dex media west amended restated credit facility conjunction credit facility repurchases dmw inc repurchased 266 million loans dex media west amended restated credit facility rate 640 par december 31 2012 outstanding balance dex media west amended restated credit facility totaled 4982 million dex media west amended restated credit facility requires quarterly principal interest payments option either ◦ highest subject floor 400 prime rate defined dex media west amended restated credit facility ii federal funds effective rate defined dex media west amended restated credit facility plus 050 iii one month libor plus 100 case plus interest rate margin base rate loans interest rate margin base rate loans initially 350 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 350 per annum dmw inc’s consolidated leverage ratio greater equal 275 100 equal 325 per annum dmw inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 300 per annum dmw inc’s consolidated leverage ratio less 250 100 ◦ higher libor rate ii 300 case plus interest rate margin eurodollar loans interest rate margin eurodollar loans initially 450 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 450 per annum dmw inc’s consolidated leverage ratio greater equal 275 100 equal 425 per annum dmw inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 400 per annum dmw inc’s consolidated leverage ratio less 250 100 dmw inc may elect interest periods one two three six months libor borrowings dex media west amended restated credit facility matures october 24 2014 weighted average interest rate outstanding debt dex media west amended restated credit facility 70 december 31 2012 credit facilities described includes uncommitted revolving credit facility available borrowings 400 million availability uncommitted revolving credit facility subject certain conditions including prepayment term loans credit facilities amount equal revolving credit facility credit facilities contain provisions prepayment net proceeds asset dispositions equity issuances debt issuances subject certain exceptions ratable portion net proceeds received company asset dispositions company subject certain exceptions portion excess cash flow credit facilities described contain certain covenants subject exceptions limit restrict borrower subsidiaries’ incurrence liens investments including acquisitions sales assets indebtedness payment dividends distributions payments certain indebtedness sale leaseback transactions swap transactions affiliate transactions capital expenditures mergers liquidations consolidations credit facility also contains certain covenants subject exceptions limit restrict borrower’s incurrence liens indebtedness ownership assets sales assets payment dividends distributions modifications dex one senior subordinated notes borrower required maintain compliance consolidated leverage ratio covenant rhdi dmw inc also required maintain compliance consolidated interest coverage ratio covenant dmw inc also required maintain compliance consolidated senior secured leverage ratio covenant dex media west amended restated credit agreement includes option additional covenant relief senior secured leverage covenant fourth quarter 2011 subject increased amortization loans first quarter 2012 increase excess cash flow sweep 2011 payment 25 basis point fee ratably lenders dex media west amended restated credit agreement march 31 2010 company exercised senior secured leverage ratio election defined dex media west amended restated credit agreement company incurred fee 21 million exercise option obligations credit facilities guaranteed subsidiaries secured lien substantially subsidiaries’ tangible intangible assets including pledge stock respective subsidiaries well mortgage certain real property pursuant shared guaranty collateral agreement subject intercreditor agreement among administrative agents credit facilities company subject certain exceptions certain subsidiaries company guaranty obligations credit facilities obligations secured lien substantially guarantors’ tangible intangible assets company’s subsidiary dex one digital including pledge stock respective subsidiaries well mortgage certain real property notes dex one senior subordinated notes conjunction note repurchases company repurchased 982 million aggregate principal amount dex one senior notes rate 270 par december 31 2012 outstanding carrying value dex one senior subordinated notes totaled 2197 million interest dex one senior subordinated notes payable semiannually march 31st september 30th year commencing march 31 2010 january 29 2017 dex one senior subordinated notes accrue interest annual rate 12 cash interest payments 14 company elects pik interest payments company may elect later two business days prior beginning semiannual interest period whether make interest payment dex one senior subordinated notes entirely cash ii 50 cash 50 pik interest capitalized additional senior subordinated notes absence election subsequent semiannual interest period interest dex one senior subordinated notes payable form interest payment semiannual interest period immediately preceding subsequent semiannual interest period semiannual interest periods ending september 30 2012 march 31 2012 company made interest payments 50 cash 50 pik interest permitted indenture governing dex one senior subordinated notes resulting issuance additional 74 million 105 million respectively dex one senior subordinated notes company continue make interest payments dex one senior subordinated notes 50 cash 50 pik interest semiannual interest period ending march 31 2013 interest rate dex one senior subordinated notes may subject adjustment event company incurs certain specified debt higher effective yield maturity yield maturity dex one senior subordinated notes dex one senior subordinated notes unsecured obligations company effectively subordinated right payment company’s existing future secured debt including dex one’s guarantee borrowings credit facilities structurally subordinated existing future liabilities including trade payables direct indirect subsidiaries indenture governing dex one senior subordinated notes contains certain covenants subject certain exceptions among things limit restrict company’s certain cases company’s restricted subsidiaries’ incurrence indebtedness making certain restricted payments incurrence liens entry transactions affiliates conduct business merger consolidation sale substantially property indenture governing dex one senior subordinated notes also requires company offer repurchase dex one senior subordinated notes par certain changes control involving company sale substantially assets company holders dex one senior subordinated notes also may cause company repurchase dex one senior subordinated notes price 101 principal amount upon incurrence company certain acquisition indebtedness dex one senior subordinated notes redeemable option following prices percentage face value impact fresh start accounting conjunction adoption fresh start accounting adjustment established record outstanding debt fair value fresh start reporting date company required record credit facilities discount result fair value fresh start reporting date therefore carrying amount debt obligations lower principal amount due maturity total discount 1202 million recorded upon adoption fresh start accounting associated credit facilities 367 million remains unamortized december 31 2012 shown following table conjunction credit facility repurchases accelerated amortization fair value adjustments credit facilities 20 million partially offset net gain credit facility repurchases recognized year ended december 31 2012 see item 7 “managements discussion analysis financial condition results operations recent trends developments related business significant financing developments” additional information liquidity cash flows company’s primary sources liquidity existing cash hand cash flows generated operations subsequent pendency filing chapter 11 cases company’s primary liquidity requirements fund operations service indebtedness company’s ability meet debt service requirements dependent ability generate sufficient cash flows operations primary sources cash flows consist mainly cash receipts sale marketing solutions impacted among factors general local business conditions continuing decline use print products increase competition fragmentation local business search market consumer confidence level demand advertising products services bankruptcy courts stay acceleration provisions outstanding debt remains effect emergence chapter 11 expected current financial projections indicate management expects able continue generate cash flows operations amounts sufficient fund operations capital expenditures well meet debt service requirements chapter 11 proceedings least next 1215 months however assurances made business generate sufficient cash flows operations enable us fund companys cash requirements since current information used financial projections could change future result changes estimates assumptions well risks noted item 1a “risk factors” see item 7 “managements discussion analysis financial condition results operations recent trends developments related business additional information related recent filing chapter 11 managements going concern assessment amendments provide greater flexibility repurchase amounts outstanding credit facilities noted march 23 2012 rhdi dme inc dmw inc collectively utilized cash hand 695 million repurchase loans credit facilities 1421 million also ability repurchase dex one senior subordinated notes open market april 19 2012 company utilized cash hand 265 million repurchase 982 million aggregate principal amount dex one senior subordinated notes may also time seek retire purchase additional dex one senior subordinated notes cash purchases open market purchases privately negotiated transactions otherwise subject applicable securities laws regulations purchases depend prevailing market conditions liquidity requirements contractual restrictions factors amounts involved may material credit facilities require significant balloon payments upon maturity october 2014 company unable extend maturity significantly reduce outstanding indebtedness prior maturity either 1 completing mergers associated refinancing credit facilities chapter 11 cases 2 open market repurchases permitted amendments credit facilities 3 obtaining additional financing andor 4 refinancing existing indebtedness separate mergers chapter 11 cases able generate cash flows operations amounts sufficient fund operations capital expenditures andor satisfy debt service requirements time addition company become noncompliant restrictive covenants debt agreements prior october 2014 default provisions would triggered credit facilities outstanding balances could become due immediately company continues monitor assess available options opportunities would allow us accomplish financing initiatives however assurances made financing initiatives attained see item 7 “management’s discussion analysis financial condition results operations” contractual obligations quantitative presentation principal interest payments associated longterm debt period provided credit facilities company’s operating subsidiaries permitted fund share parent company’s interest obligations dex one senior subordinated notes funds based percentage operating subsidiaries’ excess cash flow defined credit agreement may provided parent company fund specific activities acquisitions addition operating subsidiaries permitted send 5 million annually parent company lastly operating subsidiaries fund proportionate basis expenses paid parent company fund daily operations operating subsidiaries except certain limited situations including noted credit facilities restrict ability company subsidiaries dividend assets third party subsidiaries pay dividends loans advances us company currently believes limitations restrictions imposed credit facilities noted impact ability fund operations capital expenditures well meet debt service requirements specifically parent company level however assurances made limitations restrictions impact ability fund operations capital expenditures well meet debt service requirements specifically parent company level future see item 1a “risk factors” additional information regarding risks uncertainties associated business could significant impact future liquidity cash flows see item 7 “management’s discussion analysis financial condition results operations recent trends developments related business” additional information related trends uncertainties respect business could significant impact future liquidity cash flows see item 1a “risk factors” information regarding risks uncertainties associated proposed merger dex one supermedia impact proposed merger could future liquidity cash flows combined entity cash flow activities year ended december 31 2012 aggregate outstanding debt december 31 2012 20096 million year ended december 31 2012 made mandatory principal payments credit facilities par 2448 million made accelerated principal payments credit facilities par 600 million accelerated principal payments include prepayments cash flow sweep requirements credit facilities 2012 due 2013 result credit facility repurchases company utilized cash hand 695 million repurchase loans credit facilities 1421 million result note repurchases company utilized cash hand 265 million repurchase 982 million aggregate principal amount dex one senior subordinated notes total made debt payments cash hand 4009 million reduced outstanding debt 5452 million year ended december 31 2012 made aggregate net cash interest payments 1648 million year ended december 31 2012 december 31 2012 1720 million cash equivalents checks yet presented payment 04 million cash provided operating activities year ended december 31 2012 3485 million key components operating cash flow include following • 624 million net income • 1396 million net gains debt repurchases • 4607 million net noncash items primarily consisting 4187 million depreciation amortization 326 million bad debt provision 71 million deferred income taxes 46 million stockbased compensation expense partially offset decrease interest expense 23 million associated change fair value interest rate swaps interest rate caps • 24 million net items primarily consisting adjustments related benefit plans 165 million cash payments associated proposed merger supermedia 95 million cash payments associated debt repurchases 27 million partially offset amortization debt fair value adjustments resulting adoption fresh start accounting 245 million amortization deferred financing costs associated credit facility repurchases 17 million • 118 million merger transaction integration expenses • 699 million net use cash decrease deferred directory revenues 1142 million offset decrease accounts receivable 443 million primarily due lower advertising sales improved collections timing billings change deferred revenues accounts receivable analyzed together given fact directory published annual billable value directory initially deferred unbilled accounts receivable established month thereafter typically one twelfth billing value recognized revenues billed customers • 464 million net source cash decrease assets primarily resulting 328 million decrease deferred commissions print paper delivery costs 136 million decrease prepaid directory costs resulting lower advertising sales cost cutting initiatives publication seasonality • 231 million net use cash decrease accounts payable accrued liabilities consisting 156 million decrease accrued liabilities primarily due payments associated severance accruals declines accruals print delivery expenses due lower advertising sales cost cutting initiatives publication seasonality change fair value interest rate swaps 151 decrease trade accounts payable due improved timing vendor payments partially offset increase accrued interest payable 76 million primarily due companys election make pik interest payments dex one senior subordinated notes • 22 million increase noncurrent liabilities primarily due increases benefit plans longterm liabilities change fair value interest rate swaps partially offset changes deferred income taxes cash used investing activities year ended december 31 2012 225 million relates purchase fixed assets primarily computer equipment software leasehold improvements 226 million partially offset proceeds sale assets 01 million cash used financing activities year ended december 31 2012 4119 million includes following • 4009 million longterm debt repurchases repayments • 108 million debt issuance costs financing items • 02 million decreased balance checks yet presented payment year ended december 31 2011 aggregate outstanding debt december 31 2011 25104 million year ended december 31 2011 made scheduled accelerated principal payments 1806 million 740 million respectively total principal payments 2546 million credit facilities year ended december 31 2011 made aggregate net cash interest payments 2041 million december 31 2011 2579 million cash equivalents checks yet presented payment 07 million cash provided operating activities 4133 million year ended december 31 2011 key components operating cash flow include following • 5190 million net loss includes goodwill impairment charge offset impact tax benefit recognized year ended december 31 2011 • 6924 million net noncash items consisting goodwill impairment charge 8011 million offset 1087 million deferred income taxes includes tax impact goodwill impairment charge • 3348 million net noncash items primarily consisting 2518 million depreciation amortization 523 million bad debt provision 250 million restructuring expenses 43 million items primarily consisting amortization debt fair value adjustments resulting adoption fresh start accounting 278 million partially offset adjustments related pension plans 217 million 48 million stockbased compensation expense decrease interest expense 34 million associated change fair value interest rate swaps caps • 134 million gain sale substantially net assets businesscom • 613 million net use cash decrease deferred directory revenues 785 million offset decrease accounts receivable 172 million primarily due lower advertising sales • 380 million net source cash decrease assets consisting 247 million decrease prepaid directory costs resulting publication seasonality 133 million decrease current noncurrent assets primarily relating deferred commissions print paper delivery costs well changes fair value interest rate caps • 279 million net use cash decrease accounts payable accrued liabilities consisting 304 million decrease accrued liabilities primarily due payments associated restructuring actions change fair value interest rate swaps well decrease accrued interest payable 17 million offset 42 million increase trade accounts payable • 303 million decrease noncurrent liabilities primarily resulting deferred income taxes change fair value interest rate swaps cash used investing activities year ended december 31 2011 125 million relates purchase fixed assets primarily computer equipment software leasehold improvements 281 million offset proceeds sale substantially net assets businesscom assets 156 million cash used financing activities year ended december 31 2011 2707 million includes following • 2546 million principal payments credit facilities • 05 million provided net financing items • 166 million decreased balance checks yet presented payment offbalance sheet arrangements company offbalance sheet arrangements contractual obligations companys voluntary filing chapter 11 march 18 2013 triggered event default rendered remaining financial obligations dex one senior subordinated notes credit facilities automatically immediately due payable although believe efforts enforce acceleration financial obligations stayed result filing chapter 11 cases bankruptcy court classified dex one senior subordinated notes credit facilities current obligations consolidated balance sheet december 31 2012 see item 8 financial statements supplementary data note 1 business basis presentation going concern additional information however purposes presenting contractual obligations provided annual contractual commitments principal interest payments debt well cash obligations next five years thereafter december 31 2012 debt repayments related interest payments presented table include impact acceleration provisions result filing chapter 11 proposed amendments credit facilities conjunction mergers debt repayments related interest payments presented table include 1 scheduled principal interest payments current debt agreements 2 estimate additional debt repayments related impact interest payments resulting cash flow sweep requirements credit facilities 3 assumes issuance additional dex one senior subordinated notes related impact interest payments result companys election make pik interest payments maturity credit facilities require certain percentage annual excess cash flow defined debt agreements used repay amounts credit facilities debt repayments exclude fair value adjustments required gaap result adoption fresh start accounting 367 million adjustments impact payment obligations 1 included debt obligations scheduled principal amounts owed credit facilities dex one senior subordinated notes december 31 2012 including estimate additional debt repayments resulting cash flow sweep requirements credit facilities assumes issuance additional dex one senior subordinated notes result companys election make pik interest payments maturity 2 interest debt represents cash interest payment obligations assuming indebtedness december 31 2012 paid accordance contractual maturity assumes interest rates variable interest debt december 31 2012 remain unchanged future periods reflects impact interest payments resulting estimate additional debt repayments due cash flow sweep requirements credit facilities well impact interest payments result companys election make pik interest payments maturity please refer “liquidity capital resources” interest rates credit facilities dex one senior subordinated notes 3 enter operating leases normal course business substantially lease agreements fixed payment terms lease agreements provide us renewal early termination options future operating lease obligations would change exercised renewal early termination options entered additional operating lease agreements amounts table assume exercise renewal early termination options 4 obligated pay outsource service provider approximately 300 million years 2012 2017 datacenter server assessment migration ongoing management administration services december 31 2012 approximately 255 million remains outstanding obligation also obligated pay outsource service provider approximately 220 million years 2012 2015 software licensing related services december 31 2012 approximately 134 million remains outstanding obligation internet yellow pages reseller agreement obligated pay yp 98 million 2013 5 defined benefit plans covering substantially employees funding policy contribute amount least equal minimum legal funding requirement based past performance uncertainty dollar amounts paid excluded amounts table see item 8 “financial statements supplementary data” note 9 “benefit plans” information related benefit plans expected future benefit payments including administrative expenses net employee contributions included table expect make contributions approximately 47 million pension plans 2013 item 7aitem 7 “management’s discussion analysis financial condition results operations” discussion items 4 financial data includes results embarq directory business commencing january 3 2003 years ended december 31 2004 2003 net revenue operating income net income loss income loss available common shareholders reflect purchase accounting adjustments precluded recognition revenue certain expenses associated directories published acquired embarq directory business prior month acquisition see item 7 “management’s discussion analysis financial condition results operations” discussion items 5 connection businesscom acquisition august 23 2007 dex media merger january 31 2006 att directory acquisition september 1 2004 embarq acquisition january 3 2003 incurred significant amount debt also issued preferred stock november 2002 january 2003 connection embarq acquisition therefore cash debt balances periods higher prior periods 6 january 14 2005 repurchased 100303 shares outstanding preferred stock gs funds 2772 million cash connection preferred stock repurchase recorded increase loss available common shareholders consolidated statement operations 1337 million reflect loss repurchase shares year ended december 31 2005 january 27 2006 completed gs repurchase whereby repurchased remaining 100301 shares outstanding preferred stock gs funds 3361 million cash including accrued cash dividends interest based terms stock purchase agreement gs repurchase became probable event october 3 2005 requiring recorded value preferred stock accreted redemption value 3341 million december 31 2005 3361 million january 27 2006 accretion redemption value 2110 million 20 million represented accrued dividends interest years ended december 31 2005 2006 respectively recorded increase loss available common shareholders consolidated statements operations conjunction gs repurchase also reversed previously recorded beneficial conversion feature “bcf” related shares recorded decrease loss available common shareholders consolidated statement operations approximately 312 million year ended december 31 2006 item 7 management’s discussion analysis financial condition results operations item read conjunction audited consolidated financial statements notes thereto included item 8 unless otherwise indicated terms “company” “donnelley” “rhd” “we” “us” “our” refer rh donnelley corporation direct indirect whollyowned subsidiaries corporate overview one nation’s largest yellow pages online local commercial search companies based revenue 2007 revenues approximately 27 billion publish distribute advertiser content utilizing dex brand three highly recognizable brands industry qwest embarq att 2007 extended dex brand att embarq markets create unified identity advertisers consumers across markets dex brand considered leader local search qwest markets expect similar success att embarq markets market also cobrand products applicable highly recognizable brands att embarq qwest differentiates search solutions others triple playtm integrated marketing solutions suite encompasses increasing number tools consumers use find businesses sell products services need manage lives businesses print yellow pages directories proprietary dexknowscomtm online search site rest internet via dex search marketing® tools 2007 print online solutions helped 600000 national local businesses 28 states reach consumers actively seeking purchase products services approximately 1900 person sales force work daily basis help bring local businesses consumers together satisfy mutual objectives utilizing triple play products services 2007 published distributed print directories many country’s attractive markets including albuquerque chicago denver las vegas orlando phoenix print directories provide comprehensive local information consumers facilitating active search products services offered local merchants online products services provide merchants additional methods connect consumers actively seeking purchase products services using internet powerful offerings distribute local advertisers’ content proprietary internet yellow pages “iyp” sites extend major online search platforms including google® yahoo® msn® providing additional qualified leads advertisers marketing consultants help local businesses create advertising strategy develop customized media plan takes full advantage traditional media products iyp local search site dexknowscom dexnet internet marketing services include online profile creation local businesses broadbased distribution across internet network internet partners relationships host local business listings content search engine marketing “sem” search engine optimization “seo” services collectively referred “internet marketing” compelling set triple play products services turn generates strong returns advertisers strong advertiser return uniquely positions rhd 1900 person sales force trusted advisors marketing support service local markets serve significant business developments acquisition august 23 2007 acquired businesscom leading business search engine directory performance based advertising network disclosed amount 3450 million “businesscom acquisition” purchase price determined accordance generally accepted accounting principles “gaap” 3344 million excludes certain items value unvested equity awards recorded compensation expense vesting period purpose businesscom acquisition expand existing interactive portfolio adding leading internet advertising talent technology strengthen rhd’s position expanding local commercial search market develop online performance based advertising network businesscom also provides established businesstobusiness online properties businesscom workcom businesscom advertising network expect adopt businesscom technology platform serve existing advertiser base dexknowscom internet yellow pages site businesscom operates direct whollyowned subsidiary rhd results businesscom included consolidated results commencing august 23 2007 connection businesscom acquisition identified recorded certain intangible assets estimated fair value including 1 advertiser relationships 2 third party contracts 3 technology network platforms 4 trade names trademarks intangible assets amortized remaining useful lives ranging 3 10 years straightline method exception advertiser relationships network platform intangible assets amortized income forecast method december 31 2007 2588 million accounted goodwill resulting businesscom acquisition debt refinancing october 2 2007 issued 10 billion aggregate principal amount 8875 series a4 senior notes due 2017 “series a4 notes” proceeds issuance used repay 328 million rhd credit facility “rhd credit facility” used fund businesscom acquisition b contributed rh donnelley inc “rhdi” order provide funding tender offer consent solicitation rhdi’s 600 million aggregate principal amount 10875 senior subordinated notes due 2012 “rhdi senior subordinated notes” c used pay related fees expenses general corporate purposes october 17 2007 issued additional 500 million series a4 notes proceeds issuance transferred dex media east defined order repay 864 million 2136 million term loan term loan b former dex media east credit facility respectively b contributed rhdi order repay 918 million 162 million 830 million term loans a4 d1 d2 rhdi credit facility respectively c used pay related fees expenses october 2007 terms conditions tender offer consent solicitation purchase rhdi’s 600 million senior subordinated notes rhdi commenced september 18 2007 5999 million 999 outstanding rhdi senior subordinated notes repurchased december 2007 remaining 01 million rhdi senior subordinated notes redeemed october 24 2007 replaced former dex media east credit facility new dex media east credit facility consisting 7000 million aggregate principal amount term loan facility 4000 million aggregate principal amount term loan b facility 1000 million aggregate principal amount revolving loan facility 2000 million aggregate principal amount uncommitted incremental facility dex media east would right subject obtaining commitments incremental loans one occasions increase term loan term loan b revolving loan facility amount proceeds new dex media east credit facility used october 24 2007 repay remaining 565 million 1397 million term loan term loan b former dex media east credit facility respectively 325 million former dex media east revolver proceeds new dex media east credit facility also used november 26 2007 fund redemption 4497 million dex media east’s outstanding 9875 senior notes due 2009 3413 million dex media east’s outstanding 12125 senior subordinated notes due 2012 december 2007 redeemed rhdi’s remaining 79 million 8875 senior notes due 2010 “rhdi senior notes” see item 8 “financial statements supplementary data” note 5 “longterm debt credit facilities notes” additional information regarding refinancing transactions share repurchases november 2007 company’s board directors authorized 1000 million stock repurchase plan “repurchase plan” authorization permits company purchase shares common stock open market pursuant rule 10b18 securities exchange act 1934 block trades otherwise following twelve months based market conditions factors purchases may made suspended time accordance repurchase plan repurchased 25 million shares cost 957 million december 2007 forwardlooking information certain statements contained annual report form 10k regarding donnelley’s future operating results performance business plans prospects statements constituting historical fact “forwardlooking statements” subject safe harbor created private securities litigation reform act 1995 possible words “believe” “expect” “anticipate” “should” “will” “would” “planned” “estimates” “potential” “goal” “outlook” “may” “predicts” “could” negative words comparable expressions used identify forwardlooking statements actual events results may differ materially evaluating statements specifically consider various factors including risks uncertainties contingencies disclosed item 1a annual report form 10k factors may cause actual results differ materially rhd’s forwardlooking statements forwardlooking statements attributable us person behalf expressly qualified entirety cautionary statement forwardlooking statements reflect current beliefs assumptions respect future results business plans prospects based solely information currently available us although believe expectations reflected forwardlooking statements reasonable cannot guarantee future results levels activity performance forwardlooking statements made date annual report except required federal securities laws rules regulations united states securities exchange commission “sec” assume obligation update revise provide reasons actual results may differ acquisitions beginning 2003 completed several acquisitions become one largest yellow pages online local commercial search companies united states based revenue acquisitions summarized operating results acquisition included consolidated operating results commencing date acquisition completed see item 8 “financial statements supplementary data” note 2 “identifiable intangible assets goodwill” note 3 “acquisitions” additional information regarding acquisitions august 23 2007 acquired businesscom leading business search engine directory performance based advertising network september 6 2006 acquired local launch “local launch acquisition” local search products platform fulfillment provider years ended december 31 2007 2006 local launch business operated direct whollyowned subsidiary rhd effective january 1 2008 local launch merged businesscom products services provided local launch continue offered advertisers businesscom local launch brand logo continue utilized internet marketing offerings january 31 2006 acquired dex media “the dex media merger” exclusive publisher “official” yellow pages white pages directories qwest communications international inc “qwest” qwest primary incumbent local exchange carrier “ilec” november 2002 dex media indirect parent dex media east llc “dex media east” dex media west llc “dex media west” dex media east operates directory business following states colorado iowa minnesota nebraska new mexico north dakota south dakota collectively “dex east states” dex media west operates directory business following states arizona idaho montana oregon utah washington wyoming collectively “dex west states” together dex east states collectively “qwest states” acquired business dex media subsidiaries “dex media business” operates dex media inc one rhd’s direct whollyowned subsidiaries finance dex media merger issued 660 million 6875 senior discount notes due january 15 2013 gross proceeds 6005 million 121 billion 8875 senior notes due january 15 2016 pay cash portion purchase price dex media stockholders connection dex media merger acquired directory services agreements collectively “dex directory services agreements” dex media entered qwest including 1 publishing agreement term 50 years commencing november 8 2002 subject automatic renewal additional oneyear terms grants us right exclusive official directory publisher listings classified advertisements qwest’s telephone customers geographic areas qwest states qwest successors provided local telephone services november 8 2002 well exclusive right use certain qwest branding directories markets 2 noncompetition agreement term 40 years commencing november 8 2002 pursuant qwest behalf affiliates successors agreed sell directory products consisting principally listings classified advertisements subscribers geographic areas qwest states qwest provided local telephone service november 8 2002 directed primarily consumers geographic areas september 1 2004 completed acquisition directory publishing business “att directory business” att inc formerly known sbc communications inc “sbc” illinois northwest indiana including att’s interest dontech ii partnership “dontech” 5050 general partnership us att collectively “att directory acquisition” result att directory acquisition became publisher att branded yellow pages illinois northwest indiana acquired att directory business operates r h donnelley publishing advertising illinois partnership one indirect whollyowned subsidiaries directory services agreements att company include directory services license agreement noncompetition agreement internet yellow pages reseller agreement directory publishing listing agreement collectively “att directory services agreements” certain affiliates att directory services license agreement designates us official exclusive provider yellow pages directory services att successors illinois northwest indiana “territory” grants us exclusive license obligation specified agreement produce publish distribute white pages directories territory att’s agent grants us exclusive license obligation specified agreement use att brand logo print directories territory noncompetition agreement prohibits att affiliates successors certain limited exceptions 1 producing publishing distributing yellow white pages print directories territory 2 soliciting selling local national yellow white pages advertising inclusion directories 3 soliciting selling local internet yellow pages advertising certain internet yellow pages directories territory licensing att marks third party purpose internet yellow pages reseller agreement grants us exclusive right sell local advertisers within territory internet yellow pages advertising focused upon products services offered within territory b nonexclusive right sell local excluding national advertisers within territory internet yellow pages advertising focused upon products services offered outside territory case onto yellowpagescom platform directory publishing listing agreement gives us right purchase use basic att subscriber listing information updates purpose publishing directories att directory services agreements internet yellow pages reseller agreement initial terms 50 years commencing september 2004 subject automatic renewal early termination specified circumstances internet yellow pages reseller agreement term 5 years commencing september 2004 january 3 2003 completed acquisition directory business “embarq directory business” sprint nextel corporation “sprint” formerly known sprint corporation acquiring outstanding capital stock various entities comprising sprint publishing advertising collectively “embarq acquisition” result publisher embarq branded yellow pages directories 18 states including nevada florida embarq directory business operates rh donnelley publishing advertising inc one indirect whollyowned subsidiaries directory services agreements embarq company executed may 2006 conjunction sprint’s spinoff local telephone business include directory services license agreement trademark license agreement noncompetition agreement certain affiliates embarq well noncompetition agreement sprint entered january 2003 collectively “embarq directory services agreements” embarq directory services agreements replaced previously existing analogous agreements sprint except sprint remained bound noncompetition agreement directory services license agreement grants us exclusive license obligation specified agreement produce publish distribute yellow white pages directories embarq successors 18 states embarq provided local telephone service time agreement trademark license agreement grants us exclusive license obligation specified agreement use certain specified embarq trademarks markets noncompetition agreements prohibit embarq sprint respective affiliates successors markets selling local directory advertising certain limited exceptions producing publishing distributing print directories embarq directory services agreements initial terms 50 years commencing january 2003 subject automatic renewal early termination specified circumstances purposes acquisitions included following • building rhd leading publisher yellow pages directories provider online commercial search services • adding leading internet advertising talent technology strengthen rhd’s position expanding local commercial search market develop online performance based advertising network • enhancing local internet marketing capabilities offerings acquisitions accounted purchase business combinations purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values acquisition date segment reporting management reviews analyzes business providing local commercial search products solutions including publishing yellow pages directories one operating segment critical accounting estimates preparation financial statements accordance gaap requires management estimate effect various matters inherently uncertain date financial statements estimates varies regard level judgment involved potential impact company’s reported financial results estimates deemed critical different estimate could reasonably used changes estimate reasonably likely occur period could materially impact company’s financial condition changes financial condition results operations company’s significant accounting polices december 31 2007 discussed note 2 notes consolidated financial statements included item 8 annual report critical estimates inherent accounting polices december 31 2007 discussed management believes current assumptions considerations used estimate amounts company’s consolidated financial statements appropriate intangible assets goodwill valuation amortization intangible assets consist directory services agreements company qwest att embarq respectively noncompetition agreement company sprint established customer relationships third party contract trademarks trade names advertising commitment technology network platforms resulting dex media merger att directory acquisition embarq acquisition businesscom acquisition local launch acquisition intangible assets amortized period assets expected contribute cash flow company reflect expected pattern benefit recorded goodwill resulted dex media merger att directory acquisition embarq acquisition businesscom acquisition local launch acquisition subject amortization however subject annual impairment testing intangible assets subject impairment testing accordance statement financial accounting standards “sfas” 144 accounting impairment disposal longlived assets “sfas 144” company reviews carrying value intangible assets impairment whenever events circumstances indicate carrying amount may recoverable impairment test intangible assets performed comparing carrying amount intangible assets sum undiscounted expected future cash flows relating assets accordance sfas 144 impairment exists sum future undiscounted cash flows less carrying amount intangible asset related group assets impairment would result writedown intangible asset estimated fair value based discounted future cash flows goodwill subject impairment testing accordance sfas 142 goodwill intangible assets “sfas 142” goodwill tested impairment comparing carrying amount reporting unit estimated fair value reporting unit accordance sfas 142 impairment may exist carrying amount reporting unit less estimated fair value impairment would result writedown equal difference carrying amount estimated fair value reporting unit goodwill used certain estimates assumptions impairment evaluation including limited projected future cash flows revenue growth customer attrition levels estimated writeoffs year ended december 31 2007 recognized impairment charge 200 million associated tradenames acquired embarq acquisition impairment charge resulted change branding strategy utilize new dex market brand print online products across entire footprint discontinued use tradenames acquired embarq acquisition impairment charge determined using relief royalty valuation method included within depreciation amortization expense consolidated statement operations year ended december 31 2007 decline trading value debt equity securities require us continue assess recoverability goodwill negative industry economic trends may indicate carrying values intangible assets recoverable apart impairment charge discussed concluded impairment intangible assets goodwill december 31 2007 trading value publicly traded debt equity securities continued decline subsequent december 31 2007 value debt equity securities recover required assess fair values assets liabilities company could conclude goodwill long lived assets impaired would result impairment charges 2008 addition worsening economic conditions certain markets may require us assess recoverability intangible assets 2008 could result additional impairment charges aggregate net book value intangible assets goodwill december 31 2007 impaired 1 net income 2007 would adversely impacted approximately 882 million additionally management must assess whether remaining useful lives intangible assets represent period intangible assets expected contribute cash flow assessment process used certain estimates assumptions including projected future cash flows customer attrition levels industry economic conditions accordance sfas 144 evaluate remaining useful lives intangible assets whenever events circumstances indicate revision remaining period amortization warranted estimated remaining useful lives change remaining carrying amount intangible asset would amortized prospectively revised remaining useful life year ended december 31 2007 amortization intangible assets 4083 million remaining useful lives intangible assets shortened 10 net income 2007 would adversely impacted approximately 322 million income taxes account income taxes asset liability method accordance sfas 109 accounting income taxes “sfas 109” deferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax assets realized adopted provisions fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” january 1 2007 interpretation clarifies accounting uncertainty income taxes recognized entity’s financial statements accordance sfas 109 fin 48 prescribes recognition threshold measurement principles financial statement recognition measurement tax positions taken expected taken tax return fin 48 impact uncertain income tax position income tax return must recognized largest amount likely sustained upon audit relevant taxing authority uncertain income tax position recognized less 50 likelihood sustained additionally fin 48 provides guidance derecognition classification interest penalties accounting interim periods disclosures transition requirements see item 8 “financial statements supplementary data” note 9 “income taxes” information regarding provision benefit income taxes well impact adopting fin 48 ordinary course business may many transactions calculations ultimate tax outcome uncertain calculation tax liabilities involves dealing uncertainties application complex tax laws recognize potential liabilities anticipated tax audit issues based estimate ultimate resolution whether extent additional taxes due although believe estimates reasonable assurance given final outcome matters different reflected historical income tax provisions accruals part financial reporting process must assess likelihood deferred tax assets recovered unless recovery likely provision taxes must increased recording reserve form valuation allowance deferred tax assets estimated ultimately recoverable process certain relevant criteria evaluated including existence deferred tax liabilities used absorb deferred tax assets taxable income future years judgment regarding future taxable income may change due future market conditions changes us tax laws factors changes may require material adjustments deferred tax assets accompanying reduction increase net income period determinations made addition operate within multiple taxing jurisdictions subject audit jurisdictions audits involve complex issues may require extended period time resolve maintain liability estimate potential income tax exposure opinion adequate provision income taxes made years allowance doubtful accounts sales claims record revenue net allowance sales claims addition record provision bad debts provision bad debts allowance sales claims estimated based historical experience also evaluate current condition customer balances bankruptcy filings change credit policy historical chargeoff patterns recovery rates data determining allowance doubtful accounts reserve review estimates periodically assess whether additional adjustment needed based economic events circumstances including actual experience end billing collection cycle believe allowance doubtful accounts sales claims adequate cover anticipated losses current conditions however significant deterioration factors noted overall economy could materially change expectations provisions sales claims doubtful accounts estimated based percentage revenue accordingly additional 1 change allowance percentages would impacted 2007 net income approximately 165 million pension benefits pension plan obligations related assets company’s defined benefit pension plans presented note 10 consolidated financial statements plan assets consist primarily marketable equity debt instruments valued using market quotations determination plan obligations annual pension expense requires management make number assumptions key assumptions measuring plan obligations include discount rate future salary increases longterm expected return plan assets 2007 2006 utilized citigroup pension liability index appropriate discount rate defined benefit pension plans index widely used companies throughout united states considered one preferred standards establishing discount rate 2005 discount rate determined using methodology discounts projected plan cash flows measurement date using spot rates provided citigroup pension discount curve single discount rate computed present value benefit plans’ cash flows using single rate equaled present value computed using citigroup pension discount curve salary increase assumptions based upon historical experience anticipated future management actions asset returns based upon anticipated average rate earnings expected invested funds plan longrun december 31 2007 weightedaverage actuarial assumptions discount rate 590 longterm rate return plan assets 825 rhd plans 850 dex media plans assumed salary increases 366 net periodic pension costs recognized 2007 128 million 1 increase discount rate would affect 2007 net income approximately 35 million 1 decrease discount rate would affect 2007 net income approximately 31 million 1 increase assumed salary increases would affect 2007 net income approximately 12 million 1 decrease assumed salary increases would affect 2007 net income approximately 11 million 1 change longterm rate return plan assets would affect 2007 net income approximately 23 million stockbased compensation january 1 2006 adopted sfas 123r sharebased payment “sfas 123r” using modified prospective method required record compensation expense consolidated statement operations employee stockbased awards granted modified settled date adoption unvested portion previously granted stock awards remain outstanding beginning period adoption based grant date fair values sfas 123r fair value stockbased awards calculated using blackscholes model time stockbased awards granted sfas 123r use blackscholes model requires significant judgment use estimates particularly assumptions expected volatility riskfree interest rates expected lives value stockbased awards forfeiture rates recognize stockbased compensation following assumptions used valuing stockbased awards recognition stockbased compensation years ended december 31 2007 2006 estimate expected volatility based historical volatility price common stock expected life stockbased awards expected life represents period time stockbased awards granted expected outstanding estimated consistent simplified method identified sab 107 defined simplified method calculates expected life average vesting contractual terms award riskfree interest rate based applicable us treasury yields approximate expected life stockbased awards granted also use historical data estimate forfeiture rate estimated forfeitures adjusted extent actual forfeitures differ expected materially differ estimates assumptions reflect best estimates involve inherent uncertainties based certain conditions generally outside control company result assumptions used total stockbased compensation determined accordance sfas 123r could materially impacted furthermore use different assumptions future grants stockbased compensation could materially impacted future periods new accounting pronouncements december 2007 financial accounting standards board “fasb” issued sfas 141r business combinations “sfas 141r” sfas 141r replaces sfas 141 business combinations “sfas 141” establishes principles requirements acquirer business combination recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interest acquiree recognizes measures goodwill acquired business combination gain bargain purchase determines information disclose enable users financial statements evaluate nature financial effects business combination sfas 141r effective business combinations acquisition date beginning first annual reporting period beginning december 15 2008 earlier adoption prohibited december 2007 sec issued staff accounting bulletin 110 “use simplified method developing expected term share options” “sab 110” sab 110 amends replaces staff accounting bulletin 107 “sab 107” expressed views staff regarding use “simplified” method developing estimate expected life “plain vanilla” share options allowed usage “simplified” method share option grants prior december 31 2007 sab 110 continue permit certain circumstances use simplified method beyond december 31 2007 sab 110 effective january 1 2008 company expect adoption sab 110 material impact consolidated financial statements february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities including amendment fasb statement 115 “sfas 159” sfas 159 permits companies choose measure many financial instruments certain items fair value currently required measured fair value objective sfas 159 provide opportunities mitigate volatility reported earnings caused measuring related assets liabilities differently without apply hedge accounting provisions sfas 159 also establishes presentation disclosure requirements designed facilitate comparisons companies choose different measurement attributes similar types assets liabilities sfas 159 effective fiscal years beginning november 15 2007 adopted sfas 159 effective january 1 2008 adoption sfas 159 material impact consolidated financial position results operations september 2006 fasb issued sfas 157 fair value measurements “sfas 157” defines fair value establishes framework measuring fair value gaap expands disclosures fair value measurements sfas 157 effective fiscal years beginning november 15 2007 interim periods within fiscal years adopted sfas 157 effective january 1 2008 adoption sfas 157 material impact consolidated financial position results operations reviewed new accounting standards identified believe new standards material impact financial position operating results operations year ended december 31 2007 compared year ended december 31 2006 factors affecting comparability reclassifications certain prior period amounts included consolidated statements operations reclassified conform current period’s presentation selling support expenses presented separate expense category consolidated statements operations prior periods certain selling support expenses included cost revenue others included general administrative expenses additionally beginning 2007 began classifying adjustments customer claims sales allowance deducted gross revenue determine net revenue prior periods adjustments customer claims included bad debt expense general administrative expenses bad debt expense included selling support expenses accordingly reclassified adjustments customer claims bad debt expense 2006 conform current period’s presentation reclassifications impact operating income net income years ended december 31 2007 2006 table summarizes reclassifications acquisitions result dex media merger att directory acquisition related financings associated purchase accounting 2007 results reported accordance gaap comparable 2006 reported gaap results gaap results presented year ended december 31 2006 include eleven months results dex media business acquired january 31 2006 deferral amortization method revenue recognition billable value directories published recognized revenue subsequent reporting periods however purchase accounting precluded us recognizing 2006 directory revenue certain expenses associated directories published prior dex media merger including directories published month dex media merger completed thus reported 2007 2006 gaap results comparable 2006 results indicative underlying operating financial performance accordingly management presenting adjusted pro forma information year ended december 31 2006 among things eliminates purchase accounting impact revenue certain expenses related dex media merger assumes dex media merger occurred january 1 2006 management believes presentation adjusted pro forma information help financial statement users better easily compare current period underlying operating results combined company performance would likely comparable prior period adjusted pro forma amounts disclosed caption “nongaap measures adjusted pro forma amounts” elsewhere nongaap measures reconciled comparable gaap measures caption adjusted pro forma results exclude effects purchase accounting certain nonrecurring items better reflect underlying operating results 2006 differences rhd dex media respective accounting policies 2007 gaap results 2006 adjusted pro forma results strictly comparable treated gaap reported results net revenue components net revenue years ended december 31 2007 2006 follows directory advertising revenue earned primarily sale advertising yellow pages directories publish net sales claims allowances directory advertising revenue also includes revenue internetbased advertising products including online directories dexknowscom businesscom internet marketing services directory advertising revenue affected several factors including changes quantity size advertisements acquisition new customers renewal rates existing customers premium advertisements sold changes advertisement pricing introduction new products revenue respect print advertising internetbased advertising products sold print advertising recognized deferral amortization method whereby revenue initially deferred directory published recognized ratably directory’s life typically 12 months revenue respect internetbased services sold print advertising internet marketing services recognized delivered fulfilled gross directory advertising revenue year ended december 31 2007 increased 7900 million 414 year ended december 31 2006 increase primarily due increase 7782 million gross directory advertising revenue directories acquired dex media merger “qwest directories” included gross directory advertising revenue 16471 million year ended december 31 2007 compared 8689 million year ended december 31 2006 due purchase accounting gross directory advertising revenue year ended december 31 2006 excluded amortization advertising revenue qwest directories published prior february 2006 totaling 6615 million purchase accounting related dex media merger impact reported revenue 2007 increase also result recognizing full year results 2007 dex media business acquired january 31 2006 opposed eleven months results 2006 increase gross directory advertising revenue year ended december 31 2007 also due new product introductions including online products services incremental revenue businesscom local launch increases partially offset declines renewal business declines sales productivity related systems modernization weaker housing trends certain embarq markets sales claims allowances year ended december 31 2007 increased 129 million 308 year ended december 31 2006 increase sales claims allowances year ended december 31 2007 primarily due recognizing full year results 2007 acquired dex media business opposed eleven months results 2006 related purchase accounting impact period offset lower claims experience 2007 primarily qwest markets revenue year ended december 31 2007 increased 39 million 115 year ended december 31 2006 revenue includes barter revenue late fees received outstanding customer balances commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain advertisingrelated products increase revenue year ended december 31 2007 primarily result recognizing full year results 2007 dex media business opposed eleven months results 2006 partially offset declines barter activity advertising sales statistical measure consists sales advertising print directories distributed period internetbased products services respect advertising first appeared publicly period important distinguish advertising sales net revenue gaap recognized deferral amortization method advertising sales year ended december 31 2007 27434 million compared 27328 million year ended december 31 2006 advertising sales periods assumes businesscom acquisition occurred january 1 2006 year ended december 31 2006 assumes dex media merger occurred january 1 2006 106 million 04 increase advertising sales year ended december 31 2007 result stronger ad sales second fourth quarters 2007 increases new online products services businesscom local launch revenue partially offset declines renewal business mainly driven conservatism advertiser spending based economic indicators revenue respect print advertising internetbased advertising products sold print advertising recognized deferral amortization method whereby revenue initially deferred directory published recognized ratably directory’s life typically 12 months revenue respect internetbased services sold print advertising internet marketing services recognized delivered fulfilled expenses components total expenses years ended december 31 2007 2006 follows operating expenses 2007 include investments triple play strategy focus online products services directory publishing business new product introductions qwest embarq att markets investments include launching new dex market brand new uniform resource locator “url” dexknowscom across entire footprint introduction plus companion directories embarq att markets well associated marketing advertising campaigns employee training associated new product introductions modernization consolidation platform expect investments drive future advertising sales revenue improvements certain costs directly related selling production directories initially deferred recognized ratably life directory costs specifically identifiable particular directory include sales commissions print paper initial distribution costs sales commissions include amounts paid employees sales local advertisers certified marketing representatives “cmrs” act channel national advertisers expenses sales person salaries sales manager compensation sales office occupancy publishing information technology services specifically identifiable particular directory recognized incurred costs recognized reporting period consist costs incurred period fully recognized period ii costs incurred prior period portion amortized recognized current period iii costs incurred current period portion amortized recognized current period balance deferred future periods consequently difference costs recognized given period costs incurred given period may significant deferred costs related sale production directories recognized ratably life directory deferral amortization method accounting cost recognition commencing month directory distribution cost revenue total cost revenue year ended december 31 2007 4503 million compared 3421 million reported year ended december 31 2006 primary components 1082 million 316 increase cost revenue follows increase cost revenue year ended december 31 2007 primarily due effects purchase accounting associated dex media merger 2006 well recognizing full year results acquired dex media business 2007 result purchase accounting required gaap print delivery costs related directories published prior month dex media merger totaling 1193 million reported year ended december 31 2006 directory expenses incurred year ended december 31 2006 include amortization deferred directory costs relating qwest directories published beginning february 2006 year ended december 31 2007 incurred 372 million additional expenses related internet production distribution due investment triple play strategy well recognizing full year results acquired dex media business compared year ended december 31 2006 investment focuses enhancing growing internet yellow pages “iyp” internet marketing products services year ended december 31 2007 incurred 109 million additional print paper distribution costs compared year ended december 31 2006 due new companion print products embarq att markets well recognizing full year results acquired dex media business companion directories small format directory serves complement core directory replicated advertising core directory available additional charge advertisers increases offset commencement print product optimization program negotiated price reductions print expenses result purchase accounting required gaap recorded deferred directory costs print paper delivery commissions related directories scheduled publish subsequent dex media merger att directory acquisition fair value determined estimated billable value published directory less b expected costs complete directories plus c normal profit margin refer purchase accounting entry “cost uplift” cost uplift associated print paper delivery costs amortized terms applicable directories cost revenue whereas cost uplift associated commissions amortized terms applicable directories selling support expenses fair value costs date acquisition completed determined 1577 million 813 million dex media merger att directory acquisition respectively cost uplift amortization associated print paper delivery costs totaled 153 million year ended december 31 2007 compared 646 million year ended december 31 2006 related dex media merger represents decrease cost uplift expense 493 million year ended december 31 2007 amortization cost uplift recognized cost revenue years ended december 31 2007 2006 relating att directory acquisition year ended december 31 2007 barter expenses declined 80 million compared year ended december 31 2006 due declines barter activity qwest markets changes category primarily relate decrease print delivery management costs due synergies resulting dex media merger selling support expenses total selling support expenses year ended december 31 2007 7163 million compared 6560 million reported year ended december 31 2006 primary components 603 million 92 increase selling support expenses follows increase selling support expenses year ended december 31 2007 primarily due effects purchase accounting associated dex media merger 2006 well recognizing full year results acquired dex media business 2007 result purchase accounting required gaap deferred commissions selling support costs related directories published prior month dex media merger totaling 1007 million reported year ended december 31 2006 directory expenses incurred year ended december 31 2006 include amortization deferred directory costs relating qwest directories published beginning february 2006 year ended december 31 2007 incurred 225 million additional advertising branding expenses compared year ended december 31 2006 media collateral costs incurred promote triple play strategy dex brand name print online products well use dexknowscom new url across entire footprint increase also attributable recognizing full year results acquired dex media business advertising expense includes 78 million related traffic acquisition costs associated operations businesscom comparable expense prior corresponding period cost uplift associated commissions totaled 136 million year ended december 31 2007 relating dex media merger compared 594 million year ended december 31 2006 relating dex media merger att directory acquisition represents decrease cost uplift 458 million year ended december 31 2007 year ended december 31 2007 commissions salesperson costs declined 95 million compared year ended december 31 2006 primarily due lower cmr commission rates changes category primarily relate decrease noncash stockbased compensation expense partially offset increase sales training costs due new product introductions across entire footprint including online products services general administrative expenses general administrative “ga” expenses year ended december 31 2007 1456 million compared 1348 million year ended december 31 2006 primary components 108 million 80 increase ga expenses follows increase ga expenses year ended december 31 2007 primarily due recognizing full year results acquired dex media business 2007 opposed eleven months results 2006 year ended december 31 2007 incurred approximately 73 million additional expenses compared year ended december 31 2006 due recognizing full year results acquired dex media business investment infrastructure support triple play products services enhancements technical support multiple production systems continue integrate consolidated platform increase partially offset cost savings resulting lower rates associated recently negotiated contract became effective july 2007 ga expenses year ended december 31 2007 included reductions general corporate expenses 38 million year ended december 31 2006 primarily due achieving cost synergies expense reduction efforts associated dex media merger depreciation amortization depreciation amortization “da” expense year ended december 31 2007 4631 million compared 3236 million year ended december 31 2006 amortization intangible assets 4083 million year ended december 31 2007 compared 2775 million year ended december 31 2006 increase amortization expense year ended december 31 2007 primarily due recognizing full year amortization related intangible assets acquired dex media merger amortizing local customer relationships intangible asset acquired dex media merger beginning first quarter 2007 amortization intangible assets acquired businesscom acquisition year ended december 31 2007 recognized impairment charge 200 million associated tradenames acquired embarq acquisition impairment charge resulted change branding strategy utilize new dex market brand print online products across entire footprint discontinued use tradenames acquired embarq acquisition impairment charge determined using relief royalty valuation method included within depreciation amortization consolidated statement operations year ended december 31 2007 depreciation fixed assets amortization computer software 548 million year ended december 31 2007 compared 461 million year ended december 31 2006 increase depreciation expense year ended december 31 2007 primarily due recognizing full year depreciation related fixed assets acquired dex media merger well additional depreciation expense resulting fixed asset additions related computer software operating income operating income years ended december 31 2007 2006 follows operating income year ended december 31 2007 9050 million increased 4622 million operating income 4428 million year ended december 31 2006 increase operating income year ended december 31 2007 due effects purchase accounting associated dex media merger 2006 recognizing full year results acquired dex media business 2007 revenue expense trends described nonoperating income year ended december 31 2007 recognized nonoperating gain sale investment 18 million interest expense net interest expense year ended december 31 2007 8309 million compared 7651 million year ended december 31 2006 includes 400 million 219 million respectively noncash amortization deferred financing costs increase net interest expense 658 million year ended december 31 2007 compared prior corresponding period primarily due call premium payments 717 million writeoff unamortized deferred financing costs 168 million included amortization deferred financing costs 400 million noted associated refinancing transactions conducted fourth quarter 2007 increase net interest expense also attributable recognizing full period interest expense related outstanding debt associated dex media merger gs repurchase defined debt acquired dex media merger conjunction dex media merger result purchase accounting required gaap recorded dex media’s debt fair value january 31 2006 recognize offset interest expense period amortization corresponding fair value adjustment life respective debt offset interest expense 921 million year ended december 31 2007 compared 264 million year ended december 31 2006 offset interest expense year ended december 31 2007 includes 622 million related redemption dex media east’s outstanding 9875 senior notes 12125 senior subordinated notes november 26 2007 increase net interest expense also partially offset lower outstanding debt year ended december 31 2007 due debt repayments see “liquidity capital resources” detail regarding debt obligations provision benefit income taxes effective tax rate income taxes 383 year ended december 31 2007 compares 262 loss income taxes year ended december 31 2006 increase rate result higher state tax expense due increase uncertain tax liabilities various tax jurisdictions specifically new york north carolina due increase valuation allowance certain state net operating losses company believes likely expire prior utilization addition rate increase also reflects recognition additional interest expense 16 million 12 million 2007 related taxable years 2004 2005 respectively result irs settlement july 2007 see 2007 provision income taxes 290 million comprised federal tax provision 275 million resulting current tax provision 118 million relating internal revenue service “irs” settlement deferred tax provision 157 million resulting current year taxable loss 2007 state tax provision 15 million results current tax provision 85 million relating taxes due states subsidiaries company file separate company returns offset deferred state tax benefit 70 million relating apportioned taxable income loss among various states federal net operating loss income tax purposes approximately 3033 million generated 2007 primarily result tax amortization expense recorded respect intangible assets acquired dex media merger att directory acquisition embarq acquisition businesscom acquisition december 31 2007 company federal state net operating loss carryforwards approximately 6183 million net carryback 8013 million respectively begin expire 2026 2008 respectively amounts include consideration net operating losses expected expire unused due internal revenue code section 382 limitation ownership changes related businesscom occurred prior businesscom acquisition 2006 income tax benefit 845 million comprised federal deferred tax benefit 1129 million resulting period’s taxable loss offset state tax provision 284 million 2006 state tax provision 284 million primarily resulted modification apportioned taxable income loss among various states net operating loss tax purposes approximately 2163 million generated 2006 primarily result tax amortization expense recorded respect intangible assets acquired dex media merger att directory acquisition embarq acquisition july 2007 effectively settled issues consideration irs related audit taxable years 2003 2004 therefore tax years 2005 2006 still subject examination irs certain state tax returns examination various regulatory authorities continuously review issues raised connection ongoing examinations open tax years evaluate adequacy reserves believe accrued tax liabilities fin 48 adequate cover uncertain tax positions related us federal state income taxes net income loss available common shareholders earnings loss per share net income year ended december 31 2007 469 million compared net loss 2377 million reported year ended december 31 2006 net income year ended december 31 2007 compared net loss reported year ended december 31 2006 primarily due recognizing full year results acquired dex media business 2007 absent adverse impact purchase accounting associated dex media merger net income year ended december 31 2007 negatively impacted increased interest expense da described january 27 2006 repurchased remaining 100301 shares outstanding 8 convertible cumulative preferred stock “preferred stock” investment partnerships affiliated goldman sachs group inc “gs funds” 3361 million cash including accrued cash dividends interest “gs repurchase” based terms stock purchase agreement recorded value preferred stock accreted redemption value 3361 million january 27 2006 accretion redemption value 20 million represented accrued dividends interest recorded increase loss available common shareholders consolidated statement operations year ended december 31 2006 conjunction gs repurchase also reversed previously recorded beneficial conversion feature “bcf” related shares recorded decrease loss available common shareholders 312 million consolidated statement operations year ended december 31 2006 resulting loss available common shareholders 2085 million year ended december 31 2006 subsequent gs repurchase year ended december 31 2007 accounted earnings loss per share “eps” accordance sfas 128 earnings per share “sfas 128” year ended december 31 2006 january 27 2006 closing date gs repurchase accounted eps accordance emerging issues task force “eitf” 036 participating securities twoclass method fasb statement 128 “eitf 036” established standards regarding computation eps companies issued securities common stock contractually entitle holder participate dividends earnings company eitf 036 requires earnings available common shareholders period deduction preferred stock dividends allocated common preferred stockholders based respective rights receive dividends basic eps calculated dividing loss allocable common shareholders weighted average number shares outstanding eitf 036 require presentation basic diluted eps securities common stock therefore following eps amounts pertain common stock guidance sfas 128 diluted eps calculated dividing loss allocable common shareholders weighted average common shares outstanding plus dilutive potential common stock potential common stock includes stock options stock appreciation rights “sars” restricted stock warrants dilutive effect calculated using treasury stock method prior gs repurchase preferred stock dilutive effect calculated using “ifconverted” method calculation basic diluted eps years ended december 31 2007 2006 respectively presented 1 computing eps using twoclass method allocated net loss reported year ended december 31 2006 common preferred shareholders since preferred shareholders contractual obligation share net loss 2 due loss allocable common shareholders reported year ended december 31 2006 effect stockbased awards warrants assumed conversion preferred stock antidilutive therefore included calculation diluted eps years ended december 31 2007 2006 2593 shares 2263 shares respectively stockbased awards exercise prices exceeded average market price company’s common stock respective periods year ended december 31 2006 assumed conversion preferred stock 391 shares common stock antidilutive therefore included calculation diluted eps nongaap measures adjusted pro forma amounts result dex media merger att directory acquisition related financings associated purchase accounting 2007 results reported accordance gaap comparable 2006 reported gaap results gaap results presented year ended december 31 2006 include eleven months results dex media business acquired january 31 2006 deferral amortization method revenue recognition billable value directories published recognized revenue subsequent reporting periods however purchase accounting precluded us recognizing 2006 directory revenue certain expenses associated directories published prior dex media merger including directories published month dex media merger completed thus reported 2007 2006 gaap results comparable 2006 results indicative underlying operating financial performance accordingly management presenting adjusted pro forma information year ended december 31 2006 among things eliminates purchase accounting impact revenue certain expenses related dex media merger assumes dex media merger occurred january 1 2006 management believes presentation adjusted pro forma information help financial statement users better easily compare current period underlying operating results combined company performance would likely comparable prior period adjusted pro forma amounts disclosed elsewhere nongaap measures reconciled comparable gaap measures adjusted pro forma results exclude effects purchase accounting certain nonrecurring items better reflect underlying operating results 2006 differences rhd dex media respective accounting policies 2007 gaap results 2006 adjusted pro forma results strictly comparable treated reported gaap operating income compared 2006 adjusted pro forma operating income components reported gaap operating income year ended december 31 2007 adjusted pro forma operating income year ended december 31 2006 follows 1 represents deferred revenue directories published prior dex media merger would recognized period absent purchase accounting required gaap adjustments also include gaap revenue january 2006 reported dex media 2 represents certain deferred expenses directories published prior dex media merger would recognized period absent purchase accounting required gaap b gaap expenses january 2006 reported dex media c exclusion transaction expenses reported dex media january 2006 directly related dex media merger exclusion cost uplift recorded purchase accounting associated dex media merger att directory acquisition 3 represents additional amortization expense related identifiable intangible assets acquired dex media merger assuming dex media merger consummated january 1 2006 reported gaap net revenue compared 2006 adjusted pro forma net revenue components reported gaap net revenue year ended december 31 2007 adjusted pro forma net revenue year ended december 31 2006 follows 1 represents gross directory advertising revenue sales claims allowances directories published prior dex media merger would recognized period absent purchase accounting required gaap adjustments also include gaap results january 2006 reported dex media 2 revenue includes barter revenue late fees paid outstanding customer balances commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain print internet products gross directory advertising revenue respect print advertising internetbased advertising products sold print advertising recognized deferral amortization method whereby revenue initially deferred directory published recognized ratably directory’s life typically 12 months revenue respect internetbased services sold print advertising internet marketing services recognized delivered fulfilled accordingly revenue recognized reporting period consists revenue incurred period fully recognized period ii revenue incurred prior period current portion amortized recognized current period iii revenue incurred current period portion amortized recognized current period balance deferred future periods gross revenue year ended december 31 2007 26973 million representing decrease 81 million 03 adjusted pro forma gross revenue 27054 million year ended december 31 2006 primary components decrease include declines renewal business mainly driven conservatism advertiser spending based economic indicators weaker advertising sales first third quarters 2007 partially offset stronger advertising sales second fourth quarters 2007 increases new online products services businesscom local launch revenue reported sales claims allowances year ended december 31 2007 548 million representing decrease 101 million 156 adjusted pro forma sales claims allowances 649 million reported year ended december 31 2006 decrease primarily due higher sales claims experience 2006 associated prior legacy dex media systems conversion system conversion issues resolved 2006 reported revenue year ended december 31 2007 378 million representing decrease 102 million 213 adjusted pro forma revenue 480 million year ended december 31 2006 decrease primarily related declines barter activity declines revenue related advertising related products reported gaap expenses compared 2006 adjusted pro forma expenses reported gaap expenses depreciation amortization year ended december 31 2007 13122 million increased 705 million 57 adjusted pro forma expenses 12417 million year ended december 31 2006 primary components 705 million increase reported gaap expenses depreciation amortization year ended december 31 2007 shown reported gaap internet production distribution costs year ended december 31 2007 increased 338 million adjusted pro forma internet production distribution costs year ended december 31 2006 due investment triple play strategy well costs associated operations businesscom investment triple play strategy focuses enhancing growing iyp internet marketing products services adjusted pro forma internet production distribution costs year ended december 31 2006 also included expenses january 2006 reported dex media year ended december 31 2007 reported gaap expenses depreciation amortization include 289 million cost uplift expense related dex media merger adjusted pro forma expenses year ended december 31 2006 exclude cost uplift expense similarly reported gaap expenses year ended december 31 2006 included 1240 million cost uplift expense related dex media merger att directory acquisition comparable adjusted pro forma expense year ended december 31 2006 cost uplift related dex media merger fully recognized 2007 directories scheduled publish 12 month cycle published cost uplift related dex media merger impact future periods year ended december 31 2007 incurred 225 million additional advertising branding expenses compared adjusted pro forma advertising branding expenses year ended december 31 2006 media collateral costs incurred promote triple play strategy dex brand name print online products well use dexknowscom new url across entire footprint increase advertising expense also includes 78 million related traffic acquisition costs associated operations businesscom year ended december 31 2007 incurred 109 million additional print paper distribution costs compared adjusted pro forma print paper distribution costs year ended december 31 due new companion print products embarq att markets increases offset commencement print product optimization program negotiated price reductions print expenses year ended december 31 2007 incurred approximately 41 million additional gaap expenses compared adjusted pro forma expenses year ended december 31 2006 due recognizing full year results acquired dex media business investment infrastructure support triple play products services enhancements technical support multiple production systems continue integrate consolidated platform increase partially offset cost savings resulting lower rates associated recently negotiated contract became effective july 2007 adjusted pro forma expenses year ended december 31 2006 also included expenses january 2006 reported dex media commissions salesperson costs year ended december 31 2007 decreased 95 million adjusted pro forma commissions salesperson costs year ended december 31 2006 primarily due lower cmr commission rates year ended december 31 2007 barter expenses declined 80 million compared adjusted pro forma barter expenses year ended december 31 2006 due declines barter activity qwest markets reported gaap general corporate expenses year ended december 31 2007 55 million lower adjusted pro forma general corporate expenses year ended december 31 2006 primarily due achieving cost synergies expense reduction efforts associated dex media merger changes category primarily relate decrease noncash stockbased compensation expense partially offset increase sales training costs due new product introductions across entire footprint including online products services reported gaap da expense year ended december 31 2007 4631 million compared adjusted pro forma da expense 3441 million year ended december 31 2006 adjusted pro forma da expense year ended december 31 2006 includes incremental da dex media merger occurred january 1 2006 increase reported gaap da year ended december 31 2007 1190 million primarily related amortizing local customer relationships intangible asset acquired dex media merger beginning first quarter 2007 impairment charge associated tradenames acquired embarq acquisition discussed amortization intangible assets acquired businesscom acquisition reported gaap operating income compared 2006 adjusted pro forma operating income reported gaap operating income year ended december 31 2007 9050 million representing decrease 1977 million adjusted pro forma operating income 11027 million year ended december 31 2006 reflecting variances revenues expenses period described year ended december 31 2006 compared year ended december 31 2005 factors affecting comparability reclassifications certain prior period amounts included consolidated statements operations reclassified conform current period’s presentation selling support expenses presented separate expense category consolidated statements operations prior periods certain selling support expenses included cost revenue others included general administrative expenses additionally beginning 2007 began classifying adjustments customer claims sales allowance deducted gross revenue determine net revenue prior periods adjustments customer claims included bad debt expense general administrative expenses bad debt expense included selling support expenses accordingly reclassified adjustments customer claims bad debt expense 2006 bad debt expense 2005 conform current period’s presentation adjustments customer claims prior 2006 material reclassifications impact operating income net income years ended december 31 2006 2005 table summarizes reclassifications acquisitions result dex media merger att directory acquisition related financings associated purchase accounting 2006 results reported accordance gaap comparable 2005 reported gaap results gaap results presented year ended december 31 2006 include eleven months results dex media business acquired january 31 2006 deferral amortization method revenue recognition billable value directories published recognized revenue subsequent reporting periods however purchase accounting precluded us recognizing directory revenue certain expenses associated directories published prior acquisition including directories published month acquisition completed thus reported 2006 2005 gaap results comparable indicative underlying operating financial performance accordingly management presenting 1 2006 adjusted pro forma information among things eliminates purchase accounting impact revenue certain expenses related dex media merger assumes dex media merger occurred january 1 2006 2 2005 combined adjusted information reflecting sum rhd’s 2005 adjusted results reflecting adjustments relating att directory acquisition b dex media’s reported gaap results period management believes presentation adjusted pro forma combined adjusted information help financial statement users better easily compare current period underlying operating results combined company performance would likely comparable prior period adjusted pro forma combined adjusted amounts disclosed caption “nongaap measures adjusted pro forma combined adjusted amounts” elsewhere nongaap measures reconciled comparable gaap measures caption adjusted pro forma combined adjusted results exclude effects purchase accounting certain nonrecurring items better reflect underlying operating results respective periods differences rhd dex media att respective predecessor accounting policies adjusted pro forma combined adjusted results strictly comparable treated sfas 123r year ended december 31 2006 company recognized 433 million stockbased compensation expense accordance sfas 123 r related stockbased awards granted various employee nonemployee stock incentive plans expense comparable basis 2005 gaap reported results net revenue components net revenue years ended december 31 2006 2005 follows directory advertising revenue earned primarily sale advertising yellow pages directories publish net sales claims allowances directory advertising revenue also includes revenue internetbased advertising products bundled print advertising including certain iyp products internetbased advertising products bundled print advertising sem seo services directory advertising revenue affected several factors including changes quantity size advertisements sold defectors new advertisers well proportion premium advertisements sold changes pricing advertising changes quantity mix advertising purchased per account introduction additional products generate incremental revenue respect print advertising internetbased advertising products bundled print advertising recognized deferral amortization method whereby revenue initially deferred directory published recognized ratably directory’s life typically 12 months revenue respect internetbased services bundled print advertising sem seo services recognized delivered fulfilled total net revenue 2006 18993 million representing increase 9427 million total net revenue reported 2005 9566 million increase total net revenue 2006 primarily result dex media merger well lesser extent purchase accounting resulting att directory acquisition total net revenue 2006 includes 8572 million net revenue qwest directories comparable revenue 2005 due purchase accounting total net revenue 2006 excluded amortization advertising revenue qwest directories published february 2006 deferral amortization method totaling 6491 million would reported period absent purchase accounting purchase accounting related dex media merger adversely impact reported revenue 2007 purchase accounting resulting att directory acquisition negatively impacted net revenue 2005 850 million respect attbranded directories published prior att directory acquisition would recognized 2005 purchase accounting required gaap purchase accounting related att directory acquisition adversely impact reported revenue 2006 increase total net revenue also resulted higher recurring advertising major embarq markets improved sales performance certain att markets increase total net revenue offset declines att markets due realignment coverage areas publications better reflect shopping patterns well tightening credit standards build stable account base time revenue 2006 totaled 339 million representing increase 229 million revenue reported 2005 110 million increase revenue 2006 primarily result dex media merger revenue includes barter revenue late fees paid outstanding customer balances commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain print products advertising sales statistical measure consists sales advertising print directories distributed period internetbased products services respect advertising first appeared publicly period important distinguish advertising sales net revenue gaap recognized deferral amortization method advertising sales years ended december 31 2006 2005 26482 million 26951 million respectively assumes dex media merger occurred january 1 2005 469 million decrease advertising sales primarily result transition integration dex media business including higher customer sales claims allowances resulting prior legacy dex media systems conversion led declines advertising sales certain qwest markets decrease advertising sales also resulted declines national sales associated rescoping consolidation products att markets declines partially offset continued growth associated products embarq markets decrease advertising sales adversely impact amortization directory advertising revenues next four quarters revenue respect print advertising internetbased advertising products bundled print advertising recognized deferral amortization method whereby revenue initially deferred directory published recognized ratably directory’s life typically 12 months revenue respect internetbased services bundled print advertising sem seo services recognized delivered fulfilled expenses components total expenses years ended december 31 2006 2005 follows substantially expenses derived directory publishing business internetbased advertising products services certain costs directly related selling production directories initially deferred recognized ratably life directory costs specifically identifiable particular directory include sales commissions print paper initial distribution costs sales commissions include commissions paid employees sales local advertisers cmrs act channel national advertisers expenses sales person salaries sales manager compensation sales office occupancy publishing information technology services specifically identifiable particular directory recognized incurred costs recognized reporting period consist costs incurred period fully recognized period ii costs incurred prior period portion amortized recognized current period iii costs incurred current period portion amortized recognized current period balance deferred future periods consequently difference costs recognized given period costs incurred given period may significant deferred costs related sale production directories recognized ratably life directory deferral amortization method accounting cost recognition commencing month directory distribution cost revenue total cost revenue 2006 3421 million compared 1159 million 2005 primary components 2262 million increase cost revenue 2006 compared 2005 follows cost revenue 2006 increased 2262 million compared 2005 primarily result dex media merger expenses 1541 million incurred support dex media business 2006 include printing paper distribution internet production distribution cost revenue comparable expenses 2005 similar deferral amortization method revenue recognition certain costs directly related production directories initially deferred incurred recognized ratably life directory result purchase accounting required gaap print delivery costs totaling 1193 million reported 2006 related directories published prior month dex media merger directory expenses incurred 2006 include amortization deferred directory costs relating qwest directories published beginning february 2006 addition 47 million print delivery costs directories published prior att directory acquisition reported 2005 due purchase accounting result purchase accounting required gaap recorded deferred directory costs print paper delivery commissions related directories scheduled publish subsequent dex media merger att directory acquisition fair value determined estimated billable value published directory less b expected costs complete directories plus c normal profit margin refer purchase accounting entry “cost uplift” cost uplift associated print paper delivery costs amortized terms applicable directories cost revenue whereas cost uplift associated commissions amortized terms applicable directories selling support expenses fair value costs determined 1577 million 813 million dex media merger att directory acquisition respectively cost uplift amortization associated print paper delivery costs totaled 646 million 2006 relating dex media merger comparable expense 2005 amortization cost uplift recognized cost revenue years ended december 31 2006 2005 relating att directory acquisition selling support expenses total selling support expenses 6560 million 2006 compared 3274 million 2005 primary components 3286 million increase selling support expenses 2006 compared 2005 follows selling support expenses 2006 increased 3286 million compared 2005 primarily result dex media merger expenses 2950 million incurred support dex media business 2006 include bad debt commissions salesperson expenses advertising selling support expenses comparable expenses 2005 similar deferral amortization method revenue recognition certain costs directly related selling directories initially deferred incurred recognized ratably life directory result purchase accounting required gaap deferred commissions selling support costs totaling 1007 million reported 2006 related directories published prior month dex media merger directory expenses incurred 2006 include amortization deferred directory costs relating qwest directories published beginning february 2006 addition 104 million deferred commissions directories published prior att directory acquisition reported 2005 due purchase accounting purchase accounting related att directory acquisition adversely impacted selling support expenses 2006 21 million due remaining amortization cost uplift selling support expenses 2006 also included 155 million noncash stockbased compensation expense resulting sfas 123r company adopted effective january 1 2006 expense comparable basis 2005 2006 48 million noncash stockbased compensation expense resulted modifications stockbased awards due acceleration vesting terms result dex media merger selling support expenses includes noncash stockbased compensation expense employees whose wages classified selling support expenses also 2006 incurred approximately 101 million additional selling expenses including commissions salesperson costs compared 2005 due initiatives improve sales results certain markets cost uplift associated commissions amortized selling support expenses totaled 594 million 2006 relating dex media merger att directory acquisition represents decrease cost uplift 56 million 650 million recorded 2005 relating att directory acquisition general administrative expenses general administrative “ga” expenses 2006 1348 million compared 530 million 2005 representing increase 818 million primary components 818 million increase ga expenses 2006 compared 2005 follows ga expenses 2006 included 501 million ga expenses primarily support acquired dex media business comparable expense 2005 ga expenses include financial services human resources administrative services ga expenses 2006 also included 278 million noncash stockbased compensation expense resulting sfas 123r adopted effective january 1 2006 expense comparable basis 2005 2006 86 million noncash stockbased compensation expense resulted modifications stockbased awards due acceleration vesting terms result dex media merger ga expenses include noncash stockbased compensation expense employees whose wages classified ga expenses 2006 incurred approximately 104 million additional expenses compared 2005 due enhancements technical support multiple production systems begin implementing integration plan consolidated platform subsequent dex media merger depreciation amortization depreciation amortization “da” expenses 2006 totaled 3236 million compared 851 million 2005 representing increase 2385 million amortization intangible assets 2775 million 2006 compared 721 million 2005 increase amortization expense due increase intangible assets resulting dex media merger depreciation fixed assets amortization computer software 461 million 2006 compared 130 million 2005 increase depreciation expense primarily due depreciable assets acquired dex media merger operating income operating income years ended december 31 2006 2005 follows operating income 2006 4428 million increased 676 million 2005 operating income 3752 million primarily result dex media merger results 2006 2005 adversely affected purchase accounting precluded us recognizing deferred revenue certain expenses associated directories published prior dex media merger att directory acquisition including directories published month acquisition completed total net revenue 2006 increased 9427 million total net revenue 2005 primarily resulting dex media merger offsetting increase total net revenue increase total expenses 2006 8751 million also primarily result dex media merger 2005 purchase accounting impact att directory acquisition since deferred net revenue related directories published prior month dex media merger att directory acquisition eliminated purchase accounting certain direct expenses related directories eliminated purchase accounting purchase accounting disproportionate adverse effect reported revenues month subsequent dex media merger impact purchase accounting expires revenue increase higher rate related expenses compared prior year addition impact purchase accounting total expenses 2006 reflect noncash stockbased compensation expense recognized result adoption sfas 123r expense comparable basis 2005 additionally 2006 cost revenue reflects increase deferred cost uplift amortization described effects purchase accounting eliminated adjusted pro forma operating income 2006 substantially higher compared gaap operating income 2005 see “nongaap measures adjusted pro forma combined adjusted amounts” operating income 2007 impacted solely cost uplift aspect purchase accounting related dex media merger approximately 358 million interest expense net interest expense 2006 7651 million compared 2645 million 2005 increase net interest expense 5006 million 2006 result dramatically higher outstanding debt balances associated dex media merger combined higher interest rates see “liquidity capital resources” description debt obligations provisions related debt instruments net interest expense 2005 includes 253 million call premium payment writeoff unamortized deferred financing costs 74 million associated december 20 2005 tender offer exit consent solicitation subsidiaries’ 8875 senior notes due 2016 net interest expense 2006 includes 219 million noncash amortization deferred financing costs compared 236 million noncash amortization deferred financing costs 2005 including writeoff unamortized deferred financing costs 74 million noted conjunction dex media merger result purchase accounting required gaap recorded dex media’s debt fair value january 31 2006 recognize offset interest expense period amortization corresponding fair value adjustment life respective debt offset interest expense 2006 264 million benefit provision income taxes 2006 income tax benefit 845 million comprised federal deferred tax benefit 1129 million resulting current period taxable loss offset state tax provision 284 million 2006 state tax provision 284 million primarily resulted modification apportioned taxable income loss among various states reflected company’s 2005 state tax returns filed 2006 net operating loss approximately 2163 million generated 2006 primarily result tax amortization expense recorded respect intangible assets acquired dex media merger att directory acquisition embarq acquisition december 31 2006 company federal state net operating loss carryforwards approximately 7128 million net carryback 7823 million respectively begin expire 2023 2008 respectively company also 36 million federal alternative minimum tax amt credit carryforward expire 2005 provision income taxes 432 million comprised deferred tax provision due taxable loss generated current period 2005 deferred tax provision resulted effective tax rate 390 net operating losses approximately 1686 million related tax deductions amortization expense recorded tax purposes compared book purposes respect intangible assets acquired embarq acquisition att directory acquisition 2005 effective tax rate reflects decrease state local tax rate due integration embarq acquisition att directory acquisition currently federal tax audit internal revenue service taxable years 2003 2004 believe adequate provisions made respect federal tax audit believe resolution audit material adverse effect financial position results operations cash flows addition certain state tax returns examination various regulatory authorities continuously review issues raised connection ongoing examinations open tax years evaluate adequacy reserves believe accrued tax liabilities adequate cover probable us federal state income tax loss contingencies net loss income loss available common shareholders loss per share net loss 2006 2377 million compared net income 675 million 2005 results 2006 2005 adversely affected purchase accounting precluded us recognizing deferred revenue certain expenses associated directories published prior dex media merger att directory acquisition including directories published month acquisition completed net loss recorded 2006 also reflects increased interest expense associated dramatically higher outstanding debt balances associated dex media merger combined higher interest rates well increase amortization expense associated intangible assets acquired dex media merger purchase accounting resulting dex media merger impact reported results 2007 cost uplift aspect purchase accounting described approximately 358 million offset interest expense related fair value adjustment dex media’s debt described approximately 313 million prior gs repurchase january 2006 8 dividend preferred stock reduced earnings available common shareholders earnings per share amounts calculated amount preferred stock dividend included stated 8 dividend plus deemed dividend bcf function conversion price preferred stock fair value related warrants issued preferred stock fair market value underlying common stock date issuance preferred stock connection issuance preferred stock subsequent quarterly accrued dividend october 3 2005 bcf recorded fair value underlying common stock time issuance preferred stock greater conversion price preferred stock full amount bcf treated deemed dividend preferred stock convertible common stock immediately issuance january 2003 preferred stock dividend 2005 117 million consisted 8 dividend 101 million including 25 million accrued cash dividends recognized fourth quarter 2005 bcf 16 million january 14 2005 repurchased 100303 shares outstanding preferred stock gs funds 2772 million cash connection preferred stock repurchase recorded increase loss available common shareholders 1337 million reflect loss repurchase shares excess cash paid gs funds carrying amount repurchased preferred stock plus amount previously recognized bcf associated shares recognized loss repurchase january 27 2006 completed gs repurchase whereby repurchased remaining 100301 shares outstanding preferred stock gs funds 3361 million cash result gs repurchase becoming probable event terms stock purchase agreement october 3 2005 see item 8 “financial statements supplementary data” note 8 “redeemable preferred stock warrants” recorded value preferred stock accreted redemption value 3341 million december 31 2005 3361 million january 27 2006 accretion redemption value 2110 million 20 million represented accrued dividends interest years ended december 31 2005 2006 respectively recorded increase loss available common shareholders consolidated statements operations conjunction gs repurchase also reversed previously recorded bcf related shares recorded decrease loss available common shareholders consolidated statement operations approximately 312 million year ended december 31 2006 resulting loss available common shareholders 2085 million 2006 compared 2889 million 2005 years ended december 31 2006 january 27 2006 closing date gs repurchase 2005 accounted loss earnings per share accordance emerging issues task force issue 036 participating securities twoclass method fasb statement 128 “eitf 036” established standards regarding computation eps companies issued securities common stock contractually entitle holder participate dividends earnings company eitf 036 requires earnings available common shareholders period deduction preferred stock dividends allocated common preferred shareholders based respective rights receive dividends basic eps calculated dividing loss income allocable common shareholders weighted average number shares outstanding eitf 036 require presentation basic diluted eps securities common stock therefore following eps amounts pertain common stock guidance eitf 036 diluted eps calculated dividing loss income allocable common shareholders weighted average common shares outstanding plus dilutive potential common stock potential common stock includes stock options sars restricted stock warrants dilutive effect calculated using treasury stock method prior gs repurchase 8 preferred stock dilutive effect calculated using “ifconverted” method subsequent gs repurchase account eps accordance sfas 128 earnings per share longer utilize twoclass method eps computations calculation basic diluted loss per share years ended december 31 2006 2005 respectively presented 1 computing eps using twoclass method allocated net loss reported years ended december 31 2006 2005 respectively common preferred shareholders since preferred shareholders contractual obligation share net loss 2 due loss allocable common shareholders reported years ended december 31 2006 2005 respectively effect stockbased awards warrants assumed conversion preferred stock antidilutive therefore included calculation diluted eps years ended december 31 2006 2005 2263 shares 60 shares respectively stockbased awards exercise prices exceeded average market price company’s common stock respective periods years ended december 31 2006 2005 assumed conversion preferred stock 391 shares 5132 shares respectively common stock antidilutive therefore included calculation diluted eps nongaap measures adjusted pro forma combined adjusted amounts result dex media merger att directory acquisition related financings associated purchase accounting 2006 results reported accordance gaap comparable 2005 reported gaap results gaap results presented year ended december 31 2006 include eleven months results dex media business acquired january 31 2006 deferral amortization method revenue recognition billable value directories published recognized revenue subsequent reporting periods however purchase accounting precluded us recognizing directory revenue certain expenses associated directories published prior acquisition including directories published month acquisition completed thus reported 2006 2005 gaap results comparable indicative underlying operating financial performance accordingly management presenting 1 2006 adjusted pro forma information among things eliminates purchase accounting impact revenue certain expenses related dex media merger assumes dex media merger occurred january 1 2006 2 2005 combined adjusted information reflecting sum rhd’s 2005 adjusted results reflecting adjustments relating att directory acquisition b dex media’s reported gaap results period management believes presentation adjusted pro forma combined adjusted information help financial statement users better easily compare current period underlying operating results combined company performance would likely comparable prior period adjusted pro forma combined adjusted amounts disclosed elsewhere nongaap measures reconciled comparable gaap measures caption adjusted pro forma combined adjusted results exclude effects purchase accounting certain nonrecurring items better reflect underlying operating results respective periods differences rhd dex media att respective predecessor accounting policies adjusted pro forma combined adjusted results strictly comparable treated adjusted pro forma operating income compared 2005 combined adjusted operating income components adjusted pro forma operating income year ended december 31 2006 combined adjusted operating income year ended december 31 2005 follows 1 represents deferred revenue directories published prior dex media merger would recognized period absent purchase accounting required gaap adjustments also include gaap revenue january 2006 reported dex media 2 represents certain deferred expenses directories published prior dex media merger would recognized period absent purchase accounting required gaap b gaap expenses january 2006 reported dex media c exclusion transaction expenses reported dex media january 2006 directly related dex media merger exclusion cost uplift recorded purchase accounting att directory acquisition dex media merger 3 represents additional amortization expense related identifiable intangible assets acquired dex media merger estimated useful lives assuming dex media merger consummated january 1 2006 4 represents deferred revenue directories published prior att directory acquisition would recognized period purchase accounting required gaap 5 represents elimination cost uplift att directory acquisition net certain deferred expenses att directories published prior att directory acquisition would recognized period purchase accounting required gaap 6 represents net revenue expenses depreciation amortization reported dex media gaap basis year ended december 31 2005 adjusted pro forma revenue compared 2005 combined adjusted revenue components adjusted pro forma revenue year ended december 31 2006 combined adjusted revenue year ended december 31 2005 follows 1 represents gross directory advertising revenue sales claims allowances directories published prior dex media merger would recognized period purchase accounting required gaap adjustments also include gaap results january 2006 reported dex media 2 revenue includes barter revenue late fees paid outstanding customer balances commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain print internet products 3 represents gross directory advertising revenue sales claims allowances att directories published prior att directory acquisition would recognized period purchase accounting required gaap 4 represents 2005 reported gaap results dex media prior dex media merger dex media reported directory advertising revenue net sales claims allowances adjusted pro forma net revenue 2006 26885 million representing decrease 115 million 04 combined adjusted net revenue 27000 million 2005 deferral amortization method revenue recognition revenue directory advertising sales initially deferred directory published recognized ratably life directory typically 12 months adjusted pro forma net directory advertising revenue 2006 decreased combined adjusted net directory advertising revenue 2005 primarily due unfavorable sales claims allowance experience primarily qwest markets resulting customer claims associated prior legacy dex media systems conversion well declines att markets due rescoping consolidation products offset amortization revenue favorable sales performances certain larger markets prior four quarters adjusted pro forma expenses compared 2005 combined adjusted expenses adjusted pro forma expenses depreciation amortization 2006 12417 million increased 381 million combined adjusted expenses 12036 million 2005 primary components 381 million increase 2006 adjusted pro forma expenses depreciation amortization shown adjusted pro forma expenses depreciation amortization 2006 impacted 433 million noncash stockbased compensation expense resulting sfas 123r company adopted effective january 1 2006 expense comparable basis 2005 2006 134 million reported 433 million noncash stockbased compensation expense resulted modifications stockbased awards outstanding due acceleration vesting terms result dex media merger adjusted pro forma expenses depreciation amortization 2006 increased 234 million 2005 combined adjusted expenses due increased internet production distribution costs expanded digital product line offerings includes acquired dex media business adjusted pro forma advertising costs 2006 160 million greater compared combined adjusted advertising expenses 2005 due increased market investment competitive responses adjusted pro forma general corporate expenses 323 million lower marketing costs 108 million lower 2006 compared combined adjusted expenses 2005 reductions adjusted pro forma expenses relate partially achieving economies accompany scale subsequent dex media merger well companywide efforts reduce certain expenses throughout 2006 adjusted pro forma da 2006 3441 million includes incremental da dex media merger occurred january 1 2006 combined adjusted da 2005 4623 million represents da reported rhd dex media decrease adjusted pro forma da 2006 1182 million combined adjusted da 2005 primarily related differences rhd dex media’s valuation useful life assumptions utilized amortization dex media’s intangible assets adjusted pro forma operating income compared 2005 combined adjusted operating income adjusted pro forma operating income 2006 11027 million representing increase 686 million 66 combined adjusted operating income 2005 10341 million reflecting variances revenues expenses period described liquidity capital resources debt longterm debt company december 31 2007 2006 including fair value adjustments required gaap result dex media merger consisted following credit facilities december 31 2007 total outstanding debt credit facilities 37491 million comprised 15715 million rhdi credit facility 11061 million new dex media east credit facility 10715 million dex media west credit facility rhd finance businesscom acquisition related fees expenses august 23 2007 rhd entered 3280 million credit facility “rhd credit facility” scheduled maturity date december 31 2011 october 2 2007 rhd credit facility paid full proceeds series a4 notes repayment rhd credit facility accounted extinguishment debt resulting loss charged interest expense year ended december 31 2007 08 million related writeoff unamortized deferred financing costs rhdi december 31 2007 outstanding balances rhdi’s senior secured credit facility amended restated “rhdi credit facility” totaled 15715 million comprised 3140 million term loan d1 12575 million term loan d2 amount outstanding 1750 million revolving credit facility “rhdi revolver” additional 03 million utilized standby letter credit prior refinancing transactions october 17 2007 discussed rhdi’s credit facility also consisted term loan a4 paid full term loans require quarterly principal interest payments rhdi credit facility provides new term loan c potential borrowings 4000 million proceeds borrowed used fund acquisitions refinance certain indebtedness make certain restricted payments october 17 2007 918 million 162 million 830 million term loans a4 d1 d2 respectively repaid proceeds series a4 notes issued october 17 2007 repayment term loans accounted extinguishment debt resulting loss charged interest expense year ended december 31 2007 42 million related writeoff unamortized deferred financing costs rhdi revolver matures december 2009 term loans d1 d2 require accelerated amortization beginning 2010 final maturity june 2011 weighted average interest rate outstanding debt rhdi credit facility 650 686 december 31 2007 2006 respectively december 31 2007 rhdi’s credit facility bears interest option either • higher base rate determined administrative agent deutsche bank trust company americas ii federal funds effective rate defined plus 050 case plus 025 margin rhdi revolver 050 margin term loan d1 term loan d2 • libor rate plus 125 margin rhdi revolver 150 margin term loan d1 term loan d2 may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings dex media east october 24 2007 replaced former dex media east credit facility new dex media east credit facility new dex media east credit facility consists 7000 million aggregate principal amount term loan facility 4000 million aggregate principal amount term loan b facility 1000 million aggregate principal amount revolving loan facility “new dex media east revolver” 2000 million aggregate principal amount uncommitted incremental facility dex media east would right subject obtaining commitments incremental loans one occasions increase term loan term loan b revolving loan facility amount new dex media east credit facility secured pledges similar assets similar covenants events default former dex media east credit facility december 31 2007 principal amounts owing term loan term loan b totaled 11000 million comprised 7000 million 4000 million respectively 61 million outstanding new dex media east revolver additional 30 million utilized three standby letters credit new dex media east revolver term loan mature october 2013 term loan b mature october 2014 weighted average interest rate outstanding debt new dex media east credit facility 687 december 31 2007 weighted average interest rate outstanding debt former dex media east credit facility 685 december 31 2006 former dex media east credit facility amended restated connection dex media merger consisted revolving loan commitments “former dex media east revolver” term loan term loan b october 17 2007 864 million 2136 million term loan term loan b former dex media east credit facility respectively repaid proceeds series a4 notes issued october 17 2007 proceeds new dex media east credit facility used october 24 2007 repay remaining 565 million 1397 million term loan term loan b former dex media east credit facility respectively 325 million former dex media east revolver repayment term loans revolving loan commitments outstanding former dex media east credit facility accounted extinguishment debt resulting loss charged interest expense year ended december 31 2007 02 million related writeoff unamortized deferred financing costs proceeds new dex media east credit facility also used november 26 2007 fund redemption 4497 million dex media east’s outstanding 9875 senior notes due 2009 3413 million dex media east’s outstanding 12125 senior subordinated notes due 2012 see details december 31 2007 new dex media east credit facility bears interest option either • higher base rate determined administrative agent jp morgan chase bank na ii federal funds effective rate defined plus 050 case plus 075 050 leverage ratio less 2 1 margin new dex media east revolver term loan 100 margin term loan b • libor rate plus 175 150 leverage ratio less 2 1 margin new dex media east revolver term loan 200 margin term loan b may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings dex media west december 31 2007 dex media west credit facility amended restated connection dex media merger consists revolving loan commitments “dex media west revolver” term loan term loan b1 term loan b2 dex media west revolver consists total principal amount 1000 million available general corporate purposes subject certain conditions december 31 2007 principal amounts owed term loan term loan b1 term loan b2 totaled 10535 million comprised 1529 million 3107 million 5899 million respectively 180 million outstanding dex media west revolver term loan b1 amount 4442 million utilized redeem dex media west’s senior notes put dex media west connection change control offer associated dex media merger fund portion cash consideration paid dex media inc’s stockholders connection dex media merger remaining 588 million longer available term loan dex media west revolver mature september 2009 term loan b1 term loan b2 mature march 2010 weighted average interest rate outstanding debt dex media west credit facility 651 683 december 31 2007 2006 respectively december 31 2007 dex media west credit facility bears interest option either • higher base rate determined administrative agent jp morgan chase bank na ii federal funds effective rate defined plus 050 case plus 025 margin dex media west revolver term loan 050 margin term loan b1 term loan b2 • libor rate plus 125 margin dex media west revolver term loan 150 margin term loan b1 term loan b2 may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings notes preferred stock warrants december 31 2007 rhd total outstanding notes 64266 million comprised 39629 million outstanding rhd notes 12312 million outstanding dex media inc notes 12325 million outstanding dex media west notes rhd december 31 2007 rhd total outstanding notes 39629 million comprised 3000 million 6875 senior notes 3392 million 6875 series a1 senior discount notes 6137 million 6875 series a2 senior discount notes 12100 million 8875 series a3 senior notes 15000 million 8875 series a4 senior notes october 2 2007 issued 10 billion series a4 notes proceeds series a4 notes used repay 328 million rhd credit facility used fund businesscom acquisition b contributed rhdi order provide funding tender offer consent solicitation rhdi’s 600 million 10875 senior subordinated notes “rhdi senior subordinated notes” c used pay related fees expenses general corporate purposes october 17 2007 issued additional 500 million series a4 notes proceeds issuance transferred dex media east order repay 864 million 2136 million term loan term loan b former dex media east credit facility respectively b contributed rhdi order repay 918 million 162 million 830 million term loans a4 d1 d2 rhdi credit facility respectively c used pay related fees expenses interest series a4 notes payable semiannually april 15th october 15th year commencing april 15 2008 series a4 notes senior unsecured obligations rhd senior right payment rhd’s existing future senior subordinated debt future subordinated obligations rank equally rhd’s existing future senior unsecured debt series a4 notes effectively subordinated rhd’s secured debt including rhd’s guarantee borrowings rhdi credit facility structurally subordinated existing future liabilities including trade payables direct indirect subsidiaries december 31 2007 series a4 notes fair market value 137 billion series a4 notes issued certain institutional investors offering exempt registration requirements securities act 1933 terms registration rights agreement company agreed file registration statement series a4 notes within 210 days subsequent initial closing issued 300 million 6875 senior notes due january 15 2013 “holdco notes” proceeds used redeem 100303 shares outstanding preferred stock gs funds pay transaction costs repay debt associated rhdi’s credit facility interest payable holdco notes semiannually arrears january 15th july 15th year commencing july 15 2005 december 31 2007 6875 holdco notes fair market value 2655 million order fund cash portion dex media merger purchase price issued 660 million aggregate principal amount maturity 6005 million gross proceeds 6875 series a2 senior discount notes due january 15 2013 121 billion principal amount 8875 series a3 senior notes due january 15 2016 interest payable semiannually january 15th july 15th year series a2 senior discount notes series a3 senior notes commencing july 15 2006 also issued 365 million aggregate principal amount maturity 3321 million gross proceeds 6875 series a1 senior discount notes due january 15 2013 fund gs repurchase interest payable semiannually january 15th july 15th year commencing july 15 2006 notes unsecured obligations rhd senior right payment future senior subordinated indebtedness rhd structurally subordinated indebtedness subsidiaries december 31 2007 6875 series a1 series a2 senior discount notes 8875 series a3 senior notes fair market value 3002 million 5431 million 112 billion respectively may 30 2006 rhd redeemed outstanding preferred stock purchase rights issued pursuant company’s stockholder rights plan redemption price one cent per right total redemption payment 07 million payment recorded charge retained earnings year ended december 31 2006 november 2 2006 repurchased outstanding warrants purchase 165 million shares common stock aggregate purchase price approximately 531 million rhdi connection embarq acquisition rhdi issued 8875 325 million senior notes due 2010 “rhdi senior notes” 600 million rhdi senior subordinated notes december 20 2005 repurchased tender offer exit consent solicitation 3171 million rhdi senior notes proceeds rhdi credit facility’s 350 million term loan d1 used fund partial repurchase rhdi senior notes tender premium 253 million pay transaction costs tender offer partial repurchase rhdi senior notes accounted extinguishment debt resulting loss 327 million charged interest expense year ended december 31 2005 consisting tender premium writeoff unamortized deferred financing costs 74 million december 2007 redeemed remaining 79 million rhdi senior notes proceeds rhdi revolver used fund redemption premium 02 million pay transaction costs redemption rhdi senior notes accounted extinguishment debt resulting loss 02 million charged interest expense year ended december 31 2007 consisting redemption premium writeoff unamortized deferred financing costs less 01 million october 2007 terms conditions tender offer consent solicitation purchase 600 million rhdi senior subordinated notes rhdi commenced september 18 2007 5999 million 999 outstanding rhdi senior subordinated notes repurchased proceeds series a4 notes contributed rhd rhdi order fund repurchase rhdi senior subordinated notes tender premium 397 million pay transaction costs tender offer december 2007 remaining 01 million rhdi senior subordinated notes redeemed tender redemption rhdi senior subordinated notes accounted extinguishment debt resulting loss 513 million charged interest expense year ended december 31 2007 consisting tender premium writeoff unamortized deferred financing costs 116 million dex media inc december 31 2007 dex media inc total outstanding notes 12312 million comprised 5121 million 8 senior notes 7191 million 9 senior discount notes dex media inc issued 500 million aggregate principal amount 8 senior notes due 2013 senior notes unsecured obligations dex media inc interest payable may 15th november 15th year december 31 2007 500 million aggregate principal amount outstanding excluding fair value adjustments december 31 2007 8 senior notes fair market value 4663 million dex media inc issued 750 million aggregate principal amount 9 senior discount notes due 2013 two indentures first indenture totaling 389 million aggregate principal amount 9 senior discount notes issued original issue discount interest accruing 9 per annum compounded semiannually senior discount notes unsecured obligations dex media inc interest accrues form increased accreted value november 15 2008 “full accretion date” time accreted value equal full principal amount maturity second indenture totaling 361 million aggregate principal amount interest accrues 837 per annum compounded semiannually creates premium full accretion date amortized remainder term november 15 2008 9 senior discount notes bear cash interest 9 per annum payable semiannually may 15th november 15th year senior discount notes unsecured obligations dex media inc cash interest accrue discount notes prior full accretion date december 31 2007 7499 million aggregate principal amount outstanding excluding fair value adjustments december 31 2007 9 senior discount notes fair market value 6731 million dex media east november 26 2007 proceeds new dex media east credit facility used fund redemption 4497 million dex media east’s outstanding 9875 senior notes due 2009 3413 million dex media east’s outstanding 12125 senior subordinated notes due 2012 redemption premiums associated senior notes senior subordinated notes 111 million 207 million respectively pay transaction costs redemption senior notes senior subordinated notes accounted extinguishment debt resulting loss 318 million charged interest expense year ended december 31 2007 related redemption premiums addition result redeeming senior notes senior subordinated notes interest expense offset 622 million year ended december 31 2007 resulting accelerated amortization remaining fair value adjustment recorded result dex media merger refinancings purpose refinancing transactions occurred throughout 2007 refinance certain debt obligations debt yielding favorable interest rates simplify provide flexibility within operating capital structure dex media west december 31 2007 dex media west total outstanding notes 12325 million comprised 3987 million 85 senior notes 88 million 5875 senior notes 8250 million senior subordinated notes dex media west issued 385 million aggregate principal amount 85 senior notes due 2010 senior notes unsecured obligations dex media west interest payable february 15th august 15th year december 31 2007 385 million aggregate principal amount outstanding excluding fair value adjustments december 31 2007 85 senior notes fair market value 3898 million dex media west issued 300 million aggregate principal amount 5875 senior notes due 2011 senior notes unsecured obligations dex media west interest payable may 15th november 15th year december 31 2007 87 million aggregate principal amount outstanding excluding fair value adjustments december 31 2007 5875 senior notes fair market value 87 million dex media west issued 780 million aggregate principal amount 9875 senior subordinated notes due 2013 senior subordinated notes unsecured obligations dex media west interest payable february 15th august 15th year december 31 2007 7617 million aggregate principal amount outstanding excluding fair value adjustments december 31 2007 9875 senior subordinated notes fair market value 7884 million company’s credit facilities indentures governing notes contain usual customary affirmative negative covenants among things place limitations ability incur additional indebtedness ii pay dividends repurchase capital stock iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock subsidiaries vi engage transactions affiliates vii make investments loans advances company’s credit facilities also contain financial covenants relating maximum consolidated leverage minimum interest coverage maximum senior secured leverage defined therein substantially rhdi’s subsidiaries assets including capital stock rhdi subsidiaries pledged secure obligations rhdi credit facility substantially assets dex media east dex media west subsidiaries including equity interests pledged secure obligations respective credit facilities impact purchase accounting result dex media merger accordance sfas 141 business combinations “sfas 141” required record dex media’s outstanding debt fair value date dex media merger fair value adjustment established january 31 2006 fair value adjustment amortized reduction interest expense remaining term respective debt agreements using effective interest method impact future scheduled interest principal payments amortization fair value adjustment included reduction interest expense 921 million including 622 million related redemption dex media east’s senior notes senior subordinated notes 264 million years ended december 31 2007 2006 respectively total premium 2223 million recorded upon consummation dex media merger 1038 million remains unamortized december 31 2007 shown following table connection redemption dex media east’s senior notes senior subordinated notes remaining fair value adjustment related debt obligations fully amortized december 31 2007 liquidity cash flows primary source liquidity continue cash flow generated operations well available borrowing capacity revolver portions company’s credit facilities expect primary liquidity requirements fund operations service company’s indebtedness ability meet debt service requirements dependent ability generate sufficient cash operations incur additional borrowings company’s credit facilities primary sources cash flow consist mainly cash receipts sale advertising yellow pages online products services impacted among factors general economic conditions competition yellow pages directory publishers alternative products consumer confidence level demand advertising products services believe cash flows operations along borrowing capacity revolver portions company’s credit facilities adequate fund operations capital expenditures meet debt service requirements least next 12 24 months however make assurances business generate sufficient cash flow operations sufficient borrowing available revolver portions company’s credit facilities enable us fund operations capital expenditures meet debt service requirements pursue strategic initiatives purposes time may purchase equity andor debt securities andor subsidiaries’ debt securities privately negotiated transactions open market purchases otherwise depending among things availability funds alternative investments market conditions primarily result business combinations preferred stock repurchase transactions significant amount debt aggregate outstanding debt december 31 2007 102 billion including fair value adjustments required gaap result dex media merger completion dex media merger triggered change control offers dex media’s subsidiaries outstanding notes requiring us make offers repurchase notes 2913 million 5875 dex media west senior notes due 2011 03 million 9875 dex media east senior notes due 2009 02 million 9875 dex media west senior subordinated notes due 2013 01 million 9 dex media inc senior discount notes due 2013 tendered applicable change control offer repurchased us year ended december 31 2007 made scheduled principal payments 2399 million prepaid additional 14342 million principal credit facilities includes prepayments associated aforementioned 2007 refinancings total credit facility repayments 16741 million excluding revolver repayments year ended december 31 2007 made revolver payments 7814 million offset revolver borrowings 7226 million resulting net decrease 588 million revolver portions company’s credit facilities year ended december 31 2007 made aggregate cash interest payments 7215 million december 31 2007 461 million cash equivalents checks yet presented payment 108 million combined available borrowings revolvers 3476 million connection aforementioned 2007 refinancings received approximately 479 million general corporate purposes 2007 periodically utilized revolvers financing resource balance timing periodic payments prepayments made credit facilities interest payments subsidiaries’ senior notes senior subordinated notes timing cash receipts operations present intention repay borrowings revolvers timely manner keep outstanding amounts minimum share repurchases common stock transactions november 2007 company’s board directors authorized 1000 million repurchase plan authorization permits company purchase shares common stock open market pursuant rule 10b18 securities exchange act 1934 block trades otherwise following twelve months based market conditions factors purchases may made suspended time accordance repurchase plan repurchased 25 million shares cost 957 million december 2007 november 9 2006 certain affiliates carlyle group welsh carson anderson stowe “selling shareholders” sold 9424360 shares 9424359 shares respectively rhd common stock selling shareholders former shareholders dex media became shareholders rhd conjunction dex media merger sale selling shareholders longer hold shares rhd common stock acquired connection dex media merger receive proceeds transaction tax basis acquisitions connection att directory acquisition embarq acquisition made election internal revenue code section 338h10 treat applicable stock purchase asset purchase case permitted us record acquired intangible assets goodwill fair value tax purposes rather prior owners’ tax cost basis “carryover basis” cases significantly less fair value intangible assets goodwill acquired dex media merger recorded carryover bases tax purposes amortized 15year period inception intangible assets goodwill resulted treating earlier acquisitions prior owners dex media tax purposes purchase assets business accordingly tax deductible amortization substantially higher would typical stock purchase transaction since based upon fair value acquired intangible assets goodwill using straightline method generally 15 years annual amortization goodwill acquired intangible assets tax purposes approximately 6725 million goodwill subject amortization book purposes result amortization expense offsets taxable income cash tax requirements significantly reduced tax effect amortization deductions cash flow activities cash provided operating activities 6918 million year ended december 31 2007 key contributors operating cash flow include following • 469 million net income • 6661 million net noncash charges primarily consisting 4631 million depreciation amortization 808 million bad debt provision 390 million stockbased compensation expense 473 million noncash charges primarily related amortization deferred financing costs amortization fair value adjustments required gaap result dex media merger 263 million loss extinguishment debt related 2007 refinancing transactions noted 87 million deferred income taxes 09 million loss disposal fixed assets • 1222 million net use cash increase accounts receivable 958 million decrease deferred directory revenue 264 million change deferred revenue accounts receivable analyzed together given fact directory published annual billable value directory initially deferred unbilled accounts receivable established month thereafter typically one twelfth billing value recognized revenue billed customers • 60 million net use cash increase assets consisting 51 million increase current noncurrent assets primarily relating deferred commissions print paper delivery costs changes fair value company’s interest rate swap agreements 09 million increase prepaid expenses • 661 million net source cash increase accounts payable accrued liabilities primarily reflecting 479 million increase trade accounts payable 194 million increase accrued interest payable outstanding debt partially offset 12 million decrease accrued liabilities include accrued salaries related bonuses accrued income taxes • 409 million increase noncurrent liabilities including pension postretirement longterm liabilities cash used investing activities year ended december 31 2007 4091 million includes following • 775 million used purchase fixed assets primarily computer equipment software leasehold improvements • 3291 million net cash payments acquire businesscom • 25 million used fund equity investment cash used financing activities year ended december 31 2007 3929 million includes following • 14687 million proceeds net costs issuance series a4 notes used fund repayment rhd credit facility redemption rhdi’s 10875 senior subordinated notes partial repayment term loans former dex media east credit facility partial repayment term loans a4 d1 d2 rhdi revolver rhdi credit facility • 14168 million proceeds net costs borrowings credit facilities new dex media east credit facility used fund repayment remaining term loans revolver former dex media east credit facility redemption dex media east’s 9875 senior notes 12125 senior subordinated notes rhd credit facility used fund businesscom acquisition • 16741 million principal payments term loans credit facilities amount 2399 million represents scheduled principal payments 14342 million represents principal payments made accelerated basis option proceeds received 2007 refinancing transactions available cash flow generated operations • 14706 million note repayments amount 13989 million used redeem rhdi’s 8875 senior notes 10875 senior subordinated notes dex media east’s 9875 senior notes 12125 senior subordinated notes tender redemption premium payments 717 million incurred conjunction note repayments • 7226 million borrowings revolvers used primarily fund temporary working capital requirements well repurchase common stock redemption rhdi’s 8875 senior notes • 7814 million principal payments revolvers • 896 million used repurchase common stock amount represents value common stock repurchased actually settled cash december 31 2007 • 134 million proceeds exercise employee stock options • 90 million proceeds issuance common stock connection businesscom acquisition • 77 million decreased balance checks yet presented payment cash provided operating activities 7683 million year ended december 31 2006 key contributors operating cash flow include following • 2377 million net loss • 3922 million net source cash noncash charges primarily consisting 3236 million depreciation amortization 711 million bad debt provision 433 million stockbased compensation expense 394 million noncash charges primarily consists amortization related fair value adjustments required gaap result dex media merger offset 852 million deferred tax benefit • 5598 million net source cash 6357 million increase deferred directory revenue offset increase accounts receivable 759 million change deferred revenue accounts receivable analyzed together given fact directory published annual billable value directory initially deferred unbilled accounts receivable established month thereafter typically one twelfth billing value recognized revenue billed customers additionally purchase accounting rules deferred revenue recorded directories published prior month dex media merger however retained rights associated collection amounts due advertising contracts executed prior month dex media merger • 230 million net use cash increase assets reflecting 247 million increase prepaid expenses current noncurrent assets primarily relating changes fair value company’s interest rate swap agreements offset decrease deferred directory costs 17 million consisting decrease deferred directory costs 236 million offset 219 million amortization deferred directory costs relating directories scheduled publish subsequent dex media merger deferred directory costs represent cash payments certain costs associated publication directories since deferred directory costs initially deferred incurred cash payments made prior expense recognized • 630 million net source cash increase accounts payable accrued liabilities primarily reflecting 693 million increase accrued interest payable outstanding debt 04 million increase trade accounts payable offset 67 million decrease accrued liabilities including accrued salaries related bonuses • 140 million net source cash increase noncurrent liabilities including pension postretirement longterm liabilities cash used investing activities year ended december 31 2006 19800 million includes following • 785 million used purchase fixed assets primarily computer equipment software leasehold improvements • 19015 million cash payments primarily connection dex media merger including merger fees net cash received dex media well local launch acquisition cash provided financing activities year ended december 31 2006 13602 million includes following • 25144 million net borrowings consisting 21425 million related series a2 senior discount notes series a3 senior notes used fund cash portion dex media merger series a1 senior discount notes used fund gs repurchase net borrowings also consist 4442 million dex media west term loan b1 1500 million used fund cash portion dex media merger 2942 million used fund purchase 5875 dex media west senior notes 9875 dex media west senior subordinated notes 9 dex media inc senior discount notes conjunction change control offers borrowings net financing costs 723 million • 17380 million principal payments debt amount 2821 million represents scheduled principal payments 2950 million represents principal payments made accelerated basis option available cash flow generated operations 2919 million represents dex media senior notes tendered repurchase company 8690 million represents principal payments revolvers • 3368 million used gs repurchase redemption preferred stock purchase rights stockholder rights plan • 9349 million borrowings revolvers • 531 million used repurchase outstanding warrants gs funds • 316 million proceeds exercise employee stock options • 72 million increased balance checks yet presented payment offbalance sheet arrangements company offbalance sheet arrangements material results operations financial condition liquidity contractual obligations contractual obligations table presented sets forth annual commitments december 31 2007 principal interest payments debt well cash obligations next five years thereafter debt repayments presented table include scheduled principal payments current debt agreements include anticipated prepayments debt repayments also exclude fair value adjustments required purchase accounting adjustments impact payment obligations 1 included longterm debt principal amounts owed credit facilities senior notes senior subordinated notes including current portion longterm debt 2 interest debt represents cash interest payment obligations assuming indebtedness december 31 2007 paid accordance contractual maturity assumes interest rates variable interest debt december 31 2007 remain unchanged future periods weighted average interest rates rhdi dex media east dex media west credit facilities 650 687 651 respectively december 31 2007 please refer “liquidity capital resources” interest rates senior notes senior subordinated notes 3 enter operating leases normal course business substantially lease agreements fixed payment terms lease agreements provide us renewal early termination options future operating lease obligations would change exercised renewal early termination options entered additional operating lease agreements amounts table assume exercise renewal early termination options 4 connection software system modernization ongoing support services related amdocs software system obligated pay amdocs approximately 1282 million years 2008 2012 connection att directory acquisition entered internet yellow pages reseller agreement whereby obligated pay att 72 million years 2008 2009 conjunction dex media merger obligated pay qwest approximately 83 million years 2008 2009 certain information technology communications billing collection services entered agreements yahoo whereby yahoo serve maintain local search listings placement webbased electronic local information directory electronic mapping products obligated pay yahoo 188 million years 2008 2010 5 defined benefit plans covering substantially employees funding policy contribute amount least equal minimum legal funding requirement based past performance uncertainty dollar amounts paid excluded amounts table also unfunded postretirement plans provide certain healthcare life insurance benefits fulltime employees reach retirement age working company expected future benefit payments including administrative expenses net employee contributions included table expect make contributions approximately 158 million 68 million pension plans postretirement plan respectively 2008 addition amounts presented table unrecognized tax benefits december 31 2007 total 140 million including accrued interest penalties reasonably possible amount unrecognized tax benefits could decrease within next twelve months currently audit new york state new york city taxable years 2000 2003 north carolina taxable years 2003 2006 new york state new york city north carolina audits resolved within next twelve months total amount unrecognized tax benefits could decrease approximately 140 million unrecognized tax benefits related new york state new york city north carolina audits relate apportionment allocation income among various legal entities item 7aitem 7 management’s discussion analysis financial condition results operations item read conjunction audited consolidated financial statements notes thereto included item 8 unless otherwise indicated terms “company” “donnelley” “rhd” “we” “us” “our” refer rh donnelley corporation direct indirect whollyowned subsidiaries corporate overview leader local search within markets business 2008 generated revenues approximately 26 billion fulfilling two critical roles address needs growing local search marketplace • provide simple cost effective marketing solutions advertisers generate large volume readytobuy consumers local businesses • provide local search solutions consumers easy use deliver highly relevant search results variety print online media platforms triple playtm local search solutions “triple play” deliver audience readytobuy consumers businesses position advertisers’ messages found wherever whenever however consumer chooses search triple play comprised dexbranded solutions include dex yellow pages print directories proprietary dexknowscom® online search site dex search networktm includes strategic partnerships best known online media companies google® yahoo ® promote businesses rest internet also cobrand print local search solutions recognizable brands industry qwest embarq att order differentiate local search solutions competitors believe ability effectively compete industry supported enhanced local marketing consultants serve trusted advisors marketing support service local markets serve local marketing consultants work closely advertisers first discover needs goals assess unique situations recommend customized costeffective directional local search solutions help businesses grow additional factors support ability effectively compete industry include • brand dex brand provides differentiation ability leverage capabilities print products media online mobile • advertisers strong longterm relationships advertisers • products triple play local search solutions target consumers closer making purchase decisions • channel manage large established local sales organization • content proprietary database contains uptodate information 600000 national local businesses 28 states infrastructure service national local advertisers recent trends related business experiencing lower advertising sales primarily result declines recurring business renewal increases existing advertisers mainly driven weaker economic trends reduced consumer confidence cautious advertiser spending markets advertising sales also impacted increase competition fragmentation local business search space addition experiencing adverse bad debt trends attributable many economic challenges markets expect economic challenges continue markets advertising sales bad debt experience operating results continue adversely impacted foreseeable future response economic challenges continue actively manage expenses considering acting upon host initiatives streamline operations contain costs time improving value deliver advertisers expanding number platforms media deliver message consumers well adjusting pricing give advertisers exposure price also committing sales force focus selling value provided local businesses expanded platforms including triple play offering print yellow pages internet yellow pages online search addition continue invest future initiatives new sales force automation advertiser self service system portal new mobile voice search platforms associated employee training economic conditions recover markets believe investments drive future revenue growth thereby enhancing shareholder value also experienced significant decline stock price throughout 2008 believe decline stock price primarily reflects investment community’s evolving view 1 decreasing reliance consumers goods services provided local media companies generally 2 companies significant financial leverage particularly national economic outlook deteriorates credit markets frozen regard note stock price decline coincided significant drop stock prices many local media companies well many companies significant leverage many adversely impacted ongoing instability credit markets december 31 2008 new york stock exchange “nyse” notified company trading common stock would suspended company maintain market capitalization least 25 million consecutive 30trading day period required nyse’s continued listing standards result suspension nyse listing common stock began trading overthecounter pink sheets symbol “rhdc” beginning january 2 2009 prior time company’s common stock traded nyse symbol “rhd” result decline trading value debt equity securities decline operating results recognized noncash goodwill impairment charges 25 billion 6602 million first second quarters 2008 respectively together totaling 31 billion year ended december 31 2008 result impairment charges recorded goodwill december 31 2008 given ongoing global credit liquidity crisis significant negative impact financial markets overall economy continued decline advertising sales operating results downward revisions forecasted results recent downgrade certain credit ratings continued decline trading value debt equity securities recent suspension trading common stock nyse performed impairment tests definitelived intangible assets longlived assets accordance sfas 144 december 31 2008 result tests company recognized noncash impairment charge 7440 million fourth quarter 2008 associated local national customer relationships acquired dex media merger att directory acquisition embarq acquisition addition connection launch next version proprietary online search site dexknowscom tradenames technology acquired local launch acquisition discontinued resulted noncash impairment charge 22 million fourth quarter 2008 total impairment charges related intangible assets excluding goodwill 7462 million year ended december 31 2008 impairment charges impact current future operating cash flow compliance debt covenants tax attributes see item 7 “management’s discussion analysis financial condition results operations critical accounting estimates” additional information regarding impairment charges result credit liquidity crisis united states throughout global financial system substantial volatility world capital markets banking industry occurred several large banking financial institutions received funding federal government granted government loan guarantees taken federal regulators merged financial institutions initiated bankruptcy proceedings events significant negative impact financial markets well overall economy unprecedented instability may make difficult us access credit market obtain financing refinancing case may satisfactory terms addition result global economic instability pension plan’s investment portfolio incurred significant volatility decline fair value 2008 however values pension plan’s individual investments fluctuate response changing market conditions amount gains losses recognized subsequent periods impact funded status pension plan future minimum required cash contributions cannot determined time going concern item 8 “financial statements supplementary data” note 1 “business presentation” contains statement indicating certain events could impact ability continue going concern assessment ability continue going concern made management considering among factors significant amount maturing debt obligations commencing march 31 2010 continuing thereafter ii current global credit liquidity crisis iii significant negative impact operating results cash flows overall downturn global economy increase competition fragmentation local business search space iv certain credit ratings recently downgraded v common stock ceased trading new york stock exchange “nyse” december 31 2008 traded overthecounter pink sheets reflected goodwill impairment charges 31 billion intangible asset impairment charges 7462 million recorded year ended december 31 2008 management also considered projected inability comply certain covenants debt agreements next 12 months circumstances events increased risk unable continue satisfy debt obligations required performed management’s view raise substantial doubt whether company able continue going concern reasonable period time based current financial projections expect able continue generate cash flow operations amounts sufficient satisfy interest principal payment obligations february 2010 however estimates also indicate cash flows operations sufficient satisfy maturing debt obligations commencing march 31 2010 continuing thereafter result ability satisfy debt repayment obligations 2010 thereafter depend large part success refinancing certain obligations issuances debt equity securities ii amending restructuring terms maturities principal amounts obligations iii effecting transactions agreements holders obligations unsuccessful efforts would potentially incur payment andor defaults certain debt obligations waived respective lenders could lead acceleration debt obligations addition credit facilities indentures governing notes contain usual customary representations warranties well affirmative negative covenants among things place limitations ability incur additional indebtedness ii pay dividends repurchase capital stock iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock subsidiaries vi engage transactions affiliates vii make investments loans advances case subject customary negotiated exceptions limitations applicable credit facilities indentures governing notes also contain financial covenants relating among items maximum consolidated leverage minimum interest coverage maximum senior secured leverage defined therein indentures financial covenants generally incurrence tests meaning measured time certain proposed restricted activities failure test simply precluding proposed activity contrast credit facilities covenants generally maintenance tests meaning measured quarter failure meet test constituting event default respective credit agreement ability maintain compliance financial covenants 2009 dependent various factors certain outside control factors include ability generate sufficient revenues cash flows operations ability achieve reductions outstanding indebtedness changes interest rates impact earnings investments liabilities based current forecast absent modification waiver management projects could exceed leverage limit determined debt incurrence test rh donnelley corporation “rhdc” indentures commencing early end first quarter 2009 exceeding leverage limit would event default however rhdc would contractually prohibited engaging following activities paying dividends repurchasing capital stock ii entering mergers joint ventures consolidations acquisitions asset dispositions saleleaseback transactions based current forecast absent modification waiver management projects certain rhdc’s subsidiaries exceed leverage limits determined debt incurrence test indentures early fourth quarter 2009 material impact prohibited activities would restriction paying dividends rhdc restrictions subsidiaries’ ability pay dividends rhdc could result rhdc unable satisfy debt obligations based upon current forecast project rhdc able satisfy cash debt obligations fourth quarter 2009 however based current forecast absent modification waiver minimum interest coverage total leverage covenants dex media west credit facility satisfied measured fourth quarter 2009 first quarter 2010 respectively noted may cause cross default rhdc fourth quarter 2009 substantially rhdi’s subsidiaries’ assets including capital stock rhdi subsidiaries pledged secure obligations rhdi credit facility addition company guarantor obligations rhdi credit facility substantially assets dex media east dex media west subsidiaries including equity interests pledged secure obligations respective credit facilities failure comply financial covenants contained credit facilities would result one events default cured waived could require applicable borrower repay borrowings thereunder scheduled due dates unable make repayments otherwise refinance borrowings lenders credit facilities could pursue various default remedies set forth credit facility agreements including executing collateral securing credit facilities addition events default credit facilities may trigger events default indentures governing subsidiaries’ notes see item 1a “risk factors” risks uncertainties respect ability maintain compliance debt covenants event default rhdc would create default rhdi conversely event default rhdi would create default rhdc event default dex media would also create default rhdc previously stated would create default rhdi addition event default dex media east dex media west would create default dex media furthermore certain actions dex media would create default dex media east dex media west respective credit agreements event default rhdc would create event default dex media dex media east dex media west significant financing developments substantial amount debt significant debt service obligations due large part financings associated prior acquisitions december 31 2008 total outstanding debt 96 billion including fair value adjustments 862 million required generally accepted accounting principles “gaap” result dex media merger defined 3622 million available revolving portion various credit facilities subsidiaries year ended december 31 2008 reduced net debt outstanding 6385 million includes benefit fair value adjustment combination mandatory repayments optional prepayments financing activities noted result financing activities noted reduced outstanding debt 4100 million recorded gain 2652 million year ended december 31 2008 february 13 2009 company borrowed unused revolving portions various credit facilities subsidiaries totaling 3610 million company made borrowings various revolving credit facilities preserve financial flexibility light continuing uncertainty global credit markets effective october 21 2008 obtained waiver rhdi’s senior secured credit facility “rhdi credit facility” permit rhdi make voluntary prepayments term loan d1 term loan d2 discount par provided discount acceptable lenders choose participate prepayments may made period 270 days date waiver aggregate amount 4000 million provided prepayment must amount less 100 million rhdi obligated make prepayments result voluntary prepayments made year ended december 31 2008 recognized gain 200 million consisting difference face amount term loans repaid voluntary prepayments made offset writeoff unamortized deferred financing costs 02 million following table presents face amount term loans repaid total voluntary prepayments made net gain recognized year ended december 31 2008 october 2008 repurchased 215 million senior notes collectively senior notes senior discount notes repurchased september 2008 noted referred “notes” purchase price 74 million “october 2008 debt repurchases” result october 2008 debt repurchases recognized gain 136 million year ended december 31 2008 consisting difference par value purchase price notes offset writeoff unamortized deferred financing costs 05 million following table presents par value purchase price gain recognized october 2008 debt repurchases year ended december 31 2008 september 2008 repurchased 1655 million 1599 million accreted value applicable notes purchase price 847 million “september 2008 debt repurchases” result september 2008 debt repurchases recognized gain 724 million year ended december 31 2008 consisting difference accreted value par value applicable purchase price notes offset writeoff unamortized deferred financing costs 29 million following table presents accreted value case senior discount notes par value applicable purchase price gain recognized september 2008 debt repurchases year ended december 31 2008 june 25 2008 rhdi exchanged 5942 million 5857 million accreted value applicable rhd’s senior notes senior discount notes collectively referred “rhd notes” 4129 million aggregate principal amount rhdi’s newly issued 1175 senior notes due may 15 2015 “rhdi senior notes” referred “debt exchanges” following table presents accreted value case senior discount notes par value applicable rhd notes exchanged well gain recognized debt exchanges year ended december 31 2008 june 6 2008 conjunction debt exchanges amended rhdi credit facility order among things permit debt exchanges provide additional covenant flexibility addition part amendment rhdi modified pricing extended maturity date 1000 million revolving credit facility “rhdi revolver” june 2011 remaining 750 million rhdi revolver mature december 2009 june 6 2008 refinanced dex media west credit facility new dex media west credit facility consists 1300 million term loan maturing october 2013 9500 million term loan b maturing october 2014 900 million revolving credit facility maturing october 2013 “dex media west revolver” event 250 million dex media west’s 9875 senior subordinated notes due 2013 refinancing replacement thereof outstanding dex media west revolver term loan term loan b mature date three months prior final maturity notes new dex media west credit facility includes 4000 million uncommitted incremental facility “incremental facility” may incurred additional revolving loans additional term loans subject obtaining commitments loans incremental facility fully available used refinance dex media west 85 senior notes due 2010 however limited 2000 million used purpose proceeds new dex media west credit facility used refinance former dex media west credit facility pay related fees expenses year ended december 31 2008 recognized charge 22 million writeoff unamortized deferred financing costs associated refinancing former dex media west credit facility portions amended rhdi credit facility accounted extinguishments debt result amendment rhdi credit facility refinancing former dex media west credit facility june 6 2008 existing interest rate swaps associated two debt arrangements notional amount 16 billion december 31 2008 longer highly effective offsetting changes cash flows accordingly cash flow hedge accounting treatment statement financial accounting standards “sfas” 133 accounting derivative instruments hedging activities “sfas 133” longer permitted interest expense year ended december 31 2008 includes noncash charge 210 million resulting amounts charged accumulated comprehensive loss related interest rate swaps prior june 6 2008 interest expense also includes noncash charge 37 million resulting change fair value interest rate swaps june 6 2008 december 31 2008 see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies interest expense deferred financing costs” “summary significant accounting policies gain loss debt transactions net” note 5 “longterm debt credit facilities notes” additional information employee retirement savings pension plans october 21 2008 compensation benefits committee company’s board directors approved comprehensive redesign company’s employee retirement savings pension plans effective january 1 2009 except described sole retirement benefit available nonunion employees company employed businesscom inc “businesscom” provided single defined contribution plan unified 401k plan replace preexisting rh donnelley dex media inc “dex media” 401k savings plans businesscom employees continue eligible participate businesscom 401k plan time company able efficiently transition new unified 401k plan company continue maintain rh donnelley 401k restoration plan employees compensation excess irs annual limits conjunction establishing new unified defined contribution plan company frozen current defined benefit plans covering nonunion employees rh donnelley corporation retirement account dex media inc pension plan rh donnelley pension benefit equalization plan case effective december 31 2008 connection freeze pension plan benefit accruals nonunion plan participants ceased december 31 2008 however plan balances remained intact interest credits participant account balances well service credits vesting retirement eligibility continue accordance terms respective plans addition supplemental transition credits provided certain plan participants nearing retirement would otherwise lose portion anticipated pension benefit age 65 result freezing current plans similar supplemental transition credits provided certain plan participants grandfathered final average pay formula defined benefit plans previously converted traditional pension plans cash balance plans additionally october 21 2008 compensation benefits committee company’s board directors approved nonunion employees elimination nonsubsidized access retiree health care life insurance benefits effective january 1 2009 ii elimination subsidized retiree health care benefits medicareeligible retirees effective january 1 2009 iii phase subsidized retiree health care benefits threeyear period beginning january 1 2009 nonunion retiree health care benefits terminating january 1 2012 respect phase subsidized retiree health care benefits eligible retiree becomes medicareeligible point time phase process noted retiree longer eligible retiree health care coverage result implementing freeze company’s defined benefit plans recognized onetime noncash net curtailment loss 16 million year ended december 31 2008 consisting curtailment gain 136 million entirely offset losses incurred plan assets recognition previously unrecognized prior service costs charged accumulated comprehensive loss result eliminating retiree health care life insurance benefits nonunion employees recognized onetime noncash curtailment gain 396 million year ended december 31 2008 result actions longer incur funding expenses administrative costs associated plans nonunion employees collective bargaining agreements international brotherhood electrical workers america “ibew” communication workers america “cwa” expire 2009 intend engage good faith bargaining respect retirement benefits among items results negotiations cannot yet determined acquisitions see item 1 “business historical overview” summary company’s recent acquisitions well description acquisition used support position local search industry today acquisitions accounted purchase business combinations purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values acquisition date operating results acquisition included consolidated operating results commencing date acquisition completed see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies identifiable intangible assets goodwill” note 3 “acquisitions” additional information regarding acquisitions intangible assets acquired segment reporting management reviews analyzes business providing local search solutions one operating segment critical accounting estimates preparation financial statements accordance gaap requires management estimate effect various matters inherently uncertain date financial statements estimates varies regard level judgment involved potential impact company’s reported financial results estimates deemed critical different estimate could reasonably used changes estimate reasonably likely occur period could materially impact company’s financial condition changes financial condition results operations company’s significant accounting polices december 31 2008 discussed note 2 “summary significant accounting policies” notes consolidated financial statements included item 8 annual report critical estimates inherent accounting polices december 31 2008 discussed management believes current assumptions considerations used estimate amounts company’s consolidated financial statements appropriate intangible assets goodwill valuation amortization intangible assets consist directory services agreements company qwest att embarq respectively b established customer relationships resulting dex media merger att directory acquisition embarq acquisition businesscom acquisition local launch acquisition c noncompetition agreement company sprint trademarks trade names advertising commitment resulting dex media merger e third party contract trademarks tradenames technology network platforms resulting businesscom acquisition intangible assets amortized estimated useful lives manner best reflects economic benefit derived assets excess purchase price dex media merger att directory acquisition embarq acquisition businesscom acquisition local launch acquisition net tangible identifiable intangible assets acquired recorded goodwill accordance sfas 142 goodwill intangible assets “sfas 142” goodwill amortized subject impairment testing annual basis frequently believe indicators impairment exist intangible assets subject impairment testing accordance sfas 144 accounting impairment disposal longlived assets “sfas 144” company reviews carrying value intangible assets impairment whenever events circumstances indicate carrying amount may recoverable impairment test intangible assets performed comparing carrying amount intangible assets sum undiscounted expected future cash flows relating assets accordance sfas 144 impairment exists sum undiscounted expected future cash flows less carrying amount intangible asset related group assets longlived assets impairment would result writedown intangible asset estimated fair value based discounted future cash flows goodwill subject impairment testing accordance sfas 142 described result decline trading value debt equity securities first quarter 2008 continuing negative industry economic trends directly affected business performed impairment tests march 31 2008 goodwill definitelived intangible assets longlived assets accordance sfas 142 sfas 144 respectively used estimates assumptions impairment evaluations including limited projected future cash flows revenue growth customer attrition rates testing results definitelived intangible assets longlived assets indicated impairment march 31 2008 impairment test goodwill involved two step process first step involved comparing fair value company carrying amount assets liabilities including goodwill fair value company determined using market based approach reflects market value debt equity securities march 31 2008 result testing determined company’s fair value less carrying amount assets liabilities requiring us proceed second step goodwill impairment test second step testing process impairment loss determined comparing implied fair value goodwill recorded amount goodwill implied fair value goodwill derived discounted cash flow analysis company using discount rate results present value assets liabilities equal current fair value company’s debt equity securities based upon analysis recognized noncash impairment charge 25 billion three months ended march 31 2008 since trading value equity securities declined second quarter 2008 result continuing negative industry economic trends directly affected business performed additional impairment tests goodwill definitelived intangible assets longlived assets june 30 2008 testing results definitelived intangible assets longlived assets indicated impairment june 30 2008 result tests recognized noncash goodwill impairment charge 6602 million three months ended june 30 2008 together impairment charge recognized first quarter 2008 recognized total goodwill impairment charge 31 billion year ended december 31 2008 result impairment charge recorded goodwill december 31 2008 impairment losses recorded related goodwill year ended december 31 2007 given ongoing global credit liquidity crisis significant negative impact financial markets overall economy continued decline advertising sales operating results downward revisions forecasted results recent downgrade certain credit ratings continued decline trading value debt equity securities recent suspension trading common stock nyse performed impairment tests definitelived intangible assets longlived assets accordance sfas 144 december 31 2008 result tests company recognized noncash impairment charge 7440 million fourth quarter 2008 associated local national customer relationships acquired dex media merger att directory acquisition embarq acquisition impairment charge determined comparing fair values respective intangible assets respective carrying values fair values intangible assets derived discounted cash flow analysis using discount rate results present value assets liabilities equal current fair market value company’s debt equity securities connection launch next version proprietary online search site dexknowscom tradenames technology acquired local launch acquisition discontinued resulted noncash impairment charge 22 million fourth quarter 2008 total impairment charges related intangible assets excluding goodwill 7462 million year ended december 31 2008 year ended december 31 2007 recognized intangible asset impairment charge 200 million associated tradenames acquired embarq acquisition impairment charge resulted change branding strategy utilize new dex market brand print online products across entire footprint discontinued use tradenames acquired embarq acquisition impairment charge determined using relief royalty valuation method embarq tradenames mentioned impairment losses recorded related definitelived intangible assets longlived assets years ended december 31 2007 2006 respectively aggregate net book value intangible assets december 31 2008 impaired incremental 1 net loss 2008 would adversely impacted approximately 644 million industry economic conditions markets continue deteriorate trading value debt equity securities decline required assess recoverability useful lives longlived assets intangible assets could result additional impairment charges reduction remaining useful lives acceleration amortization expense additionally management must assess whether remaining useful lives intangible assets represent period intangible assets expected contribute cash flow assessment process used certain estimates assumptions including projected future cash flows customer attrition levels industry economic conditions accordance sfas 144 evaluate remaining useful lives intangible assets whenever events circumstances indicate revision remaining period amortization warranted estimated remaining useful lives change remaining carrying amount intangible asset would amortized prospectively revised remaining useful life year ended december 31 2008 amortization intangible assets 4159 million remaining useful lives intangible assets shortened 10 net loss 2008 would adversely impacted approximately 241 million connection impairment testing definitelived intangible assets longlived assets sfas 144 also requires evaluation remaining useful lives assets consider among things effects obsolescence demand competition economic factors including stability industry operate known technological advances legislative actions result uncertain changing regulatory environment expected changes distribution channels based evaluation remaining useful lives directory services agreements reduced 33 years effective january 1 2009 order better reflect period intangible assets expected contribute future cash flow amortization expense 2009 expected increase approximately 986 million result reduction remaining useful lives associated directory services agreements revision carrying values local national customer relationships subsequent impairment charges fourth quarter 2008 income taxes account income taxes asset liability method accordance sfas 109 accounting income taxes “sfas 109” deferred income tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred income tax assets based upon available evidence likely deferred income tax assets realized adopted provisions financial accounting standards board “fasb” interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” january 1 2007 interpretation clarifies accounting uncertainty income taxes recognized entity’s financial statements accordance sfas 109 fin 48 prescribes recognition threshold measurement principles financial statement recognition measurement tax positions taken expected taken tax return fin 48 impact uncertain income tax position income tax return must recognized largest amount likely sustained upon audit relevant taxing authority uncertain income tax position recognized less 50 likelihood sustained additionally fin 48 provides guidance derecognition classification interest penalties accounting interim periods disclosures transition requirements see item 8 “financial statements supplementary data” note 7 “income taxes” information regarding provision benefit income taxes well impact adopting fin 48 ordinary course business may many transactions calculations ultimate tax outcome uncertain calculation tax liabilities involves dealing uncertainties application complex tax laws recognize potential liabilities anticipated tax audit issues based estimate ultimate resolution whether extent additional taxes due although believe estimates reasonable assurance given final outcome matters different reflected historical income tax provisions accruals part financial reporting process must assess likelihood deferred income tax assets recovered unless recovery likely provision taxes must increased recording reserve form valuation allowance deferred income tax assets estimated ultimately recoverable process certain relevant criteria evaluated including existence deferred income tax liabilities used absorb deferred income tax assets taxable income future years judgment regarding future taxable income may change due future market conditions changes us tax laws factors changes may require material adjustments deferred income tax assets accompanying reduction increase net income period determinations made addition operate within multiple taxing jurisdictions subject audit jurisdictions audits involve complex issues may require extended period time resolve maintain liability estimate potential income tax exposure opinion adequate provision income taxes made years allowance doubtful accounts sales claims record revenue net allowance sales claims addition record provision bad debts provision bad debts allowance sales claims estimated based historical experience also evaluate current condition customer balances bankruptcy filings change credit policy historical chargeoff patterns recovery rates data determining allowance doubtful accounts reserve review estimates periodically assess whether additional adjustment needed based economic events circumstances including actual experience end billing collection cycle believe allowance doubtful accounts sales claims adequate cover anticipated losses current conditions however significant deterioration factors noted overall economy could materially change expectations provisions sales claims doubtful accounts estimated based percentage revenue accordingly additional 1 change either allowance percentages would impacted 2008 net loss approximately 171 million pension benefits pension plan obligations related assets defined benefit pension plans presented note 9 consolidated financial statements plan assets consist primarily marketable equity debt instruments valued using market quotations determination plan obligations annual pension expense requires management make number assumptions key assumptions measuring plan obligations include discount rate future salary increases longterm expected return plan assets 2008 2007 2006 utilized citigroup pension liability index appropriate discount rate defined benefit pension plans index widely used companies throughout united states considered one preferred standards establishing discount rate salary increase assumptions based upon historical experience anticipated future management actions asset returns based upon anticipated average rate earnings expected invested funds plan longrun december 31 2008 weightedaverage actuarial assumptions december 31 2007 weightedaverage actuarial assumptions net periodic pension costs recognized 2008 171 million 1 increase discount rate would affect 2008 net loss approximately 47 million 1 decrease discount rate would affect net loss approximately 31 million 1 increase assumed salary increases would affect 2008 net loss approximately 11 million 1 decrease assumed salary increases would affect 2008 net loss approximately 10 million 1 change longterm rate return plan assets would affect 2008 net loss approximately 24 million october 2008 company froze current defined benefit plans covering nonunion employees curtailed nonunion retiree health care life insurance benefits see item 8 “financial statements supplementary data” note 9 “benefit plans” information regarding benefit plans stockbased compensation adopted sfas 123r sharebased payment “sfas 123r” using modified prospective method required record compensation expense consolidated statement operations employee stockbased awards granted modified settled date adoption unvested portion previously granted stock awards remain outstanding beginning period adoption based grant date fair values sfas 123r fair value stockbased awards calculated using blackscholes model time stockbased awards granted sfas 123 r use blackscholes model requires significant judgment use estimates particularly assumptions expected volatility riskfree interest rates expected lives value stockbased awards forfeiture rates recognize stockbased compensation following assumptions used valuing stockbased awards recognition stockbased compensation years ended december 31 2008 2007 2006 estimate expected volatility based historical volatility price common stock expected life stockbased awards expected life represents period time stockbased awards granted expected outstanding estimated consistent simplified method permitted staff accounting bulletin 110 use simplified method developing expected term share options “sab 110” simplified method calculates expected life average vesting contractual terms award riskfree interest rate based applicable us treasury yields approximate expected life stockbased awards granted also use historical data estimate forfeiture rate estimated forfeitures adjusted extent actual forfeitures differ expected materially differ estimates april 2008 company increased estimated forfeiture rate determining compensation expense 5 8 adjustment based review historical forfeiture information resulted reduction compensation expense 18 million year ended december 31 2008 assumptions reflect best estimates involve inherent uncertainties based certain conditions generally outside control company result assumptions used total stockbased compensation determined accordance sfas 123 r could materially impacted furthermore use different assumptions future grants stockbased compensation could materially impacted future periods fair value financial instruments sfas 107 disclosures fair value financial instruments “sfas 107” requires disclosure fair value financial instruments practicable estimate value december 31 2008 2007 fair value cash equivalents accounts receivable accounts payable accrued liabilities approximated carrying value based shortterm nature instruments company utilized quoted market prices available compute fair market value longterm debt disclosed item 8 “financial statements supplementary data” note 5 “longterm debt credit facilities notes” estimates fair value may affected assumptions made accordingly necessarily indicative amounts company could realize current market exchange september 2006 fasb issued sfas 157 fair value measurements “sfas 157” defines fair value establishes fair value hierarchy prioritizes inputs valuation techniques used measure fair value expands disclosures fair value measurements sfas 157 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy gives highest priority quoted prices active markets comprised following three levels level 1 unadjusted quoted market prices active markets identical assets liabilities level 2 observable inputs level 1 inputs level 2 inputs would typically include quoted prices markets active financial instruments significant inputs observable either directly indirectly level 3 prices valuations require inputs significant measurement unobservable sfas 157 effective fiscal years beginning november 15 2007 interim periods within fiscal years adopted sfas 157 effective january 1 2008 adoption sfas 157 impact consolidated financial position results operations accordance sfas 157 following table represents assets liabilities measured fair value recurring basis december 31 2008 level within fair value hierarchy fair value measurements included valuation techniques fair value marketbased measure considered perspective market participant holds asset owes liability rather entityspecific measure therefore even market assumptions readily available company’s assumptions set reflect market participants would use pricing asset liability measurement date company uses prices inputs current measurement date fair value derivative instruments derived using pricing models pricing models take account relevant observable market inputs market participants would use pricing asset liability pricing models used determine fair value incorporate contract terms including maturity well inputs including limited interest rate yield curves creditworthiness counterparty accordance sfas 157 impact credit rating also considered measuring fair value liabilities credit rating could material impact fair value derivative instruments results operations financial condition particular reporting period year ended december 31 2008 impact applying credit rating determining fair value derivative instruments reduction interest rate swap liability 284 million many pricing models entail material subjectivity methodologies employed necessitate significant judgment pricing inputs observed actively quoted markets case derivative instruments pricing models used company widely accepted financial services industry noted derivative instruments categorized within level 2 fair value hierarchy fair value control processes company employs control processes validate fair value derivative instruments derived pricing models control processes designed assure values used financial reporting based observable inputs wherever possible event observable inputs available control processes designed assure valuation approach utilized appropriate consistently applied assumptions reasonable february 2008 fasb issued staff position fas 1572 effective date fasb statement 157 “fsp 1572” defers effective date sfas 157 nonfinancial assets liabilities except items recognized disclosed fair value recurring basis fiscal years beginning november 15 2008 interim periods within fiscal years company elected deferral option permitted fsp 1572 nonfinancial assets liabilities initially measured fair value prior business combinations including intangible assets goodwill expect adoption fsp 1572 material impact consolidated financial statements new accounting pronouncements fasb issued fasb staff position “fsp” fas 1423 determination useful life intangible assets “fsp fas 1423” april 2008 fsp fas 1423 amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 intent fsp improve consistency useful life recognized intangible asset determined provisions sfas 142 period expected cash flows used measure fair value asset accordance sfas 141r business combinations “sfas 141r” fsp fas 1423 effective fiscal years beginning december 15 2008 applied prospectively intangible assets acquired subsequent effective date accordingly company plans adopt provisions fsp january 1 2009 impact adoption fsp fas 1423 may company’s results operations financial condition depend nature extent intangible assets acquired subsequent effective date march 2008 fasb issued sfas 161 disclosures derivative instruments hedging activities amendment fasb statement 133 “sfas 161” sfas 161 amends sfas 133 requires enhanced disclosures derivative instruments hedging activities fair value derivative instruments presentation gains losses tabular format well disclosures regarding credit risks strategies objectives using derivative instruments sfas 161 effective fiscal years interim periods beginning november 15 2008 company plans adopt provisions standard january 1 2009 although sfas 161 requires enhanced disclosures adoption impact company’s results operations financial condition december 2007 fasb issued sfas 141r sfas 141r replaces sfas 141 business combinations establishes principles requirements acquirer recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interest acquiree goodwill acquired business combination sfas 141r also establishes disclosure requirements enable evaluation nature financial effects business combination sfas 141r applied prospective basis company would effective business combination transactions acquisition date january 1 2009 impact adoption pronouncement may company’s results operations financial condition depend nature extent business combinations subsequent effective date reviewed accounting pronouncements issued december 31 2008 company yet adopted believe pronouncements material impact financial position operating results operations year ended december 31 2008 compared year ended december 31 2007 factors affecting comparability acquisitions august 23 2007 acquired businesscom leading business search engine directory performance based advertising network results businesscom included consolidated results commencing august 23 2007 therefore consolidated results year ended december 31 2008 include full period results businesscom compared four months results businesscom year ended december 31 2007 impact purchase accounting result dex media merger associated purchase accounting required gaap recorded deferred directory costs print paper delivery commissions related directories scheduled publish subsequent dex media merger fair value determined estimated billable value published directory less b expected costs complete directories plus c normal profit margin refer purchase accounting entry “cost uplift” cost uplift associated print paper delivery costs amortized terms applicable directories production publication distribution expenses whereas cost uplift associated commissions amortized terms applicable directories selling support expenses cost uplift amortized production publication distribution expenses selling support expenses totaled 153 million 136 million respectively year ended december 31 2007 comparable expense year ended december 31 2008 reclassifications year ended december 31 2007 recorded net loss debt transactions 263 million included interest expense consolidated statements operations 2007 annual report form 10k “2007 10k” order conform current period’s presentation net loss reclassified gain loss debt transactions net consolidated statements operations see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies gain loss debt transactions net” note 5 “longterm debt credit facilities notes” additional information year ended december 31 2007 recorded intangible asset impairment charge 200 million included depreciation amortization consolidated statements operations 2007 10k order conform current period’s presentation amount reclassified impairment charges consolidated statements operations see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies identifiable intangible assets goodwill” additional information net revenue components net revenues years ended december 31 2008 2007 follows directory advertising revenues earned primarily sale advertising yellow pages directories publish net sales claims allowances directory advertising revenues also include revenues internetbased advertising products including online directories dexknowscom dex search network directory advertising revenues affected several factors including changes quantity size advertisements acquisition new customers renewal rates existing customers premium advertisements sold changes advertisement pricing introduction new products increase competition fragmentation local business search space general economic factors revenues respect print advertising internetbased advertising products sold print advertising recognized deferral amortization method revenues related print advertising initially deferred directory published recognized ratably directory’s life typically 12 months revenues respect internetbased advertising products sold print advertising initially deferred service delivered fulfilled recognized ratably life contract revenues respect internetbased services sold print advertising dex search network recognized delivered fulfilled result deferral amortization method revenue recognition recognized gross directory advertising revenues reflect amortization advertising sales consummated prior periods well advertising sales consummated current period noted advertising sales continued deteriorate due overall economic instability result lower recognized advertising revenues future periods noted revenues recognized ratably directory’s life gross directory advertising revenues year ended december 31 2008 decreased 732 million 27 year ended december 31 2007 decline gross directory advertising revenues year ended december 31 2008 primarily due declines advertising sales past twelve months primarily result declines recurring business mainly driven reduced consumer confidence cautious advertiser spending markets given advertisers’ perception economic health respective markets well increase competition fragmentation local business search space declines partially offset full year revenues 2008 businesscom compared four months revenues 2007 sales claims allowances year ended december 31 2008 decreased 95 million 173 year ended december 31 2007 decrease sales claims allowances year ended december 31 2008 primarily due improved quality lower claims experience due process improvements qwest markets 87 million revenues year ended december 31 2008 increased 02 million 05 year ended december 31 2007 revenues include late fees received outstanding customer balances barter revenues commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain advertisingrelated products advertising sales statistical measure consists sales advertising print directories distributed period internetbased products services respect advertising first appeared publicly period important distinguish advertising sales net revenues gaap recognized deferral amortization method advertising sales year ended december 31 2008 25183 million compared 27457 million year ended december 31 2007 advertising sales year ended december 31 2007 include 275 million advertising sales assuming businesscom acquisition occurred january 1 2007 2274 million 83 decrease advertising sales year ended december 31 2008 result declines new recurring business mainly driven weaker economic trends reduced consumer confidence cautious advertiser spending markets advertising sales also impacted increase competition fragmentation local business search space declines partially offset increases businesscom advertising sales advertising sales current periods recognized gross directory advertising revenues future periods result deferral amortization method revenue recognition expenses components total expenses years ended december 31 2008 2007 follows nm meaningful expenses years ended december 31 2008 2007 include costs associated triple play strategy focus online products services across markets costs relate continued launch dex market brand uniform resource locator “url” dexknowscom across entire footprint costs associated traffic purchased distributed multiple advertiser landing pages continued introduction plus companion directories embarq att markets well associated marketing advertising campaigns employee training associated modernization consolidation platform expect expenses drive future advertising sales revenue improvements economic conditions improve markets certain costs directly related selling production directories initially deferred recognized ratably life directory deferral amortization method accounting cost recognition commencing month directory distribution substantially complete costs specifically identifiable particular directory include sales commissions print paper initial distribution costs sales commissions include amounts paid employees sales local advertisers certified marketing representatives “cmrs” act channel national advertisers expenses sales person salaries sales manager compensation sales office occupancy publishing information technology services specifically identifiable particular directory recognized incurred costs recognized reporting period consist costs incurred period fully recognized period ii costs incurred prior period portion amortized recognized current period iii costs incurred current period portion amortized recognized current period balance deferred future periods consequently difference costs recognized given period costs incurred given period may significant production publication distribution expenses total production publication distribution expenses year ended december 31 2008 4182 million compared 4503 million year ended december 31 2007 primary components 321 million 71 decrease production publication distribution expenses year ended december 31 2008 follows year ended december 31 2008 print paper distribution costs declined 253 million compared year ended december 31 2007 decline primarily due improved efficiencies display advertiser content print products refinement distribution scope across markets negotiated price reductions print expenses amortization cost uplift year ended december 31 2007 totaled 153 million comparable expense year ended december 31 2008 year ended december 31 2008 production publication distribution related expenses declined 106 million compared year ended december 31 2007 primarily due full period cost savings resulting lower rates associated new contract became effective july 2007 decline partially offset additional spending associated infrastructure support triple play products services enhancements technical support multiple production systems integrated consolidated platform year ended december 31 2008 incurred 159 million additional expenses related internet production distribution costs due full period expenses businesscom compared four months expenses year ended december 31 2007 increased operations distribution costs traffic purchased generate usage advertisers’ business associated increased revenues online products services selling support expenses total selling support expenses year ended december 31 2008 7297 million compared 7163 million reported year ended december 31 2007 primary components 134 million 19 increase selling support expenses year ended december 31 2008 follows year ended december 31 2008 bad debt expense increased 575 million 711 compared year ended december 31 2007 primarily due higher bad debt provision rates deterioration accounts receivable aging categories increased writeoffs resulting adverse impact advertisers instability overall economy tightening credit markets year ended december 31 2008 bad debt expense represented 53 net revenue compared 30 year ended december 31 2007 advertisers fail pay within specified credit terms may cancel advertising future directories could impact ability collect past due amounts well adversely impact advertising sales revenue growth trends expect economic challenges continue markets bad debt experience continue adversely impacted foreseeable future advertising expense year ended december 31 2008 includes 398 million costs associated traffic purchased distributed multiple advertiser landing pages compared 78 million year ended december 31 2007 included four months costs associated businesscom increase year ended december 31 2008 also due adopting businesscom’s performance based advertising “pba” platform 2008 exclusive costs associated purchased traffic year ended december 31 2008 advertising branding expenses declined 148 million compared year ended december 31 2007 decrease primarily due additional advertising branding costs incurred 2007 promote dex brand name print online products across entire footprint well use dexknowscom new url across entire footprint year ended december 31 2008 commissions salesperson costs decreased 277 million compared year ended december 31 2007 primarily due lower advertising sales well headcount reductions consolidation responsibilities amortization cost uplift year ended december 31 2007 totaled 136 million comparable expense year ended december 31 2008 year ended december 31 2008 directory publishing support costs decreased 80 million compared year ended december 31 2007 primarily due reduction headcount related expenses resulting consolidation publishing graphics operations year ended december 31 2008 marketing expenses decreased 48 million compared year ended december 31 2007 primarily due headcount reductions consolidation responsibilities year ended december 31 2008 billing credit collection expenses decreased 32 million compared year ended december 31 2007 primarily due lower costs resulting change vendors well headcount reductions consolidation responsibilities year ended december 31 2008 selling support related noncash stockbased compensation expense sfas 123 r declined 28 million compared year ended december 31 2007 primarily due additional expense related vesting awards granted retirement early retirement eligible employees year ended december 31 2007 addition noncash stockbased compensation expense declined year ended december 31 2008 due increase forfeiture rate estimate general administrative expenses general administrative “ga” expenses year ended december 31 2008 1209 million compared 1456 million year ended december 31 2007 primary components 247 million 170 decrease ga expenses year ended december 31 2008 follows year ended december 31 2008 recognized onetime noncash net curtailment gains 380 million associated freeze company’s defined benefit plans elimination nonunion retiree health care life insurance benefits noted year ended december 31 2008 ga related noncash stockbased compensation expense sfas 123 r declined 109 million compared year ended december 31 2007 primarily due additional expense related vesting awards granted retirement early retirement eligible employees year ended december 31 2007 addition noncash stockbased compensation expense declined year ended december 31 2008 due increase forfeiture rate estimate year ended december 31 2008 ga related expenses declined 76 million compared year ended december 31 2007 primarily due full period cost savings resulting lower rates associated contract became effective july 2007 decline partially offset additional spending associated infrastructure support triple play products services year ended december 31 2008 restructuring expenses increased 306 million primarily due outside consulting fees headcount reductions consolidation responsibilities vacated leased facilities depreciation amortization depreciation amortization expense year ended december 31 2008 4833 million compared 4431 million year ended december 31 2007 amortization intangible assets 4159 million year ended december 31 2008 compared 3883 million year ended december 31 2007 increase amortization expense year ended december 31 2008 primarily due recognizing additional 130 million amortization expense intangible assets acquired businesscom acquisition compared four months amortization expense year ended december 31 2007 also due recognizing full period amortization expense related local customer relationships intangible asset acquired dex media merger 75 million commenced february 2007 depreciation fixed assets amortization computer software 674 million year ended december 31 2008 compared 548 million year ended december 31 2007 increase depreciation expense year ended december 31 2008 primarily due recognizing depreciation expense related capital projects placed service 2007 impairment charges result decline trading value debt equity securities continuing negative industry economic trends directly affected business recognized noncash goodwill impairment charges 25 billion 6602 million first second quarters 2008 respectively together totaling 31 billion year ended december 31 2008 result impairment charges recorded goodwill december 31 2008 impairment losses recorded related goodwill year ended december 31 2007 given ongoing global credit liquidity crisis significant negative impact financial markets overall economy continued decline advertising sales operating results downward revisions forecasted results recent downgrade certain credit ratings continued decline trading value debt equity securities recent suspension trading common stock nyse performed impairment tests definitelived intangible assets longlived assets accordance sfas 144 december 31 2008 result tests company recognized noncash impairment charge 7440 million fourth quarter 2008 associated local national customer relationships acquired dex media merger att directory acquisition embarq acquisition addition connection launch next version proprietary online search site dexknowscom tradenames technology acquired local launch acquisition discontinued resulted noncash impairment charge 22 million fourth quarter 2008 total impairment charges related intangible assets excluding goodwill 7462 million year ended december 31 2008 see “critical accounting estimates intangible assets goodwill valuation amortization” additional information regarding impairment testing analysis results related goodwill definitelived intangible assets longlived assets year ended december 31 2008 retired certain computer software fixed assets resulted impairment charge 04 million year ended december 31 2007 recorded intangible asset impairment charge 200 million associated tradenames acquired embarq acquisition impairment charge resulted change branding strategy utilize new dex market brand print online products across entire footprint discontinued use tradenames acquired embarq acquisition impairment charge determined using relief royalty valuation method impairment charge impairment losses recorded related definitelived intangible assets longlived assets year ended december 31 2007 industry economic conditions markets continue deteriorate trading value debt equity securities decline required assess recoverability useful lives longlived assets intangible assets could result additional impairment charges reduction remaining useful lives acceleration amortization expense operating income loss operating income loss years ended december 31 2008 2007 follows operating income loss year ended december 31 2008 30 billion compares operating income 9050 million year ended december 31 2007 change operating loss year ended december 31 2008 operating income year ended december 31 2007 primarily due noncash impairment charges noted well revenue expense trends described nonoperating income year ended december 31 2007 recognized nonoperating gain sale investment 18 million interest expense net interest expense year ended december 31 2008 8355 million includes 290 million noncash amortization deferred financing costs net interest expense year ended december 31 2007 8046 million includes 232 million noncash amortization deferred financing costs result amendment rhdi credit facility refinancing former dex media west credit facility interest rate swaps associated credit facilities deemed ineffective june 6 2008 interest expense year ended december 31 2008 includes noncash charge 210 million resulting amounts charged accumulated comprehensive loss related interest rate swaps prior june 6 2008 interest expense year ended december 31 2008 also includes noncash charge 37 million resulting change fair value interest rate swaps june 6 2008 december 31 2008 increase net interest expense 309 million 38 year ended december 31 2008 primarily due additional interest expense associated ineffective interest rate swaps noted increase partially offset lower interest rates associated company’s refinancing transactions conducted fourth quarter 2007 lower interest rates variable rate debt period compared corresponding prior period lower outstanding debt resulting debt repaid debt repurchases see “liquidity capital resources” detail regarding debt obligations conjunction dex media merger result purchase accounting required gaap recorded dex media’s debt fair market value january 31 2006 recognize offset interest expense period amortization corresponding fair value adjustment life respective debt offset interest expense 176 million year ended december 31 2008 compared 299 million year ended december 31 2007 result redeeming dex media east’s outstanding 9875 senior notes 12125 senior subordinated notes november 26 2007 fair value adjustment related notes remained unamortized december 31 2007 therefore contributing decline offset interest expense year ended december 31 2008 gain loss debt transactions net result voluntary prepayments made rhdi credit facility recognized gain 200 million year ended december 31 2008 consisting difference face amount term loans repaid voluntary prepayments made offset writeoff unamortized deferred financing costs 02 million result october 2008 debt repurchases recognized gain 136 million year ended december 31 2008 consisting difference par value purchase price notes offset writeoff unamortized deferred financing costs 05 million result september 2008 debt repurchases recorded gain 724 million year ended december 31 2008 representing difference accreted value case senior discount notes par value applicable purchase price notes offset writeoff unamortized deferred financing costs 29 million result debt exchanges recorded gain 1613 million year ended december 31 2008 representing difference accreted value case senior discount notes par value applicable extinguished rhd notes rhdi senior notes offsetting gain writeoff 115 million unamortized deferred financing costs related extinguished rhd notes accounted extinguishment debt year ended december 31 2008 recognized charge 22 million writeoff unamortized deferred financing costs associated refinancing former dex media west credit facility portions amended rhdi credit facility accounted extinguishments debt result financing activities noted recorded gain 2652 million year ended december 31 2008 year ended december 31 2007 recorded loss debt transactions 263 million resulting tender redemption premium payments 717 million writeoff unamortized deferred financing costs 168 million associated refinancing transactions conducted fourth quarter 2007 offset accelerated amortization fair value adjustment directly attributable redemption dex media east’s outstanding 9875 senior notes 12125 senior subordinated notes november 26 2007 622 million accounted extinguishment debt benefit provision income taxes effective tax rate income loss income taxes 357 year ended december 31 2008 compares effective tax rate 383 income taxes year ended december 31 2007 result noncash goodwill impairment charge 31 billion recorded year ended december 31 2008 recognized decrease deferred income tax liability 11 billion directly impacted deferred income tax benefit change effective tax rate year ended december 31 2008 primarily due tax consequences noncash goodwill impairment charges change effective tax rate year ended december 31 2008 also attributable changes estimates state tax apportionment factors impact effective state tax rates 2008 income tax benefit 12777 million comprised federal tax benefit 11287 million state tax benefit 1490 million 2008 federal tax benefit comprised current tax provision 239 million primarily related increase fin 48 liability offset deferred income tax benefit 11526 million primarily related noncash goodwill impairment charges 2008 state tax benefit 1490 million comprised current tax provision 103 million relates taxes due states subsidiaries company file separate tax returns well increase fin 48 liability offset deferred income tax benefit 1593 million primarily related noncash goodwill impairment charges 2008 company utilized federal net operating losses income tax purposes 41 million primarily resulting taxable gains associated certain financing activities conducted 2008 income tax benefit includes income tax benefit 203 million correcting overstated income tax expense fiscal years 2004 2007 evaluated materiality correction concluded material current prior year financial statements accordingly recorded correction fourth quarter 2008 december 31 2008 company federal state net operating loss carryforwards approximately 6228 million net carryback 5676 million respectively begin expire 2026 2009 respectively amounts include consideration net operating losses expected expire unused due internal revenue code section 382 limitation ownership changes related businesscom occurred prior businesscom acquisition september 2008 effectively settled issues consideration department finance new york city related audit taxable year 2000 result settlement unrecognized tax benefits associated uncertain state tax positions decreased 09 million year ended december 31 2008 decrease unrecognized tax benefits decreased effective tax rate year ended december 31 2008 unrecognized tax benefits impacted new york city audit primarily related allocation income among legal entities 2007 provision income taxes 290 million comprised federal tax provision 275 million resulting current tax provision 118 million relating internal revenue service “irs” settlement deferred income tax provision 157 million resulting current year taxable loss 2007 state tax provision 15 million results current tax provision 85 million relating taxes due states subsidiaries company file separate company returns offset deferred state tax benefit 70 million relating apportioned taxable income loss among various states federal net operating loss income tax purposes approximately 3033 million generated 2007 primarily result tax amortization expense recorded respect intangible assets acquired dex media merger att directory acquisition embarq acquisition businesscom acquisition july 2007 effectively settled issues consideration irs related audit taxable years 2003 2004 therefore tax years 2005 2007 still subject examination irs certain state tax returns examination various regulatory authorities continuously review issues raised connection ongoing examinations open tax years evaluate adequacy reserves believe accrued tax liabilities fin 48 adequate cover uncertain tax positions related us federal state income taxes net income loss earnings loss per share net income loss year ended december 31 2008 23 billion compares net income 469 million year ended december 31 2007 change net loss year ended december 31 2008 net income year ended december 31 2007 primarily due noncash impairment charges noted well revenue expense trends described offset gain recognized financing activities 2008 noted account earnings loss per share “eps” accordance sfas 128 earnings per share “sfas 128” guidance sfas 128 diluted eps calculated dividing income loss weighted average common shares outstanding plus dilutive potential common stock potential common stock includes stock options stock appreciation rights “sars” restricted stock dilutive effect calculated using treasury stock method calculation basic diluted eps presented 1 due net loss reported year ended december 31 2008 effect stockbased awards antidilutive therefore included calculation diluted eps years ended december 31 2008 2007 41 million shares 26 million shares respectively stockbased awards exercise prices exceeded average market price company’s common stock respective periods year ended december 31 2007 compared year ended december 31 2006 factors affecting comparability reclassifications certain prior period amounts included consolidated statements operations reclassified conform current period’s presentation selling support expenses presented separate expense category consolidated statements operations prior periods certain selling support expenses included cost revenue others included general administrative expenses additionally beginning 2007 began classifying adjustments customer claims sales allowance deducted gross revenue determine net revenue prior periods adjustments customer claims included bad debt expense general administrative expenses bad debt expense included selling support expenses accordingly reclassified adjustments customer claims bad debt expense 2006 conform current period’s presentation reclassifications impact operating income net income years ended december 31 2007 2006 table summarizes reclassifications year ended december 31 2007 recorded net loss debt transactions 263 million included interest expense consolidated statements operations 2007 10k order conform current period’s presentation net loss reclassified gain loss debt transactions net consolidated statements operations see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies gain loss debt transactions net” note 5 “longterm debt credit facilities notes” additional information year ended december 31 2007 recorded intangible asset impairment charge 200 million included depreciation amortization consolidated statements operations 2007 10k order conform current period’s presentation amount reclassified impairment charges consolidated statements operations see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies identifiable intangible assets goodwill” additional information acquisitions result dex media merger att directory acquisition related financings associated purchase accounting 2007 results reported accordance gaap comparable 2006 reported gaap results gaap results presented year ended december 31 2006 include eleven months results dex media business acquired january 31 2006 deferral amortization method revenue recognition billable value directories published recognized revenue subsequent reporting periods however purchase accounting precluded us recognizing 2006 directory revenue certain expenses associated directories published prior dex media merger including directories published month dex media merger completed thus reported 2007 2006 gaap results comparable 2006 results indicative underlying operating financial performance accordingly management presenting adjusted pro forma information year ended december 31 2006 among things eliminates purchase accounting impact revenue certain expenses related dex media merger assumes dex media merger occurred january 1 2006 management believes presentation adjusted pro forma information help financial statement users better easily compare current period underlying operating results combined company performance would likely comparable prior period adjusted pro forma amounts disclosed caption “nongaap measures adjusted pro forma amounts” elsewhere nongaap measures reconciled comparable gaap measures caption adjusted pro forma results exclude effects purchase accounting certain nonrecurring items better reflect underlying operating results 2006 differences rhd dex media respective accounting policies 2007 gaap results 2006 adjusted pro forma results strictly comparable treated gaap reported results net revenue components net revenue years ended december 31 2007 2006 follows directory advertising revenue earned primarily sale advertising yellow pages directories publish net sales claims allowances directory advertising revenue also includes revenue internetbased advertising products including online directories dexknowscom businesscom internet marketing services directory advertising revenue affected several factors including changes quantity size advertisements acquisition new customers renewal rates existing customers premium advertisements sold changes advertisement pricing introduction new products revenue respect print advertising internetbased advertising products sold print advertising recognized deferral amortization method whereby revenue initially deferred directory published recognized ratably directory’s life typically 12 months revenue respect internetbased services sold print advertising internet marketing services recognized delivered fulfilled gross directory advertising revenue year ended december 31 2007 increased 7900 million 414 year ended december 31 2006 increase primarily due increase 7782 million gross directory advertising revenue directories acquired dex media merger “qwest directories” included gross directory advertising revenue 16471 million year ended december 31 2007 compared 8689 million year ended december 31 2006 due purchase accounting gross directory advertising revenue year ended december 31 2006 excluded amortization advertising revenue qwest directories published prior february 2006 totaling 6615 million purchase accounting related dex media merger impact reported revenue 2007 increase also result recognizing full year results 2007 dex media business acquired january 31 2006 opposed eleven months results 2006 increase gross directory advertising revenue year ended december 31 2007 also due new product introductions including online products services incremental revenue businesscom local launch increases partially offset declines renewal business declines sales productivity related systems modernization weaker housing trends certain embarq markets sales claims allowances year ended december 31 2007 increased 129 million 308 year ended december 31 2006 increase sales claims allowances year ended december 31 2007 primarily due recognizing full year results 2007 acquired dex media business opposed eleven months results 2006 related purchase accounting impact period offset lower claims experience 2007 primarily qwest markets revenue year ended december 31 2007 increased 39 million 115 year ended december 31 2006 revenue includes barter revenue late fees received outstanding customer balances commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain advertisingrelated products increase revenue year ended december 31 2007 primarily result recognizing full year results 2007 dex media business opposed eleven months results 2006 partially offset declines barter activity advertising sales statistical measure consists sales advertising print directories distributed period internetbased products services respect advertising first appeared publicly period important distinguish advertising sales net revenue gaap recognized deferral amortization method advertising sales year ended december 31 2007 27434 million compared 27328 million year ended december 31 2006 advertising sales periods assumes businesscom acquisition occurred january 1 2006 year ended december 31 2006 assumes dex media merger occurred january 1 2006 106 million 04 increase advertising sales year ended december 31 2007 result stronger ad sales second fourth quarters 2007 increases new online products services businesscom local launch revenue partially offset declines renewal business mainly driven conservatism advertiser spending based economic indicators revenue respect print advertising internetbased advertising products sold print advertising recognized deferral amortization method whereby revenue initially deferred directory published recognized ratably directory’s life typically 12 months revenue respect internetbased services sold print advertising internet marketing services recognized delivered fulfilled expenses components total expenses years ended december 31 2007 2006 follows operating expenses 2007 include investments triple play strategy focus online products services directory publishing business new product introductions qwest embarq att markets investments include launching new dex market brand new url dexknowscom across entire footprint introduction plus companion directories embarq att markets well associated marketing advertising campaigns employee training associated new product introductions modernization consolidation platform expect investments drive future advertising sales revenue improvements certain costs directly related selling production directories initially deferred recognized ratably life directory costs specifically identifiable particular directory include sales commissions print paper initial distribution costs sales commissions include amounts paid employees sales local advertisers cmrs act channel national advertisers expenses sales person salaries sales manager compensation sales office occupancy publishing information technology services specifically identifiable particular directory recognized incurred costs recognized reporting period consist costs incurred period fully recognized period ii costs incurred prior period portion amortized recognized current period iii costs incurred current period portion amortized recognized current period balance deferred future periods consequently difference costs recognized given period costs incurred given period may significant deferred costs related sale production directories recognized ratably life directory deferral amortization method accounting cost recognition commencing month directory distribution cost revenue total cost revenue year ended december 31 2007 4503 million compared 3421 million reported year ended december 31 2006 primary components 1082 million 316 increase cost revenue follows increase cost revenue year ended december 31 2007 primarily due effects purchase accounting associated dex media merger 2006 well recognizing full year results acquired dex media business 2007 result purchase accounting required gaap print delivery costs related directories published prior month dex media merger totaling 1193 million reported year ended december 31 2006 directory expenses incurred year ended december 31 2006 include amortization deferred directory costs relating qwest directories published beginning february 2006 year ended december 31 2007 incurred 372 million additional expenses related internet production distribution due investment triple play strategy well recognizing full year results acquired dex media business compared year ended december 31 2006 investment focuses enhancing growing local search internet marketing products services year ended december 31 2007 incurred 109 million additional print paper distribution costs compared year ended december 31 2006 due new companion print products embarq att markets well recognizing full year results acquired dex media business companion directories small format directory serves complement core directory replicated advertising core directory available additional charge advertisers increases offset commencement print product optimization program negotiated price reductions print expenses result purchase accounting required gaap recorded deferred directory costs print paper delivery commissions related directories scheduled publish subsequent dex media merger att directory acquisition fair value determined estimated billable value published directory less b expected costs complete directories plus c normal profit margin refer purchase accounting entry “cost uplift” cost uplift associated print paper delivery costs amortized terms applicable directories cost revenue whereas cost uplift associated commissions amortized terms applicable directories selling support expenses fair value costs date acquisition completed determined 1577 million 813 million dex media merger att directory acquisition respectively cost uplift amortization associated print paper delivery costs totaled 153 million year ended december 31 2007 compared 646 million year ended december 31 2006 related dex media merger represents decrease cost uplift expense 493 million year ended december 31 2007 amortization cost uplift recognized cost revenue years ended december 31 2007 2006 relating att directory acquisition year ended december 31 2007 barter expenses declined 80 million compared year ended december 31 2006 due planned declines barter activity qwest markets changes category primarily relate decrease print delivery management costs due synergies resulting dex media merger selling support expenses total selling support expenses year ended december 31 2007 7163 million compared 6560 million reported year ended december 31 2006 primary components 603 million 92 increase selling support expenses follows increase selling support expenses year ended december 31 2007 primarily due effects purchase accounting associated dex media merger 2006 well recognizing full year results acquired dex media business 2007 result purchase accounting required gaap deferred commissions selling support costs related directories published prior month dex media merger totaling 1007 million reported year ended december 31 2006 directory expenses incurred year ended december 31 2006 include amortization deferred directory costs relating qwest directories published beginning february 2006 year ended december 31 2007 incurred 225 million additional advertising branding expenses compared year ended december 31 2006 media collateral costs incurred promote triple play strategy dex brand name print online products well use dexknowscom new url across entire footprint increase also attributable recognizing full year results acquired dex media business advertising expense includes 78 million related traffic acquisition costs associated operations businesscom comparable expense prior corresponding period cost uplift associated commissions totaled 136 million year ended december 31 2007 relating dex media merger compared 594 million year ended december 31 2006 relating dex media merger att directory acquisition represents decrease cost uplift 458 million year ended december 31 2007 year ended december 31 2007 commissions salesperson costs declined 95 million compared year ended december 31 2006 primarily due lower cmr commission rates changes net category primarily relate decrease noncash stockbased compensation expense partially offset increase sales training costs due new product introductions across entire footprint including online products services general administrative expenses general administrative “ga” expenses year ended december 31 2007 1456 million compared 1348 million year ended december 31 2006 primary components 108 million 80 increase ga expenses follows increase ga expenses year ended december 31 2007 primarily due recognizing full year results acquired dex media business 2007 opposed eleven months results 2006 year ended december 31 2007 incurred approximately 73 million additional expenses compared year ended december 31 2006 due recognizing full year results acquired dex media business investment infrastructure support triple play products services enhancements technical support multiple production systems continue integrate consolidated platform increase partially offset cost savings resulting lower rates associated recently negotiated contract became effective july 2007 ga expenses year ended december 31 2007 included reductions general corporate expenses 38 million year ended december 31 2006 primarily due achieving cost synergies expense reduction efforts associated dex media merger depreciation amortization depreciation amortization “da” expense year ended december 31 2007 4431 million compared 3236 million year ended december 31 2006 amortization intangible assets 3883 million year ended december 31 2007 compared 2775 million year ended december 31 2006 increase amortization expense year ended december 31 2007 primarily due recognizing full year amortization related intangible assets acquired dex media merger amortizing local customer relationships intangible asset acquired dex media merger beginning first quarter 2007 amortization intangible assets acquired businesscom acquisition depreciation fixed assets amortization computer software 548 million year ended december 31 2007 compared 461 million year ended december 31 2006 increase depreciation expense year ended december 31 2007 primarily due recognizing full year depreciation related fixed assets acquired dex media merger well additional depreciation expense resulting fixed asset additions related computer software impairment charges year ended december 31 2007 recorded intangible asset impairment charge 200 million associated tradenames acquired embarq acquisition impairment charge resulted change branding strategy utilize new dex market brand print online products across entire footprint discontinued use tradenames acquired embarq acquisition impairment charge determined using relief royalty valuation method impairment charge impairment losses recorded related definitelived intangible assets longlived assets years ended december 31 2007 2006 respectively operating income operating income years ended december 31 2007 2006 follows operating income year ended december 31 2007 9050 million increased 4622 million operating income 4428 million year ended december 31 2006 increase operating income year ended december 31 2007 due effects purchase accounting associated dex media merger 2006 recognizing full year results acquired dex media business 2007 revenue expense trends described nonoperating income year ended december 31 2007 recognized nonoperating gain sale investment 18 million interest expense net interest expense year ended december 31 2007 8046 million compared 7651 million year ended december 31 2006 includes 232 million 219 million respectively noncash amortization deferred financing costs increase net interest expense 395 million year ended december 31 2007 compared prior corresponding period attributable recognizing full period interest expense related outstanding debt associated dex media merger gs repurchase defined debt acquired dex media merger conjunction dex media merger result purchase accounting required gaap recorded dex media’s debt fair market value january 31 2006 recognize offset interest expense period amortization corresponding fair value adjustment life respective debt offset interest expense 299 million year ended december 31 2007 compared 264 million year ended december 31 2006 increase net interest expense also partially offset lower outstanding debt year ended december 31 2007 due debt repayments see “liquidity capital resources” detail regarding debt obligations loss debt transactions net year ended december 31 2007 recorded loss debt transactions 263 million resulting tender redemption premium payments 717 million writeoff unamortized deferred financing costs 168 million associated refinancing transactions conducted fourth quarter 2007 offset accelerated amortization fair value adjustment directly attributable redemption dex media east’s outstanding 9875 senior notes 12125 senior subordinated notes november 26 2007 622 million accounted extinguishment debt provision benefit income taxes effective tax rate income taxes 383 year ended december 31 2007 compares 262 loss income taxes year ended december 31 2006 increase rate result higher state tax expense due increase uncertain tax liabilities various tax jurisdictions specifically new york north carolina due increase valuation allowance certain state net operating losses company believes likely expire prior utilization addition rate increase also reflects recognition additional interest expense 16 million 12 million 2007 related taxable years 2004 2005 respectively result irs settlement july 2007 see 2007 provision income taxes 290 million comprised federal tax provision 275 million resulting current tax provision 118 million relating internal revenue service “irs” settlement deferred income tax provision 157 million resulting current year taxable loss 2007 state tax provision 15 million results current tax provision 85 million relating taxes due states subsidiaries company file separate company returns offset deferred state tax benefit 70 million relating apportioned taxable income loss among various states federal net operating loss income tax purposes approximately 3033 million generated 2007 primarily result tax amortization expense recorded respect intangible assets acquired dex media merger att directory acquisition embarq acquisition businesscom acquisition december 31 2007 company federal state net operating loss carryforwards approximately 6183 million net carryback 8013 million respectively begin expire 2026 2008 respectively amounts include consideration net operating losses expected expire unused due internal revenue code section 382 limitation ownership changes related businesscom occurred prior businesscom acquisition 2006 income tax benefit 845 million comprised federal deferred income tax benefit 1129 million resulting period’s taxable loss offset state tax provision 284 million 2006 state tax provision 284 million primarily resulted modification apportioned taxable income loss among various states net operating loss tax purposes approximately 2163 million generated 2006 primarily result tax amortization expense recorded respect intangible assets acquired dex media merger att directory acquisition embarq acquisition july 2007 effectively settled issues consideration irs related audit taxable years 2003 2004 therefore tax years 2005 2006 still subject examination irs certain state tax returns examination various regulatory authorities continuously review issues raised connection ongoing examinations open tax years evaluate adequacy reserves believe accrued tax liabilities fin 48 adequate cover uncertain tax positions related us federal state income taxes net income loss available common shareholders earnings loss per share net income year ended december 31 2007 469 million compared net loss 2377 million reported year ended december 31 2006 net income year ended december 31 2007 compared net loss reported year ended december 31 2006 primarily due recognizing full year results acquired dex media business 2007 absent adverse impact purchase accounting associated dex media merger net income year ended december 31 2007 negatively impacted increased interest expense da well loss debt transactions described january 27 2006 repurchased remaining 100301 shares outstanding 8 convertible cumulative preferred stock “preferred stock” investment partnerships affiliated goldman sachs group inc “gs funds” 3361 million cash including accrued cash dividends interest “gs repurchase” based terms stock purchase agreement recorded value preferred stock accreted redemption value 3361 million january 27 2006 accretion redemption value 20 million represented accrued dividends interest recorded increase loss available common shareholders consolidated statement operations year ended december 31 2006 conjunction gs repurchase also reversed previously recorded beneficial conversion feature “bcf” related shares recorded decrease loss available common shareholders 312 million consolidated statement operations year ended december 31 2006 resulting loss available common shareholders 2085 million year ended december 31 2006 subsequent gs repurchase year ended december 31 2007 accounted earnings loss per share “eps” accordance sfas 128 earnings per share “sfas 128” year ended december 31 2006 january 27 2006 closing date gs repurchase accounted eps accordance emerging issues task force “eitf” 036 participating securities twoclass method fasb statement 128 “eitf 036” established standards regarding computation eps companies issued securities common stock contractually entitle holder participate dividends earnings company eitf 036 requires earnings available common shareholders period deduction preferred stock dividends allocated common preferred stockholders based respective rights receive dividends basic eps calculated dividing loss allocable common shareholders weighted average number shares outstanding eitf 036 require presentation basic diluted eps securities common stock therefore following eps amounts pertain common stock guidance sfas 128 diluted eps calculated dividing loss allocable common shareholders weighted average common shares outstanding plus dilutive potential common stock potential common stock includes stock options stock appreciation rights “sars” restricted stock warrants dilutive effect calculated using treasury stock method prior gs repurchase preferred stock dilutive effect calculated using “ifconverted” method calculation basic diluted eps years ended december 31 2007 2006 respectively presented 1 computing eps using twoclass method allocated net loss reported year ended december 31 2006 common preferred shareholders since preferred shareholders contractual obligation share net loss 2 due loss allocable common shareholders reported year ended december 31 2006 effect stockbased awards warrants assumed conversion preferred stock antidilutive therefore included calculation diluted eps years ended december 31 2007 2006 2593 shares 2263 shares respectively stockbased awards exercise prices exceeded average market price company’s common stock respective periods year ended december 31 2006 assumed conversion preferred stock 391 shares common stock antidilutive therefore included calculation diluted eps nongaap measures adjusted pro forma amounts result dex media merger att directory acquisition related financings associated purchase accounting 2007 results reported accordance gaap comparable 2006 reported gaap results gaap results presented year ended december 31 2006 include eleven months results dex media business acquired january 31 2006 deferral amortization method revenue recognition billable value directories published recognized revenue subsequent reporting periods however purchase accounting precluded us recognizing 2006 directory revenue certain expenses associated directories published prior dex media merger including directories published month dex media merger completed thus reported 2007 2006 gaap results comparable 2006 results indicative underlying operating financial performance accordingly management presenting adjusted pro forma information year ended december 31 2006 among things eliminates purchase accounting impact revenue certain expenses related dex media merger assumes dex media merger occurred january 1 2006 management believes presentation adjusted pro forma information help financial statement users better easily compare current period underlying operating results combined company performance would likely comparable prior period adjusted pro forma amounts disclosed elsewhere nongaap measures reconciled comparable gaap measures adjusted pro forma results exclude effects purchase accounting certain nonrecurring items better reflect underlying operating results 2006 differences rhd dex media respective accounting policies 2007 gaap results 2006 adjusted pro forma results strictly comparable treated reported gaap operating income compared 2006 adjusted pro forma operating income components reported gaap operating income year ended december 31 2007 adjusted pro forma operating income year ended december 31 2006 follows 1 represents deferred revenue directories published prior dex media merger would recognized period absent purchase accounting required gaap adjustments also include gaap revenue january 2006 reported dex media 2 represents certain deferred expenses directories published prior dex media merger would recognized period absent purchase accounting required gaap b gaap expenses january 2006 reported dex media c exclusion transaction expenses reported dex media january 2006 directly related dex media merger exclusion cost uplift recorded purchase accounting associated dex media merger att directory acquisition 3 represents additional amortization expense related identifiable intangible assets acquired dex media merger assuming dex media merger consummated january 1 2006 reported gaap net revenue compared 2006 adjusted pro forma net revenue components reported gaap net revenue year ended december 31 2007 adjusted pro forma net revenue year ended december 31 2006 follows 1 represents gross directory advertising revenue sales claims allowances directories published prior dex media merger would recognized period absent purchase accounting required gaap adjustments also include gaap results january 2006 reported dex media 2 revenue includes barter revenue late fees paid outstanding customer balances commissions earned sales contracts respect advertising placed publishers’ directories sales directories certain print internet products gross directory advertising revenue respect print advertising internetbased advertising products sold print advertising recognized deferral amortization method whereby revenue initially deferred directory published recognized ratably directory’s life typically 12 months revenue respect internetbased services sold print advertising internet marketing services recognized delivered fulfilled accordingly revenue recognized reporting period consists revenue incurred period fully recognized period ii revenue incurred prior period current portion amortized recognized current period iii revenue incurred current period portion amortized recognized current period balance deferred future periods gross revenue year ended december 31 2007 26973 million representing decrease 81 million 03 adjusted pro forma gross revenue 27054 million year ended december 31 2006 primary components decrease include declines renewal business mainly driven conservatism advertiser spending based economic indicators weaker advertising sales first third quarters 2007 partially offset stronger advertising sales second fourth quarters 2007 increases new online products services businesscom local launch revenue reported sales claims allowances year ended december 31 2007 548 million representing decrease 101 million 156 adjusted pro forma sales claims allowances 649 million reported year ended december 31 2006 decrease primarily due higher sales claims experience 2006 associated prior legacy dex media systems conversion system conversion issues resolved 2006 reported revenue year ended december 31 2007 378 million representing decrease 102 million 213 adjusted pro forma revenue 480 million year ended december 31 2006 decrease primarily related declines barter activity declines revenue related advertising related products reported gaap expenses compared 2006 adjusted pro forma expenses reported gaap expenses depreciation amortization impairment charges year ended december 31 2007 13122 million increased 705 million 57 adjusted pro forma expenses 12417 million year ended december 31 2006 primary components 705 million increase reported gaap expenses depreciation amortization year ended december 31 2007 shown reported gaap internet production distribution costs year ended december 31 2007 increased 338 million adjusted pro forma internet production distribution costs year ended december 31 2006 due investment triple play strategy well costs associated operations businesscom investment triple play strategy focuses enhancing growing local search internet marketing products services adjusted pro forma internet production distribution costs year ended december 31 2006 also included expenses january 2006 reported dex media year ended december 31 2007 reported gaap expenses depreciation amortization include 289 million cost uplift expense related dex media merger adjusted pro forma expenses year ended december 31 2006 exclude cost uplift expense similarly reported gaap expenses year ended december 31 2006 included 1240 million cost uplift expense related dex media merger att directory acquisition comparable adjusted pro forma expense year ended december 31 2006 cost uplift related dex media merger fully recognized 2007 directories scheduled publish 12 month cycle published cost uplift related dex media merger impact future periods year ended december 31 2007 incurred 225 million additional advertising branding expenses compared adjusted pro forma advertising branding expenses year ended december 31 2006 media collateral costs incurred promote triple play strategy dex brand name print online products well use dexknowscom new url across entire footprint increase advertising expense also includes 78 million related traffic acquisition costs associated operations businesscom year ended december 31 2007 incurred 109 million additional print paper distribution costs compared adjusted pro forma print paper distribution costs year ended december 31 due new companion print products embarq att markets increases offset commencement print product optimization program negotiated price reductions print expenses year ended december 31 2007 incurred approximately 41 million additional gaap expenses compared adjusted pro forma expenses year ended december 31 2006 due recognizing full year results acquired dex media business investment infrastructure support triple play products services enhancements technical support multiple production systems continue integrate consolidated platform increase partially offset cost savings resulting lower rates associated recently negotiated contract became effective july 2007 adjusted pro forma expenses year ended december 31 2006 also included expenses january 2006 reported dex media commissions salesperson costs year ended december 31 2007 decreased 95 million adjusted pro forma commissions salesperson costs year ended december 31 2006 primarily due lower cmr commission rates year ended december 31 2007 barter expenses declined 80 million compared adjusted pro forma barter expenses year ended december 31 2006 due declines barter activity qwest markets reported gaap general corporate expenses year ended december 31 2007 55 million lower adjusted pro forma general corporate expenses year ended december 31 2006 primarily due achieving cost synergies expense reduction efforts associated dex media merger changes category primarily relate decrease noncash stockbased compensation expense partially offset increase sales training costs due new product introductions across entire footprint including online products services reported gaap da expense year ended december 31 2007 4431 million compared adjusted pro forma da expense 3441 million year ended december 31 2006 adjusted pro forma da expense year ended december 31 2006 includes incremental da dex media merger occurred january 1 2006 increase reported gaap da year ended december 31 2007 990 million primarily related amortizing local customer relationships intangible asset acquired dex media merger beginning first quarter 2007 amortization intangible assets acquired businesscom acquisition year ended december 31 2007 recorded intangible asset impairment charge 200 million associated tradenames acquired embarq acquisition impairment charge resulted change branding strategy utilize new dex market brand print online products across entire footprint discontinued use tradenames acquired embarq acquisition reported gaap operating income compared 2006 adjusted pro forma operating income reported gaap operating income year ended december 31 2007 9050 million representing decrease 1977 million adjusted pro forma operating income 11027 million year ended december 31 2006 reflecting variances revenues expenses period described liquidity capital resources debt following table presents fair market value longterm debt december 31 2008 based quoted market prices date well carrying value longterm debt december 31 2008 2007 including 862 million 1038 million respectively fair value adjustments required gaap result dex media merger experienced significant decline fair market value debt based primarily significant amount maturing debt obligations commencing march 31 2010 continuing thereafter ii current global credit liquidity crisis iii significant negative impact operating results cash flows overall downturn global economy increase competition fragmentation local business search space iv certain credit ratings recently downgraded v common stock ceased trading new york stock exchange “nyse” december 31 2008 traded overthecounter pink sheets although fair market value debt based quoted market prices may limited market depth securities attributing quoted prices entire debt tranches may truly represent amount debt could bought sold february 13 2009 company borrowed unused revolving portions various credit facilities subsidiaries totaling 3610 million company made borrowings various revolving credit facilities preserve financial flexibility light continuing uncertainty global credit markets company’s credit facilities indentures governing notes contain usual customary representations warranties well affirmative negative covenants among things place limitations ability incur additional indebtedness ii pay dividends repurchase capital stock iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock subsidiaries vi engage transactions affiliates vii make investments loans advances case subject customary negotiated exceptions limitations applicable company’s credit facilities also contain financial covenants relating maximum consolidated leverage minimum interest coverage maximum senior secured leverage defined therein substantially rhdi’s subsidiaries’ assets including capital stock rhdi subsidiaries pledged secure obligations rhdi credit facility substantially assets dex media east dex media west subsidiaries including equity interests pledged secure obligations respective credit facilities rhd october 2 2007 issued 10 billion aggregate principal amount 8875 series a4 senior notes due 2017 “series a4 notes” proceeds issuance used repay 3280 million rhd credit facility “rhd credit facility” used fund businesscom acquisition b contributed rhdi order provide funding tender offer consent solicitation rhdi’s 6000 million aggregate principal amount 10875 senior subordinated notes due 2012 “rhdi senior subordinated notes” c used pay related fees expenses general corporate purposes october 17 2007 issued additional 5000 million series a4 notes proceeds issuance transferred dex media east order repay 864 million 2136 million term loan term loan b former dex media east credit facility respectively b contributed rhdi order repay 918 million 162 million 830 million term loans a4 d1 d2 rhdi credit facility respectively c used pay related fees expenses result refinancing transactions term loan a4 rhdi credit facility paid full december 31 2007 repayment term loans rhdi credit facility accounted extinguishment debt resulting loss debt transactions year ended december 31 2007 42 million related writeoff unamortized deferred financing costs july 2008 registered approximately 12353 million series a4 notes finance businesscom acquisition related fees expenses august 23 2007 rhd entered 3280 million credit facility scheduled maturity date december 31 2011 october 2 2007 rhd credit facility paid full proceeds series a4 notes repayment rhd credit facility accounted extinguishment debt resulting loss debt transactions year ended december 31 2007 08 million related writeoff unamortized deferred financing costs credit facilities december 31 2008 total outstanding debt credit facilities 35026 million comprised 13411 million rhdi credit facility 10815 million dex media east credit facility 10800 million new dex media west credit facility rhdi effective october 21 2008 obtained waiver rhdi credit facility permit us make voluntary prepayments term loan d1 term loan d2 discount par provided discount acceptable lenders choose participate obligated make prepayments may made period 270 days date waiver aggregate amount 4000 million provided prepayment must amount less 100 million year ended december 31 2008 repaid 98 million term loan d1 459 million term loan d2 rhdi credit facility making voluntary prepayments 355 million including fees discount par result unamortized deferred financing costs 02 million written year ended december 31 2008 june 6 2008 conjunction debt exchanges amended rhdi credit facility order among things permit debt exchanges provide additional covenant flexibility addition part amendment rhdi modified pricing extended maturity date 1000 million rhdi revolver june 2011 remaining 750 million rhdi revolver continue mature december 2009 december 31 2008 outstanding balances rhdi credit facility totaled 13411 million comprised 2693 million term loan d1 10718 million term loan d2 amount outstanding rhdi revolver 02 million utilized standby letter credit term loans require quarterly principal interest payments rhdi credit facility provides uncommitted term loan c potential borrowings 4000 million proceeds borrowed used fund acquisitions refinance certain indebtedness make certain restricted payments noted 750 million rhdi revolver matures december 2009 1000 million rhdi revolver matures june 2011 term loans d1 d2 require accelerated amortization beginning 2010 final maturity june 2011 weighted average interest rate outstanding debt rhdi credit facility 677 650 december 31 2008 2007 respectively amended june 6 2008 december 31 2008 rhdi credit facility bears interest option either • highest base rate determined administrative agent deutsche bank trust company americas ii federal funds effective rate defined plus 050 iii 40 case plus 250 margin rhdi revolver 275 margin term loan d1 term loan d2 • higher libor rate ii 30 case plus 350 margin rhdi revolver 375 margin term loan d1 term loan d2 may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings dex media east december 31 2008 principal amounts owed dex media east credit facility totaled 10815 million comprised 6825 million term loan 3990 million term loan b amount outstanding 1000 million aggregate principal amount revolving loan facility “dex media east revolver” additional 26 million utilized two standby letters credit dex media east credit facility also consists 2000 million aggregate principal amount uncommitted incremental facility dex media east would right subject obtaining commitments incremental loans one occasions increase term loan term loan b dex media east revolver amount dex media east revolver term loan mature october 2013 term loan b mature october 2014 weighted average interest rate outstanding debt dex media east credit facility 383 687 december 31 2008 2007 respectively december 31 2008 dex media east credit facility bears interest option either • higher base rate determined administrative agent jp morgan chase bank na ii federal funds effective rate defined plus 050 case plus 075 050 leverage ratio less 2 1 margin dex media east revolver term loan 100 margin term loan b • libor rate plus 175 150 leverage ratio less 2 1 margin dex media east revolver term loan 200 margin term loan b may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings october 24 2007 replaced former dex media east credit facility new dex media east credit facility proceeds new dex media east credit facility used october 24 2007 repay remaining 565 million 1397 million term loan term loan b former dex media east credit facility respectively 325 million former dex media east revolving loan facility repayment term loans revolving loan commitments outstanding former dex media east credit facility accounted extinguishment debt resulting loss debt transactions year ended december 31 2007 02 million related writeoff unamortized deferred financing costs proceeds new dex media east credit facility also used november 26 2007 fund redemption 4497 million dex media east’s outstanding 9875 senior notes due 2009 3413 million dex media east’s outstanding 12125 senior subordinated notes due 2012 see details dex media west june 6 2008 refinanced dex media west credit facility new dex media west credit facility consists 1300 million term loan maturing october 2013 9500 million term loan b maturing october 2014 900 million dex media west revolver event 250 million dex media west’s 9875 senior subordinated notes due 2013 refinancing replacement thereof outstanding dex media west revolver term loan term loan b mature date three months prior final maturity notes new dex media west credit facility includes 4000 million uncommitted incremental facility “incremental facility” may incurred additional revolving loans additional term loans subject obtaining commitments loans incremental facility fully available used refinance dex media west 85 senior notes due 2010 however limited 2000 million used purpose proceeds new dex media west credit facility used refinance former dex media west credit facility pay related fees expenses refinancing former dex media west credit facility accounted extinguishment debt resulting loss debt transactions year ended december 31 2008 21 million related writeoff unamortized deferred financing costs december 31 2008 principal amounts owed new dex media west credit facility totaled 10800 million comprised 1300 million term loan 9500 million term loan b amount outstanding dex media west revolver weighted average interest rate outstanding debt new dex media west credit facility 710 december 31 2008 weighted average interest rate outstanding debt former dex media west credit facility 651 december 31 2007 december 31 2008 new dex media west credit facility bears interest option either • highest base rate determined administrative agent jp morgan chase bank na ii federal funds effective rate defined plus 050 iii 40 case plus 275 250 leverage ratio less 300 100 margin dex media west revolver term loan 30 margin term loan b • higher libor rate ii 30 plus 375 350 leverage ratio less 300 100 margin dex media west revolver term loan 40 margin term loan b may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings notes december 31 2008 total outstanding notes 61197 million comprised 32065 million outstanding rhd notes 4129 million outstanding rhdi notes 12819 million outstanding dex media inc notes 12184 million outstanding dex media west notes rhd december 31 2008 rhd total outstanding notes 32065 million comprised 2068 million 6875 senior notes 3019 million 6875 series a1 senior discount notes 4552 million 6875 series a2 senior discount notes 10128 million 8875 series a3 senior notes 12298 million 8875 series a4 senior notes october 2008 repurchased 215 million notes purchase price 74 million september 2008 repurchased 1655 million 1599 million accreted value applicable notes purchase price 847 million june 25 2008 rhdi exchanged 5942 million 5857 million accreted value applicable rhd notes 4129 million rhdi senior notes resulting reduction debt 1728 million issued 15 billion aggregate principal amount 8875 series a4 senior notes due 2017 interest series a4 notes payable semiannually april 15th october 15th year commencing april 15 2008 series a4 notes senior unsecured obligations rhd senior right payment rhd’s existing future senior subordinated debt future subordinated obligations rank equally rhd’s existing future senior unsecured debt series a4 notes effectively subordinated rhd’s secured debt including rhd’s guarantee borrowings rhdi credit facility structurally subordinated existing future liabilities including trade payables direct indirect subsidiaries issued 3000 million 6875 senior notes due january 15 2013 “holdco notes” proceeds used redeem 100303 shares outstanding preferred stock gs funds pay transaction costs repay debt associated rhdi’s credit facility interest payable holdco notes semiannually arrears january 15th july 15th year commencing july 15 2005 order fund cash portion dex media merger purchase price issued 6600 million aggregate principal amount maturity 6005 million gross proceeds 6875 series a2 senior discount notes due january 15 2013 121 billion principal amount 8875 series a3 senior notes due january 15 2016 interest payable semiannually january 15th july 15th year series a2 senior discount notes series a3 senior notes commencing july 15 2006 also issued 3650 million aggregate principal amount maturity 3321 million gross proceeds 6875 series a1 senior discount notes due january 15 2013 fund gs repurchase interest payable semiannually january 15th july 15th year commencing july 15 2006 notes unsecured obligations rhd senior right payment future senior subordinated indebtedness rhd structurally subordinated indebtedness subsidiaries rhdi june 25 2008 rhdi exchanged 5942 million 5857 million accreted value rhd notes 4129 million rhdi senior notes interest rhdi senior notes payable semiannually may 15th november 15th year commencing november 15 2008 rhdi senior notes senior unsecured obligations rhdi rank equally rhdi’s senior unsecured indebtedness rhdi senior notes fully unconditionally guaranteed rhd rhdi’s subsidiaries guarantee obligations rhdi credit facility general senior unsecured basis rhdi senior notes effectively subordinated right payment rhdi’s existing future secured debt extent value assets securing debt rhdi senior notes also structurally subordinated existing future liabilities including trade payables rhdi’s existing future subsidiaries guarantee rhdi senior notes rhd guarantee respect rhdi senior notes structurally subordinated liabilities rhd’s subsidiaries rhdi subsidiaries guarantee obligations rhdi senior notes claims respect rhdi senior notes structurally senior claims respect outstanding rhd notes connection embarq acquisition rhdi issued 3250 million aggregate principal amount 8875 senior notes due 2010 “senior notes” 6000 million senior subordinated notes december 2005 repurchased tender offer exit consent solicitation 3171 million senior notes remaining 79 million senior notes redeemed december 2007 proceeds rhdi revolver used fund december 2007 redemption premium 02 million pay transaction costs redemption senior notes accounted extinguishment debt resulting loss debt transactions 02 million year ended december 31 2007 consisting redemption premium writeoff unamortized deferred financing costs less 01 million october 2007 terms conditions tender offer consent solicitation purchase senior subordinated notes commenced september 18 2007 5999 million 999 outstanding senior subordinated notes repurchased proceeds series a4 notes contributed rhd rhdi order fund repurchase senior subordinated notes tender premium 397 million pay transaction costs tender offer december 2007 remaining 01 million senior subordinated notes redeemed tender redemption senior subordinated notes accounted extinguishment debt resulting loss debt transactions 513 million year ended december 31 2007 consisting tender premium writeoff unamortized deferred financing costs 116 million dex media inc december 31 2008 dex media inc total outstanding notes 12819 million comprised 5104 million 8 senior notes 7715 million 9 senior discount notes dex media inc issued 5000 million aggregate principal amount 8 senior notes due 2013 senior notes unsecured obligations dex media inc interest payable may 15th november 15th year december 31 2008 5000 million aggregate principal amount outstanding excluding fair value adjustments dex media inc issued 7500 million aggregate principal amount 9 senior discount notes due 2013 two indentures first indenture totaling 3890 million aggregate principal amount 9 senior discount notes issued original issue discount interest accruing 9 per annum compounded semiannually senior discount notes unsecured obligations dex media inc interest accrues form increased accreted value november 15 2008 “full accretion date” time accreted value equal full principal amount maturity second indenture totaling 3610 million aggregate principal amount interest accrues 837 per annum compounded semiannually creates premium full accretion date amortized remainder term november 15 2008 9 senior discount notes bear cash interest 9 per annum payable semiannually may 15th november 15th year senior discount notes unsecured obligations dex media inc cash interest accrue discount notes prior full accretion date december 31 2008 7499 million aggregate principal amount outstanding excluding fair value adjustments dex media east november 26 2007 proceeds new dex media east credit facility used fund redemption 4497 million dex media east’s outstanding 9875 senior notes due 2009 3413 million dex media east’s outstanding 12125 senior subordinated notes due 2012 redemption premiums associated senior notes senior subordinated notes 111 million 207 million respectively pay transaction costs redemption senior notes senior subordinated notes accounted extinguishment debt resulting loss debt transactions 318 million year ended december 31 2007 related redemption premiums addition result redeeming senior notes senior subordinated notes loss debt transactions offset 622 million year ended december 31 2007 resulting accelerated amortization remaining fair value adjustment recorded result dex media merger dex media west december 31 2008 dex media west total outstanding notes 12184 million comprised 3939 million 85 senior notes 87 million 5875 senior notes 8158 million senior subordinated notes dex media west issued 3850 million aggregate principal amount 85 senior notes due 2010 senior notes unsecured obligations dex media west interest payable february 15th august 15th year december 31 2008 3850 million aggregate principal amount outstanding excluding fair value adjustments dex media west issued 3000 million aggregate principal amount 5875 senior notes due 2011 senior notes unsecured obligations dex media west interest payable may 15th november 15th year december 31 2008 87 million aggregate principal amount outstanding excluding fair value adjustments dex media west issued 780 million aggregate principal amount 9875 senior subordinated notes due 2013 senior subordinated notes unsecured obligations dex media west interest payable february 15th august 15th year december 31 2008 7617 million aggregate principal amount outstanding excluding fair value adjustments debt refinancings repurchases purpose debt refinancings repurchases noted reduce nearterm mandatory debt repayments extend maturity profile provide additional covenant flexibility reduce debt levels year ended december 31 2008 reduced net debt outstanding 6385 million includes benefit fair value adjustment combination mandatory repayments optional prepayments financing activities noted result financing activities noted reduced outstanding debt 4100 million recorded gain 2652 million year ended december 31 2008 result voluntary prepayments made rhdi credit facility recognized gain 200 million year ended december 31 2008 consisting difference face amount term loans repaid voluntary prepayments made offset writeoff unamortized deferred financing costs 02 million result october 2008 debt repurchases recognized gain 136 million year ended december 31 2008 consisting difference par value purchase price notes offset writeoff unamortized deferred financing costs 05 million september 2008 debt repurchases resulted gain 724 million year ended december 31 2008 representing difference accreted value case senior discount notes par value applicable purchase price notes offset writeoff unamortized deferred financing costs 29 million debt exchanges resulted gain approximately 1613 million year ended december 31 2008 representing difference accreted value case senior discount notes par value applicable extinguished rhd notes rhdi senior notes offset writeoff unamortized deferred financing costs 115 million associated extinguished rhd notes addition year ended december 31 2008 recognized charge 22 million writeoff unamortized deferred financing costs associated refinancing former dex media west credit facility portions amended rhdi credit facility accounted extinguishments debt impact dex media merger result dex media merger adjustment established record acquired debt fair market value january 31 2006 fair value adjustment amortized reduction interest expense remaining term respective debt agreements using effective interest method impact future scheduled interest principal payments amortization fair value adjustment included reduction interest expense loss debt transactions applicable 176 million 921 million including 622 million related redemption dex media east’s senior notes senior subordinated notes recorded loss debt transactions 264 million years ended december 31 2008 2007 2006 respectively total premium 2223 million recorded upon consummation dex media merger 862 million remains unamortized december 31 2008 shown following table connection redemption dex media east’s senior notes senior subordinated notes remaining fair value adjustment related debt obligations fully amortized december 31 2007 share repurchases common stock transactions november 2007 company’s board directors authorized 1000 million stock repurchase plan “repurchase plan” authorization permitted company purchase shares common stock open market pursuant rule 10b18 securities exchange act 1934 block trades otherwise following twelve months based market conditions factors purchases may made suspended time accordance repurchase plan repurchased 25 million shares rhd common stock cost 957 million december 2007 61 million funded january 2008 shares rhd common stock repurchased year ended december 31 2008 repurchase plan expired tax basis acquisitions connection att directory acquisition embarq acquisition made election internal revenue code section 338h10 treat applicable stock purchase asset purchase case permitted us record acquired intangible assets goodwill fair value tax purposes rather prior owners’ tax cost basis “carryover basis” cases significantly less fair value intangible assets goodwill acquired dex media merger recorded carryover basis tax purposes amortized using straightline method 15 years inception intangible assets goodwill previously benefited treatment asset purchase tax purposes prior owners dex media accordingly tax deductible amortization substantially higher would typical stock purchase transaction since based upon fair value acquired intangible assets goodwill using straightline method generally 15 years annual amortization goodwill acquired intangible assets tax purposes approximately 6751 million result amortization expense offsets taxable income cash tax requirements significantly reduced tax effect amortization deductions impact economic instability prospective pension funding result credit liquidity crisis united states throughout global financial system substantial volatility world capital markets banking industry occurred volatility events significant negative impact financial markets well overall economy result global economic instability pension plan’s investment portfolio incurred significant volatility decline fair value 2008 however values pension plan’s individual investments fluctuate response changing market conditions amount gains losses recognized subsequent periods impact funded status pension plan future minimum required cash contributions cannot determined time addition result developments company use rate 80 expected longterm rate return assumption plan assets pension plans 2009 basis used determining rate longterm capital market return forecasts asset mix similar plans’ asset allocation target 65 equity securities 35 debt securities liquidity cash flows primary source liquidity continue cash flows generated operations expect primary liquidity requirements fund operations service company’s indebtedness ability meet debt service requirements dependent ability generate sufficient cash flows operations primary sources cash flows consist mainly cash receipts sale advertising yellow pages online products services impacted among factors general economic conditions increase competition fragmentation local business search space consumer confidence level demand advertising products services based current financial projections expect able continue generate cash flows operations amounts sufficient fund operations capital expenditures well meet debt service requirements satisfy interest principal payment obligations february 2010 however estimates also indicate cash flows operations sufficient satisfy maturing debt obligations commencing march 31 2010 continuing thereafter make assurances business generate sufficient cash flows operations enable us fund operations capital expenditures meet debt service requirements pursue strategic initiatives purposes furthermore unprecedented instability financial markets may make difficult us obtain financing refinancing case may satisfactory terms time may purchase equity andor debt securities andor subsidiaries’ debt securities privately negotiated transactions open market purchases otherwise depending among things availability funds alternative investments market conditions addition time may prepay certain subsidiaries’ term debt portions thereof depending among things availability funds market conditions see item 7 “management’s discussion analysis financial condition results operations” “recent trends related business” “going concern” additional information related trends uncertainties respect business ability continue operate going concern primarily result business combinations significant amount debt aggregate outstanding debt december 31 2008 96 billion including fair value adjustments 862 million required gaap result dex media merger year ended december 31 2008 reduced net debt outstanding 6385 million includes benefit fair value adjustment combination mandatory repayments optional prepayments financing activities noted result financing activities noted reduced outstanding debt 4100 million year ended december 31 2008 made scheduled principal payments 607 million prepaid additional 12210 million principal credit facilities includes prepayments associated refinancing former dex media west credit facility total credit facility repayments 12817 million excluding revolver payments year ended december 31 2008 made revolver payments 4221 million offset revolver borrowings 3981 million resulting net decrease 240 million revolver portions company’s credit facilities year ended december 31 2008 made aggregate net cash interest payments 7465 million december 31 2008 1312 million cash equivalents checks yet presented payment 108 million combined available borrowings revolvers 3622 million year ended december 31 2008 periodically utilized revolvers financing resource balance timing periodic payments prepayments made credit facilities interest payments senior notes subsidiaries’ senior notes senior subordinated notes timing cash receipts operations cash flow activities cash provided operating activities 5487 million year ended december 31 2008 key contributors operating cash flow include following • 22983 million net loss includes impact noncash goodwill impairment charges • 25585 million net noncash items consisting noncash impairment charges 38704 million offset 13119 million deferred income taxes includes tax impact noncash goodwill impairment charges • 2652 million net gain debt transactions • 6809 million net noncash items primarily consisting 4833 million depreciation amortization 1384 million bad debt provision 364 million relates change net accounts receivable 295 million stockbased compensation expense 247 million net additional interest expense associated ineffective interest rate swaps 50 million noncash items primarily consisting 651 million related accretion discounted debt 290 million related amortization deferred financing costs offset 325 million associated change fair value interest rate swaps 380 million associated freeze company’s defined benefit plans elimination retiree health care life insurance benefits 176 million associated amortization fair value adjustments required gaap result dex media merger reduced interest expense • 1977 million net use cash decrease deferred directory revenues 958 million due lower advertising sales increase accounts receivable 1019 million representing increase accounts receivable net provision bad debts 1383 million due increase days outstanding customer balances deterioration accounts receivable aging categories driven extension writeoff policy qwest markets conform legacy rhd markets weaker economic conditions transition inhouse billing collection services certain local customers qwest markets previously performed qwest behalf change deferred revenues accounts receivable analyzed together given fact directory published annual billable value directory initially deferred unbilled accounts receivable established month thereafter typically one twelfth billing value recognized revenues billed customers • 450 million net source cash decrease assets consisting 287 million decrease prepaid directory costs resulting publication seasonality well 163 million decrease current noncurrent assets primarily relating deferred commissions print paper delivery costs changes fair value company’s interest rate swap agreements • 254 million net use cash decrease accounts payable accrued liabilities primarily reflecting 395 million decrease trade accounts payable resulting timing invoice processing versus payment thereon 177 million decrease accrued interest payable outstanding debt offset 318 million increase accrued liabilities • 509 million increase noncurrent liabilities including pension postretirement longterm liabilities cash used investing activities year ended december 31 2008 663 million includes following • 706 million used purchase fixed assets primarily computer equipment software leasehold improvements • 43 million cash proceeds disposition equity investment fourth quarter 2007 received january 2008 cash used financing activities year ended december 31 2008 3972 million includes following • 10172 million proceeds net costs borrowings new dex media west credit facility used refinance former dex media west credit facility pay related fees expenses • 12817 million principal payments term loans credit facilities notes regard credit facilities 607 million represents scheduled principal payments 12210 million represents principal payments made accelerated basis option proceeds received new dex media west credit facility available cash flow generated operations • 3981 million borrowings revolvers used primarily fund temporary working capital requirements • 4221 million principal payments revolvers • 921 million associated october 2008 debt repurchases september 2008 debt repurchases • 105 million fees associated issuance rhdi senior notes voluntary prepayments made rhdi credit facility accounted noncash financing activities • 61 million used repurchase common stock use cash pertains common stock repurchases made 2007 settled january 2008 • 01 million decreased balance checks yet presented payment • 01 million proceeds exercise employee stock options cash provided operating activities 6918 million year ended december 31 2007 key contributors operating cash flow include following • 469 million net income • 6661 million net noncash charges primarily consisting 4631 million depreciation amortization 808 million bad debt provision 390 million stockbased compensation expense 473 million noncash charges primarily related amortization deferred financing costs amortization fair value adjustments required gaap result dex media merger 263 million loss debt transactions related 2007 refinancing transactions noted 87 million deferred income taxes 09 million loss disposal fixed assets • 1222 million net use cash increase accounts receivable 958 million decrease deferred directory revenue 264 million change deferred revenue accounts receivable analyzed together given fact directory published annual billable value directory initially deferred unbilled accounts receivable established month thereafter typically one twelfth billing value recognized revenue billed customers • 60 million net use cash increase assets consisting 51 million increase current noncurrent assets primarily relating deferred commissions print paper delivery costs changes fair value company’s interest rate swap agreements 09 million increase prepaid expenses • 661 million net source cash increase accounts payable accrued liabilities primarily reflecting 479 million increase trade accounts payable 194 million increase accrued interest payable outstanding debt partially offset 12 million decrease accrued liabilities include accrued salaries related bonuses accrued income taxes • 409 million increase noncurrent liabilities including pension postretirement longterm liabilities cash used investing activities year ended december 31 2007 4091 million includes following • 775 million used purchase fixed assets primarily computer equipment software leasehold improvements • 3291 million net cash payments acquire businesscom • 25 million used fund equity investment cash used financing activities year ended december 31 2007 3929 million includes following • 14687 million proceeds net costs issuance series a4 notes used fund repayment rhd credit facility redemption rhdi’s 10875 senior subordinated notes partial repayment term loans former dex media east credit facility partial repayment term loans a4 d1 d2 rhdi revolver rhdi credit facility • 14168 million proceeds net costs borrowings credit facilities new dex media east credit facility used fund repayment remaining term loans revolver former dex media east credit facility redemption dex media east’s 9875 senior notes 12125 senior subordinated notes rhd credit facility used fund businesscom acquisition • 16741 million principal payments term loans credit facilities amount 2399 million represents scheduled principal payments 14342 million represents principal payments made accelerated basis option proceeds received 2007 refinancing transactions available cash flow generated operations • 14706 million note repayments amount 13989 million used redeem rhdi’s 8875 senior notes 10875 senior subordinated notes dex media east’s 9875 senior notes 12125 senior subordinated notes tender redemption premium payments 717 million incurred conjunction note repayments • 7226 million borrowings revolvers used primarily fund temporary working capital requirements well repurchase common stock redemption rhdi’s 8875 senior notes • 7814 million principal payments revolvers • 896 million used repurchase common stock amount represents value common stock repurchased actually settled cash december 31 2007 • 134 million proceeds exercise employee stock options • 90 million proceeds issuance common stock connection businesscom acquisition • 77 million decreased balance checks yet presented payment offbalance sheet arrangements company offbalance sheet arrangements contractual obligations contractual obligations table presented sets forth annual commitments december 31 2008 principal interest payments debt well cash obligations next five years thereafter debt repayments presented table include scheduled principal payments current debt agreements include anticipated prepayments debt repayments also exclude fair value adjustments required purchase accounting adjustments impact payment obligations 1 included longterm debt principal amounts owed credit facilities senior notes senior subordinated notes including current portion longterm debt 2 interest debt represents cash interest payment obligations assuming indebtedness december 31 2008 paid accordance contractual maturity assumes interest rates variable interest debt december 31 2008 remain unchanged future periods weighted average interest rates rhdi new dex media east new dex media west credit facilities 677 383 710 respectively december 31 2008 please refer “liquidity capital resources” interest rates senior notes senior subordinated notes 3 enter operating leases normal course business substantially lease agreements fixed payment terms lease agreements provide us renewal early termination options future operating lease obligations would change exercised renewal early termination options entered additional operating lease agreements amounts table assume exercise renewal early termination options 4 connection software system modernization ongoing support services related amdocs software system obligated pay amdocs approximately 927 million years 2009 2012 connection att directory acquisition entered internet yellow pages reseller agreement whereby obligated pay att 30 million 2009 entered agreements yahoo whereby yahoo serve maintain local search listings placement webbased electronic local information directory electronic mapping products obligated pay yahoo 132 million 2009 2010 entered directory advertisement agreement cmr cover advertising placed rhd cmr behalf qwest agreement obligated pay cmr approximately 77 million commissions years 2009 2014 5 defined benefit plans covering substantially employees funding policy contribute amount least equal minimum legal funding requirement based past performance uncertainty dollar amounts paid excluded amounts table also unfunded postretirement plans provide certain healthcare life insurance benefits fulltime employees reach retirement age working company see item 8 “financial statements supplementary data” note 9 “benefit plans” changes made defined benefit plans unfunded postretirement plans effective january 1 2009 expected future benefit payments including administrative expenses net employee contributions included table expect make contributions approximately 659 million 61 million pension plans postretirement plan respectively 2009 item 7a nannannannanitem 7a quantitative qualitative disclosures market risk information response item set forth managements discussion analysis financial condition results operations pages 29 34 1997 annual report note 5 financial instruments offbalance sheet risks page 44 1997 annual report information incorporated herein reference item 8item 7a quantitative qualitative disclosure market risk requirements item discussed item 7 managements discussion analysis financial condition results operations item 8item 7a quantitative qualitative disclosure market risk requirements item discussed item 7 managements discussion analysis financial condition results operations market risk sensitive instruments item 8item 7a quantitative qualitative disclosure market risk requirements item discussed item 7 managements discussion analysis financial condition results operations risk management market risk sensitive instruments item 8item 7a quantitative qualitative disclosure market risk management exposed interest rate risk credit agreement borrow prevailing shortterm rates outstanding interest rate swap agreements notional principal amount 125 million whereby company makes fixed rate payments 59 receives floating rate payments based 3month libor rates 2001 weighted average rate received 30 swap agreements effectively change interest rate 125 million floating rate borrowings fixed rates result significant prepayment debt 2001 2000 96 total debt december 31 2001 effectively fixed rate debt therefore interest rate risk minimal exposed credit risk event nonperformance counterparty agreements notional amount swap agreements used measure interest paid received represent amount exposure credit loss would limited amount would received remaining life agreements counterparty agreements major financial institution currently anticipate nonperformance counterparty interest rate swaps entered hedging purposes use interest rate swaps derivative financial instruments trading speculative purposes june 2002 interest rate swap agreement notional value 50 million expire due reduced level indebtedness anticipate replacing expiring interest rate swap time final interest rate swap agreement notional amount 75 million expire june 2003 management determined time whether swap replaced discussion accounting policies disclosure relating financial instruments included note 1 consolidated financial statements included item 8item 7a quantitative qualitative disclosure market risk preacquisition interest rate risk management exposed interest rate risk prior credit facility borrowed prevailing shortterm rates outstanding interest rate swap agreement notional principal amount 75 million whereby pay fixed rate 59 receive floating rate payments based 3month libor rates 2002 weighted average rate received 11 swap agreement expires june 2003 due pending repayment variable rate debt prior credit agreement conjunction spa acquisition december 31 2002 interest rate swap longer qualified hedge accounting treatment recognized charge 15 million 2002 record swap fair market value expect changes fair value swap 2003 result gain approximately 15 million swap approaches maturity fair value declines zero intend hold interest rate swap expiration date outstanding interest rate swap exposes us credit risk event net gain position counter party agreement cannot meet obligation notional amount used measure interest paid received represent amount exposure credit loss would limited amount would received remaining life swap agreement december 31 2002 net loss position 15 million see “market risk sensitive instruments” therefore exposed credit risk counterparty swap major financial institution net gain position would expect counterparty able perform obligations swap use derivative financial instruments hedging purposes trading speculative purposes discussion accounting policies disclosure relating financial instruments included note 1 consolidated financial statements included item 8item 7a quantitative qualitative disclosure market risk interest rate risk management credit facility bears interest variable rates accordingly earnings cash flow affected changes interest rates credit facility requires maintain hedge agreements provide either fixed interest rate interest rate protection least 50 total outstanding debt march 28 2003 entered three interest rate swap agreements total notional value 255 million interest rate swaps effectively convert 255 million variable debt fixed rate debt terms agreements receive variable interest based threemonth libor pay fixed rate 285 swaps mature march 28 2007 october 9 2003 entered interest rate swap agreement total notional value 150 million interest rate swap effectively converts 150 million variable debt fixed rate debt terms agreement receive variable interest based threemonth libor pay fixed rate 1959 swap agreement matures october 9 2005 based initial terms swap agreements annual cost swap arrangements approximately 52 million actual cost swaps depend variable rate payments received assuming 18 increase interest rate associated borrowings credit facility giving effect interest rate swaps interest expense would increase 09 million annual basis effect interest rate swap agreements discussed total fixed rate debt comprises approximately 65 total debt portfolio december 31 2003 outstanding interest rate swaps expose us credit risk event counterparties agreements cannot meet obligations notional amount used measure interest paid received represent amount exposure credit loss would limited amount would received remaining life swap agreements counterparties swaps major financial institutions expect counterparties able perform obligations swaps use derivative financial instruments hedging purposes trading speculative purposes discussion accounting policies disclosure relating financial instruments included note 2 audited consolidated financial statements year ended december 31 2003 included item 8item 7a “quantitative qualitative disclosures market risk” additional information interest rate swap agreements benefit provision income taxes 2003 tax benefit based effective tax rate 418 results tax benefit generated 2003 attributable net operating loss approximately 176 million related tax deductions connection spa acquisition 2003 effective tax rate reflects increase state local tax rate result spa acquisition combined favorable settlement 2003 certain prior year state local tax audits 2002 tax provision based effective tax rate 400 adversely impacted chinabig investment impairment charge deductible tax purposes charge represents capital loss offset capital gains charge also gave rise deferred tax asset realized offsetting future capital gains given current business portfolio projections future results believe probability generating future capital gains realize asset remote accordingly valuation allowance deferred tax asset relating chinabig investment established net loss income loss income available common shareholders loss earnings per share net loss 2003 500 million compared net income 672 million 2002 operating results 2003 reflect lower operating income described previously higher interest expense da result spa acquisition dividend preferred stock increases net loss reduces net income resulting loss income available common shareholders earnings per share amounts calculated amount preferred stock dividend includes stated 8 dividend plus deemed dividend beneficial conversion feature “bcf” bcf function conversion price preferred stock 2405 fair value warrants issued preferred stock weighted average 1108 per warrant based blackscholes model exercise prices 2628 warrants issued november 2002 2862 warrants issued january 2003 fair market value common stock january 3 2003 date preferred stock issued 2992 full amount bcf treated deemed dividend preferred stock convertible common stock immediately issuance november 2002 january 2003 preferred stock dividend 2003 2002 584 million 247 million respectively consisted stated 8 dividend 165 million 05 million respectively bcf 419 million 242 million respectively resulting loss income available common shareholders 1083 million 425 million 2003 2002 respectively basic earnings per common share eps generally calculated dividing income available common shareholders weighted average number common shares outstanding however preferred stock contains certain participation rights eitf topic d95 “effect participating securities computation basic earnings per share” “topic d95” requires dilutive effect securities included weighted average number shares outstanding furthermore topic d95 requires dilutive effect included basic eps may calculated using either ifconverted method twoclass method however dilutive effect preferred stock cannot less would result application twoclass method elected use ifconverted method calculating basic eps however 2003 reported eps calculated using twoclass method less eps calculated using ifconverted method diluted eps equals income available common shareholders divided weighted average common shares outstanding plus common share equivalents common share equivalents include stock options warrants dilutive effect calculated using treasury stock method preferred stock potential dilutive effect calculated using ifconverted method calculation basic diluted eps 2003 2002 presented 1 december 31 2002 preferred stock convertible 2933888 shares common stock however since 70 million preferred stock issued november 2002 number common share equivalents included eps calculation weighted actual time preferred stock outstanding year 2 2964329643 281 year ended december 31 2002 3 basic eps calculated twoclass method loss 275 year ended december 31 2003 however net loss period application twoclass method antidilutive accordingly reported basic eps calculated loss available common shareholders divided weighted average basic shares outstanding 4 934 stock options 2003 assumed conversion preferred stock 2003 2002 9023 2939 shares common stock antidilutive therefore included calculation diluted eps adjusted pro forma amounts nongaap measures result spa acquisition 2003 results prepared accordance gaap comparable 2002 reported gaap results deferral amortization revenue recognition method certain directories published 2002 would recognized revenue 2003 however purchase accounting considerations precluded us recognizing directory revenue certain expenses associated directories published prior acquisition including january 2003 published directories accordingly reported 2003 gaap results indicative underlying operations financial performance accordingly management presenting adjusted results 2003 among things eliminate purchase accounting impact revenue certain expenses adjusted pro forma information 2002 assumes acquisition related financing occurred january 1 2002 management believes presentation adjusted pro forma information help readers better easily compare current period underlying operating results combined company performance would likely comparable prior period following adjusted pro forma amounts nongaap measures reconciled comparable gaap measures 1 represents revenue directories published prior spa acquisition including january 2003 published directories would recognized period purchase accounting adjustments required gaap 2 represents expenses directories published prior spa acquisition including january 2003 published directories would recognized period purchase accounting adjustments required gaap effect differences application accounting policies legacy spa donnelley 3 represents revenue recognized spa 2002 5457 million less commission revenue prepress publishing revenue spa included reported gaap amounts 498 million would eliminated intercompany revenues spa acquisition occurred january 1 2002 4 represents expenses recognized spa 2002 2533 million less commission prepress publishing expenses services provided us 447 million would eliminated intercompany expenses spa acquisition occurred january 1 2002 plus additional expense 83 million related required purchase accounting adjustment recorded increase acquired deferred directory costs fair value adjusted pro forma amounts also exclude 64 million restructuring reserve reversal investment impairment charge 20 million 5 represents depreciation amortization expense recognized spa 2002 85 million plus amortization expense intangible assets acquired spa acquisition assuming occurred january 1 2002 500 million 6 represents income cendon recognized donnelley included reported gaap amounts would eliminated intercompany income spa acquisition occurred january 1 2002 2003 adjusted revenue expenses compared 2002 adjusted pro forma revenue expenses components 2003 adjusted revenue 2002 adjusted pro forma revenue follows total adjusted net revenue 2003 5723 million increase 10 million 02 adjusted pro forma net revenue 5713 million 2002 deferral amortization method revenue recognition revenue directory advertising sales initially deferred directory published recognized ratably life directory typically 12 months increase adjusted gross directory advertising revenue result higher advertiser renewal rates solid performance two major markets nevada southwest florida offset weaker performance military markets due iraqi conflict generally weak regional economic conditions much year addition due deferral amortization method sales growth published directories amortized revenue life directory delays recognition publication sales recorded revenue reduction sales claims allowances result improved processes sales organization prepress services decrease prepress publishing fees 35 million result expiration third party prepress publishing contract ceased providing services first quarter 2003 adjusted operating ga expenses 2003 2755 million 58 million 21 pro forma operating ga expenses 2813 million 2002 similar deferral amortization method revenue recognition certain costs directly related selling production directories initially deferred incurred recognized ratably life directory decrease adjusted expenses 2003 primarily due lower bad debt expense 137 million resulting better expected collections due certain process improvements synergy savings combination spa operations donnelley’s 2003 102 million lower print paper distribution costs 93 million due lower paper prices printing expenses vendor costs decreases offset 85 million increased corporate costs due higher insurance premiums compensation governance costs related larger organization 76 million costs achieve synergies consolidation publishing technology operations sales offices administrative functions 73 million related headquarters relocation 43 million due increased advertising order bring advertising levels sprintbranded directories back historical levels 2002 adjusted partnership income 2003 1141 million decrease 30 million 26 adjusted pro forma partnership income 2002 1171 million decrease partnership income reflects decrease income dontech previously discussed adjusted operating income 2003 3451 million increase 28 million 08 adjusted pro forma operating income 2002 3423 million donnelley advertising sales publication sales management reviews evaluates value advertising sales directories published period “publication sales” primary sales performance measure directory advertising revenue driven publication sales management believes comparison publication sales directories one period another gives better indication underlying sales trends economic conditions business confidence comparison directory revenue recognized using deferral amortization method recognize directory revenue ratably life directory amount revenue recognized period directly related sales trends economic conditions business confidence period publication sales comparable “samestore” sales measure utilized disclosed many directory publishers thus facilitating comparison sales performance among publishers publication sales 2003 donnelley segment 5482 million 65 million 12 pro forma publication sales donnelley segment 5417 million 2002 increase publication sales resulted higher advertiser renewal rates solid performance two major markets nevada southwest florida results partially offset regional economic weakness weaker performance several military markets due troop deployment connection iraqi conflict publication sales nongaap measure comparable gaap measure related donnelley segment net revenue reconciliation publication sales net revenue reported accordance gaap presented dontech advertising sales calendar publication sales calendar sales agent sbc dontech recognizes commission revenue based annual value sales contract calendar sales period contract executed management reviews calendar sales dontech primary driver income dontech manages sale advertising customers directorybydirectory basis project basis project consists two directories geographic area organizes sales directories sales campaign accordingly changes beginning ending dates sales campaign actual sales recorded point campaign vary one period next variations timing factors cause calendar sales thus partnership income materially different prior comparative period income dontech consisted following dontech partnership income 2003 1141 million decreased 30 million 26 1171 million 2002 mainly due lower calendar sales dontech calendar sales 2003 3949 million 20 lower calendar sales 2002 4029 million result continued weak economy midwest 2003 competition local media market share dontech’s net income decreased 11 million 185 million 174 million addition revenue participation income received sbc decreased 19 million 20 967 million 2003 986 million 2002 decreases direct result reduction dontech’s calendar sales share dontech’s net income revenue participation derived publication sales management also utilizes publication sales evaluate sales performance dontech management believes measure provides better indication underlying sales trends economic conditions business confidence dontech markets comparison partnership income dontech publication sales dontech represent annual billing value sbc directories published period dontech sells advertising publication sales 2003 4024 million 158 million 38 2002 publication sales 4182 million decrease result continued weak economy midwest stagnant job growth competition local media market calendar sales publication sales nongaap measures comparable gaap measures related dontech partnership income reconciliation publication sales calendar sales partnership income provided liquidity capital resources senior secured credit facility amended restated september 1 2004 connection sbc directory acquisition consisted 700 million term loan a2 1650 million term loan b2 175 million revolving credit facility “revolver” aggregate facility 2525 million collectively “credit facility” credit facility provides new term loan c potential borrowings 400 million proceeds borrowed used fund acquisitions retirement notes redemption payment dividends preferred stock subject certain limitations substantially assets including capital stock subsidiaries pledged collateralize obligations credit facility senior notes connection sbc directory acquisition borrowed additional 1332 million increasing existing term loan a2 700 million 100 million increasing existing term loan b2 1650 million 918 million revolver increased 175 million 125 million proceeds credit facility used acquire sbc directory business pay related fees expenses borrowing made revolver fund sbc directory acquisition sources uses funds connection sbc directory acquisition summarized follows december 6 2004 amended credit facility accomplish following objectives • obtain favorable pricing variable rate debt • adjust nonfinancial covenants make less restrictive corporate operating flexibility • obtain consent carve designated additional debt required mandatory prepayments amendment credit facility created new term loan a3 new term loan replacing term loan b2 term loans a2 a3 require quarterly principal payments december 31 2004 outstanding balances term loans a2 a3 526 million 194 million 1441 million respectively 41 million outstanding revolver term loan a2 term loan a3 mature december 2009 term loan matures june 2011 september 1 2004 december 6 2004 amendments credit facility accounted modifications underlying debt instruments weighted average interest rate outstanding debt credit facility 432 december 31 2004 391 former term facilities december 31 2003 increase weighted average interest rate primarily reflects increase libor rate 2004 partially offset lower pricing variable rate debt credit facility bears interest option either • higher base rate determined administrative agent deutsche bank trust company americas plus 100 margin revolver term loan a2 075 margin term loan a3 term loan ii federal funds effective rate defined plus 05 plus 100 margin revolver term loan a2 075 margin term loan a3 term loan • libor rate plus 200 margin revolver term loan a2 175 margin term loan a3 term loan may elect interest periods 1 2 3 6 9 12 months libor borrowings effective interest rate credit facility including interest rate swaps twelve months ended december 31 2004 448 also outstanding 325 million senior notes 600 million senior subordinated notes issued connection spa acquisition interest paid notes semiannually june 15 december 15 senior notes became secured conjunction amendment restatement credit facility connection sbc directory acquisition connection spa acquisition also issued 200604 shares preferred stock gs funds gross proceeds 200 million used finance acquisition shares convertible time price 2405 earn cumulative dividend 8 compounded quarterly consent majority holders preferred stock may pay dividends cash prior october 1 2005 subsequent october 1 2005 dividends preferred stock may paid cash subject limitations credit facility allowed accrete option credit facility may significantly limit ability pay dividends preferred stock cash connection issuance preferred stock issued warrants purchase 165 million shares common stock exercise prices 2682 2862 may exercised time expire january 3 2008 intend issue treasury stock satisfy conversion preferred sock exercise warrants may redeem preferred stock cash time january 3 2006 market price defined common stock exceeds 200 conversion price 30 45 consecutive trading days preferred stock redeemable cash us time january 3 2013 preferred stock redeemable cash option gs funds event change control defined december 31 2004 liquidation value preferred stock approximately 235 million preferred stock convertible approximately 98 million shares common stock except case change control defined redemption price preferred stock time greater liquidation value preferred stock market value preferred stock converted basis time january 14 2005 repurchased approximately 50 outstanding preferred stock gs funds 2772 million order fund repurchase january 14 2005 issued 300 million holdco notes private transaction exempt registration requirements securities act 1933 holdco notes bear interest 6875 per annum payable semiannually arrears january 15 july 15 year commencing july 15 2005 holdco notes unsecured senior obligations company mature january 15 2013 entered registration rights agreement whereby agreed among things 1 file exchange offer registration statement sec respect holdco notes within 120 days january 14 2005 ii use reasonable efforts exchange offer registration statement declared effective sec within 180 days january 14 2005 iii subject certain limitations consummate exchange offer exchange offer registration statement relates within 210 days january 14 2005 remaining preferred stock repurchased convertible approximately 50 million shares common stock march 4 2005 credit facility indentures governing notes agreements relating preferred stock contain usual customary negative covenants among things place limitations ability incur additional indebtedness including capital leases liens ii pay dividends repurchase capital stock iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock subsidiaries vi engage transactions affiliates credit facility also contains financial covenants relating maximum consolidated leverage minimum interest coverage maximum senior secured leverage defined therein result sbc directory acquisition spa acquisition repurchase preferred stock significant amount debt requiring significant debt service aggregate outstanding debt december 31 2004 31273 million following issuance january 2005 300 million holdco notes connection repurchase preferred stock aggregate outstanding debt january 31 2005 33858 million twelve months ended december 31 2004 made scheduled principal payments 671 million prepaid additional 2500 million principal credit facility principal payments offset 412 million increase revolver borrowings credit facility 2004 also redeemed remaining 212 million amount preacquisition 9125 subordinated notes year ended december 31 2004 made aggregate cash interest payments 1607 million december 31 2004 108 million cash equivalents checks yet presented payment 58 million available borrowings revolver 1338 million 2004 periodically utilized revolver financing resource balance timing periodic accelerated payments made credit facility interest payments senior notes senior subordinated notes timing cash receipts operations present intention repay borrowings revolver timely manner keep outstanding amounts minimum primary source liquidity continue cash flows operations well available borrowing capacity revolver expect primary liquidity requirement fund operations principal interest payments debt ability meet debt service requirements depend ability generate cash flow future primary sources cash flow consist mainly cash receipts sale advertising yellow pages directories impacted among factors general economic conditions competition yellow pages directory publishers alternative products consumer confidence level demand yellow pages advertising believe cash flows operations along borrowing capacity revolver adequate fund operations capital expenditures meet debt service requirements least next 12 24 months however make assurances business generate sufficient cash flow operations sufficient borrowing available revolver term loan c enable us fund operations capital expenditures meet debt service requirements pursue strategic initiatives purposes cash flow provided operating activities 4063 million year ended december 31 2004 key contributors operating cash flow 2004 include following • 703 million net income • 1699 million net noncash charges primarily consisting 666 million depreciation amortization 149 million bad debt provision 169 million noncash charges 715 million deferred taxes • 1131 million net source cash 1649 million increase deferred directory revenue offset increase accounts receivable 518 million analyze change deferred revenue accounts receivable together directory published annual billing value directory initially deferred unbilled accounts receivable established month thereafter typically onetwelfth billing value recognized revenue billed customers connection sbc directory acquisition record unrecognized revenue directories published prior acquisition september 2004 due purchase accounting acquire associated unbilled receivables rights bill collect receivables totaled approximately 2073 million • 499 million net use cash increase assets reflecting 834 million increase deferred directory costs offset decrease 335 million current noncurrent assets deferred directory costs represent cash payments certain costs associated publication directories since deferred directory costs initially deferred incurred cash payments made prior expense recognized • 324 million net source cash increase accounts payable accrued liabilities reflecting 23 million increase accrued interest payable outstanding debt decrease 206 million federal income tax refunds received additionally accounts payable accrued liabilities includes 42 million advance sbc transition services agreement relating accounts receivable billing collection services offset timing invoices received compared invoices paid year ended december 31 2004 • 732 million net source cash increase noncurrent liabilities reflecting 589 million tax refund pertained company’s election carryback federal net operating loss connection spa acquisition cash flow operations reflects normal operations business excludes impact incremental assets liabilities acquired result sbc directory acquisition september 1 2004 impact reflected cash flow investing activities cash used investing activities year ended december 31 2004 14316 million includes following • 14136 million cash payments connection sbc directory acquisition • 180 million used purchase fixed assets primarily computer equipment software leasehold improvements cash provided financing activities year ended december 31 2004 10283 million includes following • 13189 million net borrowings credit facility consisting 6005 million 7318 million borrowings terms loans a2 b2 respectively net transaction costs 134 million funds received credit facility used finance sbc directory acquisition • 4214 million principal payments debt borrowed credit facility amount 671 million represents scheduled principal payments 2500 million represents principal payments made accelerated basis option excess cash flow generated operations 1043 million represents principal payments revolver • 212 million principal payments redeem remaining 9125 senior subordinated notes due 2008 • 1455 million borrowings revolver • 09 million decreased value checks yet presented payment • 74 million proceeds exercise employee stock options cash provided operating activities 2003 2486 million key contributors cash flows operating activities 2003 include following • 2939 million source cash resulting decrease accounts receivable increase deferred directory revenue analyze change deferred revenue accounts receivable together directory published annual billing value directory initially deferred unbilled accounts receivable established month thereafter onetwelfth billing value recognized revenue billed customers connection spa acquisition record unrecognized revenue directories published prior acquisition january 2003 due purchase accounting acquire associated unbilled receivables rights bill collect receivables totaled approximately 250 million components adding cash provided operating activities include lower bad debts sales claims well improvements collection past due balances • 102 million source cash due cash received partnerships excess recorded partnership income partnership income related cash received 2003 consisted 50 interest dontech’s net income revenue participation income sbc received cash dontech sbc subsequent time record associated partnership income therefore periods declining dontech partnership income cash received related prior periods exceed income recognized current period partially offsetting sources cash following use cash • 320 million increase assets primarily comprised deferred directory costs deferred directory costs represent cash payments certain costs associated publication directories since deferred directory costs initially deferred incurred cash payments made prior expense recognized cash used investing activities 2003 3779 million consists following • 22596 million cash payments acquire spa pay transaction costs • 18943 million decrease restricted cash recorded december 31 2002 amount comprised funds received last quarter 2002 placed escrow pending spa acquisition amount 900 million raised term loan b credit facility 925 million raised notes 693 million net proceeds raised issuance preferred stock gs funds • 126 million used purchase fixed assets primarily computer equipment computer software cash provided financing activities 2003 1293 million includes following • 4613 million net borrowings 500 million term loan credit facility january 3 2003 funds raised credit facility finance spa acquisition refinance existing debt received december 2002 held escrow january 3 2003 • 1257 million net proceeds issuance preferred stock stated value 130 million related warrants gs funds january 3 2003 gs funds invested total stated amount 200 million connection spa acquisition initial investment 70 million made november 2002 • 2430 million principal payments preacquisition debt proceeds credit facility notes preferred stock used january 2003 repay 1142 million variable rate bank debt redeem 1288 9125 senior subordinated notes pursuant tender offer • 3124 million principal payments debt borrowed credit facility amount 494 million represents scheduled principal payments 1935 million represents principal payments made accelerated basis option excess cash flow generated operations • 696 million borrowings revolver • 214 million proceeds exercise employee stock options contractual obligations table presented sets forth annual commitments december 31 2004 principal payments debt well cash obligations next five years thereafter plus 300 million holdco notes issued january 2005 debt repayments presented table include scheduled principal payments current debt agreements include anticipated prepayments interest charges 1 included longterm debt amounts owed credit facility notes weighted average interest rate credit facility 432 december 31 2004 senior notes senior subordinated notes bear interest 8875 10875 respectively holdco notes bear interest 6875 2 enter operating leases normal course business substantially lease agreements fixed payment terms based passage time lease agreements provide us renewal early termination options future operating lease obligations would change exercised renewal early termination options entered additional operating lease agreements amounts table assume exercise renewal early termination options 3 unconditional purchase obligations four vendors regarding purchase paper expire various times december 31 2005 december 31 2006 purchase obligations based annual minimum quantities preestablished pricing amounts table reflect pricing minimum quantities contract market price paper drop preestablished pricing vendor obligated negotiate us lower paper price quantities used contractual minimums would increase payment obligations contractual obligations beyond 2006 connection sbc directory acquisition entered smartpages reseller agreement whereby obligated pay sbc 154 million 5year term agreement 4 defined benefit plan covering substantially employees funding policy contribute amount least equal minimum legal funding requirement contributions required threeyear period ended december 31 2004 based past performance uncertainty dollar amounts paid excluded amounts table unfunded postretirement plan provides certain healthcare life insurance benefits fulltime employees reach retirement age working company expected future benefit payments including administrative expenses net employee contributions included table additionally expect make contributions approximately 10 million retirement postretirement benefit plans 2005 5 connection sbc directory acquisition entered transition services agreement sbc whereby sbc would provide certain ongoing operational services billing collection services behalf relating directory operations acquired third quarter 2005 item 7a quantitative qualitative disclosure market risk interest rate risk management credit facility bears interest variable rates accordingly earnings cash flow affected changes interest rates credit facility requires maintain hedge agreements provide either fixed interest rate interest rate protection least 50 total outstanding debt company entered following interest rate swaps effectively convert variable rate debt fixed rate debt december 31 2004 terms agreements company receives variable interest based threemonth libor pays fixed rate interest 1 consists three swaps 2 consists two swaps 3 consists four swaps based initial terms swap agreements annual cost swap arrangements approximately 210 million actual cost swaps depend variable rate payments received assuming 0125 increase interest rate associated borrowings credit facility giving effect interest rate swaps interest expense would increase 11 million annual basis effect interest rate swap agreements discussed total fixed rate debt comprised approximately 73 total debt portfolio december 31 2004 outstanding interest rate swaps expose us credit risk event counterparties agreements cannot meet obligations notional amount used measure interest paid received represent amount exposure credit loss would limited amount would received remaining life swap agreements counterparties swaps major financial institutions expect counterparties able perform obligations swaps use derivative financial instruments hedging purposes trading speculative purposes discussion accounting policies disclosure relating financial instruments included note 2 audited consolidated financial statements year ended december 31 2004 included item 8item 7a quantitative qualitative disclosure market risk interest rate risk management credit facility bears interest variable rates accordingly earnings cash flow affected changes interest rates credit facility requires maintain hedge agreements provide either fixed interest rate interest rate protection least 50 total outstanding debt company entered following interest rate swaps effectively convert variable rate debt fixed rate debt december 31 2005 terms agreements company receives variable interest based threemonth libor pays fixed rate interest 1 consists three swaps 2 consists four swaps based initial terms swap agreements annual cost swap arrangements approximately 205 million actual cost swaps depend variable rate payments received assuming 0125 increase interest rate associated floating rate borrowings credit facility giving effect interest rate swaps interest expense would increase 08 million annual basis effect interest rate swap agreements discussed total fixed rate debt comprised approximately 784 total debt portfolio december 31 2005 outstanding interest rate swaps expose us credit risk event counterparties agreements cannot meet obligations notional amount used measure interest paid received represent amount exposure credit loss would limited amount would received remaining life swap agreements counterparties swaps major financial institutions expect counterparties able perform obligations swaps use derivative financial instruments hedging purposes trading speculative purposes discussion accounting policies disclosure relating financial instruments included note 2 audited consolidated financial statements year ended december 31 2005 included item 8item 7a quantitative qualitative disclosures market risk interest rate risk management rhdi credit facility dex media west dex media east credit facilities bear interest variable rates accordingly earnings cash flow affected changes interest rates rhdi credit facility requires maintain hedge agreements provide either fixed interest rate interest rate protection least 50 total outstanding debt dex media east dex media west credit facilities require maintain hedge agreements provide fixed rate least 33 respective indebtedness company entered following interest rate swaps effectively convert approximately 75 company’s variable rate debt fixed rate debt december 31 2006 december 31 2006 approximately 39 total debt outstanding consists variable rate debt excluding effect interest rate swaps including effect interest rate swaps total fixed rate debt comprised approximately 90 total debt portfolio december 31 2006 terms agreements company receives variable interest based threemonth libor pays fixed rate interest 1 consists one swap 2 consists two swaps 3 consists three swaps 4 consists four swaps 5 consists five swaps 6 consists six swaps 7 denotes swaps entered dex media east acquired rhd result dex media merger swaps designated cash flow hedges use derivative financial instruments hedging purposes trading speculative purposes using derivative financial instruments hedge exposures changes interest rates company exposes credit risk market risk credit risk possible failure counterparty perform terms derivative contract fair value derivative contract positive counterparty owes company creates credit risk company fair value derivative contract negative company owes counterparty therefore subject credit risk company minimizes credit risk derivative financial instruments entering transactions major financial institutions credit ratings higher market risk adverse effect value financial instrument results change interest rates market risk associated interestrate contracts managed establishing monitoring parameters limit types degree market risk may undertaken notional amount interest rate swaps used measure interest paid received represent amount exposure credit loss assuming 0125 increase interest rate associated floating rate borrowings credit facilities giving effect interest rate swaps interest expense would increase 13 million annual basis please refer note 2 “summary significant accounting policies” note 6 “derivative financial instruments” included item 8item 7a quantitative qualitative disclosure market risk interest rate risk management december 31 rhdi credit facility dex media west dex media east credit facilities bear interest variable rates accordingly earnings cash flow affected changes interest rates dex media west dex media east credit facilities require maintain hedge agreements provide fixed rate least 33 respective indebtedness including indebtedness dex media company entered following interest rate swaps effectively convert approximately 2000 million 6 company’s variable rate debt fixed rate debt december 31 2009 december 31 2009 approximately 37 total debt outstanding consists variable rate debt excluding effect interest rate swaps including effect interest rate swaps total fixed rate debt comprised approximately 65 total debt portfolio december 31 2009 terms agreements company receives variable interest based threemonth libor pays fixed rate interest 1 consists one swap use derivative financial instruments hedging purposes trading speculative purposes using derivative financial instruments hedge exposures changes interest rates company exposes credit risk market risk credit risk possible failure counterparty perform terms derivative contract fair value derivative contract positive counterparty owes company creates credit risk company fair value derivative contract negative company owes counterparty therefore subject credit risk company minimizes credit risk derivative financial instruments entering transactions major financial institutions credit ratings aa higher market risk adverse effect value financial instrument results change interest rates market risk associated interestrate contracts managed establishing monitoring parameters limit types degree market risk may undertaken result filing chapter 11 petitions company interest rate swaps designated cash flow hedges december 31 2009 terms interest rate swap agreements company receives variable interest based threemonth libor pays weighted average fixed rate 34 weighted average variable rate received interest rate swaps 025 december 31 2009 periodic payments receipts recorded interest expense notional amount interest rate swaps used measure interest paid received represent amount exposure credit loss assuming 0125 increase interest rate associated floating rate borrowings credit facilities giving effect interest rate swaps interest expense would increase 42 million annual basis see note 2 “summary significant accounting policies derivative financial instruments hedging activities” note 6 “derivative financial instruments” included item 8item 7a quantitative qualitative disclosure market risk interest rate risk management company’s amended restated credit facilities bear interest variable rates accordingly earnings cash flow affected changes interest rates management believes prudent mitigate interest rate risk portion variable rate borrowings satisfy objectives requirements company entered interest rate swap interest rate cap agreements designated cash flow hedges manage exposure interest rate fluctuations variable rate debt company entered following interest rate swaps effectively convert approximately 5000 million 21 company’s variable rate debt fixed rate debt december 31 2010 since rhdi amended restated credit facility dex media west amended restated credit facility subject libor floor 300 libor rate floor december 31 2010 credit facilities effectively fixed rate debt time libor exceeds stated floor december 31 2010 approximately 89 total debt outstanding consisted variable rate debt excluding effect interest rate swaps including effect interest rate swaps total fixed rate debt comprised approximately 29 total debt portfolio december 31 2010 interest rate swaps mature varying dates february 2012 february 2013 interest rate swaps dex media east terms interest rate swap agreements receive variable interest based threemonth libor pay weighted average fixed rate 15 weighted average rate received interest rate swaps 03 eleven months ended december 31 2010 periodic payments receipts recorded interest expense notional amount interest rate swaps used measure interest paid received represent amount exposure credit loss assuming 0125 increase interest rate associated floating rate borrowings amended restated credit facilities giving effect interest rate swaps interest expense would increase 24 million annual basis terms interest rate cap agreements company receive payments based spread rates threemonth libor rate increases cap rates noted table company paid 21 million interest rate cap agreements entered first quarter 2010 required make future payments related interest rate cap agreements interest rate caps rhdi use derivative financial instruments cash flow hedging purposes trading speculative purposes using derivative financial instruments hedge exposures changes interest rates company exposes credit risk market risk credit risk possible failure counterparty perform terms derivative contract fair value derivative contract positive counterparty owes company creates credit risk company fair value derivative contract negative company owes counterparty therefore subject credit risk company minimizes credit risk derivative financial instruments entering transactions major financial institutions credit ratings aa higher equivalent dependent upon credit rating agency market risk adverse effect value financial instrument results change interest rates market risk associated interestrate contracts managed establishing monitoring parameters limit types degree market risk may undertaken see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies derivative financial instruments hedging activities” note 7 “derivative financial instruments” additional information regarding derivative financial instruments hedging activities market risk sensitive instruments derivative financial instruments recognized either assets liabilities consolidated balance sheets measurement fair value quarterly basis fair values interest rate swaps interest rate caps determined based quoted market prices derivative instruments designated cash flow hedges initial fair value subsequent gains losses change fair value interest rate swaps interest rate caps reported earnings component interest expense gains losses related quarterly fair value adjustments presented operating activity consolidated statements cash flows see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies interest expense deferred financing costs” information impact interest rate swaps interest rate caps interest expense derivative instruments designated cash flow hedges determined provide effective hedge differences fair value book value derivative instruments recognized accumulated comprehensive income loss component shareholders’ equity deficit item 8item 7a quantitative qualitative disclosure market risk interest rate risk management company’s amended restated credit facilities bear interest variable rates accordingly earnings cash flow affected changes interest rates management believes prudent mitigate interest rate risk portion variable rate borrowings satisfy objectives requirements company entered interest rate swap interest rate cap agreements designated cash flow hedges manage exposure interest rate fluctuations variable rate debt company entered following interest rate swaps effectively convert 5000 million approximately 23 company’s variable rate debt fixed rate debt december 31 2011 since rhdi amended restated credit facility dex media west amended restated credit facility subject libor floor 300 libor rate floor december 31 2011 credit facilities effectively fixed rate debt time libor exceeds stated floor december 31 2011 approximately 88 total debt outstanding consisted variable rate debt excluding effect interest rate swaps including effect interest rate swaps total fixed rate debt comprised approximately 32 total debt portfolio december 31 2011 interest rate swaps mature varying dates february 2012 february 2013 interest rate swaps dex media east terms interest rate swap agreements receive variable interest based threemonth libor pay weighted average fixed rate 15 weighted average rate received interest rate swaps 05 year ended december 31 2011 periodic payments receipts recorded interest expense notional amount interest rate swaps used measure interest paid received represent amount exposure credit loss assuming 0125 increase interest rate associated floating rate borrowings amended restated credit facilities giving effect interest rate swaps interest expense would increase 21 million annual basis terms interest rate cap agreements company receive payments based spread rates threemonth libor rate increases cap rates noted table company paid 21 million interest rate cap agreements entered first quarter 2010 required make future payments related interest rate cap agreements interest rate caps rhdi 1 consists one swap 2 consists three swaps 3 consists two caps 4 consists one cap use derivative financial instruments economic hedging purposes trading speculative purposes using derivative financial instruments hedge exposures changes interest rates company exposes credit risk market risk credit risk possible failure counterparty perform terms derivative contract fair value derivative contract positive counterparty owes company creates credit risk company fair value derivative contract negative company owes counterparty therefore subject credit risk company minimizes credit risk derivative financial instruments entering transactions major financial institutions credit ratings aa higher equivalent dependent upon credit rating agency market risk adverse effect value financial instrument results change interest rates market risk associated interestrate contracts managed establishing monitoring parameters limit types degree market risk may undertaken see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies derivative financial instruments hedging activities” note 6 “derivative financial instruments” additional information regarding derivative financial instruments hedging activities market risk sensitive instruments derivative financial instruments recognized either assets liabilities consolidated balance sheets measurement fair value quarterly basis fair values interest rate swaps interest rate caps determined based quoted market prices derivative instruments designated cash flow hedges initial fair value subsequent gains losses change fair value interest rate swaps interest rate caps reported earnings component interest expense gains losses related quarterly fair value adjustments presented operating activity consolidated statements cash flows see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies interest expense deferred financing costs” information impact interest rate swaps interest rate caps interest expense derivative instruments designated cash flow hedges determined provide effective hedge differences fair value book value derivative instruments recognized accumulated comprehensive income loss component shareholders equity deficit item 8item 7a quantitative qualitative disclosure market risk interest rate risk management company’s credit facilities bear interest variable rates accordingly earnings cash flow affected changes interest rates management believes prudent mitigate interest rate risk portion variable rate borrowings satisfy objectives requirements company entered interest rate swap interest rate cap agreements designated cash flow hedges manage exposure interest rate fluctuations variable rate debt company entered following interest rate swaps effectively convert 3000 million approximately 17 company’s variable rate debt fixed rate debt december 31 2012 since rhdi amended restated credit facility dex media west amended restated credit facility subject libor floor 300 libor rate floor december 31 2012 credit facilities effectively fixed rate debt time libor exceeds stated floor december 31 2012 approximately 89 total debt outstanding consisted variable rate debt excluding effect interest rate swaps including effect interest rate swaps total fixed rate debt comprised approximately 26 total debt portfolio december 31 2012 interest rate swaps dex media east 1 consists one swap terms interest rate swap agreements receive variable interest based threemonth libor pay weighted average fixed rate 17 weighted average rate received interest rate swaps 03 year ended december 31 2012 periodic payments receipts recorded interest expense terms interest rate cap agreements company receive payments based spread rates threemonth libor rate increases cap rates noted table company paid 21 million interest rate cap agreements entered first quarter 2010 required make future payments related interest rate cap agreements interest rate caps rhdi 2 consists one cap use derivative financial instruments economic hedging purposes trading speculative purposes using derivative financial instruments hedge exposures changes interest rates company exposes credit risk market risk credit risk possible failure counterparty perform terms derivative contract fair value derivative contract positive counterparty owes company creates credit risk company fair value derivative contract negative company owes counterparty therefore subject credit risk company minimizes credit risk derivative financial instruments entering transactions major financial institutions credit ratings higher equivalent dependent upon credit rating agency market risk adverse effect value financial instrument results change interest rates market risk associated interestrate contracts managed establishing monitoring parameters limit types degree market risk may undertaken see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies derivative financial instruments hedging activities” note 6 “derivative financial instruments” additional information regarding derivative financial instruments hedging activities market risk sensitive instruments derivative financial instruments recognized either assets liabilities consolidated balance sheets measurement fair value quarterly basis fair values interest rate swaps interest rate caps determined based observable inputs derivative instruments designated cash flow hedges initial fair value subsequent gains losses change fair value interest rate swaps interest rate caps reported earnings component interest expense gains losses related quarterly fair value adjustments presented noncash operating activity consolidated statements cash flows see item 8 “financial statements supplementary data” note 2 “summary significant accounting policies interest expense deferred financing costs” information impact interest rate swaps interest rate caps interest expense item 8item 7a quantitative qualitative disclosure market risk interest rate risk management rhdi credit facility dex media west new dex media east credit facilities bear interest variable rates accordingly earnings cash flow affected changes interest rates rhdi credit facility requires maintain hedge agreements provide either fixed interest rate interest rate protection least 50 rhdi’s total outstanding debt dex media west new dex media east credit facilities require maintain hedge agreements provide fixed rate least 33 respective indebtedness company entered following interest rate swaps effectively convert approximately 26 billion 69 company’s variable rate debt fixed rate debt december 31 2007 december 31 2007 approximately 37 total debt outstanding consists variable rate debt excluding effect interest rate swaps including effect interest rate swaps total fixed rate debt comprised approximately 89 total debt portfolio december 31 2007 terms agreements company receives variable interest based threemonth libor pays fixed rate interest 1 consists one swap 2 consists two swaps 3 consists three swaps 4 consists four swaps use derivative financial instruments hedging purposes trading speculative purposes using derivative financial instruments hedge exposures changes interest rates company exposes credit risk market risk credit risk possible failure counterparty perform terms derivative contract fair value derivative contract positive counterparty owes company creates credit risk company fair value derivative contract negative company owes counterparty therefore subject credit risk company minimizes credit risk derivative financial instruments entering transactions major financial institutions credit ratings aa higher market risk adverse effect value financial instrument results change interest rates market risk associated interestrate contracts managed establishing monitoring parameters limit types degree market risk may undertaken interest rate swaps notional value 26 billion designated cash flow hedges hedge threemonth liborbased interest payments 26 billion bank debt december 31 2007 respective interest rate swaps provided effective hedge threemonth liborbased interest payments 26 billion bank debt notional amount interest rate swaps used measure interest paid received represent amount exposure credit loss assuming 0125 increase interest rate associated floating rate borrowings credit facilities giving effect interest rate swaps interest expense would increase 14 million annual basis please refer note 2 “summary significant accounting policies” note 6 “derivative financial instruments” included item 8item 7a quantitative qualitative disclosure market risk interest rate risk management rhdi credit facility new dex media west dex media east credit facilities bear interest variable rates accordingly earnings cash flow affected changes interest rates rhdi credit facility required maintain hedge agreements provide either fixed interest rate interest rate protection least 50 rhdi’s total outstanding debt requirement expired december 31 2008 new dex media west dex media east credit facilities require maintain hedge agreements provide fixed rate least 33 respective indebtedness company entered following interest rate swaps effectively convert approximately 24 billion 69 company’s variable rate debt fixed rate debt december 31 2008 december 31 2008 approximately 36 total debt outstanding consists variable rate debt excluding effect interest rate swaps including effect interest rate swaps total fixed rate debt comprised approximately 89 total debt portfolio december 31 2008 terms agreements company receives variable interest based threemonth libor pays fixed rate interest 1 consists one swap 2 consists two swaps 3 consists three swaps 4 consists four swaps use derivative financial instruments hedging purposes trading speculative purposes using derivative financial instruments hedge exposures changes interest rates company exposes credit risk market risk credit risk possible failure counterparty perform terms derivative contract fair value derivative contract positive counterparty owes company creates credit risk company fair value derivative contract negative company owes counterparty therefore subject credit risk company minimizes credit risk derivative financial instruments entering transactions major financial institutions credit ratings aa higher market risk adverse effect value financial instrument results change interest rates market risk associated interestrate contracts managed establishing monitoring parameters limit types degree market risk may undertaken interest rate swaps notional value 8500 million designated cash flow hedges hedge threemonth liborbased interest payments 8500 million bank debt december 31 2008 respective interest rate swaps provided effective hedge threemonth liborbased interest payments 8500 million bank debt notional amount interest rate swaps used measure interest paid received represent amount exposure credit loss assuming 0125 increase interest rate associated floating rate borrowings credit facilities giving effect interest rate swaps interest expense would increase 14 million annual basis see note 2 “summary significant accounting policies” note 6 “derivative financial instruments” included item 8 item 8financial statements supplementary data see index financial statements schedules item 14 page 19 item 9item 8 financial statements supplementary data see index financial statements schedules item 14 page 18 item 9item 8 financial statements supplementary data see index financial statements schedules item 14 page 19 item 9item 8 financial statements supplementary data see index financial statements schedules item 14 page 15 item 9item 8 financial statements supplementary data see index financial statements schedules page 14 item 9item 8 financial statements supplementary data report independent accountants board directors shareholders rh donnelley corporation opinion accompanying consolidated balance sheets related consolidated statements operations shareholders equity deficit cash flows present fairly material respects financial position rh donnelley corporation company subsidiary december 31 1998 1997 results operations cash flows three years period ended december 31 1998 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp new york new york february 19 1999 rh donnelley corporation consolidated statements operations accompanying notes integral part financial statements rh donnelley corporation consolidated balance sheets accompanying notes integral part financial statements rh donnelley corporation consolidated statements cash flows accompanying notes integral part financial statements rh donnelley corporation consolidated statements changes shareholders equity deficit accompanying notes integral part financial statements rh donnelley corporation notes consolidated financial statements thousands except share data unless otherwise noted 1 description business basis presentation rh donnelley corporation company provides advertising sales marketing services yellow pages directory products longterm sales agency agreements joint venture partnerships operating units major telephone companies well independent operations company sales agent new york state operating unit bell atlantic florida operating unit sprint also serves sales agent cendon partnership cendon 5050 partnership company operating unit sprint formed publish directories florida nevada virginia north carolina company also 5050 partnership dontech operating unit ameritech corporation acts exclusive sales agent yellow pages directories published ameritech illinois northwest indiana companys independent operations located cincinnati ohio company also provides prepress publishing services yellow pages directories including advertisement creation sales contract management listing database management sales reporting commissions pagination billing services imaging yellow pages publishers existing customers separately negotiated contracts prior july 1 1998 company operated part dun bradstreet corporation old db december 17 1997 board directors old db approved principle plan separate two publicly traded companies rh donnelley corporation new dun bradstreet corporation new db distribution method old db distributed shareholders shares new db common stock july 1 1998 part distribution old db distributed shareholders shares new db stock connection distribution old db changed name rh donnelley corporation distribution companys operating subsidiary rh donnelley inc donnelley therefore consolidated basis financial statements company donnelley substantially identical financial statements reflect financial position results operations cash flows company separate entity periods presented old db provided certain centralized services company cost allocated company management believes allocations reasonable however costs services necessarily indicative costs would incurred company performed provided services separate entity allocations 11570 six months ended june 30 1998 21531 18626 years ended 1997 1996 respectively included operating expenses general administrative expenses consolidated statements operations company retained assets liabilities related yellow pages directory product sales marketing publishing service businesses distribution well allocation certain old db corporate headquarters assets liabilities relating companys businesses management believes allocations reasonable financial information included herein may necessarily reflect results operations financial position changes shareholders equity cash flows company future would company separate standalone entity periods presented connection distribution donnelley entered credit agreement chase manhattan bank lenders party thereto terms agreement donnelley obtained senior revolving credit facility 100000 senior secured term facilities aggregate amount 300000 donnelley initially borrowed 350000 addition donnelley issued 150000 senior subordinated notes aggregate 500000 dividended old db repayment indebtedness remains obligation donnelley guaranteed company net distributions old db include net cash transfers third party liabilities paid behalf company old db amounts due tofrom old db services charges interest charged intercompany transactions rh donnelley corporation notes consolidated financial statements continued purposes governing certain ongoing relationships company new db distribution provide orderly transition company new db entered various agreements including distribution agreement tax allocation agreement employee benefits agreement shared transaction services agreement intellectual property agreement data services agreement transition services agreement 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company wholly owned subsidiary intercompany transactions balances eliminated investments companys 50 less owned partnerships accounted equity method accounting companys share partnerships operating results reflected income partnerships related fees related fees represent revenue participation earnings operating unit ameritech corporation ameritech see note 4 revenue recognition company recognizes revenue earned based contractual relationships agreements company sales agent revenue comprised sales commissions recognized upon execution contracts sale advertising businesses company publisher revenues recognized directories published revenues publishing services recognized straightline basis throughout year services performed cash equivalents cash equivalents include highly liquid investments maturity less three months time acquisition unbilled receivables agreements company sales agent unbilled receivables represent revenues earned sale advertising directories scheduled published publisher receivables billed publisher upon directory publication accordance contractual provisions businesses company publisher unbilled receivables represent revenues earned published directories cases advertisers billed ratably life directories generally 12 months deferred contract costs direct costs incurred company publisher deferred related directory published direct costs incurred company sales agent expensed period incurred property equipment property equipment recorded cost depreciation provided estimated useful lives depreciable assets using straightline method estimated useful lives five years machinery equipment ten years furniture fixtures three five years computer equipment leasehold improvements amortized straightline basis shorter term lease estimated useful life improvement capitalized software costs certain direct costs incurred computer software meet needs company customers capitalized costs amortized straightline basis five years march 1998 accounting standards executive committee aicpa issued statement position sop 981 accounting costs computer software developed obtained internal use sop requires capitalization certain costs incurred connection developing obtaining software internal use effective fiscal years beginning december 15 1998 companys existing accounting policy compliance requirements sop longlived assets company adopted provisions statement financial accounting standards sfas 121 accounting impairment longlived assets longlived assets disposed statement requires longlived assets certain identifiable intangibles held used entity reviewed impairment whenever events changes circumstances indicate rh donnelley corporation notes consolidated financial statements continued carrying amount asset may recoverable general impairment loss would recognized sum undiscounted expected future cash flows less carrying amount assets measurement impairment loss based fair value asset income taxes company accounts income taxes liability method accordance sfas 109 accounting income taxes prior distribution company included federal certain state income tax returns old db provision income taxes three years ended december 31 1998 1997 1996 calculated separatecompany basis income taxes paid behalf company june 30 1998 old db included equity concentration credit risk company maintains significant accounts receivable balances agreements operating units ameritech bell atlantic sprint company establishes allowance doubtful accounts based expected collectibility accounts receivable advertisers principally historical trends company currently foresee credit risk associated receivables due high credit ratings counterparties comprehensive income effective january 1 1998 company adopted sfas 130 reporting comprehensive income statement requires items recognized accounting standards components comprehensive earnings reported financial statement period recognized displayed prominence financial statements additional components comprehensive income result companys total comprehensive income periods presented equal net income derivative financial instruments company uses interest rate swap contracts manage market risk reduce exposure fluctuations interest rates variable rate debt periodic payments receipts interest rate swaps recorded part interest expense related amounts payable receivable counterparty included accrued current liabilities current assets fair value interest rate swaps recognized consolidated financial statements accounted hedges interest rate swaps cease qualify hedge subsequent gains losses recognized currently income company subject credit risk event nonperformance counterparty interest rate swap agreements however company anticipate nonperformance counterparty company use derivative financial instruments trading speculative purposes june 1998 financial accounting standards board issued statement 133 accounting derivative instruments hedging activities required adopted years beginning june 15 1999 companys limited use derivatives management anticipate adoption new statement significant effect earnings financial position company earnings per share common stock basic earnings per share calculated dividing net income weighted average common shares outstanding year diluted earnings per share calculated dividing net income weighted average common shares outstanding potentially dilutive common shares primarily employee stock options potentially dilutive common shares calculated accordance treasury stock method assumes proceeds exercise employee options used repurchase common stock market value amount shares remaining proceeds exhausted represent number potentially dilutive options table provides reconciliation basic weighted average shares outstanding dilutive weighted average shares outstanding december 31 1998 options purchase 2026740 shares common stock included computation diluted earnings per share effect would antidilutive rh donnelley corporation notes consolidated financial statements continued 1998 company executed oneforfive split outstanding common stock share per share data provided herein adjusted reflect reverse stock split estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities revenues expenses disclosure contingent assets liabilities actual results could differ estimates used determination allowances bad debts depreciation amortization employee benefit plans among others reclassifications 1998 company reclassified certain expenses related sale advertising historically included general administrative expenses operating expenses better measure contribution operating unit facilitate decision making resource allocation costs reclassified general administrative operating expenses consolidated statements operations result general administrative costs 33040 34629 reclassified operating expenses 1997 1996 respectively addition certain prior year amounts restated conform 1998 presentation reclassifications impact previously reported results operations shareholders equity 3 nonrecurring items postdistribution adjustments asset liability amounts allocated company old db pursuant distribution agreement based preliminary estimates subject revision based final determinations amounts accordingly adjustments made reflect approximately 136 million additional deferred tax liabilities decrease benefit liabilities originally assumed approximately 81 million adjustments reflected adjustment equity impact consolidated statements operations sale businesses 1997 operating results include pretax gain 9412 related sale proprietaryeast business peast connection sale peast business company maintained continuing obligation provide publishing services year 2002 acquirer obligation adequately provided financial statements 1996 results reflect pretax charge 28500 incurred result sale proprietarywest business pwest 4 partnerships dontech 1991 company formed general partnership operating unit ameritech dontech partnership dontech prior august 1997 dontech published various directories solicited advertising manufactured delivered directories illinois northwest indiana agreement companys share profits dontech 54 1996 53 1997 august 1997 company signed series agreements ameritech changing structure existing partnership new partnership formed dontech appointing dontech exclusive sales rh donnelley corporation notes consolidated financial statements continued agent perpetuity yellow pages directories published ameritech illinois northwest indiana new sales agency partnership dontech performs advertising sales function directories earns commission ameritech serves publisher company 50 interest profits dontech company also receives direct fees revenue participation operating unit ameritech tied advertising sales company recognized equity earnings including revenue participation 120087 116228 121354 dontech partnership 1998 1997 1996 respectively companys investment dontech 198848 203589 december 31 1998 1997 respectively revenue participation receivable ameritech included companys total investment 100748 december 31 1998 51610 december 31 1997 cendon company 50 interest profits cendon company recognized equity earnings 15767 12219 9695 cendon 1998 1997 1996 respectively companys investment cendon 17634 15031 december 31 1998 1997 respectively cendon agreement extends end december 2004 company also provides sales publishing services cendon partnership billed upon publication directory based contractual rate sales billed pro rata year publishing services based contractual fee sales commissions publishing services revenue company 32560 35126 32258 1998 1997 1996 respectively 5 property equipment property equipment december 31 1998 1997 consisted following 6 computer software computer software costs capitalized december 31 1998 1997 consisted following amortization expense charged earnings 10017 1998 9789 1997 rh donnelley corporation notes consolidated financial statements continued 7 longterm debt credit facilities longterm debt december 31 1998 consisted following longterm debt incurred june 5 1998 connection distribution accordingly longterm debt outstanding december 31 1997 connection issuance longterm debt company incurred deferred financing costs 9592 amortized term debt 1998 793 amortized included interest expense senior subordinated notes pay interest semiannually mature 2008 notes indenture contains covenants among things restricts ability company subsidiary incur certain additional debt liens engage mergers consolidations asset sales notes callable option company time june 1 2003 companys committed bank facilities consist aggregate 300000 senior secured term facilities term facilities 100000 senior revolving credit facility revolver term facilities require quarterly principal repayments mature june 2004 december 2006 revolver matures june 2004 facilities bear interest floating rate based spread london interbank offered rate libor greater either prime rate fed funds rate plus 50 basis points election company committed facilities contain covenants among things restrict ability company subsidiary engage mergers consolidations asset sales incur additional indebtedness liens require company maintain certain financial ratios december 31 1998 company 318625 outstanding debt term facilities revolver weighted average interest rate 71 per annum december 31 1998 company available borrowing capacity 80250 revolver aggregate maturities longterm debt december 31 1998 interest payable 11392 recorded financial statements component accrued current liabilities cash interest paid period ended december 31 1998 totaled 15866 rh donnelley corporation notes consolidated financial statements continued 8 commitments contingencies company leases office facilities computer equipment operating leases terms expiring various dates 2011 rent expense real estate operating leases years 1998 1997 1996 6948 8612 9482 respectively lease expense computer equipment leases 2032 2245 1762 1998 1997 1996 respectively approximate minimum rental payments applicable noncancelable operating leases december 31 1998 company entered joint venture china united telecommunications corporation china unicom teleway communications limited publish yellow pages directories offer internet directory services peoples republic china terms joint venture agreement company invest cash approximately 156 million acquire 15 equity interest joint venture 1998 company invested 13 million make additional contributions totaling 143 million next two three years company anticipates contributing approximately 80 million 1999 38 million 2000 25 million 2001 july 29 1996 information resources inc iri filed complaint united states district court southern district new york naming defendant old db acnielsen company ims international inc iri action complaint alleges among things various violations antitrust laws seeks damages excess 350 million iri seeking trebled antitrust laws iri also seeks punitive damages unspecified amount distribution agreement new db assume defense indemnify company payments made company donnelley respect iri action indemnity joint defense agreement otherwise including ongoing legal fees expenses related thereto certain tax planning strategies entered old db currently subject review tax authorities internal revenue service irs currently reviewing old dbs utilization certain capital losses 1989 1990 irs issued formal assessment respect transactions irs assessed companies entered similar types transactions assessment made irs prevail total cash obligation irs december 31 1998 would approximate 500 million taxes accrued interest pursuant series agreements ims health incorporated ims nielsen media research inc nmr former subsidiaries old db jointly severally liable pay 50 old db liable remaining 50 payments taxes accrued interest arising matter certain potential tax liabilities old db pays first 137 million explained result form distribution company legal entity taxpayer referred herein old db however new db pursuant terms distribution agreement tax allocation agreement executed connection distribution assumed indemnify company donnelley payments made company donnelley respect tax liability may assessed costs expenses relating thereto including ongoing legal fees accordingly management believes tax liabilities costs expenses relating thereto impact consolidated rh donnelley corporation notes consolidated financial statements continued financial position company management believes new db ims nmr sufficient financial resources satisfy liabilities reimburse company costs expenses relating thereto matters described company donnelley involved legal proceedings claims litigation arising ordinary conduct business although assurances companys management believes outcome legal proceedings material adverse affect companys financial position results operations cash flows 9 pension postretirement benefits prior distribution substantially employees company donnelley eligible participate old dbs defined benefit defined contribution pension plans accounted multiemployer plans accordingly company recorded pension costs allocated old db relating defined benefit plan totaling 1121 six months ended june 30 1998 996 1997 1082 1996 allocated costs relating defined contribution plan 818 six months ended june 30 1998 2243 1997 2268 1996 addition providing pension benefits old db provided certain health care life insurance benefits retired employees company donnelley company accounted plan multiemployer plan accordingly company recorded postretirement benefits costs allocated old db totaling 893 six months ended june 30 1998 1724 1997 1873 1996 subsequent distribution company assumed responsibility pension benefits active employees company donnelley vested benefits old db retirement plan responsibility donnelley retirees vested terminated employees prior distribution remain new db company assumed responsibility postretirement benefits active employees donnelley allocation assets liabilities related active employee benefits included financial statements description companys benefit plans follows pension company defined benefit plan covering substantially employees benefits paid employees based years service percentage total annual compensation percentage compensation allocated retirement account ranges 30 125 depending age years service pension costs determined actuarially due overfunded status plan company formally adopted funding policy december 31 1998 underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities company also two unfunded nonqualified defined benefit plans pension benefit equalization plan pbep supplemental executive benefit plan sebp senior executives certain key employees entitled participate plans provide retirement benefits based years service compensation including compensation permitted taken account previously mentioned defined benefit plan company also maintains defined contribution plan substantially employees contributions plan generally determined based percentage eligible employees salary company makes matching contribution 50 cents dollar contributed 6 participating employees salary cost plan company six months ended december 31 1998 808 postretirement benefits addition companys defined benefit defined contribution plans company sponsors unfunded defined benefit postretirement plan provides certain health care life insurance benefits fulltime employees reach normal retirement age working company donnelley rh donnelley corporation notes consolidated financial statements continued summary funded status benefit plans december 31 1998 follows measurement purposes 65 annual rate increase per capita cost covered healthcare benefits assumed 1999 rate assumed decrease gradually 50 2021 remain level thereafter assumed health care cost trend rates significant effect amounts reported rh donnelley corporation notes consolidated financial statements continued health care plans one percentage point change assumed health care cost trend rates would following effects 10 employee stock option plans sfas 123 accounting stockbased compensation requires companies stockbased compensation plans either recognize compensation expense based fair value options granted continue apply existing accounting rules disclose pro forma net income earnings per share assuming fair value method applied company chosen continue applying accounting principles board opinion 25 related interpretations accounting plans accordingly compensation cost recognized fixed stock option plans following table reflects pro forma net income earnings per share assuming fair value method applied accordance sfas 123 proforma disclosures shown representative effects income earnings per share future years fair value stock options used compute companys pro forma income disclosures estimated present value grant date using blackscholes optionpricing model following weighted average assumptions terms old db 1982 key employees stock option plan 1991 key employees stock option plan amended collectively stock option plans certain key employees company eligible receive stock options stock appreciation rights limited stock appreciation rights tandem stock options immediately distribution plans amended adopted company outstanding awards stock option plans held company employees adjusted ratio exercise price per option market value per share aggregate difference market value exercised price vesting provisions option periods terms conditions applicable prior distribution rh donnelley corporation notes consolidated financial statements continued vesting period awards stock option plans determined board date grant options may granted less fair market value companys common stock date grant may expire ten years grant date december 31 1998 1997 1996 options 1456610 shares 121291 shares 115188 shares common stock respectively exercisable options 4272093 shares 290039 shares 848154 shares available future grants stock option plans december 31 1998 1997 1996 respectively changes stock options three years ended december 31 1998 summarized follows weighted average fair value options granted 1998 1997 1996 491 2770 1800 respectively information prepared based historical old db prices giving retroactive effect reverse oneforfive stock split august 1998 options outstanding june 30 1998 converted july 1 1998 give effect distribution rh donnelley corporation notes consolidated financial statements continued following table summarizes information stock options outstanding december 31 1998 board directors adopted 1998 directors stock option plan terms plan nonemployee directors receive annual award 1500 shares restricted common stock options purchase 1500 shares companys common stock additionally nonemployee directors receive 1500 shares restricted common stock upon election board shares vest equally three year period company reserved 150000 shares common stock issuance plan year company granted 17677 stock options restricted shares december 31 1998 132323 shares remain available future issuance 11 income taxes provision income taxes consisted following table summarizes significant differences us federal statutory tax rate companys effective tax rate financial statement purposes rh donnelley corporation notes consolidated financial statements continued deferred tax assets liabilities consisted following december 31 federal state income taxes paid cash six months ended december 31 1998 16362 12 financial instruments companys financial instruments consists cash equivalents accounts receivables longterm debt including current maturities carrying amount cash equivalents accounts receivables reported consolidated balance sheet approximates fair value due shortterm nature instruments longterm debt consists borrowings committed bank facilities notes carrying amount companys borrowings committed bank facilities december 31 1998 318625 approximates fair value obligations bear interest floating rates carrying amount notes december 31 1998 150000 fair value 157875 fair value determined based quoted market prices similar debt instruments company enters interest rate swap agreements manage market risk reduce exposure fluctuations interest rates variable rate debt interest rate swaps allow company raise funds floating rates effectively swap fixed rates lower available fixedrate borrowings made directly agreements involve exchange floatingrate fixedrate payments without exchange underlying principal amount december 31 1998 company outstanding interest rate swaps notional value 175000 swap contracts expire june 2001 june 2003 fixedrate payments rates ranging 586 590 floatingrate payments received based rates tied prevailing shortterm interest rates december 31 1998 average pay rate outstanding interest rate swaps 588 average receive rate 531 periodic payments receipts interest rate swaps recorded part interest expense company terminates swap agreement gain loss amortized shorter remaining original life debt swap december 31 1998 unrealized fair value interest rate swaps loss 3582 rh donnelley corporation notes consolidated financial statements continued 13 business segments company provides advertising sales marketing services yellow pages directory products longterm sales agency agreements joint venture partnerships operating units major telephone companies independent operations company also provides publishing production services yellow pages directories companys reportable operating segments directory advertising services dontech partnership directory publishing services dontech partnership viewed separate reportable operating segment company since among factors employees dontech including officers managers employees company essentially companys operations conducted united states company evaluates performance operating segments allocates resources based operating income factors operating income reportable segments except dontech includes costs directly incurred business unit plus allocation certain shared operating general administrative expenses based estimated business usage interest expense income tax expense nonoperating income expenses allocated operating segments information operating segment years ended december 31 1998 1997 1996 presented rh donnelley corporation notes consolidated financial statements continued 1 advertising sales represents billing value advertisements sold company dontech management reviews performance operating segments among things advertising sales generated calendar cycle publication cycle basis calendar cycle advertising sales represent billing value advertisements sold stated basis revenue recognized consolidated financial statements sales contract signed company sales agent directory published company publisher advertising sales publication cycle basis represent billing value advertisements sold based directory published regardless companys role recognition revenue consolidated financial statements 2 reconciling items represent publishing services revenue charged internal businesses based costs incurred revenues eliminated consolidated financial statements 3 ebitda represents earnings interest taxes depreciation amortization directory advertising services segment information includes data relating peast pwest businesses sold 1997 1996 respectively amounts related businesses follows operating loss column represents general administrative expenses activities allocated business units total assets included column represent assets allocated business units cash equivalents prepaid expenses deferred financing costs property equipment company two major customers within directory advertising services segment derives significant portion total revenues one major customers 50 total revenues 1998 36 1997 36 1996 revenues major customer 25 total revenues 1998 16 1997 13 1996 rh donnelley corporation notes consolidated financial statements continued 14 valuation qualifying accounts 1 includes accounts written amounts related businesses sold year amount allowance doubtful accounts related businesses sold 1997 1996 6658 6432 respectively 15 quarterly information unaudited 1997 quarterly results affected imbalance publication dates various directories dontech markets majority directories published fourth quarter end 1998 dontech rescheduled publication directories markets evenly distribute publication dates throughout year result company anticipates quarterly results line 1998 trends report independent accountants board directors partners dontech ii opinion accompanying combined balance sheets related combined statements operations partners capital cash flows present fairly material respects combined financial position amdon business dontech hereafter referred dontech ii partnership dontech ii december 31 1998 1997 combined results operations cash flows three years period ended december 31 1998 conformity generally accepted accounting principles financial statements responsibility management dontech ii responsibility express opinion combined financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp chicago illinois january 8 1999 dontech combined statements operations accompanying notes integral part financial statements dontech combined balance sheets accompanying notes integral part financial statements dontech combined statements cash flows accompanying notes integral part financial statements dontech combined statements partners capital accompanying notes integral part financial statements dontech notes combined financial statements amounts thousands 1 form organization nature business amdon dba dontech general partnership rh donnelley inc formerly known reuben h donnelley corporation rh donnelley delaware corporation ameritech publishing illinois inc apiil illinois corporation business ameritech advertising services aas new structure defined master agreement dated august 19 1997 existing partnership defined dontech concurrently apiil r h donnelley formed new partnership defined dontech ii dontech participated directory agreement rh donnelley illinois bell telephone company ibt business ameritech illinois apiil aas dontech also participated subcontracting agreement ameritech publishing inc api perform certain apis obligations publishing services contract api indiana bell telephone company incorporated indiana bell business ameritech indiana dontech published various directories identified directory agreements solicited advertising primary source revenues manufactured delivered directories dontech net income allocated partner based predefined percentage set forth amended partnership agreement accordance second amended restated amdon partnership agreement effective august 19 1997 dontech partnership ceased publishing directories january 1 1998 partnership recognize deferred revenue expenses recorded december 31 1997 remaining life directories published prior january 1 1998 upon completion earning process partnership thereafter wind accordance agreement august 1997 rh donnelley apiil reached agreement regarding revised partnership structure new dontech partnership became exclusive sales agent perpetuity yellow pages directories published api illinois northwest indiana new partnership known dontech ii receives 27 commission sales net provisions capped 61 dontech iis cost structure includes principally sales operations office services finance facilities related overhead dontech ii profits shared equally partners board directors board appointed administer activities partnership time term partnership board may call additional capital contributions equal amounts partners opinion board additional capital required operation partnership accompanying financial statements dontech ii shown combined basis dontech ii formed august 1997 combined statements operations three years period ended december 31 1998 include results operations dontech ii period august 1997 december 1998 significant affiliated accounts transactions eliminated preparation combined financial statements 2 significant accounting policies cash equivalents cash equivalents include highly liquid investments initial maturity date three months less carrying value cash equivalents approximates fair value due shortterm nature revenue recognition substantially dontech sales made customers cities covered directories recorded deferred sales revenue accounts receivable month publication revenue related sales recognized lives directories generally twelve months sales made customers outside cities covered directories recognized quarter sales national dontech notes combined financial statements continued accounts recognized full month publication dontech ii revenue comprised sales commissions recognized upon execution contracts sale advertising fixed assets fixed assets recorded cost depreciated straightline basis estimated useful lives assets upon asset retirement disposition cost related accumulated depreciation removed accounts gain loss included statement operations amounts incurred repairs maintenance charged operations deferred expenses printing manufacturing compilation sales delivery administrative costs dontech publications deferred recognized proportion revenue postretirement benefits pensions partnership obligated provide postretirement benefits consisting mainly life health insurance substantially employees dependents accrual method accounting utilized postretirement health care life insurance benefits income taxes provision income taxes made proportional share partnerships income responsibility individual partners reclassifications certain reclassifications made 1997 financial statements conform 1998 presentation reclassifications impact previously reported net income partners capital 3 deferred expenses deferred expenses consist following december 31 4 fixed assets fixed assets consist following december 31 dontech notes combined financial statements continued 5 related party transactions dontech directory agreement dontech obligated pay illinois bell telephone ibt minimum 75000 per year exchange billing collection services performed ibt base fee services 75000 calendar year directory agreement terminated terms revised partnership agreement responsibility payment fees transferred ameritech effective january 1 1998 addition base fee dontech agreed pay ibt amount equal 7 12 increase total revenue received certain sources identified directory agreement revenues received immediately preceding calendar year additional fee due ibt 1800 1100 1997 1996 respectively ibt also provided directory operations services white page compilation dontech paid approximately 2000 ibt 1997 1996 services however effective january 1 1998 terms revised partnership agreement cost services became responsibility ameritech 1997 1996 rh donnelley provided compilation photocomposition data processing services dontech addition dun bradstreet corporation rh donnelley wholly owned subsidiary provided employee benefits administrative services certain business insurance coverages partnership amount paid services determined beginning year based upon estimated activity adjusted actual end year total amount paid services approximately 20500 22000 1997 1996 respectively amount paid employee benefits includes administration partnerships profit sharing 401k plans well health care long short term disability dental pension plans effective june 1 1997 dontech became selfinsured health care long short term disability dental plans time terminated coverages plans dun bradstreet dontech also entered subcontracting agreements publishing certain indiana bell directories first four months 1997 directory fulfillment memorandum understanding dontech obligated perform certain directory fulfillment services aas obligation services transferred outside vendor effective may 1 1997 amended partnership allocation partners negotiated settlement agreements regarding excessive bad debt writeoffs incurred dontech year ended december 31 1998 1997 agreements provided special allocations excessive bad debts partners based upon negotiated ratio effect settlement agreements included allocation net income presented statement partners capital december 31 1998 1997 dontech partnership incurred certain expenses behalf dontech ii partnership related advertising sales activities expenses charged dontech ii partnership years ended december 31 1997 year ended december 31 1998 dontech ii assumed responsibility sales related expenses dontech ii provisions revenue participation agreement dated august 19 1997 exchange exclusive publishing rights apil partners partnership agrees pay rh donnelley revenue participation interests revenue participation interests based upon gross revenues dontech ii partnership net dontech notes combined financial statements continued provisions capped 61 per annum sales commissions paid dontech ii revenue participation interest follows 6 concentration credit risk financial instruments potentially subject partnership concentration credit risk consist principally commercial paper accounts receivables partnership invests excess cash commercial paper investment rating aa higher experienced losses investments dontech trade accounts receivable primarily composed amounts due customers whose businesses state illinois dontech ii commissions receivable due ameritech advertising services collateral generally required either partnerships customers 7 partnership contribution receivable dontech ii respective partner capital contributions made equal proportion according initial capital schedule reflected dontech ii partnership agreement december 31 1997 total amount capital required contributed partners 27000 december 31 1997 respective partnership capital accounts credited amount required capital contributions offset corresponding contribution receivable funds received contributions funded 1998 8 use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expense reporting period actual results could differ estimates 9 lease commitments dontech leases certain office facilities noncancelable lease arrangements leases related obligations assumed dontech ii rent expense operating leases approximately 2743 2603 2564 1998 1997 1996 respectively future minimum lease payments required noncancelable operating leases initial remaining lease terms excess one year december 31 1998 follows dontech notes combined financial statements continued 10 employee retirement profit participation plans partnership participates defined benefit pension plan covering substantially respective employees principal plan principal plans assets invested equity funds fixed income funds real estate total expense principal plan approximately 820 1121 1181 1998 1997 1996 respectively following provides reconciliation benefit obligations plan assets funded status principle plan change benefit obligation change plan assets reconciliation prepaid cost dontech notes combined financial statements continued net periodic pension cost plan 1998 1997 1996 include following components assumptions used follows additionally respective partnership participates profit participation plan profit plan covers substantially employees may voluntarily contribute 6 salaries profit plan guaranteed matching contribution fifty cents per dollar contributed partnership also makes contributions profit plan based formula contingent upon attainment financial goals set advance defined plan contributions made plan 768 926 809 1998 1997 1996 respectively plans administered rh donnelley 11 postretirement pensions partnership provides postretirement health care life insurance benefits certain retired employees dependents following provides reconciliation benefit obligations plan assets funded status health life insurance plans change benefit obligation change plan assets dontech notes combined financial statements continued reconciliation accrued cost net periodic post retirement benefit costs 1998 1997 1996 included following components discount rate used determining apbo december 31 1998 1997 675 786 respectively assumed health care cost trend rate used measuring apbo december 31 1998 1997 varies age participant retirement date ranges 65 80 respectively rates assumed decrease gradually 50 2021 remain level thereafter increasing health care cost trend rates one percentage point would material effect december 31 1998 apbo net periodic postretirement expense 12 valuation qualifying accounts includes accounts written allowances made item 9item 8 financial statements supplementary data page rh donnelley corporation report independent accountants consolidated statements operations three years ended december 31 1999 consolidated balance sheets december 31 1999 1998 consolidated statements cash flows three years ended december 31 1999 consolidated statement changes shareholders equity deficit three years ended december 31 1999 notes consolidated financial statements dontech report independent accountants combined statements operations three years ended december 31 1999 combined balance sheets december 31 1999 1998 combined statements cash flows three years ended december 31 1999 combined statements partners capital three years ended december 31 1999 notes combined financial statements report independent accountants board directors shareholders rh donnelley corporation opinion accompanying consolidated balance sheets related consolidated statements operations shareholders equity deficit cash flows present fairly material respects financial position rh donnelley corporation company subsidiary december 31 1999 1998 results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp new york new york february 21 2000 rh donnelley corporation consolidated statements operations thousands except per share data revenues 185154 169090 238823 expenses operating expenses 138354 123420 164636 general administrative expenses 29185 28447 29576 provision bad debts 8571 8264 18382 depreciation amortization 18319 19578 21930 total expenses 194429 179709 234524 income partnerships related fees 139181 135854 130171 operating income 129906 125235 134470 interest expense net 36744 23141 gain disposition 9412 income provision income taxes 93162 102094 143882 provision income taxes 38011 40826 59139 net income 55151 61268 84743 earnings per share basic 164 179 248 diluted 161 177 248 shares used computing earnings per share basic 33676 34237 34153 diluted 34159 34522 34213 accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated balance sheets thousands except share per share data assets current assets cash equivalents 2390 2302 accounts receivable billed 8478 6941 unbilled 68213 67654 10011 8712 allowance doubtful accounts 7992 8765 total accounts receivable net 78710 74542 deferred contract costs 9728 10746 income tax refund receivable 6000 current assets 5448 4278 total current assets 102276 91868 property equipment net 17626 21077 computer software net 24225 33523 partnership investments related receivables 230205 27782 noncurrent assets 21074 21591 total assets 395406 385841 liabilities shareholders deficit current liabilities accounts payable accrued liabilities 45582 57623 accrued interest payable 9253 11391 investment obligation unicom media ltd 3978 current portion longterm debt 9750 4125 total current liabilities 68563 73139 longterm debt 435000 464500 deferred income taxes 63024 50909 postretirement postemployment benefits 9380 9648 liabilities 12250 12415 commitments contingencies shareholders deficit preferred stock par value 1 per share authorized 10000000 shares outstanding none common stock par value 1 per share authorized 400000000 shares issued 51621894 shares 1999 1998 respectively 51622 additional paidin capital 5172 unearned compensation 86 retained deficit 203443 258594 treasury stock cost 18578996 17419739 shares 1999 1998 respectively 46076 18072 total shareholders deficit 192811 224770 total liabilities shareholders deficit 395406 385841 accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements cash flows thousands cash flows operating activities net income 55151 61268 84743 reconciliation net income net cash provided operating activities depreciation amortization 19021 19578 21930 deferred income tax 12115 2800 13043 noncash interest expense 1109 noncash compensation expense provision doubtful accounts 8571 8264 18382 gain sale business 9412 cash received excess less income partnerships 1402 1061 10930 loss sale property equipment 1551 increase decrease accounts receivable 12740 7848 16566 decrease increase deferred contract costs 1018 7428 increase income tax refund receivable 6000 increase decrease assets 1524 4066 1806 decrease increase accounts payable accrued current liabilities 12691 12908 26057 decrease increase liabilities 2983 6026 314 net cash provided operating activities 62599 98888 99654 cash flows investing activities proceeds sale business 122000 additions property equipment 4030 5207 9078 additions computer software 3405 7443 7190 investment unicom media ltd 8000 1300 net cash used provided investing activities 15435 13950 105732 cash flows financing activities net proceeds longterm borrowings 490408 repayment debt 23875 31375 net distribution db 529306 205414 purchase treasury stock 27957 1017 proceeds employee stock option exercises 4756 payment dividend 12016 net cash used financing activities 47076 82668 205414 increase decrease cash equivalents 2270 28 cash equivalents beginning year 2302 cash equivalents end year 2390 2302 32 accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements changes shareholders equity deficit common stock paidin capital unearned compensation retained earnings deficit treasury shares total shareholders equity deficit thousands except per share data balance january 1 1997 51774 342317 17613 376478 net income 84743 net distribution db 205414 net change due treasury stock activity 241 balance december 31 1997 51967 221694 17854 255807 net income 61268 dividends paid 035 per share 12016 net distribution db 529306 net change due treasury stock activity prior distribution 345 274 234 acquisition common stock 1017 balance december 31 1998 51622 258594 18072 224770 net income 55151 employee stock option exercises 4898 5369 issuance restricted stock 236 amortization restricted stock issuance compensatory stock options acquisition common stock 28475 balance december 31 1999 51622 5172 86 203443 46076 192811 accompanying notes integral part consolidated financial statements rh donnelley corporation notes consolidated financial statements thousands except share per share data unless otherwise noted 1 description business basis presentation rh donnelley corporation company provides advertising sales marketing services yellow pages directory products longterm sales agency agreements partnerships operating units major telephone companies independent proprietary operation joint venture interest company sales agent new york state operating unit bell atlantic corporation bell atlantic florida operating unit sprint corporation sprint also serves sales agent cendon partnership cendon 5050 partnership company operating unit sprint formed publish directories florida nevada virginia north carolina company also 5050 partnership dontech operating unit ameritech corporation ameritech acts exclusive sales agent yellow pages directories published ameritech illinois northwest indiana dontech partnership initially partnership donnelley operating unit ameritech since merger sbc communications inc sbc ameritech october 1999 controlled sbc merger trigger change agreement governing dontech partnership lastly company holds 1875 equity interest joint venture unicom media ltd china united telecommunications corporation china unicom publish yellow pages directories offer internet directory services peoples republic china company also provides prepress publishing services yellow pages directories including advertisement creation sales contract management listing database management sales reporting commissions pagination billing services imaging yellow pages publishers existing customers separately negotiated contracts december 31 1999 companys operating subsidiary rh donnelley inc donnelley therefore consolidated basis financial statements company donnelley substantially identical prior july 1 1998 company operated part dun bradstreet corporation context specifically describing distribution referred old db otherwise db december 17 1997 board directors old db approved principle plan separate two publicly traded companies rh donnelley corporation new dun bradstreet corporation new db distribution method old db distributed shareholders shares new db common stock july 1 1998 part distribution old db distributed shareholders shares new db stock old db changed name rh donnelley corporation consolidated financial statements reflect financial position results operations cash flows company separate entity periods presented prior distribution db provided certain centralized services company cost allocated company allocations totaled 11570 six months ended june 30 1998 21531 year ended 1997 included operating expenses general administrative expenses consolidated statements operations management believes allocations reasonable however believes costs services indicative costs would incurred company performed provided services separate entity company retained assets liabilities related yellow pages directory product sales marketing publishing service businesses distribution well allocation certain db corporate headquarters assets liabilities relating companys businesses management believes allocations reasonable connection distribution donnelley entered credit agreement chase manhattan bank lenders party thereto terms agreement donnelley obtained senior revolving credit facility 100000 senior secured term facilities aggregate amount 300000 donnelley initially borrowed 350000 combined facilities addition donnelley issued 150000 senior subordinated notes net proceeds distributed db connection distribution repayment indebtedness remains obligation donnelley guaranteed company net distributions db include net cash transfers thirdparty liabilities paid behalf company db amounts due tofrom db services charges interest charged intercompany transactions purposes governing certain ongoing relationships company db distribution provide orderly transition company db entered various agreements including distribution agreement tax allocation agreement indemnity joint defense agreement employee benefits agreement shared transaction services agreement expired 1999 intellectual property agreement data services agreement transition services agreement 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company wholly owned subsidiary intercompany transactions balances eliminated investments companys partnerships joint venture accounted equity method accounting companys share partnership joint venture operating results reflected income partnerships related fees component operating income related fees represent revenue participation fees sbc see note 4 revenue recognition company recognizes revenue earned based contractual relationships agreements company sales agent revenue comprised sales commissions recognized upon execution contracts sale advertising operations company publisher revenue recognized directories published revenue publishing services recognized straightline basis throughout year services performed cash equivalent cash equivalents include highly liquid investments maturity less three months time acquisition unbilled receivables agreements company sales agent unbilled receivables represent revenues earned sale advertising directories scheduled published publisher receivables billed publisher upon directory publication accordance contractual provisions operations company publisher unbilled receivables represent revenues earned published directories cases advertisers billed ratably life directories generally 12 months deferred contract costs direct costs incurred company publisher deferred related directory published direct costs incurred company sales agent expensed year incurred property equipment property equipment recorded cost depreciation provided estimated useful lives depreciable assets using straightline method estimated useful lives five years machinery equipment ten years furniture fixtures three five years computer equipment leasehold improvements amortized straightline basis shorter term lease estimated useful life improvement depreciation expense 7104 9561 11703 year ended december 31 1999 1998 1997 respectively capitalized software costs certain direct costs incurred computer software meet needs company customers capitalized costs amortized straightline basis five years effective january 1 1999 company adopted statement position 981 accounting costs computer software developed obtained internal use requires certain costs incurred connection developing obtaining software internal use capitalized amortization expense 11215 10017 9789 year ended december 31 1999 1998 1997 respectively income taxes company accounts income taxes liability method accordance sfas 109 accounting income taxes provision income taxes years ended december 31 1998 1997 calculated separatecompany basis prior distribution company included federal certain state income tax returns db income taxes paid behalf company june 30 1998 db included equity concentration credit risk company maintains significant receivable balances operating units sbc bell atlantic sprint amount company receives subject subsequent adjustments specified maximums based collections telephone companies individual advertisers company currently foresee credit risk associated receivables due high credit ratings counterparties company also maintains accounts receivable balances directly individual advertisers cincinnati operations company establishes allowance doubtful accounts based expected collectibility receivables advertisers principally based upon historical trends derivative financial instruments company uses interest rate swap contracts manage market risk reduce exposure fluctuations interest rates variable rate debt periodic payments receipts interest rate swaps recorded part interest expense related amount payable receivable counterparty included accrued interest payable current assets fair value interest rate swaps recognized consolidated financial statements accounted hedges interest rate swaps cease qualify hedge subsequent gains losses would recognized income company subject credit risk event nonperformance counterparty interest rate swap agreements however company anticipate nonperformance counterparty company use derivative financial instruments trading speculative purposes june 1999 financial accounting standards board fasb issued statement 137 accounting derivative instruments hedging activitiesdeferral effective date fasb statement 133 statement defers one year effective date fasb statement 133 accounting derivative instruments hedging activities statement 133 effective fiscal quarters fiscal years beginning june 15 2000 statement require company recognize derivative instruments balance sheet fair value subsequent changes fair value derivative instruments would recognized earnings unless specific hedge accounting criteria met management believes adoption statement 133 material adverse effect companys earnings financial position still process determining effect statement 133 companys earnings financial position earnings per share common stock basic earnings per share calculated dividing net income weighted average common shares outstanding year diluted earnings per share calculated dividing net income weighted average common shares outstanding plus potentially dilutive common shares primarily stock options calculated using treasury stock method table provides reconciliation basic weighted average shares outstanding diluted weighted average shares outstanding december 31 1999 1998 options purchase 32700 2026740 shares common stock respectively included computation diluted weighted average shares outstanding effect would antidilutive thousands weighted average shares outstanding basic 33676 34237 34153 potentially dilutive shares weighted average shares outstanding diluted 34159 34522 34213 1998 company executed oneforfive split outstanding common stock share per share data provided herein adjusted reflect reverse stock split treasury stock activity purchases company common stock accounted using cost method whereby total cost shares reacquired charged treasury stock contra equity account treasury stock reissued eg satisfy exercises employee stock options proceeds received excess cost credited additional paidin capital cost determined based firstin firstout cost flow assumption estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities revenues expenses disclosure contingent assets liabilities actual results could differ materially estimates assumptions estimates assumptions used determination allowances bad debts depreciation amortization employee benefit plans among others reclassifications certain prior year amounts reclassified conform current years presentation addition 1998 certain expenses related sale advertising historically included general administrative expenses reclassified operating expenses better measure contribution operating unit facilitate decision making resource allocation result general administrative expenses 33040 reclassified operating expenses 1997 reclassifications impact previously reported results operations shareholders equity 3 nonrecurring items postdistribution adjustments asset liability amounts allocated company db pursuant distribution based preliminary estimates subject revision based final determinations amounts accordingly 1998 adjustments made reflect approximately 13600 additional deferred tax liabilities decrease benefit liabilities originally assumed approximately 8100 adjustments reflected adjustment equity impact consolidated statements operations sale business 1997 operating results include pretax gain 9412 related sale proprietaryeast business peast connection sale peast company maintains continuing obligation provide publishing services acquirer 2002 obligation adequately provided financial statements 4 partnership joint venture investments dontech 1991 company formed general partnership operating unit ameritech dontech partnership dontech prior august 1997 dontech published various directories solicited advertising manufactured delivered directories illinois northwest indiana august 1997 company signed series agreements ameritech changing structure existing partnership new partnership formed dontech appointed exclusive sales agent perpetuity yellow pages directories published ameritech illinois northwest indiana new sales agency partnership dontech performs advertising sales function directories earns commission ameritech serves publisher company 50 interest profits dontech company also receives direct fees revenue participation operating unit sbc tied advertising sales company recognized income related fees 123524 120087 116228 dontech partnership 1999 1998 1997 respectively amounts included revenue participation income 103755 99727 51610 1999 1998 1997 respectively companys investment dontech 197307 198848 december 31 1999 1998 respectively revenue participation receivable sbc included companys total investment 104105 december 31 1999 100748 december 31 1998 cendon company 50 interest profits cendon company recognized equity earnings 16935 15767 12219 cendon 1999 1998 1997 respectively companys investment cendon 18348 17634 december 31 1999 1998 respectively cendon partnership agreement extends end december 2004 company also provides sales publishing services cendon partnership billed upon publication directory based contractual rate sales billed pro rata year publishing services based contractual fee sales commissions publishing services revenue cendon 39932 37507 34084 1999 1998 1997 respectively unicom media ltd 1998 company acquired 1875 equity interest unicom media ltd agreed invest cash approximately 15800 unicom media ltd holds 80 interest unicom yellow pages yellow pages directories operating subsidiary owns operates chinabig comprehensive bilingual internet directory december 31 1999 terms joint venture agreement company contributed 9300 cash make additional cash contributions 4000 2000 2500 2001 amounts provided financial statements company also option purchase additional 125 interest 10000 november 5 2000 1999 unicom media ltd received necessary regulatory approvals commenced directory operations companys share losses startup joint ventures directory operations totaled 576 year ended december 31 1999 book value companys investment december 31 1999 14550 greater companys share underlying equity unicom media ltd 1354 difference premium paid amortized 10 years amortization expense 1999 702 included income partnership related fees 5 property equipment property equipment december 31 1999 1998 consisted following 6 computer software computer software costs capitalized december 31 1999 1998 consisted following 7 longterm debt credit facilities longterm debt december 31 1999 1998 consisted following senior subordinated notes pay interest semiannually mature june 2008 notes indenture contains covenants among things restrict ability company subsidiary incur certain additional debt liens engage mergers consolidations asset sales notes callable option company time june 1 2003 companys committed bank facilities consist aggregate 300000 senior secured term facilities term facilities 100000 senior revolving credit facility revolver together term facilities credit agreement term facilities require quarterly principal repayments mature june 2004 december 2006 revolver matures june 2004 facilities bear interest floating rate based spread london interbank offered rate libor greater either prime rate fed funds rate plus 50 basis points election company companys obligations credit agreement secured security interests granted lenders substantially companys assets including capital stock existing newlyformed subsidiaries credit agreement contains covenants among things restrict ability company subsidiary engage mergers consolidations asset sales incur additional indebtedness create liens require company maintain certain financial ratios december 31 1999 1998 weighted average annual interest rate outstanding debt credit agreement 74 71 respectively december 31 1999 company available borrowing capacity 100000 revolver aggregate maturities longterm debt december 31 1999 thereafter total 9750 15375 19125 24750 33500 342250 444750 cash interest paid period ended december 31 1999 1998 totaled 38218 15866 respectively 8 commitments contingencies company leases office facilities computer equipment operating leases terms expiring various dates 2011 rent expense real estate operating leases 1999 1998 1997 7543 6948 8612 respectively lease expense computer equipment leases 2298 2032 2245 1999 1998 1997 respectively approximate minimum rental payments applicable noncancelable operating leases december 31 1999 thereafter total 7259 6453 6651 6514 6437 18900 52214 april 1999 sandy goldberg dellwood publishing inc rockland yellow pages initiated lawsuit donnelley bell atlantic united states district court southern district new york rockland yellow pages proprietary directory competes bell atlantic directory region donnelley sales agent complaint alleges defendants disseminated false information concerning rockland yellow pages resulted damages rockland yellow pages plaintiffs alleging variety claims including rico violations antitrust violations lanham act violations seeking damages excess 30000 amount plaintiffs seeking trebled antitrust laws addition plaintiffs also seeking punitive damages unspecified amount management intends mount vigorous defense donnelley matter june 1999 defendants filed motion dismiss complaint september 1999 plaintiffs filed papers opposition defendants motion dismiss november 1999 defendants answered opposition papers moved dismiss complaint hearing motion yet scheduled february 2000 yellow book usa ltd one companys primary competitors acquired dellwood publishing inc preliminary stage proceedings management unable predict outcome matter presently believes resolution action material adverse effect companys financial position results operations july 1996 information resources inc iri filed complaint united states district court southern district new york naming defendants company successor old db acnielsen company ims international inc former subsidiaries db iri action complaint alleges among things various violations antitrust laws seeks damages excess 350000 iri seeking trebled antitrust laws iri also seeks punitive damages unspecified amount definitive agreement entered connection distribution agreement new db assumed defense indemnify company payments made company donnelley respect iri action indemnity joint defense agreement entered connection distribution otherwise including ongoing legal fees expenses related thereto management presently believes new db sufficient financial resources andor borrowing capacity satisfy liabilities reimburse company costs expenses incurred management believe previously announced separation moodys new db would material adverse impact indemnity rights company distribution agreement new db would obligated cause moodys agree jointly severally liable new db indemnity obligations company certain tax planning strategies entered old db currently subject review tax authorities internal revenue service irs currently reviewing old dbs utilization certain capital losses 1989 1990 irs issued formal assessment respect transactions irs assessed companies entered similar types transactions new db expects irs issue assessment second quarter 2000 assessment made irs prevail total cash obligation irs december 31 1999 would approximate 550000 taxes accrued interest pursuant series agreements ims health incorporated ims nielsen media research inc nmr former subsidiaries db jointly severally liable pay 50 old db liable remaining 50 payments taxes accrued interest arising matter certain potential tax liabilities old db pays first 137000 tax liability explained result form distribution company corporate successor taxpayer referred herein old db however pursuant terms distribution agreement tax allocation agreement executed connection distribution new db assumed defense indemnify company donnelley payments made company donnelley respect tax liability may assessed costs expenses relating thereto including ongoing legal fees expenses related thereto accordingly management believes tax liabilities costs expenses relating thereto material adverse impact consolidated financial position results operations company management presently believes new db ims nmr sufficient financial resources andor borrowing capacity satisfy liabilities reimburse company costs expenses relating thereto management believe previously announced separation moodys new db would material adverse impact indemnity rights company distribution agreement new db would obligated cause moodys agree jointly severally liable new db indemnity obligations company matters described company donnelley involved legal proceedings claims litigation arising ordinary conduct business although assurances management presently believes outcome legal proceedings material adverse affect companys financial position results operations cash flows 9 benefit plans retirement plans prior distribution substantially employees company donnelley eligible participate dbs defined benefit defined contribution pension plans accounted multiemployer plans benefits defined benefit pension plan determined based participants average compensation years service final average pay benefit terms distribution agreement company assumed responsibility pension benefits active employees company donnelley vested benefits db defined benefit pension plan responsibility donnelley retirees vested terminated employees prior distribution remained db companys financial statements include allocated costs db relating defined benefit pension plan 1121 six months ended june 30 1998 996 1997 subsequent distribution company established defined benefit pension plan covering substantially employees benefits paid employees based years service percentage total annual compensation percentage compensation allocated retirement account ranges 30 125 depending age years service cash balance benefit benefits paid employees participants prior db defined benefit pension plan equal greater final average pay benefit cash balance benefit pension costs determined using projected unit credit actuarial cost method companys funding policy contribute amount least equal minimum legal funding requirement contributions made plan 1999 1998 due overfunded status plan company would entitled current tax deduction contributions made would required pay annual excise taxes underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities company also two unfunded nonqualified defined benefit pension plans pension benefit equalization plan pbep supplemental executive benefit plan sebp senior executives certain key employees entitled participate plans provide retirement benefits based years service compensation including compensation permitted taken account previously mentioned defined benefit pension plan company also maintains defined contribution savings plan substantially employees company makes contribution 50 cents dollar contributed participating employee maximum 6 participating employees salary cost plan company 1662 1626 2243 year ended december 31 1999 1998 1997 respectively postretirement benefits prior distribution db provided certain health care life insurance benefits retired employees company donnelley accounted plan multiemployer plan terms distribution agreement company assumed responsibility postretirement benefits active employees donnelley companys financial statements include allocated costs db relating postretirement benefits 893 six months ended june 30 1998 1724 1997 subsequent distribution company established unfunded postretirement benefit plan provides certain health care life insurance benefits fulltime employees reach retirement age working company donnelley summary funded status benefit plans december 31 1999 1998 follows funded status plans 26986 18127 6660 6760 unrecognized net gain loss 15485 5927 310 unrecognized prior service costs 80 unrecognized transition asset 477 950 prepaid accrued benefit cost 11416 11685 6970 6130 pbep sebp unfunded plans projected benefit obligation pbep sebp 782 3072 december 31 1999 392 1283 december 31 1998 respectively accumulated benefit obligation pbep sebp 320 1200 december 31 1999 21 253 december 31 1998 respectively net periodic benefit expense benefit plans follows following assumptions used determining benefit obligation net periodic benefit expense measurement purposes 65 annual rate increase per capita cost covered health care benefits assumed 2000 rate assumed decrease gradually 50 2021 remain level thereafter assumed health care cost trend rates significant effect amounts reported health care plans onepercentagepoint increase would increase accumulated postretirement benefit obligation december 31 1999 580 service interest cost components postretirement benefit expense year ended 80 onepercentagepoint decrease would decrease accumulated postretirement benefit obligation december 31 1999 530 service interest cost components postretirement benefit expense year ended 70 10 employee stock option plans certain key employees company eligible receive stock options stock appreciation rights limited stock appreciation rights tandem stock options companys 1991 key employees stock option plan amended stock option plan immediately distribution outstanding awards stock option plan held company employees adjusted ratio exercise price per option market value per share aggregate difference market value exercise price vesting provisions option periods terms conditions applicable prior distribution options may granted less fair market value companys common stock date grant vesting period awards stock option plan determined board date grant typically become exercisable equal annual installments four years expire ten years grant date changes employee stock options stock option plan three years ended december 31 1999 shown following table prepared based historical db prices giving retroactive effect reverse oneforfive stock split august 1998 options outstanding june 30 1998 converted july 1 1998 give effect distribution shares weighted average exercise price options outstanding december 31 1996 265114 10985 granted 75798 14975 exercised 35013 10225 surrendered expired 23882 11435 options outstanding december 31 1997 282017 12115 granted 1808 15953 exercised 16436 10836 surrendered expired 25992 12671 options outstanding june 30 1998 241397 12376 options converted july 1 1998 2473354 1208 granted 2043250 1531 exercised 12868 1089 surrendered expired 118743 1265 options outstanding december 31 1998 4384993 1355 granted 1 83025 1649 exercised 456137 1115 surrendered expired 465904 1449 options outstanding december 31 1999 3545977 1380 1 includes 12725 options granted employees dontech compensation expense 66 related issuance options recognized 1999 december 31 1999 1998 1997 options 1367777 shares 1456610 shares 121291 shares respectively exercisable options 4605772 shares 4272093 shares 290039 shares available future grants stock option plan december 31 1999 1998 1997 respectively weighted average fair value options granted 1999 1998 1997 706 491 2770 respectively following table summarizes information stock options outstanding stock option plan december 31 1999 1998 directors stock option plan company grants nonemployee directors annual award 1500 deferred shares option purchase 1500 shares companys common stock additionally nonemployee directors receive option purchase 1500 shares upon election board nonemployee directors may also elect receive additional option purchase shares companys common stock lieu annual cash retainer fee option grants deferred shares vest equally threeyear period company granted 22000 stock options deferred shares 1999 plan december 31 1999 options 7789 shares exercisable options 110323 shares 132323 shares available future grants december 31 1999 1998 respectively plan company follows accounting principles board opinion 25 accounting stock issued employees related interpretations accounting stock option plan accordingly compensation expense related issuance stock option grants employees recognized following table reflects pro forma net income earnings per share company assuming company applied fair value method sfas 123 accounting stockbased compensation pro forma disclosures shown representative effects income earnings per share future years net income reported 55151 61268 84743 pro forma 53532 59809 84380 basic earnings per share reported 164 179 248 pro forma 159 175 247 diluted earnings per share reported 161 177 248 pro forma 157 173 247 fair value stock options used compute companys pro forma disclosures estimated using blackscholes optionpricing model following weighted average assumptions dividend yield 0 33 expected volatility 35 20 riskfree interest rate 545 546 573 expected holding period 48 years 47 years 45 years 11 income taxes provision income taxes consisted current provision us federal 20665 31006 63519 state local 5231 7020 8660 total current provision 25896 38026 72179 deferred provision benefit us federal 10298 2261 15777 state local 1817 2734 total deferred provision benefit 12115 2800 13043 provision income taxes 38011 40826 59139 following table summarizes significant differences us federal statutory tax rate companys effective tax rate statutory federal tax rate 350 state local taxes net us federal tax benefit 50 47 51 nondeductible expense 08 03 10 effective tax rate 408 400 411 deferred tax assets liabilities consisted following december 31 1999 1998 deferred tax assets postretirement benefits 2973 2648 postemployment benefits reorganization restructuring costs bad debts 3211 2119 various accrued liabilities 6908 11572 total deferred tax asset 13717 17534 deferred tax liabilities revenue recognition 62384 50670 pension 4586 5117 capitalized project costs 9734 12195 total deferred tax liabilities 76741 68443 net deferred tax liability 63024 50909 federal state income taxes paid cash year ended december 31 1999 six months ended december 31 1998 37450 16362 respectively 12 financial instruments companys financial instruments december 31 1999 1998 consisted following carrying amount cash equivalents approximates fair value due shortterm nature instruments longterm debt consists borrowings credit agreement notes carrying amount companys borrowings credit agreement december 31 1999 1998 294750 318625 respectively approximates fair value obligations bear interest floating rates carrying amount notes december 31 1999 1998 150000 fair value notes determined based quoted market price december 31 1999 1998 146625 157875 respectively company enters interest rate swap agreements manage market risk reduce exposure fluctuations interest rates variable rate debt interest rate swaps allow company raise funds floating rates effectively swap fixed rates lower available fixedrate borrowings made directly agreements involve exchange floatingrate fixedrate payments without exchange underlying principal amount company terminates swap agreement gain loss amortized shorter remaining original life debt swap december 31 1999 1998 company outstanding interest rate swaps notional value 175000 swap contracts expire june 2001 june 2003 fixedrate payments rates ranging 586 590 floatingrate payments received based rates tied prevailing shortterm interest rates average pay rate outstanding interest rate swaps december 31 1999 1998 588 average receive rate 612 531 respectively fair value estimated amount company would receive pay terminate agreements determined based quoted market interest rates 13 business segments companys reportable operating segments directory advertising services das dontech partnership directory publishing services despite similarities services provided das dontech partnership viewed separate reportable operating segment since among factors employees dontech including officers managers employees company evaluates performance operating segments allocates resources based operating income factors expenses purposes computing operating income reportable segments except dontech includes costs directly incurred business unit plus allocation certain shared operating general administrative expenses based estimated business usage represents expenses assets allocated operating segments interest expense income tax expense nonoperating income expenses allocated operating segments company derives significant portion total revenue bell atlantic sprint revenue bell atlantic represented 54 total revenues 1999 50 1998 36 1997 revenue sprint including cendon represented 23 total revenues 1999 25 1998 16 1997 unicom media ltd companys operations conducted united states information operating segment years ended december 31 1999 1998 1997 presented directory advertising services 1 dontech partnership directory publishing services 2 consolidated totals advertising sales unaudited 3 calendar cycle 634380 432348 1066728 publication cycle 617570 427562 1045132 revenues 153763 31391 185154 income partnerships related fees 15657 123524 139181 ebitda 4 42480 123524 1473 19252 148225 depreciation amortization 6477 6628 5214 18319 operating income loss 36003 123524 5155 24466 129906 total assets 130835 197307 16530 50734 395406 advertising sales unaudited 3 calendar cycle 562375 429200 991575 publication cycle 5 580352 408930 989282 revenues 137172 31918 169090 income partnerships related fees 15767 120087 135854 ebitda 4 38094 120087 3348 16716 144813 depreciation amortization 6009 6344 7225 19578 operating income loss 32085 120087 2996 23941 125235 total assets 119081 198848 21948 45964 385841 advertising sales unaudited 3 calendar cycle 656145 408600 1064745 publication cycle 5 691391 391181 1082572 revenues 213732 25091 238823 income partnerships related fees 13943 116228 130171 ebitda 4 47492 116228 2272 9592 156400 depreciation amortization 6741 6895 8294 21930 operating income loss 40751 116228 4623 17886 134470 total assets 119913 203589 23551 30454 377507 1 directory advertising services segment information 1997 includes data relating peast business sold 1997 follows advertising sales unaudited 3 calendar cycle 73753 publication cycle 5 73753 revenues 77979 income partnership related fees 1724 ebitda 4 11817 depreciation amortization operating income 10969 total assets 2 directory publishing services revenue include intracompany revenue 1461 793 9893 years ended december 31 1999 1998 1997 respectively revenue represents charges internal business units based costs incurred eliminated consolidated financial statements 3 advertising sales represent billing value advertisements sold annual directory company dontech management reviews performance operating segments among things advertising sales generated calendar cycle publication cycle basis calendar cycle advertising sales represent billing value advertisements sold annual directory stated basis revenue recognized consolidated financial statements sales contract signed company acts sales agent directory published company acts publisher management believes additional useful measurement sales performance publication cycle basis method measures sales based value annual directory according publication date regardless companys role recognition revenue consolidated financial statements directory publication date changes one year next prior year publication date adjusted conform present year maintain comparability 4 ebitda represents earnings interest taxes depreciation amortization ebitda measurement operating performance computed accordance generally accepted accounting principles considered substitute operating income net income prepared conformity generally accepted accounting principles addition ebitda may comparable similarly titled measures companies 5 publication cycle sales 1998 1997 das adjusted amount reported prior year reduce sales 481 1250 respectively conform 1999 publication dates publication cycle sales 1998 1997 dontech also adjusted amount reported prior year increase sales 5830 5681 respectively conform 1999 publication dates also 1999 sprint took responsibility national advertising sales central florida consideration annual fee payable company consequently national advertising sales 1999 accordingly conform 1999 presentation national sales 6051 5677 excluded 1998 1997 publication cycle sales das respectively 14 valuation qualifying accounts balance beginning period additions charged cost expenses deductions 1 balance end period allowance doubtful accounts year ended december 31 1999 8765 8571 9344 7992 year ended december 31 1998 3295 8264 2794 8765 year ended december 31 1997 10979 18382 26066 3295 1 includes accounts written 6658 related sale peast 1997 15 quarterly information unaudited full year earnings per share amount may equal sum quarters due changes average share calculations rounding report independent accountants board directors partners dontech ii opinion accompanying combined balance sheets related combined statements partners capital operations cash flows present fairly material respects combined financial position amdon business dontech hereafter referred dontech ii partnership dontech ii december 31 1999 1998 combined results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states financial statements responsibility management dontech ii responsibility express opinion combined financial statements based audits conducted audits statements accordance auditing standards generally accepted united states require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp january 7 2000 except note 10 january 28 2000 chicago illinois dontech combined statements operations thousands sales 109260 286931 503912 less allowances 6364 30731 77788 net sales 102896 256200 426124 expenses selling 53460 68235 52927 telephone company fees 2021 83210 printing manufacturing 14036 39085 compilation 3384 8888 delivery 1074 7703 administrative 1974 7696 occupancy depreciation 7049 9055 9880 2478 3472 12489 total operating expenses 63008 103251 221878 income operations 39888 152949 204246 income expense 1422 507 2064 net income 41310 152442 206310 accompanying notes integral part financial statements dontech combined balance sheets thousands assets current assets cash equivalents 19408 20943 trade receivable net allowance doubtful accounts 61 1999 2187 1998 20128 30205 commission receivable related party 110179 106386 prepaid expenses deferred expenses total current assets 150676 157982 fixed assets net accumulated depreciation amortization 7141 8468 pension asset 8443 5314 1628 1099 total assets 167888 172863 liabilities partners capital current liabilities accounts payable 2446 6572 accrued liabilities 7531 6828 deferred sales revenue total current liabilities 9977 13866 partners capital 157911 158997 total liabilities partners capital 167888 172863 accompanying notes integral part financial statements dontech combined statements cash flows thousands cash flows operating activities net income 41310 152442 206310 reconciliation net income net cash provided operating activities depreciation amortization 2615 3088 3246 provision uncollectible accounts 6364 20832 32474 increase decrease accounts receivable 94 132687 61332 decrease deferred printing manufacturing 13913 20788 decrease deferred selling 20331 13076 decrease deferred compilation 3310 5309 decrease deferred delivery 1087 1895 decrease deferred directory operating service 1468 increase decrease deferred 4 2105 2280 increase current assets 4187 604 3184 decrease increase accounts payable 4090 36033 18885 increase accrued liabilities decrease deferred sales revenue 466 161340 11345 net cash provided operating activities 42149 152819 230387 cash flows investing activities purchases equipment 1288 6658 1522 cash flows financing activities partners contributions 49000 2998 distributions partners 42396 181042 229598 net cash used financing activities 42396 132042 226600 decrease increase cash equivalents 1535 14119 2265 cash equivalents beginning year 20943 6824 4559 cash equivalents end year 19408 20943 6824 noncash financing activities partnership capital contribution receivable 27000 accompanying notes integral part financial statements dontech combined statements partners capital rh donnelley corporation ameritech publishing illinois inc total thousands balance january 1 1997 85789 73098 158887 contributions per agreement 13500 27000 contribution receivable 13500 27000 net income 118162 88148 206310 distributions partners 121688 104912 226600 balance december 31 1997 82263 56334 138597 payment contribution receivable 13500 27000 contributions per agreement 11000 22000 net income 86430 66012 152442 distributions partners 98407 82635 181042 balance december 31 1998 94786 64211 158997 net income 20312 20998 41310 distributions partners 21896 20500 42396 balance december 31 1999 93202 64709 157911 accompanying notes integral part financial statements dontech notes combined financial statements amounts thousands 1 form organization nature business amdon dba dontech general partnership rh donnelley inc formerly known reuben h donnelley corporation rh donnelley delaware corporation ameritech publishing illinois inc apiil illinois corporation business ameritech advertising services aas new structure defined master agreement dated august 19 1997 existing partnership referred dontech concurrently apiil r h donnelley formed new partnership referred dontech ii dontech participated directory agreement r h donnelley illinois bell telephone company ibt business ameritech illinois apiil aas dontech also participated subcontracting agreement ameritech publishing inc api perform certain apis obligations publishing services contract api indiana bell telephone company incorporated indiana bell business ameritech indiana dontech published various directories identified directory agreements solicited advertising primary source revenues manufactured delivered directories dontech net income allocated partner based predefined percentage set forth amended partnership agreement accordance second amended restated amdon partnership agreement effective august 19 1997 dontech partnership ceased publishing directories january 1 1998 partnership recognize deferred revenue expenses recorded december 31 1997 remaining life directories published prior january 1 1998 upon completion collection receivables partnership thereafter wind accordance agreement august 1997 rh donnelley apiil reached agreement regarding revised partnership structure new dontech partnership became exclusive sales agent perpetuity yellow page white page street address directories published api illinois northwest indiana michigan new partnership known dontech ii receives 27 commission sales net provisions capped 61 subject certain exclusions dontech iis cost structure includes principally sales operations office services finance facilities related overhead dontech ii profits shared equally partners term partnership agreement neither partner may compete directly business dontech ii without consent board defined board directors board appointed administer activities partnership time term partnership board may call additional capital contributions equal amounts partners opinion board additional capital required operation partnership accompanying financial statements dontech ii shown combined basis dontech ii formed august 1997 combined statements operations three years period ended december 31 1999 include results operations dontech ii period august 1997 december 1999 significant affiliated accounts transactions eliminated preparation combined financial statements 2 significant accounting policies cash equivalents cash equivalents include highly liquid investments initial maturity date three months less carrying value cash equivalents approximates fair value due shortterm nature revenue recognition substantially dontech sales made customers cities covered directories recorded deferred sales revenue accounts receivable month publication revenue related sales recognized lives directories generally twelve months sales made customers outside cities covered directories recognized quarter sales national accounts recognized full month publication dontech ii revenue comprised sales commissions recognized upon execution contracts sale advertising fixed assets fixed assets recorded cost depreciated straightline basis estimated useful lives assets upon asset retirement disposition cost related accumulated depreciation removed accounts gain loss included statement operations amounts incurred repairs maintenance charged operations deferred expenses printing manufacturing compilation sales delivery administrative costs dontech publications deferred recognized proportion revenue postretirement benefits pensions partnership obligated provide postretirement benefits consisting mainly life health insurance substantially employees dependents accrual method accounting utilized postretirement health care life insurance benefits income taxes provision income taxes made proportional share partnerships income responsibility individual partners concentration credit risk financial instruments potentially subject partnership concentration credit risk consist principally commercial paper accounts receivables partnership invests excess cash commercial paper investment rating aa higher experienced losses investments dontech trade accounts receivable dontech ii commissions receivable due aas collateral generally required either partnerships customers use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expense reporting period actual results could differ estimates 1999 partnership recorded 62 million charge related bad debts allocated partner based respective share partnership income loss stipulated partnership agreement recent pronouncements june 1998 fasb issued statement 133 accounting derivative instruments hedging activities statement establishes accounting reporting standards derivative instruments hedging activities requires recognition derivatives assets liabilities statement financial position measurement instruments fair value statement amended effective fiscal years beginning june 15 2000 partnership derivative instruments hedging activities sfas 133 expected material effect financial results 3 fixed assets fixed assets consist following december 31 equipment 21873 21003 furniture fixtures 7250 7034 leasehold improvements 1544 2159 30667 30196 less accumulated depreciation amortization 23526 21728 7141 8468 4 related party transactions dontech directory agreement dontech obligated pay illinois bell telephone ibt minimum 75000 per year exchange billing collection services performed ibt base fee services 75000 calendar year directory agreement terminated terms revised partnership agreement responsibility payment fees transferred ameritech effective january 1 1998 addition base fee dontech agreed pay ibt amount equal 7 12 increase total revenue received certain sources identified directory agreement revenues received immediately preceding calendar year additional fee due ibt 1800 1997 ibt also provided directory operations services white page compilation dontech paid approximately 2000 ibt 1997 services however effective january 1 1998 terms revised partnership agreement cost services became responsibility ameritech 1997 r h donnelley provided compilation photocomposition data processing services dontech addition dun bradstreet corporation rh donnelley wholly owned subsidiary provided employee benefits administrative services certain business insurance coverages partnership amount paid services determined beginning year based upon estimated activity adjusted actual end year total amount paid services approximately 20500 1997 amount paid employee benefits includes administration partnerships profit sharing 401k plans well health care long short term disability dental pension plans effective june 1 1997 dontech established health care long short term disability dental plans time terminated coverages plans dun bradstreet dontech also entered subcontracting agreements publishing certain indiana bell directories first four months 1997 directory fulfillment memorandum understanding dontech obligated perform certain directory fulfillment services aas obligation services transferred outside vendor effective may 1 1997 amended partnership allocation partners negotiated settlement agreements regarding excessive bad debt writeoffs incurred dontech years ended december 31 1999 1998 1997 agreements provided special allocations excessive bad debts partners based upon negotiated ratio effect settlement agreements included allocation net income presented statement partners capital december 31 1999 1998 1997 dontech ii provisions revenue participation agreement dated august 19 1997 exchange exclusive publishing rights apil partners partnership agrees pay rh donnelley revenue participation interests revenue participation interests based upon gross revenues dontech ii partnership net provisions capped 61 per annum subject certain exclusions sales commissions paid dontech ii revenue participation interest 348 1998 359 1999 thereafter partnership purchases car plan administration insurance services rh donnelley general ledger purchasing services aas partnership also provides facility space certain employees aas agreement entered 1998 5 partnership contribution receivable dontech ii respective partner capital contributions made equal proportion according initial capital schedule reflected dontech ii partnership agreement december 31 1997 total amount capital required contributed partners 27000 respectively december 31 1997 respective partnership capital accounts credited amount required capital contributions offset corresponding contribution receivable funds received contributions funded 1998 6 contingencies commitments dontech leases certain office facilities noncancelable lease arrangements leases related obligations assumed dontech ii rent expense operating leases approximately 1807 2743 2603 1999 1998 1997 respectively future minimum lease payments required noncancelable operating leases initial remaining lease terms excess one year december 31 1999 follows thereafter 3862 3715 3408 3298 3064 14930 32277 september 1998 dontech entered maintenance service agreement ameritech provide maintenance services including parts aas length agreement five years according terms agreement dontechs obligations life agreement december 31 1999 follows 110 418 7 employee retirement profit participation plans partnership participates defined benefit pension plan covering substantially respective employees principal plan principal plans assets invested equity funds fixed income funds real estate total expense principal plan approximately 564 820 1121 1999 1998 1997 respectively following provides reconciliation benefit obligations plan assets funded status principal plan change benefit obligation projected benefit obligation beginning year 20572 17686 service cost 1027 interest cost 1364 1298 benefits paid 713 1149 gain loss 13 1130 effect plan amendments assumption changes charges 1803 projected benefit obligation end year 20434 20572 change plan assets market value assets january 1 25314 20195 benefits paid 713 1149 contributions 3620 2507 actual return assets 2621 3761 market value assets december 31 30842 25314 funded status plan 10408 4742 unrecognized net gain 4398 2214 unrecognized prior service costs 1974 2400 prepaid cost 7984 4928 prepaid benefit cost 8443 5314 accrued benefit liability 459 488 intangible asset net amount recognized 7984 4928 net periodic pension cost plan 1999 1998 1997 include following components service cost 1027 929 936 interest cost 1364 1298 1185 expected return assets 2255 1833 1440 amortization net gain amortization unrecognized prior service cost total pension cost 564 820 1121 assumptions used follows discount rate 775 700 750 expected longterm rate return 975 weighted average compensation increase 416 316 additionally respective partnership participates profit participation plan profit plan covers substantially employees may voluntarily contribute 6 salaries profit plan guaranteed matching contribution fifty cents per dollar contributed partnership also makes contributions profit plan based formula contingent upon attainment financial goals set advance defined plan contributions made plan 782 768 926 1999 1998 1997 respectively 8 postretirement benefits pensions partnership provides postretirement health care life insurance benefits certain retired employees dependents following provides reconciliation benefit obligations plan assets funded status health life insurance plans change benefit obligation benefit obligation beginning year 2910 2294 service cost interest cost plan participants contributions amendments actuarial gain 210 173 benefits paid 130 30 benefit obligation end year 2951 2910 change plan assets market value assets january 1 employer contributions plan participants contributions benefits paid 130 30 market value assets december 31 funded status plan 2951 2910 unrecognized actuarial gain 23 231 unrecognized prior benefit cost 310 399 accrued cost 2618 2280 net periodic postretirement benefit cost 1999 1998 1997 include following components service cost 253 157 101 interest cost net periodic benefit cost 449 318 243 discount rate used determining apbo december 31 1999 1998 775 675 respectively assumed health care cost trend rate used measuring apbo december 31 1999 1998 varies age participant retirement date ranges 65 80 respectively rates assumed decrease gradually 50 2021 remain level thereafter increasing health care cost trend rates one percentage point would material effect december 31 1999 apbo net periodic postretirement expense 9 valuation qualifying accounts balance beginning period additions charged cost expenses deductions 1 balance end period allowance doubtful accounts year ended december 31 1999 2187 6364 8490 61 year ended december 31 1998 35581 28487 61881 2187 year ended december 31 1997 13908 40230 18557 35581 1 includes accounts written allowances made 10 subsequent event january 28 2000 respective partners dontech partnership agreed amend dontech partnership agreement provide payment 29898 dontech partnership apiil preferential distribution preferential distribution comprised cash funds totaling 13332 forgiveness cancellation receivable due apiil partnership amount 16566 additionally partners dontech ii also agreed amend dontech ii partnership agreement provide payment 29898 apiil dontech ii partnership upon dissolution dontech ii partnership subsequent payment 29898 preferential distribution rh donnelley item 9item 8 financial statements supplementary data report independent accountants board directors shareholders rh donnelley corporation opinion accompanying consolidated balance sheets related consolidated statements operations shareholders equity deficit cash flows present fairly material respects financial position rh donnelley corporation company subsidiaries december 31 2000 1999 results operations cash flows three years period ended december 31 2000 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp new york new york february 16 2001 rh donnelley corporation consolidated statements operations accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated balance sheets accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements cash flows accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements changes shareholders equity deficit accompanying notes integral part consolidated financial statements rh donnelley corporation notes consolidated financial statements thousands except share per share data unless otherwise noted 1 basis presentation prior july 1 1998 rh donnelley corporation company operated part dun bradstreet corporation context specifically describing distribution referred old db otherwise db board directors old db approved principle plan separate two publicly traded companies rh donnelley corporation new dun bradstreet corporation new db distribution method old db distributed shareholders shares new db common stock july 1 1998 part distribution old db distributed shareholders shares new db stock old db changed name rh donnelley corporation consolidated financial statements reflect results operations cash flows company separate entity periods presented prior distribution db provided certain centralized services company cost allocated company allocations totaled 11570 six months ended june 30 1998 included operating expenses general administrative expenses consolidated statements operations management believes allocations reasonable however believes costs services indicative costs would incurred company performed provided services separate entity connection distribution rh donnelley inc companys direct subsidiary donnelley obtained senior revolving credit facility 100000 senior secured term facilities aggregate amount 300000 donnelley initially borrowed 350000 combined facilities addition donnelley issued 150000 senior subordinated notes net proceeds distributed db connection distribution repayment indebtedness remains obligation donnelley guaranteed company net distributions db include net cash transfers thirdparty liabilities paid behalf company db amounts due tofrom db services charges interest charged intercompany transactions 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company direct indirect wholly owned subsidiaries intercompany transactions balances eliminated see note 4 partnership joint venture investments consolidation policy companys partnership joint venture investments revenue recognition company serves sales agent sales commission revenue recognized time advertising contract executed customer includes sales commission revenue realized sprint including cendon directories published june 30 2000 bell atlantic june 30 2000 company publisher revenue recognized directory published included revenue realized publication directories cendon june 30 2000 publication companys cincinnati proprietary directory 1999 revenue recognized 2000 cincinnati proprietary operation business sold prior scheduled directory publication date revenue companys prepress publishing operations recognized straightline basis throughout year services performed cash equivalents cash equivalents include highly liquid investments maturity less three months time acquisition unbilled receivables unbilled receivables represent commission revenue earned sale advertising directories scheduled published publisher receivables billed publisher upon directory publication accordance contractual provisions december 31 1999 unbilled receivables also included revenue earned publication cincinnati directory yet billed advertisers billed ratably 12month life directory deferred contract costs company publisher direct costs incurred deferred related directory published direct costs incurred company sales agent expensed period incurred property equipment property equipment recorded cost depreciation provided estimated useful lives depreciable assets using straightline method estimated useful lives five years machinery equipment ten years furniture fixtures three five years computer equipment leasehold improvements amortized straightline basis shorter term lease estimated useful life improvement depreciation expense 5532 7104 9561 year ended december 31 2000 1999 1998 respectively property equipment december 31 2000 1999 consisted following capitalized software costs certain direct costs incurred computer software meet needs company customers capitalized costs amortized straightline basis five years effective january 1 1999 company adopted statement position 981 accounting costs computer software developed obtained internal use requires certain costs incurred connection developing obtaining software internal use capitalized amortization expense 9901 11215 10017 year ended december 31 2000 1999 1998 respectively computer software costs capitalized december 31 2000 1999 consisted following income taxes company accounts income taxes liability method accordance sfas 109 accounting income taxes provision income taxes year ended december 31 1998 calculated separatecompany basis prior distribution company included federal certain state income tax returns db income taxes paid behalf company june 30 1998 db included equity concentration credit risk company maintains significant receivable balances operating units sbc communications inc sbc sprint corporation sprint bell atlantic corporation known verizon communications bell atlantic prior early termination agency agreements see note 3 disposition businesses ultimate remittance receivables subject adjustment specified maximums contractual provisions based collections companies individual advertisers company currently foresee credit risk associated receivables due high credit ratings counterparties company establishes sales allowance doubtful accounts based expected collectibility receivables advertisers principally based upon historical trends derivative financial instruments company uses interest rate swap agreements manage market risk reduce exposure fluctuations interest rates variable rate debt company makes fixedrate payments receives variablerate payments periodic payments receipts recorded part interest expense related amount payable receivable counterparty end period included accrued interest payable current assets fair value interest rate swaps recognized consolidated financial statements accounted hedges interest rate swaps cease qualify hedge subsequent gains losses would recognized income company subject credit risk event nonperformance counterparty interest rate swap agreements however company anticipate nonperformance counterparty company use derivative financial instruments trading speculative purposes june 1998 financial accounting standards board fasb issued statement 133 fas 133 accounting derivative instruments hedging activities september 2000 fasb issued statement 138 accounting certain derivative instruments hedging activities amendment fas 133 fas 133 amended requires companies recognize derivative instruments balance sheet fair value regardless purpose intent holding subsequent changes fair value would recognized either earnings shareholders equity component comprehensive income depending purpose derivative instrument fas 133 amended effective fiscal quarters fiscal years beginning june 15 2000 management determined adoption fas 133 material adverse effect companys earnings financial position interest rate swap instruments designated cash flow hedges subsequent changes fair value derivative instruments recognized comprehensive income earnings per share basic earnings per share calculated dividing net income weighted average common shares outstanding year diluted earnings per share calculated dividing net income weighted average common shares outstanding plus potentially dilutive common shares primarily stock options calculated using treasury stock method table provides reconciliation basic weighted average shares outstanding diluted weighted average shares outstanding december 31 2000 1999 1998 options purchase 12800 32700 2026740 shares common stock respectively included computation diluted weighted average shares outstanding effect would antidilutive 1998 company executed oneforfive split outstanding common stock share per share data provided herein adjusted reflect reverse stock split treasury stock activity company open market share repurchase plan systematic share repurchase plan systematic share repurchase plan intended offset dilutive impact earnings exercise employee stock options april 2000 board directors authorized company acquire 100000 common stock open market share repurchase plan following 18 24 months purchases common stock accounted using cost method whereby total cost shares reacquired charged treasury stock contra equity account treasury stock reissued cost shares reissued determined based firstin firstout cost flow assumption charged treasury stock excess reissuance price cost credited additional paidin capital december 31 2000 company authority repurchase 75724 common stock 100000 open market share repurchase plan repurchase 2281300 shares systematic share repurchase plan estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities revenue expenses disclosure contingent assets liabilities actual results could differ materially estimates assumptions estimates assumptions used determination sales allowances bad debts depreciation amortization employee benefit plans among others reclassifications certain prior year amounts reclassified conform current years presentation reclassifications impact previously reported results operations shareholders deficit 3 disposition businesses april 27 2000 company sold cincinnati proprietary directory business yellow book usa inc 8000 june 30 2000 company entered agreement affiliate bell atlantic early termination directory services agreements company bell atlantic dated september 5 1985 may 5 1998 amended agency agreements pursuant agency agreements company served exclusive sales agent bell atlantic directories covering substantially new york state agency agreements scheduled expire 2005 2003 respectively terms agreement company received cash proceeds 114000 reduced approximately 3000 liabilities assumed bell atlantic related preclosing period company also received commissions approximately 42000 sales occurred prior closing yet payable terms agency agreements addition commissions approximately 15000 received sales certain directories published preclosing period agency agreements accounted approximately 10 8 consolidated operating income 1999 1998 respectively december 2000 company ceased operations get digital smart gds business gds launched february 2000 miamift lauderdale market test economic viability providing variety products services designed deliver comprehensive package internet marketing ecommerce capabilities small mediumsized local businesses december 2000 company entered agreement pursuant innuity inc provider ecommerce services small mediumsized businesses assumed rights obligations gds customer contracts company recognized onetime costs 2940 severance related costs company also implemented costcutting measures 2000 including headcount reductions raleigh nc facility corporate headquarters consistent current operating structure pretax gain transactions 86495 53454 taxes recognized 4 partnership joint venture investments dontech 1991 company formed general partnership operating unit ameritech corporation ameritech dontech partnership dontech prior august 1997 dontech published various directories illinois northwest indiana august 1997 company signed series agreements ameritech changing structure existing partnership new partnership formed dontech appointed exclusive sales agent perpetuity ameritechs illinois northwest indiana yellow pages directories ameritech became publisher new sales agency arrangement dontech performs advertising sales function directories earns commission company 50 interest profits dontech company also receives direct fees revenue participation tied advertising sales sbc parent company ameritech company accounts investment dontech equity method accounting companys share partnership results revenue participation fees sbc reflected income partnerships related fees income related fees dontech totaled 124025 123524 120087 2000 1999 1998 respectively amounts included revenue participation income 103354 103755 99727 2000 1999 1998 respectively companys investment dontech including revenue participation receivable sbc 197822 197307 december 31 2000 1999 respectively cendon company received commissions served exclusive sales agent cendon partnership cendon 5050 partnership company centel directory company centel subsidiary sprint formed publish directories florida nevada virginia north carolina effective directories published june 30 2000 company centel entered series agreements effectively restructured existing cendon partnership limited liability company cendon llc together cendon relationship prior restructuring company accounted investment cendon equity method accounting recognized share profits income partnerships related fees cendon llc agreement company continues receive commissions also receives priority distribution membership interest cendon llc tied advertising sales commissions recorded revenue priority distribution recorded income partnerships related fees cendon agency relationship extends december 2010 cendon llc agreement revenue related costs recognized time sale rather time directory publication historically case cendon accordingly 2000 results include onetime operating income benefit 15771 relating advertising sales made related costs incurred prior effective date agreement directories published subsequent effective date agreement company recognized income related fees cendon relationship 24747 16935 15767 2000 1999 1998 respectively income related fees amount 2000 includes onetime benefit 5422 restructuring partnership agreement companys investment cendon llc case may including priority distribution receivable 16012 18348 december 31 2000 1999 respectively company provided sales prepress publishing services cendon continues provide similar services cendon llc net revenue cendon relationship 62179 39240 39068 2000 1999 1998 respectively amount 2000 includes onetime sales commission revenue 20956 restructuring partnership agreement chinabigcom limited company 18 interest chinabigcom limited previously known unicom media limited chinabig publishes yellow pages directories offers internet directory services peoples republic china company actively involved daily operations chinabigs yellow pages business due companys ability influence daily operations chinabig accounted investment equity method however 2000 management chinabig made decision focus time resources internet aspect business plan known chinabigcom connection equity investment unaffiliated third party order facilitate raising additional capital provide greater flexibility chinabig existing investor including company restructured existing joint venture agreement chinabig among things significantly reduce companys ability influence daily operations chinabig result restructured agreement effective june 15 2000 company became passive investor accounts investment cost method therefore company longer recognizes share losses chinabig company recognized loss chinabig 1078 2000 june 15 2000 1278 1999 5 longterm debt credit facilities longterm debt december 31 2000 1999 consisted following senior subordinated notes pay interest semiannually mature june 2008 indenture governing notes contains covenants among things restrict ability company subsidiaries incur certain additional debt liens engage mergers consolidations asset sales notes callable option company time june 1 2003 companys committed bank facilities consist aggregate 300000 senior secured term facilities term facilities 100000 senior revolving credit facility revolver together term facilities credit agreement term facilities require quarterly principal repayments mature june 2004 december 2006 revolver matures june 2004 facilities bear interest floating rate based spread london interbank offered rate libor greater either prime rate fed funds rate plus 50 basis points election company companys obligations credit agreement secured security interests granted lenders substantially companys assets including capital stock existing newly formed subsidiaries credit agreement contains covenants among things restrict ability company subsidiaries engage mergers consolidations asset sales incur additional indebtedness pay dividends create liens require company maintain certain financial ratios weighted average annual interest rate outstanding debt credit agreement december 31 2000 1999 72 74 respectively december 31 2000 company available borrowing capacity 100000 revolver 2000 company prepaid 90000 outstanding term facilities connection prepayment company recognized extraordinary loss 704 net taxes 440 writeoff related deferred financing costs aggregate maturities longterm debt december 31 2000 6 commitments contingencies company leases office facilities computer equipment operating leases terms expiring various dates 2006 rent expense real estate operating leases 2000 1999 1998 5896 7543 6948 respectively lease expense computer equipment leases 1169 2298 2032 2000 1999 1998 respectively noncancelable minimum rental payments applicable operating leases december 31 2000 april 1999 sandy goldberg dellwood publishing inc rockland yellow pages initiated lawsuit company bell atlantic united states district court southern district new york rockland yellow pages proprietary directory competes bell atlantic directory region company served bell atlantics sales agent june 30 2000 complaint alleged defendants disseminated false information concerning rockland yellow pages resulted damages rockland yellow pages plaintiffs alleged variety claims including rico violations antitrust violations lanham act violations sought damages excess 30000 amount plaintiffs sought trebled antitrust laws addition plaintiffs also sought punitive damages unspecified amount february 2000 yellow book usa inc one companys primary competitors acquired dellwood publishing inc matter part assets acquired yellow book june 1999 defendants filed motion dismiss complaint september 2000 court dismissed complaint entirety gave plaintiffs 30 days leave amend complaint replead claims rico claims october 2000 plaintiffs filed amended complaint alleging substantially facts claims damages set forth original complaint rico claims november 2000 defendants filed motion dismiss amended complaint preliminary stage proceedings management unable predict outcome matter presently believes resolution action material adverse effect companys financial position results operations july 1996 information resources inc iri filed complaint united states district court southern district new york naming defendants company successor old db acnielsen company ims international inc former subsidiaries db iri action complaint alleges among things various violations antitrust laws seeks damages excess 350000 iri seeking trebled antitrust laws iri also seeks punitive damages unspecified amount definitive agreement entered connection distribution agreement new db assumed defense indemnify company payments made company respect iri action indemnity joint defense agreement entered connection distribution otherwise including ongoing legal fees expenses related thereto management presently believes new db sufficient financial resources andor borrowing capacity satisfy liabilities reimburse company costs expenses incurred management believe recent separation moodys new db material adverse impact indemnity rights company required distribution agreement moodys agreed jointly severally liable new db indemnity obligations company certain tax planning strategies entered old db currently subject review tax authorities pursuant series agreements ims health incorporated ims nielsen media research inc nmr former subsidiaries db jointly severally liable pay 50 old db liable remaining 50 payments taxes accrued interest arising matter certain potential tax liabilities old db pays first 137000 tax liability explained result form distribution company corporate successor taxpayer referred herein old db however pursuant terms distribution agreement tax allocation agreement executed connection distribution new db assumed defense indemnify company payments made company respect tax liability may assessed costs expenses relating thereto including ongoing legal fees expenses related thereto may 2000 internal revenue service irs issued summary report respect taxplanning strategies connection summary report new db filed amended tax return 1989 1990 reflected 561600 tax interest due paid irs approximately 349300 amount ims paid approximately 212300 company understands payments funded shortterm borrowings paid dispute order stop additional interest accruing management presently believes new db ims nmr sufficient financial resources andor borrowing capacity satisfy liabilities reimburse company costs expenses relating thereto management believe recent separation moodys new db material adverse impact indemnity rights company required distribution agreement moodys agreed jointly severally liable new db indemnity obligations company matters described company involved legal proceedings claims litigation arising ordinary conduct business although assurances management presently believes outcome legal proceedings material adverse effect companys financial position results operations cash flows 7 benefit plans retirement plans prior distribution substantially employees company eligible participate dbs defined benefit defined contribution pension plans accounted multiemployer plans benefits defined benefit pension plan determined based participants average compensation years service final average pay benefit terms distribution agreement company assumed responsibility pension benefits active employees company vested benefits db defined benefit pension plan responsibility retirees vested terminated employees prior distribution remained db companys financial statements include allocated costs db relating defined benefit pension plan 1121 six months ended june 30 1998 subsequent distribution company established defined benefit pension plan covering substantially employees benefits paid employees based years service percentage total annual compensation percentage compensation allocated retirement account ranges 30 125 depending age years service cash balance benefit benefits paid certain employees participants prior db defined benefit pension plan equal greater final average pay benefit cash balance benefit pension costs determined using projected unit credit actuarial cost method companys funding policy contribute amount least equal minimum legal funding requirement contributions made plan 2000 1999 due overfunded status plan company would entitled current tax deduction contributions made would required pay annual excise taxes underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities company also two unfunded nonqualified defined benefit pension plans pension benefit equalization plan pbep supplemental executive benefit plan sebp senior executives certain key employees entitled participate plans provide retirement benefits based years service compensation including compensation permitted taken account previously mentioned defined benefit pension plan company also maintains defined contribution savings plan substantially employees company makes contribution 50 cents dollar contributed participating employee maximum 6 participating employees salary company made contributions plan 1287 1662 1626 year ended december 31 2000 1999 1998 respectively postretirement benefits prior distribution db provided certain health care life insurance benefits retired employees company accounted plan multiemployer plan terms distribution agreement company assumed responsibility postretirement benefits active employees company companys financial statements include allocated costs db relating postretirement benefits 893 six months ended june 30 1998 subsequent distribution company established unfunded postretirement benefit plan provides certain health care life insurance benefits fulltime employees reach retirement age working company result disposition businesses 2000 resulting reduction headcount company recognized curtailment gain 4756 2450 retirement plans postretirement plan respectively amounts reported component net gain disposition businesses consolidated statement operations summary funded status benefit plans december 31 2000 1999 follows pbep sebp unfunded plans projected benefit obligation pbep sebp 840 3628 december 31 2000 782 3072 december 31 1999 respectively accumulated benefit obligation pbep sebp 391 1359 december 31 2000 320 1200 december 31 1999 respectively net periodic benefit income expense benefit plans follows following assumptions used determining benefit obligation net periodic benefit income expense measurement purposes 65 annual rate increase per capita cost covered health care benefits assumed 2001 rate assumed decrease gradually 50 2021 remain level thereafter assumed health care cost trend rates significant effect amounts reported health care plans onepercentagepoint increase would increase accumulated postretirement benefit obligation december 31 2000 430 service interest cost components postretirement benefit expense year ended 60 onepercentagepoint decrease would decrease accumulated postretirement benefit obligation december 31 2000 370 service interest cost components postretirement benefit expense year ended 50 8 stock option plans companys 1991 key employees stock option plan amended stock option plan certain employees eligible receive stock options stock appreciation rights limited stock appreciation rights tandem stock options immediately distribution outstanding stock options stock option plan june 30 1998 held company employees adjusted ratio exercise price per option market value per share aggregate difference market value exercise price vesting provisions option periods terms conditions applicable prior distribution options may granted less fair market value companys common stock date grant vesting period awards stock option plan determined board date grant typically become exercisable equal annual installments four years expire ten years grant date company never granted stock appreciation rights limited stock appreciation rights changes stock options stock option plan six months ended june 30 1998 shown following table based historical db prices giving retroactive effect reverse oneforfive stock split august 1998 1 includes 12725 options granted employees dontech compensation expense 66 relating options recognized 1999 2 includes 16278 options granted employees dontech compensation expense 176 related options granted dontech employees recognized 2000 following table summarizes information stock options outstanding exercisable stock option plan december 31 2000 1367777 shares exercisable december 31 1999 1456610 shares exercisable december 31 1998 weighted average fair value options granted 2000 1999 1998 536 706 491 respectively based blackscholes option pricing model certain assumptions set forth december 31 2000 4572889 shares available future grants stock option plan terms plan grants permitted february 2001 1998 directors stock option plan directors plan company grants nonemployee directors annual award 1500 deferred shares option purchase 1500 shares companys common stock additionally nonemployee directors receive option purchase 1500 shares upon election board nonemployee directors may also elect receive additional options purchase shares companys common stock lieu annual cash retainer fee option grants deferred shares vest equally threeyear period stock options deferred shares granted 2000 1999 1998 23300 shares 22000 shares 17677 shares respectively december 31 2000 1999 16677 7789 stock options exercisable shares exercisable december 31 1998 december 31 2000 87023 shares available future grants directors plan weighted average fair value options granted 2000 1999 1998 613 437 362 respectively based blackscholes option pricing model certain assumptions set forth company follows accounting principles board opinion 25 accounting stock issued employees related interpretations accounting stock option plan directors plan accordingly compensation expense related issuance stock option grants employees nonemployee directors recognized following table reflects pro forma net income diluted earnings per share assuming company applied fair value method sfas 123 accounting stockbased compensation pro forma disclosures shown representative effects income diluted earnings per share future years fair value stock options used compute pro forma disclosures estimated using blackscholes optionpricing model following weighted average assumptions 9 income taxes provision income taxes consisted following table summarizes significant differences us federal statutory tax rate companys effective tax rate deferred tax assets liabilities consisted following december 31 2000 1999 10 financial instruments companys financial instruments december 31 2000 1999 consisted following carrying amount cash equivalents approximates fair value due shortterm nature instruments longterm debt consists borrowings credit agreement notes carrying amount companys borrowings credit agreement december 31 2000 1999 201750 294750 respectively approximates fair value obligations bear interest floating rates carrying amount notes december 31 2000 1999 150000 fair value notes determined based quoted market price december 31 2000 1999 145500 146625 respectively company enters interest rate swap agreements manage market risk reduce exposure fluctuations interest rates variable rate debt interest rate swaps effectively change interest rate portion companys variable rate debt fixed rates december 31 2000 1999 company outstanding interest rate swaps notional value 175000 expiration dates june 2001 june 2003 company makes fixedrate payments rates ranging 586 590 weighted average pay rate 588 receives floatingrate payments based rates tied prevailing shortterm interest rates weighted average receive rate 2000 1999 64 52 respectively fair value estimated amount company would receive pay terminate agreements determined based quoted market interest rates company terminates swap agreement gain loss amortized shorter remaining original life debt swap 11 business segments result transactions described note 3 disposition businesses company restructured reportable operating segments 2000 better reflect current operations way management views businesses company organized three business segments december 31 2000 dontech partnership directory advertising services das get digital smart prior period amounts restated accordance new reporting structure dontech segment includes companys 50 interest profits dontech revenue participation income include allocation certain operating general administrative expenses incurred support business although dontech provides advertising sales yellow pages directory products similar das partnership considered separate operating segment since among things employees dontech including officers managers employees company within das segment company provides advertising sales marketing services yellow pages directory products affiliated entities sprint performs prepress publishing services yellow pages directories das includes companys prepress publishing operations formerly reported separately directory publishing services information technology costs portion previously allocated included company exclusive sales agent central florida operating unit sprint exclusive sales agent nevada florida virginia north carolina cendon company also provides prepress publishing services yellow pages directories publishers company serves sales agent well otherwise unaffiliated independent yellow pages publisher separately negotiated contracts das also includes operating results bell atlantic cincinnati businesses investment chinabig dates transactions caused changes reporting respective business see note 3 disposition businesses note 4 partnership joint venture investments gds segment includes get digital smart business began operations first quarter 2000 test economic viability offering internet marketing ecommerce services small mediumsized businesses miamift lauderdale market company ceased operations business december 2000 company evaluates performance operating segments allocates resources based operating income factors expenses purposes computing operating income reportable segments except dontech includes costs directly incurred business unit plus allocation certain shared operating general administrative expenses based estimated business usage represents expenses assets allocated operating segments interest expense interest income tax expense nonoperating income expenses allocated operating segments company historically derived significant portion net revenue bell atlantic sprint net revenue bell atlantic represented 30 total net revenue 2000 june 30 2000 54 1999 49 1998 net revenue sprint including cendon represented 46 total net revenue 2000 23 1999 25 1998 segment information years ended december 31 2000 1999 1998 presented 1 directory advertising services segment information includes following data relating bell atlantic cincinnati businesses disposed 2000 certain onetime items related cendon restructuring see notes 3 4 2 gds shutdown december 2000 accordingly operating segment 2001 3 advertising sales represent billing value advertisements sold annual directory company dontech calendar cycle advertising sales represent billing value advertisements sold annual directory stated basis revenue recognized sales contract signed company acts sales agent directory published company acted publisher publication cycle sales represent sales directories published current period compared sales directories published prior period regardless advertising directory sold directory publication date changes one year next prior year publication date adjusted conform present year maintain comparability 4 ebitda represents earnings interest taxes depreciation amortization ebitda measurement operating performance computed accordance generally accepted accounting principles considered substitute operating income net income prepared conformity generally accepted accounting principles addition ebitda may comparable similarly titled measures companies 5 publication cycle sales 1998 das adjusted amount originally reported reduce sales 481 conform 1999 publication dates publication cycle sales 1998 dontech also adjusted amount originally reported increase sales 5830 conform 1999 publication dates also 1999 sprint assumed responsibility national advertising sales central florida consideration annual fee payable company consequently national advertising sales 1999 accordingly conform 1999 presentation national sales 6051 excluded 1998 publication cycle sales das 12 valuation qualifying accounts 1 primarily includes sales allowances accounts written 13 quarterly information unaudited includes pretax gain disposition businesses 89435 55271 tax second quarter pretax loss disposition business 2940 1817 tax fourth quarter b includes extraordinary loss 704 net taxes 440 third quarter relating writeoff deferred financing costs connection early repayment debt c basic earnings per share extraordinary loss third quarter full year 074 391 respectively diluted earnings per share extraordinary loss third quarter full year 072 383 respectively full year earnings per share amount may equal sum quarters due changes average share calculations rounding report independent accountants board directors partners dontech ii opinion accompanying combined balance sheets related combined statements partners capital operations cash flows present fairly material respects combined financial position amdon business dontech hereafter referred dontech ii partnership dontech ii december 31 2000 1999 combined results operations cash flows three years period ended december 31 2000 conformity accounting principles generally accepted united states america financial statements responsibility management dontech ii responsibility express opinion combined financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp january 12 2001 chicago illinois dontech combined statements operations accompanying notes integral part financial statements dontech combined balance sheets accompanying notes integral part financial statements dontech combined statements cash flows accompanying notes integral part financial statements dontech combined statements partners capital accompanying notes integral part financial statements dontech notes combined financial statements amounts thousands 1 form organization nature business amdon dba dontech general partnership rh donnelley inc formerly known reuben h donnelley corporation rh donnelley delaware corporation ameritech publishing illinois inc apiil illinois corporation business ameritech advertising services aas new structure defined master agreement dated august 19 1997 existing partnership defined dontech concurrently apiil rh donnelley formed new partnership defined dontech ii dontech participated directory agreement rh donnelley illinois bell telephone company ibt business ameritech illinois apiil aas dontech also participated subcontracting agreement ameritech publishing inc api perform certain apis obligations publishing services contract api indiana bell telephone company incorporated indiana bell business ameritech indiana dontech published various directories identified directory agreements solicited advertising primary source revenues manufactured delivered directories dontech net income allocated partner based predefined percentage set forth amended partnership agreement accordance second amended restated amdon partnership agreement effective august 19 1997 dontech partnership ceased publishing directories january 1 1998 partnership recognized deferred revenue expenses recorded december 31 1997 remaining life directories published prior january 1 1998 december 31 2000 dontech ceased business operations remaining assets distributed partners august 1997 rh donnelley apiil reached agreement regarding revised partnership structure new dontech partnership became exclusive sales agent perpetuity yellow page white page street address directories published api illinois northwest indiana michigan new partnership known dontech ii receives 27 commission sales net provisions capped 61 per annum subject certain exclusions dontech iis cost structure includes principally sales operations office services finance facilities related overhead dontech ii profits shared equally partners term partnership agreement neither partner may compete directly business dontech ii without consent board directors board directors board appointed administer activities partnership time term partnership board may call additional capital contributions equal amounts partners opinion board additional capital required operation partnership accompanying financial statements dontech ii shown combined basis significant affiliated accounts transactions eliminated preparation combined financial statements january 28 2000 respective partners dontech agreed amend dontech partnership agreement provide payment 29898 dontech apiil preferential distribution preferential distribution comprised cash funds totaling 13331 forgiveness cancellation receivable due apiil partnership amount 16567 additionally partners dontech ii also agreed amend dontech ii partnership agreement provide payment 29898 apiil dontech ii upon dissolution dontech ii subsequent payment 29898 preferential distribution dontech ii rh donnelley 2 significant accounting policies cash equivalents cash equivalents include highly liquid investments initial maturity date three months less carrying value cash equivalents approximates fair value due shortterm nature revenue recognition substantially dontech sales made customers cities covered directories recorded deferred sales revenue accounts receivable month publication revenue related sales recognized lives directories generally twelve months sales made customers outside cities covered directories recognized quarter sales national accounts recognized full month publication dontech ii revenue comprised sales commissions reflected net provisions capped 61 per annum subject certain exclusions recognized upon execution contracts sale advertising fixed assets fixed assets recorded cost depreciated straightline basis estimated useful lives assets upon asset retirement disposition cost related accumulated depreciation removed accounts resulting gain loss included statement operations amounts incurred repairs maintenance charged operations deferred expense printing manufacturing compilation sales delivery administrative costs dontech publications deferred recognized proportion revenue postretirement benefits pensions dontech ii obligated provide postretirement benefits consisting mainly life health insurance substantially employees dependants accrual method accounting utilized postretirement health care life insurance benefits income taxes provision income taxes recognized proportional share partnerships income responsibility individual partners concentration credit risk financial instruments potentially subject partnership concentration credit risk consist principally accounts receivables dontech trade accounts receivable dontech ii commissions receivable due aas collateral generally required either partnerships customers use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expense reporting period actual results could differ estimates 1999 dontech recorded 6200 charge related bad debts allocated partner based respective share partnership loss stipulated partnership agreement recent pronouncements june 1998 fasb issued sfas 133 accounting derivative instruments hedging activities statement establishes accounting reporting standards derivative instruments hedging activities requires recognition derivatives assets liabilities statement financial position measurement instruments fair value statement amended effective fiscal years beginning june 15 2000 dontech ii derivative instruments hedging activities sfas 133 expected material effect financial results 3 fixed assets fixed assets consist following december 31 depreciation expense three years ending december 31 2000 1999 1998 2135 2615 3088 respectively year ended december 31 2000 dontech ii disposed 9565 fixed assets longer utilized assets fully depreciated disposal activity resulted net loss 44 reflected statement operations year ended december 31 2000 4 related party transactions amended partnership allocation partners negotiated settlement agreements regarding excessive bad debt writeoffs incurred dontech years ended december 31 1999 1998 agreements provided special allocations excessive bad debts partners based upon negotiated ratio effect settlement agreements included allocation net income presented statement partners capital december 31 1999 1998 dontech ii provisions revenue participation agreement apil partners partnership rh donnelley dated august 19 1997 exchange exclusive publishing rights apil partners partnership agrees pay rh donnelley revenue participation interests revenue participation interests based upon gross revenues dontech ii partnership net provisions capped 61 per annum subject certain exclusions sales commissions paid dontech ii revenue participation interest 348 1998 359 1999 2000 payment revenue participation interest outside dontech ii partnership structure reflected combined financial statements partnership purchases insurance services august 2000 purchased car plan administration rh donnelley general ledger purchasing services aas partnership also provides facility space certain employees aas agreement entered 1998 5 contingencies commitments dontech ii leases certain office facilities noncancelable lease arrangements rent expense operating leases 2119 1807 2743 2000 1999 1998 respectively 2000 dontech ii entered sublease agreement sbc directory operations sbc whereby dontech ii received 30 sublease rental income sbc 2000 future minimum lease payments required noncancelable operating leases initial remaining lease terms excess one year december 31 2000 follows september 1998 dontech entered maintenance service agreement ameritech provide maintenance services including parts dontech ii length agreement five years according terms agreement dontech iis obligations life agreement december 31 2000 follows 6 employee retirement profit participation plans dontech ii sponsors defined benefit pension plan covering substantially employees plan plans assets invested equity funds fixed income funds real estate net periodic pension benefit expense plan 342 564 820 2000 1999 1998 respectively following provides reconciliation benefit obligations plan assets funded status plan net periodic pension benefit cost plan 2000 1999 1998 include following components fourth quarter 2000 partnership changed method accounting used determine value plan assets purposes calculating annual pension expense method changed marketrelated value whereby gains losses recognized straightline basis five years market value whereby gains losses reflected immediately effect change 2000 results operations including cumulative effect prior years material additionally dontech ii profit participation plan profit plan covers substantially employees may voluntarily contribute 6 salaries profit plan guaranteed matching contribution fifty cents per dollar contributed dontech ii also makes contributions profit plan based formula contingent upon attainment financial goals set advance defined profit plan contributions made profit plan 854 782 768 2000 1999 1998 respectively 7 postretirement benefits pensions dontech ii provides postretirement health care life insurance benefits certain retired employees dependents following provides reconciliation benefit obligations plan assets funded status health life insurance plans net periodic postretirement benefit cost 2000 1999 1998 include following components discount rate used determining accumulated postretirement benefit obligation apbo december 31 2000 1999 750 775 respectively assumed health care cost trend rate used measuring apbo december 31 2000 1999 varies age participant retirement date ranges 65 80 respectively rates assumed decrease gradually 50 2021 remain level thereafter increasing health care cost trend rates one percentage point would material effect december 31 2000 apbo net periodic postretirement expense 8 valuation qualifying accounts 1 includes accounts written allowances made item 9item 8 financial statements supplementary data report independent accountants board directors shareholders rh donnelley corporation opinion accompanying consolidated balance sheets related consolidated statements operations shareholders deficit cash flows present fairly material respects financial position rh donnelley corporation company subsidiaries december 31 2001 2000 results operations cash flows three years period ended december 31 2001 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp new york new york february 8 2002 rh donnelley corporation consolidated statements operations accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated balance sheets accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements cash flows accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements changes shareholders deficit accompanying notes integral part consolidated financial statements rh donnelley corporation notes consolidated financial statements thousands except share per share data unless otherwise noted 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts company direct indirect wholly owned subsidiaries intercompany transactions balances eliminated dontech partnership dontech consolidated companys financial statements dontech accounted equity method whereby company recognizes 50 share net profits dontech consolidated statements operations partnership joint venture income revenue recognition earn revenue form commissions sale advertising fees prepress publishing services sales agent sales commission revenue recognized time advertising contract executed customer includes sales commission revenue realized affiliates sprint corporation sprint including cendon llc cendon directories published june 30 2000 affiliates bell atlantic corporation known verizon communications bell atlantic june 30 2000 company publisher part publishing partnership revenue recognized directory published included revenue realized publication directories cendon partnership june 30 2000 publication companys cincinnati proprietary directory 1999 revenue recognized 2000 cincinnati proprietary operation business sold prior scheduled directory publication date sales commission revenue recorded net potential claims allowances estimated based historical experience revenue companys prepress publishing operations recognized services performed partnership joint venture income partnership joint venture income includes companys 50 share net profits dontech revenue participation income sbc communications inc sbc priority distribution companys membership interest cendon priority distribution revenue participation income priority distribution earned recognized sales contract executed customer prior restructuring cendon relationship effective july 1 2000 company accounted cendon partnership equity method recognizing 50 share net profits cendon partnership joint venture income company also accounted investment chinabigcom limited chinabig equity method june 15 2000 time company became passive investor began accounting investment cost method see also note 5 partnership joint venture investments cash equivalents cash equivalents include highly liquid investments maturity less three months time acquisition trade receivables trade receivables represent sales commissions earned sale advertising fees prepress publishing services company establishes allowance doubtful accounts based expected collectibility receivables advertisers based upon historical experience contractual provisions receivables sales commissions billed publisher upon directory publication collected accordance contractual provisions typically month publication receivables prepress publishing services billed collected accordance terms applicable agreement fixed assets computer software fixed assets recorded cost depreciation provided estimated useful lives depreciable assets using straightline method estimated useful lives five years machinery equipment ten years furniture fixtures three five years computer equipment leasehold improvements amortized straightline basis shorter term lease estimated useful life improvement certain direct costs incurred computer software meet needs company customers capitalized accordance sop 981 accounting costs computer software developed obtained internal use amortized straightline basis five years fixed assets computer software december 31 2001 2000 consisted following depreciation amortization expense years ended december 31 2001 2000 1999 follows partnership joint venture investments company includes carrying value dontech investment revenue participation receivable sbc priority distribution receivable sprint partnership joint venture investments investment chinabig noncurrent assets carrying value partnership joint venture investments evaluated impairment events changes circumstances indicate carrying value investment may impaired impairment deemed occurred impairment determined permanent carrying value investment writtendown estimated fair value estimate fair value would determined based independent third party valuations discounting estimated future cash flows based independent third party valuation impairment charge 11432 recorded 2001 related chinabig investment see also note 3 investment impairment charge concentration credit risk company maintains significant receivable balances sbc sprint revenue participation priority distribution sales commissions ultimate remittance receivables subject adjustment specified maximums contractual provisions based collections companies individual advertisers company currently foresee material credit risk associated receivables although assurance full payment received timely manner derivative financial instruments companys derivative financial instruments limited interest rate swap agreements used manage exposure fluctuations interest rates variable rate debt december 31 2001 2000 company outstanding interest rate swaps notional value 125000 175000 respectively company makes fixedrate payments 59 receives variablerate payments based 3month libor rates weighted average rate received 2001 2000 30 64 respectively periodic payments receipts recorded part interest expense related amount payable receivable counterparty end period included accrued interest payable current assets company terminates swap agreement gain loss amortized shorter remaining original life debt swap company subject credit risk event nonperformance counterparty agreements however loss limited amount would received remaining life agreements counterparty agreements major financial institution company currently anticipate nonperformance counterparty company use derivative financial instruments trading speculative purposes swap notional principal value 50000 set expire june 2002 swap notional principal value 75000 set expire june 2003 provisions fas 133 accounting derivative instruments hedging activities amended fas 137 fas 138 fas 133 became effective company january 1 2001 fas 133 requires fair value derivative instruments recognized balance sheet interest rate swaps designated cash flow hedges accordance fas 133 difference fair value company would pay terminate swaps book value swaps unrealized fair value recorded comprehensive income december 31 2001 unrealized fair value loss net related taxes 2330 recognized noncurrent liabilities balance sheet corresponding charge accumulated comprehensive loss component shareholders deficit loss expected reclassified earnings company intends hold swaps respective maturities earnings per share basic earnings per share calculated dividing net income weighted average common shares outstanding year diluted earnings per share calculated dividing net income weighted average common shares outstanding plus potentially dilutive common shares primarily stock options calculated using treasury stock method table provides reconciliation basic weighted average shares outstanding diluted weighted average shares outstanding estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities revenue expenses disclosure contingent assets liabilities actual results could differ materially estimates assumptions estimates assumptions used determination sales allowances bad debts depreciation amortization employee benefit plans restructuring reserve investment impairment among others reclassifications certain prior year amounts reclassified conform current years presentation reclassifications impact previously reported results operations shareholders deficit new accounting pronouncements july 2001 financial accounting standards board fasb issued fas 141 business combinations eliminates poolingofinterests method accounting business combinations modifies application purchase accounting method july 2001 fasb also issued fas 142 goodwill intangible assets eliminates current requirement amortize goodwill indefinitelived intangible assets addresses amortization intangible assets definite life addresses impairment testing recognition goodwill intangible assets fas 142 effective 2002 apply existing goodwill intangible assets well transactions completed statements effective date company recorded goodwill intangible assets december 31 2001 therefore statement impact companys operating results financial condition june 2001 fasb issued fas 143 accounting asset retirement obligations fas 143 addresses financial accounting reporting obligations associated retirement tangible longlived assets associated asset retirement costs statement requires fair value liability asset retirement obligation recognized period incurred reasonable estimate fair value made statement effective 2003 company incurred identified asset retirement obligation liability time therefore statement currently would impact companys results operations financial condition august 2001 fasb issued fas 144 accounting impairment disposal longlived assets fas 144 establishes single model impairment longlived assets broadens presentation discontinued operations include disposal transactions fas 144 effective 2002 expected material impact companys results operations financial condition time adoption 2 restructuring special charge operating results 2001 include restructuring special charge 18556 connection executive management employment transition arrangements expiration prepress publishing contract result elimination approximately 100 positions 2002 charge includes 9937 executive management employment transition arrangements including severance accrued benefits executive pension plans related costs 3252 employee severance related costs 4380 idle leased space raleigh publishing facility planned relocation companys corporate headquarters due excess capacity 987 professional fees writeoff assets longer considered useable addition shortterm restructuring related liabilities consolidated balance sheet includes 2735 previously accrued liabilities paid connection executive management transition arrangements 3 investment impairment charge company currently 18 interest chinabig publishes yellow pages directories offers internet directory services peoples republic china november 2001 management received independent third party valuation chinabigs current business plan capital needs outlook profitability cash flow valuation conducted connection proposed equity financing results valuation provided range possible estimated fair values chinabig implied value companys 18 interest substantially lower carrying value 13432 accordingly management determined carrying value investment permanently impaired recorded impairment charge 11432 write investment 2000 management believes best estimate current fair value investment valuation determined based present value expected cash flows prior valuations chinabig business assumed rapid development internet advertising china currently forecast see also note 5 partnership joint venture investments 4 disposition businesses 2000 company sold cincinnati proprietary directory business yellow book usa inc terminated early directory services agreements bell atlantic ceased operations get digital smart gds business implemented related costcutting measures including headcount reductions raleigh facility corporate headquarters connection actions company received cash proceeds 122009 recognized pretax gain 86495 53454 taxes 5 partnership joint venture investments dontech 5050 perpetual partnership operating unit sbc acts exclusive sales agent yellow pages directories published sbc illinois northwest indiana company receives 50 net profits dontech receives revenue participation income directly sbc directly correlated advertising sales income dontech consisted following companys investment dontech including revenue participation receivable sbc 193810 197822 december 31 2001 2000 respectively cendon company exclusive sales agent nevada florida virginia north carolina cendon llc joint venture centel directory company centel subsidiary sprint prior june 30 2000 company general partner cendon partnership 5050 partnership company centel also served exclusive sales agent effective directories published june 30 2000 company centel entered series agreements effectively restructured cendon partnership limited liability company cendon restructured arrangement company continues receive sales commissions advertising sold consideration transferring control publishing functions centel company also receives priority distribution determined percentage cendon advertising sales priority distribution allows us maintain level profitability would earned cendon partnership original expiration date 2004 company also provided prepress publishing services cendon partnership continues provide similar services cendon sales agency relationship extends december 2010 restructured cendon arrangement revenue related costs recognized time sale rather time directory publication historically case cendon partnership accordingly upon restructuring cendon arrangement 2000 onetime partnership joint venture income benefit 5422 recognized income cendon partnership 17545 24747 16935 2001 2000 1999 respectively priority distribution receivable 15179 16012 december 31 2001 2000 respectively chinabig company currently 18 interest chinabig however result companys prior active involvement daily operations chinabigs yellow pages business investment accounted equity method 2000 connection equity investment unaffiliated third party order facilitate raising additional capital provide greater flexibility chinabig existing investor including company restructured existing joint venture agreement chinabig among things significantly reduce companys involvement daily operations chinabig result restructured agreement effective june 15 2000 company became passive investor accordingly company accounts investment cost method longer recognizes share losses chinabig partnership joint venture income includes loss chinabig 1078 2000 june 15 2000 1278 1999 2001 impairment charge recorded related investment see note 3 investment impairment charge 6 longterm debt credit facilities longterm debt december 31 2001 2000 consisted following senior subordinated notes pay interest semiannually mature june 2008 indenture governing notes contains covenants among things restrict ability company subsidiaries incur certain additional debt liens engage mergers consolidations asset sales notes callable option company time june 1 2003 1046 par percentage declines 15 12month period june 1 2006 notes callable 100 par companys committed bank facilities consist 136750 outstanding senior secured term facilities term facilities 100000 senior revolving credit facility revolver together term facilities credit agreement facilities bear interest floating rates based spread london interbank offered rate libor greater either prime rate fed funds rate plus 50 basis points election company december 31 2001 company available borrowing capacity 100000 revolver weighted average interest rate outstanding debt term facilities december 31 2001 2000 74 72 respectively companys obligations credit agreement secured security interests granted lenders substantially companys assets including capital stock existing newly formed subsidiaries credit agreement contains covenants among things restrict ability company subsidiaries engage mergers consolidations asset sales incur additional indebtedness pay dividends create liens require company maintain certain financial ratios 2001 2000 company prepaid 65000 90000 respectively outstanding term facilities connection prepayment extraordinary loss 441 net taxes 263 704 net taxes 440 recognized 2001 2000 respectively writeoff related deferred financing costs aggregate maturities longterm debt december 31 2001 7 commitments company leases office facilities equipment operating leases noncancelable lease terms expiring various dates 2006 rent lease expense 2001 2000 1999 3534 7065 9841 respectively noncancelable minimum rental payments applicable operating leases december 31 2001 companys lease corporate headquarters extends 2011 however cancelable option company 2006 minimal fee company make payments approximately 13800 2002 related executive management transition arrangements include 10500 settlement accrued benefits due executive retirement plans consideration agreement cease participation retirement plans special recognition payment 1500 executive bonus plan payments 1100 payments 700 company also pay cendon 7049 2005 representing share obligation cendon owes applicable telephone companies prior cendon partnership payment fully provided financial statements 8 litigation rockland yellow pages 1999 sandy goldberg dellwood publishing inc rockland yellow pages initiated lawsuit company bell atlantic united states district court southern district new york rockland yellow pages proprietary directory competes bell atlantic directory region company served bell atlantics advertising sales agent june 30 2000 complaint alleged defendants disseminated false information concerning rockland yellow pages resulted damages rockland yellow pages may 2001 court dismissed substantially plaintiffs claims including antitrust claims false advertising claim lanham act state law tort claim respect one advertiser survived august 2001 plaintiff withdrew lanham act claim prejudice court dismissed state law tort claim without prejudice refiling state court august 2001 plaintiffs filed complaint naming defendants new york state supreme court rockland county alleging virtually state law tort claim seeking unspecified damages october 2001 defendants filed motion dismiss complaint stage proceedings management unable predict outcome matter presently believes resolution action material adverse effect companys results operations financial condition information resources 1996 information resources inc iri filed complaint united states district court southern district new york naming defendants company successor dun bradstreet corporation db acnielsen company ims international inc former subsidiaries db iri action complaint alleges among things various violations antitrust laws seeks damages excess 350000 iri seeking trebled antitrust laws iri also seeks punitive damages unspecified amount definitive agreement entered connection companys separation db 1998 distribution agreement db assumed defense indemnify company payments made company respect iri action including related legal fees expenses required distribution agreement moodys corporation subsequently separated db agreed jointly severally liable db indemnity obligation company management presently believes db moodys sufficient financial resources andor borrowing capacity satisfy liabilities reimburse company related costs expenses however assurances provided liabilities costs expenses covered tax matters certain tax planning strategies entered db currently subject review tax authorities pursuant series agreements ims health incorporated ims nielsen media research inc nmr former subsidiaries db jointly severally liable pay 50 db liable remaining 50 payments taxes accrued interest arising matter certain potential tax liabilities db pays first 137000 tax liability result form separation company db company corporate successor technically taxpayer referred herein db however pursuant terms distribution agreement tax allocation agreement entered connection companys separation db assumed defense agreed indemnify company payments made company respect tax liability may assessed related costs expenses 2000 db filed amended tax return 1989 1990 reflected 561600 tax interest due paid irs approximately 349300 ims paid approximately 212300 company understands payments paid dispute order stop additional interest accruing required distribution agreement moodys corporation agreed jointly severally liable db indemnity obligation company ims filed arbitration proceeding nmr claiming nmr underpaid proper allocation tax liability agreements nmr ims response nmrs position paid appropriate allocation tax liability ims joined company successor db respondent arbitration proceeding nmr prevail interpretation allocation computation ims could apply interpretation allocation computation company agreement company nmr prevail arbitration ims turn ims prevail company believes additional liability company represented alternative interpretation allocation computation would approximately 15000 approximate 60000 gross claim offset approximately 45000 tax benefit company believes interpretation allocation computation correct even nmr prevail ims turn ims prevail company arbitration proceeding db moodys would obligated indemnify company liability fact db ims already paid irs substantial amount additional taxes respect contested tax planning strategies significantly mitigates risk company addition management presently believes db moodys ims nmr sufficient financial resources andor borrowing capacity satisfy liabilities reimburse company related costs expenses however assurances provided liabilities costs expenses covered image one may 2001 image one filed complaint certain sprint corporation affiliates company united states district court middle district florida complaint image one alleged created licensed original text graphics images artwork specifically yellow pages advertising defendants engaged copyright infringement false designation origin image one sought actual damages approximately 95000 statutory damages excess 330000 matter settled complaint dismissed february 2002 resolution action material adverse effect companys results operations financial condition matters described company involved legal proceedings claims litigation arising ordinary conduct business although assurances management presently believes outcome legal proceedings material adverse effect companys results operations financial condition 9 benefit plans retirement plans company defined benefit pension plan covering substantially employees benefits paid employees based years service percentage total annual compensation percentage compensation allocated retirement account ranges 30 125 depending age years service cash balance benefit benefits certain employees participants predecessor db defined benefit pension plan also determined based participants average compensation years service final average pay benefit benefits paid equal greater final average pay benefit cash balance benefit pension costs determined using projected unit credit actuarial cost method companys funding policy contribute amount least equal minimum legal funding requirement due overfunded status plan contributions made 2001 2000 underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities company also two unfunded nonqualified defined benefit pension plans pension benefit equalization plan pbep supplemental executive benefit plan sebp senior executives certain key employees entitled participate plans provide retirement benefits based years service compensation including compensation permitted taken account previously mentioned defined benefit pension plan connection executive management employment transition arrangements companys ceo cfo cease participate plans earn additional retirement benefits december 31 2001 settlement accrued benefits thereunder aggregate lump sum payment 7559 includes special benefits 3452 made individuals 2002 company maintains defined contribution savings plan substantially employees makes contribution 50 cents dollar contributed participating employee maximum 6 participating employees salary company contributions plan 776 1287 1662 year ended december 31 2001 2000 1999 respectively postretirement benefits company unfunded postretirement benefit plan provides certain health care life insurance benefits fulltime employees reach retirement age working company summary funded status benefit plans december 31 2001 2000 follows net amounts recognized consolidated balance sheets december 31 2001 2000 follows accumulated benefit obligation abo projected benefit obligation pbo unfunded pbep sebp december 31 2001 2000 shown table abo pbo sebp obligation plan effectively settled plan curtailed december 31 2001 net periodic benefit income expense benefit plans follows addition net periodic benefit income expense charge 4823 recognized 2001 special benefits settlement portion liability pbep curtailment sebp connection executive management transition arrangements costs included part restructuring special charge 2000 result disposition businesses resulting reduction headcount company recognized curtailment gain 4756 2450 retirement plans postretirement plan respectively amounts reported component gain disposition businesses following assumptions used determining benefit obligation net periodic benefit income expense measurement purposes 95 annual rate increase per capita cost covered health care benefits assumed 2002 rate assumed decrease gradually 50 2011 remain level thereafter assumed health care cost trend rates significant effect amounts reported health care plans onepercentagepoint change assumed health care cost trend rate would following effects 10 stock option plans 2001 company adopted 2001 stock award incentive plan replace 1991 key employees stock option plan 1998 directors stock option plan collectively stock option plan stock option plan certain employees nonemployee directors eligible receive stock options stock appreciation rights limited stock appreciation rights tandem stock options deferred stock nonemployee directors receive option purchase 1500 shares award 1500 deferred shares upon election board annual basis receive option purchase 1500 shares companys common stock award 1500 deferred shares nonemployee directors may also elect receive additional options purchase shares companys common stock lieu annual cash retainer fee options may granted less fair market value companys common stock date grant expire ten years grant date vesting period awards stock option plan determined board date grant historically typically become exercisable equal annual installments four years employees three years nonemployee directors deferred shares granted nonemployee directors vest equally threeyear period company never granted stock appreciation rights limited stock appreciation rights changes stock options stock option plan last three years follows company also grants stock options certain key employees dontech stock option plan options granted dontech employees 16195 shares 2001 16278 shares 2000 12725 shares 1999 options considered compensatory current accounting rules compensation expense 627 176 66 recognized 2001 2000 1999 respectively weighted average fair value options granted 2001 2000 1999 881 615 662 respectively based blackscholes option pricing model certain assumptions set forth following table summarizes information stock options outstanding exercisable stock option plan december 31 2001 december 31 2000 2861333 shares outstanding weighted average exercise price per share 1432 1357603 shares exercisable weighted average exercise price per share 1284 december 31 1999 3545977 shares outstanding weighted average exercise price per share 1380 1367777 shares exercisable weighted average exercise price per share 1182 company follows accounting principles board opinion 25 accounting stock issued employees related interpretations accounting stock option plan accordingly compensation expense related issuance stock option grants employees nonemployee directors recognized following table reflects pro forma net income diluted earnings per share assuming company applied fair value method sfas 123 accounting stockbased compensation pro forma disclosures shown necessarily representative effects income diluted earnings per share future years fair value stock options used compute pro forma disclosures estimated using blackscholes optionpricing model following weighted average assumptions 11 income taxes company accounts income taxes liability method accordance sfas 109 accounting income taxes provision income taxes consisted following table summarizes significant differences us federal statutory tax rate companys effective tax rate deferred tax assets liabilities consisted following december 31 2001 2000 investment impairment charge 11432 writedown companys investment chinabig gave rise deferred tax asset 4287 loss investment represents capital loss income tax purposes utilized offset future capital gains based companys current business portfolio projection future results management believe company generate future capital gains offset capital loss accordingly valuation allowance established full amount asset management believes able obtain full benefit deferred tax assets based assessment companys anticipated profitability years deferred tax assets expected become tax deductions 12 financial instruments companys financial instruments december 31 2001 2000 consist cash equivalents term facilities notes carrying amount cash equivalents term facilities approximates fair value shortterm instruments bear interest floating rates carrying value notes 150000 december 31 2001 2000 fair value notes determined based quoted market price 154425 145500 december 31 2001 2000 respectively 13 business segments companys two operating segments december 31 2001 dontech directory advertising services das get digital smart companys internet business operating segment 2000 1999 company ceased operations business december 2000 dontech segment includes companys 50 interest net profits dontech revenue participation income received sbc income dontech accounted 79 72 83 operating income general corporate costs unallocated expenses years ended december 31 2001 2000 1999 respectively although dontech provides advertising sales yellow pages directory products similar das partnership considered separate operating segment since among things board directors employees dontech including officers managers employees company within das segment company provides yellow pages advertising sales affiliated entities sprint performs prepress publishing services yellow pages directories das segment also includes information technology costs operating income das includes results costs directly incurred constituent business unit less allocation certain shared expenses based estimated business usage das results 2000 1999 also include operating results bell atlantic cincinnati businesses companys share losses chinabig dates transactions caused changes reporting respective business unit certain onetime items restructuring cendon relationship 2000 see note 4 disposition businesses note 5 partnership joint venture investments operating income das accounted 21 28 17 operating income general corporate costs unallocated expenses years ended december 31 2001 2000 1999 respectively general corporate includes expenses allocated das segment interest expense interest income tax expense nonoperating income expenses allocated operating segments segment information years ended december 31 2001 2000 1999 presented 1 2001 represents restructuring special charge 18556 investment impairment charge 11432 allocated operating segment 2 advertising sales represent billing value advertisements sold annual directory company dontech calendar sales represent billing value advertisements sold annual directory stated basis revenue recognized publication sales represent sales directories published current period regardless advertising directory sold sales compared sales directories published prior year period events occur current year affects comparability publication sales prior year changes directory publication dates contractual changes prior year publication sales adjusted conform current year presentation maintain comparability accordingly comparative purposes das publication sales 2000 increased 1667 dontech sales 2000 1999 decreased 286 982 respectively result changes directory publication dates contractual changes 3 ebitda represents earnings interest taxes depreciation amortization ebitda measurement operating performance computed accordance generally accepted accounting principles considered substitute operating income net income prepared conformity generally accepted accounting principles addition ebitda may comparable similarly titled measures companies 4 directory advertising services segment includes following data relating bell atlantic cincinnati businesses disposed 2000 certain onetime items related cendon restructuring 14 valuation qualifying accounts 15 quarterly information unaudited full year earnings per share eps amount may equal sum quarters eps quarter computed using weighted average number shares outstanding quarter eps year computed using weighted average number shares outstanding year also diluted eps effect potentially dilutive shares included periods effect would antidilutive 1 fourth quarter 2001 includes pretax restructuring special charge 18556 investment impairment charge 11432 2 company recognized extraordinary loss 2001 2000 relating prepayment debt writeoff related deferred financing costs 3 second quarter 2000 includes onetime operating income benefit 15771 restructuring cendon relationship pretax gain 89435 disposition bell atlantic cincinnati businesses related strategic cost cutting initiatives 4 fourth quarter 2000 includes pretax loss 2940 disposition get digital smart operations report independent accountants board directors partners dontech ii opinion accompanying combined balance sheets related combined statements partners capital operations cash flows present fairly material respects combined financial position amdon business dontech hereafter referred dontech ii partnership dontech ii december 31 2001 2000 combined results operations cash flows three years period ended december 31 2001 conformity accounting principles generally accepted united states america financial statements responsibility management dontech ii responsibility express opinion combined financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp january 18 2002 dontech combined statements operations accompanying notes integral part financial statements dontech combined balance sheets accompanying notes integral part financial statements dontech combined statements cash flows accompanying notes integral part financial statements dontech combined statements partners capital accompanying notes integral part financial statements dontech notes combined financial statements thousands 1 form organization nature business amdon dba dontech general partnership rh donnelley inc formerly known reuben h donnelley corporation r h donnelley delaware corporation ameritech publishing illinois inc apiil illinois corporation business ameritech advertising services aas new structure defined master agreement dated august 19 1997 existing partnership defined dontech concurrently apiil r h donnelley formed new partnership defined dontech ii dontech participated directory agreement r h donnelley illinois bell telephone company ibt business ameritech illinois apiil aas dontech also participated subcontracting agreement ameritech publishing inc api perform certain apis obligations publishing services contract api indiana bell telephone company incorporated indiana bell business ameritech indiana dontech published various directories identified directory agreements solicited advertising primary source revenues manufactured delivered directories dontech net income allocated partner based predefined percentage set forth amended partnership agreement accordance second amended restated amdon partnership agreement effective august 19 1997 dontech partnership ceased publishing directories january 1 1998 partnership recognized deferred revenue expenses recorded december 31 1997 remaining life directories published prior january 1 1998 december 31 2000 dontech ceased business operations remaining assets distributed partners august 1997 rh donnelley apiil reached agreement regarding revised partnership structure new dontech partnership became exclusive sales agent perpetuity yellow page white page street address directories published api illinois northwest indiana michigan new partnership known dontech ii receives 27 commission sales net provisions capped 61 subject certain exclusions dontech iis cost structure includes principally sales operations office services finance facilities related overhead dontech ii profits shared equally partners term partnership agreement neither partner may compete directly business dontech ii without consent board directors board directors board appointed administer activities partnership time term partnership board may call additional capital contributions equal amounts partners opinion board additional capital required operation partnership accompanying financial statements dontech ii shown combined basis significant affiliated accounts transactions eliminated preparation combined financial statements january 28 2000 respective partners dontech partnership agreed amend dontech partnership agreement provide payment 29898 dontech partnership apiil preferential distribution preferential distribution comprised cash funds totaling 13331 forgiveness cancellation receivable due apiil partnership amount 16567 additionally partners tech ii also agreed amend dontech ii partnership agreement provide payment 29898 apiil dontech ii partnership upon dissolution tech ii partnership subsequent payment 29898 preferential distribution r h donnelley 2 significant accounting policies cash equivalents cash equivalents include highly liquid investments initial maturity date three months less carrying value cash equivalents approximates fair value due shortterm nature revenue recognition substantially dontech sales made customers cities covered directories recorded deferred sales revenue accounts receivable month publication revenue related sales recognized lives directories generally twelve months sales made customers outside cities covered directories recognized quarter sales national accounts recognized full month publication dontech ii revenue comprised sales commissions reflected net provisions capped 61 per annum subject certain exclusions recognized upon execution contracts sale advertising fixed assets fixed assets recorded cost depreciated straightline basis estimated useful lives assets upon asset retirement disposition cost related accumulated depreciation removed accounts resulting gain loss included statement operations amounts incurred repairs maintenance charged operations postretirement benefits pensions dontech ii obligated provide postretirement benefits consisting mainly life health insurance substantially employees dependents accrual method accounting utilized postretirement health care life insurance benefits income taxes provision income taxes made proportional share partnerships income responsibility individual partners concentration credit risk financial instruments potentially subject dontech ii concentration credit risk consist principally commission receivable dontech iis commission receivable due one partners aas collateral required 1999 dontech recorded 62 million charge related bad debts allocated partner based respective share partnership loss stipulated tech partnership agreement use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expense reporting period actual results could differ estimates recent pronouncements july 2001 financial accounting standards board fasb issued sfas no141 business combinations sfas 141 sfas no142 goodwill intangible assets sfas 142 sfas 141 requires business combinations initiated june 30 2001 accounted using purchase method accounting also defines criteria identifying intangible assets recognition apart goodwill sfas 142 addresses recognition measurement goodwill intangible assets subsequent acquisition statement requires intangible assets finite useful lives amortized intangible assets indefinite lives goodwill longer amortized instead tested impairment least annually adoption sfas 141 142 material impact dontech iis financial position results operations august 2001 fasb issued sfas no143 accounting asset retirement obligations sfas 143 effective fiscal years beginning june 15 2002 sfas 143 addresses financial accounting reporting obligations associated retirement tangible longlived assets associated asset retirement costs adoption sfas 143 material impact dontech iis financial position results operations october 2001 fasb issued sfas no144 accounting impairment disposal longlived assets sfas 144 effective fiscal years beginning december 15 2001 sfas 144 addresses financial accounting reporting impairment disposal longlived assets supercedes sfas 121 accounting impairment longlived assets longlived assets disposed retaining many provisions statement sfas 144 also supercedes accounting reporting provisions accounting principles board opinion 30 reporting impairment disposal segment business extraordinary unusual infrequently occurring events transactions apb 30 adoption sfas 144 material impact dontech iis financial position results operations 3 fixed assets fixed assets consist following december 31 depreciation expense three years ended december 31 2001 2000 1999 2360 2135 2615 respectively year ended december 31 2000 dontech ii disposed 9565 fixed assets longer utilized assets fully depreciated disposal activity resulted net loss 44 reflected statement operations year ended december 31 2000 4 accrued liabilities accrued liabilities consist following december 31 5 related party transactions amended partnership allocation partners negotiated settlement agreements regarding excessive bad debt writeoffs incurred dontech year ended december 31 1999 agreements provided special allocations excessive bad debts partners based upon negotiated ratio effect settlement agreements included allocation net income presented statement partners capital december 31 1999 dontech ii provisions revenue participation agreement apil partners partnership rh donnelley dated august 19 1997 exchange exclusive publishing rights apil partners partnership agrees pay rh donnelley revenue participation interests revenue participation interests based upon gross revenues dontech ii partnership net provisions capped 61 per annum subject certain exclusions sales commissions paid dontech ii revenue participation interest 359 1999 thereafter payment revenue participation interest outside dontech ii partnership structure reflected combined financial statements dontech ii purchases insurance services august 2000 purchased automobile plan administration rh donnelley general ledger purchasing services aas dontech ii also provides facility space certain employees aas agreement entered 1998 6 contingencies commitments dontech ii leases certain office facilities noncancelable lease arrangements rent expense operating leases approximately 2223 2119 1807 2001 2000 1999 respectively 2000 dontech ii entered sublease agreement aas whereby dontech ii received 54 30 sublease rental income sbc 2001 2000 respectively future minimum lease payments required noncancelable operating leases initial remaining lease terms excess one year december 31 2001 follows september 1998 dontech ii entered maintenance service agreement ameritech provide maintenance services including parts dontech ii length agreement five years according terms agreement dontech iis obligations december 31 2001 116 2002 79 2003 7 employee retirement profit participation plans dontech ii sponsors defined benefit pension plan covering substantially employees principal plan principal plans assets invested equity funds fixed income funds real estate total expense benefit principal plan 29 342 564 2001 2000 1999 respectively following provides reconciliation benefit obligations plan assets funded status principal plan net periodic pension benefit cost plan 2001 2000 1999 include following components assumptions used follows fourth quarter 2000 partnership changed method accounting used determine value plan assets purposes calculating annual pension expense method changed marketrelated value whereby gains losses recognized straightline basis five years market value whereby gains losses reflected immediately effect change 2000 results operations including cumulative effect prior years material additionally dontech ii profit participation plan profit plan covers substantially employees may voluntarily contribute 6 salaries profit plan guaranteed matching contribution fifty cents per dollar contributed dontech ii also makes contributions profit plan based formula contingent upon attainment financial goals set advance defined profit plan agreement contributions made plan 944 854 782 2001 2000 1999 respectively 8 postretirement benefits pensions dontech ii provides postretirement health care life insurance benefits certain retired employees dependents following provides reconciliation benefit obligations plan assets funded status health life insurance plans net periodic postretirement benefit cost 2001 2000 1999 include following components discount rate used determining benefit obligation december 31 2001 2000 725 750 respectively assumed health care cost trend rate used measuring benefit obligation december 31 2001 95 65 respectively rates assumed decrease gradually 50 2015 remain level thereafter increasing health care cost trend rates one percentage point would material effect net periodic postretirement expense year ended december 31 2001 would increased benefit obligation december 31 2001 354 9 valuation qualifying accounts 1 includes accounts written allowances made item 9item 8 financial statements supplementary data report independent accountants board directors shareholders rh donnelley corporation opinion accompanying consolidated balance sheets related consolidated statements operations shareholders’ deficit cash flows present fairly material respects financial position rh donnelley corporation subsidiaries “company” december 31 2002 2001 results operations cash flows three years period ended december 31 2002 conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp new york new york february 21 2003 rh donnelley corporation consolidated balance sheets accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements operations accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements cash flows accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements changes shareholders’ deficit accompanying notes integral part consolidated financial statements rh donnelley corporation notes consolidated financial statements thousands except share per share data unless otherwise noted 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts rh donnelley corporation direct indirect wholly owned subsidiaries “company” “we” “us” “our” intercompany transactions balances eliminated dontech partnership accounted equity method control ability exercise significant influence dontech’s operating financial policies accordingly dontech’s results consolidated financial statements share net profits reported partnership joint venture income consolidated statements operations january 3 2003 acquired common stock sprint publishing advertising business included consolidated results acquisition date accordingly operating results spa included consolidated financial statements year ended december 31 2002 see note 17 “subsequent events” revenue recognition earn revenue form commissions sale advertising fees prepress publishing services sales commission revenue recognized net potential claims allowances time advertising contract executed customer revenue prepress publishing operations recognized services performed partnership joint venture income investments partnership joint venture income includes 50 share net profits dontech revenue participation income affiliate sbc priority distribution income membership interest cendon revenue participation income priority distribution income earned recognized sales contract executed customer prior restructuring cendon relationship effective july 1 2000 cendon partnership accounted equity method recognized 50 share net profits cendon carrying value dontech investment revenue participation receivable sbc priority distribution receivable sprint included partnership joint venture investments priority distribution receivable december 31 2002 16266 result acquisition receivable became intercompany item included part purchase price cash equivalents cash equivalents include liquid investments maturity less three months time acquisition december 31 2002 cash 1928700 restricted intended used finance spa acquisition trade receivables trade receivables represent sales commissions earned sale advertising fees prepress publishing services establish allowance doubtful accounts based expected collectibility receivables advertisers based upon historical experience contractual provisions receivables sales commissions billed publisher upon directory publication collected accordance contractual provisions typically month publication later nine months publication receivables prepress publishing services billed collected accordance terms applicable agreement trade receivables december 31 2002 include 27206 due spa commissions prepress publishing services result acquisition receivables became intercompany items included part purchase price fixed assets computer software fixed assets computer software recorded cost depreciation amortization provided estimated useful lives assets using straightline method estimated useful lives five years machinery equipment ten years furniture fixtures three five years computer equipment five years computer software leasehold improvements amortized straightline basis shorter term lease estimated useful life improvement fixed assets computer software december 31 2002 2001 consisted following depreciation amortization expense years ended december 31 2002 2001 2000 follows concentration credit risk maintain significant receivable balances sbc sprint sales commissions prepress services revenue participation priority distribution revenue participation receivable sbc subject adjustment based collections sbc individual advertisers however adjustment limited based contractual provisions receivables recorded net realizable value foresee material credit risk associated collection although give assurance full payment continue received timely basis result spa acquisition receivables sprint became intercompany items included part purchase price pension postretirement benefits pension postretirement benefits represent estimated amounts paid employees future accounting benefits reflects recognition benefit costs employee’s approximate service period based terms plan investment funding decisions made determination benefit obligations net periodic pension postretirement benefit costs requires management make assumptions regarding discount rate return retirement plan assets increase future compensation health care cost trends changes assumptions significant impact projected benefit obligation funding requirement net periodic benefit cost assumed discount rate pension benefits could settled use rates aa corporate bonds basis determining discount rate assumption expected longterm rate return plan assets based mix assets held plan expected longterm rates return within asset class anticipated trend future health care costs based historical experience external factors see note 9 information regarding benefit plans effective january 1 2003 reduced rate return plan assets 975 825 result low investment returns last years well outlook longterm particularly equity securities determined assumed rate return 975 longer reflected best estimate future longterm returns based current investment environment pension plan’s asset allocation determined longterm rate return 825 better reflected expectations future longterm returns derivative financial instruments derivative financial instruments limited interest rate swap agreements used manage exposure fluctuations interest rates variable rate debt december 31 2002 interest rate swap agreement notional value 75000 december 31 2001 interest rate swaps combined notional value 125000 make fixedrate payments 59 receive variablerate payments based 3month libor rates weighted average rate received 11 2002 30 2001 periodic payments receipts recorded part interest expense swap agreement december 31 2002 expire june 2003 use derivative financial instruments trading speculative purposes result spa acquisition repayment existing variable rate debt 75000 notional value interest rate swap qualify hedge accounting treatment december 31 2002 interest rate swap qualify hedge accounting treatment december 31 2002 unrecognized fair market value swap previously recognized accumulated comprehensive loss balance sheet charged earnings accordingly charge 1523 included expense net year ended december 31 2002 income taxes account income taxes liability method accordance sfas 109 “accounting income taxes” see note 8 information regarding income tax provision earnings per share basic earnings per common share eps generally calculated dividing income available common shareholders weighted average number common shares outstanding however outstanding preferred stock contains certain participation rights eitf topic d95 “effect participating securities computation basic earnings per share” requires dilutive effect securities included weighted average number shares outstanding furthermore topic d95 requires dilutive effect included basic eps may calculated using either ifconverted method twoclass method however dilutive effect preferred stock cannot less would result application twoclass method elected use ifconverted method calculating basic eps diluted eps calculated dividing net income weighted average common shares outstanding plus common share equivalents common stock equivalents include stock options warrants dilutive effect calculated using treasury stock method preferred stock dilutive effect calculated using ifconverted method calculation basic diluted eps 2002 presented december 31 2002 preferred stock convertible 2933888 shares common stock however since preferred stock issued november 2002 number common share equivalents included eps calculation weighted actual time preferred stock outstanding year conversion preferred stock reflected calculation diluted eps effect antidilutive years ended december 31 2001 2000 basic earnings per share calculated dividing net income weighted average common shares outstanding year diluted earnings per share calculated dividing net income weighted average common shares outstanding plus potentially dilutive common shares primarily stock options calculated using treasury stock method calculation basic diluted eps years ended december 31 2001 2000 comparison 2002 eps presented employee stock options follow accounting principles board opinion 25 “accounting stock issued employees” related interpretations accounting stock option plan accordingly compensation expense related issuance stock options employees nonemployee directors recognized three year period ended december 31 2002 also grant stock options certain key employees dontech considered compensatory current accounting rules compensation expense 234 627 176 recognized 2002 2001 2000 respectively following table reflects pro forma net income earnings per share assuming applied fair value method sfas 123 “accounting stockbased compensation” pro forma disclosures shown necessarily representative effects income earnings per share future years fair value stock options 829 2002 881 2001 615 2000 estimated grant date using blackscholes optionpricing model following assumptions estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities revenue expenses disclosure contingent assets liabilities actual results could differ materially estimates assumptions estimates assumptions used determination sales allowances bad debts depreciation amortization employee benefit plans restructuring reserve among others reclassifications certain prior year amounts reclassified conform current year’s presentation reclassifications impact previously reported results operations shareholders’ deficit new accounting pronouncements april 2002 financial accounting standards board “fasb” issued fas 145 “rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections” statement among things changes way gains losses extinguishment debt reported previously gains losses extinguishment debt required reported extraordinary item net related tax effect fas 145 gains losses extinguishment debt reported part ongoing operations unless extinguishment debt unusual infrequent event entity previously reported extraordinary gains losses extinguishment debt unusual infrequent reclassified statement effective calendar year 2003 however adopted statement end 2002 previously reported extraordinary losses extinguishment debt reclassified accordingly interest expense includes writeoff deferred financing costs associated prepayment debt 482 704 1144 2002 2001 2000 respectively adoption statement impact previously reported net income june 2002 fasb issued fas 146 “accounting costs associated exit disposal activities” fas 146 addresses accounting reporting costs associated exit disposal activities nullifies emerging issues task force issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” statement effective transactions initiated december 31 2002 applied prospectively december 2002 fasb issued fas 148 “accounting stockbased compensation transition disclosure amendment fas 123” statement provides alternative methods transition voluntary change fair value method accounting stock based employee compensation addition statement amends disclosure requirements fas 123 require prominent disclosures annual interim financial statements method accounting stock based employee compensation effect method reported results statement effective calendar year 2003 however time intend voluntarily adopt provisions fas 123 november 2002 fasb issued fasb interpretation 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” interpretation elaborates disclosures made guarantor financial statements obligations certain guarantees issued also clarifies guarantor required recognize inception guarantee liability fair value obligation undertaken issuing guarantee recognition measurement provisions interpretation applicable prospective basis guarantees issued modified december 31 2002 disclosure requirements effective financial statements periods ending december 15 2002 guarantee obligations third parties including dontech however indirect subsidiaries jointly severally fully unconditionally guarantee debt obligations rh donnelley inc see note 13 guarantees 2 restructuring special charge 2001 recognized restructuring special charge 18556 consisting special charge 9937 connection transition executive management restructuring charge 8619 connection expiration prepress publishing contract december 2002 result spa acquisition management determined certain costs originally anticipated restructuring charge incurred specifically idle leased space raleigh publishing facility utilized planned severance related costs significantly less corporate headquarters relocated accordingly 6694 original charge reversed table shows payments adjustments applied reserve 2002 3 investment impairment charges nominal 18 interest chinabig publishes yellow pages directories offers internet directory services people’s republic china 2001 independent third party valuation chinabig’s current business plan capital needs outlook profitability cash flow prepared connection proposed equity financing chinabig indicated carrying value investment permanently impaired result valuation recorded impairment charge 11432 2001 2002 chinabig achieve sales objective generate sufficient operating cash flows fund operations meet obligations needed obtain shareholder loans make cash shortfall accordingly recorded additional impairment charge 2000 writeoff remaining book value investment since believe sufficient doubt exists chinabig’s ability raise sufficient cash either operations additional investments existing new investors believe investment provide value foreseeable future 4 longterm debt credit facilities longterm debt december 31 2002 2001 consisted following existing notes paid interest semiannually matured june 2008 existing notes callable option time june 1 2003 1046 par percentage declined 15 12month period june 1 2006 existing notes callable 100 par carrying value existing notes 150000 december 31 2002 2001 fair value existing notes determined based quoted market price 150900 154425 respectively see note 17 subsequent events additional information relating existing notes indenture governing existing notes contained covenants among things restricted ability incur certain additional debt liens engage mergers consolidations asset sales 2002 technical default existing senior secured term facilities “existing term facilities” indenture governing existing notes resulting inadvertent failure cause certain subsidiaries added guarantors 2000 november 2002 received net proceeds 69300 issuance preferred stock proceeds used offset certain restricted payments made 2000 2001 result technical default cured spa acquisition closing retired 128755 existing notes result covenants existing notes became void existing term facilities consisted 74250 outstanding committed bank facilities 40000 outstanding existing 100000 senior evolving credit facility “existing revolver” together existing term facilities “existing credit agreement” obligations existing credit agreement secured security interests granted lenders substantially assets including capital stock existing newly formed subsidiaries existing credit agreement contained covenants among things restricted ability engage mergers consolidations asset sales incur additional indebtedness pay dividends create liens required maintain certain financial ratios existing credit agreement borrowings bore interest floating rates based spread london interbank offered rate libor greater either prime rate fed funds rate plus 50 basis points election weighted average interest rate outstanding debt existing credit agreement december 31 2002 2001 67 74 respectively see note 17 subsequent events additional information relating existing credit agreement connection spa acquisition entered new 1525000 credit facility consisting 500000 term loan 900000 term loan b 125000 revolver issued 325000 8year 8 78 600000 10year 10 78 notes december 31 2002 gross proceeds 1825000 term loan b notes held escrow pending spa acquisition closing see note 17 subsequent events additional information relating debt indentures governing notes contain covenants among things restrict ability subsidiaries incur certain additional debt liens pay dividends equity interests repurchase equity interests make certain investments enter certain types transactions affiliates receive dividends payments restricted subsidiaries use assets security transactions sell certain assets merge companies new credit facility revolver bear interest option either highest base rate determined deutsche bank securities inc salomon smith barney inc bear stearns co inc ii threemonth certificate deposit rate plus 12 1 iii federal funds effective rate defined plus 12 1 plus case applicable margin b libor plus applicable margin may elect interest periods 1 2 3 6 12 months libor borrowings credit facility contains usual customary negative covenants among things place limitations ability incur additional indebtedness including capital leases liens ii pay dividends repurchase capital stock iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock subsidiaries credit facility also contains financial covenants relating maximum leverage minimum interest coverage minimum fixed charge coverage maximum senior secured leverage term loan b loan matures june 2010 aggregate maturities longterm debt december 31 2002 5 partnership joint venture investments dontech acts exclusive sales agent yellow pages directories published sbc illinois northwest indiana income dontech consists 50 net profits dontech revenue participation income received directly sbc based value advertising sales income dontech consisted following investment dontech including revenue participation receivable sbc 185969 193810 december 31 2002 2001 respectively cendon 2002 exclusive sales agent nevada florida virginia north carolina cendon llc joint venture centel directory company “centel” subsidiary sprint income cendon llc consisted priority distribution based percentage cendon advertising sales income cendon six months ended june 30 2000 consisted 50 interest net profit cendon partnership company centel partnership restructured limited liability company effective july 1 2000 income cendon llc cendon partnership 19727 17545 24747 2002 2001 2000 respectively 6 redeemable preferred stock warrants 10 million shares preferred stock authorized december 31 2002 70000 shares preferred stock outstanding november 2002 issued private placement 70000 shares preferred stock warrants purchase 577500 shares common stock aggregate gross consideration 70000 preferred stock convertible common stock time issuance price 2405 earns cumulative dividend 8 compounded quarterly may pay cash allow accrue option fair value preferred stock based independent valuation security value warrants 1218 determined based blackscholes model following assumptions net proceeds received allocated preferred stock warrants based relative fair values fair market value underlying common stock date issuance 2992 greater conversion price beneficial conversion feature “bcf” 24158 existed bcf function conversion price preferred stock fair value warrants fair market value underlying common stock date issuance bcf treated deemed dividend 2002 see note 17 subsequent events maintain shareholder approved stock option plan whereby certain employees nonemployee directors eligible receive stock options stock appreciation rights limited stock appreciation rights tandem stock options deferred stock options typically granted fair market value common stock date grant follow accounting principles board opinion 25 “accounting stock issued employees” related interpretations accounting stock option plan accordingly typically recognize compensation expense related issuance stock options expire ten years grant date board determines vesting provisions date grant yet grant stock appreciation rights limited stock appreciation rights nonemployee directors receive options purchase 1500 shares award 1500 deferred shares upon election board nonemployee directors also receive annual basis options purchase 1500 shares award 1500 deferred shares nonemployee directors may also elect receive additional options lieu annual cash retainer fee changes stock option plan last three years follows following table summarizes information stock options outstanding exercisable december 31 2002 december 31 2001 2629354 options outstanding weighted average exercise price per share 1670 1350153 options exercisable weighted average exercise price per share 1402 december 31 2000 2898585 options outstanding weighted average exercise price per share 1435 1357603 options exercisable weighted average exercise price per share 1284 options granted 2002 include grant 1486000 options “founders grant” certain employees contingent consummation spa acquisition result sale preferred stock connection spa acquisition change control company occurred options granted end 2002 exception founders grant options held senior management respect change control waived became fully vested accordingly january 3 2003 2080071 options exercisable weighted average exercise price 1712 provision income taxes consisted following table summarizes significant differences us federal statutory tax rate effective tax rate deferred tax assets liabilities consisted following december 31 2002 2001 investment impairment charge 2000 11432 2002 2001 writedown chinabig investment contributed deferred tax asset 6094 writedown investment treated capital loss income tax purposes utilized offset future capital gains believe future capital gains generated offset capital loss accordingly valuation allowance established full amount asset however believe obtain full benefit deferred tax assets based assessment company’s anticipated profitability years deferred tax assets expected become tax deductions retirement plans defined benefit pension plan covering substantially employees least one year service benefits paid employees based years service percentage total annual compensation percentage compensation allocated retirement account ranges 30 125 depending age years service “cash balance benefit” benefits certain employees participants predecessor db defined benefit pension plan also determined based participant’s average compensation years service “final average pay benefit” benefits paid equal greater final average pay benefit cash balance benefit pension costs determined using projected unit credit actuarial cost method funding policy contribute amount least equal minimum legal funding requirement contributions required made 2002 2001 2000 underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities also unfunded nonqualified defined benefit pension plan pension benefit equalization plan “pbep” covers senior executives certain key employees benefits based years service compensation including compensation permitted taken account previously mentioned defined benefit pension plan also additional unfunded nonqualified defined benefit plan supplemental executive benefit plan “sebp” discontinued end 2001 offer defined contribution savings plan substantially employees contribute 50 cents dollar contributed participating employee maximum 6 participating employee’s salary including bonus commissions contributions plan 724 776 1287 year ended december 31 2002 2001 2000 respectively postretirement benefits unfunded postretirement benefit plan provides certain health care life insurance benefits fulltime employees reach retirement age working company summary funded status benefit plans december 31 2002 2001 follows net amounts recognized consolidated balance sheets december 31 2002 2001 follows projected benefit obligation accumulated benefit obligation unfunded pbep december 31 2002 2001 follows net periodic benefit income retirement plan years ended december 31 2002 2001 2000 follows additionally charge 4823 recognized 2001 special benefits settlement portion liability pbep curtailment sebp connection executive management transition arrangements costs included part restructuring special charge following assumptions used determining benefit obligation net periodic benefit income retirement plan effective january 1 2003 reduce expected return plan assets assumption 825 net periodic benefit expense postretirement plan years ended december 31 2002 2001 2000 follows discount rate used determine benefit obligation net periodic benefit expense postretirement plan 650 725 750 2002 2001 2000 respectively measurement purposes 10 annual rate increase per capita cost covered health care benefits assumed 2003 rate assumed decrease gradually 5 2011 remain level thereafter onepercentagepoint increase decrease would material effect net periodic postretirement expense onepercentage point increase would increased benefit obligation end period 310 onepercentage point decrease would decreased benefit obligation end period 280 lease office facilities equipment operating leases noncancelable lease terms expiring various dates 2006 lease corporate headquarters extends 2011 however option canceling lease 2006 minimal fee rent lease expense 2002 2001 2000 3090 3534 7065 respectively noncancelable minimum rental payments applicable operating leases december 31 2002 involved various legal proceedings arising ordinary course business well certain extraordinary litigation tax matters described periodically assess liabilities contingencies connection matters based upon latest information available us matters probable incurred loss range loss reasonably estimated record reserves consolidated financial statements instances unable make reasonable estimate liability uncertainties related probable outcome amount range loss additional information becomes available adjust assessment estimates liabilities accordingly based review latest information available believe ultimate liability connection pending legal proceedings including extraordinary litigation tax matters described material adverse effect results operations cash flows financial position described order understand potential exposure extraordinary litigation tax matters described captions “information resources inc” “tax matters” need understand relationship us dun bradstreet corporation certain predecessors affiliates various corporate reorganizations contractual commitments assumed varying degrees responsibility respect matters november 1996 company known dun bradstreet corporation “db1” separated “1996 distribution” spinoff three separate public companies db1 acnielsen corporation “acnielsen” cognizant corporation “cognizant” june 1998 db1 separated “1998 distribution” spinoff two separate public companies db1 changed name rh donnelley corporation “donnelley” new company named dun bradstreet corporation “db2” later 1998 cognizant separated “cognizant distribution” spinoff two separate public companies ims health incorporated “ims” nielsen media research inc “nmr” september 2000 db2 separated “2000 distribution” spinoff two separate public companies db2 changed name moody’s corporation “moody’s” new company named dun bradstreet corporation “db3” together db1 db2 also referred elsewhere form 10k “db” result form separation db corporate successor technically defendant taxpayer referred db rockland yellow pages 1999 sandy goldberg dellwood publishing inc rockland yellow pages initiated lawsuit company bell atlantic corporation united states district court southern district new york rockland yellow pages proprietary directory competes bell atlantic directory region served bell atlantic’s advertising sales agent june 30 2000 complaint alleged defendants disseminated false information concerning rockland yellow pages resulted damages rockland yellow pages may 2001 district court dismissed substantially plaintiffs’ claims august 2001 remaining claims either withdrawn plaintiffs dismissed district court plaintiffs filed complaint defendants new york state supreme court rockland county alleging virtually state law tort claim previously dismissed district court seeking unspecified damages october 2001 defendants filed motion dismiss complaint may 2002 court granted defendants’ motion dismiss complaint plaintiffs filed appeal dismissal nonetheless presently believe final outcome matter material adverse effect results operations financial condition information resources inc 1996 information resources inc “iri” filed complaint united states district court southern district new york naming defendants company successor db acnielsen company ims international inc time filing wholly owned subsidiaries db iri alleges among things various violations antitrust laws including alleged violations sections 1 2 sherman act complaint also alleges claim tortious interference contract claim tortious interference prospective business relationship claims relate acquisition defendants survey research group limited “srg” iri alleges srg violated alleged agreement iri agreed acquired defendants induced srg breach agreement iri seeking damages excess 350000 amount iri seeks treble antitrust laws iri also seeking punitive damages unspecified amount trial date set discovery ongoing agreements relating 1996 distribution cognizant ac nielsen db agreed conduct joint defense allocated liabilities amongst agreements relating 1998 distribution db assumed defense agreed indemnify us payments may required make including related legal fees required agreements moody’s corporation subsequently separated db 2000 distribution agreed jointly severally liable db indemnity obligation us stage proceedings unable predict outcome matter cannot assure outcome management presently believes db moody’s sufficient financial resources borrowing capacity indemnity rights ims nmr succeeded cognizant’s indemnity obligations cognizant distribution reimburse us payments may required make related costs may incur connection matter tax matters db entered global tax planning initiatives normal course business principally taxfree restructurings foreign domestic operations status internal revenue service “irs” reviews initiatives summarized pursuant series agreements relating 1996 1998 cognizant 2000 distributions ims nmr jointly severally liable must pay onehalf db moody’s jointly severally liable must pay half payments 137000 taxes accrued interest amounts resulting unfavorable irs rulings tax matters summarized matter summarized “amortization expense deductions 19972002” db moody’s jointly severally solely responsible db behalf contractually obligated pay first 137000 tax liability connection matter summarized “utilization capital losses 19891990” agreements relating 1998 distribution db agreed assume defense indemnify us tax liability may assessed us related costs expenses may incur connection tax matters also required agreements moody’s corporation agreed jointly severally liable db indemnity obligation us agreements relating 2000 distribution db moody’s agreed financially responsible 50 potential liabilities may arise extent potential liabilities directly attributable party’s respective business operations cannot assure outcome matters management presently believes db moody’s sufficient financial resources borrowing capacity indemnity rights ims nmr succeeded cognizant’s indemnity obligations cognizant distribution reimburse us payments may required make related costs may incur connection tax matters utilization capital losses 19891990 2000 db filed amended tax return respect utilization capital losses 1989 1990 response formal irs assessment amended tax return reflected additional 561600 tax interest due 2000 db paid irs 349300 ims behalf nmr paid approximately 212300 irs understand payment made dispute order stop additional interest accruing db contesting irs’s formal assessment would also contest assessment amounts excess amounts paid db filed petition refund united states district court case expected go trial 2004 subsequent making payment irs 2000 ims sought obtain partial reimbursement nmr terms agreements relating cognizant distribution nmr paid ims less ims sought accordingly 2001 ims filed arbitration proceeding nmr claiming nmr underpaid ims proper allocation tax payments provided agreements relating cognizant distribution neither db party cognizant distribution ims nonetheless sought include us arbitration arguing nmr prevail interpretation ims could seek enforce interpretation us successor db agreements relating 1996 distribution arbitration panel ruled proper party arbitration proceeding decision arbitration panel merits expected 2003 nmr prevail arbitration ims turn ims prevail us believe additional liability would approximately 15000 net tax benefits believe original interpretation tax allocation computation correct claims ims without merit nmr prevails ims turn ims prevails us arbitration proceeding noted db moody’s would jointly severally obligated indemnify us liability related costs believe fact db ims already paid irs substantial amount additional taxes respect contested tax planning strategies significantly mitigates risk assurances given currently believe db moody’s sufficient financial resources borrowing capacity indemnity rights ims nmr reimburse us payments may required make related costs may incur respect matter royalty expense deductions 19941996 second quarter 2002 db behalf received notice proposed adjustment irs respect transaction entered 1993 notice irs proposed disallow certain royalty expense deductions claimed db 1994 1995 1996 tax returns irs previously concluded audit transaction taxable years 1993 1994 disallow similarly claimed deductions understand db disagrees position taken irs notice filed responsive brief effect irs issue formal assessment consistent notice payment disputed amounts would required db opted challenge assessment us district court rather us tax court event challenge db required payment db irs would 42000 48000 offset 6000 tax benefit verbal communications db irs 2002 understand irs expressed willingness withdraw proposed disallowance certain royalty expense deductions 7500 1994 however also understand irs expressed intent seek penalties 7500 1995 1996 based interpretation applicable law advised db would challenge irs’s interpretation agreements relating 1998 2000 distributions db moody’s agreed jointly severally defend indemnify us liability related costs notwithstanding verbal communications irs 2002 noted regarding royalty expense deductions 7500 1994 february 2003 letter db behalf irs asserted intends take position regarding prior tax years would effect disallowing portion 1994 royalty expense deduction share would 5000 irs prevailed understand db disagrees irs’s position also february 2003 db behalf received preliminary partnership summary report irs challenges tax treatment certain royalty payments received partnership db partner stated report irs would reallocate certain partnership income db irs prevailed would require additional payment us 20000 includes tax interest penalty net associated tax benefits agreements relating 1998 2000 distributions db moody’s agreed jointly severally defend indemnify us liability related costs amortization expense deductions 19972002 understand irs sought certain documentation db respect transaction entered 1997 produces amortization expense deductions db understand db believes deductions appropriate irs could ultimately challenge issue assessment irs prevail assessment challenged us district court understand db estimates cash payment irs respect deductions claimed date including potential assessment penalties 6500 could 46400 43000 net associated tax benefits transaction scheduled expire 2012 unless earlier terminated db cash exposure based current interest rates tax rates would increase rate approximately 2300 per quarter including potential penalties future amortization expenses deducted agreements relating 1998 2000 distributions db moody’s required jointly severally indemnify us liability related costs result assessment exposure tax matters especially light indemnity arrangements db moody’s financial resources borrowing capacity indemnity rights ims nmr material amounts accrued consolidated financial statements db related litigation tax matters coastal termite pest control 2001 marnan group inc business coastal termite pest control “coastal” filed complaint united states district court middle district florida spa complaint amended alleged spa breached certain directory advertising contracts 1996 1999 fraudulently induced coastal enter another directory advertising contract tortiously interfered coastal’s business relationships customers coastal seeking damages lost contract benefits lost profits diminution business value unspecified amount including prejudgment interest january 2002 spa filed motion dismiss certain coastal’s claims september 2002 court denied spa’s motion dismiss nonetheless believe final outcome matter material adverse effect results operations financial condition spa approximately 500 reserved consolidated financial statements matter amount transferred consolidated financial statements result acquisition matters also involved legal proceedings claims litigation arising ordinary conduct business although cannot assure outcome management presently believes outcome legal proceedings material adverse effect results operations financial condition 12 business segments operating segments december 31 2002 2001 dontech directory advertising services get digital smart internet business operating segment 2000 ceased operations business december 2000 dontech segment includes 50 interest net profits dontech revenue participation income received sbc although dontech provides advertising sales yellow pages directory products similar das partnership considered separate operating segment since among things board directors employees dontech including officers managers employees company das segment includes yellow pages advertising sales services affiliated entities sprint prepress publishing services yellow pages directories das segment also includes information technology costs operating income das includes allocation certain shared expenses based estimated business usage das results 2000 include operating results bell atlantic cincinnati businesses disposed 2000 certain onetime items restructuring cendon relationship see note 15 2000 transactions disposition businesses partnership restructuring general corporate includes expenses allocated das segment interest expense interest income tax expense nonoperating items allocated operating segments segment information years ended december 31 2002 2001 2000 presented also evaluate dontech das based advertising sales appear financial statements financial statements dontech critical measure performance reviewed management play important role management’s decision allocating financial resources discussion advertising sales see “management’s discussion analysis financial condition results operations results operations” 13 guarantees rh donnelley inc direct wholly owned subsidiary company issuer existing notes company direct indirect wholly owned subsidiaries rh donnelley inc jointly severally fully unconditionally guarantee existing notes december 31 2002 rh donnelley inc’s direct wholly owned subsidiaries rh donnelley apil inc rh donnelley cd inc rh donnelley acquisitions ii inc get digital smartcom inc rh donnelley acquisitions inc wholly owned subsidiary rh donnelley apil inc rh donnelley finance corporation ii subsidiary borrowers established connection financing spa acquisition nonguarantor subsidiaries december 31 2002 subject technical default subsequently cured see note 4 nonguarantor subsidiaries years ended december 31 2001 2000 following consolidating condensed financial statements read conjunction consolidated financial statements company rh donnelley corporation consolidating condensed balance sheet december 31 2002 rh donnelley corporation consolidating condensed balance sheet december 31 2001 rh donnelley corporation consolidating condensed statement operations year ended december 31 2002 rh donnelley corporation consolidating condensed statement operations year ended december 31 2001 rh donnelley corporation consolidating condensed statement operations year ended december 31 2000 rh donnelley corporation consolidating condensed statement cash flows year ended december 31 2002 rh donnelley corporation consolidating condensed statement cash flows year ended december 31 2001 rh donnelley corporation consolidating condensed statement cash flows year ended december 31 2000 14 valuation qualifying accounts 15 2000 transactions disposition businesses partnership restructuring disposition businesses 2000 sold cincinnati proprietary directory business yellow book usa inc terminated early directory services agreements bell atlantic ceased operations get digital smart internet business implemented related costcutting measures including headcount reductions raleigh facility corporate headquarters pretax gain 86495 53454 taxes recognized connection actions calculation gain included certain estimated reserves based best information available time transactions december 31 2002 determined sufficient time elapsed since transaction additional costs incurred risks uncertainties existed balance sheet date accordingly remaining reserves 1072 reversed income cendon restructuring effective directories published june 30 2000 entered series agreements centel effectively restructured cendon partnership limited liability company cendon llc restructured arrangement receive sales commissions advertising sold consideration transferring control publishing functions centel receive priority distribution determined percentage cendon advertising sales priority distribution allows us maintain level profitability would earned cendon partnership original expiration date 2004 also provided prepress publishing services cendon partnership continue provide similar services cendon sales agency relationship extends december 2010 revised arrangement revenue related costs recognized time sale previous cendon partnership shared responsibility publishing delivery functions revenue related costs recognized time directory publication accordingly upon restructuring cendon arrangement onetime operating income benefit 15771 recorded benefit related advertising sales made costs incurred prior effective date agreement directories published subsequent effective date agreement 16 quarterly information unaudited full year earnings per share amount may equal sum quarters due weighting shares 17 subsequent events january 3 2003 completed acquisition sprint corporation’s directory publishing business sprint publishing advertising 2213475 preliminary working capital adjustment repaid existing debt accrued interest 244166 paid transaction costs 15101 ultimate purchase price subject final working capital adjustment spa publisher 260 revenuegenerating yellow pages directories 18 states prior acquisition provided sales agency prepress publishing services 44 directories four states acquisition transforms company sales agent prepress vendor leading publisher yellow pages directories closing acquisition borrowed 510000 consisting 500000 term loan proceeds 10000 revolver also received proceeds 1825000 held escrow see note 4 issued 130000 shares preferred stock warrants purchase 1072500 shares common stock investment partnerships affiliated goldman sachs group inc collectively “gs funds” gross proceeds 130000 investment gs funds represented remaining investment amount 200000 commitment january 3 2003 70000 shares series b1 preferred stock purchased gs funds november 2002 automatically converted 70604 shares preferred stock proceeds along 69300 net proceeds issuance preferred stock gs funds november 40000 borrowed existing revolver december used purchase outstanding common stock spa repay existing debt including accrued interest pay transaction fees expenses revolver term loan mature december 2008 preferred stock redeemable option time january 3 2013 preferred stock may redeemed option january 3 2006 january 3 2013 market price defined common stock exceeds 200 conversion price 30 trading days preferred stock redeemable option holder event change control defined sources uses funds connection acquisition summarized follows january 3 2003 borrowings existing term facilities repaid connection tender offer exit consent solicitation 128755 existing notes repurchased borrowed initial 1410000 credit facility contingent upon repurchase entire 150000 aggregate principal amount existing notes proceeds used repurchase existing notes required repaid lenders credit facility accordingly 21245 representing amount existing notes remain outstanding following tender offer exit consent solicitation repaid lenders credit facility shortly consummation acquisition connection tender offer exit consent solicitation holders existing notes agreed terminate covenants set forth indenture governing existing notes accordingly restrictions indenture discussed note 4 longer effective addition repayment existing term facilities terminated existing credit agreement acquisition accounted purchase business combination accordance sfas 141 “business combinations” purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values acquisition date fair value certain longterm intangible assets respective useful lives valued independent third party expert knowledge area valuing acquired businesses industry identifiable intangible assets acquired included commercial agreements entered sprint us customer relationships acquired trade names commercial agreements sprint us include directory services license agreement trademark license agreement noncompetition agreement collectively “directory services agreements” directory services license agreement gives us exclusive right produce publish distribute directories sprint markets sprint currently provides local telephone service trademark license agreement gives us exclusive right use certain specified sprint trademarks including sprint diamond logo markets noncompetition agreement prohibits sprint producing publishing distributing print directories selling local advertising markets certain limited exceptions agreements interrelated initial term 50 years subject earlier termination specified circumstances fair value assigned agreements 1625000 based present value estimated future cash flows also acquired established local national customer relationships spa value relationships determined based present value estimated future cash flows analysis historical attrition rates value 200000 assigned local customer relationships value 60000 assigned national customer relationships finally also acquired certain trade names historically used spa directory business value 30000 assigned trade names based “relief royalty” method values trade names based estimated amount company would pay arms length transaction use trade names excess purchase price fair value assets acquired liabilities assumed recognized goodwill accordance sfas 142 “goodwill intangible assets” fair value identifiable intangible assets amortized estimated useful lives manner best reflects economic benefits derived assets goodwill amortized subject impairment testing annual basis estimated amortization expense identified intangible assets approximately 50000 per year purchase accounting rules assume deferred revenue balance spa january 3 2003 292775 amount represented revenue would recognized 2003 deferral amortization recognition method described acquisition occurred accordingly never record revenue associated directories published prior acquisition although deferred revenue balance eliminated retained rights associated collection amounts due obligations advertising contracts executed prior spa acquisition result spa’s billed unbilled accounts receivable balances remain assets donnelley also purchase accounting rules assume deferred directory costs january 3 2003 related directories published prior acquisition costs represented operating expenses would recognized 2003 deferral amortization method acquisition occurred policy deferring direct costs attributable directory postacquisition different policy followed spa prior acquisition certain costs previously deferred amortized spa treated period expenses allocation purchase price fair value assets acquired liabilities assumed presented table purchase price allocation based best information date could change additional information arises publisher yellow pages directories recognize revenue directory advertising sales direct costs incurred generating sales deferral amortization method advertising sales value directory related direct costs initially deferred recognized ratably life directory typically twelve months acquisition significant portion revenue derived selling advertising local small mediumsized businesses advertisers including new advertisers subject credit review advertiser qualifies extend credit advertising purchase small mediumsized businesses tend fewer financial resources higher financial failure rates large businesses addition full collection delinquent accounts take extended period time involve increased costs believe extending credit local advertisers material adverse affect results operations financial condition assurances given require collateral advertisers although charge interest advertisers pay within specified due dates national advertising typically paid full within 30 days directory publication report independent accountants board directors partners dontech opinion accompanying combined balance sheets related combined statements partners’ capital operations cash flows present fairly material respects combined financial position amdon “dontech i” dontech ii partnership “dontech ii” together referred “dontech” december 31 2002 2001 results operations cash flows three years period ended december 31 2002 conformity accounting principles generally accepted united states america financial statements responsibility dontech’s management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp january 17 2003 dontech combined balance sheets accompanying notes integral part combined financial statements dontech combined statements operations accompanying notes integral part combined financial statements dontech combined statements cash flows accompanying notes integral part combined financial statements dontech combined statements partners’ capital accompanying notes integral part combined financial statements dontech notes combined financial statements thousands 1 form organization nature business dontech ii partnership “dontech ii” general partnership reuben h donnelley inc formerly known reuben h donnelley corporation “rh donnelley” delaware corporation ameritech publishing illinois inc “apiil” unit sbc communications “sbc” partnership established august 1997 preceded amdon “dontech i” general partnership parties december 31 2000 ceased business operations distributed remaining assets partners accompanying financial statements dontech ii hereafter referred “dontech” shown combined basis significant affiliated accounts transactions incurred prior december 31 2000 eliminated preparation combined financial statements dontech ii exclusive sales agent perpetuity yellow page white page street address directories published sbc illinois northwest indiana partnership receives 27 commission sales net provisions capped 61 subject certain exclusions dontech ii’s cost structure includes principally sales operations office services finance facilities related overhead dontech ii profits shared equally partners term partnership agreement neither partner may compete directly business dontech ii without consent board directors board directors “board” appointed administer activities partnership time term partnership board may call additional capital contributions equal amounts partners opinion board additional capital required operation partnership january 28 2000 partners agreed amend dontech partnership agreement provide payment 29898 dontech apiil preferential distribution preferential distribution comprised cash totaling 13331 forgiveness cancellation receivable due apiil partnership amount 16567 additionally partners also agreed amend dontech ii partnership agreement provide payment 29898 apiil dontech ii upon dissolution dontech ii partnership subsequent payment 29898 preferential distribution rh donnelley 2 significant accounting policies cash equivalents cash equivalents include highly liquid investments initial maturity date three months less carrying value cash equivalents approximates fair value due shortterm nature revenue recognition revenue comprised sales commissions reflected net provisions capped 61 per annum subject certain exclusions recognized upon execution contracts sale advertising greater 99 dontech’s revenue generated dontech’s sales agency agreement apiil fixed assets fixed assets recorded cost depreciated straightline basis estimated useful lives assets upon asset retirement disposition cost related accumulated depreciation removed accounts resulting gain loss included statement operations amounts incurred repairs maintenance charged operations postretirement benefits pensions dontech provides postretirement benefits consisting mainly life health insurance substantially employees dependents accrual method accounting utilized postretirement health care life insurance benefits income taxes provision income taxes made proportional share partnership income responsibility individual partners concentration credit risk financial instruments potentially subject dontech concentration credit risk consist principally commission receivable dontech’s commission receivable due one partners sbc collateral required use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expense reporting period actual results could differ estimates recent pronouncements april 2002 financial accounting standards board “fasb” issued statement financial accounting standard “sfas” 145 “rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections” “sfas 145” effective fiscal years beginning may 15 2002 sfas 145 updates clarifies simplifies existing accounting pronouncements adoption standard significant impact dontech’s financial position results operations cash flows june 2002 fasb issued sfas 146 “accounting costs associated exit disposal activities” “sfas 146” supercedes emerging issues task force issue 943 “liability certain employee termination benefits costs exit activity including certain costs incurred restructuring” sfas 146 requires companies recognize costs associated exit disposal activities incurred rather date commitment exit disposal plan statement effective exit disposal activities initiated december 31 2002 adoption impact dontech’s historical combined financial position results operations october 2002 fasb issued sfas 147 “acquisition certain financial institutions” applicable dontech november 2002 fasb issued fasb interpretation 45 “guarantors’ accounting disclosure requirements guarantees including indirect guarantees indebtedness others” interpretation clarifies requirements guarantor’s accounting disclosure certain guarantees issued outstanding initial recognition measurement provisions interpretation applicable prospective basis guarantees issued modified december 31 2002 disclosure requirements effective financial statements ending december 15 2002 adoption significant impact dontech’s financial position results operations cash flows december 2002 fasb issued sfas 148 “accounting stockbased compensation transition disclosures amendment fasb statement 123” applicable dontech january 2003 fasb issued fasb interpretation 46 “consolidation variable interest entities interpretation arb 51” applicable dontech 3 fixed assets fixed assets consist following december 31 depreciation expense three years ended december 31 2002 2001 2000 1702 2360 2135 respectively 4 accrued liabilities accrued liabilities consist following december 31 5 related party transactions dontech purchases insurance services august 2000 purchased automobile plan administration services rh donnelley general ledger purchasing services sbc dontech also provides facility space certain employees sbc agreement entered 1998 see note 6 contingencies commitments dontech leases certain office facilities noncancelable lease arrangements rent expense operating leases approximately 2254 2223 2119 2002 2001 2000 respectively 2000 dontech entered sublease agreement sbc whereby dontech received 56 54 30 sublease rental income sbc 2002 2001 2000 respectively future minimum lease payments required noncancelable operating leases initial remaining lease terms excess one year december 31 2002 follows 2002 dontech renegotiated lease headquarters facilities originally scheduled terminate january 31 2010 renegotiated lease extends terms agreement two additional years january 31 2012 exchange certain cash concessions totaling 1579cash concessions received connection amended lease recorded deferred rent credits combined balance sheet recognized straightline basis reduction rent expense lease term december 31 2002 longterm deferred credit related concessions 1524 connection renegotiation lease dontech incurred brokers fees 779 reflected combined balance sheet noncurrent asset december 31 2002 fees amortized rent expense lease term september 1998 dontech entered maintenance service agreement ameritech advertising services provide certain maintenance services including parts dontech length agreement five years according terms agreement dontech’s remaining obligation december 31 2002 79 7 employee retirement profit participation plans dontech sponsors defined benefit pension plan covering substantially employees “principal plan” principal plan’s assets invested equity funds fixed income funds real estate total expense benefit principal plan 986 29 342 2002 2001 2000 respectively following provides reconciliation benefit obligations plan assets funded status principal plan net periodic pension cost benefit plan 2002 2001 2000 include following components fourth quarter 2000 partnership changed method accounting used determine value plan assets purposes calculating annual pension expense method changed marketrelated value whereby gains losses recognized straightline basis five years market value whereby gains losses reflected immediately effect change 2000 results operations including cumulative effect prior years material additionally dontech offers defined contribution savings plan “profit plan” substantially employees contributes fifty cents dollar contributed participating employee maximum 6 participant’s compensation including salary commission shortterm bonus dontech also makes contributions profit plan contingent upon attainment financial goals set advance defined profit plan agreement matching contributions made plan 876 944 854 2002 2001 2000 respectively 8 postretirement benefits pensions dontech ii provides postretirement health care life insurance benefits certain retired employees dependents following provides reconciliation benefit obligations plan assets funded status health life insurance plans net periodic postretirement benefit cost 2002 2001 2000 include following components discount rate used determining benefit obligation december 31 2002 2001 650 725 respectively assumed health care cost trend rate used measuring benefit obligation december 31 2002 2001 100 95 respectively rates assumed decrease gradually 50 2011 remain level thereafter increasing decreasing health care cost trend rates one percentage point would material effect net periodic postretirement expense year ended december 31 2002 onepercentage point increase would increased benefit obligation december 31 2002 315 onepercentage point decrease would decreased benefit obligation december 31 2002 285 item 9item 8 financial statements supplementary data report independent auditors board directors shareholders rh donnelley corporation opinion accompanying consolidated balance sheets related consolidated statements operations shareholders’ deficit cash flows present fairly material respects financial position rh donnelley corporation subsidiaries “company” december 31 2003 2002 results operations cash flows three years period ended december 31 2003 conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp new york new york february 16 2004 rh donnelley corporation subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements rh donnelley corporation subsidiaries consolidated statements operations accompanying notes integral part consolidated financial statements rh donnelley corporation subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements rh donnelley corporation subsidiaries consolidated statements changes shareholders’ deficit accompanying notes integral part consolidated financial statements rh donnelley corporation subsidiaries notes consolidated financial statements thousands except share per share data unless otherwise noted 1 business presentation consolidated financial statements include accounts rh donnelley corporation direct indirect wholly owned subsidiaries “company” “rhd” “we” “us” “our” intercompany transactions balances eliminated see “equity method accounting” discussion unconsolidated operations leading yellow pages directory publisher united states currently publish 260 sprintbranded yellow pages directories 18 states total circulation approximately 18 million serving approximately 160000 local 4000 national advertisers dontech ii partnership “dontech” partnership affiliate sbc communications inc “sbc” sell advertising additional 129 sbcbranded directories illinois northwest indiana total circulation approximately 10 million serving approximately 100000 local advertisers january 3 2003 acquired outstanding common stock various entities comprising sprint publishing advertising “spa” sprint corporation’s “sprint” directory publishing business acquisition transformed donnelley sales agent prepress vendor leading publisher yellow pages directories prior spa acquisition one largest independent sales agents prepress vendors yellow pages advertising united states see note 3 “acquisition sprint publishing advertising” description acquisition 2 summary significant accounting policies revenue recognition earn revenue principally sale advertising sprintbranded yellow pages directories revenue sale advertising deferred directory published recognized ratably life directory typically 12 months “deferral amortization method” revenue sale advertising recorded net allowance sales claims estimated based historical experience directorybydirectory basis increase decrease estimate information circumstances indicate estimate may longer adequately represent amount claims may incur directory future also earn revenue providing prepress publishing services sbc directories dontech markets revenue prepress publishing services recognized services performed years ended december 31 2002 2001 earned sales commission revenue sale advertising behalf spa fees prepress publishing services sales agent spa recognized sales commission revenue net allowance sales claims time advertising contract executed customer revenue prepress publishing services recognized services performed deferred directory costs directly related selling production directories initially deferred incurred recognized ratably life directory typically 12 months costs include sales commissions print paper initial distribution costs equity method accounting dontech 5050 perpetual partnership operating unit sbc partners dontech separate legal entity provides services employees standalone management team employees dontech right authority power act accomplish enter contract incidental attain purposes partnership employees either rhd sbc involved daytoday operations dontech partners share equally net profits one voting member dontech board neither partner unilateral ability control influence operations dontech accordingly account dontech equity method consolidate dontech results financial statements recognize 50 share net income dontech partnership income consolidated statements operations partnership income also includes revenue participation income sbc revenue participation income based dontech advertising sales recognized sales contract executed customer investment dontech revenue participation receivable sbc reported partnership investment consolidated balance sheet years ended december 31 2002 2001 partnership income also included priority distribution income membership interest cendon llc “cendon” connection spa acquisition became sole owner cendon operating results cendon subsequent spa acquisition included consolidated results operations cash equivalents cash equivalents include liquid investments maturity less three months time acquisition december 31 2002 cash 1928700 restricted used 2003 finance spa acquisition company places investments high quality financial institutions times investments may excess federally insured limits accounts receivable december 31 2003 accounts receivable consist balances advertising customers advertisers typically enter twelvemonth contract advertising advertisers billed pro rata amount contract value monthly basis billed receivables represent amount billed advertisers unbilled receivables represent contractually owed amounts published directories yet billed advertisers billed receivables recorded net allowance doubtful accounts sales claims estimated based historical experience directorybydirectory basis increase decrease estimate information circumstances indicate estimate may longer adequately represent amount bad debts sales claims may incur december 31 2002 accounts receivable consisted sales commissions earned sale advertising receivables sales commissions billed publisher upon directory publication collected accordance contractual provisions allowance doubtful accounts sales claims provided based expected collectibility receivables fixed assets computer software fixed assets computer software recorded cost depreciation amortization provided estimated useful lives assets using straightline method estimated useful lives 30 years building five years machinery equipment ten years furniture fixtures three five years computer equipment five years computer software leasehold improvements amortized straightline basis shorter term lease estimated useful life improvement fixed assets computer software december 31 2003 2002 consisted following depreciation amortization expense fixed assets computer software years ended december 31 2003 2002 2001 follows identifiable intangible assets goodwill result spa acquisition certain longterm intangible assets identified recorded estimated fair value amortization expense intangible assets year ended december 31 2003 49833 amortization expense intangible assets five succeeding years estimated approximately 50000 acquired longterm intangible assets respective book values december 31 2003 shown table directory services agreements sprint company include directory services license agreement trademark license agreement noncompetition agreement collectively “directory services agreements” certain affiliates sprint directory services license agreement gives us exclusive right produce publish distribute directories sprint 18 states sprint provided local telephone service time agreement trademark license agreement gives us exclusive right use certain specified sprint trademarks including sprint diamond logo markets noncompetition agreement prohibits sprint markets selling local directory advertising producing publishing distributing print directories certain limited exceptions fair value agreements determined based present value estimated future cash flows amortized using straightline method 50 years fair value local national customer relationships determined based present value estimated future cash flows historical attrition rates amortized accelerated method assumes value derived customer relationships greater earlier years steadily declines time weighted average useful life relationships 18 years fair value acquired trade names determined based “relief royalty” method values trade names based estimated amount company would pay arms length transaction use trade names assets amortized using straightline method 15 years excess purchase price spa net tangible identified intangible assets acquired recorded goodwill accordance sfas 142 “goodwill intangible assets” goodwill amortized subject impairment testing tested goodwill impairment concluded goodwill amount 97040 december 31 2003 impaired goodwill resulting spa acquisition assigned donnelley segment see note 14 segment information deferred financing costs associated issuance debt instruments capitalized included noncurrent assets consolidated balance sheet costs amortized interest expense terms related debt agreements bond outstanding method used amortize deferred financing costs relating debt instruments respect make accelerated principal payments deferred financing costs amortized using straightline method amortization deferred financing costs included interest expense 15023 1273 957 2003 2002 2001 respectively advertising expense recognize advertising expense incurred expenses include public relations media online advertising promotional sponsorship costs total advertising expenses 8797 2003 prior spa acquisition advertising costs significant concentration credit risk approximately 85 directory advertising revenue derived sale advertising local small mediumsized businesses advertisers typically enter twelvemonth advertising sales contracts typically make monthly payments term contract advertisers prepay full amount portion contract value advertisers qualify may extend credit advertising purchase small mediumsized businesses tend fewer financial resources higher failure rates large businesses addition full collection delinquent accounts take extended period time involve significant costs believe extending credit local advertisers material adverse effect results operations financial condition assurances given require collateral advertisers although charge interest advertisers pay within specified due dates remaining 15 directory advertising revenue derived sale advertising national large regional chains rental car companies automobile repair shops pizza delivery businesses substantially revenue derived national accounts serviced certified marketing representatives “cmrs” contract cmrs independent third parties act agents national companies cmrs responsible billing national customers advertising receive payment value advertising placed directory net cmr’s commission directly cmr still exposed credit risk amount losses accounts historically less local accounts advertisers cases cmrs tend larger companies greater financial resources local advertisers maintain significant receivable balance sbc revenue participation prepress publishing services fees revenue participation receivable subject adjustment based collections sbc individual advertisers however adjustment limited based contractual provisions receivable recorded net realizable value currently foresee material credit risk associated receivable although assurance full payment received timely basis december 31 2003 interest rate swap agreements major financial institutions notional value 405000 exposed credit risk event one counterparties agreements cannot meet obligation notional amount used measure interest paid received represent amount exposure credit loss would limited amount would received remaining life swap agreement counterparties swap agreements major financial institutions credit ratings higher currently foresee material credit risk associated swap agreements however assurances given pension postretirement benefits pension postretirement benefits represent estimated amounts paid employees future accounting benefits reflects recognition benefit costs employee’s approximate service period based terms plan investment funding decisions made determination benefit obligation net periodic pension postretirement benefit costs requires management make assumptions regarding discount rate return retirement plan assets increase future compensation healthcare cost trends changes assumptions significant impact projected benefit obligation funding requirement net periodic benefit cost assumed discount rate pension benefits could settled use rates aa corporate bonds basis determining discount rate assumption expected longterm rate return plan assets based mix assets held plan expected longterm rates return within asset class anticipated trend future healthcare costs based historical experience external factors see note 11 information regarding benefit plans effective january 1 2003 reduced rate return plan assets 975 825 result low investment returns last years well outlook long term particularly equity securities determined prior assumed rate return 975 longer reflected best estimate future longterm returns based current investment environment pension plan’s asset allocation determined longterm rate return 825 better reflected expectations future longterm returns derivative financial instruments use derivative financial instruments trading speculative purposes derivative financial instruments limited interest rate swap agreements used manage exposure fluctuations interest rates variable rate debt agreements effectively convert 405000 variable rate debt fixed rate debt mitigating exposure changes interest rates terms swap agreements receive variable interest based threemonth libor pay weighted average fixed rate 252 swaps mature october 2005 march 2007 weighted average rate received 12 2003 periodic payments receipts recorded part interest expense interest rate swaps designated cash flow hedges hedge threemonth liborbased interest payments 405000 bank debt extent swaps provide effective hedge changes fair value swaps recorded comprehensive income component shareholders’ deficit ineffectiveness recorded earnings year ended december 31 2003 interest rate swaps provided effective hedge threemonth liborbased interest payments 405000 bank debt ineffectiveness included earnings december 31 2002 interest rate swap agreement notional value 75000 december 31 2001 interest rate swaps combined notional value 125000 made fixedrate payments 59 received variablerate payments based threemonth libor rates weighted average rate received 11 2002 30 2001 periodic payments receipts recorded part interest expense result pending spa acquisition contemplated repayment existing variable rate debt 75000 notional value interest rate swap qualify hedge accounting treatment december 31 2002 thus unrecognized fair market value swap previously recognized accumulated comprehensive loss balance sheet charged earnings accordingly charge 1523 included expense net year ended december 31 2002 swap held maturity corresponding gain recognized 2003 income taxes account income taxes liability method accordance sfas 109 accounting income taxes deferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax assets realized see note 10 information regarding benefit provision income taxes earnings per share basic earnings per common share “eps” generally calculated dividing income available common shareholders weighted average number common shares outstanding however outstanding preferred stock contains certain participation rights eitf topic d95 effect participating securities computation basic earnings per share “topic d95” requires dilutive effect securities included weighted average number shares outstanding furthermore topic d95 requires dilutive effect included basic eps may calculated using either ifconverted method twoclass method however dilutive effect preferred stock cannot less would result application twoclass method elected use ifconverted method calculating basic eps however 2003 reported eps calculated using twoclass method less eps calculated using ifconverted method diluted eps calculated dividing income available common shareholders weighted average common shares outstanding plus common share equivalents common stock equivalents include stock options warrants dilutive effect calculated using treasury stock method preferred stock dilutive effect calculated using ifconverted method calculation basic diluted eps 2003 2002 presented 1 december 31 2002 preferred stock convertible 2933888 shares common stock however since 70000 preferred stock issued november 2002 number common share equivalents included 2002 eps calculation weighted actual time preferred stock outstanding year 230683 30683 8761 year ended december 31 2003 29643 281 year ended december 31 2002 3 basic eps calculated twoclass method loss 275 year ended december 31 2003 however net loss period application twoclass method antidilutive accordingly reported basic eps calculated loss available common shareholders divided weighted average basic shares outstanding 4 effect stock options 2003 assumed conversion preferred stock 2002 2003 antidilutive therefore included calculation diluted eps year ended december 31 2001 basic eps calculated dividing net income weighted average common shares outstanding year diluted eps calculated dividing net income weighted average common shares outstanding plus potentially dilutive common shares primarily stock options employee stock options follow accounting principles board opinion 25 accounting stock issued employees “apb 25” related interpretations accounting stock option plan compensation expense related issuance stock options employees nonemployee directors recognized exercise price stock option less fair market value underlying stock grant date following table reflects pro forma net loss income loss earnings per share assuming applied fair value method sfas 123 accounting stockbased compensation pro forma disclosures shown necessarily representative effects net loss income loss earnings per share future years weighted average fair value stock options 921 2003 829 2002 881 2001 estimated grant date using blackscholes optionpricing model following assumptions estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities revenue certain expenses disclosure contingent assets liabilities actual results could differ materially estimates assumptions estimates assumptions used determination sales allowances doubtful accounts depreciation amortization employee benefit plans restructuring reserves among others reclassifications certain prior year amounts reclassified conform current year’s presentation reclassifications impact previously reported results operations shareholders’ deficit new accounting pronouncements may 2003 financial accounting standards board “fasb” issued statement financial accounting standards 150 accounting certain financial instruments characteristics liabilities equity “sfas 150” statement established standards classification measurement certain financial instruments characteristics liabilities equity statement effective july 1 2003 redeemable convertible preferred stock represents financial instrument characteristics liabilities equity applied provisions sfas 150 determined classification measurement redeemable convertible preferred stock appropriate january 2003 fasb issued interpretation 46 consolidation variable interest entities “fin 46” general variable interest entity corporation partnership trust legal structure used business purposes either equity investors voting rights b equity investors provide sufficient financial resources entity support activities fin 46 requires certain variable interest entities consolidated primary beneficiary entity investors characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties consolidation requirements fin 46 apply immediately variable interest entities created january 31 2003 adopted provisions fin 46 effective february 1 2003 adoption material impact consolidated financial statements currently variable interest entities december 2003 fasb issued fin 46r respect variable interest entities created january 31 2003 among things revised implementation date first fiscal year interim period ending march 15 2004 exception special purpose entities “spe” consolidation requirements apply spes first fiscal year interim period ending december 15 2003 adopted provisions fin 46r effective december 2003 adoption material impact consolidated financial statements currently spes april 2003 fasb issued statement financial accounting standards 149 amendment statement 133 derivative instruments hedging activities “sfas 149” sfas 149 amends clarifies accounting derivative instruments including certain derivative instruments embedded contracts hedging activities sfas 133 sfas 149 effective contracts hedging relationships entered modified june 30 2003 adopted provisions sfas 149 effective june 30 2003 adoption material impact consolidated financial statements december 2002 fasb issued statement financial accounting standards 148 accounting stockbased compensation transition disclosure “sfas 148” sfas 148 amends transition provisions statement financial accounting standards sfas no123 accounting stockbased compensation “sfas 123” entities voluntarily change fair value method accounting stockbased employee compensation currently intend change accounting fair value method sfas 148 also amends disclosure provisions sfas 123 require prominent disclosure effects reported net income entity’s accounting policy decisions respect stockbased employee compensation amends apb opinion 28 interim financial reporting “apb 28” require disclosures effects interim financial information adopted disclosure provisions sfas 148 first quarter 2003 december 8 2003 medicare prescription drug improvement modernization act 2003 “act” signed law act introduces prescription drug care benefits medicare also allows certain sponsors postretirement benefit plans drug benefit receive nontaxable federal subsidy certain criteria met response passage legislation january 12 2004 fasb issued fasb staff position “fsp” fas 1061 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” fsp permits employers sponsor postretirement benefit plans provide prescription drug benefits retirees make onetime election defer accounting effects act accordance fsp donnelley elected defer accounting effects act accordingly measures accumulated postretirement benefit obligation net periodic postretirement benefit cost financial statements disclosed note 11 benefits plans reflect effects act donnelley’s plans authoritative guidance accounting federal subsidy currently considered fasb issued could require us change previously reported information december 2003 fasb issued statement financial accounting standards “sfas” 132 revised 2003 employers’ disclosures pensions postretirement benefits sfas 132 revised 2003 amends disclosure requirements sfas 132 require complete information pension postretirement benefits change measurement recognition plans required sfas 87 employers’ accounting pensions sfas 88 employers’ accounting settlements curtailments defined benefit pension plans termination benefits sfas 106 employers’ accounting postretirement benefits pensions adopted disclosure provisions sfas 132 revised 2003 december 31 2003 3 acquisition sprint publishing advertising january 3 2003 acquired spa 2229763 publisher 260 revenuegenerating sprintbranded yellow pages directories 18 states prior acquisition provided sales agency prepress publishing services 44 directories four states acquisition transformed company sales agent prepress vendor leading publisher yellow pages directories results spa business included consolidated results january 3 2003 acquisition closing date spa operated rh donnelley publishing advertising inc “rhdpa” indirect wholly owned subsidiary company acquisition accounted purchase business combination accordance sfas 141 business combinations sources uses funds connection acquisition summarized see notes 6 8 information regarding financing spa acquisition 1calculated prior application 1 closing payment fees allocation cash purchase price fair value net assets acquired summarized purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values acquisition date fair value certain longterm intangible assets identified recorded estimated fair value identifiable intangible assets acquired included directory services agreements sprint us customer relationships acquired trade names december 31 2002 donnelley net receivable spa 27888 result acquisition net receivable became intercompany item included part purchase price commercial agreements sprint us include directory services license agreement trademark license agreement noncompetition agreement collectively “directory services agreements” directory services license agreement gives us exclusive right produce publish distribute directories sprint markets sprint provided local telephone service time agreement trademark license agreement gives us exclusive right use certain specified sprint trademarks including sprint diamond logo markets noncompetition agreement prohibits sprint markets selling local directory advertising producing publishing distributing print directories certain limited exceptions agreements interrelated initial term 50 years subject earlier termination specified circumstances fair value assigned agreements 1625000 based present value estimated future cash flows also acquired established local national customer relationships spa value relationships determined based present value estimated future cash flows analysis historical attrition rates value 200000 assigned local customer relationships value 60000 assigned national customer relationships finally also acquired certain trade names historically used spa directory business value 30000 assigned trade names based “relief royalty” method values trade names based estimated amount company would pay arms length transaction use trade names excess purchase price fair value assets acquired liabilities assumed recognized goodwill accordance sfas 142 goodwill intangible assets fair value identifiable intangible assets amortized estimated useful lives manner best reflects economic benefits derived assets goodwill amortized subject impairment testing annual basis purchase accounting rules assume deferred revenue balance spa january 3 2003 315911 amount represented revenue would recognized subsequent acquisition deferral amortization recognition method acquisition occurred accordingly record revenue associated directories published prior acquisition january 2003 although deferred revenue balance eliminated retained rights associated collection amounts due obligations advertising contracts executed prior spa acquisition result spa’s billed unbilled accounts receivable balances became assets donnelley also purchase accounting rules assume record deferred directory costs january 3 2003 related directories published prior acquisition january 2003 costs represented operating expenses would recognized subsequent acquisition deferral amortization method acquisition occurred summarized condensed balance sheet company january 3 2003 presented summarized unaudited condensed pro forma information year ended december 31 2002 assuming spa acquisition occurred january 1 2002 presented following unaudited pro forma information purport represent combined entity’s results operations would actually transaction fact occurred january 1 2002 necessarily representative results operations future period 4 restructuring special charge result spa acquisition consolidated publishing technology operations sales offices administrative personnel relocating headquarters functions overland park kansas purchase new york cary north carolina 2004 collectively “2003 restructuring actions” approximately 140 people affected shutdown tennessee publishing facility included restructuring reserve addition approximately 140 people affected relocation headquarters functions overland park kansas purchase new york 75 included restructuring reserve remaining 65 people expected relocating company 2003 2878 charged goodwill representing closure prepress publishing facility operated spa severance paid certain spa executives terminated immediately upon closing acquisition reserve prepress publishing facility 2181 represents remaining lease payments net estimated sublease income payments made 2012 severance spa executives 697 paid full 2003 9531 charged earnings primarily representing severance related costs associated consolidation publishing technology operations sales offices administrative personnel relocation headquarters payments 3213 made 2003 remaining costs paid 2004 2005 2001 recognized restructuring special charge 18556 consisting special charge 9937 connection transition executive management restructuring charge 8619 connection expiration prepress publishing contract december 2002 result pending spa acquisition late 2002 management determined certain costs originally anticipated restructuring charge would incurred specifically idle leased space morrisville publishing facility would utilized planned severance related costs would significantly less believed time corporate headquarters would relocated accordingly 6694 original charge reversed 2002 2003 restructuring actions completed resulting payments 1162 remaining balance 513 reversed included income table shows activity restructuring reserves 2001 2002 2003 5 investment impairment charges 9 interest chinabigcom limited “chinabig” publishes yellow pages directories offers internet directory services people’s republic china 2001 independent third party valuation chinabig’s current business plan capital needs outlook profitability cash flow prepared connection proposed equity financing chinabig indicated carrying value investment permanently impaired result valuation recorded impairment charge 11432 2001 2002 chinabig achieve sales objective generate sufficient operating cash flows fund operations meet obligations needed obtain shareholder loans make cash shortfall result management believed sufficient doubt existed chinabig’s ability raise sufficient cash either operations additional investments investment would provide value foreseeable future accordingly 2002 additional impairment charge 2000 recognized writeoff remaining book value investment impairment charges included general administrative expenses consolidated statements operations 6 longterm debt credit facilities notes longterm debt december 31 2003 2002 consisted following connection spa acquisition late 2002 entered 1525000 credit facility “credit facility” consisting 500000 term loan 900000 term loan b 125000 revolving credit facility “revolver” issued 325000 8 78 senior notes “senior notes” 600000 10 78 subordinated notes “subordinated notes” collectively senior notes “notes” december 31 2003 fair values senior notes subordinated notes 365625 711750 respectively also issued 200000 8 redeemable convertible cumulative preferred stock “preferred stock” warrants purchase 1650000 shares common stock partnerships affiliated goldman sachs group inc collectively “the gs funds” funds used acquire spa pay transaction costs repurchase portion existing 9 18 senior subordinated notes due 2008 “preacquisition notes” pursuant tender offer repay former term facilities december 8 2003 amended credit facility accomplish following objectives • obtain favorable pricing variable rate debt • adjust nonfinancial covenants make less restrictive corporate operating flexibility • obtain cash resources consent us redeem remaining outstanding preacquisition notes • obtain consent new term loan c potential borrowings 400 million proceeds borrowed used fund acquisitions retirement existing notes redemption equity subject certain limitations amendment credit facility created new term loan a2 replacing initial term loan created new term loan b2 replacing initial term loan b connection amendment borrowed additional 32000 term loan b2 proceeds used redeem balance preacquisition notes pay transaction costs including prepayment premium 8930 representing 1 balance term loan b outstanding date amendment weighted average interest rate outstanding debt credit facility 39 december 31 2003 former term facilities 67 2002 amendment credit facility accounted modification underlying debt instruments amended credit facility bears interest option either • higher base rate determined deutsche bank securities inc salomon smith barney inc bear stearns co inc plus 250 margin revolver 150 margin term loans credit facility amended indentures governing notes contain usual customary negative covenants among things place limitations ability incur additional indebtedness including capital leases liens ii pay dividends repurchase capital stock iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock subsidiaries credit facility also contains financial covenants relating maximum consolidated leverage minimum interest coverage minimum fixed charge coverage maximum senior secured leverage defined therein revolver term loan a2 mature december 2008 term loan b2 matures june 2010 substantially assets including capital stock subsidiaries pledged secure obligations credit facility january 3 2003 repurchased tender offer exit consent solicitation 128800 preacquisition notes borrowed initial 1410000 credit facility contingent upon repurchase entire 150000 aggregate principal amount preacquisition notes proceeds used repurchase preacquisition notes required repaid lenders credit facility accordingly 21200 representing amount preacquisition notes remained outstanding following tender offer exit consent solicitation repaid lenders credit facility shortly consummation spa acquisition february 6 2004 utilizing proceeds term loan b2 redeemed remaining aggregate principal amount preacquisition notes see note 18 subsequent events prior redemption interest paid preacquisition notes semiannual basis december 31 2003 borrowings revolver interest paid notes semiannually june 15 december 15 commencing june 15 2003 senior notes mature 2010 redeemable option beginning 2006 following prices senior subordinated notes mature 2012 redeemable option beginning 2007 following prices january 3 2003 repaid former term facilities consisting 74250 outstanding balances committed bank facilities 40000 outstanding thenexisting 100000 revolving credit facility former term facilities bore interest floating rates based spread libor greater either prime rate fed funds rate plus 50 basis points election aggregate maturities longterm debt december 31 2003 7 partnership investment dontech acts exclusive sales agent yellow pages directories published sbc illinois northwest indiana income dontech consists 50 net profits dontech revenue participation income received directly sbc based value advertising sales income dontech consisted following summarized financial information dontech shown table results consolidated financial statements total assets dontech 117506 december 31 2003 investment dontech including revenue participation receivable sbc 175729 185969 december 31 2003 2002 respectively cendon 2002 exclusive sales agent certain markets nevada florida virginia north carolina cendon joint venture centel directory company “centel” subsidiary sprint income cendon consisted priority distribution based percentage cendon advertising sales income cendon 19727 17545 2002 2001 respectively connection spa acquisition became sole owner cendon operating results cendon subsequent spa acquisition included consolidated results operations 8 redeemable preferred stock warrants 10000000 shares preferred stock authorized issuance december 31 2003 2002 200604 70000 shares preferred stock outstanding respectively january 3 2003 issued private placement 130000 shares preferred stock warrants purchase 1072500 shares common stock gs funds gross proceeds 130000 november 2002 issued private placement 70000 shares series b1 preferred stock warrants purchase 577500 shares common stock gs funds aggregate gross consideration 70000 january 3 2003 70000 shares series b1 preferred stock automatically converted 70604 shares preferred stock preferred stock accrued unpaid dividends convertible common stock time issuance price 2405 earns cumulative dividend 8 compounded quarterly cannot pay cash dividends preferred stock september 2005 time dividend accrue october 1 2005 may pay preferred stock dividend cash subject limitations credit facility allow accrue option may redeem preferred stock cash time january 3 2006 market price defined common stock exceeds 200 conversion price 30 45 trading days preferred stock redeemable cash us time january 3 2013 preferred stock redeemable cash option gs funds event change control defined december 31 2003 redemption value preferred stock 216998 convertible 9022798 shares common stock net proceeds received issuance preferred stock january 2003 november 2002 allocated preferred stock warrants beneficial conversion feature “bcf” preferred stock based relative fair values fair value preferred stock estimated using dividend discount method determines fair value based discounted cash flows security bcf function conversion price preferred stock fair value warrants fair market value underlying common stock date issuance fair value warrants 1218 january 3 2003 1043 november 2002 determined based blackscholes model following assumptions connection issuance preferred stock subsequent quarterly dividend date bcf recorded fair value underlying common stock time issuance greater conversion price preferred stock bcf treated deemed dividend preferred stock convertible common stock immediately issuance preferred stock dividend 2003 2002 58397 24702 respectively consisted stated 8 dividend 16454 544 respectively bcf 41943 24158 respectively 9 stock option plans maintain shareholder approved stock option plan whereby certain employees nonemployee directors eligible receive stock options stock appreciation rights limited stock appreciation rights tandem stock options deferred stock options typically granted fair market value common stock date grant follow apb 25 related interpretations accounting stock option plan accordingly typically recognize compensation expense related issuance stock options expire ten years grant date board determines termination vesting relevant provisions date grant yet grant stock appreciation rights limited stock appreciation rights nonemployee directors receive options purchase 1500 shares award 1500 deferred shares upon election board nonemployee directors also receive annual basis options purchase 1500 shares award 1500 deferred shares nonemployee directors may also elect receive additional options lieu portion annual cash retainer fee changes options outstanding stock option plan last three years follows following table summarizes information stock options outstanding exercisable december 31 2003 december 31 2002 4282621 options outstanding weighted average exercise price per share 2097 1564657 options exercisable weighted average exercise price per share 1518 december 31 2001 2629354 options outstanding weighted average exercise price per share 1670 1350153 options exercisable weighted average exercise price per share 1402 options granted 2002 included grant 1486000 options “founders grant” certain employees including senior management connection spa acquisition options granted october 2002 strike price equal fair market value company’s common stock date grant however award options contingent upon successful closing spa acquisition therefore options subject forfeiture january 3 2003 time fair market value company’s common stock exceeded strike price accordingly options accounted compensatory options resulted charge 1705 2003 sale preferred stock connection spa acquisition triggered change control terms company’s stock option plans accordingly options granted end 2002 exception founders grant options held senior management waived change control provisions became fully vested 10 income taxes provision benefit income taxes consisted following table summarizes significant differences us federal statutory tax rate effective tax rate deferred tax assets liabilities consisted following december 31 2003 2002 2003 tax benefit based effective tax rate 418 results tax benefit generated 2003 attributable net operating loss approximately 176000 related tax deductions connection spa acquisition federal net operating loss carryforward begin expire 2023 state net operating loss carryforwards begin expire 2008 2003 effective tax rate reflects increase state local tax rate result acquisition spa combined favorable settlement 2003 certain prior year state local tax audits 2002 2001 tax provision based effective tax rate 400 419 respectively adversely impacted chinabig investment impairment charges 2000 11432 2002 2001 respectively 2002 2001 valuation allowance established deferred tax asset generated writedown chinabig investment writedown investment treated capital loss income tax purposes offset capital gains believe future capital gains generated offset capital loss accordingly valuation allowance established total amount chinabig investment however regard deferred tax assets believe obtain full benefit assets based assessment company’s anticipated profitability years deferred tax assets expected become tax deductions 11 benefit plans retirement plans defined benefit pension plan covering substantially employees least one year service benefits paid employees based years service percentage total annual compensation percentage compensation allocated retirement account ranges 30 125 depending age years service “cash balance benefit” benefits certain employees participants predecessor dun bradstreet corporation “db” defined benefit pension plan also determined based participant’s average compensation years service “final average pay benefit” benefits paid equal greater final average pay benefit cash balance benefit pension costs determined using projected unit credit actuarial cost method funding policy contribute amount least equal minimum legal funding requirement contributions required made 2003 2002 2001 underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities use measurement date december 31 majority plan assets also unfunded nonqualified defined benefit pension plan pension benefit equalization plan “pbep” covers senior executives certain key employees benefits based years service compensation including compensation permitted taken account previously mentioned defined benefit pension plan also additional unfunded nonqualified defined benefit plan supplemental executive benefit plan “sebp” discontinued end 2001 offer defined contribution savings plan substantially employees contribute 050 dollar contributed participating employee maximum 6 participating employee’s salary including bonus commissions contributions plan 1142 724 776 years ended december 31 2003 2002 2001 respectively postretirement benefits unfunded postretirement benefit plan provides certain healthcare life insurance benefits fulltime employees reach retirement age working company summary funded status benefit plans december 31 2003 2002 follows net amounts recognized consolidated balance sheets december 31 2003 2002 follows accumulated benefit obligation defined benefit pension plans 61143 53299 december 31 2003 2002 respectively projected benefit obligation accumulated benefit obligation unfunded pbep december 31 2003 2002 follows net periodic benefit expense income retirement plans years ended december 31 2003 2002 2001 follows additionally charge 4823 recognized 2001 special benefits settlement portion liability pbep curtailment sebp connection executive management transition arrangements costs included part restructuring special charge following assumptions used determining benefit obligations retirement plans postretirement plan following assumptions used determining net periodic benefit expense income retirement plans weighted average discount rate used determine net periodic expense postretirement plan 65 725 750 2003 2002 2001 respectively 2004 use rate 825 expected longterm rate return assumption plan assets retirement plans assumption based plan’s present target asset allocation 65 equity securities 35 debt securities reflects longterm capital market return forecasts asset classes employed assumed excess returns active management within asset class portion plan assets actively managed periodic rebalancing back target allocations current market factors inflation interest rates evaluated longterm capital market assumptions determined although review expected longterm rate return assumption annually plan performance one particular year significantly influence evaluation assumption generally revised unless fundamental change one factors upon based target asset allocation longterm capital market return forecasts net periodic benefit expense postretirement plan years ended december 31 2003 2002 2001 follows following table reflects assumed healthcare cost trend rates assumed healthcare cost trend rates significant effect amounts reported healthcare plans onepercentagepoint change assumed healthcare cost trend rates would following effects pension plan weightedaverage asset allocation december 31 2003 2002 assets category follows total return investment approach mix equity debt investments used maximize longterm return plan assets prudent level risk plan’s target asset allocation presently 65 equity securities 35 debt securities target allocation controlled periodic rebalancing back target plan assets invested using combination active passive indexed investment strategies plan’s equity securities diversified across us nonus stocks plan’s debt securities diversified principally among securities issued guaranteed united states government agencies mortgagebacked securities including collateralized mortgage obligations investmentgrade corporate debt obligations dollardenominated obligations issued us nonus banks corporations investment risk controlled diversification among asset classes managers securities risk controlled investment manager level requiring active managers follow formal written investment guidelines investment results measured monitored ongoing basis quarterly investment reviews conducted plan’s active united states investment manager prohibited investing plan assets equity debt securities issued guaranteed rhd however plan may hold donnelley stock part total united states equity market index fund plan invests expect make significant contributions retirement postretirement benefit plans 2004 12 commitments lease office facilities equipment operating leases noncancelable lease terms expiring various dates 2015 rent lease expense 2003 2002 2001 10171 3090 3534 respectively future noncancelable minimum rental payments applicable operating leases december 31 2003 entered longterm purchase agreement paper used publishing directories purchase commitment paper one supplier estimated based minimum required quantities aggregate approximately 43260 2006 minimum purchases required agreement 13920 2004 14220 2005 15120 2006 13 litigation involved various legal proceedings arising ordinary course business well certain litigation tax matters described periodically assess liabilities contingencies connection matters based upon latest information available us matters probable incurred loss range loss reasonably estimated record reserves consolidated financial statements instances unable make reasonable estimate liability uncertainties related probable outcome amount range loss additional information becomes available adjust assessment estimates liabilities accordingly based review latest information available believe ultimate liability connection pending legal proceedings including litigation tax matters described material adverse effect results operations cash flows financial position described order understand potential exposure litigation tax matters described captions “information resources inc” “tax matters” need understand relationship us db certain predecessors affiliates various corporate reorganizations contractual commitments assumed varying degrees responsibility respect matters november 1996 company known dun bradstreet corporation separated spinoff “1996 distribution” three separate public companies dun bradstreet corporation acnielsen corporation “acnielsen” cognizant corporation “cognizant” june 1998 dun bradstreet corporation separated spinoff “1998 distribution” two separate public companies rh donnelley corporation formerly dun bradstreet corporation new company changed name dun bradstreet corporation later 1998 cognizant separated spinoff “cognizant distribution” two separate public companies ims health incorporated “ims” nielsen media research inc “nmr” september 2000 dun bradstreet corporation separated two separate public companies moody’s corporation “moody’s” formerly dun bradstreet corporation new company changed name dun bradstreet corporation result form rh donnelley corporation’s separation dun bradstreet corporation 1998 corporate successor technically defendant taxpayer referred db rockland yellow pages 1999 sandy goldberg dellwood publishing inc rockland yellow pages initiated lawsuit company bell atlantic corporation united states district court southern district new york rockland yellow pages proprietary directory competes bell atlantic directory region served bell atlantic’s advertising sales agent june 30 2000 complaint alleged defendants disseminated false information concerning rockland yellow pages resulted damages rockland yellow pages may 2001 district court dismissed substantially plaintiffs’ claims august 2001 remaining claims either withdrawn plaintiffs dismissed district court plaintiffs filed complaint defendants new york state supreme court rockland county alleging virtually state law tort claim previously dismissed district court seeking unspecified damages october 2001 defendants filed motion dismiss complaint may 5 2002 court granted defendants’ motion dismiss complaint plaintiffs filed appeal dismissal april 10 2003 appellate division heard oral arguments appeal april 28 2003 appellate division dismissed one count complaint count alleges immaterial compensatory damages respect one advertiser accordingly presently believe final outcome matter material adverse effect results operations financial condition information resources inc 1996 information resources inc “iri” filed complaint united states district court southern district new york naming defendants company successor db acnielsen ims time filing wholly owned subsidiaries db complaint alleges various violations us antitrust laws sections 1 2 sherman act complaint also alleges claim tortious interference contract claim tortious interference prospective business relationship claims relate acquisition defendants survey research group limited “srg” iri alleges srg violated alleged agreement iri agreed acquired defendants induced srg breach agreement iri’s antitrust claims allege defendants developed implemented plan undermine iri’s ability compete within us foreign markets north america latin america asia europe australianew zealand series anticompetitive practices including unlawfully tyingbundling services markets defendants allegedly monopoly power services markets acnielsen competed iri entering exclusionary contracts retailers certain countries deny iri’s access sales data necessary provide retail tracking services artificially raise cost data predatory pricing acquiring foreign market competitors intent impeding iri’s efforts expand disparaging iri financial analysts clients denying iri access capital necessary compete iri’s complaint originally sought damages excess 350000 amount iri sought treble antitrust laws iri since revised allegation damages exceed 650000 iri also seeks treble iri also seeks punitive damages unspecified amount april 2003 court denied motion partial summary judgment defendants sought dismiss certain iri’s claims granted part motion iri seeking reconsideration certain summary judgment rulings court previously made favor defendants motion granted court concerns iri’s claims injuries defendants’ alleged conduct certain foreign markets connection 1996 distribution cognizant “nmr” acnielsen db entered indemnity joint defense agreement “jda” pursuant agreed • allocate potential liabilities may relate arise result iri lawsuit “iri liabilities” • conduct joint defense action particular jda provides • acnielsen assume exclusive liability iri liabilities maximum amount calculated time liabilities become payable result final nonappealable judgment settlement permitted jda “acn maximum amount” • db cognizant share liability equally amounts excess acn maximum amount noted acnielsen responsible iri liabilities acn maximum amount jda provides acnielsen initially determine amount pay time settlement final judgment iri’s favor “acn payment” acn payment could less acn maximum amount jda also provides db cognizant pay iri 50 difference settlement judgment amount acn payment exchange jda requires acnielsen issue secured note “acn note” subject certain limits offsets db cognizant amount payment acn notes would become payable upon completion recapitalization plan described next paragraph acn maximum amount determined investment banking firm maximum amount acnielsen able pay giving effect • recapitalization plan submitted investment bank designed maximize claimspaying ability acnielsen without impairing investment banking firm’s ability deliver viability opinion without requiring stockholder approval • payment interest acn notes related fees expenses purposes “viability” means ability acnielsen giving effect recapitalization plan payment interest acn notes payment related fees expenses payment acn maximum amount • pay debts become due • finance current anticipated operating capital requirements business reconstituted recapitalization plan two years date recapitalization plan expected implemented 2001 acnielsen acquired vnu nv “vnu” understand vnu assumed acnielsen’s liabilities jda agreements relating cognizant distribution ims nmr jointly severally liable cognizant liabilities jda although understand amongst agreed share liability amounts follows 75 ims 25 nmr maximum 125000 agreements relating 1998 distribution db assumed defense agreed indemnify us payments may required make including liabilities arising jda iri liabilities arising iri action itsef case related legal fees required agreements moody’s corporation subsequently separated db 2000 distribution agreed jointly severally liable db indemnity obligation us understand db moody’s agreed share equally 50 indemnity obligations us however liability violations antitrust laws joint several many rights obligations relating jda based contractual relationships inability failure party jda fulfill obligations could result parties including us bearing greater share iri liabilities joint several liability means even one defendant determined responsible alleged wrongdoing plaintiff collect part judgment one responsible defendants true regardless contractual allocation responsibility indemnification provisions including described among vnu acnielsen db ims moody’s nmr us discovery lawsuit ongoing although court originally set trial date september 2004 court rescinded date january 2004 currently trial date set unable predict time outcome iri action financial condition acnielsen vnu time outcome hence cannot estimate acn maximum amount portion judgment paid vnu acnielsen jda nonetheless cannot assure outcome matter management presently believes db moody’s sufficient financial resources borrowing capacity indemnity rights ims nmr succeeded cognizant’s indemnity obligations cognizant distribution ii ims nmr turn sufficient financial resources borrowing capacity satisfy indemnity obligations db moody’s reimburse us payments may required make related costs may incur connection matter tax matters db entered global taxplanning initiatives normal course business primarily taxfree restructurings foreign domestic operations status internal revenue service reviews initiatives summarized pursuant series agreements relating spinoffs separations referred ims nmr jointly severally liable must pay onehalf db moody’s jointly severally liable must pay half payments 137000 taxes accrued interest amounts resulting unfavorable irs rulings matters summarized matter summarized “ amortization royalty expense deductions 19972003” db moody’s jointly severally solely responsible db behalf contractually obligated pay first 137000 tax liability connection matter summarized “ utilization capital losses 19891990” terms 1998 distribution db agreed assume defense indemnify us tax liability may assessed us related costs expenses may incur connection tax matters also required agreements moody’s agreed jointly severally liable db indemnity obligation us terms certain spinoffs separations db moody’s agreed financially responsible 50 potential liabilities may arise extent potential liabilities directly attributable party’s respective business operations cannot assure outcome matters management presently believes db moody’s sufficient financial resources borrowing capacity indemnity rights ims nmr succeeded cognizant’s indemnity obligations cognizant distribution ims nmr turn sufficient financial resources borrowing capacity satisfy respective indemnity obligations db moody’s reimburse us payments may required make related costs may incur connection tax matters utilization capital losses 19891990 2000 db filed amended tax return respect utilization capital losses 1989 1990 response formal irs notice adjustment amended tax return reflected additional 561600 tax interest due 2000 db paid irs 349300 ims behalf nmr paid approximately 212300 understand payment made dispute order stop additional interest accruing db contesting irs’s formal assessment would also contest assessment amounts excess amounts paid db filed complaint refund united states district court case expected go trial 2005 believe fact db ims already paid irs substantial amount additional taxes respect contested tax planning strategies significantly mitigates risk royalty expense deductions 19931997 second quarter 2003 db received behalf irs examination report respect partnership transaction entered 1993 specifically irs proposing disallow certain royalty expense deductions claimed db 1993 1996 tax returns understand db estimates disallowance 1993 1994 royalty expense deductions would result loss 5000 pending tax refunds additional tax liability respect disallowance 1995 1996 royalty expense deductions could 44100 tax interest penalties net associated tax benefits addition also second quarter 2003 db received behalf partnership associated transaction irs examination report challenging tax treatment certain royalty payments received partnership db partner report irs seeking reallocate certain partnership income db january 2004 db received additional irs notices similar received second quarter 2003 reflecting additional tax liability 1600 tax interest penalties net associated tax benefits associated db’s remaining interest partnership transaction described three months 1997 entities partners additional tax liability respect db’s share income notices received second quarter 2003 january 2004 could 21900 tax interest penalties net associated tax benefits understand db believes positions regarding partnership inconsistent irs’ position respect royalty expense deductions described 21900 additional liability would addition 44100 additional liability related royalty expense deductions discussed previous paragraph db filed protests relating proposed adjustments irs office appeals parties attempting resolve matters appeals phase proceeding litigation necessary irs prevail position db would share responsibility matter moody’s ims nmr disclosed db challenge irs positions time us district court us court federal claims rather us tax court disputed amounts would need paid advance court jurisdiction case amortization royalty expense deductions 19972003 fourth quarter 2003 db received behalf irs notices proposed adjustment respect partnership transaction entered 1997 addition db received behalf partnership various irs materials explaining examining agent’s position respect activities partnership 1997 1998 specifically irs asserted certain amortization expense deductions claimed db 1997 1998 tax returns disallowed understand db estimates additional tax liability result disallowance 1997 1998 amortization deductions disallowance deductions claimed 1999 date could 52000 tax interest penalties net associated tax benefits transaction scheduled expire 2012 unless earlier terminated based current interest rates tax rates additional tax exposure would increase rate approximately 2500 per quarter including potential penalties future amortization expenses deducted addition irs asserted royalty expense deductions claimed db tax returns 1997 1998 royalties paid partnership disallowed relatedly irs asserted receipt royalties partnership reallocated reported royalty income db including portions royalties allocated third party partners partnership thus included taxable income understand db believes irs’ stated positions respect treatment royalty expense royalty income mutually inconsistent making unlikely irs prevail positions result understand db estimates taking account certain tax benefits resulting irs’ position partnership unlikely additional cash tax payments due addition amounts noted related amortization expense deduction event irs prevail positions respect royalty expenseincome db believes unlikely db estimates additional tax liability result disallowance 1997 1998 royalty expense deductions disallowance deductions claimed 1999 date inclusion reallocated royalty income relevant years could 137000 tax interest penalties net associated tax benefits 137000 would addition 52000 noted related amortization expense deduction db attempting resolve matters irs proceeding irs appeals litigation necessary db challenge irs positions time us district court us court federal claims rather us tax court disputed amounts applicable year would need paid advance court jurisdiction case result assessment exposure matters relating prior relationship db former affiliates especially light indemnity arrangements db moody’s respective financial resources borrowing capacity indemnity rights ims nmr acnielsen vnu respect iri matter turn ims nmr’s acnielsen’s vnu’s respect iri matter respective financial resources borrowing capacity satisfy respective indemnity obligations db moody’s material amounts accrued consolidated financial statements dbrelated litigation tax matters coastal termite pest control 2001 marnan group inc business coastal termite pest control “coastal” filed complaint us district court middle district florida spa complaint amended alleged spa breached certain directory advertising contracts 1996 1999 fraudulently induced coastal enter another directory advertising contract tortiously interfered coastal’s business relationships customers coastal seeking damages lost contract benefits lost profits diminution business value unspecified amount including prejudgment interest october 2003 parties settled dispute amount less 500 reserved company’s financial statements connection spa acquisition matters also involved legal proceedings claims litigation arising ordinary conduct business although cannot assure outcome management presently believes outcome legal proceedings material adverse effect results operations financial condition material amounts accrued consolidated financial statements respect matters 14 business segments revised historical segment reporting first quarter 2003 reflect change business resulted spa acquisition reflect way management reviews analyzes business reportable operating segments donnelley dontech donnelley includes revenue 260 sprintbranded yellow pages directories revenue prepress publishing services contract sbc operating administrative expenses dontech segment includes revenue participation income 50 interest net profits dontech although dontech provides advertising sales yellow pages directory products similar donnelley partnership considered separate operating segment since among things board directors employees dontech including officers managers employees company evaluate performance segments based primarily operating income earnings interest taxes depreciation amortization “ebitda” evaluate report performance segments based ebitda believe ebitda useful measure underlying operating performance ability satisfy significant debt service requirements segment information 2002 2001 adjusted comparable 2003 presentation also evaluate performance donnelley dontech based advertising sales advertising sales critical measure performance review play important role decision allocate financial resources segments segment information years ended december 31 2003 2002 2001 presented 1 ebitda measurement operating performance computed accordance generally accepted accounting principles “gaap” considered substitute operating income net income prepared conformity gaap addition ebitda may comparable similarly titled measures companies see reconciliation ebitda net loss income comparable gaap measure comparable gaap measure ebitda net income reconciliation net loss income ebitda presented 15 guarantees rh donnelley inc direct wholly owned subsidiary company issuer preacquisition notes redeemed full february 6 2004 senior notes subordinated notes company direct indirect wholly owned subsidiaries rh donnelley inc jointly severally fully unconditionally guarantee debt instruments december 31 2003 rh donnelley inc’s direct wholly owned subsidiaries rh donnelley publishing advertising inc rh donnelley apil inc get digital smartcom inc december 31 2002 rh donnelley inc’s direct wholly owned subsidiaries rh donnelley apil inc rh donnelley cd inc rh donnelley acquisitions ii inc get digital smartcom inc rh donnelley acquisitions ii inc wholly owned subsidiary rh donnelley apil inc rh donnelley finance corporation ii subsidiary borrowers established connection financing spa acquisition nonguarantor subsidiaries december 31 2002 subject technical default subsequently cured nonguarantor subsidiaries year ended december 31 2001 following consolidating condensed financial statements read conjunction consolidated financial statements company december 31 2003 rh donnelley corporation issued 200604 shares preferred stock see note 8 redeemable preferred stock warrants description terms preferred stock related dividend requirements see note 13 litigation description various legal proceedings company involved related contingencies rh donnelley corporation receives dividends rh donnelley inc payment income taxes dividends received payment income taxes 0 38940 39608 years 2003 2002 2001 respectively dividends items years significant general company subsidiaries restricted paying dividends third party subsidiaries restricted paying dividends loans advances rh donnelley corporation limited exceptions terms credit facility see note 6 longterm debt credit facilities notes description debt instruments rh donnelley corporation consolidated condensed balance sheet december 31 2003 rh donnelley corporation consolidated condensed balance sheet december 31 2002 rh donnelley corporation consolidated condensed statement operations year ended december 31 2003 rh donnelley corporation consolidated condensed statement operations year ended december 31 2002 rh donnelley corporation consolidated condensed statement operations year ended december 31 2001 rh donnelley corporation consolidated condensed statement cash flows year ended december 31 2003 rh donnelley corporation consolidated condensed statement cash flows year ended december 31 2002 rh donnelley corporation consolidated condensed statement cash flows year ended december 31 2001 16 valuation qualifying accounts 17 quarterly information unaudited full year loss earnings per share amount may equal sum quarters due weighting shares 1 revenue sale advertising deferred directory published recognized ratably life directory due purchase accounting rules able recognize revenue directories published spa prior acquisition directories published january 2003 2 second third fourth quarters 2003 include restructuring charges 3121 4340 2071 respectively closing redundant facilities relocation company’s corporate offices cary north carolina 3 fourth quarter 2002 includes benefit 6694 reversal restructuring reserve investment impairment charge 2000 loss hedging activities 1523 benefit 1072 reversal reserves established connection disposition former bell atlantic business 18 subsequent events february 6 2004 utilizing proceeds term loan b2 redeemed remaining aggregate principal amount preacquisition notes totaling 21245 redemption price 104563 principal amount thereof plus accrued unpaid interest loss 1228 recorded first quarter 2004 consisting premium par value paid redemption 969 plus writeoff 259 unamortized deferred financing costs report independent auditors board directors partners dontech opinion accompanying balance sheets related statements partners’ capital operations cash flows present fairly material respects financial position dontech ii partnership “dontech” december 31 2003 2002 results operations cash flows three years period ended december 31 2003 conformity accounting principles generally accepted united states america financial statements responsibility dontech’s management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp chicago illinois february 12 2004 dontech balance sheets accompanying notes integral part financial statements dontech statements partners’ capital accompanying notes integral part financial statements dontech statement operations accompanying notes integral part financial statements dontech statement cash flows accompanying notes integral part financial statements dontech notes financial statements thousands 1 form organization nature business dontech ii partnership “dontech” general partnership reuben h donnelley inc formerly known reuben h donnelley corporation “rh donnelley” delaware corporation ameritech publishing illinois inc “apiil” unit sbc communications “sbc” partnership established august 1997 preceded amdon “dontech i” general partnership parties december 31 2000 ceased business operations distributed remaining assets partners dontech exclusive sales agent perpetuity yellow pages white pages street address directories published sbc illinois northwest indiana partnership receives 27 commission sales net provisions capped 61 subject certain exclusions dontech’s cost structure includes principally sales operations office services finance facilities related overhead dontech profits shared equally partners term partnership agreement neither partner may compete directly business dontech without consent board directors board directors “board” appointed administer activities partnership time term partnership board may call additional capital contributions equal amounts partners opinion board additional capital required operation partnership 2 summary significant accounting policies cash equivalents cash equivalents include highly liquid investments initial maturity date three months less carrying value cash equivalents approximates fair value due shortterm nature revenue recognition revenue comprised sales commissions reflected net provisions capped 61 per annum subject certain exclusions recognized upon execution contracts sale advertising greater 99 dontech’s revenue generated dontech’s sales agency agreement apiil fixed assets fixed assets recorded cost depreciated straightline basis estimated useful lives assets upon asset retirement disposition cost related accumulated depreciation removed accounts resulting gain loss included statement operations amounts incurred repairs maintenance charged operations postretirement benefits pensions dontech provides postretirement benefits consisting mainly life health insurance substantially employees dependents accrual method accounting utilized postretirement healthcare life insurance benefits income taxes provision income taxes made proportional share partnership income responsibility individual partners concentration credit risk financial instruments potentially subject dontech concentration credit risk consist principally commission receivable dontech’s commission receivable due one partners sbc collateral required use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expense reporting period actual results could differ estimates effects recent accounting pronouncements december 2003 financial accounting standards board “fasb” issued statement financial accounting standards “sfas” 132 revised 2003 employers’ disclosures pensions postretirement benefits sfas 132 revised 2003 amends disclosure requirements sfas 132 require complete information pension postretirement benefits change measurement recognition plans required sfas 87 employers’ accounting pensions sfas 88 employers’ accounting settlements curtailments defined benefit pension plans termination benefits sfas 106 employers’ accounting postretirement benefits pensions dontech adopted disclosure provisions sfas 132 revised 2003 december 31 2003 december 8 2003 medicare prescription drug improvement modernization act 2003 “act” signed law act introduces prescription drug care benefits medicare also allows certain sponsors postretirement benefit plans drug benefit receive nontaxable federal subsidy certain criteria met response passage legislation january 12 2004 fasb issued fasb staff position “fsp” fas 1061 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 fsp permits employers sponsor postretirement benefit plans provide prescription drug benefits retirees make onetime election defer accounting effects act accordance fsp dontech elected defer accounting effects act accordingly measures accumulated postretirement benefit obligation net periodic postretirement benefit cost financial statements disclosed note 8 postretirement benefits pensions reflect effects act dontech’s plan authoritative guidance accounting federal subsidy currently considered fasb issued could require dontech change previously reported information november 2002 emerging issues task force “eitf” reached consensus issue 0021 “revenue arrangements multiple deliverables” eitf issue 0021 provides guidance account arrangements involve delivery performance multiple products services andor rights use assets provisions eitf issue 0021 effective fiscal periods beginning june 15 2003 adoption eitf issue 0021 january 1 2004 expected material impact dontech’s results operations financial position december 2003 fasb issued fasb interpretation “fin” 46 consolidation variable interest entities interpretation accounting research bulletin “arb” 51 revised december 2003 primary objectives fin 46 provide guidance identification entities control achieved means voting rights variable interest entities “vies” determine business enterprise consolidate vie fin 46 effective vies created december 31 2003 effective vies first reporting period beginning december 15 2004 adoption fin 46 expected significant effect dontech’s financial position results operations fixed assets consist following december 31 depreciation amortization expense three years ended december 31 2003 2002 2001 1603 1702 2360 respectively year ended december 31 2003 dontech disposed fixed assets cost 12118 assets disposed net book value 205 resulting loss disposal reflected statement operations accrued liabilities consist following december 31 5 related party transactions dontech purchases insurance services rh donnelley general ledger purchasing services sbc payments made rh donnelley insurance services totaled 837 510 442 2003 2002 2001 respectively payment made sbc general ledger purchasing services insignificant three years period ended december 31 2003 dontech also provides facility space certain employees sbc agreement entered 1998 see note 6 contingencies commitments dontech leases certain office facilities noncancelable lease arrangements rent expense operating leases approximately 2232 2254 2223 2003 2002 2001 respectively 2000 dontech entered sublease agreement sbc whereby dontech received 58 56 54 sublease rental income sbc 2003 2002 2001 respectively future minimum lease payments required noncancelable operating leases initial remaining lease terms excess one year december 31 2003 follows 2002 dontech renegotiated lease headquarters facility originally scheduled terminate january 31 2010 renegotiated lease extends terms agreement two additional years january 31 2012 exchange certain cash concessions totaling 1579 cash concessions received connection amended lease recorded deferred rent credits balance sheet recognized straightline basis reduction rent expense lease term december 31 2003 longterm deferred credit related concessions 1435 connection renegotiation lease dontech incurred brokers fees 669 reflected balance sheet noncurrent asset december 31 2003 fees amortized rent expense lease term september 1998 dontech entered maintenance service agreement ameritech advertising services provide certain maintenance services pertaining telecommunications support including parts dontech agreement set expire september 2003 september 2003 dontech entered new agreement sbc global services provision maintenance services new agreement fiveyear term expiring august 2008 according terms agreement dontech’s remaining obligation december 31 2003 617 7 employee retirement profit participation plans dontech sponsors defined benefit pension plan covering substantially employees “principal plan” benefits paid employees based years service percentage total annual compensation percentage compensation allocated retirement account ranges 30 125 depending age years service pension costs determined using projected unit credit actuarial cost method dontech’s funding policy contribute amount least equal minimum legal funding requirement contributions required made 2003 2002 2001 principal plan’s assets invested equity funds debt securities fixed income funds real estate dontech uses measurement date december 31 majority plan assets dontech also unfunded nonqualified defined benefit pension plan pension benefit equalization plan “pbep” covers senior executives certain key employees benefits based years service compensation including compensation permitted taken account previously mentioned defined benefit pension plan following provides reconciliation benefit obligations plan assets funded status principal plan pbep “plans” accumulated benefit obligation principal plan pbep 30572 24472 december 31 2003 2002 respectively net periodic pension cost plan 2003 2002 2001 includes following components assumptions used determine benefit obligation follows assumptions used determine net periodic benefit cost follows principal plan participates master trust along rh donnelley assets administered northern trust company total return investment approach used maximize longterm return plan assets prudent level risk principal plan’s target asset allocation 65 equity securities 35 debt securities target allocation controlled periodic rebalancing back target principal plan assets invested using combination active passive indexed investment strategies principal plan’s equity securities diversified across us nonus stocks principal plan’s debt securities diversified principally among securities issued guaranteed united states government agencies mortgagebacked securities including collateralized mortgage obligations investmentgrade corporate debt obligations dollardenominated obligations issued us nonus banks corporations investment risk controlled diversification among asset classes managers securities risk controlled investment manager level requiring active managers follow formal written investment guidelines investment results measured monitored ongoing basis quarterly investment reviews conducted principal plan’s us investment manager prohibited investing principal plan assets equity debt securities issued guaranteed rh donnelley however principal plan may hold rh donnelley stock part total us equity market index fund principal plan invests weightedaverage asset allocation principal plan december 31 2003 2002 asset category follows dontech expect make significant contributions principal plan pbep 2004 dontech use rate 825 expected longterm rate return assumption plan assets plans assumption based plans’ target asset allocation 65 equity securities 35 debt securities reflects longterm capital market return forecasts asset classes employed assumed excess returns active management within asset class portion plan assets actively managed periodic rebalancing back target allocations current market factors inflation interest rates evaluated longterm capital market assumptions determined although dontech reviews expected longterm rate return assumption annually dontech’s plan performance one particular year significantly influence evaluation dontech’s assumption generally revised unless fundamental change one factors upon based target asset allocation longterm capital market return forecasts additionally dontech offers defined contribution savings plan “profit plan” substantially employees contributes fifty cents dollar contributed participating employee maximum 6 participant’s compensation including salary commission shortterm bonus dontech also makes contributions profit plan contingent upon attainment financial goals set advance defined profit plan agreement contributions made based upon attainment financial goals periods presented matching contributions made plan 861 876 944 2003 2002 2001 respectively 8 postretirement benefits pensions dontech provides postretirement healthcare life insurance benefits certain retired employees dependents following provides reconciliation benefit obligations plan assets funded status health life insurance plans change benefit obligation net periodic postretirement benefit costs 2003 2002 2001 included following components discount rate used determining benefit obligation december 31 2003 2002 60 65 respectively assumed healthcare cost trend rate used measuring benefit obligation december 31 2003 2002 95 10 respectively rates assumed decrease gradually 50 2011 remain level thereafter increasing decreasing healthcare cost trend rates one percentage point would material effect net periodic postretirement expense year ended december 31 2003 one percentage point increase would increased benefit obligation december 31 2003 277 one percentage point decrease would decreased benefit obligation december 31 2003 252 item 9item 8 annual report market risk sensitive instruments interest rate swap agreements designated cash flow hedges accordance provisions sfas 133 “accounting derivative instruments hedging activities” amended sfas 137 sfas 138 swaps recorded fair value quarterly basis fair value swaps determined based quoted market prices assuming effectiveness difference fair value book value swaps recognized comprehensive income component shareholders’ equity ineffectiveness swaps required recognized earnings swaps hedged item threemonth liborbased interest payments 1355 million bank debt designed critical terms interest reset dates duration index coincide assuming critical terms continue coincide cash flows swaps exactly offset cash flows hedged item ineffectiveness exist management’s annual report internal control financial reporting management rh donnelley responsible establishing maintaining adequate internal control company’s financial reporting within meaning rule 13a15f promulgated securities exchange act 1934 inherent limitations internal control financial reporting may prevent detect misstatements financial statements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management excluded assessment company’s internal control financial reporting december 31 2004 certain elements internal control financial reporting directory publishing business sbc communications inc illinois northwest indiana company acquired september 2004 acquisition represented material purchase business combination subsequent acquisition certain elements acquired businesses’ internal control financial reporting related functions processes systems integrated company’s existing internal control financial reporting related functions processes systems elements acquired businesses’ internal control financial reporting integrated company’s existing internal control financial reporting excluded management’s assessment effectiveness internal control financial reporting december 31 2004 excluded elements represent controls accounts approximately 6 consolidated assets 4 consolidated liabilities 5 consolidated revenues 15 consolidated operating expenses see “adjusted pro forma amounts nongaap measures” “management’s discussion analysis financial condition results operations” item 7 annual report disclosure full year adjusted pro forma revenue acquired business company consolidated basis management assessed effectiveness rh donnelley’s internal controls financial reporting december 31 2004 undertaking assessment management used criteria established committee sponsoring organizations coso treadway commission contained internal control integrated framework based assessment management concluded december 31 2004 company’s internal control financial reporting effective based coso criteria management’s assessment effectiveness internal control financial reporting december 31 2004 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appears page item 8 financial statements supplementary data 1 audited financial statements subsidiaries included annual report form 10k pursuant rule 316 regulation sx senior notes became secured capital stock equity interests subsidiaries connection sbc directory acquisition report independent registered public accounting firm board directors shareholders rh donnelley corporation completed integrated audit rh donnelley corporation’s 2004 consolidated financial statements internal control financial reporting december 31 2004 audits 2003 2002 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements opinion accompanying consolidated balance sheets related consolidated statements operations shareholders’ equity deficit cash flows present fairly material respects financial position rh donnelley corporation subsidiaries december 31 2004 2003 results operations cash flows three years period ended december 31 2004 conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion internal control financial reporting also opinion management’s assessment included accompanying management’s report internal control financial reporting company maintained effective internal control financial reporting december 31 2004 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting december 31 2004 based criteria established internal control integrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate described management’s report internal control financial reporting management excluded certain elements internal control financial reporting directory publishing business company acquired sbc communications inc assessment company’s internal control financial reporting december 31 2004 directory publishing business acquired company purchase business combination 2004 subsequent acquisition certain elements acquired directory publishing businesses’ internal control financial reporting related processes integrated company’s existing systems internal control financial reporting controls integrated excluded management’s assessment effectiveness internal control financial reporting december 31 2004 also excluded elements internal control financial reporting acquired directory publishing business audit company’s internal control financial reporting excluded elements represent controls accounts approximately 6 consolidated assets 4 consolidated liabilities 5 consolidated revenues 15 consolidated operating expenses pricewaterhousecoopers llp raleigh north carolina march 16 2005 rh donnelley corporation consolidated balance sheets accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements operations accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements cash flows accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements changes shareholders’ equity deficit accompanying notes integral part consolidated financial statements rh donnelley corporation notes consolidated financial statements tabular amounts thousands except per share data 1 business presentation consolidated financial statements include accounts rh donnelley corporation direct indirect wholly owned subsidiaries “company” “rhd” “we” “us” “our” intercompany transactions balances eliminated leading yellow pages publisher directional media company directional media consumers search find sells goods services ready purchase publish sprintbranded yellow pages directories 18 states major markets including las vegas nevada orlando lee county florida total distribution approximately 18 million serving approximately 160000 local national advertisers also publish sbcbranded yellow pages directories illinois northwest indiana total distribution approximately 10 million serving approximately 100000 local national advertisers also offer online city guides search web sites major sprint markets best red yellow pages brand wwwbestredypcom chicagoland area wwwchicagolandypcom also sell local advertising illinois northwest indiana onto wwwsmartpagescom sbc’s internet yellow pages platform september 1 2004 completed acquisition directory publishing business “sbc directory business” sbc communications inc “sbc” illinois northwest indiana including sbc’s interests dontech ii partnership “dontech” 5050 general partnership us sbc collectively “sbc directory acquisition” 141 billion cash working capital adjustments settlement 30 million liquidation preference owed us related dontech acquisition consummated pursuant accordance terms purchase agreement dated july 28 2004 among company ameritech corporation “ameritech” direct wholly owned subsidiary sbc ameritech publishing inc “api” direct wholly owned subsidiary ameritech acquisition accounted purchase business combination purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values acquisition date results sbc directory business included consolidated results september 1 2004 acquired sbc directory business operates rh donnelley publishing advertising illinois partnership indirect wholly owned subsidiary company see note 3 “acquisitions” description acquisition january 3 2003 completed acquisition directory business “spa directory business” sprint corporation “sprint” acquiring outstanding capital stock various entities comprising sprint publishing advertising “spa” collectively “spa acquisition” 223 billion cash acquisition consummated pursuant purchase agreement dated september 21 2002 among company sprint centel directories llc acquisition accounted purchase business combination purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values acquisition date results spa directory business included consolidated results january 3 2003 acquired spa directory business operates rh donnelley publishing advertising inc indirect wholly owned subsidiary company see note 3 “acquisitions” description acquisition acquisitions transformed donnelley leading publisher yellow pages directories prior spa acquisition one largest independent sales agents prepress vendors yellow pages advertising united states time 2002 revenue reflected sales commissions prepress fees transactions business partners including sprint sbc commencing 2003 following spa acquisition operating financial results reflect yellow pages publishing business rather former business sales agent prepress vendor yellow pages advertising behalf publishers publisher report full value advertising sales certain direct costs deferral amortization method dontech’s business remained unchanged following spa acquisition investment dontech eliminated connection sbc directory acquisition 2003 2004 sbc directory acquisition continued earn revenue prepress publishing ancillary services related sbc directory business continued report partnership income investment dontech 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts rh donnelley corporation direct indirect wholly owned subsidiaries intercompany transactions balances eliminated reclassifications 2003 preferred stock dividends 448 million reclassified accumulated deficit additional paidin capital prior year amounts reclassified conform current year’s presentation impact previously reported results operations shareholders’ equity deficit company’s presentation comprehensive income loss 2003 2002 revised reflect net income loss rather income loss available common shareholders revenue recognition earn revenue principally sale advertising yellow pages directories revenue sale advertising deferred directory published recognized ratably life directory typically 12 months “deferral amortization method” revenue sale advertising recorded net allowance sales claims estimated based historical experience directorybydirectory basis increase decrease estimate information circumstances indicate estimate may longer adequately represent amount claims may incur directory future sbc directory acquisition also earned revenue providing prepress publishing services sbc directories dontech markets revenue prepress publishing services recognized services performed year ended december 31 2002 earned sales commission revenue sale advertising behalf spa fees prepress publishing services behalf spa sbc well another unaffiliated publisher sales agent spa recognized sales commission revenue net allowance sales claims time advertising contract executed customer revenue prepress publishing services recognized services performed deferred directory costs directly related selling production directories initially deferred incurred recognized ratably life directory typically 12 months costs include sales commissions print paper initial distribution costs paid prior directory publication classified current assets equity method accounting sbc directory acquisition dontech 5050 partnership subsidiary sbc partners dontech separate legal entity provided services employees standalone management team subject oversight board directors employees dontech right authority power act accomplish enter contract incidental attain purposes partnership employees either rhd sbc involved daytoday operations dontech partners shared equally net profits one voting member dontech board directors neither partner unilateral ability control influence operations dontech accordingly september 1 2004 accounted dontech equity method consolidate results dontech financial statements sbc directory acquisition reported 50 share dontech net income partnership income consolidated statement operations dontech reported commission revenue based annual value sales contract period contract executed calendar sales reported expenses incurred partnership income also included revenue participation income sbc revenue participation income based dontech advertising sales reported sales contract executed customer investment dontech revenue participation receivable sbc reported partnership investment consolidated balance sheet prior sbc directory acquisition result sbc directory acquisition sbc ceased paying us revenue participation income consolidate net profits dontech partnership investment eliminated consequently partnership income longer reported commencing september 1 2004 rather following sbc directory acquisition revenues expenses income acquired sbc directory business directly recorded statement operations cash equivalents cash equivalents include liquid investments maturity less three months time purchase company places investments high quality financial institutions times investments may excess federally insured limits accounts receivable accounts receivable consist balances owed us advertising customers advertisers typically enter twelvemonth contract advertising local advertisers billed pro rata amount contract value monthly basis behalf national advertisers certified marketing representatives “cmrs” pay company total contract value advertising net commission within 60 days publication month billed receivables represent amount billed advertisers unbilled receivables represent contractually owed amounts published directories yet billed advertisers billed receivables recorded net allowance doubtful accounts sales claims estimated based historical experience directorybydirectory basis increase decrease estimate information circumstances indicate estimate may longer adequately represent amount bad debts sales claims may incur connection sbc directory acquisition entered transition services agreement sbc whereby sbc billed collected advertising customers illinois northwest indiana directories remitted collections net specified holdback us early 2005 monthly basis commencing september 1 2004 sbc provided advance us related billings recorded advance sbc decreased sbc collected advertisers thus satisfying liability likewise included portion billed unbilled receivables related allowance doubtful accounts sales claims consolidated balance sheet early 2005 assumed responsibility billing collections settled remaining amounts sbc fixed assets computer software fixed assets computer software recorded cost depreciation amortization provided estimated useful lives assets using straightline method estimated useful lives 30 years buildings five years machinery equipment ten years furniture fixtures three five years computer equipment five years computer software leasehold improvements amortized straightline basis shorter term lease estimated useful life improvement 2004 wroteoff fixed assets computer software fully depreciated fixed assets computer software december 31 2004 2003 consisted following depreciation amortization expense fixed assets computer software years ended december 31 2004 2003 2002 follows identifiable intangible assets goodwill result sbc directory acquisition spa acquisition certain longterm intangible assets identified recorded estimated fair value amortization expense years ended december 31 2004 2003 573 million 498 million respectively amortization expense intangible assets five succeeding years estimated approximately 722 million 775 million 796 million 793 million 787 million respectively annual amortization goodwill tax purposes approximately 207 million acquired longterm intangible assets respective book values december 31 2004 shown table directory services agreements sbc company include directory services license agreement noncompetition agreement smartpages reseller agreement directory publishing listing agreement collectively “sbc directory services agreements” certain affiliates sbc directory services license agreement designates us official exclusive provider yellow pages directory services sbc successors illinois northwest indiana “territory” grants us exclusive license obligation specified agreement produce publish distribute white pages directories territory sbc’s agent grants us exclusive license obligation specified agreement use sbc brand logo print directories territory noncompetition agreement prohibits sbc affiliates successors certain limited exceptions 1 producing publishing distributing yellow white pages print directories territory 2 soliciting selling local national yellow white pages advertising inclusion directories 3 soliciting selling local internet yellow pages advertising certain internet yellow pages directories territory licensing sbc marks third party purpose smartpages reseller agreement gives us exclusive right sell local internet yellow pages advertising nonexclusive right sell internet yellow pages advertising respect geographies outside territory advertiser excluding national advertisers located inside territory onto sbc’s smartpagescom platform successor products specified agreement directory publishing listing license agreement gives us right purchase use basic sbc subscriber listing information updates purpose publishing directories sbc directory services agreements smartpages reseller agreement initial terms 50 years subject automatic renewal early termination specified circumstances smartpages reseller agreement term 5 years fair value assigned sbc directory services agreements smartpages reseller agreement 9500 million 25 million respectively based present value estimated future cash flows amortized straightline method indicated terms directory services agreements sprint company include directory services license agreement trademark license agreement noncompetition agreement collectively “spa directory services agreements” certain affiliates sprint directory services license agreement grants us exclusive license obligation specified agreement produce publish distribute yellow white pages directories sprint successors 18 states sprint provided local telephone service time agreement trademark license agreement grants us exclusive license obligation specified agreement use certain specified sprint trademarks including sprint diamond logo markets noncompetition agreement prohibits sprint affiliates successors markets selling local directory advertising certain limited exceptions producing publishing distributing print directories spa directory services agreements initial terms 50 years subject automatic renewal early termination specified circumstances fair value agreements determined based present value estimated future cash flows amortized straightline method 50 years fair values local national customer relationships determined based present value estimated future cash flows amortized income forecast method assumes value derived customer relationships greater earlier years steadily declines time weighted average useful life relationships 20 years fair value acquired trade names determined based “relief royalty” method values trade names based estimated amount company would pay arms length transaction use trade names assets amortized straightline method 15 years excess purchase price sbc directory acquisition spa acquisition net tangible identifiable intangible assets acquired 2129 million 970 million respectively recorded goodwill fourth quarter 2004 recorded adjustment increasing goodwill sbc directory acquisition approximately 81 million primarily resulting completion fair value measurement dontech pension assets liabilities acquisition date intercompany net receivables connection sbc directory acquisition spa acquisition 1412 million 279 million respectively eliminated also included goodwill anticipate significant changes fair value net assets acquired restructuring plan announced first quarter 2005 see subsequent events note 17 additional information could come attention may require us revise purchase price allocation connection sbc directory acquisition accordance sfas 142 goodwill intangible assets goodwill amortized subject periodic impairment testing impairment losses recorded 2004 2003 deferred financing costs certain costs associated issuance debt instruments capitalized included noncurrent assets consolidated balance sheet costs amortized interest expense terms related debt agreements bond outstanding method used amortize deferred financing costs relating debt instruments respect make accelerated principal payments deferred financing costs amortized using straightline method amortization deferred financing costs included interest expense 136 million 150 million 13 million 2004 2003 2002 respectively advertising expense recognize advertising expenses incurred expenses include public relations media online advertising promotional sponsorship costs total advertising expense 111 million 88 million 2004 2003 respectively prior spa acquisition advertising costs significant advertising expense 2004 includes 11 million advertising costs pertain 2003 concentration credit risk approximately 85 directory advertising revenue derived sale advertising local small mediumsized businesses advertisers typically enter 12month advertising sales contracts make monthly payments term contract advertisers prepay full amount portion contract value new advertisers desiring expand advertising programs subject credit review advertisers qualify may extend credit advertising purchase smalland mediumsized businesses tend fewer financial resources higher failure rates large businesses addition full collection delinquent accounts take extended period time involve significant costs believe extending credit local advertisers material adverse effect results operations financial condition assurances given require collateral advertisers although charge interest advertisers pay specified due dates remaining approximately 15 directory advertising revenue derived sale advertising national large regional chains rental car companies automobile repair shops pizza delivery businesses substantially revenue derived national accounts serviced cmrs contract cmrs independent third parties act agents national advertisers cmrs responsible billing national customers advertising receive payment value advertising placed directory net cmr’s commission directly cmr still exposed credit risk amount losses accounts historically less local accounts advertisers cases cmrs tend larger companies greater financial resources local advertisers sbc directory acquisition maintained significant receivable balance sbc revenue participation prepress publishing services fees receivable settled connection sbc directory acquisition december 31 2004 interest rate swap agreements major financial institutions notional value 1355 million exposed credit risk event one counterparties agreements cannot meet obligation notional amount used measure interest paid received represent amount exposure credit loss would limited amount would received remaining life swap agreement counterparties swap agreements major financial institutions credit ratings higher currently foresee material credit risk associated swap agreements however assurances given pension postretirement benefits pension postretirement benefits represent estimated amounts paid employees future accounting benefits reflects recognition benefit costs employee’s approximate service period based terms plan investment funding decisions made determination benefit obligation net periodic pension postretirement benefit costs requires management make assumptions regarding discount rate return retirement plan assets increase future compensation healthcare cost trends changes assumptions significant impact projected benefit obligation funding requirement net periodic benefit cost assumed discount rate pension benefits could settled use rates aa corporate bonds basis determining discount rate assumption expected longterm rate return plan assets based mix assets held plan expected longterm rates return within asset class anticipated trend future healthcare costs based historical experience external factors see note 10 information regarding benefit plans including dontech acquired connection sbc directory acquisition effective january 1 2003 reduced estimated rate return plan assets 975 825 result low investment returns preceding years well outlook long term particularly equity securities determined prior assumed rate return 975 longer reflected best estimate future longterm returns based thencurrent investment environment pension plan’s asset allocation determined longterm rate return 825 better reflected expectations future longterm returns derivative financial instruments use derivative financial instruments trading speculative purposes derivative financial instruments limited interest rate swap agreements used manage exposure fluctuations interest rates variable rate debt agreements effectively convert 1355 million variable rate debt fixed rate debt mitigating exposure increases interest rates terms swap agreements receive variable interest based threemonth libor pay weighted average fixed rate 319 swaps mature varying dates beginning october 2005 september 2009 weighted average rate received 166 twelve months ended december 31 2004 periodic payments receipts recorded interest expense interest rate swaps designated cash flow hedges hedge threemonth liborbased interest payments 1355 million bank debt extent swaps provide effective hedge changes fair value swaps recorded comprehensive income component shareholders’ equity ineffectiveness recorded earnings december 31 2004 interest rate swaps provided effective hedge threemonth liborbased interest payments 1355 million bank debt ineffectiveness included earnings december 31 2002 interest rate swap agreement notional value 75 million made fixedrate payments 59 received variablerate payments based threemonth libor rates weighted average rate received 11 2002 periodic payments receipts recorded part interest expense result thenpending spa acquisition contemplated repayment existing variable rate debt 75 million notional value interest rate swap qualify hedge accounting treatment december 31 2002 thus unrecognized fair market value swap previously recognized accumulated comprehensive loss balance sheet charged earnings accordingly charge 15 million included income expense net year ended december 31 2002 swap held maturity corresponding gain 15 million recognized 2003 income taxes account income taxes liability method accordance sfas 109 accounting income taxes deferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax assets realized see note 9 information regarding provision benefit income taxes earnings per share march 2004 emerging issues task force “eitf” reached final consensus eitf issue 036 participating securities two class method fasb statement 128 “eitf 036” established standards regarding computation earnings per share “eps” companies issued securities common stock contractually entitle holder participate dividends earnings company eitf 036 effective interim periods ending june 30 2004 calendar year companies adopted provisions eitf 036 first quarter 2004 eitf 036 requires earnings available common shareholders period deduction preferred stock dividends allocated common preferred shareholders based respective rights receive dividends basic eps calculated dividing income loss allocable common shareholders weighted average number shares outstanding eitf 036 require presentation basic diluted eps securities common stock therefore following eps amounts pertain common stock guidance eitf 036 diluted eps calculated dividing income loss allocable common shareholders weighted average common shares outstanding plus dilutive potential common stock potential common stock includes stock options warrants dilutive effect calculated using treasury stock method preferred stock dilutive effect calculated using ifconverted method calculation basic diluted eps years ended december 31 2004 2003 2002 presented 1 31268 9483 year ended december 31 2004 29643 281 year ended december 31 2002 computing basic eps using twoclass method allocated loss available common shareholders year ended december 31 2003 common preferred shareholders since preferred shareholders contractual obligation share net loss 2 934 stock options 2003 assumed conversion preferred stock 9767 9023 2939 shares common stock 2004 2003 2002 respectively antidilutive therefore included calculation diluted eps employee stock awards follow accounting principles board opinion 25 accounting stock issued employees “apb 25” related interpretations accounting stock option plan compensation expense related issuance stock options employees nonemployee directors recognized exercise price stock option less fair market value underlying stock grant date compensation expense related stock appreciation rights “sars” recognized end period amount quoted market value underlying shares covered grant exceeds grant price recognized vesting term following table reflects pro forma net income loss earnings loss per share assuming applied fair value method sfas 123 accounting stockbased compensation pro forma disclosures shown necessarily representative effects net income loss earnings loss per share future years weighted average fair value stock awards 1364 2004 921 2003 829 2002 estimated grant date using blackscholes optionpricing model following assumptions estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities revenue certain expenses disclosure contingent assets liabilities actual results could differ materially estimates assumptions estimates assumptions used determination sales allowances doubtful accounts depreciation amortization employee benefit plans restructuring reserves among others new accounting pronouncements december 16 2004 fasb issued fasb statement 123 revised 2004 “sharebased payment” “fas 123r” fas 123r requires companies calculate fair value stock options granted employees amortize amount vesting period expense income statement accounting provisions fas 123r effective interim periods beginning june 15 2005 companies choice transition methods modified prospective modified retrospective early adoption company presently evaluating transition method effective date transition fas 123r 2005 impact adoption fas 123r may company may 2004 financial accounting standards board issued financial staff position “fsp” fas 1062 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 provides guidance accounting effects medicare prescription drug improvement modernization act 2003 employers sponsor postretirement healthcare plans provide drug benefits act introduces prescription drug care benefits medicare also allows certain sponsors postretirement benefit plans drug benefit receive nontaxable federal subsidy certain criteria met fsp requires interim annual period financial statements beginning june 15 2004 include effect subsidy measurement net periodic postretirement benefit costs adopted provisions fsp fourth quarter 2004 resulted decrease accumulated postretirement benefit obligation approximately 43 million 3 acquisitions september 1 2004 completed sbc directory acquisition 141 billion cash working capital adjustments settlement 30 million liquidation preference owed us related dontech result acquisition became publisher sbcbranded yellow pages directories illinois northwest indiana results sbc directory business included consolidated results september 1 2004 sbc directory business operates rh donnelley publishing advertising illinois partnership one indirect wholly owned subsidiaries january 3 2003 completed spa acquisition 223 billion cash became publisher sprintbranded yellow pages directories 18 states results spa directory business included consolidated results january 3 2003 spa directory business operates rh donnelley publishing advertising inc one indirect wholly owned subsidiaries primary purpose acquisition facilitate company’s transformation sales agent prepress vendor yellow pages advertising leading publisher yellow pages directories control business acquisitions accounted purchase business combinations accordance sfas 141 business combinations purchase price allocated related tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values acquisition dates certain longterm intangible assets identified recorded estimated fair value identifiable intangible assets acquired include directory services agreements company sprint company sbc customer relationships acquired trademarks trade names accordance sfas 142 goodwill intangible assets fair values identifiable intangible assets amortized estimated useful lives manner best reflects economic benefits derived assets goodwill amortized subject impairment testing annual basis see note 2 summary significant accounting policies identifiable intangible assets goodwill description intangible assets goodwill purchase accounting rules assume record deferred revenue balance associated sbc directory business 2041 million september 1 2004 deferred revenue balance spa business 3159 million january 3 2003 amounts represented revenue would recognized subsequent acquisition deferral amortization method absence purchase accounting accordingly record revenue associated directories published prior acquisition well directories published month acquisition completed although deferred revenue balances eliminated retained rights associated collection amounts due contractual obligations advertising contracts executed prior acquisitions result billed unbilled accounts receivable balances acquired acquisitions became assets company also purchase accounting rules assume record deferred directory costs related directories published prior acquisition well directories published month acquisition completed totaling 1758 million sbcbranded directories 633 million sprintbranded directories respectively costs represented operating expenses would recognized subsequent acquisitions deferral amortization method absence purchase accounting following table summarizes estimated fair values assets acquired liabilities assumed sbc directory acquisition september 1 2004 pro forma financial information presented prepared accordance article 11 regulation sx includes combined sbc directory business donnelley gaap results 2003 2004 combined spa business donnelley gaap results 2002 summarized unaudited condensed pro forma information years ended december 31 2004 2003 assuming sbc directory acquisition related financing occurred january 1 2003 presented following unaudited pro forma information purport represent company’s results operations would actually sbc directory acquisition fact occurred january 1 2003 necessarily representative results operations future period following table summarizes estimated fair values assets acquired liabilities assumed spa acquisition january 3 2003 summarized unaudited condensed pro forma information year ended december 31 2002 assuming spa acquisition occurred january 1 2002 presented following unaudited pro forma information purport represent company’s results operations would actually spa acquisition fact occurred january 1 2002 necessarily representative results operations future period 4 restructuring impairment charges following spa acquisition consolidated publishing technology operations sales offices administrative personnel relocated headquarters functions overland park kansas purchase new york cary north carolina approximately 140 people affected relocation headquarters functions overland park kansas purchase new york 75 included restructuring reserve remaining 65 people relocated company table shows activity restructuring reserves 2002 2003 2004 2003 29 million charged goodwill representing closure prepress publishing facility operated spa tennessee severance paid certain spa executives terminated immediately upon closing acquisition reserve prepress publishing facility 22 million represents remaining lease payments net estimated sublease income additional reserve 03 million recorded 2004 additional facility related costs well 13 million related severance related cost estimates payments 05 million 09 million made respect former prepress publishing facility 2003 2004 respectively remaining payments made 2012 severance spa executives 07 million paid full 2003 restructuring charges included general administrative expenses consolidated statement operations 2003 95 million charged earnings primarily representing severance related costs associated consolidation publishing technology operations sales offices administrative personnel relocation headquarters payments 32 million 36 million made 2003 2004 respectively remaining costs paid 2005 2004 several employees included initial reserve estimate redirected within company resulting reduction reserve 12 million additional reserve 23 million recorded 2004 representing estimated fair value remaining lease payments net estimated sublease income former purchase ny headquarters office lease payments 05 million made respect former headquarters office lease 2004 remaining payments made 2006 prior 2002 recognized restructuring special charge 186 million consisting special charge 99 million connection transition executive management restructuring charge 86 million connection expiration prepress publishing contract december 2002 result pending spa acquisition late 2002 management determined certain costs originally anticipated restructuring charge would incurred specifically idle leased space morrisville publishing facility would utilized planned severance related costs would significantly less believed time corporate headquarters would relocated accordingly 67 million original charge reversed 2002 2003 restructuring actions completed resulting payments 12 million remaining balance 5 million reversed included income 2002 impairment charge 20 million recognized writeoff remaining book value interest chinabigcom limited “chinabig” based management’s belief sufficient doubt existed chinabig’s ability raise sufficient cash either operations additional investments investment would provide value foreseeable future first quarter 2005 announced restructuring plan relating sbc directory business see note 17 subsequent events 5 longterm debt credit facilities notes longterm debt december 31 2004 2003 consisted following total debt outstanding 31273 million december 31 2004 consisted primarily borrowings related spa acquisition sbc directory acquisition connection spa acquisition late 2002 entered 1525 million credit facility “credit facility” consisting 500 million term loan 900 million term loan b 125 million revolving credit facility “revolver” issued 325 million 8875 senior notes “senior notes” 600 million 10878 senior subordinated notes “subordinated notes” collectively senior notes “notes” also issued 200 million 8 redeemable convertible cumulative preferred stock “preferred stock” warrants purchase 1650000 shares common stock investment partnerships affiliated goldman sachs group inc collectively “the gs funds” funds used acquire spa pay transaction costs repurchase portion existing 9125 senior subordinated notes due 2008 “preacquisition notes” pursuant tender offer repay former term facilities consisted 743 million outstanding balances committed bank facilities 40 million outstanding thenexisting 100 million revolving credit facility credit facility december 8 2003 amended credit facility accomplish following objectives • obtain favorable pricing variable rate debt • adjust nonfinancial covenants make less restrictive corporate operating flexibility • obtain cash resources consent us redeem remaining outstanding preacquisition notes • obtain consent new term loan c potential borrowings 400 million proceeds borrowed used fund acquisitions retirement existing notes redemption equity subject certain limitations amendment credit facility created new term loan a2 replacing initial term loan created new term loan b2 replacing initial term loan b connection amendment borrowed additional 32 million term loan b2 proceeds used redeem balance preacquisition notes pay transaction costs including prepayment premium 89 million representing 1 balance term loan b outstanding date amendment credit facility accounted modification underlying debt instruments connection sbc directory acquisition september 1 2004 amended restated credit facility consisted 700 million term loan a2 1650 million term loan b2 175 million revolver aggregate facility 2525 million credit facility provides new term loan c potential borrowings 400 million proceeds borrowed used fund acquisitions retirement notes redemption payment dividends preferred stock subject certain limitations substantially assets including capital stock subsidiaries pledged collateralize obligations credit facility senior notes amendment credit facility accounted modification underlying debt instruments december 6 2004 amended restated credit facility accomplish following objectives • obtain favorable pricing variable rate debt • adjust nonfinancial covenants make less restrictive corporate operating flexibility • obtain consent carve designated additional debt required mandatory prepayments amendment restated credit facility created new term loan a3 new term loan replacing term loan b2 term loans a2 a3 require quarterly principal payments december 31 2004 outstanding balances term loans a2 a3 526 million 194 million 1441 million respectively 41 million outstanding revolver term loan a2 term loan a3 mature december 2009 term loan matures june 2011 amendment restated credit facility accounted modification underlying debt instruments weighted average interest rate outstanding debt credit facility 432 391 december 31 2004 2003 respectively 67 former term facilities december 31 2002 amended restated credit facility bears interest option either • higher base rate determined administrative agent deutsche bank trust company americas plus 100 margin revolver term loan a2 075 margin term loan a3 term loan ii federal funds effective rate defined plus 050 plus 100 margin revolver term loan a2 075 margin term loan a3 term loan • libor rate plus 200 margin revolver term loan a2 175 margin term loan a3 term loan may elect interest periods 1 2 3 6 9 12 months libor borrowings credit facility indentures governing notes contain usual customary negative covenants among things place limitations ability incur additional indebtedness including capital leases liens ii pay dividends repurchase capital stock iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock subsidiaries vi engage transactions affiliates credit facility also contains financial covenants relating maximum consolidated leverage minimum interest coverage maximum senior secured leverage defined therein notes january 3 2003 repurchased tender offer exit consent solicitation 1288 million preacquisition notes borrowed initial 1410 million original credit facility contingent upon repurchase entire 150 million aggregate principal amount preacquisition notes proceeds used repurchase preacquisition notes required repaid lenders credit facility accordingly 212 million representing amount preacquisition notes remained outstanding following tender offer exit consent solicitation repaid lenders credit facility shortly consummation spa acquisition february 6 2004 utilizing proceeds term loan b2 redeemed remaining aggregate principal amount preacquisition notes totaling 212 million redemption price 104563 principal amount thereof plus accrued unpaid interest 2004 recorded interest expense related notes 12 million consisting premium par value paid redemption 10 million plus writeoff 02 million unamortized deferred financing costs interest paid notes semiannually arrears june 15 december 15 senior notes fair value 365625 december 31 2004 mature 2010 redeemable option beginning 2006 following prices senior subordinated notes fair value 712500 december 31 2004 mature 2012 redeemable option beginning 2007 following prices aggregate maturities longterm debt december 31 2004 january 14 2005 issued 300 million aggregate principal amount senior notes “holdco notes” holdco notes bear interest 6875 per annum payable semiannually arrears january 15 july 15 year commencing july 15 2005 holdco notes unsecured senior obligations company mature january 15 2013 see note 17 subsequent events 6 partnership income investment sbc directory acquisition partnership income included 50 share net profits dontech revenue participation income received directly sbc based value advertising sales result sbc directory acquisition sbc ceased paying us revenue participation income consolidate net profits dontech partnership investment eliminated consequently partnership income longer reported commencing september 1 2004 partnership income dontech three years ended 2004 2003 2002 consisted following summarized financial information dontech shown table prior september 1 2004 results consolidated financial statements investment dontech including revenue participation receivable sbc 1757 million 1860 million december 31 2003 2002 respectively cendon 2002 exclusive sales agent certain markets nevada florida virginia north carolina cendon joint venture centel directory company “centel” subsidiary sprint income cendon consisted priority distribution based percentage cendon advertising sales income cendon 197 million 2002 connection spa acquisition became sole owner cendon operating results cendon subsequent spa acquisition prior dissolution included consolidated results operations 7 redeemable preferred stock warrants 10000000 shares preferred stock authorized issuance december 31 2004 2003 200604 shares preferred stock outstanding january 3 2003 issued private placement 130000 shares preferred stock warrants purchase 1072500 shares common stock gs funds gross proceeds 130 million november 2002 issued private placement 70000 shares series b1 preferred stock warrants purchase 577500 shares common stock gs funds aggregate gross consideration 70 million january 3 2003 70000 shares series b1 preferred stock automatically converted 70604 shares preferred stock preferred stock accrued unpaid dividends convertible common stock time issuance price 2405 per share earns cumulative dividend 8 compounded quarterly cannot pay cash dividends preferred stock september 2005 time dividend accrete october 1 2005 may pay preferred stock dividend cash subject limitations credit facility allow accrete option may redeem preferred stock cash time january 3 2006 market price defined common stock exceeds 200 conversion price 30 45 consecutive trading days preferred stock redeemable cash us time january 3 2013 preferred stock redeemable cash option gs funds event change control defined december 31 2004 liquidation value preferred stock 2349 million preferred stock convertible 9766564 shares common stock except case change control defined redemption price preferred stock time greater liquidation value preferred stock market value preferred stock converted basis time net proceeds received issuance preferred stock january 2003 november 2002 allocated preferred stock warrants beneficial conversion feature “bcf” preferred stock based relative fair values fair value preferred stock estimated using dividend discount method determines fair value based discounted cash flows security bcf function conversion price preferred stock fair value warrants fair market value underlying common stock date issuance fair value warrants 1218 january 2003 warrants 1043 november 2002 warrants determined based blackscholes model following assumptions connection issuance preferred stock subsequent quarterly dividend date bcf recorded fair value underlying common stock time issuance greater conversion price preferred stock bcf treated deemed dividend preferred stock convertible common stock immediately issuance preferred stock dividend 2004 2003 218 million 584 million respectively consisted stated 8 dividend 179 million 165 million respectively bcf 39 million 419 million respectively january 14 2005 repurchased approximately 50 outstanding preferred stock gs funds 2772 million see note 17 subsequent events 8 stock incentive plans maintain shareholder approved stock incentive plan whereby certain employees nonemployee directors eligible receive stock options stock appreciation rights limited stock appreciation rights tandem stock options deferred shares awards typically granted fair market value common stock date grant follow apb 25 related interpretations accounting stock incentive plan typically recognize compensation expense related issuance stock options compensation expense related sars recognized end period amount quoted market value underlying shares covered grant exceeds grant price recognized vesting term awards expire ten years grant date board determines termination vesting relevant provisions date grant nonemployee directors receive options purchase 1500 shares award 1500 deferred shares upon election board nonemployee directors also receive annual basis options purchase 1500 shares award 1500 deferred shares nonemployee directors may also elect receive additional options lieu portion annual cash retainer fee changes awards outstanding stock incentive plans last three years follows following table summarizes information stock awards outstanding exercisable december 31 2004 december 31 2003 3344412 options outstanding weighted average exercise price per share 2378 1526193 options exercisable weighted average exercise price per share 2010 december 31 2002 4282621 options outstanding weighted average exercise price per share 2097 1564657 options exercisable weighted average exercise price per share 1518 july 28 2004 company granted 09 million stock appreciation rights “sars” certain employees including senior management connection sbc directory acquisition sars settled common stock granted grant price 4158 per share equal fair market value company’s common stock grant date maximum appreciation sar 100 initial grant price accordance apb 25 fin 28 accounting stock appreciation rights variable stock option award plans recognize noncash compensation end period amount quoted market value underlying shares covered grant exceeds grant price recognized vesting term recognized noncash compensation related sars 13 million year ended december 31 2004 options granted 2002 included grant 1486000 options “founders grant” certain employees including senior management connection spa acquisition options granted october 2002 exercise price equal fair market value company’s common stock date grant however award options contingent upon successful closing spa acquisition therefore options subject forfeiture january 3 2003 time fair market value company’s common stock exceeded exercise price accordingly options accounted compensatory options resulted charge 10 million 17 million 2004 2003 respectively sale preferred stock connection spa acquisition triggered change control terms company’s stock incentive plans accordingly awards granted end 2002 exception founders grant options held senior management waived change control provisions became fully vested 9 income taxes deferred tax assets liabilities determined based estimated future tax effects temporary differences financial statements tax basis assets liabilities measured current enacted tax rates deferred tax expense benefit result changes deferred tax asset liability provision benefit income taxes consisted following table summarizes significant differences us federal statutory tax rate effective tax rate deferred tax assets liabilities consisted following december 31 2004 2003 2004 provision income taxes 459 million comprised current tax benefit 256 million deferred tax provision 715 million 2004 current tax benefit based effective tax rate 395 net operating losses approximately 724 million related tax deductions connection spa acquisition sbc directory acquisition 2004 deferred tax provision 715 million primarily related difference amortization expense recorded tax purposes compared book purposes respect intangible assets acquired connection spa acquisition sbc directory acquisition 2004 effective tax rate reflects decrease state local tax rate due integration spa acquisition sbc directory acquisition december 31 2004 company 36 million federal alternative minimum tax amt credit carryforward expire company also federal state net operating loss carryforwards approximately 734 million net carryback 2490 million respectively federal net operating loss carryforward begin expire 2023 state net operating loss carryforwards begin expire 2008 portion benefits net operating loss carryforwards reflected additional paidin capital portion net operating loss carryforwards generated deductions related exercise stock options 2003 tax benefit 360 million comprised current tax provision 42 million deferred tax benefit 402 million 2003 tax benefit based effective tax rate 418 net operating losses approximately 1760 million related tax deductions connection spa acquisition 2003 deferred tax benefit primarily related net operating loss generated 2003 partially offset deferred tax provision principally relating difference amortization recorded tax purposes compared book purposes respect intangible assets acquired connection spa acquisition 2002 effective tax rate adversely impacted chinabig investment impairment charge 2 million writedown investment treated capital loss income tax purposes utilized capital gains believe likely company would generate capital gains order realize tax benefits capital loss accordingly valuation allowance established total amount deferred tax asset related capital loss chinabig investment however regard deferred tax assets believe obtain full benefit assets based assessment company’s anticipated profitability years deferred tax assets expected become tax deductions 10 benefit plans retirement plans defined benefit pension plan covering substantially employees least one year service benefits paid employees based years service percentage total annual compensation percentage compensation allocated retirement account ranges 30 125 depending age years service “cash balance benefit” benefits certain employees participants predecessor dun bradstreet corporation “db” defined benefit pension plan also determined based participant’s average compensation years service “final average pay benefit” benefits paid equal greater final average pay benefit cash balance benefit pension costs determined using projected unit credit actuarial cost method funding policy contribute amount least equal minimum legal funding requirement contributions required made 2004 2003 2002 underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities use measurement date december 31 majority plan assets also unfunded nonqualified defined benefit pension plan pension benefit equalization plan “pbep” covers senior executives certain key employees benefits based years service compensation including compensation permitted taken account previously mentioned defined benefit pension plan offer defined contribution savings plan substantially employees contribute 050 dollar contributed participating employee maximum 6 participating employee’s salary including bonus commissions contributions plan 17 million 11 million 07 million years ended december 31 2004 2003 2002 respectively postretirement benefits unfunded postretirement benefit plan provides certain healthcare life insurance benefits fulltime employees reach retirement age working company connection sbc directory acquisition assumed dontech’s benefit plans information presented 2004 includes amounts company plans dontech plans since september 1 2004 information 2003 excludes amounts relating dontech benefit plans since obligation time retirement postretirement plans company dontech similar nature share master trust summary funded status benefit plans december 31 2004 2003 follows net amounts recognized consolidated balance sheets december 31 2004 2003 follows accumulated benefit obligation defined benefit pension plans 1022 million 611 million december 31 2004 2003 respectively projected benefit obligation accumulated benefit obligation unfunded pbep december 31 2004 2003 follows net periodic benefit expense income retirement plans years ended december 31 2004 2003 2002 follows additional information following assumptions used determining benefit obligations retirement plans postretirement plan following assumptions used determining net periodic benefit expense income retirement plans weighted average discount rate used determine net periodic expense postretirement plan 600 650 725 2004 2003 2002 respectively 2004 used 2005 use rate 825 expected longterm rate return assumption plan assets retirement plan assumption based plan’s present target asset allocation 65 equity securities 35 debt securities reflects longterm capital market return forecasts asset classes employed assumed excess returns active management within asset class portion plan assets actively managed periodic rebalancing back target allocations current market factors inflation interest rates evaluated longterm capital market assumptions determined although review expected longterm rate return assumption annually plan performance one particular year significantly influence evaluation assumption generally revised unless fundamental change one factors upon based target asset allocation longterm capital market return forecasts net periodic benefit expense postretirement plan years ended december 31 2004 2003 2002 follows following table reflects assumed healthcare cost trend rates assumed healthcare cost trend rates significant effect amounts reported healthcare plans onepercentagepoint change assumed healthcare cost trend rates would following effects 2004 pension plan weightedaverage asset allocation december 31 2004 2003 asset category follows total return investment approach mix equity debt investments used maximize longterm return plan assets prudent level risk plan’s target asset allocation presently 65 equity securities 35 debt securities target allocation controlled periodic rebalancing back target plan assets invested using combination active passive indexed investment strategies plan’s equity securities diversified across us nonus stocks plan’s debt securities diversified principally among securities issued guaranteed united states government agencies mortgagebacked securities including collateralized mortgage obligations investmentgrade corporate debt obligations dollardenominated obligations issued us nonus banks corporations investment risk controlled diversification among asset classes managers securities risk controlled investment manager level requiring active managers follow formal written investment guidelines investment results measured monitored ongoing basis quarterly investment reviews conducted plan’s active united states investment manager prohibited investing plan assets equity debt securities issued guaranteed rhd however plan may hold donnelley stock part total united states equity market index fund plan invests estimated future benefit payments following benefit payments reflect expected future service net medicare subsidy appropriate expected paid expect make contributions approximately 09 million 01 million defined benefit nonqualified defined benefit plans respectively 2005 may 2004 financial accounting standards board issued financial staff position “fsp” fas 1062 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 provides guidance accounting effects medicare prescription drug improvement modernization act 2003 employers sponsor postretirement healthcare plans provide drug benefits act introduces prescription drug care benefits medicare also allows certain sponsors postretirement benefit plans drug benefit receive nontaxable federal subsidy certain criteria met fsp requires interim annual period financial statements beginning june 15 2004 include effect subsidy measurement net periodic postretirement benefit costs adopted provisions fsp fourth quarter 2004 resulted decrease accumulated postretirement benefit obligation approximately 43 million 11 commitments lease office facilities equipment operating leases noncancelable lease terms expiring various dates 2014 rent lease expense 2004 2003 2002 116 million 102 million 31 million respectively future noncancelable minimum rental payments applicable operating leases december 31 2004 entered longterm purchase agreements paper used publishing directories purchase commitments paper four suppliers estimated based minimum required quantities aggregate approximately 445 million 2006 minimum purchases required agreements 264 million 2005 181 million 2006 connection sbc directory acquisition entered smartpages reseller agreement whereby obligated pay sbc 154 million 5year term agreement 12 legal proceedings involved various legal proceedings arising ordinary course business well certain litigation tax matters described periodically assess liabilities contingencies connection matters based upon latest information available us matters probable incurred loss range loss reasonably estimated record reserves consolidated financial statements instances unable make reasonable estimate liability uncertainties related probable outcome amount range loss additional information becomes available adjust assessment estimates liabilities accordingly based review latest information available believe ultimate liability connection pending legal proceedings including litigation tax matters described material adverse effect results operations cash flows financial position described material amounts accrued financial statements respect matters order understand potential exposure litigation tax matters described captions “information resources inc” “tax matters” need understand relationship us db certain predecessors affiliates various corporate reorganizations contractual commitments assumed varying degrees responsibility respect matters november 1996 company known dun bradstreet corporation separated spinoff “1996 distribution” three separate public companies dun bradstreet corporation acnielsen corporation “acnielsen” cognizant corporation “cognizant” june 1998 dun bradstreet corporation separated spinoff “1998 distribution” two separate public companies rh donnelley corporation formerly dun bradstreet corporation new company changed name dun bradstreet corporation later 1998 cognizant separated spinoff “cognizant distribution” two separate public companies ims health incorporated “ims” nielsen media research inc “nmr” september 2000 dun bradstreet corporation separated two separate public companies moody’s corporation “moody’s” formerly dun bradstreet corporation new company changed name dun bradstreet corporation result form rh donnelley corporation’s separation dun bradstreet corporation 1998 corporate successor technically defendant taxpayer referred db respect matter accruing prior june 30 1998 information resources inc following description antitrust lawsuit filed 1996 information resources inc “iri” vnu nv publicly traded dutch company “vnu” us subsidiaries vnu inc ac nielsen ac nielsen us inc “acn us” nmr collectively “vnu parties” assumed exclusive joint several liability judgment settlement antitrust lawsuit collectively “iri liabilities” result indemnity obligation exposure judgment settlement lawsuit unless vnu parties default obligations event default contingent liability matter result succeeding db’s liabilities obligations part 1998 distribution event however contractual commitments described amounts might need pay would shared equally 50 db moody’s joint several basis db moody’s unable bear part iri liabilities would liable extent either could satisfy joint several indemnity obligations us february 1 2005 us district court southern district new york entered final judgment iri dismissing iri’s claims prejudice merits iri filed notice appeal second circuit court appeals due dismissal matter several layers indemnity described disclosure regarding matter relatively brief detailed discussion regarding background past procedural history regarding matter please see prior periodic reports july 1996 iri filed complaint subsequently amended 1997 united states district court southern district new york naming defendants db company successor db ac nielsen company subsidiary acnielsen ims known cognizant time filing wholly owned subsidiaries db amended complaint alleged among claims various violations us antitrust laws sections 1 2 sherman antitrust act iri sought damages excess 6500 million iri sought treble antitrust laws iri also sought punitive damages unspecified amount believe precluded result prior dismissal one iri’s claims december 2004 court entered order barred iri arguing defendant’s pricing practices discounts illegal anticompetitive unless could satisfy specified burden proof response ruling press release iri stated relevant part “without evidence iri believes little would left iri’s case take trial” result iri asked court enter final judgment could take immediate appeal second circuit defendants object request noted case dismissed district court iri filed appeal court appeals second circuit ordered appeal argued earlier week june 13 2005 connection 1996 distribution cognizant nmr acnielsen db company entered indemnity joint defense agreement july 30 2004 vnu parties company db moody’s ims entered amended restated indemnity joint defense agreement “amended jda” pursuant amended jda iri liabilities incurred us db moody’s ims relating judgment even final settlement entered iri action jointly severally assumed fully discharged exclusively vnu parties amended jda vnu parties agreed jointly severally indemnify us db moody’s ims iri liabilities become subject agreements relating 1998 distribution db assumed defense agreed indemnify us payments may required make respect iri liabilities related legal fees required agreements moody’s corporation subsequently separated db 2000 distribution agreed jointly severally liable db indemnity obligation us understand db moody’s agreed amongst share equally 50 indemnity obligations us db moody’s unable bear part aggregate 50 share liability would liable extent either could satisfy joint several indemnity obligations us liability violations antitrust laws joint several rights obligations relating amended jda based contractual relationships failure vnu parties fulfill obligations amended jda could result parties bearing share iri liabilities joint several liability iri liabilities means even one defendant determined responsible alleged wrongdoing plaintiff collect part judgment one defendants true regardless whatever contractual allocation responsibility defendants indemnifying parties may made including allocations described vnu parties company db moody’s ims accordingly result allocations liability described event vnu parties default obligations amended jda db moody’s jointly severally responsible payment portion judgment settlement ultimately payable company defendant iri action could high iri liabilities described iri lawsuit dismissed prejudice merits iri filed appeal accordingly unable predict outcome iri litigation financial condition vnu parties defendants time outcome hence cannot estimate ability pay iri liabilities pursuant amended jda judgment settlement iri action nonetheless cannot assure outcome matter management presently believes vnu parties sufficient financial resources borrowing capacity satisfy obligations amended jda default db moody’s sufficient financial resources borrowing capacity reimburse us payments may required make related costs may incur connection matter therefore management presently believes ultimate resolution matter would material adverse effect company’s results operations cash flows financial condition accordingly amount respect matter accrued consolidated financial statements tax matters db entered global taxplanning initiatives normal course business primarily taxfree restructurings foreign domestic operations collectively “legacy tax matters” irs currently disputing certain tax positions taken respect legacy tax matters status legacy tax matters summarized including settlement matter “utilization capital losses 1989 1990” “capital losses matter” fourth quarter 2004 pursuant series tax sharing agreements collectively “tax sharing agreements” relating spinoffs separations referred ims nmr jointly severally liable must pay onehalf db moody’s jointly severally liable must pay half payments 1370 million taxes accrued interest amounts resulting legacy tax matters summarized matter summarized “ amortization royalty expense deductionsroyalty income 19972004” db moody’s jointly severally solely responsible db behalf contractually obligated pay first 1370 million tax liability connection capital loss matter terms 1998 distribution db agreed assume defense indemnify us tax liability may assessed us related costs expenses may incur connection legacy tax matters also required agreements moody’s agreed jointly severally liable db indemnity obligation us terms certain spinoffs separations db moody’s agreed financially responsible 50 potential liabilities may arise extent potential liabilities directly attributable party’s respective business operations db moody’s unable bear part liabilities would liable extent could satisfy joint several indemnity obligations us cannot assure outcome legacy tax matters settled capital losses matter management presently believes db moody’s sufficient financial resources borrowing capacity applicable indemnity rights ims nmr succeeded cognizant’s indemnity obligations cognizant distribution ims nmr turn sufficient financial resources borrowing capacity satisfy respective indemnity obligations db moody’s reimburse us payments may required make related costs may incur connection legacy tax matters therefore management presently believes ultimate resolution legacy tax matters would material adverse effect company’s results operations cash flows financial condition utilization capital losses 1989 2000 db filed amended tax return respect utilization capital losses 1989 1990 response formal irs notice adjustment amended tax return reflected additional 5616 million tax interest due 2000 db paid irs approximately 3493 million ims behalf nmr paid irs approximately 2123 million understand payments made dispute order stop additional interest accruing fourth quarter 2004 taxpayer record entered settlement agreement irs resolving capital losses matter described fully indemnified payments required made irs resulting settlement expect aggregate tax liability including penalties arising settlement approximately 48 million payable irs following receipt various bills irs related settlement february 2005 irs issued first bill tax year 1990 amount 116 million paid full indemnitors february 24 2005 march 2005 taxpayer record received second bill irs amount 632 million irs indicated writing amount bill inaccurate 358 million based written confirmation indemnitors paid respective shares including db moody’s paying shortfall ims nmr described following paragraph 358 million liability march 14 2005 deadline understand db expects irs issue bills remaining balance settlement payment first half 2005 noted tax sharing agreements provide ims nmr jointly severally liable must pay one half tax liabilities relating capital expense matter understand ims nmr advised db believe responsible certain portions remaining balance settlement payment nevertheless indemnity arrangements db moody’s would jointly severally liable portion settlement paid ims nmr acknowledged us responsibility shortfall ims nmr understand based upon discussions ims nmr db estimates moody’s required pay approximately 45 million tax interest net tax benefits excess allocable share settlement terms tax sharing agreements understand db moody’s believe position ims nmr contrary provisions tax sharing agreements commenced discussions respect dispute negotiation process contemplated tax sharing agreements understand negotiations successful db intends commence arbitration proceedings ims nmr enforce relevant provisions tax sharing agreements taxpayer record would likely need commence arbitration proceeding behalf db moody’s understand db believes would prevail arbitration cannot assure respect ultimate outcome proceeding timing resolution royalty expense deductions 1993 second quarter 2003 db received behalf proposed notice deficiency irs respect partnership transaction entered 1993 specifically irs proposed disallow certain royalty expense deductions claimed db 1993 1996 tax returns understand db estimates disallowance 1993 1994 royalty expense deductions would result loss approximately 50 million pending tax refunds additional tax liability respect disallowance 1995 1996 royalty expense deductions could approximately 462 million tax interest penalties net tax benefits addition also second quarter 2003 db received irs behalf partnership associated transaction notice proposed partnership adjustment challenging tax treatment certain royalty payments received partnership db partner notice irs seeking reallocate certain partnership income db january april 2004 db received additional irs notices similar received second quarter 2003 associated db’s remaining interest partnership transaction described three months 1997 entities partners additional tax liability respect db’s share income notices received second quarter 2003 january april 2004 could 228 million tax interest penalties net tax benefits understand db believes positions regarding partnership inconsistent irs’ position respect royalty expense deductions described 228 million additional liability would addition 462 million additional liability related royalty expense deductions discussed previous paragraph matters collectively referred herein royalty expense matter previously reported form 10q quarters ended june 30 2004 september 30 2004 understood db reached tentative settlement “proposed settlement” irs regarding disallowance 1995 1996 royalty expense deductions portion royalty expense matter also previously reported understood third quarter 2004 irs tendered db behalf final settlement agreement respect royalty expense matter tax years 1995 1996 reflecting financial terms set forth related proposed settlement according terms proposed settlement taxpayer would retain approximately 15 tax benefit associated royalty expense matter 1995 1996 pay penalty approximately 7 respect royalty expense matter 1995 1996 accordance tax sharing agreements db sought consent execute final settlement agreement royalty expense matter tax years 1995 1996 relevant parties financial responsibilities matter tax sharing agreements ie moody’s ims nmr db parties consented final settlement agreement tendered irs exception nmr ims result nmr’s ims’s decision consent royalty expense matter final settlement agreement november 1 2004 db informed irs could execute final settlement agreement november 3 2004 irs informed db withdrawing final settlement agreement respect royalty expense matter result cannot predict time whether parties able conclude negotiations irs respect final settlement agreement regarding royalty expense matters tax years 1995 1996 financial terms andor terms set forth proposed settlement tax sharing agreements govern parties’ rights obligations circumstances provide “royalty expense indemnity defense provisions” party withholding consent proposed settlement shall “continue initiate proceedings” irs “at expense liability parties previously control proceedings shall limited liability would resulted proposed settlement agreement consented including interest additions tax penalties accrued time” believe therefore result failure nmr ims provide consent contingent assuming db moody’s fail satisfy indemnity obligations us liability royalty expense matter respect tax years 1995 1996 effectively capped amounts provided final settlement agreement tendered irs also believe accordance royalty expense indemnity defense provisions nmr ims would jointly severally liable excess amounts reflected final settlement agreement tendered irs may ultimately owing royalty expense matter respect tax years 1995 1996 understand db estimates ultimate resolution portion royalty expense matter would projected net impact cash flow 377 million tax interest penalties net tax benefits based upon financial terms final settlement agreement tendered irs ims alleged various breaches db’s obligations tax sharing agreements related db’s management attempted settlement matter irs addition “reserving rights” us db ims urged nmr direct contractual privity us • challenge application royalty expense indemnity defense provisions tax sharing agreements specifically nmr reject position nmr must lead defense nmr ims jointly severally indemnify us financial outcome less advantageous us final settlement agreement • assert breaches contract terminate obligations ims nmr tax sharing agreements generally legal counsel understand db legal counsel believe neither nmr ims right legal basis terminate indemnity obligations tax sharing agreements attempt found without merit although cannot assure respect ultimate outcome issue respect timing resolution anticipate commencing arbitration proceedings along db enforce respective rights royalty expense indemnity defense provisions tax sharing agreements negotiation process required tax sharing agreements fail resolve parties’ dispute believe prevail arbitration thereby effectively cap exposure respect royalty expense matter tax years 1995 1996 levels described cannot assure ultimate outcome matter respect timing resolution noted irs withdrawn proposed settlement respect tax years 1995 1996 accordingly may issue notices preliminary making assessments time db challenge assessment tax years 1993 1994 us district court us court federal claims rather us tax court disputed amounts applicable year would need paid advance court jurisdiction case possible irs may seek issue notices respect positions noted db believes inconsistent 1993 1994 1997 royalty expense deduction portions royalty expense matter remain pending irs amortization royalty expense deductionsroyalty income 1997 2004 fourth quarter 2003 db received behalf irs notices proposed adjustment respect partnership transaction entered 1997 addition db received behalf partnership various irs materials explaining examining agent’s position respect activities partnership 1997 1998 april 2004 db received behalf proposed notices deficiency irs proposing adjustments respect partnership transaction entered 1997 described adjustments proposed april notices reflect notices proposed adjustment irs materials referred specifically irs asserted certain amortization expense deductions claimed db 1997 1998 tax returns disallowed understand db estimates additional tax liability result disallowance 1997 1998 amortization deductions disallowance deductions claimed 1999 date could 599 million tax interest penalties net tax benefits transaction scheduled expire 2012 unless earlier terminated based current interest rates tax rates additional tax exposure would increase rate approximately 21 million per quarter including potential penalties future amortization expenses deducted addition irs asserted royalty expense deductions claimed db tax returns 1997 1998 royalties paid partnership disallowed irs also asserted receipt royalties partnership reallocated reported royalty income db including portions royalties allocated third party partners partnership thus included taxable income understand db believes irs’ stated positions respect treatment royalty expense royalty income mutually inconsistent making unlikely irs prevail positions result understand db estimates taking account certain tax benefits resulting irs’ position partnership unlikely additional cash tax payments due addition amounts noted related amortization expense deduction event irs prevail positions respect royalty expenseincome db believes unlikely db estimates additional tax liability result disallowance 1997 1998 royalty expense deductions disallowance deductions claimed 1999 date inclusion reallocated royalty income relevant years could 1407 million tax interest penalties net tax benefits would addition 599 million noted related amortization expense deduction understand db filed protests relating matters irs office appeals understand third quarter 2004 db informed irs office appeals matter returned examination division irs development issues understand db attempting resolve matters irs proceeding litigation necessary db challenge time irs positions years 1997 1998 us district court us court federal claims rather us tax court disputed amounts applicable year would need paid advance court jurisdiction case possible irs may seek issue notices respect positions noted db believes inconsistent conclusion result assessment exposure matters relating prior relationship db former affiliates especially light indemnity arrangements db moody’s vnu parties respect iri matter respective financial resources borrowing capacity case certain legacy tax matters indemnity rights ims nmr turn ims nmr’s respective financial resources borrowing capacity satisfy respective indemnity obligations db moody’s material amounts accrued consolidated financial statements dbrelated litigation tax matters also involved legal proceedings claims litigation arising ordinary conduct business although cannot assure outcome management presently believes outcome legal proceedings material adverse effect results operations financial condition material amounts accrued consolidated financial statements respect matters 13 business segments revised historical segment reporting reflect change business resulted sbc directory acquisition reflect management reviews analyzes business publishing yellow pages directories conducted one reportable operating segment prepress publishing services ancillary services previously performed behalf others performed entirely behalf directories publish result sbc directory acquisition sbc ceased paying us revenue participation income consolidate net profits dontech partnership investment dontech eliminated consequently partnership income longer reported commencing september 1 2004 accordingly previously reported dontech operating segment longer applicable 14 guarantees rh donnelley inc direct wholly owned subsidiary company issuer preacquisition notes redeemed full february 6 2004 senior notes subordinated notes company direct indirect 100 owned subsidiaries rh donnelley inc jointly severally fully unconditionally guarantee debt instruments holdco notes issued december 31 2004 guaranteed company’s subsidiaries december 31 2004 rh donnelley inc’s direct wholly owned subsidiaries rh donnelley publishing advertising inc rh donnelley apil inc dontech holdings llc dontech ii partnership rh donnelley publishing advertising illinois holdings llc rh donnelley publishing advertising illinois partnership get digital smartcom inc december 31 2002 rh donnelley inc’s direct wholly owned subsidiaries rh donnelley apil inc rh donnelley cd inc rh donnelley acquisitions ii inc get digital smartcom inc rh donnelley acquisitions ii inc wholly owned subsidiary rh donnelley apil inc rh donnelley finance corporation ii subsidiary borrowers established connection financing spa acquisition nonguarantor subsidiaries december 31 2002 following consolidating condensed financial statements read conjunction consolidated financial statements company december 31 2004 rh donnelley corporation issued 200604 shares preferred stock see note 7 redeemable preferred stock warrants description terms preferred stock related dividend requirements see note 12 litigation description various legal proceedings company involved related contingencies rh donnelley corporation receives dividends rh donnelley inc payment income taxes dividends received payment income taxes 0 389 million 396 million years 2004 2003 2002 respectively dividends items years significant general substantially net assets company subsidiaries restricted paid dividends third party subsidiaries restricted paying dividends loans advances rh donnelley corporation limited exceptions terms credit facility see note 5 longterm debt credit facilities notes description debt instruments rh donnelley corporation consolidating condensed balance sheet december 31 2004 rh donnelley corporation consolidating condensed balance sheet december 31 2003 rh donnelley corporation consolidating condensed statement operations year ended december 31 2004 rh donnelley corporation consolidated condensed statement operations year ended december 31 2003 rh donnelley corporation consolidated condensed statement operations year ended december 31 2002 rh donnelley corporation consolidating condensed statement cash flows year ended december 31 2004 rh donnelley corporation consolidated condensed statement cash flows year ended december 31 2003 rh donnelley corporation consolidated condensed statement cash flows year ended december 31 2002 15 valuation qualifying accounts 16 quarterly information unaudited full year earnings loss per share amount may equal sum quarters due weighting shares 1 revenue sale advertising recognized deferral amortization method whereby revenue advertising sales initially deferred directory published recognized ratably life directory due purchase accounting rules able recognize revenue directories published sbc directory business spa directory business prior acquisition directories published months acquisitions completed 2 similar deferral amortization method revenue recognition certain costs directly related selling production directories initially deferred recognized ratably life directory due purchase accounting rules able recognize expenses directories published sbc directory business spa directory business prior acquisition directories published months acquisitions completed additionally result sbc directory acquisition sbc ceased paying us revenue participation income consolidate net profits dontech 3 second third fourth quarters 2003 include restructuring charges 31 million 43 million 21 million respectively closing redundant facilities relocation company’s corporate offices cary north carolina 17 subsequent events january 14 2005 repurchased approximately 50 outstanding preferred stock gs funds 2772 million first quarter 2005 record reduction earnings available common shareholders approximately 134 million reflect loss repurchase shares order fund repurchase january 14 2005 issued 300 million holdco notes private transaction exempt registration requirements securities act 1933 holdco notes bear interest 6875 per annum payable semiannually arrears january 15 july 15 year commencing july 15 2005 holdco notes unsecured senior obligations company mature january 15 2013 entered registration rights agreement whereby agreed among things 1 file exchange offer registration statement sec respect holdco notes within 120 days january 14 2005 ii use reasonable efforts exchange offer registration statement declared effective sec within 180 days january 14 2005 iii subject certain limitations consummate exchange offer exchange offer registration statement relates within 210 days january 14 2005 first quarter 2005 announced restructuring plan relating sbc directory business number employees terminated others relocated corporate headquarters cary north carolina additionally vacating portion leased facility chicago illinois first quarter 2005 record costs associated restructuring effort expensed recorded adjustment goodwill accordance eitf 953 recognition liabilities connection purchase business combination report independent registered public accounting firm board directors shareholders rh donnelley corporation board directors shareholder rh donnelley publishing advertising inc opinion accompanying balance sheets related statements operations cash flows changes shareholder’s equity deficit present fairly material respects financial position rh donnelley publishing advertising inc “company” december 31 2004 2003 results operations cash flows years ended conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp raleigh north carolina march 16 2005 rh donnelley publishing advertising inc balance sheets accompanying notes integral part financial statements rh donnelley publishing advertising inc statements operations accompanying notes integral part financial statements rh donnelley publishing advertising inc statements cash flows accompanying notes integral part financial statements rh donnelley publishing advertising inc statements changes shareholder’s equity deficit accompanying notes integral part financial statements rh donnelley publishing advertising inc notes financial statements tabular amounts thousands 1 business presentation rh donnelley publishing advertising inc “company” “successor” “we” “us” “our” wholly owned subsidiary rh donnelley inc “rhd inc” wholly owned subsidiary rh donnelley corporation “rhd” leading yellow pages publisher directional media company directional media consumers search find sells goods services ready purchase publish sprintbranded yellow pages directories 18 states major markets including las vegas nevada orlando lee county florida total distribution approximately 18 million serving approximately 160000 local national advertisers also offer online city guides search web sites major markets best red yellow pages ® brand wwwbestredypcom january 3 2003 rhd completed acquisition directory business “spa directory business” sprint corporation “sprint” acquiring outstanding capital stock various entities comprising sprint publishing advertising “spa” collectively “spa acquisition” 2227 million cash acquisition consummated pursuant purchase agreement dated september 21 2002 among rhd company sprint centel directories llc acquisition accounted purchase business combination purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values acquisition date results spa directory business included results january 3 2003 see note 3 “acquisition sprint publishing advertising” description acquisition financial statements presented herein include accounts company since january 3 2003 significant transactions occurred january 1 2003 january 3 2004 2 summary significant accounting policies revenue recognition earn revenue principally sale advertising yellow pages directories revenue sale advertising deferred directory published recognized ratably life directory typically 12 months “deferral amortization method” revenue sale advertising recorded net allowance sales claims estimated based historical experience directorybydirectory basis increase decrease estimate information circumstances indicate estimate may longer adequately represent amount claims may incur directory future deferred directory costs directly related selling production directories initially deferred incurred recognized ratably life directory typically 12 months costs include sales commissions print paper initial distribution costs paid prior directory publication classified current assets cash equivalents cash equivalents include liquid investments original maturity three months less carrying amounts approximate fair value accounts receivable accounts receivable consist balances owed us advertising customers advertisers typically enter twelvemonth contract advertising local advertisers billed pro rata amount contract value monthly basis behalf national advertisers certified marketing representatives “cmrs” pay company total contract value advertising net commission within 60 days publication month billed receivables represent amount billed advertisers unbilled receivables represent contractually owed amounts published directories yet billed advertisers billed receivables recorded net allowance doubtful accounts sales claims estimated based historical experience directorybydirectory basis increase decrease estimate information circumstances indicate estimate may longer adequately represent amount bad debts sales claims may incur fixed assets computer software fixed assets computer software recorded cost depreciation amortization provided estimated useful lives assets using straightline method estimated useful lives 30 years building five years machinery equipment ten years furniture fixtures three five years computer equipment five years computer software leasehold improvements amortized straightline basis shorter term lease estimated useful life improvement 2004 wrote fixed assets computer software fully depreciated fixed assets computer software december 31 2004 2003 consisted following depreciation amortization expense fixed assets computer software years ended december 31 2004 2003 follows identifiable intangible assets goodwill result spa acquisition certain longterm intangible assets identified recorded estimated fair values amortization expense years ended december 31 2004 2003 498 million amortization expense intangible assets five succeeding years estimated approximately 500 million annual amortization goodwill tax purposes approximately 1223 million acquired longterm intangible assets respective book values december 31 2004 shown table directory services agreements sprint company include directory services license agreement trademark license agreement noncompetition agreement collectively “spa directory services agreements” certain affiliates sprint directory services license agreement grants us exclusive license obligation specified agreement produce publish distribute directories sprint successors 18 states sprint provided local telephone service time agreement trademark license agreement grants us exclusive license obligation specified agreement use certain specified sprint trademarks including sprint diamond logo markets noncompetition agreement prohibits sprint affiliates successors markets selling local directory advertising certain limited exceptions producing publishing distributing print directories spa directory services agreements initial terms 50 years subject automatic renewal early termination specified circumstances fair value agreements determined based present value estimated future cash flows amortized straightline method 50 years fair values local national customer relationships determined based present value estimated future cash flows amortized income forecast method weighted average useful life relationships 20 years fair value acquired trade names determined based “relief royalty” method values trade names based estimated amount company would pay arms length transaction use trade names assets amortized straightline method 15 years excess purchase price spa acquisition net tangible identifiable intangible assets acquired 970 million recorded goodwill intercompany net receivables connection spa acquisition 279 million eliminated included goodwill accordance sfas 142 goodwill intangible assets goodwill amortized subject periodic impairment testing impairment losses recorded 2003 2004 advertising expense recognize advertising expenses incurred expenses include public relations media online advertising promotional sponsorship costs total advertising expenses 91 million 2004 88 million 2003 concentration credit risk approximately 85 directory advertising revenue derived sale advertising local small mediumsized businesses advertisers typically enter 12month advertising sales contracts make monthly payments term contract advertisers prepay full amount portion contract value new advertisers desiring expand advertising programs subject credit review advertisers qualify may extend credit advertising purchase small mediumsized businesses tend fewer financial resources higher failure rates large businesses addition full collection delinquent accounts take extended period time involve significant costs believe extending credit local advertisers material adverse effect results operations financial condition assurances given require collateral advertisers although charge interest advertisers pay specified due dates remaining approximately 15 directory advertising revenue derived sale advertising national large regional chains rental car companies automobile repair shops pizza delivery businesses substantially revenue derived national accounts serviced cmrs contract cmrs independent third parties act agents national advertisers cmrs responsible billing national customers advertising receive payment value advertising placed directory net cmr’s commission directly cmr still exposed credit risk amount losses accounts historically less local accounts advertisers cases cmrs tend larger companies greater financial resources local advertisers pension postretirement benefits employees participate multiemployer benefit plans operated rhd following information relates multiemployer plans pension postretirement benefits represent estimated amounts paid employees future accounting benefits reflects recognition benefit costs employee’s estimated service period based terms plan investment funding decisions made determination benefit obligation net periodic pension postretirement benefit costs requires management make assumptions regarding discount rate return retirement plan assets increase future compensation healthcare cost trends changes assumptions significant impact projected benefit obligation funding requirement net periodic benefit cost assumed discount rate pension benefits could settled use rates aa corporate bonds basis determining discount rate assumption expected longterm rate return plan assets based mix assets held plan expected longterm rates return within asset class anticipated trend future healthcare costs based historical experience external factors effective january 1 2003 rhd reduced rate return plan assets 975 825 result low investment returns last years well outlook long term particularly equity securities rhd determined prior assumed rate return 975 longer reflected best estimate future long term returns based current investment environment pension plan’s asset allocation rhd determined longterm rate return 825 better reflected expectations future longterm returns income taxes account income taxes liability method accordance sfas 109 accounting income taxes deferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax assets realized employee stock options certain employees eligible participate stock option plan sponsored rhd follow accounting principles board opinion 25 accounting stock issued employees “apb 25” related interpretations accounting stock option plan compensation expense related issuance stock options employees nonemployee directors recognized exercise price stock option less fair market value underlying stock grant date following table reflects pro forma net income loss assuming applied fair value method sfas 123 accounting stockbased compensation pro forma disclosures shown necessarily representative effects net income loss future years weighted average fair value stock options 1364 2004 921 2003 estimated grant date using blackscholes optionpricing model following assumptions estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities revenue certain expenses disclosure contingent assets liabilities actual results could differ materially estimates assumptions estimates assumptions used determination sales allowances doubtful accounts depreciation amortization employee benefit plans restructuring reserves among others new accounting pronouncements december 16 2004 fasb issued fasb statement 123 revised 2004 “sharebased payment “fas 123r”” fas 123r requires companies calculate fair value stock options granted employees amortize amount vesting period expense income statement accounting provisions fas 123r effective interim periods beginning june 15 2005 companies choice transition methods modified prospective modified retrospective early adoption rhd presently evaluating transition method effective date transition fas 123r 2005 impact adoption fas 123r may company may 2004 financial accounting standards board issued financial staff position “fsp” fas 1062 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 provides guidance accounting effects medicare prescription drug improvement modernization act 2003 employers sponsor postretirement healthcare plans provide drug benefits act introduces prescription drug care benefits medicare also allows certain sponsors postretirement benefit plans drug benefit receive nontaxable federal subsidy certain criteria met fsp requires interim annual period financial statements beginning june 15 2004 include effect subsidy measurement net periodic postretirement benefit costs rhd adopted provision fsp fourth quarter 2004 holds accumulated postretirement obligation 3 acquisition sprint publishing advertising january 3 2003 rhd acquired spa 223 billion renamed rh donnelley publishing advertising inc following spa acquisition publish sprintbranded yellow pages directories 18 states results spa directory business included operating results january 3 2003 primary purpose acquisition transform rhd sales agent prepress vendor yellow pages advertising leading publisher yellow pages directories acquisition accounted purchase business combination accordance sfas 141 business combinations purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values acquisition date fair values certain longterm intangible assets identified recorded estimated fair values identifiable intangible assets acquired included directory services agreements sprint us customer relationships acquired trade names accordance sfas 142 goodwill intangible assets fair values identifiable intangible assets amortized estimated useful lives manner best reflects economic benefits derived assets goodwill amortized subject impairment testing annual basis purchase accounting rules assume deferred revenue balance spa january 3 2003 3159 million amount represented revenue would recognized subsequent acquisition deferral amortization recognition method acquisition occurred accordingly record revenue associated directories published prior acquisition january 2003 although deferred revenue balance eliminated retained rights associated collection amounts due obligations advertising contracts executed prior spa acquisition result spa’s billed unbilled accounts receivable balances became assets also purchase accounting rules assume record deferred directory costs related directories published prior acquisition well directories published month acquisition completed totaling 1758 million costs represented operating expenses would recognized subsequent acquisition deferral amortization method absence purchase accounting following table summarizes estimated fair values assets acquired liabilities assumed spa acquisition january 3 2003 4 restructuring special charge result spa acquisition 55 million charged earnings representing severance related costs associated consolidation publishing technology operations sales offices payments 36 million made 2003 severance related cost estimates additional reserve 13 million recorded 2004 related additional severance related cost estimates 2004 restructuring reserves completely settled 5 longterm debt due affiliate connection spa acquisition rh donnelley apil inc wholly owned subsidiary rhd provided longterm loan form promissory note company total proceeds loan 2227 million note matures 2022 provides monthly principal payments 93 million plus interest annual rate 93 interest expense totaled 1934 million 2015 million years ended december 31 2004 2003 respectively aggregate maturities longterm debt due affiliate december 31 2004 6 stock option plans rhd maintains shareholder approved stock incentive plan “the plan” whereby certain employees nonemployee directors eligible receive stock options stock appreciation rights limited stock appreciation rights tandem stock options deferred shares options typically granted fair market value rhd’s common stock date grant rhd affiliates follow apb 25 related interpretations accounting stock incentive plan accordingly typically recognize compensation expense related issuance stock options expire ten years grant date board determines termination vesting relevant provisions date grant years ended december 31 2004 2003 respectively 1703416 401150 common stock options granted plan amounts 145125 192552 granted employees respectively july 28 2004 rhd granted 02 million stock appreciation rights “sars” certain employees including senior management sars granted grant price equal fair market value company’s common stock grant date maximum appreciation sar 100 initial grant price accordance apb 25 recognize noncash compensation end period amount quoted market value underlying shares covered grant exceeds grant price vesting term recognized noncash compensation related sars 02 million year ended december 31 2004 rhd granted 04 million options “founders grant” 2002 certain employees including senior management connection spa acquisition options granted october 2002 exercise price equal fair market value rhd’s common stock date grant however award options contingent upon successful closing spa acquisition therefore options subject forfeiture january 3 2003 time fair market value rhd’s common stock exceeded exercise price accordingly options accounted compensatory options resulted compensation expense 03 million 2004 05 million 2003 respectively 7 income taxes included rhd’s combined federal income tax return deferred tax assets liabilities determined based estimated future tax effects temporary differences financial statements tax basis assets liabilities measured current enacted tax rates deferred tax expense benefit result changes deferred tax asset liability provision benefit income taxes consisted following table summarizes significant differences us federal statutory tax rate effective tax rate deferred tax assets liabilities consisted following december 31 2004 2003 2004 tax provision based effective tax rate 391 tax benefit generated 2003 attributable net operating loss approximately 176 million federal net operating loss carryforward begin expire 2023 state net operating loss carryforwards begin expire 2008 rhd considered taxpayer current income tax liabilities benefits reflected amounts due tofrom affiliates balance sheet accordingly deferred tax assets deferred tax liabilities settled rhd regard deferred tax assets believe obtain full benefit assets based assessment company’s anticipated profitability years deferred tax assets expected become tax deductions 8 benefit plans retirement plans rhd defined benefit pension plan covering substantially employees least one year service benefits paid employees based years service percentage total annual compensation percentage compensation allocated retirement account ranges 30 125 depending age years service “cash balance benefit” pension costs determined using projected unit credit actuarial cost method rhd’s funding policy contribute amount least equal minimum legal funding requirement contributions required made 2004 2003 underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities rhd uses measurement date december 31 majority plan assets pension expense allocated us rhd plan 12 million 07 million 2004 2003 respectively rhd also unfunded nonqualified defined benefit pension plan pension benefit equalization plan “pbep” covers senior executives certain key employees benefits based years service compensation including compensation permitted taken account previously mentioned defined benefit pension plan pension expense allocated us rhd plan 01 million 2004 expense recognized plan 2003 rhd offers defined contribution savings plan substantially employees contributes 050 dollar contributed participating employee maximum 6 participating employee’s salary including bonus commissions contributions plan allocated us rhd 07 million 09 million years ended december 31 2004 2003 respectively postretirement benefits rhd unfunded postretirement benefit plan provides certain healthcare life insurance benefits fulltime employees reach retirement age working company total pension expense allocated us rhd defined benefit pension plan pbep 2004 2003 10 million 7 million respectively 9 commitments lease office facilities equipment operating leases noncancelable lease terms expiring various dates 2012 rent lease expense 2004 2003 41 million 59 million respectively future noncancelable minimum rental payments applicable operating leases december 31 2004 entered longterm purchase agreement paper used publishing directories purchase commitment paper one supplier estimated based minimum required quantities aggregate approximately 349 million 2006 minimum purchases required agreement 168 million 2005 181 million 2006 10 legal proceedings involved various legal proceedings arising ordinary course business periodically assess liabilities contingencies connection matters based upon latest information available us matters probable incurred loss range loss reasonably estimated record reserves financial statements instances unable make reasonable estimate liability uncertainties related probable outcome amount range loss additional information becomes available adjust assessments estimates liabilities accordingly based review latest information available believe ultimate liability connection pending legal proceedings material adverse effect results operations cash flows financial position 11 pledge capital stock connection rhd’s acquisition directory publishing business sbc communications inc “sbc” illinois northwest indiana september 1 2004 “sbc directory acquisition” rhd inc amended restated credit facility “credit facility” time consisted 700 million term loan a2 1650 million term loan b2 175 million revolver aggregate facility 2525 million december 6 2004 rhd inc amended credit facility creating new term loan a3 new term loan replacing term loan b2 term loans a2 a3 require quarterly principal payments december 31 2004 outstanding balances term loans a2 a3 526 million 194 million 1441 million respectively 41 million outstanding revolver term loan a2 term loan a3 mature december 2009 term loan matures june 2011 rhd inc also issued 325 million 8875 senior notes “senior notes” 600 million 10875 senior subordinated notes “subordinated notes” collectively senior notes “notes” senior notes became secured connection amendment restatement credit facility sbc directory acquisition capital stock thus indirectly assets stockholders’ equity pledged collateral secure rhd inc’s’ obligations credit facility senior notes also guarantee senior notes total principal amount senior notes subject pledge capital stock december 31 2004 325 million rhd’s credit facility indentures governing notes contain usual customary negative covenants among things place limitations ability incur additional indebtedness including capital leases liens ii pay dividends except may freely pay dividends parent repurchase capital stock iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock vi engage transactions affiliates credit facility also contains financial covenants relating maximum consolidated leverage minimum interest coverage maximum senior secured leverage defined therein 12 related party transactions allocations rhd affiliates provide us operating general administrative services include prepress publishing information technology accounting finance customer credit collection certain cost directly assigned indirect costs rhd affiliates appropriate allocated us based several factors including relative equity number employees composite based proportionate share certain direct allocated charges direct indirect cost charges allocated us years ended december 31 2004 2003 445 million 671 million respectively decrease charges resulted realignment consolidation rhd achieve operating efficiencies financing activities managed rhd centralized basis centralized cash management program rhd company advanced funds intercompany net advances classified current asset liability noninterest bearing report independent auditors board directors shareholders sprint corporation rh donnelley corporation audited accompanying combined consolidated balance sheet december 31 2002 directory publishing operations sprint corporation sprint publishing advertising described note 1 related combined consolidated statements income shareholders’ equity cash flows year ended financial statements responsibility sprint publishing advertising’s management responsibility express opinion financial statements based audit conducted audit accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion financial statements referred present fairly material respects combined consolidated financial position sprint publishing advertising december 31 2002 combined consolidated results operations cash flows year ended conformity accounting principles generally accepted united states ernst young llp kansas city missouri january 31 2003 sprint publishing advertising combined consolidated balance sheet december 31 2002 thousands assets see accompanying notes combined consolidated financial statements sprint publishing advertising combined consolidated statement income year ended december 31 2002 thousands see accompanying notes combined consolidated financial statements sprint publishing advertising combined consolidated statement cash flows year ended december 31 2002 thousands see accompanying notes combined consolidated financial statements sprint publishing advertising combined consolidated statement shareholders’ equity year ended december 31 2002 thousands see accompanying notes combined consolidated financial statements sprint publishing advertising notes combined consolidated financial statements 1 summary significant accounting policies basis combination presentation combined consolidated financial statements include accounts directoriesamerica inc wholly owned subsidiary sprint publishing advertising inc spa inc centel directory company cdc collectively referred sprint publishing advertising significant intercompany amounts eliminated directoriesamerica inc cdc wholly owned sprint corporation sprint january 3 2003 sprint completed sale sprint publishing advertising see note 10 combined consolidated financial statements prepared using accounting principles generally accepted united states principles require management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities reported amounts revenues expenses actual results could differ estimates sprint corporation sprint global communications company leader integrating longdistance local service wireless communications sprint’s business divided three main lines business global markets division local division pcs wireless telephony products services business fon common stock intended reflect financial results economic value global markets division local telecommunications division businesses consisting primarily wholesale distribution telecommunications products sprint publishing advertising effective third quarter 2002 reported discontinued operations fon group pcs common stock intended reflect financial results economic value pcs wireless telephony products services business operations sprint publishing advertising publishes markets approximately 260 revenue producing white yellow pages directories primarily territories served sprint’s local telecommunications division material agreements sprint publishing advertising entered sales agency agreements rh donnelley inc agreements rh donnelley inc provides sales management services sales forces certain directories receives commission based certain advertising revenues sold directories agreement cdc expiration date january 1 2009 agreement automatic twoyear extension january 1 2011 agreement spa inc expires december 31 2004 spa inc entered directory manufacturing agreement rr donnelley sons company printing substantially directories agreement expiration date print binding services december 31 2007 cdc spa inc entered production agreements rh donnelley inc production prepress graphic services cendon llc central florida directories respectively agreements expiration date december 31 2003 conjunction cendon partnership restructuring cdc agreed priority distributions accrue rh donnelley inc 2004 priority distributions approximate partnership distributions anticipated initial cendon partnership agreement sprint publishing advertising cendon llc entered directory agreement sprint’s local telecommunications companies agreement provides sprint publishing advertising access customer listings local territories right use listings directories local telephone companies receive fee based number listings directory initial term agreement expires december 31 2004 automatically renews successive oneyear terms unless either party provides notice termination pursuant sales agency agreement cdc obligated replace directory agreements cdc’s right publish directories extended term sales agency agreement event cdc fails replace directory agreement january 1 2004 time prior april 30 2004 rh donnelley inc may require cdc purchase cash rh donnelley inc’s rights sales agency agreement fair market values determined accordance sales agency agreement material agreements rh donnelley inc longer apply effective january 3 2003 result change control see note 10 income taxes sprint publishing advertising’s operations included consolidated income tax return sprint corporation income tax recognized entities comprise sprint publishing advertising basis entity filing separate returns sprint publishing advertising records deferred income taxes based temporary differences carrying amounts assets liabilities financial reporting purposes tax bases revenue recognition deferred directory costs revenues sale advertising placed directory deferred amortized life directory generally one year expenditures directly related sales production printing distribution directories deferred amortized period related revenues advertising expense sprint publishing advertising recognizes advertising expense incurred expenses include production media promotional sponsorship costs total advertising expense approximately 4514000 2002 property plant equipment property plant equipment recorded cost property plant equipment depreciated straightline basis estimated economic useful lives repair maintenance costs expensed incurred goodwill represents excess purchase price fair value net assets acquired business combinations accounted purchases prior adoption sfas 142 goodwill amortized five years using straightline method goodwill net accumulated amortization included combined consolidated balance sheet 1275000 december 31 2001 sprint publishing advertising adopted sfas 142 “goodwill intangible assets” january 1 2002 standard prescribes accounting treatment identifiable intangibles goodwill initial recognition upon adoption standard amortization goodwill indefinite life intangibles ceased accumulated amortization december 31 2001 reduced carrying value assets periodic impairment testing assets required concurrent adoption sprint publishing advertising evaluated impairment goodwill indefinite life intangibles accordance standard’s guidance determined assets impaired stockbased compensation sprint publishing advertising accounts stockbased employee compensation plans recognition measurement principles apb opinion 25 “accounting stock issued employees” related interpretations based additional disclosure requirements sfas 148 “accounting stockbased compensation transition disclosure” following table illustrates effect net income year ended december 31 2002 company applied fair value recognition provisions sfas 123 “accounting stockbased compensation” see note 9 additional information regarding sfas 148 2 related party transactions allocations sprint directly assigns possible certain general administrative costs sprint publishing advertising based actual use services direct assignment costs possible practical sprint uses indirect methods including time studies estimate allocation costs operating unit cost allocation methods time studies include factors general marketing headcount derived operating unit’s relative share predefined category referenced eg headcount costs shared services allocated sprint publishing advertising totaled approximately 16161000 2002 allocation shared services may change discretion sprint’s board financing activities managed sprint centralized basis debt incurred sprint behalf sprint publishing advertising therefore reflected financial statements sprint publishing advertising sprint’s centralized cash management program sprint publishing advertising may advance funds net advances classified current asset bear interest rate substantially equal rate sprint whole obtains shortterm basis allocation financing activities may change discretion sprint’s board require shareholder approval sprint files consolidated federal income tax return certain state income tax returns include sprint publishing advertising results tax payments due divisions within fon group satisfied date sprint’s related tax payment due refund received applicable tax authority sprint publishing advertising’s related party transactions sprint affiliates follows thousands 3 restructuring charge fourth quarter 2001 sprint announced plans take steps improve competitive position reduce operating costs business units comprise fon group efforts included consolidation streamlining marketing network operations well streamlining corporate support functions decision resulted allocation 2001 onetime charge sprint publishing advertising 1588000 predominately associated severance costs work force reductions 2002 sprint performed analysis finalize restructuring estimates recorded 2001 fourth quarter analysis resulted additional charge 180000 december 31 2002 substantially amounts paid 4 employee benefit plans defined benefit pension plan sprint publishing advertising employees covered sprint’s noncontributory defined benefit pension plan pension benefits based years service participants’ compensation sprint’s policy make plan contributions equal actuarially determined amount consistent federal tax regulations funding objective accumulate funds relatively stable rate participants’ working lives benefits fully funded retirement net pension costs credits determined sprint publishing advertising based direct calculation service costs interest projected benefit obligations appropriate allocation unrecognized prior service costs amortization unrecognized transition assets actuarial gains losses expected return plan assets amounts included plan combined consolidated balance sheet include accrued pension expense approximately 11639000 december 31 2002 sprint publishing advertising recorded net pension expense approximately 1512000 2002 defined contribution plans sprint sponsors defined contribution employee savings plans covering sprint publishing advertising employees participants may contribute portions pay plans union employees sprint matches contributions based negotiated amounts sprint publishing advertising union employees sprint also matches contributions nonunion employees fon stock pcs stock matching equal 50 participants’ contributions 6 pay addition sprint may discretion board directors provide additional matching contributions based performance fon stock pcs stock compared telecommunications companies’ stock yearend 2002 plans held 42 million fon shares market value 608 million dividends reinvested plan 20 million yearend 2002 plans held 52 million pcs shares market value 227 million amounts directly allocated sprint publishing advertising matching contributions expenses approximately 905000 2002 postretirement benefits sprint provides postretirement benefits mainly medical life insurance sprint publishing advertising employees retiring certain dates eligible benefits cost reduced cost employees retiring certain dates eligible benefits sharedcost basis sprint funds accrued costs benefits paid amount accrued postretirement benefit costs included combined consolidated balance sheet december 31 2002 6629000 net postretirement benefits costs determined sprint publishing advertising based direct calculation service costs interest accumulated postretirement benefit obligations appropriate allocation unrecognized prior service costs actuarial gains sprint publishing advertising recorded net periodic benefit credit 491000 2002 5 income taxes income tax expense consisted following year ended december 31 2002 differences caused sprint publishing advertising’s effective income tax rates vary 35 federal statutory rate income taxes follows sprint publishing advertising recognizes deferred income taxes temporary differences carrying amounts assets liabilities financial statement purposes tax bases sources differences give rise deferred income tax assets liabilities yearend 2002 along income tax effect follows management believes likely deferred income tax assets realized based current income tax laws expectations future taxable income stemming reversal existing deferred tax liabilities ordinary operations uncertainties surrounding income tax law changes shifts operations state taxing jurisdictions future operating income levels may however affect ultimate realization deferred income tax assets 6 longterm obligation 1990 sprint publishing advertising entered directory agreements various sprint local telephone companies includes termination fees initial installments paid 1990 remaining installment payments due quarterly 2005 total approximately 19730000 yearend 2002 longterm obligation recorded sprint publishing advertising’s combined consolidated balance sheet approximately 16110000 represents present value termination fees per various directory agreements interest accrued present value liability 10 per annum interest expense obligations totaled 1238000 2002 estimated fair value longterm obligation 18078000 december 31 2002 estimated fair value longterm obligation based quoted market prices publicly traded issues see note 10 treatment subsequent change control 7 commitments contingencies litigation claims assessments time various lawsuits arise ordinary course business sprint publishing advertising management cannot predict final outcome actions believes material sprint publishing advertising’s combined consolidated financial statements operating leases sprint publishing advertising’s minimum rental commitments yearend 2002 noncancelable operating leases consisting mainly leases data processing equipment follows sprint publishing advertising’s gross rental expense totaled 1837000 2002 rental commitments subleases contingent rentals executory costs significant 8 additional financial information printing costs paid one vendor represented approximately 17 sprint publishing advertising’s net operating expenses 2002 sales agency directory production services paid one vendor represent approximately 21 sprint publishing advertising’s net operating expenses 2002 9 recently issued accounting pronouncements april 2002 fasb issued statement 145 “recission fasb statements 4 44 64 amendment fasb statement 13 technical corrections” provisions related statement 4 effective fiscal years beginning may 15 2002 provisions related statement 13 effective transactions occurring may 15 2002 provisions statement effective financial statements issued may 15 2002 recission statement 4 “reporting gains losses extinguishment debt” statement 64 “extinguishment debt satisfy sinkingfund requirements” requires gains losses extinguishment debt reported income expense gains losses would reported extraordinary items unusual nature occur infrequently amendment statement 13 “accounting leases” requires modifications capital leases give rise operating lease classification treated saleleaseback sprint publishing advertising adopt statement provisions become effective sprint publishing advertising determined material impact adopting standard july 2001 fasb issued sfas 143 “accounting asset retirement obligations” objective statement provide accounting guidance legal obligations associated retirement longlived assets requiring fair value liability asset retirement obligation recognized period incurred liability initially recognized asset retirement costs also capitalized increasing carrying amount related longlived asset liability accreted present value period capitalized costs depreciated useful life associated asset sprint publishing advertising assessed legal obligations accordingly determined material impact adopting standard statement effective fiscal years beginning june 15 2002 sprint publishing advertising intends adopt standard january 1 2003 june 2002 fasb issued statement 146 “accounting costs associated exit disposal activities” effective financial statements exit disposal activities initiated december 31 2002 statement nullifies eitf issue 943 “liability recognition certain employee termination benefits costs exit activity” allowed recognition liability exit disposal activities upon management’s intent exit dispose activity statement requires liability costs associated exit disposal activity recognized liability incurred sprint publishing advertising adopt statement exit disposal activities initiated december 31 2002 december 2002 fasb issued statement 148 “accounting stockbased compensation transition disclosure” statement amends statement 123 “accounting stockbased compensation” provisions statement effective interim annual financial statements fiscal years ending december 15 2002 statement provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation also statement amends disclosure requirements statement 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results sprint publishing advertising adopted fair value recognition method adopt disclosure requirements statement 10 subsequent events january 3 2003 sprint completed sale directory publishing business rh donnelley inc 223 billion cash part stock sale agreement longterm obligation settled 14 million payment rh donnelley inc payment spa remainder future value obligation part settling intercompany accounts concurrent sale transaction entities comprising spa underwent name change sprint publishing advertising inc changed name rh donnelley publishing advertising inc centel directory company changed name rh donnelley directory company report independent registered public accounting firm board directors shareholders rh donnelley corporation rh donnelley apil inc opinion accompanying balance sheets related consolidated statements operations cash flows changes shareholder’s equity present fairly material respects financial position rh donnelley apil inc “company” december 31 2004 2003 results operations cash flows three years ended december 31 2004 conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp raleigh north carolina march 16 2005 rh donnelley apil inc balance sheets accompanying notes integral part financial statements rh donnelley apil inc statements operations accompanying notes integral part financial statements rh donnelley apil inc statements cash flows accompanying notes integral part financial statements rh donnelley apil inc statements changes shareholder’s equity accompanying notes integral part financial statements rh donnelley apil inc notes consolidated financial statements tabular amounts thousands 1 business basis presentation consolidated financial statements years ended december 31 2003 2002 include accounts rh donnelley apil inc “company” “apil” “we” “us” “our” direct wholly owned subsidiary rh donnelley acquisitions inc “rhd acquisitions” december 2003 company transferred assets liabilities rhd acquisitions rh donnelley inc “rhd inc” commencing december 31 2003 accompanying financial statements represent solely company wholly owned subsidiary rhd inc wholly owned subsidiary rh donnelley corporation “rhd” intercompany transactions balances eliminated september 1 2004 rhd completed acquisition directory publishing business “sbc directory business” sbc communications inc “sbc” illinois northwest indiana “territory” including sbc’s interests dontech ii partnership “dontech” 5050 general partnership rhd inc affiliate sbc collectively “sbc directory acquisition” dontech 5050 general partnership rhd inc one wholly owned subsidiaries exclusive sales agent sbcbranded yellow pages white pages street address directories published territory apil incorporated april 7 2000 principally engaged business managing revenue participation agreement “rpi agreement” rhd inc rh donnelley publishing advertising illinois partnership “pail partnership” formerly known ameritech publishing illinois partners partnership “apil partners” apil partners indirect wholly owned subsidiary sbc prior sbc directory acquisition september 1 2004 2 summary significant accounting policies principles consolidation financial statements year ended december 31 2004 include accounts apil single company basis years 2003 2002 consolidated financial statements include accounts apil rhd acquisitions wholly owned subsidiary intercompany transactions balances eliminated revenue recognition company earns revenue terms rpi agreement based dontech’s advertising sales recognized sales contract executed customer prior sbc directory acquisition earned rpi revenue apil partners affiliate sbc subsequently rpi revenue earned pail partnership affiliate rhd totaled 235 million 2004 cash equivalents cash equivalents include liquid investments original maturity three months less carrying amounts approximate fair value accounts receivable december 31 2003 date sbc directory acquisition accounts receivable consisted revenue participation receivable balances owed us sbc upon completion sbc directory acquisition amounts owed us rpi agreement also included accounts receivable represent amounts due pail partnership affiliate income taxes included rhd’s combined federal income tax return account income taxes liability method accordance sfas 109 accounting income taxes deferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax assets realized see note 4 information regarding provision income taxes use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates 3 notes receivable affiliates related interest income 2004 issued two notes connection sbc directory acquisition one note issued newly formed rh donnelley publishing advertising illinois holdings llc “pail holdings” newly formed dontech holdings llc “dth” entities wholly owned direct subsidiaries rhd inc notes recorded face value carrying amounts approximate fair values principal interest payments due quarterly mature 2011 interest accrues unpaid principal annual rate equal composite interest rate applicable borrowings rhd’s credit facility defined note 5 approximately 42 four months ended december 1 2004 interest income pail holdings dth 2004 138 million 19 million respectively carrying amounts notes summarized follows december 31 2004 2003 2002 rhd acquisitions received interest income 71 million years 999 million promissory note bearing interest annual rate 71 due rhd inc additionally 2003 rhd acquisitions issued 2227 million note receivable bearing annual interest rate 93 rh donnelley publishing advertising affiliate received related interest income note 2015 million 2003 note issued connection acquisition directory business sprint corporation 4 income taxes provision income taxes consisted following table summarizes significant differences us federal statutory tax rate effective tax rate 2004 tax provision based effective tax rate 374 rhd inc considered taxpayer current income tax liabilities reflected amounts due affiliates balance sheet 5 pledge capital stock connection sbc directory acquisition rhd inc amended restated credit facility “credit facility” time consisted 700 million term loan a2 1650 million term loan b2 175 million revolver aggregate facility 2525 million december 6 2004 rhd inc amended credit facility creating new term loan a3 new term loan replacing term loan b2 term loans a2 a3 require quarterly principal payments december 31 2004 outstanding balances term loans a2 a3 526 million 194 million 1441 million respectively 41 million outstanding revolver term loan a2 term loan a3 mature december 2009 term loan matures june 2011 rhd inc also issued 325 million 8875 senior notes “senior notes” 600 million 10875 senior subordinated notes “subordinated notes” collectively senior notes “notes” senior notes became secured connection amendment restatement credit facility sbc directory acquisition capital stock thus indirectly assets stockholder’s equity pledged collateral secure rhd inc’s obligations credit facility senior notes also guarantee senior notes senior subordinated notes total principal amount senior notes subject pledge capital stock december 31 2004 325 million rhd’s credit facility indentures governing notes contain usual customary negative covenants among things place limitations ability incur additional indebtedness including capital leases liens ii pay dividends except may freely pay dividends parent repurchase capital stock iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock vi engage transactions affiliates credit facility also contains financial covenants relating maximum consolidated leverage minimum interest coverage maximum senior secured leverage defined therein 6 related party transactions entered various agreements business transactions rhd inc subsidiaries years threeyear period ended december 31 2004 entered annual lease agreement rhd inc rent office space las vegas nevada rent expense arrangement totaled 10000 year ended december 31 2003 2002 respectively agreement terminated 2003 accordance continuing dividend resolution passed board directors month distribute cash received rpi agreement rhd inc form dividend dividends declared paid us rhd inc years ended december 31 2004 2003 2002 624 million 3980 million 920 million respectively december 2003 company distributed 100 ownership capital stock rhd acquisitions parent company rhd inc distribution amounted 2041 million reflected statement shareholder’s equity gain loss recognized transaction rhd inc made capital contribution company amount 1139 million september 2004 report independent registered public accounting firm board directors shareholders rh donnelley corporation board directors partners dontech ii partnership opinion accompanying balance sheets related statements operations cash flows changes partners’ capital present fairly material respects financial position dontech ii partnership “dontech” december 31 2003 results operations cash flows eight months ended august 31 2004 years ended december 31 2003 2002 conformity accounting principles generally accepted united states america financial statements responsibility dontech’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp raleigh north carolina march 16 2005 report independent registered public accounting firm board directors shareholders rh donnelley corporation board directors partners dontech ii partnership opinion accompanying balance sheets related statements operations cash flows changes partners’ capital present fairly material respects financial position dontech ii partnership “dontech” december 31 2004 results operations cash flows four months ended december 31 2004 conformity accounting principles generally accepted united states america financial statements responsibility dontech’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp raleigh north carolina march 16 2005 dontech balance sheets accompanying notes integral part financial statements dontech statements operations accompanying notes integral part financial statements dontech statements cash flows accompanying notes integral part financial statements dontech statements changes partners’ capital accompanying notes integral part financial statements dontech notes financial statements tabular amounts thousands 1 form organization nature business dontech ii partnership “dontech” “we” “us” “our” 5050 general partnership r h donnelley inc “rhd inc” dontech holdings llc “dth” dth limited liability company wholly owned rhd inc wholly owned subsidiary rh donnelley corporation “rhd” september 1 2004 rhd completed acquisition 141 billion cash directory publishing business “sbc directory business” sbc communications inc “sbc” illinois northwest indiana including sbc’s interests dontech time 5050 general partnership rhd inc ameritech publishing illinois inc “apil” indirect wholly owned subsidiary sbc collectively “sbc directory acquisition” september 1 2004 dth made initial capital contribution 170 million dontech sbc directory acquisition accounted purchase business combination rhd purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values september 1 2004 connection purchase price allocation 105 million identifiable intangible assets 32 million goodwill related dontech see “identifiable intangible assets goodwill” additional information financial statements presented herein prior september 1 2004 dontech 5050 general partnership rhd inc apil “predecessor” financial statements december 31 2004 fourmonth period ended dontech subsequent sbc directory acquisition 5050 general partnership rhd inc dth “successor” see note 3 “acquisition” description acquisition dontech exclusive sales agent sbcbranded yellow pages white pages street address directories published illinois northwest indiana partnership receives 27 commission sales net provisions dontech’s cost structure includes principally sales operations office services finance facilities related overhead dontech profits shared equally rhd inc apil periods prior sbc directory acquisition periods august 31 2004 dontech profits losses shared equally rhd inc dth 2 summary significant accounting policies cash equivalents cash equivalents include liquid investments original maturity three months less carrying amounts approximate fair value revenue recognition revenue comprised sales commissions reflected net provisions recognized based upon execution contracts period contract executed sale advertising following sbc directory acquisition 99 dontech’s revenue generated dontech’s sales agency agreement rh donnelley publishing advertising illinois partnership affiliate rhd fixed assets computer software fixed assets computer software recorded cost depreciated straightline basis estimated useful lives assets upon asset retirement disposition cost related accumulated depreciation removed accounts resulting gain loss included statement operations amounts incurred repairs maintenance charged operations identifiable intangible assets goodwill result sbc directory acquisition certain identifiable intangible assets specific dontech’s operations recorded estimated fair value amortization expense four months ended december 31 2004 09 million amortization expense intangible assets five succeeding years estimated approximately 27 million acquired identifiable intangible assets respective book values december 31 2004 shown table directory services agreements sbc rhd including dontech subsidiaries rhd include directory services license agreement noncompetition agreement smartpages reseller agreement directory publishing listing agreement collectively “sbc directory services agreements” certain affiliates sbc directory services license agreement designates us official exclusive provider yellow pages directory services sbc successors illinois northwest indiana “territory” grants us exclusive license obligation specified agreement produce publish distribute white pages directories territory sbc’s agent grants us exclusive license obligation specified agreement use sbc brand logo print directories territory noncompetition agreement prohibits sbc affiliates successors certain limited exceptions 1 producing publishing distributing yellow white pages print directories territory 2 soliciting selling local national yellow white pages advertising inclusion directories 3 soliciting selling local internet yellow pages advertising certain internet yellow pages directories territory licensing sbc marks third party purpose smartpages reseller agreement gives us exclusive right sell local internet yellow pages advertising nonexclusive right sell internet yellow pages advertising respect geographies outside territory advertiser excluding national advertisers located inside territory onto sbc’s smartpagescom platform successor product specified agreement directory publishing listing license agreement gives us right purchase use basic sbc subscriber listing information updates purpose publishing directories sbc directory services agreements smartpages reseller agreement initial terms 50 years subject automatic renewal early termination specified circumstances smartpages reseller agreement term 5 years fair value agreements determined based present value estimated future cash flows amortized straightline method indicated terms fair value smartpages reseller agreement allocated dontech fair value customer relationships determined based present value estimated future cash flows amortized income forecast method weighted average useful life relationships approximately 20 years excess purchase price sbc directory acquisition net tangible identifiable intangible assets acquired 2129 million recorded goodwill amount 320 million related dontech based fair value dontech’s net assets acquired acquisition anticipate significant changes fair value net assets acquired additional information could come attention may require us revise purchase price allocation connection sbc directory acquisition accordance sfas 142 goodwill intangible assets goodwill amortized subject periodic impairment testing impairment losses recorded 2004 pension postretirement benefits pension postretirement benefits represent estimated amounts paid employees future accounting benefits reflects recognition benefit costs employee’s approximate service period based terms plan investment funding decisions made determination benefit obligation net periodic pension postretirement benefit costs requires management make assumptions regarding discount rate return retirement plan assets increase future compensation healthcare cost trends changes assumptions significant impact projected benefit obligation funding requirement net periodic benefit cost assumed discount rate pension benefits could settled use rates aa corporate bonds basis determining discount rate assumption expected longterm rate return plan assets based mix assets held plan expected longterm rates return within asset class anticipated trend future healthcare costs based historical experience external factors see note 7 information regarding benefit plans effective january 1 2003 reduced estimated rate return plan assets 975 825 result low investment returns preceding years well outlook long term particularly equity securities determined prior assumed rate return 975 longer reflected best estimate future longterm returns based thencurrent investment environment pension plan’s asset allocation determined longterm rate return 825 better reflected expectations future longterm returns income taxes provision income taxes made proportional share partnership income responsibility individual partners concentration credit risk financial instruments potentially subject dontech concentration credit risk consist principally receivables affiliates sales commissions prior sbc directory acquisition amounts due sbc subsequently sales commissions due rhd affiliate rh donnelley publishing advertising illinois partnership dontech require affiliates provide collateral use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expense reporting period actual results could differ estimates reclassifications certain prior year amounts reclassified conform current year’s presentation reclassifications impact previously reported results operations partners’ capital new accounting pronouncements december 16 2004 fasb issued fasb statement 123 revised 2004 sharebased payment” “fas 123r” fas 123r requires companies calculate fair value stock options granted employees amortize amount vesting period expense income statement accounting provisions fas 123r effective interim periods beginning june 15 2005 companies choice transition methods modified prospective modified retrospective early adoption management presently evaluating transition method effective date transition fas 123r 2005 impact adoption fas 123r may dontech may 2004 financial accounting standards board issued financial staff position “fsp” fas 1062 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 provides guidance accounting effects medicare prescription drug improvement modernization act 2003 employers sponsor postretirement healthcare plans provide drug benefits act introduces prescription drug care benefits medicare also allows certain sponsors postretirement benefit plans drug benefit receive nontaxable federal subsidy certain criteria met fsp requires interim annual period financial statements beginning june 15 2004 include effect subsidy measurement net periodic postretirement benefit costs dontech adopted provisions fsp fourth quarter 2004 resulted decrease accumulated postretirement benefit obligation approximately 18 million 3 acquisition september 1 2004 rhd completed sbc directory acquisition 141 billion cash working capital adjustments settlement 30 million liquidation preference owed rhd related dontech connection purchase price allocation 105 million identifiable intangible assets 32 million goodwill related dontech primary purpose acquisition complete rhd’s transformation sales agent prepress vendor yellow pages advertising leading publisher yellow pages directories control business acquisition accounted purchase business combination accordance sfas 141 business combinations purchase price allocated related tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values acquisition date certain longterm intangible assets identified recorded estimated fair value identifiable intangible assets acquired include directory services agreements company sbc customer relationships acquired trademarks trade names accordance sfas 142 goodwill intangible assets fair values identifiable intangible assets amortized estimated useful lives manner best reflects economic benefits derived assets goodwill amortized subject impairment testing annual basis see note 2 summary significant accounting policies identifiable intangible assets goodwill description intangible assets goodwill following table summarizes estimated fair values assets acquired liabilities assumed sbc directory acquisition september 1 2004 specific dontech 4 fixed assets computer software fixed assets computer software consisted following depreciation amortization expense four months ended december 31 2004 eight months ended august 31 2004 years ended december 31 2003 2002 03 million 12 million 16 million 17 million respectively eight months ended august 31 2004 year ended december 31 2003 dontech disposed fixed assets cost 04 million 121 million respectively assets disposed net book value 002 million 02 million respectively significant sales proceeds resulting losses disposal reflected statement operations income net 5 accrued liabilities accrued liabilities consisted following 6 related party transactions rhd subsidiaries provide us general administrative services record expenses possible certain costs directly assigned us indirect costs rhd subsidiaries appropriate allocated us based several factors including relative equity number employees composite based proportionate share certain direct allocated charges direct indirect costs charged us rhd subsidiaries four months ended december 31 2004 totaled 28 million financing activities managed rhd consolidated basis cash management program rhd dontech advanced funds intercompany net advances classified current asset noninterest bearing prior sbc directory acquisition dontech purchased insurance services rhd general ledger purchasing services sbc payments made rhd insurance services eight months ended august 31 2004 years ended december 31 2003 2002 06 million 08 million 05 million respectively payments made sbc general ledger purchasing services prior sbc directory acquisition significant periods presented statements operations prior sbc directory acquisition dontech also provided facility space certain employees sbc agreement entered 1998 see note 6 7 commitments contingencies dontech leases certain office facilities noncancelable lease arrangements rent expense operating leases four months ended december 31 2004 eight months ended august 31 2004 years ended december 31 2003 2002 07 million 15 million 22 million 23 million respectively 1998 dontech entered sublease agreement sbc whereby dontech received sublease rental income sbc eight months ended august 31 2004 years ended december 31 2003 2002 sublease rental income totaled 04 million 006 million 006 million respectively sublease agreement terminated connection sbc directory acquisition future minimum lease payments required noncancelable operating leases initial remaining lease terms excess one year december 31 2004 follows 2002 dontech renegotiated lease headquarters facility originally scheduled terminate january 31 2010 renegotiated lease extended terms agreement two additional years january 31 2012 exchange certain cash concessions totaling 16 million cash concessions received connection amended lease recorded deferred rent credits balance sheet recognized straightline basis reduction rent expense lease term december 31 2004 longterm deferred credit related concessions 16 million connection renegotiation lease dontech incurred broker’s fees 07 million reflected balance sheet noncurrent asset fees amortized rent expense lease term unamortized balance 06 million december 31 2004 additionally dontech received rent concessions one new 2004 sales office leases totaling 04 million concessions also amortized rent expense lease term unamortized balance 04 million december 31 2004 september 1998 dontech entered maintenance service agreement ameritech advertising services predecessor affiliate sbc provide certain maintenance services pertaining telecommunications support including parts dontech agreement set expire september 2003 september 2003 dontech entered new agreement sbc global services provision maintenance services monthly payments approximately 001 million new agreement fiveyear term expiring august 2008 agreements dontech recorded expenses totaling 004 million 008 million 012 million 012 million four months ended december 31 2004 eight months ended august 31 2004 years ended december 31 2003 2002 respectively according terms agreement dontech’s remaining obligation december 31 2004 05 million 8 employee retirement profit participation plans dontech sponsors defined benefit pension plan covering substantially employees “principal plan” benefits paid employees based years service percentage total annual compensation percentage compensation allocated retirement account ranges 30 125 depending age years service pension costs determined using projected unit credit actuarial cost method dontech’s funding policy contribute amount least equal minimum legal funding requirement contributions required made 2004 2003 2002 principal plan’s assets invested equity debt securities dontech uses measurement date december 31 majority plan assets dontech also unfunded nonqualified defined benefit pension plan pension benefit equalization plan “pbep” covers certain former key employees dontech benefits based years service compensation including compensation permitted taken account principal plan following provides reconciliation benefit obligations plan assets funded status principal plan pbep “plans” accumulated benefit obligation plans 344 million 337 million 306 million december 31 2004 august 31 2004 december 31 2003 respectively net periodic benefit expense plans years ended december 31 2004 2003 2002 follows following assumptions used determining benefit obligations plans following assumptions used determining net periodic benefit expense income plans benefits expected paid next five years aggregate five years thereafter december 31 2004 follows principal plan participates master trust along rhd inc assets administered northern trust company total return investment approach used maximize longterm return plan assets prudent level risk principal plan’s target asset allocation 65 equity securities 35 debt securities target allocation controlled periodic rebalancing back target principal plan assets invested using combination active passive indexed investment strategies principal plan’s equity securities diversified across us nonus stocks principal plan’s debt securities diversified principally among securities issued guaranteed us government agencies mortgagebacked securities including collateralized mortgage obligations investmentgrade corporate debt obligations dollardenominated obligations issued us nonus banks corporations investment risk controlled diversification among asset classes managers securities risk controlled investment manager level requiring active managers follow formal written investment guidelines investment results measured monitored ongoing basis quarterly investment reviews conducted principal plan’s us investment manager prohibited investing principal plan assets equity debt securities issued guaranteed rhd however principal plan may hold rhd stock part total us equity market index fund principal plan invests weightedaverage asset allocation principal plan’s assets december 31 2004 august 31 2004 december 31 2003 asset category follows dontech expect make significant contributions principal plan pbep 2005 2004 dontech used 2005 dontech use rate 825 expected longterm rate return assumption plan assets plans assumption based plans’ target asset allocation 65 equity securities 35 debt securities reflects longterm capital market return forecasts asset classes employed assumed excess returns active management within asset class portion plan assets actively managed periodic rebalancing back target allocations current market factors inflation interest rates evaluated longterm capital market assumptions determined although dontech reviews expected longterm rate return assumption annually dontech’s plan performance one particular year significantly influence evaluation dontech’s assumption generally revised unless fundamental change one factors upon based target asset allocation longterm capital market return forecasts additionally dontech offers defined contribution savings plan “profit plan” substantially employees contributes fifty cents dollar contributed participating employee maximum 6 participant’s compensation including salary commission shortterm bonus dontech also makes contributions profit plan contingent upon attainment financial goals set advance defined profit plan agreement contributions made based upon attainment financial goals periods presented matching contributions made plan 03 million 06 million 09 million 09 million four months ended december 31 2004 eight months ended august 31 2004 years ended december 31 2003 2002 respectively 9 postretirement benefits pensions dontech provides postretirement health care life insurance benefits certain retired employees dependents following provides reconciliation benefit obligations plan assets funded status postretirement health life insurance plans net periodic postretirement benefit costs included following components discount rate used determining benefit obligation december 31 2004 august 31 2004 575 discount rate used december 31 2003 2002 600 65 respectively assumed health care cost trend rate used measuring projected benefit obligation december 31 2004 august 31 2004 11 preage 65 retirees 13 postage 65 retirees assumed health care cost trend rate used 95 10 measure projected benefit obligation december 31 2003 2002 respectively trend rates assumed decrease gradually 50 2013 remain level thereafter postretirement benefits pensions expected paid next five years aggregate five years thereafter december 31 2004 follows increasing decreasing health care cost trend rates one percentage point would material effect net periodic postretirement expense 4 months ended december 31 2004 8 months ended august 31 2004 onepercentage point increase would increased accumulated postretirement benefit obligation december 31 2004 14 million onepercentage point decrease would decreased accumulated postretirement benefit obligation december 31 2004 11 million fourth quarter 2004 adopted provisions financial accounting standards board financial staff position “fsp” fas 1062 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 fsp requires interim annual period financial statements beginning june 15 2004 include effect subsidy measurement net periodic postretirement benefit costs adoption fsp resulted decrease accumulated postretirement benefit obligation approximately 18 million following benefit payments reflect expected future benefits appropriate expected recognized 10 legal proceedings involved various legal proceedings arising ordinary course business periodically assess liabilities contingencies connection matters based upon latest information available us matters probable incurred loss range loss reasonably estimated record reserves financial statements instances unable make reasonable estimate liability uncertainties related probable outcome amount range loss additional information becomes available adjust assessment estimates liabilities accordingly based review latest information available believe ultimate liability connection pending legal proceedings material adverse effect results operations cash flows financial position 11 pledge equity interest connection sbc directory acquisition rhd inc amended restated credit facility “credit facility” time consisted 700 million term loan a2 1650 million term loan b2 175 million revolver aggregate facility 2525 million december 6 2004 rhd amended credit facility creating new term loan a3 new term loan replacing term loan b2 term loans a2 a3 require quarterly principal payments december 31 2004 outstanding balances term loans a2 a3 526 million 194 million 1441 million respectively 41 million outstanding revolver term loan a2 term loan a3 mature december 2009 term loan matures june 2011 rhd inc also issued 325 million 8875 senior notes “senior notes” 600 million 10875 senior subordinated notes “subordinated notes” collectively senior notes “notes” senior notes became secured connection amendment restatement credit facility sbc directory acquisition equity interests thus indirectly assets partners’ capital pledged collateral secure rhd inc’s obligations credit facility senior notes also guarantee senior notes senior subordinated notes total principal amount senior notes subject pledge equity interests december 31 2004 325 million rhd’s credit facility indentures governing notes contain usual customary negative covenants among things place limitations ability incur additional indebtedness including capital leases liens ii pay dividends except may freely pay dividends parent repurchase equity interests iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock vi engage transactions affiliates credit facility also contains financial covenants relating maximum consolidated leverage minimum interest coverage maximum senior secured leverage defined therein 12 subsequent event first quarter 2005 announced restructuring plan relating sbc directory business number employees terminated others relocated corporate headquarters cary north carolina additionally vacating portion leased facility chicago illinois first quarter 2005 record costs associated restructuring effort expensed recorded adjustment goodwill accordance eitf 953 recognition liabilities connection purchase business combination report independent registered public accounting firm board directors shareholders rh donnelley corporation board directors members rh donnelley publishing advertising illinois holdings llc opinion accompanying consolidated balance sheet related consolidated statements operations cash flows member’s capital present fairly material respects financial position rh donnelley publishing advertising illinois holdings llc subsidiary december 31 2004 results operations cash flows four months ended december 31 2004 conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit provides reasonable basis opinion pricewaterhousecoopers llp raleigh north carolina march 16 2005 rh donnelley publishing advertising illinois holdings llc consolidated balance sheet december 31 2004 thousands accompanying notes integral part consolidated financial statements rh donnelley publishing advertising illinois holdings llc consolidated statement operations four months ended december 31 2004 thousands accompanying notes integral part consolidated financial statements rh donnelley publishing advertising illinois holdings llc consolidated statement cash flows four months ended december 31 2004 thousands accompanying notes integral part consolidated financial statements rh donnelley publishing advertising illinois holdings llc consolidated statement member’s capital accompanying notes integral part consolidated financial statements rh donnelley publishing advertising illinois holdings llc notes consolidated financial statements tabular amounts thousands 1 business basis presentation rh donnelley publishing advertising illinois holdings llc “pail holdings” “the company” “we” “us” “our” founded august 17 2004 purpose holding 99 ownership interest rh donnelley publishing advertising illinois partnership “pail partnership” “partnership” pail partnership successor ameritech publishing illinois partners partnership “apil partners” general partnership ameritech publishing illinois inc “apil” ameritech publishing inc “api” indirect wholly owned subsidiaries sbc communications inc “sbc” apil partners provided yellow white pages telephone directory advertising primarily state illinois northwest indiana september 1 2004 rh donnelley corporation “rhd” ultimate parent company completed acquisition directory publishing business “sbc directory business” sbc communications inc “sbc” illinois northwest indiana including sbc’s interests dontech ii partnership “dontech” 5050 general partnership rhd sbc collectively “sbc directory acquisition” 141 billion cash part sbc directory acquisition 13 billion total purchase price paid sbc acquire sbc directory business exclusive local sales operations dontech “sbc directory operations” results sbc directory operations included consolidated results september 1 2004 see note 3 “acquisition” description acquisition following sbc directory acquisition rh donnelley inc “rhd inc” wholly owned subsidiary pail holdings new partners pail partnership sbc directory acquisition accounted purchase business combination rhd purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values september 1 2004 connection purchase price allocation 9925 million identifiable intangible assets 1810 million goodwill related pail partnership see “identifiable intangible assets goodwill” additional information following sbc directory acquisition pail partnership 99 general 1 limited partnership pail holdings rhd inc respectively pail partnership sbc directory acquisition manages operates publishing distribution sbcbranded yellow pages white pages directories illinois northwest indiana pail partnership retained dontech sales agent solicit sell local yellow pages white pages advertising addition pail partnership entered fiveyear agreement sbc provides us exclusive right sell local internet yellow pages advertising sbc’s internet yellow pages platform smartpagescom 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts pail holdings 99 owned subsidiary pail partnership intercompany transactions balances eliminated revenue recognition earn revenue principally sale advertising yellow pages directories revenue sale advertising deferred directory published recognized ratably life directory typically 12 months “deferral amortization method” revenue sale advertising recorded net allowance sales claims estimated based historical experience directorybydirectory basis increase decrease estimate information circumstances indicate estimate may longer adequately represent amount claims may incur directory future deferred directory costs directly related selling production directories initially deferred incurred recognized ratably life directory typically twelve months costs include sales commissions paper printing initial distribution costs also included deferred directory costs amounts incurred revenue participation agreement company affiliated entity see note 9 costs paid prior publication classified current assets cash equivalents cash equivalents include liquid investments original maturity three months less carrying value approximates fair value accounts receivable accounts receivable consist balances owed us advertising customers advertisers typically enter twelvemonth contract advertising local advertisers billed pro rata amount contract value monthly basis behalf national advertisers certified marketing representatives “cmrs” pay us total contract value advertising net commission within 60 days publication month billed receivables represent amount billed advertisers unbilled receivables represent contractually owed amounts published directories yet billed advertisers billed receivables recorded net allowance doubtful accounts sales claims estimated based historical experience directorybydirectory basis increase decrease estimate information circumstances indicate estimate may longer adequately represent amount bad debts sales claims may incur connection sbc directory acquisition entered transition services agreement sbc whereby sbc billed collected advertising customers illinois northwest indiana directories remitted collections net specified holdback us early 2005 monthly basis sbc provided advance us related billings recorded advance sbc decreased sbc collected advertisers thus satisfying liability early 2005 assumed responsibility billing collections settled remaining amounts sbc identifiable intangible assets goodwill result sbc directory acquisition certain identifiable intangible assets specific pail partnership’s operations recorded estimated fair value amortization expense four months ended december 31 2004 69 million amortization expense intangible assets five succeeding years estimated 206 million 249 million 267 million 264 million 260 million respectively acquired identifiable intangible assets respective book values december 31 2004 shown table directory services agreements sbc rhd including pail partnership subsidiaries rhd include directory services license agreement noncompetition agreement smartpages reseller agreement directory publishing listing agreement collectively “sbc directory services agreements” certain affiliates sbc directory services license agreement designates us official exclusive provider yellow pages directory services sbc successors state illinois northwest indiana “territory” grants us exclusive license obligation specified agreement produce publish distribute white pages directories territory sbc’s agent grants us exclusive license obligation specified agreement use sbc brand logo print directories territory noncompetition agreement prohibits sbc affiliates successors certain limited exceptions 1 producing publishing distributing yellow white pages print directories territory 2 soliciting selling local national yellow white pages advertising inclusion directories 3 soliciting selling local internet yellow pages advertising certain internet yellow pages directories territory licensing sbc marks third party purpose smartpages reseller agreement gives us exclusive right sell local internet yellow pages advertising nonexclusive right sell internet yellow pages advertising respect geographies outside territory advertiser excluding national advertisers located inside territory onto sbc’s smartpagescom platform successor product specified agreements directory publishing listing agreement gives us right purchase use basic sbc subscriber listing information updates purpose publishing directories sbc directory services agreements smartpages reseller agreement initial terms 50 years subject automatic renewal early termination specified circumstances smartpages reseller agreement term five years fair value agreements determined based present value estimated future cash flows amortized straightline method indicated terms fair value customer relationships determined based present value estimated future cash flows amortized income forecast method weighted average useful life relationships 20 years excess purchase price sbc directory acquisition net tangible identifiable intangible assets acquired 2129 million recorded goodwill rhd amount 1810 million related pail partnership based fair value partnership’s net assets acquired acquisition annual amortization goodwill tax purposes approximately 121 million anticipate significant changes fair value net assets acquired additional information could come attention may require us revise purchase price allocation connection sbc directory acquisition accordance sfas 142 goodwill intangible assets goodwill amortized subject periodic impairment testing impairment losses recorded 2004 2003 advertising expense recognize advertising expenses incurred expenses include public relations media online advertising well promotional sponsorship costs total advertising expense 24 million four months ended december 31 2004 concentration credit risk approximately 85 directory advertising revenue derived sale advertising local small mediumsized businesses advertisers typically enter 12month advertising sales contracts make monthly payments term contract advertisers prepay full amount portion contract value new advertisers desiring expand advertising programs subject credit review advertisers qualify may extend credit advertising purchase small mediumsized businesses tend fewer financial resources higher failure rates large businesses addition full collection delinquent accounts take extended period time involve significant costs believe extending credit local advertisers material adverse effect results operations financial condition assurances given require collateral advertisers although charge interest advertisers pay specified due dates remaining approximately 15 directory advertising revenue derived sale advertising national large regional chains rental car companies automobile repair shops pizza delivery businesses substantially revenue derived national accounts serviced cmrs contract cmrs independent third parties act agents national advertisers cmrs responsible billing national customers advertising receive payment value advertising placed directory net cmr’s commission directly cmr still exposed credit risk amount losses accounts historically less local accounts advertisers cases cmrs tend larger companies greater financial resources local advertisers income taxes account income taxes liability method accordance sfas 109 accounting income taxes deferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax assets realized see note 5 information regarding provision income taxes estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities revenue certain expenses disclosure contingent assets liabilities actual results could differ materially estimates assumptions estimates assumptions used determination sales allowances doubtful accounts amortization minority interest record minority interest partnership income loss reflects portion income loss applicable rhd inc minority partner pail partnership minority interest amount recorded balance sheet reflects rhd inc’s proportionate share pail partnership’s equity september 1 2004 rhd completed sbc directory acquisition 141 billion cash working capital adjustments settlement 30 million liquidation preference owed rhd related dontech result acquisition became publisher revenuegenerating sbcbranded yellow pages directories illinois northwest indiana results sbc directory operations included consolidated results september 1 2004 primary purpose acquisition complete rhd’s transformation sales agent prepress vendor yellow pages advertising leading publisher yellow pages directories control business acquisition accounted purchase business combination accordance sfas 141 business combinations purchase price allocated related tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values acquisition date certain longterm intangible assets identified recorded estimated fair value identifiable intangible assets acquired include directory services agreements company sbc customer relationships acquired trademarks trade names accordance sfas 142 goodwill intangible assets fair values identifiable intangible assets amortized estimated useful lives manner best reflects economic benefits derived assets goodwill amortized subject impairment testing annual basis see note 2 summary significant accounting policies identifiable intangible assets goodwill description intangible assets goodwill purchase accounting rules assume record deferred revenue balance associated sbc directory business 2041 million september 1 2004 amounts represented revenue would recognized subsequent acquisition deferral amortization method absence purchase accounting accordingly record revenue associated directories published prior acquisition well directories published month acquisition completed although deferred revenue balance eliminated retained rights associated collection amounts due contractual obligations advertising contracts executed prior acquisition result billed unbilled accounts receivable balances acquired acquisition became assets company also purchase accounting rules assume record deferred directory costs related directories published prior acquisition well directories published month acquisition completed totaling 1758 million sbcbranded directories costs represented operating expenses would recognized subsequent acquisitions deferral amortization method absence purchase accounting following table summarizes estimated fair values assets acquired liabilities assumed sbc directory acquisition september 1 2004 4 longterm debt due affiliate connection acquisition 99 ownership interest pail partnership wholly owned affiliate rhd provided us longterm loan form promissory note total proceeds loan 10026 million principal interest payments due quarterly amount principal due accelerating future years shown table maturing june 2011 interest accrues unpaid principal annual rate equal composite interest rate applicable borrowings rhd’s credit facility defined note 7 interest expense loan totaled 138 million four months ended december 31 2004 aggregate maturities longterm debt due affiliate december 31 2004 deferred tax assets liabilities determined based estimated future tax effects temporary differences financial statements tax basis assets liabilities measured current enacted tax rates deferred tax expense benefit result changes deferred tax asset liability provision benefit income taxes consisted following table summarizes significant differences us federal statutory tax rate effective tax rate deferred tax assets liabilities consisted following december 31 2004 company federal state net operating loss carryforwards approximately 277 million federal net operating loss carryforward begin expire 2023 state net operating loss carryforwards begin expire 2008 2004 tax benefit based effective tax rate 376 rhd considered taxpayer current income tax liabilities benefits reflected amounts due tofrom affiliates balance sheet regard deferred tax assets believe obtain full benefit assets based assessment company’s anticipated profitability years deferred tax assets expected become tax deductions terms smartpages reseller agreement directory publishing listing agreement executed connection sbc directory acquisition committed minimum annual payments next five years 24 million 39 million 41 million 41 million 30 million respectively connection sbc directory acquisition rhd inc amended restated credit facility “credit facility” time consisted 700 million term loan a2 1650 million term loan b2 175 million revolver aggregate facility 2525 million december 6 2004 rhd inc amended credit facility creating new term loan a3 new term loan replacing term loan b2 term loans a2 a3 require quarterly principal payments december 31 2004 outstanding balances term loans a2 a3 526 million 194 million 1441 million respectively 41 million outstanding revolver term loan a2 term loan a3 mature december 2009 term loan matures june 2011 rhd inc also issued 325 million 8875 senior notes “senior notes” 600 million 10875 senior subordinated notes “subordinated notes” collectively senior notes “notes” senior notes became secured connection amendment restatement credit facility sbc directory acquisition equity interest thus indirectly assets member’s capital pledged collateral secure rhd inc’s obligations credit facility senior notes also guarantee senior notes total principal amount senior notes subject pledge equity interest december 31 2004 325 million rhd’s credit facility indentures governing notes contain usual customary negative covenants among things place limitations ability incur additional indebtedness including capital leases liens ii pay dividends except may freely pay dividends parent repurchase capital stock iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock vi engage transactions affiliates credit facility also contains financial covenants relating maximum consolidated leverage minimum interest coverage maximum senior secured leverage defined therein involved various legal proceedings arising ordinary course business periodically assess liabilities contingencies connection matters based upon latest information available us matters probable incurred loss range loss reasonably estimated record reserves financial statements instances unable make reasonable estimate liability uncertainties related probable outcome amount range loss additional information becomes available adjust assessments estimates liabilities accordingly based review latest information available believe ultimate liability connection pending legal proceedings material adverse effect results operations cash flows financial position 9 related party transactions allocations rhd subsidiaries provide us operating general administrative services record expenses incurred services include prepress support services general accounting credit collection shared financial services indirect costs rhd subsidiaries appropriate allocated us based several factors including relative equity number employees composite based proportionate share certain direct allocated charges direct indirect cost charges us rhd affiliates four months ended december 31 2004 totaled 342 million also renewed multiple service agreements rhd inc publishing nonpublishing support services billing applications set expire various dates december 31 2005 december 31 2008 connection sales agency agreement dontech incurred 12 million commission costs deferral amortization method four months ended december 31 2004 december 31 2004 owed dontech 889 million apil partners entered revenue participation agreement “rpi agreement” rhd affiliates 1997 terms agreement apil partners paid rhd 359 dontech’s advertising sales less dontech’s commissions connection sbc directory acquisition became successor apil partners began paying revenue participation income affiliate rh donnelley apil inc rpi agreement rhd apil inc incurred 55 million rpi costs accounted deferral amortization method fourmonth period ending december 31 2004 december 31 2004 owed rhd apil inc 846 million first quarter 2005 announced restructuring plan relating sbc directory business number employees terminated others relocated corporate headquarters cary north carolina additionally vacating portion leased facility chicago illinois first quarter 2005 record costs associated restructuring effort expensed recorded adjustment goodwill accordance eitf 953 recognition liabilities connection purchase business combination report independent registered public accounting firm board directors shareholders rh donnelley corporation board directors partners rh donnelley publishing advertising illinois partnership opinion accompanying balance sheet related statements operations cash flows changes partners’ capital present fairly material respects financial position rh donnelley publishing advertising illinois partnership december 31 2004 results operations cash flows four months ended december 31 2004 conformity accounting principles generally accepted united states america financial statements responsibility partnership’s management responsibility express opinion financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit provides reasonable basis opinion pricewaterhousecoopers llp raleigh north carolina march 16 2005 rh donnelley publishing advertising illinois partnership balance sheet december 31 2004 thousands accompanying notes integral part financial statements rh donnelley publishing advertising illinois partnership statement operations four months ended december 31 2004 thousands accompanying notes integral part financial statements rh donnelley publishing advertising illinois partnership statement cash flows four months ended december 31 2004 thousands accompanying notes integral part financial statements rh donnelley publishing advertising illinois partnership statement changes partners’ capital accompanying notes integral part financial statements rh donnelley publishing advertising illinois partnership notes financial statements tabular amounts thousands 1 business basis presentation rh donnelley publishing advertising illinois partnership “pail partnership” “we” “us” “our” successor ameritech publishing illinois partners partnership “apil partners” general partnership previously ameritech publishing illinois inc “apil” ameritech publishing inc “api” indirect wholly owned subsidiaries sbc communications inc “sbc” apil partners provided yellow white pages directory advertising primarily states illinois northwest indiana september 1 2004 rh donnelley corporation “rhd” ultimate parent company completed acquisition directory publishing business “sbc directory business” sbc communications inc “sbc” illinois northwest indiana including sbc’s interests dontech ii partnership “dontech” 5050 general partnership rhd sbc collectively “sbc directory acquisition” 141 billion cash part sbc directory acquisition 13 billion total purchase price paid rh donnelley publishing advertising illinois holdings llc “pail holdings sbc acquire sbc directory business exclusive local sales operations dontech “sbc directory operations” results sbc directory operations included consolidated results september 1 2004 see note 3 “acquisitions” description acquisition following sbc directory acquisition rh donnelley inc “rhd inc” wholly owned subsidiary pail holdings new partners pail partnership sbc directory acquisition accounted purchase business combination rhd purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values september 1 2004 connection purchase price allocation 9925 million identifiable intangible assets 1810 million goodwill related pail partnership see “identifiable intangible assets goodwill” additional information following sbc directory acquisition pail partnership 99 general 1 limited partnership pail holdings rhd inc respectively pail partnership sbc directory acquisition manages operates publishing distribution sbcbranded yellow pages white pages directories illinois northwest indiana pail partnership retained dontech sales agent solicit sell local yellow pages white pages advertising directories publishes addition pail partnership entered fiveyear agreement sbc provides us exclusive right sell local internet yellow pages advertising sbc’s internet yellow pages platform smartpagescom 2 summary significant accounting policies revenue recognition earn revenue principally sale advertising yellow pages directories revenue sale advertising deferred directory published recognized ratably life directory typically 12 months “deferral amortization method” revenue sale advertising recorded net allowance sales claims estimated based historical experience directorybydirectory basis increase decrease estimate information circumstances indicate estimate may longer adequately represent amount claims may incur directory future deferred directory costs directly related selling production directories initially deferred incurred recognized ratably life directory typically 12 months costs include sales commissions paper print initial distribution costs also included deferred directory costs amounts incurred revenue participation agreement company affiliated entity amounts incurred sales agency agreement dontech see note 7 costs paid prior publication classified current assets cash equivalents cash equivalents include liquid investments original maturity less three months less carrying amount approximates fair value accounts receivable accounts receivable consist balances owed us advertising customers advertisers typically enter twelvemonth contract advertising local advertisers billed pro rata amount contract value monthly basis behalf national advertisers certified marketing representatives “cmrs” typically pay us total contract value advertising net commission within 60 days publication month billed receivables represent amount billed advertisers unbilled receivables represent contractually owed amounts published directories yet billed advertisers billed receivables recorded net allowance doubtful accounts sales claims estimated based historical experience directorybydirectory basis increase decrease estimate information circumstances indicate estimate may longer adequately represent amount bad debts sales claims may incur connection sbc directory acquisition entered transition services agreement sbc whereby sbc billed collected advertising customers illinois northwest indiana directories remitted collections net specified holdback us early 2005 monthly basis sbc provided advance us related billings recorded advance sbc decreased sbc collected advertisers thus satisfying liability early 2005 assumed responsibility billing collections settled remaining amounts sbc identifiable intangible assets goodwill result sbc directory acquisition certain identifiable intangible assets specific pail partnership’s operations identified estimated fair value amortization expense four months ended december 31 2004 69 million amortization expense intangible assets five succeeding years estimated 206 million 249 million 267 million 264 million 260 million respectively acquired identifiable intangible assets respective book values december 31 2004 shown table directory services agreements sbc rhd including pail partnership subsidiaries rhd include directory services license agreement noncompetition agreement smartpages reseller agreement directory publishing listing agreement collectively “sbc directory services agreements” certain affiliates sbc directory services license agreement designates us official exclusive provider yellow pages directory services sbc successors illinois northwest indiana “territory” grants us exclusive license obligation specified agreement produce publish distribute white pages directories territory sbc’s agent grants us exclusive license obligation specified agreement use sbc brand logo print directories territory noncompetition agreement prohibits sbc affiliates successors certain limited exceptions 1 producing publishing distributing yellow white pages print directories territory 2 soliciting selling local national yellow white pages advertising inclusion directories 3 soliciting selling local internet yellow pages advertising certain internet yellow pages directories territory licensing sbc marks third party purpose smartpages reseller agreement gives us exclusive right sell local internet yellow pages advertising nonexclusive right sell internet yellow pages advertising respect geographies outside territory advertiser excluding national advertisers located inside territory onto sbc’s smartpagescom platform successor product specified agreements directory publishing listing agreement gives us right purchase use basic sbc subscriber listing information updates purpose publishing directories sbc directory services agreements smartpages reseller agreement initial terms 50 years subject automatic renewal early termination specified circumstances smartpages reseller agreement term five years fair value agreements determined based present value estimated future cash flows amortized straightline method indicated terms fair value customer relationships determined based present value estimated future cash flows amortized income forecast method weighted average useful life relationships 20 years excess purchase price sbc directory acquisition net tangible identifiable intangible assets acquired 2129 million recorded goodwill rhd amount 1810 million related pail partnership based fair value partnership’s net assets acquired acquisition annual amortization goodwill tax purposes approximately 121 million anticipate significant changes fair value net assets acquired additional information could come attention may require us revise purchase price allocation connection sbc directory acquisition accordance sfas 142 goodwill intangible assets goodwill amortized subject periodic impairment testing impairment losses recorded 2004 advertising expense recognize advertising expenses incurred expenses include public relations media online advertising well promotional sponsorship costs total advertising expense 24 million four months ended december 31 2004 concentration credit risk approximately 85 directory advertising revenue derived sale advertising local small mediumsized businesses advertisers typically enter 12month advertising sales contracts make monthly payments term contract advertisers prepay full amount portion contract value new advertisers desiring expand advertising programs subject credit review advertisers qualify may extend credit advertising purchase small mediumsized businesses tend fewer financial resources higher failure rates large businesses addition full collection delinquent accounts take extended period time involve significant costs believe extending credit local advertisers material adverse effect results operations financial condition assurances given require collateral advertisers although charge interest advertisers pay specified due dates remaining approximately 15 directory advertising revenue derived sale advertising national large regional chains rental car companies automobile repair shops pizza delivery businesses substantially revenue derived national accounts serviced cmrs contract cmrs independent third parties act agents national advertisers cmrs responsible billing national customers advertising receive payment value advertising placed directory net cmr’s commission directly cmr still exposed credit risk amount losses accounts historically less local accounts advertisers cases cmrs tend larger companies greater financial resources local advertisers estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities revenue certain expenses disclosure contingent assets liabilities actual results could differ materially estimates assumptions estimates assumptions used determination sales allowances doubtful accounts amortization 3 acquisition september 1 2004 rhd completed sbc directory acquisition 141 billion cash working capital adjustments settlement 30 million liquidation preference owed rhd related dontech result acquisition became publisher revenuegenerating sbcbranded yellow pages directories illinois northwest indiana results sbc directory operations included results september 1 2004 primary purpose acquisition complete rhd’s transformation sales agent prepress vendor yellow pages advertising leading publisher yellow pages directories control business acquisition accounted purchase business combination accordance sfas 141 business combinations purchase price allocated related tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values acquisition date certain longterm intangible assets identified recorded estimated fair value identifiable intangible assets acquired include directory services agreements company sbc customer relationships acquired trademarks trade names accordance sfas 142 goodwill intangible assets fair values identifiable intangible assets amortized estimated useful lives manner best reflects economic benefits derived assets goodwill amortized subject impairment testing annual basis see note 2 summary significant accounting policies identifiable intangible assets goodwill description intangible assets goodwill purchase accounting rules assume record deferred revenue balance associated sbc directory business 2041 million september 1 2004 amount represented revenue would recognized subsequent acquisition deferral amortization method absence purchase accounting accordingly record revenue associated directories published prior acquisition well directories published month acquisition completed although deferred revenue balance eliminated retained rights associated collection amounts due contractual obligations advertising contracts executed prior acquisition result billed unbilled accounts receivable balances acquired acquisition became assets company also purchase accounting rules assume record deferred directory costs related directories published prior acquisition well directories published month acquisition completed totaling 1758 million sbcbranded directories costs represented operating expenses would recognized subsequent acquisitions deferral amortization method absence purchase accounting following table summarizes estimated fair values assets acquired liabilities assumed sbc directory acquisition september 1 2004 specific sbc directory operations allocated us 4 commitments terms smartpages reseller agreement directory publishing listing agreement executed connection sbc directory acquisition committed minimum annual payments next five years 24 million 39 million 41 million 41 million 30 million respectively 5 legal proceedings involved various legal proceedings arising ordinary course business periodically assess liabilities contingencies connection matters based upon latest information available us matters probable incurred loss range loss reasonably estimated record reserves financial statements instances unable make reasonable estimate liability uncertainties related probable outcome amount range loss additional information becomes available adjust assessments estimates liabilities accordingly based review latest information available believe ultimate liability connection pending legal proceedings material adverse effect results operations cash flows financial position 6 pledge equity interest connection sbc directory acquisition rhd inc amended restated credit facility “credit facility” time consisted 700 million term loan a2 1650 million term loan b2 175 million revolver aggregate facility 2525 million december 6 2004 rhd inc amended credit facility creating new term loan a3 new term loan replacing term loan b2 term loans a2 a3 require quarterly principal payments december 31 2004 outstanding balances term loans a2 a3 526 million 194 million 1441 million respectively 41 million outstanding revolver term loan a2 term loan a3 mature december 2009 term loan matures june 2011 rhd inc also issued 325 million 8875 senior notes “senior notes” 600 million 10875 senior subordinated notes “subordinated notes” collectively senior notes “notes” senior notes became secured connection amendment restatement credit facility sbc directory acquisition equity interests partners’ capital thus indirectly assets partners’ capital pledged collateral secure rhd inc’s obligations credit facility senior notes also guarantee senior notes total principal amount senior notes subject pledge equity interests december 31 2004 325 million rhd’s credit facility indentures governing notes contain usual customary negative covenants among things place limitations ability incur additional indebtedness including capital leases liens ii pay dividends except may freely pay dividends parent repurchase equity interests iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock vi engage transactions affiliates credit facility also contains financial covenants relating maximum consolidated leverage minimum interest coverage maximum senior secured leverage defined therein 7 related party transactions rhd subsidiaries provide us operating general administrative services record expenses incurred services include prepress support services general accounting credit collection shared financial services indirect costs rhd subsidiaries appropriate allocated us based several factors including relative equity number employees composite based proportionate share certain direct allocated charges direct indirect cost charges us rhd affiliates four months ended december 31 2004 totaled 342 million also renewed multiple service agreements rhd inc publishing nonpublishing support services billing applications set expire various dates december 31 2005 december 31 2008 connection sales agency agreement dontech incurred 12 million commission costs deferral amortization method four months ended december 31 2004 december 31 2004 owed dontech 889 million apil partners entered revenue participation agreement “rpi agreement” rhd affiliates 1997 terms agreement apil partners paid rhd 359 dontech’s advertising sales less dontech’s commissions connection sbc directory acquisition became successor apil partners began paying revenue participation income affiliate rh donnelley apil inc rpi agreement incurred 55 million rpi costs accounted deferral amortization method fourmonth period ending december 31 2004 december 31 2004 owed rhd apil inc 846 million 8 subsequent event first quarter 2005 announced restructuring plan relating sbc directory business number employees terminated others relocated corporate headquarters cary north carolina additionally vacating portion leased facility chicago illinois first quarter 2005 record costs associated restructuring effort expensed recorded adjustment goodwill accordance eitf 953 recognition liabilities connection purchase business combination report independent auditors board directors sbc communications inc audited accompanying combined balance sheets ameritech publishing illinois inc ameritech publishing illinois partners partnership collectively company indirect wholly owned subsidiaries sbc communications inc august 31 2004 december 31 2003 related combined statements income parent company capital cash flows eightmonth period ended august 31 2004 two years period ended december 31 2003 combined financial statements responsibility company’s management responsibility express opinion combined financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness companys internal control financial reporting accordingly express opinion audit also includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion combined financial statements referred present fairly material respects combined financial position company august 31 2004 december 31 2003 combined results operations cash flows eightmonth period ended august 31 2004 two years period ended december 31 2003 conformity accounting principles generally accepted united states discussed note 1 combined financial statements 2003 company changed method recognizing revenues expenses related publishing directories ernst young llp san antonio texas march 9 2005 ameritech publishing illinois inc ameritech publishing illinois partners partnership combined statements income dollars thousands accompanying notes integral part financial statements ameritech publishing illinois inc ameritech publishing illinois partners partnership combined balance sheets dollars thousands accompanying notes integral part financial statements ameritech publishing illinois inc ameritech publishing illinois partners partnership combined statements cash flows dollars thousands increase decrease cash equivalents accompanying notes integral part financial statements ameritech publishing illinois inc ameritech publishing illinois partners partnership combined statements parent company capital dollars thousands accompanying notes integral part financial statements ameritech publishing illinois inc ameritech publishing illinois partners partnership notes combined financial statements august 31 2004 dollars thousands 1 summary significant accounting policies basis presentation combined financial statements include accounts ameritech publishing illinois inc apil ameritech publishing illinois partners partnership collectively referred throughout document “we” “the company” “ameritech publishing il” apil wholly owned subsidiary ameritech publishing inc api wholly owned subsidiary ameritech corporation ameritech wholly owned sbc communications inc sbc partnership owned apil limited partner api general partner 99 1 ownership respectively ameritech publishing il provides yellow white pages directory advertising primarily within state illinois northwest indiana result sale company see note 7 accordance terms agreement sell company employees employeerelated liability intercompany account balances transferred sbc affiliate prior august 31 2004 january 2003 financial accounting standards board fasb issued fasb interpretation 46 “consolidation variable interest entities interpretation accounting research bulletin arb 51” fin 46 fin 46 provides guidance determining whether entity variable interest entity vie equity investor vie include vie consolidated financial statements december 2003 fasb staff revised fin 46 clarify provisions certain vies fin 46 became effective periods ending december 15 2003 addition revision delayed effective date application fin 46 large public companies sbc periods ending march 15 2004 types vies specialpurpose entities including joint venture investment see note 3 adoption fin 46 effect accounting investment preparation financial statements conformity accounting principles generally accepted united states gaap requires management make estimates assumptions affect amounts reported financial statements accompanying notes including estimates probable losses expenses actual results could differ estimates comprehensive income comprehensive income net income periods presented income taxes included sbc’s combined federal income tax return federal income taxes provided accordance provisions tax allocation agreement sbc general income tax provision agreement reflects financial consequences income deductions credits utilized separate return basis consolidation sbc assured realization deferred income taxes provided temporary differences carrying amounts assets liabilities financial reporting purposes amounts used tax purposes cash equivalents cash equivalents include highly liquid investments original maturities three months less carrying amounts approximate fair value ameritech publishing illinois inc ameritech publishing illinois partners partnership notes combined financial statements august 31 2004 dollars thousands revenue recognition cumulative effect accounting change prior 2003 recognized revenues expenses directly related publishing directories “issue basis” method accounting method recognizes revenue expenses time initial delivery related directory completed effective january 1 2003 changed method recognizing revenue expenses related publishing directories “issue basis” method “amortization” method amortization method recognizes revenues expenses directly related directory ratably life directory typically 12 months expenses directly related directories progress reflected deferred charges combined balance sheet decided change methods amortization method become prevalent method used among significant directory publishers directory accounting change resulted noncash charge 58711 net deferred income tax benefit 38664 recorded cumulative effect accounting change combined statement income january 1 2003 excluding cumulative amount effect change decrease combined pretax income 2003 5515 3331 net tax compared issue basis method table shows estimated results years adopted amortization method january 1 2002 customer accounted 10 revenues eightmonth period ended august 31 2004 years ended december 31 2003 2002 allowance accounts receivable allowance accounts receivable estimated primarily based analysis history future expectations company’s customers estimates based company’s actual historical writeoffs net recoveries aging accounts receivable balances company’s assumptions reviewed least quarterly adjustments made allowance appropriate addition allowance accounts receivable company reserves certain receivables sold recourse affiliate reserves subject analysis similar included current liabilities combined balance sheets ameritech publishing illinois inc ameritech publishing illinois partners partnership notes combined financial statements august 31 2004 dollars thousands ameritech publishing illinois inc ameritech publishing illinois partners partnership notes combined financial statements august 31 2004 dollars thousands also share bank accounts api cash transactions consolidated api bank accounts held accounts receivable accounts payable parent represents difference net cash receipts payments dividends pay dividends api based net income changes parent receivable payable line items reflected financing activities majority receivables sold month recourse sbc subsidiary performs billing collection services partnership amounts receivable arrangement included accounts receivable affiliates bad debt expense related receivables included provision doubtful accounts associated liability included current liabilities recorded august 31 2004 december 31 2003 totaled 14431 23004 respectively 3 investment joint venture material agreements rhd investments joint venture august 1997 apil entered agreements reuben h donnelley corporation rhd create dontech ii partnership dontech rhd 50 dontech investment accounted equity method following table reconciliation gross investment dontech ameritech publishing illinois inc ameritech publishing illinois partners partnership notes combined financial statements august 31 2004 dollars thousands following table presents summarized financial information dontech ameritech publishing illinois inc ameritech publishing illinois partners partnership notes combined financial statements august 31 2004 dollars thousands components income tax expense follows reconciliation income tax expense amount computed applying statutory federal income tax rate 35 income taxes follows tax expense eightmonth period ended august 31 2004 includes 5400 relates additional tax allocations due parent company api trueup prior periods allowed tax allocation agreement sbc affiliates 5 employee benefits employees company transferred sbc affiliate august 15 2004 result associated postemployment benefit obligation liabilities including due retirees also transferred sbc affiliate accordingly august 31 2004 balance sheet reflect liabilities related postemployment benefit obligations transferred employees employed company majority eightmonth period ended august 31 2004 costs related postemployment benefit obligations appropriately reflected income statement ameritech publishing illinois inc ameritech publishing illinois partners partnership notes combined financial statements august 31 2004 dollars thousands pensions prior transfer employees sbc affiliate substantially employees covered one various noncontributory pension death benefit plans management employees participated cash balance pension plans additionally management employees participated traditional pension benefit formula stated percentage employees’ adjusted career income pension benefit formula nonmanagement employees based flat dollar amount per year according job classification employees elect receive pension benefits either lump sum payment annuity use december 31 measurement date calculating values reported plan assets benefit obligations plans sbc’s objective funding plans combination standards employee retirement income security act 1974 amended erisa accumulate assets sufficient meet plans’ obligations provide benefits employees upon retirement although significant cash contributions required erisa regulations 2004 july sbc voluntarily contributed approximately 1 billion pension trusts benefit plan participants 1000 allocated apil financial statement purposes plan assets ameritech plans include employees apil restricted transfer prior october 2004 due change control provision contained plans ameritech plans combined sbc plan effective december 2004 significant weightedaverage assumptions used sbc developing pension information include postemployment benefit obligations remaining august 31 2004 due transfer employees discount rate projected benefit obligation applicable accordance gaap sbc’s assumed discount rate 625 december 31 2003 reflects hypothetical rate projected benefit obligation could effectively settled paid participants date sbc determined discount rate based range factors including rates return highquality fixedincome investments available measurement date expected longterm rate return plan assets 85 2004 reflects sbc’s average rate earnings expected funds invested provide benefits included projected benefit obligations sbc considers many factors include limited historic returns plan assets current market information longterm returns eg longterm bond rates current target asset allocations asset categories target asset allocation determined based consultations external investment advisors ameritech publishing illinois inc ameritech publishing illinois partners partnership notes combined financial statements august 31 2004 dollars thousands weightedaverage expected return assets assumption reflects view longterm returns one significant weightedaverage assumptions used determine actuarial estimates pension postretirement benefit expense based longterm expectations market returns future years sbc’s longterm rate return plan assets 85 2004 factors remain unchanged expect 1 decrease expected longterm rate return would caused 2004 combined pension postretirement cost increase approximately 215 2003 analogous change would result 1 increase gaap expected longterm rate return calculated marketrelated value assets mrva gaap requires actual gains losses pension postretirement plan assets recognized mrva equally period five years sbc uses methodology allowed gaap mrva held within 20 actual fair value plan assets effect accelerating recognition excess actual gains losses mrva less five years due investment losses plan assets experienced last several years methodology contributed higher combined net pension postretirement cost 2003 compared using methodology significant effect 2004 2002 combined net pension postretirement benefit mrva almost equal fair value plan assets gaap requires certain disclosures made components net periodic pension cost period including reconciliation funded status plans amounts reported balance sheets disclosures specific information plan assets investment policies targeted actual return plan assets asset category since funded status plan assets obligations relates sbcsponsored plans whole information presented company eightmonth period ended august 31 2004 recognized pension benefits approximately 16 years ended december 31 2003 2002 recognized pension benefits approximately 182 1123 respectively august 31 2004 cumulative amount contributions made trust excess pension cost approximately 3832 december 31 2003 2002 cumulative amount contributions made trust excess pension cost approximately 3778 3587 respectively postretirement benefits prior transfer employees sbc affiliate ameritech’s sbc’s benefit plans provided certain medical dental life insurance benefits substantially retired employees various plans accrued actuarially determined postretirement benefit costs active employees earned benefits sbc maintains voluntary employee beneficiary association veba trusts partially fund postretirement benefits however erisa regulations requiring postretirement benefit plans funded annually also fund postretirement life insurance benefits actuarially determined rate trust assets consist principally private public equity government corporate bonds index funds ameritech publishing illinois inc ameritech publishing illinois partners partnership notes combined financial statements august 31 2004 dollars thousands second quarter 2004 sbc agreed new fiveyear labor agreements communications workers america cwa international brotherhood electrical workers agreement provided additional contributions current employees toward certain medical prescription drug copays january 2004 majority nonmanagement retirees informed medical coverage changes sbc subsequently announced modifications changes contingent upon reaching agreement cwa agreement reached modified effective january 1 2005 medical coverage nonmanagement retirees require increased copays deductibles prescription drugs certain medical services changes reduced postemployment cost approximately 176 eightmonth period ended august 31 2004 may 2004 fasb issued guidance referred fsp fas 1062 employers account provisions recently enacted medicare prescription drug improvement modernization act 2003 medicare act medicare act allows employers sponsor postretirement health care plan provides prescription drug benefit receive subsidy cost providing drug benefit order employers us receive subsidy payment medicare act value offered prescription drug plan must least equal value standard prescription drug coverage provided medicare part due lower deductibles better coverage drug costs believe plan greater value medicare part preliminary guidance issued fasb fsp fas 1061 permitted us recognize immediately subsidy financial statements sbc accounted medicare act plan amendment recorded adjustment amortization liability date enactment medicare act december 2003 final guidance issued fasb fspfas 1062 requires us account medicare act actuarial gain loss decreased postretirement cost approximately 53 eightmonth period ended august 31 2004 6 year ended december 31 2003 sbc’s accounting assumes plans offers continue provide drug benefits equivalent medicare part plans continue primary plan retirees receive subsidy sbc expect medicare act significant effect retirees’ participation postretirement benefit plan gaap requires certain disclosures made components net periodic postretirement benefit cost including reconciliation funded status plans amounts reported combined balance sheets disclosures specific information plan assets investment policies targeted actual return plan assets asset category since funded status assets obligations relates sbc’s plans whole information presented us eightmonth period ended august 31 2004 recognized postretirement costs approximately 264 years ended december 31 2003 2002 recognized postretirement costs approximately 637 204 december 31 2003 amount included combined balance sheet accrued postretirement benefit obligations approximately 1508 sbc used significant assumptions discount rate longterm rate return plan assets composite rate compensation increase used developing accumulated postretirement benefit obligation related postretirement benefit costs used developing pension information ameritech publishing illinois inc ameritech publishing illinois partners partnership notes combined financial statements august 31 2004 dollars thousands medical cost trend rate 2004 90 retirees 64 100 retirees 65 trending expected increase 50 2009 retirees prior adjustment costsharing provisions medical dental plans certain retired employees assumed dental cost trend rate 2004 50 raising annual medical dental cost trend rates one percentagepoint increases total service interest cost components net periodic postretirement benefit cost year ended december 31 2003 approximately 17 decreasing annual medical dental cost trend rates one percentagepoint decreases total service interest cost components net periodic postretirement benefit cost 2003 approximately 14 postemployment benefits prior transfer employees sbc affiliate ameritech’s sbc’s benefit plans provided employees varying levels severance pay disability pay workers’ compensation medical benefits specified circumstances accrued postemployment benefits occurrence event rendered employee inactive benefits ratably vested vesting period savings plans prior transfer employees sbc affiliate substantially employees eligible participate contributory savings plans sponsored sbc savings plans matched stated percentage eligible employee contributions subject specified ceiling allocated costs related savings plans approximately 55 eightmonth period ended august 31 2004 82 36 years ended december 31 2003 2002 respectively stockbased compensation prior transfer employees sbc affiliate employees participated various stock option plans sponsored sbc plans senior management nonmanagement employees nonemployee directors received stock options performance stock units nonvested stock units based sbc stock options issued august 31 2004 carry exercise prices equal market price stock date grant maximum terms ranging five ten years depending upon grant vesting stock options may occur five years date grant options vesting graded basis three years 13 grant vests one year another 13 vests two years final 13 vests three years grant date nonvested stock units valued market price stock date grant vest three fiveyear period august 31 2004 sbc authorized issue 40 million shares stock addition shares may issued upon exercise outstanding options upon vesting performance stock units nonvested stock units officers employees directors pursuant various plans sbc uses accelerated method recognizing compensation cost fixed awards graded vesting essentially treats grant three separate awards vesting periods 12 24 36 months vest three years noted majority options vest three years recognize approximately 61 associated compensation expense first year 28 second year remaining 11 third year allowed fas 123 compensation cost accrued options granted subject service requirement expected vest effects actual forfeitures unvested options recognized reversal expense occur ameritech publishing illinois inc ameritech publishing illinois partners partnership notes combined financial statements august 31 2004 dollars thousands compensation cost charged income plans follows estimated fair value options granted amortized expense options’ vesting period options exercisable sbc common stock separate assumptions developed subsidiaries sbc fair value options estimated date grant using blackscholes option pricing model following weightedaverage assumptions fas 123 fas 148 require certain disclosures made outstanding exercisable options option activity weighted average exercise price per option exercise price range income statement period since stock option activity relates sbc’s shareowners’ equity information presented us 6 commitments contingencies addition issues specifically discussed elsewhere party various lawsuits proceedings matters arising ordinary course business opinion although outcomes proceedings uncertain material adverse effect company’s financial position results operations cash flows 7 subsequent events effective september 1 2004 apil sold 50 interest dontech 100 interest partnership rhd 145 billion cash result sale apil’s exclusive sales agency agreement dontech revenue participation agreement rhd partnership’s service agreements rhd terminated effective september 1 2004 additionally 29898 payable dontech upon dissolution dontech partnership settled part sale company ameritech publishing illinois inc ameritech publishing illinois partners partnership notes combined financial statements august 31 2004 dollars thousands 8 quarterly information unaudited item 9item 8 annual report dex media subsidiaries’ revolving credit facilities term loan facilities subject variable rates earnings cash flow affected changes interest rates order mitigate interest rate risk dex media’s subsidiaries entered interest rate swap agreements effectively convert variable rate debt fixed rate debt dex media east interest rate swap agreements became effective may 8 2003 dex media east two interest rate swap agreements interest rate swap notional amount 500 million applicable fixed rate 3638 expire november 2007 interest rate swap notional amount 750 million applicable fixed rate 4085 expire may 2008 dex media west fixed interest rate swap agreements entered october 2004 aggregate notional amount 3000 million applicable preset monthly fixed rates ranging 1901 361 expire october 2006 financial derivative instruments intended used speculative purposes market risk sensitive instruments interest rate swap agreements designated cash flow hedges accordance provisions sfas 133 “accounting derivative instruments hedging activities” amended sfas 137 sfas 138 swaps recorded fair value quarterly basis fair value swaps determined based quoted market prices assuming effectiveness difference fair value book value swaps recognized comprehensive income component shareholders’ deficit equity ineffectiveness swaps required recognized earnings swaps hedged item threemonth liborbased interest payments 1505 million bank debt designed critical terms interest reset dates duration index coincide assuming critical terms continue coincide cash flows swaps exactly offset cash flows hedged item ineffectiveness exist item 8 financial statements supplementary data management’s annual report internal control financial reporting management rh donnelley corporation responsible establishing maintaining adequate internal control company’s financial reporting within meaning rule 13a15f promulgated securities exchange act 1934 inherent limitations internal control financial reporting may prevent detect misstatements financial statements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness rh donnelley corporation’s internal controls financial reporting december 31 2005 undertaking assessment management used criteria established committee sponsoring organizations coso treadway commission contained internal control integrated framework based assessment management concluded december 31 2005 company’s internal control financial reporting effective based coso criteria management’s assessment effectiveness internal control financial reporting december 31 2005 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appears page report independent registered public accounting firm board directors shareholders rh donnelley corporation completed integrated audits rh donnelley corporation’s 2005 2004 consolidated financial statements internal control financial reporting december 31 2005 audit 2003 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements opinion consolidated financial statements listed accompanying index present fairly material respects financial position rh donnelley corporation subsidiaries december 31 2005 2004 results operations cash flows three years period ended december 31 2005 conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion internal control financial reporting also opinion management’s assessment included accompanying management’s annual report internal control financial reporting company maintained effective internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp raleigh north carolina march 15 2006 rh donnelley corporation consolidated balance sheets accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements operations accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements cash flows accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements changes shareholders’ deficit equity accompanying notes integral part consolidated financial statements rh donnelley corporation notes consolidated financial statements tabular amounts thousands except per share data 1 business presentation consolidated financial statements include accounts rh donnelley corporation direct indirect wholly owned subsidiaries “company” “rhd” “donnelley” “we” “us” “our” intercompany transactions balances eliminated significant business developments january 31 2006 acquired outstanding common stock dex media inc “dex media” purchase price 41 billion consisting 36547381 shares common stock valued 22 billion 19 billion cash “dex media merger” also assumed dex media’s outstanding indebtedness fair value 57 billion dex media exclusive publisher “official” yellow pages white pages directories qwest communications international inc “qwest” qwest primary incumbent local exchange carrier “ilec” prior dex media merger dex media leading directory publisher united states purpose dex media merger take step transformation rhd leading publisher yellow pages directories well combine complementary strengths companies see note 17 “subsequent events” description dex media merger financial statements accompanying footnotes year ended december 31 2005 give effect otherwise reflect transaction disclosure subsequent events note 17 january 27 2006 repurchased remaining 100301 shares outstanding 8 redeemable convertible cumulative preferred stock “preferred stock” investment partnerships affiliated goldman sachs group inc collectively “gs funds” 3361 million cash including accrued cash dividends interest “gs repurchase” subsequent gs repurchase outstanding shares preferred stock see note 17 “subsequent events” description gs repurchase note 7 “redeemable preferred stock warrants” description related impact financial statements year ended december 31 2005 following closing dex media merger third largest print online directory publisher united states based revenue based revenue expect total annual distribution approximately 80 million serving 600000 local national advertisers 625 directories 28 states 2005 dex media published 293 directories printed approximately 52 million copies directories distribution virtually business residential customers throughout dex media states dex media’s internetbased directory dexonlinecomtm bundled dex media’s print product provide webbased access dex media’s directories expands distribution dex media’s advertiser content addition acquired dex media directory business publish sprintbranded directories 18 states major markets including las vegas nevada orlando lee county florida total distribution approximately 18 million serving approximately 160000 local national advertisers also publish att formerly known “sbc”branded directories illinois northwest indiana total distribution approximately 10 million serving approximately 100000 local national advertisers also offer online city guides search web sites sprint markets best red yellow pages brand wwwbestredypcom chicagoland area wwwchicagolandypcom september 1 2004 completed acquisition directory publishing business “att directory business” att inc “att” illinois northwest indiana including att’s interests dontech ii partnership “dontech” 5050 general partnership us att collectively “att directory acquisition” 141 billion cash working capital adjustments settlement 30 million liquidation preference owed us related dontech acquisition consummated pursuant accordance terms purchase agreement dated july 28 rh donnelley corporation notes consolidated financial statements continued 2004 among company ameritech corporation “ameritech” direct wholly owned subsidiary att ameritech publishing inc “api” direct wholly owned subsidiary ameritech acquisition accounted purchase business combination purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values acquisition date results att directory business included consolidated results september 1 2004 acquired att directory business operates rh donnelley publishing advertising illinois partnership indirect wholly owned subsidiary company see note 3 “acquisitions” description acquisition january 3 2003 completed acquisition directory business “spa directory business” sprint corporation known sprint nextel corporation “sprint” acquiring outstanding capital stock various entities comprising sprint publishing advertising “spa” collectively “spa acquisition” 223 billion cash acquisition consummated pursuant purchase agreement dated september 21 2002 among company sprint centel directories llc acquisition accounted purchase business combination purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values acquisition date results spa directory business included consolidated results january 3 2003 acquired spa directory business operates rh donnelley publishing advertising inc indirect wholly owned subsidiary company see note 3 “acquisitions” description acquisition acquisitions transformed donnelley leading publisher yellow pages directories prior spa acquisition one largest independent sales agents prepress vendors yellow pages advertising united states publisher report full value advertising sales certain direct costs deferral amortization method dontech’s business remained unchanged following spa acquisition investment dontech eliminated connection att directory acquisition 2003 2004 att directory acquisition continued earn revenue prepress publishing ancillary services related att directory business continued report partnership income investment dontech 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts rh donnelley corporation direct indirect wholly owned subsidiaries intercompany transactions balances eliminated revenue recognition earn revenue principally sale advertising yellow pages directories revenue sale advertising deferred directory published recognized ratably life directory typically 12 months “deferral amortization method” revenue sale advertising recorded net allowance sales claims estimated based historical experience directorybydirectory basis increase decrease estimate information circumstances indicate estimate may longer adequately represent amount claims may incur directory future att directory acquisition also earned revenue providing prepress publishing services att directories dontech markets revenue prepress publishing services recognized services performed deferred directory costs directly related selling production directories initially deferred incurred recognized ratably life directory typically 12 months costs include sales commissions print paper initial distribution costs paid prior directory publication classified current assets publication reclassified deferred directory costs rh donnelley corporation notes consolidated financial statements continued equity method accounting att directory acquisition dontech 5050 partnership subsidiary att partners dontech separate legal entity provided services employees standalone management team subject oversight board directors employees dontech right authority power act accomplish enter contract incidental attain purposes partnership employees either rhd att involved daytoday operations dontech partners shared equally net profits one voting member dontech board directors neither partner unilateral ability control influence operations dontech accordingly september 1 2004 accounted dontech equity method consolidate results dontech financial statements att directory acquisition reported 50 share dontech net income partnership income consolidated statement operations dontech reported commission revenue based annual value sales contract period contract executed calendar sales reported expenses incurred partnership income also included revenue participation income att revenue participation income based dontech advertising sales reported sales contract executed customer result att directory acquisition att ceased paying us revenue participation income consolidate net profits dontech eliminated dontech partnership investment consequently partnership income longer reported commencing september 1 2004 rather following att directory acquisition revenues expenses income acquired att directory business directly recorded statement operations cash equivalents cash equivalents include liquid investments maturity less three months time purchase company places investments high quality financial institutions times investments may excess federally insured limits accounts receivable accounts receivable consist balances owed us advertising customers advertisers typically enter twelvemonth contract advertising local advertisers billed pro rata amount contract value monthly basis behalf national advertisers certified marketing representatives “cmrs” pay company total contract value advertising net commission within 60 days publication month billed receivables represent amount billed advertisers unbilled receivables represent contractually owed amounts published directories yet billed advertisers billed receivables recorded net allowance doubtful accounts sales claims estimated based historical experience directorybydirectory basis increase decrease estimate information circumstances indicate estimate may longer adequately represent amount bad debts sales claims may incur fixed assets computer software fixed assets computer software recorded cost depreciation amortization provided estimated useful lives assets using straightline method estimated useful lives thirty years buildings five years machinery equipment ten years furniture fixtures three five years computer equipment five years computer software leasehold improvements amortized straightline basis shorter term lease estimated useful life improvement 2004 wroteoff fixed assets computer rh donnelley corporation notes consolidated financial statements continued software fully depreciated fixed assets computer software december 31 2005 2004 consisted following depreciation amortization expense fixed assets computer software years ended december 31 2005 2004 2003 follows identifiable intangible assets goodwill result att directory acquisition spa acquisition certain longterm intangible assets identified recorded estimated fair value amortization expense years ended december 31 2005 2004 2003 721 million 573 million 498 million respectively amortization expense intangible assets five succeeding years estimated approximately 778 million 797 million 793 million 787 million 785 million respectively annual amortization goodwill tax purposes approximately 207 million acquired longterm intangible assets respective book values december 31 2005 shown table directory services agreements att company include directory services license agreement noncompetition agreement internet yellow pages reseller agreement directory publishing listing agreement collectively “att directory services agreements” certain affiliates att directory services license agreement designates us official exclusive provider yellow pages directory services att successors illinois northwest indiana “territory” rh donnelley corporation notes consolidated financial statements continued grants us exclusive license obligation specified agreement produce publish distribute white pages directories territory att’s agent grants us exclusive license obligation specified agreement use att brand logo print directories territory noncompetition agreement prohibits att affiliates successors certain limited exceptions 1 producing publishing distributing yellow white pages print directories territory 2 soliciting selling local national yellow white pages advertising inclusion directories 3 soliciting selling local internet yellow pages advertising certain internet yellow pages directories territory licensing att marks third party purpose internet yellow pages reseller agreement gives us exclusive right sell local internet yellow pages advertising nonexclusive right sell internet yellow pages advertising respect geographies outside territory advertiser excluding national advertisers located inside territory onto yellowpagescom platform successor products specified agreement directory publishing listing license agreement gives us right purchase use basic att subscriber listing information updates purpose publishing directories att directory services agreements internet yellow pages reseller agreement initial terms 50 years subject automatic renewal early termination specified circumstances internet yellow pages reseller agreement term 5 years fair value assigned att directory services agreements internet yellow pages reseller agreement 9500 million 25 million respectively based present value estimated future cash flows amortized straightline method indicated terms directory services agreements sprint company include directory services license agreement trademark license agreement noncompetition agreement collectively “spa directory services agreements” certain affiliates sprint directory services license agreement grants us exclusive license obligation specified agreement produce publish distribute yellow white pages directories sprint successors 18 states sprint provided local telephone service time agreement trademark license agreement grants us exclusive license obligation specified agreement use certain specified sprint trademarks including sprint diamond logo markets noncompetition agreement prohibits sprint affiliates successors markets selling local directory advertising certain limited exceptions producing publishing distributing print directories spa directory services agreements initial terms 50 years subject automatic renewal early termination specified circumstances fair value agreements determined based present value estimated future cash flows amortized straightline method 50 years fair values local national customer relationships determined based present value estimated future cash flows amortized income forecast method assumes value derived customer relationships greater earlier years steadily declines time weighted average useful life relationships approximately 20 years fair value acquired trade names determined based “relief royalty” method values trade names based estimated amount company would pay arms length transaction use trade names assets amortized straightline method 15 years excess purchase price att directory acquisition spa acquisition net tangible identifiable intangible assets acquired 2220 million includes first quarter 2005 adjustment 970 million respectively recorded goodwill first quarter 2005 recorded adjustment increasing goodwill att directory acquisition approximately 90 million relating restructuring plan associated att directory acquisition fourth quarter 2004 recorded adjustment increasing goodwill att directory acquisition approximately 81 million primarily resulting completion fair value measurement dontech pension assets liabilities acquisition date intercompany net receivables rh donnelley corporation notes consolidated financial statements continued connection att directory acquisition spa acquisition 1412 million 279 million respectively eliminated also included goodwill accordance sfas 142 goodwill intangible assets goodwill amortized subject periodic impairment testing impairment losses recorded 2005 2004 2003 interest expense deferred financing costs interest expense related company’s outstanding debt 2645 million 1755 million 1800 million years ended december 31 2005 2004 2003 respectively certain costs associated issuance debt instruments capitalized included noncurrent assets consolidated balance sheet costs amortized interest expense terms related debt agreements bond outstanding method used amortize deferred financing costs relating debt instruments respect make accelerated principal payments deferred financing costs amortized using straightline method amortization deferred financing costs included interest expense 236 million 136 million 150 million 2005 2004 2003 respectively company’s policy recognize losses incurred conjunction debt extinguishments component interest expense interest expense 2005 includes writeoff 74 million unamortized deferred financing costs relating debt extinguished 2005 included amortization deferred financing costs 236 million noted see note 5 “longterm debt credit facilities notes” description debt extinguishment advertising expense recognize advertising expenses incurred expenses include public relations media online advertising promotional sponsorship costs total advertising expense 181 million 111 million 88 million 2005 2004 2003 respectively concentration credit risk approximately 85 directory advertising revenue derived sale advertising local small mediumsized businesses advertisers typically enter 12month advertising sales contracts make monthly payments term contract advertisers prepay full amount portion contract value new advertisers desiring expand advertising programs subject credit review advertisers qualify may extend credit advertising purchase small mediumsized businesses tend fewer financial resources higher failure rates large businesses addition full collection delinquent accounts take extended period time involve significant costs believe extending credit local advertisers material adverse effect results operations financial condition assurances given require collateral advertisers although charge interest advertisers pay specified due dates remaining approximately 15 directory advertising revenue derived sale advertising national large regional chains rental car companies automobile repair shops pizza delivery businesses substantially revenue derived national accounts serviced cmrs contract cmrs independent third parties act agents national advertisers cmrs responsible billing national customers advertising receive payment value advertising placed directory net cmr’s commission directly cmr still exposed credit risk amount losses accounts historically less local accounts advertisers cases cmrs tend larger companies greater financial resources local advertisers december 31 2005 interest rate swap agreements major financial institutions notional value 1505 million exposed credit risk event one counterparties agreements cannot meet obligation notional amount used measure interest paid received represent amount exposure credit loss would limited amount would received remaining life swap agreement counterparties swap agreements major financial institutions credit ratings higher currently foresee material credit risk associated swap agreements however assurances given rh donnelley corporation notes consolidated financial statements continued pension postretirement benefits pension postretirement benefits represent estimated amounts paid employees future accounting benefits reflects recognition benefit costs employee’s approximate service period based terms plan investment funding decisions made determination benefit obligation net periodic pension postretirement benefit costs requires management make assumptions regarding discount rate return retirement plan assets increase future compensation healthcare cost trends changes assumptions significant impact projected benefit obligation funding requirement net periodic benefit cost assumed discount rate pension benefits could settled methodology used determine discount rate 2005 changed methodology discounts projected plan cash flows measurement date using spot rates provided citigroup pension discount curve single discount rate computed present value benefit cash flows using single rate equals present value computed using citigroup pension discount curve company changed approach 2005 better reflect specific cash flows plans determining discount rate prior years discount rates developed reference moody’s longterm aa corporate bond yield plan’s measurement date consideration plan’s duration relative duration moody’s aa corporate bond portfolio expected longterm rate return plan assets based mix assets held plan expected longterm rates return within asset class anticipated trend future healthcare costs based historical experience external factors see note 10 “benefit plans” information regarding benefit plans derivative financial instruments use derivative financial instruments trading speculative purposes derivative financial instruments limited interest rate swap agreements used manage exposure fluctuations interest rates variable rate debt agreements effectively convert 1505 million variable rate debt fixed rate debt mitigating exposure increases interest rates terms swap agreements receive variable interest based threemonth libor pay weighted average fixed rate 362 swaps mature varying dates beginning june 2006 december 2008 weighted average rate received interest rate swaps 329 twelve months ended december 31 2005 periodic payments receipts recorded interest expense interest rate swaps designated cash flow hedges hedge threemonth liborbased interest payments 1505 million bank debt extent swaps provide effective hedge changes fair value swaps recorded comprehensive income component shareholders’ deficit equity ineffectiveness recorded earnings december 31 2005 interest rate swaps provided effective hedge threemonth liborbased interest payments 1505 million bank debt ineffectiveness included earnings december 31 2002 result thenpending spa acquisition contemplated repayment existing variable rate debt 75 million notional value interest rate swap qualify hedge accounting treatment thus unrecognized fair market value swap previously recognized accumulated comprehensive loss balance sheet charged earnings accordingly charge 15 million included income expense net year ended december 31 2002 swap held maturity corresponding gain 15 million recognized 2003 income taxes account income taxes liability method accordance sfas 109 accounting income taxes deferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax assets realized see note 9 “income taxes” information regarding provision benefit income taxes rh donnelley corporation notes consolidated financial statements continued earnings per share account earnings per share accordance emerging issues task force issue 036 participating securities two class method fasb statement 128 “eitf 036” established standards regarding computation earnings per share “eps” companies issued securities common stock contractually entitle holder participate dividends earnings company eitf 036 requires earnings available common shareholders period deduction preferred stock dividends allocated common preferred shareholders based respective rights receive dividends basic eps calculated dividing loss income allocable common shareholders weighted average number shares outstanding eitf 036 require presentation basic diluted eps securities common stock therefore following eps amounts pertain common stock guidance eitf 036 diluted eps calculated dividing loss income allocable common shareholders weighted average common shares outstanding plus dilutive potential common stock potential common stock includes stock options stock appreciation rights “sars” warrants dilutive effect calculated using treasury stock method preferred stock dilutive effect calculated using “ifconverted” method calculation basic diluted loss earnings per share years ended december 31 2005 2004 2003 presented 1 31268 9483 year ended december 31 2004 computing basic eps using twoclass method allocated loss available common shareholders years ended december 31 2005 december 31 2003 common preferred shareholders since preferred shareholders contractual obligation share net losses rh donnelley corporation notes consolidated financial statements continued 2 60 934 stock options 2005 2003 assumed conversion preferred stock 5132 9767 9023 shares common stock 2005 2004 2003 respectively antidilutive therefore included calculation diluted eps subsequent gs repurchase longer required utilize twoclass method eps computations see note 17 “subsequent events” description gs repurchase employee stock awards accordance statement financial accounting standards 123 accounting stock based compensation “sfas 123” company accounts employee stock compensation plans using intrinsic valuebased method prescribed accounting principles board opinion 25 accounting stock issued employees “apb 25” related interpretations compensation expense related issuance stock options employees nonemployee directors recognized exercise price stock option less fair market value underlying stock grant date compensation expense related stock appreciation rights “sars” recognized end period amount quoted market value underlying shares covered grant exceeds grant price recognized vesting term following table reflects pro forma net income loss earnings per share assuming applied fair value method sfas 123 pro forma disclosures shown necessarily representative effects net income loss earnings per share future years rh donnelley corporation notes consolidated financial statements continued weighted average fair value stock awards 1976 2005 1364 2004 921 2003 estimated grant date using blackscholes optionpricing model following assumptions company grants stock awards eligible employees subject specific vesting conditions stock awards accelerated vesting feature associated eligible employee retirement allowing immediate exercise stock awards without providing future service pro forma reporting purposes company follows nominal vesting period approach requires recognition compensation expense vesting period employee terminates reason eligible retirement end vesting period remaining unrecognized compensation cost recognized date eligible retirement statement financial accounting standards 123r sharebased payment “sfas 123r” specifies award vested employee’s retention award longer contingent providing subsequent service “nonsubstantive vesting period approach” would case awards vest employees retire awards granted retirement eligible employees accordingly related compensation cost must recognized immediately awards granted retirement eligible employees period grant date retirement eligibility achieved expected occur nominal vesting period continue follow nominal vesting period approach 1 new stock awards granted prior adopting sfas 123r 2 remaining portion unvested outstanding awards adopting sfas 123r upon adoption sfas 123r apply nonsubstantive vesting period approach new grants retirement eligibility provisions effect net income applying nominal vesting approach versus nonsubstantive vesting approach years ended december 31 2005 2003 immaterial would approximately 27 million 2004 net tax estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities revenue certain expenses disclosure contingent assets liabilities actual results could differ materially estimates assumptions estimates assumptions used determination sales allowances doubtful accounts depreciation amortization employee benefit plans restructuring reserves among others new accounting pronouncements december 16 2004 financial accounting standards board “fasb” issued sfas 123r revision sfas 123 accounting stockbased compensation sfas 123r supersedes apb opinion 25 accounting stock issued employees approach sfas 123r similar approach described sfas 123 however sfas 123r requires companies calculate fair value sharebased payments employees including grants employee stock options amortize amount vesting period expense statement operations pro forma disclosure allowed sfas 123 longer permitted alternative sfas 123r offers choice transition methods including modified prospective modified retrospective prior periods interim periods year adoption april 14 2005 securities exchange commission “sec” announced adoption new rule amends compliance dates sfas 123r sec’s new rule allows companies implement sfas 123r beginning next fiscal year instead next reporting period rh donnelley corporation notes consolidated financial statements continued begins june 15 2005 company adopted sfas 123r effective january 1 2006 using modified prospective application method upon adoption sfas 123r company anticipates recognize pretax compensation expense approximately 47 million related equity awards 2006 approximately 35 million pretax compensation expense relates modification existing equity awards issuance new awards conjunction dex media merger see note 17 “subsequent events” information regarding dex media merger may 2005 fasb issued statement financial accounting standards 154 accounting changes error corrections replacement apb opinion 20 fasb statement 3 “sfas 154” statement applies voluntary changes accounting principle changes requirements accounting reporting change accounting principle sfas 154 requires retrospective application prior periods’ financial statements voluntary changes accounting principle unless impracticable determine either periodspecific effects cumulative effect change apb opinion 20 previously required voluntary changes accounting principle recognized including net income period change cumulative effect changing new accounting principle statement carries forward without change guidance contained apb opinion 20 reporting correction error previously issued financial statements change accounting estimate sfas 154 effective accounting changes corrections errors made fiscal years beginning december 15 2005 accordingly company adopt sfas 154 effective january 1 2006 company expect adoption sfas 154 material impact consolidated financial position results operations cash flows company reviewed new accounting standards identified believe new standards material impact company’s financial position operating results 3 acquisitions january 31 2006 acquired outstanding common stock dex media purchase price 41 billion consisting 36547381 shares common stock valued 22 billion 19 billion cash also assumed dex media’s outstanding indebtedness fair value 57 billion see note 17 “subsequent events” description dex media merger september 1 2004 completed att directory acquisition 141 billion cash working capital adjustments settlement 30 million liquidation preference owed us related dontech result acquisition became publisher attbranded yellow pages directories illinois northwest indiana results att directory business included consolidated results september 1 2004 att directory business operates rh donnelley publishing advertising illinois partnership indirect wholly owned subsidiary company january 3 2003 completed spa acquisition 223 billion cash became publisher sprintbranded yellow pages directories 18 states results spa directory business included consolidated results january 3 2003 spa directory business operates rh donnelley publishing advertising inc indirect wholly owned subsidiary company primary purpose acquisition facilitate company’s transformation sales agent prepress vendor yellow pages advertising leading publisher yellow pages directories control business acquisitions accounted purchase business combinations accordance sfas 141 business combinations purchase price allocated related tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values acquisition dates certain longterm intangible assets identified recorded estimated fair value identifiable intangible assets acquired include directory services agreements company rh donnelley corporation notes consolidated financial statements continued sprint company att customer relationships acquired trademarks trade names accordance sfas 142 goodwill intangible assets fair values identifiable intangible assets amortized estimated useful lives manner best reflects economic benefits derived assets goodwill amortized subject impairment testing annual basis see note 2 summary significant accounting policies identifiable intangible assets goodwill description intangible assets goodwill purchase accounting rules assume record deferred revenue balance associated att directory business 2041 million september 1 2004 deferred revenue balance spa business 3159 million january 3 2003 amounts represented revenue would recognized subsequent acquisition deferral amortization method absence purchase accounting accordingly record revenue associated directories published prior acquisition well directories published month acquisition completed although deferred revenue balances eliminated retained rights associated collection amounts due contractual obligations advertising contracts executed prior acquisitions result billed unbilled accounts receivable balances acquired acquisitions became assets company also purchase accounting rules assume record deferred directory costs related directories published prior acquisition well directories published month acquisition completed totaling 1758 million attbranded directories 633 million sprintbranded directories costs represented deferred operating expenses would recognized subsequent acquisitions deferral amortization method absence purchase accounting following table summarizes estimated fair values assets acquired liabilities assumed att directory acquisition september 1 2004 unaudited pro forma financial information presented prepared accordance sfas 141 business combinations includes combined att directory business rhd gaap results 2003 2004 summarized unaudited condensed pro forma information years ended december 31 2004 2003 assuming att directory acquisition related financing occurred january 1 2003 2004 presented following unaudited pro forma information purport represent company’s results operations would actually att directory rh donnelley corporation notes consolidated financial statements continued acquisition fact occurred january 1 2003 2004 necessarily representative results operations future period 4 restructuring impairment charges table shows activity restructuring reserves 2003 2004 2005 2003 2001 restructuring actions completed resulting payments 12 million remaining balance 5 million reversed included income restructuring actions resulted primarily executive management transition expiration prepress publishing contract december 2002 following spa acquisition january 3 2003 consolidated publishing technology operations sales offices administrative personnel relocated headquarters functions overland park kansas purchase new york cary north carolina approximately 140 people affected relocation headquarters functions overland park kansas purchase new york 75 included restructuring reserve remaining 65 people relocated company 2003 29 million charged goodwill representing closure prepress publishing facility operated spa blountville tennessee severance paid certain spa executives terminated immediately upon closing acquisition reserve prepress publishing facility 22 million represents remaining lease payments net estimated sublease income additional reserve 03 million recorded 2004 additional facility related costs well 13 million rh donnelley corporation notes consolidated financial statements continued related severance related cost estimates net payments 09 million 04 million made respect former prepress publishing facility 2004 2005 respectively remaining payments made 2012 severance spa executives 07 million paid full 2003 restructuring charges included general administrative expenses consolidated statement operations 2003 95 million charged earnings primarily representing severance related costs associated consolidation publishing technology operations sales offices administrative personnel relocation headquarters payments 36 million 06 million made 2004 2005 respectively related severance related costs relocation 2004 several employees included initial reserve estimate redirected within company resulting reduction reserve 12 million additional reserve 23 million recorded 2004 representing estimated fair value remaining lease payments net estimated sublease income former purchase new york headquarters office lease net payments 05 million 08 million made respect former headquarters office lease 2004 2005 respectively remaining payments made 2006 first quarter 2005 completed restructuring relating integration att directory business approximately 63 employees affected restructuring 57 terminated first quarter 2005 6 relocated corporate headquarters cary north carolina additionally vacated certain leased facilities chicago illinois estimated costs associated terminated employees abandonment certain leased facilities approximately 88 million costs charged goodwill first quarter 2005 payments 14 million made respect severance relocation retention 2005 payments 10 million made 2005 respect leased facilities chicago illinois remaining lease payments made 2012 costs associated restructuring plan estimated approximately 02 million charged earnings incurred 5 longterm debt credit facilities notes longterm debt december 31 2005 2004 consisted following credit facility december 31 2005 senior secured credit facility amended restated “credit facility” consists 3134 million term loan a2 1160 million term loan a3 14295 million term loan 350 million term loan d1 175 million revolving credit facility “revolver” aggregate credit facility 23839 million term loans require quarterly principal interest payments credit facility provides new term loan c potential borrowings 400 million proceeds borrowed used fund acquisitions retirement notes defined december 31 2005 outstanding balances term loans a2 a3 d1 2846 million rh donnelley corporation notes consolidated financial statements continued 1055 million 14258 million 3500 million respectively 50 million outstanding revolver term loan a2 term loan a3 mature december 2009 term loans d1 mature june 2011 weighted average interest rate outstanding debt credit facility 621 432 december 31 2005 2004 respectively amended restated credit facility bears interest option either • higher base rate determined administrative agent deutsche bank trust company americas plus 100 margin revolver term loan a2 075 margin term loan a3 term loan term loan d1 ii federal funds effective rate defined plus 050 plus 100 margin revolver term loan a2 075 margin term loan a3 term loan term loan d1 • libor rate plus 200 margin revolver term loan a2 175 margin term loan a3 term loan 150 margin term loan d1 may elect interest periods 1 2 3 6 9 12 months libor borrowings credit facility indentures governing notes defined contain usual customary negative covenants among things place limitations ability incur additional indebtedness including capital leases liens ii pay dividends repurchase capital stock iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock subsidiaries vi engage transactions affiliates credit facility also contains financial covenants relating maximum consolidated leverage minimum interest coverage maximum senior secured leverage defined therein substantially assets including capital stock subsidiaries pledged collateralize obligation credit facility senior notes defined september 1 2004 connection att directory acquisition amended restated credit facility consisted 700 million term loan a2 1650 million term loan b2 175 million revolver aggregate facility 2525 million december 6 2004 amended restated credit facility accomplish following objectives • obtain favorable pricing variable rate debt • provide new term loan a3 new term loan replacing term loan b2 • adjust nonfinancial covenants make less restrictive corporate operating flexibility • obtain consent carve designated additional debt required mandatory prepayments december 13 2005 amended credit facility accomplish following objectives • provide new 350 million term loan d1 fund repurchase 8875 senior notes due 2010 pay transaction prepayment costs • adjust nonfinancial covenants make less restrictive corporate operating flexibility • obtain consent dex media merger gs repurchase amendments restated credit facility accounted modification underlying debt instruments notes february 6 2004 company redeemed remaining aggregate principal amount 9125 senior subordinated notes due 2008 totaling 212 million redemption price 104563 rh donnelley corporation notes consolidated financial statements continued principal amount thereof plus accrued unpaid interest 2004 recorded interest expense related notes 12 million consisting premium par value paid redemption 10 million plus writeoff 02 million unamortized deferred financing costs connection spa acquisition issued 325 million 8875 senior notes due 2010 “senior notes” 600 million 10875 senior subordinated notes due 2012 “subordinated notes” collectively senior notes “notes” notes unsecured obligations company interest paid notes semiannually june 15 december 15 december 20 2005 repurchased tender offer exit consent solicitation 3171 million senior notes considering among alternatives redemption remaining 79 million senior notes 2006 proceeds credit facility’s 350 million term loan d1 used fund partial repurchase call premium 253 million pay transaction costs partial repurchase senior notes accounted extinguishment debt 327 million recorded interest expense year ended december 31 2005 consisting 253 million call premium writeoff 74 million unamortized deferred financing costs january 14 2005 rh donnelley corporation issued 300 million 6875 senior notes “holdco notes” proceeds used redeem 100303 shares outstanding preferred stock gs funds pay transaction costs repay debt associated credit facility interest payable holdco notes semiannually arrears january 15 july 15 year commencing july 15 2005 holdco notes unsecured senior obligations company mature january 15 2013 connection issuance holdco notes entered registration rights agreement completed exchange offer registration statement sec june 2005 december 31 2005 remaining 8875 senior notes fair value 85 million redeemable option beginning 2006 following prices december 31 2005 10875 senior subordinated notes fair value 6818 million redeemable option beginning 2007 following prices december 31 2005 6875 senior notes fair value 2805 million redeemable option beginning 2009 following prices rh donnelley corporation notes consolidated financial statements continued aggregate maturities longterm debt december 31 2005 dex media merger gs repurchase financing january 27 2006 connection dex media merger issued 660 million 6875 series a2 senior discount notes due january 15 2013 gross proceeds 6005 million 1210 million 8875 series a3 senior notes due january 15 2016 pay cash portion purchase price dex media stockholders also january 27 2006 issued 365 million 6875 series a1 senior discount notes due january 15 2013 gross proceeds 3321 million fund gs repurchase additionally assumed dex media’s outstanding indebtedness fair value approximately 57 billion see note 17 “subsequent events” additional information regarding transactions 6 partnership income investment att directory acquisition partnership income included 50 share net profits dontech revenue participation income received directly att based value advertising sales result att directory acquisition att ceased paying us revenue participation income consolidate net profits dontech partnership investment eliminated consequently partnership income longer reported commencing september 1 2004 rather following att directory acquisition revenues expenses income acquired att directory business directly recorded consolidated statements operations partnership income dontech eight months ended august 31 2004 year ended december 31 2003 consisted following summarized financial information dontech shown table prior september 1 2004 results consolidated financial statements rh donnelley corporation notes consolidated financial statements continued 7 redeemable preferred stock warrants 10000000 shares preferred stock authorized issuance december 31 2005 2004 100301 200604 shares preferred stock outstanding respectively january 27 2006 completed gs repurchase subsequently outstanding shares preferred stock series transactions related spa acquisition november 2002 january 2003 issued private placement 200604 shares preferred stock warrants purchase 1650000 shares common stock gs funds gross proceeds 200 million exercise prices related warrants range 2628 2862 exercisable time fiveyear term prior gs repurchase preferred stock accrued unpaid dividends convertible gs funds common stock time issuance price 2405 per share earned cumulative dividend 8 compounded quarterly could pay cash dividends preferred stock september 30 2005 time dividend accreted december 31 2005 preferred stock dividends paid cash gs funds company net proceeds received issuance preferred stock january 2003 november 2002 allocated preferred stock warrants beneficial conversion feature “bcf” preferred stock based relative fair values fair value preferred stock estimated using dividend discount method determines fair value based discounted cash flows security bcf function conversion price preferred stock fair value warrants fair market value underlying common stock date issuance fair value warrants 1218 january 2003 warrants 1043 november 2002 warrants determined based blackscholes model following assumptions connection issuance preferred stock subsequent quarterly dividend date september 30 2005 bcf recorded fair value underlying common stock time issuance greater conversion price preferred stock bcf treated deemed dividend preferred stock convertible common stock immediately issuance commencing october 3 2005 preferred stock longer convertible common stock consequently longer recognize bcf preferred stock dividend 2005 2004 117 million 218 million respectively consisted stated 8 dividend 101 million including 25 million accrued cash dividends 179 million respectively bcf 16 million 39 million respectively january 14 2005 repurchased 100303 shares outstanding preferred stock gs funds 2772 million cash order fund repurchase january 14 2005 issued 300 million holdco notes see note 5 longterm debt credit facilities notes discussion financing associated transaction connection preferred stock repurchase recorded reduction earnings available common shareholders consolidated statements operations 1337 million reflect loss repurchase shares yearended december 31 2005 excess cash paid gs funds carrying amount repurchased preferred stock plus amount previously recognized bcf associated shares recognized loss repurchase amount represents return gs funds therefore treated manner similar treatment preferred stock dividend rh donnelley corporation notes consolidated financial statements continued january 27 2006 repurchased remaining 100301 shares outstanding preferred stock gs funds 3361 million cash including accrued cash dividends interest pursuant terms stock purchase support agreement “stock purchase agreement” dated october 3 2005 aggregate purchase price defined stock purchase agreement equal product 6400 number shares company’s common stock outstanding shares preferred stock convertible including september 30 2005 plus ii amount equal amount cash dividends would accrued outstanding shares preferred stock parties entered stock purchase agreement october 1 2005 including earlier date transactions contemplated stock purchase agreement completed january 3 2006 purchase price also included daily interest component defined based number days january 3 2006 repurchase date january 27 2006 based terms stock purchase agreement repurchase preferred stock became probable event october 3 2005 requiring recorded value preferred stock accreted redemption value accretion redemption value 2005 totaled 2110 million recorded reduction net income available common shareholders consolidated statements operations year ended december 31 2005 conjunction gs repurchase first quarter 2006 reverse previously recorded bcf related shares record increase income available common shareholders approximately 312 million january 27 2006 order fund gs repurchase issued 365 million 6875 series a1 senior discount notes due january 15 2013 gross proceeds 3321 million see note 17 “subsequent events” additional information regarding transaction 8 stock incentive plans maintain shareholder approved stock incentive plan whereby certain employees nonemployee directors eligible receive stock options stock appreciation rights limited stock appreciation rights tandem stock options deferred shares awards typically granted fair market value common stock date grant follow apb 25 related interpretations accounting stock incentive plan typically recognize compensation expense related issuance stock options compensation expense related sars recognized end period amount quoted market value underlying shares covered grant exceeds grant price recognized vesting term awards expire ten years grant date board determines termination vesting relevant provisions date grant nonemployee directors receive options purchase 1500 shares award 1500 deferred shares upon election board nonemployee directors also receive annual basis options purchase 1500 shares award 1500 deferred shares nonemployee directors may also elect receive additional options lieu portion annual cash retainer fee rh donnelley corporation notes consolidated financial statements continued changes awards outstanding stock incentive plans last three years follows following table summarizes information stock awards outstanding exercisable december 31 2005 december 31 2005 4002244 awards outstanding weighted average exercise price per share 3269 2132666 awards exercisable weighted average exercise price per share 2560 december 31 2004 4034885 awards outstanding weighted average exercise price per share 2957 1709293 awards exercisable weighted average exercise price per share 2298 december 31 2003 3344412 awards outstanding weighted average exercise price per share 2378 1526193 awards exercisable weighted average exercise price per share 2010 february 24 2005 company granted 05 million stock appreciation rights “sars” certain employees conjunction annual grant stock incentive awards sars settled common stock granted grant price 5900 per share equal fair market rh donnelley corporation notes consolidated financial statements continued value company’s common stock grant date vest ratably three years july 28 2004 company granted 09 million sars certain employees including senior management connection att directory acquisition sars settled common stock granted grant price 4158 per share equal fair market value company’s common stock grant date initially scheduled vest entirely five years maximum appreciation july 28 2004 sar grants 100 initial grant price accordance apb 25 fin 28 accounting stock appreciation rights variable stock option award plans recognize noncash compensation end period amount quoted market value underlying shares covered grant exceeds grant price recognized vesting term recognized noncash compensation related smaller sar grants 41 million 13 million year ended december 31 2005 2004 respectively connection spa acquisition company granted 15 million options “founders grant” certain employees including senior management 2002 options granted october 2002 exercise price equal fair market value company’s common stock date grant however award options contingent upon successful closing spa acquisition therefore options subject forfeiture january 3 2003 time fair market value company’s common stock exceeded exercise price accordingly options accounted compensatory options resulted charge 10 million years ended december 31 2005 2004 sale preferred stock connection spa acquisition triggered change control terms company’s stock incentive plans accordingly awards granted end 2002 exception founders grant options held senior management waived change control provisions became fully vested connection dex media merger company granted october 3 2005 11 million sars certain employees including senior management sars granted exercise price 6500 vest ratably three years award sars contingent upon successful completion dex media merger dex media merger triggered change control company’s stock incentive plans accordingly awards granted january 31 2006 exception stock awards held senior management waived change control provisions became fully vested addition vesting conditions related july 28 2004 sars grant modified result dex media merger vest ratably three years date grant lastly january 31 2006 equity awards outstanding existing dex media equity compensation plans totaled 40 million dex media option shares weighted average exercise price 548 per option share result dex media merger outstanding dex media equity awards converted rhd equity awards february 1 2006 upon conversion rhd equity awards number securities issued upon exercise outstanding awards totaled 17 million shares rhd weighted average exercise price 1273 february 1 2006 number rhd shares remaining available future issuance totaled 05 million dex media inc 2004 incentive award plan see note 17 “subsequent events” additional information 9 income taxes deferred tax assets liabilities determined based estimated future tax effects temporary differences financial statements tax basis assets liabilities measured current enacted tax rates deferred tax expense benefit result changes deferred tax asset liability rh donnelley corporation notes consolidated financial statements continued provision benefit income taxes consisted following table summarizes significant differences us federal statutory tax rate effective tax rate rh donnelley corporation notes consolidated financial statements continued deferred tax assets liabilities consisted following december 31 2005 2004 2005 provision income taxes 432 million comprised deferred tax provision due taxable loss generated current period 2005 deferred tax provision resulted effective tax rate 390 net operating losses approximately 1686 million related tax deductions amortization expense recorded tax purposes compared book purposes respect intangible assets acquired connection spa acquisition att directory acquisition 2005 effective tax rate reflects decrease state local tax rate due integration spa acquisition att directory acquisition december 31 2005 company 36 million federal alternative minimum tax amt credit carryforward expire company also federal state net operating loss carryforwards approximately 3425 million net carryback approximately 6500 million respectively assessing realizability deferred tax assets considered whether likely portion deferred tax assets realized ultimate realization deferred tax assets dependent upon generation future taxable income periods temporary differences become deductible making determination applicable financial reporting standards allowed consider scheduled reversal deferred tax liabilities projected future taxable income tax planning strategies based upon future taxable income periods deferred tax assets utilizable projected future taxable income believe likely realize benefits deferred tax assets federal net operating loss carryforward begin expire 2023 state net operating loss carryforwards begin expire 2008 portion benefits net operating loss carryforwards reflected additional paidin capital portion rh donnelley corporation notes consolidated financial statements continued net operating loss carryforwards generated deductions related exercise stock options 2005 2004 deduction stock options 132 million 101 million respectively 2004 provision income taxes 459 million comprised current tax benefit 256 million deferred tax provision 715 million 2004 current tax benefit resulted effective tax rate 395 net operating losses approximately 724 million related tax deductions connection spa acquisition att directory acquisition 2004 deferred tax provision 715 million primarily related difference amortization expense recorded tax purposes compared book purposes respect intangible assets acquired connection spa acquisition att directory acquisition 2004 effective tax rate reflects decrease state local tax rate due integration spa acquisition att directory acquisition 2003 tax benefit 360 million comprised current tax provision 42 million deferred tax benefit 402 million 2003 tax benefit resulted effective tax rate 418 net operating losses approximately 1760 million related tax deductions connection spa acquisition 2003 deferred tax benefit primarily related net operating loss generated 2003 partially offset deferred tax provision principally relating difference amortization recorded tax purposes compared book purposes respect intangible assets acquired connection spa acquisition company currently federal tax audit internal revenue service taxable years 2003 2004 company believes adequate provisions made respect federal tax audit company believes resolution audit material adverse effect company’s financial position results operations cash flows addition certain state tax returns examination various regulatory authorities continuously review issues raised connection ongoing examinations open tax years evaluate adequacy reserves believe accrued tax liabilities adequate cover probable us federal state income tax loss contingencies 10 benefit plans retirement plans cash balance defined benefit pension plan covering substantially employees least one year service benefits paid employees based years service percentage total annual compensation percentage compensation allocated retirement account ranges 30 125 depending age years service “cash balance benefit” benefits certain employees participants predecessor dun bradstreet corporation “db” defined benefit pension plan also determined based participant’s average compensation years service “final average pay benefit” benefits paid equal greater final average pay benefit cash balance benefit pension costs determined using projected unit credit actuarial cost method funding policy contribute amount least equal minimum legal funding requirement contributions required made 2005 2004 2003 underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities use measurement date december 31 majority plan assets also unfunded nonqualified defined benefit pension plan pension benefit equalization plan “pbep” covers senior executives certain key employees benefits based years service compensation including compensation permitted taken account previously mentioned defined benefit pension plan savings plan offer defined contribution savings plan substantially employees contribute 050 dollar contributed participating employee maximum 6 participating employee’s salary including bonus commissions contributions plan 25 million 17 million 11 million years ended december 31 2005 2004 2003 respectively effective rh donnelley corporation notes consolidated financial statements continued july 1 2005 dontech’s defined contribution savings plan merged company’s defined contribution savings plan postretirement benefits unfunded postretirement benefit plan provides certain healthcare life insurance benefits fulltime employees reach retirement age working company connection att directory acquisition assumed dontech’s benefit plans information presented 2005 2004 includes amounts company plans dontech plans since september 1 2004 retirement postretirement plans company dontech similar nature share master trust summary funded status benefit plans december 31 2005 2004 follows rh donnelley corporation notes consolidated financial statements continued net amounts recognized consolidated balance sheets december 31 2005 2004 follows accumulated benefit obligation defined benefit pension plans 1127 million 1022 million december 31 2005 2004 respectively projected benefit obligation accumulated benefit obligation unfunded pbep december 31 2005 2004 follows net periodic benefit expense retirement plans years ended december 31 2005 2004 2003 follows additional information following assumptions used determining benefit obligations retirement plans postretirement plan discount rate reflects current rate pension obligation could effectively settled end year methodology used determine discount rate 2005 changed methodology discounts projected plan cash flows measurement date using spot rates provided citigroup pension discount curve single discount rate computed present rh donnelley corporation notes consolidated financial statements continued value benefit cash flows using single rate equals present value computed using citigroup pension discount curve company changed approach 2005 better reflect specific cash flows plans determining discount rate prior years discount rates developed reference moody’s longterm aa corporate bond yield plan’s measurement date consideration plan’s duration relative duration moody’s aa corporate bond portfolio following assumptions used determining net periodic benefit expense retirement plans weighted average discount rate used determine net periodic expense postretirement plan 575 600 650 2005 2004 2003 respectively 2005 2004 used rate 825 expected longterm rate return assumption plan assets retirement plan assumption based plan’s present target asset allocation 65 equity securities 35 debt securities reflects longterm capital market return forecasts asset classes employed assumed excess returns active management within asset class portion plan assets actively managed periodic rebalancing back target allocations current market factors inflation interest rates evaluated longterm capital market assumptions determined although review expected longterm rate return assumption annually plan performance one particular year significantly influence evaluation assumption generally revised unless fundamental change one factors upon based target asset allocation longterm capital market return forecasts net periodic benefit expense postretirement plan years ended december 31 2005 2004 2003 follows following table reflects assumed healthcare cost trend rates rh donnelley corporation notes consolidated financial statements continued assumed healthcare cost trend rates significant effect amounts reported healthcare plans onepercentagepoint change assumed healthcare cost trend rates would following effects 2005 pension plan weightedaverage asset allocation december 31 2005 2004 asset category follows total return investment approach mix equity debt investments used maximize longterm return plan assets prudent level risk plan’s target asset allocation presently 65 equity securities 35 debt securities target allocation controlled periodic rebalancing back target plan assets invested using combination active passive indexed investment strategies plan’s equity securities diversified across us nonus stocks plan’s debt securities diversified principally among securities issued guaranteed united states government agencies mortgagebacked securities including collateralized mortgage obligations investmentgrade corporate debt obligations dollardenominated obligations issued us nonus banks corporations investment risk controlled diversification among asset classes managers securities risk controlled investment manager level requiring active managers follow formal written investment guidelines investment results measured monitored ongoing basis quarterly investment reviews conducted plan’s active united states investment manager prohibited investing plan assets equity debt securities issued guaranteed rhd however plan may hold donnelley stock part total united states equity market index fund plan invests estimated future benefit payments following table illustrates estimated future benefit payments made next five fiscal years aggregate five fiscal years thereafter company’s retirement plans postretirement plan expected medicare part subsidies received rh donnelley corporation notes consolidated financial statements continued expect make contributions approximately 01 million 09 million nonqualified retirement plan postretirement plan respectively 2006 11 commitments lease office facilities equipment operating leases noncancelable lease terms expiring various dates 2015 rent lease expense 2005 2004 2003 100 million 116 million 102 million respectively future noncancelable minimum rental payments applicable operating leases december 31 2005 entered longterm purchase agreements paper used publishing directories purchase commitments paper three suppliers estimated based minimum required quantities aggregate approximately 305 million 2006 connection att directory acquisition entered internet yellow pages reseller agreement whereby obligated pay att 154 million 5year term agreement connection software system modernization ongoing support services related amdocs software system obligated pay amdocs 402 million periods 2006 2009 12 legal proceedings involved various legal proceedings arising ordinary course business well certain litigation tax matters described periodically assess liabilities contingencies connection matters based upon latest information available us matters probable incurred loss range loss reasonably estimated record reserves consolidated financial statements instances unable make reasonable estimate liability uncertainties related probable outcome amount range loss additional information becomes available adjust assessment estimates liabilities accordingly based review latest information available believe ultimate liability connection pending legal proceedings including litigation tax matters described material adverse effect results operations cash flows financial position described material amounts accrued financial statements respect matters order understand potential exposure litigation tax matters described captions “information resources inc” “tax matters” need understand relationship us db certain predecessors affiliates various corporate reorganizations contractual commitments assumed varying degrees responsibility respect matters november 1996 company known dun bradstreet corporation separated spinoff “1996 distribution” three separate public companies dun bradstreet corporation acnielsen corporation “acnielsen” cognizant corporation “cognizant” june 1998 dun bradstreet corporation separated spinoff “1998 distribution” two separate public companies rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation formerly dun bradstreet corporation new company changed name dun bradstreet corporation later 1998 cognizant separated spinoff “cognizant distribution” two separate public companies ims health incorporated “ims” nielsen media research inc “nmr” september 2000 dun bradstreet corporation separated two separate public companies moody’s corporation “moody’s” formerly dun bradstreet corporation new company changed name dun bradstreet corporation result form rh donnelley corporation’s separation dun bradstreet corporation 1998 corporate successor technically defendant taxpayer referred db respect matter accruing prior june 30 1998 information resources inc following description antitrust lawsuit filed 1996 information resources inc “iri” july 1996 iri filed complaint subsequently amended 1997 united states district court southern district new york naming defendants db company successor db ac nielsen company subsidiary acnielsen ims known cognizant time filing wholly owned subsidiaries db vnu nv publicly traded dutch company “vnu” us subsidiaries vnu inc ac nielsen ac nielsen us inc “acn us” nmr collectively “vnu parties” assumed exclusive joint several liability judgment settlement antitrust lawsuit collectively “iri liabilities” amended complaint alleged among claims various violations us antitrust laws sections 1 2 sherman antitrust act iri sought damages excess 6500 million iri sought treble antitrust laws iri also sought punitive damages unspecified amount believe precluded result prior dismissal one iri’s claims december 2004 court entered order barred iri arguing defendant’s pricing practices discounts illegal anticompetitive unless could satisfy specified burden proof response ruling press release iri stated relevant part “without evidence iri believes little would left iri’s case take trial” result iri asked court enter final judgment could take immediate appeal second circuit defendants object request february 1 2005 us district court southern district new york entered final judgment iri dismissing iri’s claims prejudice merits appeal fully briefed argued court october 18 2005 febraury 16 2006 iri defendants including company entered settlement agreement pursuant vnu parites agreed pay iri approximately 550 million consideration release claims defendants result settlement longer report matter tax matters db entered global taxplanning initiatives normal course business primarily taxfree restructurings foreign domestic operations collectively “legacy tax matters” irs disputed past currently disputing certain tax positions taken respect legacy tax matters current status legacy tax matters summarized december 31 2005 settlement agreements executed irs respect legacy tax matters previously referred sec filings “utilization capital losses” “royalty expense deductions” respect utilization capital losses matter settlement agreement resolved matter entirety without financial impact us royalty expense deductions matter settlement resolved tax years 1995 1996 without financial impact us represented rh donnelley corporation notes consolidated financial statements continued approximately 90 total potential liability irs including penalties believe resolution remaining exposure irs royalty expense deduction matter material adverse impact financial position results operations cash flows based upon settlements matters longer reported upon sec filings one remaining legacy tax matter described immediately amortization royalty expense deductionsroyalty income 19971998 fourth quarter 2003 db received behalf irs notices proposed adjustment respect partnership transaction entered 1997 irs asserted certain amortization expense deductions claimed db 1997 1998 tax returns disallowed april 2004 db received behalf proposed notices deficiency irs proposing adjustments respect 1997 partnership transaction consistent notices proposed adjustment understand db filed protests relating matter 1997 1998 tax years irs office appeals third quarter 2004 db informed irs office appeals 1997 1998 tax years returned examination division irs development issues addition irs asserted royalty expense deductions claimed db tax returns 1997 1998 royalties paid partnership disallowed irs also asserted receipt royalties partnership reallocated reported royalty income db including portions royalties allocated third party partners partnership thus included taxable income understand db believes irs’ stated positions respect treatment royalty expense royalty income mutually inconsistent making unlikely irs prevail positions also understand db nonetheless believes irs may seek issue notices respect inconsistent positions understand db estimates additional tax liability result disallowance 1997 1998 amortization deductions could 443 million tax interest penalties net tax benefits event irs prevail positions respect royalty expense royalty income db believes unlikely db estimates additional tax liability result disallowance 1997 1998 royalty expense deductions inclusion reallocated royalty income relevant years could 1463 million tax interest penalties net tax benefits would addition 443 million noted related amortization expense deduction understand db attempting resolve matters irs proceeding litigation necessary db challenge time irs positions years 1997 1998 us district court us court federal claims rather us tax court disputed amounts applicable year would need paid advance court jurisdiction case pursuant series tax sharing agreements collectively “tax sharing agreements” relating spinoffs separations referred db moody’s jointly severally liable amounts resulting “amortization royalty expense deductionsroyalty income 19971998” described terms 1998 distribution db agreed assume defense indemnify us tax liability may assessed us related costs expenses may incur connection legacy tax matters also required agreements moody’s agreed jointly severally liable db indemnity obligation us terms certain spinoffs separations db moody’s agreed financially responsible 50 potential liabilities may arise extent potential rh donnelley corporation notes consolidated financial statements continued liabilities directly attributable party’s respective business operations db moody’s unable bear part liabilities would liable extent could satisfy joint several indemnity obligations us cannot assure outcome remaining legacy tax matter amortization royalty expense deductionsroyalty income 19971998 management presently believes db moody’s sufficient financial resources borrowing capacity satisfy respective indemnity obligations connection remaining legacy tax matter therefore management presently believes ultimate resolution legacy tax matter would material adverse effect company’s results operations cash flows financial condition matters company exposed potential defamation breach privacy claims arising publication directories methods collecting processing using advertiser telephone subscriber data determined inaccurate data stored us improperly accessed disseminated us unauthorized persons subjects data users data collect publish could submit claims company although date experienced material claims relating defamation breach privacy may party proceedings future could material adverse effect business also involved legal proceedings claims litigation arising ordinary conduct business although cannot assure outcome management presently believes outcome legal proceedings material adverse effect results operations financial condition material amounts accrued consolidated financial statements respect matters 13 business segments 2004 revised historical segment reporting reflect change business resulted att directory acquisition reflect management reviews analyzes business publishing yellow pages directories conducted one operating segment prepress publishing services ancillary services previously performed behalf publishers performed entirely behalf directories publish result att directory acquisition att ceased paying us revenue participation income consolidate net profits dontech eliminated partnership investment dontech consequently partnership income longer reported commencing september 1 2004 accordingly previously reported dontech operating segment longer applicable 14 guarantees rh donnelley inc direct wholly owned subsidiary rh donnelley corporation issuer senior notes subordinated notes rh donnelley corporation direct indirect 100 owned subsidiaries rh donnelley inc jointly severally fully unconditionally guarantee debt instruments holdco notes issued rh donnelley corporation january 14 2005 guaranteed company’s subsidiaries december 31 2005 rh donnelley inc’s direct wholly owned subsidiaries rh donnelley publishing advertising inc rh donnelley apil inc dontech holdings llc dontech ii partnership rh donnelley publishing advertising illinois holdings llc rh donnelley publishing advertising illinois partnership get digital smartcom inc following consolidating condensed financial statements read conjunction consolidated financial statements company rh donnelley corporation notes consolidated financial statements continued see note 12 “legal proceedings” description various legal proceedings company involved related contingencies general substantially net assets company subsidiaries restricted paid dividends third party subsidiaries restricted paying dividends loans advances rh donnelley corporation limited exceptions terms credit facility see note 5 “longterm debt credit facilities notes” description debt instruments rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation consolidating condensed balance sheet december 31 rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation consolidating condensed balance sheet december 31 rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation consolidating condensed statement operations year ended december 31 2005 rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation consolidating condensed statement operations year ended december 31 2004 rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation consolidated condensed statement operations year ended december 31 2003 rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation consolidating condensed statement cash flows year ended december 31 2005 rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation consolidating condensed statement cash flows year ended december 31 2004 presentation 2004 cash flows revised prior year correct presentation cash flow rh donnelley corporation rh donnelley inc guarantor subsidiaries rh donnelley corporation consolidated condensed statement cash flows year ended december 31 2003 rh donnelley corporation notes consolidated financial statements continued 15 valuation qualifying accounts 16 quarterly information unaudited rh donnelley corporation notes consolidated financial statements continued 1 revenue sale advertising recognized deferral amortization method whereby revenue advertising sales initially deferred directory published recognized ratably life directory due purchase accounting rules able recognize revenue directories published att directory business spa directory business prior acquisition directories published months acquisitions completed 2 similar deferral amortization method revenue recognition certain costs directly related selling production directories initially deferred recognized ratably life directory due purchase accounting rules able recognize expenses directories published att directory business spa directory business prior acquisition directories published months acquisitions completed additionally result att directory acquisition att ceased paying us revenue participation income consolidate net profits dontech 3 january 14 2005 repurchased 100303 shares outstanding preferred stock gs funds 2772 million first quarter 2005 recorded reduction earnings available common shareholders approximately 1337 million reflect loss repurchase shares fourth quarter 2005 carrying value preferred stock accreted redemption value 3341 million result recorded reduction earnings available common shareholders approximately 2110 million 17 subsequent events dex media merger january 31 2006 completed dex media merger purchasing outstanding common stock dex media purchase price 41 billion pursuant agreement plan merger dated october 3 2005 “merger agreement” issued outstanding share dex media common stock converted 1230 cash 024154 share rhd common stock resulting aggregate cash value 19 billion aggregate stock value 22 billion based 36547381 newly issued shares rhd common stock valued 6182 per share 6182 share price used value common shares issued dex media merger based average closing price rhd’s common stock two business days announcement dex media merger october 3 2005 accordance eitf 9519 determination measurement date market price securities issued purchase business combination additionally assumed dex media’s outstanding indebtedness january 31 2006 fair value 57 billion upon completion dex media merger transactions contemplated merger agreement company’s stockholders former dex media stockholders approximately 47 53 company’s common stock respectively dex media merger accounted purchase business combination company considered acquirer first quarter 2006 accordance sfas 141 business combinations “sfas 141” purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values january 31 2006 purchase accounting rules assume record deferred revenue balance dex media january 31 2006 related directories published prior dex media merger amount would recognized revenue subsequent merger deferral amortization method absence purchase accounting although deferred revenue balance eliminated retain rights associated collection amounts due obligations advertising contracts executed prior dex media merger result dex media’s accounts receivable balances remain assets also purchase accounting rules assume record deferred directory costs january 31 2006 related directories published prior dex media merger costs represent operating expenses would recognized subsequent merger rh donnelley corporation notes consolidated financial statements continued deferral amortization method absence purchase accounting following purchase price allocation preliminary subject closing balance sheet audit dex media january 31 2006 final determination fair value assets acquired liabilities assumed calculation allocable purchase price pursuant merger agreement issued outstanding share dex media common stock january 31 2006 converted right receive 1230 cash 024154 share rhd common stock january 31 2006 151309850 shares dex media common stock issued outstanding resulted issuance 36547381 shares rhd common stock valued 6182 per share b number dex media vested equity awards conversion rhd shares totals 13 million january 31 2006 value vested equity awards totals 694 million using valuation price 5129 per share number dex media unvested equity awards conversion rhd shares totals 04 million january 31 2006 value unvested equity awards totals 194 million using valuation price range 5129 5260 per share c pursuant sfas 141 provisions required fair value dex media’s outstanding debt merger completion date january 31 2006 dex media outstanding debt 55 billion associated fair value adjustment totaled 02 billion rh donnelley corporation notes consolidated financial statements continued represents contractual agreements dex media entered qwest agreements include noncompetition nonsolicitation agreement amortization period 3738 years whereby qwest agreed sell directory products consisting principally listings classified advertisements subscribers geographic areas dex media states qwest provides local telephone service ii publishing agreement amortization period 3738 years grants dex media right exclusive official directory publisher listings classified advertisements qwest’s telephone customers geographic areas dex media states qwest provides local telephone service iii local national customer relationships amortization period 1525 years iv trademark license agreement amortization period 15 years whereby qwest licensed dex media right use qwest dex qwest dex advantage marks connection directory products related marketing materials dex media states right use marks connection dexonlinecom dex media’s directory website weighted average amortization period intangible assets acquired totals approximately 33 years e represents estimated net unbilled dex media customer receivables directories published january 31 2006 f represents “cost uplift” adjustment increase costs incurred directories scheduled publish january 31 2006 fair value g adjustments represent reversal dex media’s premerger deferred revenue liability deferred directory costs directories published prior january 31 2006 elimination deferred financing costs deferred income taxes required eliminated purchase accounting h represents recognition deferred income taxes relating dex media merger represents excess purchase price estimated fair value net identifiable assets acquired goodwill allocated company’s one operating segment company expect goodwill deductible tax purposes results dex media business included consolidated results commencing february 1 2006 january 27 2006 order fund cash portion dex media merger purchase price company issued 660 million aggregate principal amount maturity 6005 million gross proceeds 6875 series a2 senior discount notes due january 15 2013 1210 million principal amount 8875 series a3 senior notes due january 15 2016 interest payable semiannually series a2 senior discount notes series a3 senior notes unsecured obligations rhd senior right payment future senior subordinated indebtedness rhd structurally subordinated indebtedness subsidiaries addition cash received dex media west’s credit facility amendment occurred january 2006 utilized fund remaining cash portion dex media merger purchase price connection issuance notes entered registration rights agreement whereby agreed among things file one registration statements sec series a2 discount notes series a3 notes within 120 days january 31 2006 ii use reasonable efforts registration statements declared effective sec within 180 days january 31 2006 iii subject certain limitations consummate exchange offers exchange offer registration statements relate within 210 days january 31 2006 connection dex media merger october 3 2005 company granted 11 million sars certain employees including senior management sars granted grant price 6500 vest ratably three years award sars contingent upon successful completion dex media merger dex media merger triggered change control company’s stock incentive plans accordingly awards granted january 31 2006 exception stock awards held senior management waived change control provisions became fully vested addition vesting conditions related july 28 2004 sars grant modified result dex media rh donnelley corporation notes consolidated financial statements continued merger vest ratably three years date grant january 31 2006 equity awards outstanding existing dex media equity compensation plans totaled 40 million weighted average exercise price 548 result dex media merger outstanding dex media equity awards converted rhd equity awards february 1 2006 upon conversion rhd equity awards number securities issued upon exercise outstanding awards total 17 million shares rhd weighted average exercise price 1273 february 1 2006 number rhd shares remaining available future issuance totaled 05 million dex media inc 2004 incentive award plan gs repurchase january 27 2006 repurchased remaining 100301 shares outstanding preferred stock gs funds 3361 million cash including accrued cash dividends interest pursuant terms stock purchase support agreement “stock purchase agreement” dated october 3 2005 aggregate purchase price defined stock purchase agreement equal product 6400 number shares company’s common stock outstanding shares preferred stock convertible including september 30 2005 plus ii amount equal amount cash dividends would accrued outstanding shares preferred stock parties entered stock purchase agreement october 1 2005 including earlier date transactions contemplated stock purchase agreement completed january 3 2006 purchase price also included daily interest component defined based number days january 3 2006 repurchase date january 27 2006 order fund gs repurchase issued 365 million aggregate principal amount maturity 3321 million gross proceeds 6875 series a1 senior discount notes due january 15 2013 notes unsecured obligations rhd senior right payment future senior subordinated indebtedness rhd structurally subordinated indebtedness subsidiaries interest payable semiannually commencing july 15 2006 connection issuance notes entered registration rights agreement whereby agreed among things file exchange offer registration statement sec respect notes within 120 days january 27 2006 ii use reasonable efforts exchange offer registration statement declared effective sec within 180 days january 27 2006 iii subject certain limitations consummate exchange offer exchange offer registration statement relates within 210 days january 27 2006 result gs repurchase purchase agreement among company gs funds relating preferred stock terminated null void force effect without action company gs funds required ii none gs funds rights designate directors company veto corporate action company provided purchase agreement relating preferred stock otherwise iii registration rights agreement dated november 25 2002 among company gs funds terminated null void force effect without action company gs funds required closing gs repurchase none gs funds registration rights respect securities company including without limitation warrants purchase shares company’s common stock shares company’s common stock may issued issuable upon exercise warrants subject preceding paragraph gs funds retain warrants purchase approximately 165 million shares company’s common stock result gs repurchase becoming probable event terms stock purchase agreement dated october 3 2005 see note 7 “redeemable preferred stock warrants” recorded value preferred stock accreted redemption value 3341 million december 31 2005 3361 million january 27 2006 first quarter 2006 accretion redemption value 20 million recorded reduction income available common shareholders previously recorded bcf approximately 312 million related shares recognized increase income available common shareholders 2006 item 9item 8 annual report additional information regarding derivative financial instruments hedging activities market risk sensitive instruments company utilizes combination fixedrate variablerate debt finance operations variablerate debt exposes company variability interest payments due changes interest rates management believes prudent mitigate interest rate risk portion variablerate borrowings satisfy objective company entered fixed interest rate swap agreements manage fluctuations cash flows resulting changes interest rates variablerate debt certain interest rate swap agreements designated cash flow hedges accordance provisions sfas 133 accounting derivative instruments hedging activities “sfas 133” amended sfas 138 accounting certain derivative instruments certain hedging activities amendment fas 133 sfas 149 amendment statement 133 derivative instruments hedging activities swaps recorded fair value quarterly basis fair values swaps determined based quoted market prices assuming effectiveness differences fair value book value swaps recognized accumulated comprehensive loss income component shareholders’ equity deficit swaps hedged item threemonth liborbased interest payments 29 billion bank debt designed critical terms interest reset dates duration index coincide assuming critical terms continue coincide cash flows swaps exactly offset cash flows hedged item ineffectiveness exist derivative instruments designated qualify hedged transactions initial fair value subsequent gains losses change fair value reported earnings component interest expense may 2006 company entered 10 billion notional value interest rate swaps designated cash flow hedges july 2006 addition certain interest rate swaps acquired result dex media merger notional amount 425 million designated cash flow hedges fourth quarter 2006 300 million interest rate swaps settled december 31 2006 125 million remain undesignated resulting gains losses change fair value interest rate swaps recognized earnings component interest expense item 8 financial statements supplementary data management’s annual report internal control financial reporting management rh donnelley corporation responsible establishing maintaining adequate internal control company’s financial reporting within meaning rule 13a15f promulgated securities exchange act 1934 inherent limitations internal control financial reporting may prevent detect misstatements financial statements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness rh donnelley corporation’s internal control financial reporting december 31 2006 undertaking assessment management used criteria established committee sponsoring organizations coso treadway commission contained internal control integrated framework based assessment management concluded december 31 2006 company’s internal control financial reporting effective based coso criteria management’s assessment effectiveness internal control financial reporting december 31 2006 audited kpmg llp independent registered public accounting firm stated report appears page kpmg llp also audited consolidated financial statements rh donnelley corporation subsidiaries year ended december 31 2006 included annual report form 10k stated report appears page report independent registered public accounting firm board directors shareholders rh donnelley corporation audited accompanying consolidated balance sheet rh donnelley corporation subsidiaries december 31 2006 related consolidated statements operations comprehensive loss cash flows changes shareholders’ equity year ended consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects financial position rh donnelley corporation subsidiaries december 31 2006 results operations cash flows year ended conformity us generally accepted accounting principles discussed note 2 notes consolidated financial statements company adopted provisions statement financial accounting standards 123r sharebased payment january 1 2006 statement financial accounting standards 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r december 31 2006 also audited accordance standards public company accounting oversight board united states effectiveness rh donnelley corporation’s internal control financial reporting december 31 2006 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso report dated march 13 2007 expressed unqualified opinion management’s assessment effective operation internal control financial reporting kpmg llp raleigh north carolina march 13 2007 report independent registered public accounting firm board directors shareholders rh donnelley corporation audited management’s assessment included accompanying management’s annual report internal control financial reporting rh donnelley corporation maintained effective internal control financial reporting december 31 2006 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso rh donnelley corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment opinion effectiveness company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion management’s assessment rh donnelley corporation maintained effective internal control financial reporting december 31 2006 fairly stated material respects based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso also opinion rh donnelley corporation maintained material respects effective internal control financial reporting december 31 2006 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso also audited accordance standards public company accounting oversight board united states consolidated balance sheet rh donnelley corporation subsidiaries december 31 2006 related consolidated statements operations comprehensive loss cash flows changes shareholders’ equity year ended report dated march 13 2007 expressed unqualified opinion consolidated financial statements kpmg llp raleigh north carolina march 13 2007 report independent registered public accounting firm board directors shareholders rh donnelley corporation opinion consolidated balance sheet december 31 2005 related consolidated statements operations comprehensive income cash flows changes shareholders’ deficit equity two years period ended december 31 2005 present fairly material respects financial position rh donnelley corporation subsidiaries december 31 2005 results operations cash flows two years period ended december 31 2005 conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp raleigh north carolina march 15 2006 rh donnelley corporation consolidated balance sheets accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements operations comprehensive loss income accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements cash flows accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements changes shareholders’ equity deficit accompanying notes integral part consolidated financial statements rh donnelley corporation notes consolidated financial statements tabular amounts thousands except per share data percentages 1 business presentation consolidated financial statements include accounts rh donnelley corporation direct indirect whollyowned subsidiaries “company” “rhd” “donnelley” “we” “us” “our” intercompany transactions balances eliminated one nation’s largest yellow pages online local commercial search companies based revenue publish distribute advertiser content utilizing three highly recognizable brands industry dex embarq formerly known sprint att formerly known sbc 2006 print online solutions helped 600000 national local businesses 28 states reach consumers actively seeking purchase products services 2006 published distributed 80 million print directories markets include albuquerque denver las vegas orlando phoenix certain prior period amounts included consolidated balance sheet reclassified conform current period’s presentation significant business developments january 31 2006 acquired dex media inc “dex media” equity purchase price 41 billion consisting 36547381 shares common stock valued 22 billion 19 billion cash “dex media merger” also assumed dex media’s subsidiaries’ outstanding indebtedness fair value 55 billion together costs total aggregate purchase price 98 billion dex media indirect parent dex media east llc “dex media east” dex media west llc “dex media west” dex media exclusive publisher “official” yellow pages white pages directories qwest communications international inc “qwest” qwest primary incumbent local exchange carrier “ilec” november 2002 dex media east operates directory business following states colorado iowa minnesota nebraska new mexico north dakota south dakota collectively “dex east states” dex media west operates directory business following states arizona idaho montana oregon utah washington wyoming collectively “dex west states” together dex east states collectively “dex media states” prior dex media merger dex media leading directory publisher united states purpose dex media merger take step transformation rhd leading publisher yellow pages directories well combine complementary strengths companies acquired business dex media subsidiaries “dex media business” operates dex media inc one rhd’s direct whollyowned subsidiaries results dex media business included company’s operating results commencing february 1 2006 see note 3 “acquisitions” description dex media merger january 27 2006 conjunction dex media merger repurchased remaining 100301 shares outstanding 8 convertible cumulative preferred stock “preferred stock” investment partnerships affiliated goldman sachs group inc “gs funds” 3361 million cash including accrued cash dividends interest “gs repurchase” preferred stock issued gs funds partially fund embarq acquisition subsequent gs repurchase outstanding shares preferred stock see note 8 “redeemable preferred stock warrants” description financial impact preferred stock gs repurchase september 6 2006 acquired “local launch acquisition” local launch inc “local launch” local launch leading local search products platform fulfillment provider enables resellers sell internet advertising solutions local advertisers local launch specializes search publishing distribution directory organic marketing solutions purpose local launch rh donnelley corporation notes consolidated financial statements continued acquisition support expansion current local search engine marketing “sem” search engine optimization “seo” offerings provide new innovative solutions enhance local sem seo capabilities results local launch business included consolidated results commencing september 6 2006 local launch business operates direct wholly owned subsidiary rhd see note 3 “acquisitions” description local launch acquisition november 2 2006 repurchased outstanding warrants purchase 165 million shares common stock gs funds aggregate purchase price approximately 531 million november 9 2006 certain affiliates carlyle group welsh carson anderson stowe “selling shareholders” sold 9424360 shares 9424359 shares respectively rhd common stock selling shareholders former shareholders dex media became shareholders rhd conjunction dex media merger sale selling shareholders longer hold shares rhd common stock acquired connection dex media merger receive proceeds transaction 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts rh donnelley corporation direct indirect whollyowned subsidiaries intercompany transactions balances eliminated revenue recognition earn revenue principally sale advertising yellow pages directories revenue sale advertising deferred directory published net estimated sales claims recognized ratably life directory typically 12 months “deferral amortization method” company also recognizes revenue internetbased advertising products bundled print advertising using deferral amortization method revenue respect internetbased advertising bundled print advertising recognized ratably period advertisement appears site revenue respect products services sem seo services recognized delivered fulfilled revenue deferred revenue sale advertising recorded net allowance sales claims estimated based historical experience directorybydirectory basis increase decrease estimate information circumstances indicate estimate may longer represent amount claims may incur directory future company recorded sales claims allowances 453 million 104 million 65 million years ended december 31 2006 2005 2004 respectively company enters transactions exclusivity arrangements sponsorships media access transactions company’s products services promoted third party exchange company carries third party’s advertisement company accounts transactions accordance emerging issues task force “eitf” issue 9917 accounting advertising barter transactions revenue expense related transactions included consolidated statements operations consistent extent reasonably similar recent items sold purchased cash certain cases company enters agreements customers involve delivery one product service revenue arrangements allocated separate units accounting using relative fair value method accordance eitf issue 0021 revenue arrangements multiple deliverables deferred directory costs directly related selling production directories initially deferred incurred recognized ratably life directory typically 12 months costs specifically identifiable particular directory include sales commissions rh donnelley corporation notes consolidated financial statements continued print paper initial distribution costs paid prior directory publication classified current assets publication reclassified deferred directory costs equity method accounting att directory acquisition defined dontech defined 5050 partnership subsidiary att partners dontech separate legal entity provided services employees standalone management team subject oversight dontech board directors employees dontech right authority power act accomplish enter contract incidental attain purposes partnership employees either rhd att involved daytoday operations dontech partners shared equally net profits one voting member dontech board directors neither partner unilateral ability control influence operations dontech accordingly september 1 2004 accounted dontech equity method consolidate results dontech consolidated financial statements att directory acquisition reported 50 share dontech net income partnership income consolidated statement operations dontech reported commission revenue based annual value sales contract period contract executed calendar sales reported expenses incurred partnership income also included revenue participation income att revenue participation income based dontech advertising sales reported sales contract executed customer result att directory acquisition att ceased paying us revenue participation income consolidate net profits dontech eliminated dontech partnership investment consequently partnership income longer reported commencing september 1 2004 rather following att directory acquisition revenues expenses income acquired att directory business directly recorded consolidated statements operations cash equivalents cash equivalents include liquid investments maturity less three months time purchase company places investments high quality financial institutions times investments may excess federally insured limits accounts receivable accounts receivable consist balances owed us advertising customers advertisers typically enter twelvemonth contract advertising local advertisers billed pro rata amount contract value monthly basis behalf national advertisers certified marketing representatives “cmrs” pay company total contract value advertising net commission within 60 days publication month billed receivables represent amount billed advertisers billed receivables recorded net allowance doubtful accounts sales claims estimated based historical experience directorybydirectory basis increase decrease estimate information circumstances indicate estimate longer appropriately represents amount bad debts sales claims may incur unbilled receivables represent contractually owed amounts net allowance sales claims published directories yet billed advertisers fixed assets computer software fixed assets computer software recorded cost depreciation amortization provided estimated useful lives assets using straightline method estimated useful lives thirty years buildings five years machinery equipment ten years furniture fixtures three five years computer equipment computer software leasehold improvements amortized straightline basis shorter term lease estimated useful life improvement fixed assets computer software december 31 2006 include fixed assets computer software acquired dex media merger local launch acquisition rh donnelley corporation notes consolidated financial statements continued recorded fair value respective acquisition dates fixed assets computer software december 31 2006 2005 consisted following depreciation amortization expense fixed assets computer software years ended december 31 2006 2005 2004 follows identifiable intangible assets goodwill result dex media merger att directory acquisition embarq acquisition defined local launch acquisition certain longterm intangible assets identified recorded estimated fair value amortization expense years ended december 31 2006 2005 2004 2775 million 721 million 573 million respectively amortization expense intangible assets five succeeding years estimated approximately 3299 million 3861 million 3836 million 3730 million 3636 million respectively annual amortization goodwill tax purposes approximately 3866 million acquired longterm intangible assets respective book values december 31 2006 shown following table rh donnelley corporation notes consolidated financial statements continued acquired longterm intangible assets respective book values december 31 2005 shown following table connection dex media merger acquired directory services agreements collectively “dex directory services agreements” dex media entered qwest including 1 publishing agreement term 50 years commencing november 8 2002 subject automatic renewal additional oneyear terms grants us right exclusive official directory publisher listings classified advertisements qwest’s telephone customers geographic areas dex media states qwest successors provided local telephone services november 8 2002 well exclusive right use certain qwest branding directories markets 2 noncompetition agreement term 40 years commencing november 8 2002 pursuant qwest behalf affiliates successors agreed sell directory products consisting principally listings classified advertisements subscribers geographic areas dex media states qwest provided local telephone service november 8 2002 directed primarily consumers geographic areas fair value assigned dex media directory services agreements 73 billion based multiperiod excess earnings method amortized straightline method 42 years multiperiod excess earnings method projected cash flows intangible asset computed indirectly means future cash flows projected deductions made recognize returns appropriate contributory assets leaving excess residual net cash flow indicative intangible asset fair value result dex media merger also acquired 1 advertising commitment agreement whereby qwest agreed purchase aggregate 20 million advertising per year 2017 us pricing terms least favorable offered similar large customers 2 intellectual property contribution agreement pursuant qwest assigned licensed us qwest intellectual property previously used qwest directory services business along 3 trademark license agreement pursuant qwest granted us right november 2007 use qwest dex qwest dex advantage marks connection directory products related marketing material dex media states right use marks connection dexonlinecom® intangible assets 2 3 collectively “trade names” fair value assigned dex media advertising commitment based multiperiod excess earnings method amortized straightline method 12 years directory services agreements att company include directory services license agreement noncompetition agreement internet yellow pages reseller agreement directory publishing listing agreement collectively “att directory services agreements” certain affiliates att directory services license agreement designates us official exclusive provider yellow pages directory services att successors illinois northwest indiana “territory” grants us exclusive license obligation specified agreement produce publish distribute white pages directories territory att’s agent grants us exclusive license obligation rh donnelley corporation notes consolidated financial statements continued specified agreement use att brand logo print directories territory noncompetition agreement prohibits att affiliates successors certain limited exceptions 1 producing publishing distributing yellow white pages print directories territory 2 soliciting selling local national yellow white pages advertising inclusion directories 3 soliciting selling local internet yellow pages advertising certain internet yellow pages directories territory licensing att marks third party purpose internet yellow pages reseller agreement grants us exclusive right sell local advertisers within illinois northwest indiana internet yellow pages advertising focused upon products services offered within territory b nonexclusive right sell local excluding national advertisers within illinois northwest indiana internet yellow pages advertising focused upon products services offered outside territory case onto yellowpagescom platform directory publishing listing agreement gives us right purchase use basic att subscriber listing information updates purpose publishing directories att directory services agreements internet yellow pages reseller agreement initial terms 50 years subject automatic renewal early termination specified circumstances internet yellow pages reseller agreement term 5 years fair value assigned att directory services agreements internet yellow pages reseller agreement 9500 million 25 million respectively based present value estimated future cash flows amortized straightline method 50 years 5 years respectively directory services agreements embarq company executed may 2006 conjunction sprint’s spinoff local telephone business include directory services license agreement trademark license agreement noncompetition agreement certain affiliates embarq well noncompetition agreement sprint entered january 2003 collectively “embarq directory services agreements” embarq directory services agreements replaced previously existing analogous agreements sprint except sprint remained bound noncompetition agreement directory services license agreement grants us exclusive license obligation specified agreement produce publish distribute yellow white pages directories embarq successors 18 states embarq provided local telephone service time agreement trademark license agreement grants us exclusive license obligation specified agreement use certain specified embarq trademarks markets noncompetition agreements prohibit embarq sprint respective affiliates successors markets selling local directory advertising certain limited exceptions producing publishing distributing print directories embarq directory services agreements initial terms 50 years commencing january 2003 subject automatic renewal early termination specified circumstances fair value embarq directory services agreements 16 billion determined based present value estimated future cash flows time embarq acquisition january 2003 amortized straightline method 50 years fair values local national customer relationships obtained result dex media merger determined using multiperiod excess earnings method fair values local national customer relationships obtained result att directory acquisition embarq acquisition determined based present value estimated future cash flows intangible assets amortized “income forecast” method assumes value derived customer relationships greater earlier years steadily declines time weighted average useful life relationships approximately 20 years amortization local customer relationships obtained result dex media merger commence cost uplift resulting purchase accounting substantially amortized fair value acquired trade names obtained result dex media merger embarq acquisition determined based “relief royalty” method values trade names based rh donnelley corporation notes consolidated financial statements continued estimated amount company would pay arms length transaction use trade names assets amortized straightline method 15 years connection local launch acquisition identified recorded certain intangible assets estimated fair value including 1 local customer relationships 2 noncompete agreements 3 technology 4 tradenames intangible assets amortized straightline method remaining useful lives ranging 3 7 years excess purchase price dex media merger att directory acquisition embarq acquisition local launch acquisition net tangible identifiable intangible assets acquired 25 billion 2186 million 970 million 66 million respectively recorded goodwill change goodwill year ended december 31 2006 primarily related dex media merger total amount goodwill expected deductible tax purposes related dex media merger approximately 25 billion 2006 formalized plan reoccupy early 2007 portion leased facilities chicago illinois vacated conjunction att directory acquisition result reduced reserve related leased facilities december 31 2006 35 million corresponding offset goodwill accordance statement financial accounting standards “sfas” 142 goodwill intangible assets “sfas 142” goodwill amortized subject periodic impairment testing impairment losses recorded years ended december 31 2006 2005 2004 respectively interest expense deferred financing costs interest expense years ended december 31 2006 2005 2004 7727 million 2650 million 1758 million respectively certain costs associated issuance debt instruments capitalized included noncurrent assets consolidated balance sheets costs amortized interest expense terms related debt agreements bond outstanding method used amortize deferred financing costs relating debt instruments respect make accelerated principal payments deferred financing costs amortized using effective interest method amortization deferred financing costs included interest expense 219 million 236 million 136 million 2006 2005 2004 respectively apart business combinations company’s policy recognize losses incurred conjunction debt extinguishments component interest expense interest expense 2005 includes 253 million call premium payment writeoff unamortized deferred financing costs 74 million included amortization deferred financing costs 236 million noted associated december 20 2005 tender offer exit consent solicitation subsidiaries’ 8875 senior notes due 2016 see note 5 “longterm debt credit facilities notes” description debt extinguishment conjunction dex media merger result purchase accounting required generally accepted accounting principles “gaap” recorded dex media’s debt fair value january 31 2006 recognize offset interest expense period subsequent dex media merger amortization corresponding fair value adjustment life respective debt offset interest expense year ended december 31 2006 264 million advertising expense recognize advertising expenses incurred expenses include public relations media online advertising promotional sponsorship costs total advertising expense 327 million 181 million 111 million 2006 2005 2004 respectively concentration credit risk approximately 85 directory advertising revenue derived sale advertising local small mediumsized businesses advertisers typically enter 12month advertising sales contracts make monthly payments term contract advertisers prepay full amount portion contract value new advertisers desiring expand advertising programs subject credit review advertisers qualify may extend credit advertising purchase small mediumsized businesses tend fewer rh donnelley corporation notes consolidated financial statements continued financial resources higher failure rates large businesses addition full collection delinquent accounts take extended period time involve significant costs believe extending credit local advertisers material adverse effect results operations financial condition assurances given require collateral advertisers although charge interest advertisers pay specified due dates remaining approximately 15 directory advertising revenue derived sale advertising national large regional chains rental car companies automobile repair shops pizza delivery businesses substantially revenue derived national accounts serviced cmrs accept orders cmrs independent third parties act agents national advertisers cmrs responsible billing national customers advertising receive payment value advertising placed directory net cmr’s commission directly cmr still exposed credit risk amount losses accounts historically less local accounts advertisers cases cmrs tend larger companies greater financial resources local advertisers december 31 2006 interest rate swap agreements major financial institutions notional value 30 billion exposed credit risk event one counterparties agreements cannot meet obligation notional amount used measure interest paid received represent amount exposure credit loss would limited amount would received remaining life swap agreement counterparties swap agreements major financial institutions credit ratings higher currently foresee material credit risk associated swap agreements however assurances given derivative financial instruments hedging activities company accounts derivative financial instruments hedging activities accordance sfas 133 accounting derivative instruments hedging activities “sfas 133” amended sfas 138 accounting certain derivative instruments certain hedging activities amendment fas 133 sfas 149 amendment statement 133 derivative instruments hedging activities use derivative financial instruments trading speculative purposes derivative financial instruments limited interest rate swap agreements company utilizes combination fixed rate variable rate debt finance operations variable rate debt exposes company variability interest payments due changes interest rates management believes prudent mitigate interest rate risk portion variable rate borrowings additionally rhd inc’s credit facility requires maintain hedge agreements provide either fixed interest rate interest rate protection least 50 total outstanding debt dex media east dex media west credit facilities require maintain hedge agreements provide fixed rate least 33 respective indebtedness satisfy objectives requirements company entered fixed interest rate swap agreements manage fluctuations cash flows resulting changes interest rates variable rate debt company’s interest rate swap agreements effectively convert 30 billion approximately 75 variable rate debt fixed rate debt mitigating exposure increases interest rates december 31 2006 approximately 39 total debt outstanding consists variable rate debt excluding effect interest rate swaps including effect interest rate swaps total fixed rate debt comprised approximately 90 total debt portfolio december 31 2006 day derivative contract executed company may designate derivative instrument hedge variability cash flows received paid cash flow hedge hedging relationships company formally documents hedging relationship riskmanagement objective strategy undertaking hedge hedging instrument item nature risk hedged hedging instrument’s effectiveness offsetting hedged risk assessed description method measuring ineffectiveness company also formally assesses hedge’s inception rh donnelley corporation notes consolidated financial statements continued ongoing basis whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged items derivative financial instruments recognized either assets liabilities consolidated balance sheets measurement fair value quarterly basis fair values interest rate swaps determined based quoted market prices extent swaps provide effective hedge differences fair value book value swaps recognized accumulated comprehensive loss income component shareholders’ equity deficit derivative financial instruments designated qualify hedged transactions initial fair value subsequent gains losses change fair value reported earnings component interest expense gains losses related quarterly fair value adjustments presented noncash operating activity consolidated statements cash flows company discontinues hedge accounting prospectively determined derivative longer effective offsetting changes cash flows hedged item derivative hedged item expired sold terminated exercised management determines designation derivative hedging instrument longer appropriate situations hedge accounting discontinued company continues carry derivative fair value consolidated balance sheet recognizes subsequent changes fair value earnings component interest expense see note 6 “derivative financial instruments” additional information regarding derivative financial instruments hedging activities pension postretirement benefits pension postretirement benefits represent estimated amounts paid employees future accounting benefits reflects recognition benefit costs employee’s approximate service period based terms plan investment funding decisions made determination benefit obligation net periodic pension postretirement benefit costs requires management make assumptions regarding discount rate return retirement plan assets increase future compensation healthcare cost trends changes assumptions significant impact projected benefit obligation funding requirement net periodic benefit cost assumed discount rate pension benefits could settled 2006 adopted citigroup pension liability index appropriate discount rate defined benefit pension plans 2005 discount rate determined using methodology discounts projected plan cash flows measurement date using spot rates provided citigroup pension discount curve single discount rate computed present value benefit cash flows using single rate equaled present value computed using citigroup pension discount curve prior years discount rates developed reference moody’s longterm aa corporate bond yield plan’s measurement date consideration plan’s duration relative duration moody’s aa corporate bond portfolio expected longterm rate return plan assets based mix assets held plan expected longterm rates return within asset class anticipated trend future healthcare costs based historical experience external factors september 2006 financial accounting standards board “fasb” issued sfas 158 employees’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r “sfas 158” statement requires recognition overfunded underfunded status defined benefit postretirement plans asset liability statement financial position recognize changes funded status accumulated comprehensive income year changes occur sfas 158 also requires measurement funded status plan date statement financial position sfas 158 effective recognition funded status benefit plans fiscal years ending december 15 2006 effective measurement date provisions fiscal years ending december 15 2008 adopted funded status recognition provisions sfas 158 related defined benefit pension rh donnelley corporation notes consolidated financial statements continued postretirement plans december 31 2006 required complied measurement date provisions sfas 158 december 31 2006 please refer note 11 “benefit plans” addresses financial impact adoption sfas 158 information regarding benefit plans income taxes account income taxes asset liability method accordance sfas 109 accounting income taxes “sfas 109” deferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax assets realized see note 10 “income taxes” information regarding benefit provision income taxes loss earnings per share years ended december 31 2006 january 27 2006 closing date gs repurchase 2005 2004 accounted loss earnings per share accordance emerging issues task force issue 036 participating securities two class method fasb statement 128 “eitf 036” established standards regarding computation loss earnings per share “eps” companies issued securities common stock contractually entitle holder participate dividends earnings company eitf 036 requires earnings available common shareholders period deduction preferred stock dividends allocated common preferred shareholders based respective rights receive dividends basic eps calculated dividing loss income allocable common shareholders weighted average number shares outstanding eitf 036 require presentation basic diluted eps securities common stock therefore following eps amounts pertain common stock guidance eitf 036 diluted eps calculated dividing loss income allocable common shareholders weighted average common shares outstanding plus dilutive potential common stock potential common stock includes stock options stock appreciation rights “sars” restricted stock warrants dilutive effect calculated using treasury stock method prior gs repurchase 8 preferred stock dilutive effect calculated using “ifconverted” method subsequent gs repurchase account eps accordance sfas 128 earnings per share longer utilize twoclass method eps computations calculation basic diluted loss earnings per share years ended december 31 2006 2005 2004 respectively presented rh donnelley corporation notes consolidated financial statements continued 1 computing eps using twoclass method allocated net loss reported years ended december 31 2006 2005 respectively common preferred shareholders since preferred shareholders contractual obligation share net loss amount allocable common shareholders 77 year ended december 31 2004 determined follows 31268 9483 2 due loss allocable common shareholders reported years ended december 31 2006 2005 respectively effect stockbased awards warrants assumed conversion preferred stock antidilutive therefore included calculation diluted eps years ended december 31 2006 2005 2263 shares 60 shares respectively stockbased awards exercise prices exceeded average market price company’s common stock respective periods stockbased awards exercise prices exceeded average market price company’s common stock year ended december 31 2004 years ended december 31 2006 2005 2004 assumed conversion preferred stock 391 shares 5132 shares 9767 shares respectively common stock antidilutive therefore included calculation diluted eps stockbased awards maintain shareholder approved stock incentive plan 2005 stock award incentive plan “2005 plan” whereby certain employees nonemployee directors eligible receive stock options sars limited stock appreciation rights tandem stock options restricted stock prior adoption 2005 plan maintained shareholder approved stock incentive plan 2001 stock award incentive plan “2001 plan” 2005 plan 2001 plan 5 million 4 million shares respectively originally authorized grant stock awards typically granted market value common stock date grant become exercisable ratable installments otherwise period one five years date grant may exercised maximum ten years time grant compensation committee determines termination vesting relevant provisions date grant implemented policy issuing treasury shares held company satisfy stock issuances associated stockbased award exercises nonemployee directors receive options purchase 1500 shares award 1500 shares restricted stock upon election board nonemployee directors also receive annual basis options purchase 1500 shares award 1500 shares restricted stock nonemployee directors may also elect receive additional equity awards lieu portion cash fees rh donnelley corporation notes consolidated financial statements continued january 1 2006 company adopted provisions sfas 123 r sharebased payment “sfas 123 r” using modified prospective method required record compensation expense consolidated statement operations employee stockbased awards granted modified settled date adoption unvested portion previously granted stock awards remain outstanding beginning period adoption based grant date fair values company estimates forfeitures requisite service period recognizing compensation expense estimated forfeitures adjusted extent actual forfeitures differ expected materially differ estimates year ended december 31 2006 company utilized forfeiture rate 5 determining compensation expense prior adopting sfas 123 r company accounted stockbased awards granted employees nonemployee directors accordance intrinsic valuebased method prescribed accounting principles board opinion 25 accounting stock issued employees “apb 25” related interpretations compensation expense related issuance stock options employees nonemployee directors recognized exercise price stock option less market value underlying common stock date grant compensation expense related sars determined end period amount quoted market value underlying shares covered grant exceeded grant price recognized vesting term accordance modified prospective method financial statement amounts prior periods presented annual report form 10k restated reflect fair value method expensing stockbased compensation following table depicts effect adopting sfas 123 r net loss available common shareholders loss per share year ended december 31 2006 company’s reported net loss available common shareholders basic diluted loss per share year ended december 31 2006 reflect compensation expense related company’s stockbased awards recorded accordance sfas 123 r compared net loss available common shareholders basic diluted loss per share period would reported compensation expense determined apb 25 rh donnelley corporation notes consolidated financial statements continued upon adoption sfas 123r pro forma disclosure permitted sfas 123 accounting stock based compensation “sfas 123” longer permitted alternative company adopted sfas 123r january 1 2006 using modified prospective method company provided following pro forma disclosures effect net income loss earnings per share years ended december 31 2005 2004 respectively company accounted employee stock awards granted fair value method sfas 123 2005 2004 periods weighted average fair value stockbased awards granted 2005 2004 1976 1364 per share respectively pro forma information noted determined based fair value stockbased awards calculated using blackscholes optionpricing model following assumptions rh donnelley corporation notes consolidated financial statements continued accordance apb 25 following table presents changes awards outstanding stock incentive plans years ended december 31 2005 2004 accordance apb 25 following table summarizes information stock awards outstanding exercisable december 31 2005 please refer note 9 “stock incentive plans” additional information regarding stock incentive plans adoption sfas 123 r estimates preparation financial statements conformity gaap requires management make estimates assumptions affect reported amounts assets liabilities revenue certain expenses disclosure contingent assets liabilities actual results could differ materially estimates assumptions estimates assumptions used determination sales allowances doubtful accounts depreciation amortization employee benefit plans restructuring reserves certain assumptions pertaining stockbased awards among others new accounting pronouncements february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities including amendment fasb statement 115 “sfas 159” sfas 159 permits companies choose measure many financial instruments certain items fair value currently required measured fair value objective sfas 159 provide opportunities mitigate volatility reported earnings caused measuring rh donnelley corporation notes consolidated financial statements continued related assets liabilities differently without apply hedge accounting provisions sfas 159 also establishes presentation disclosure requirements designed facilitate comparisons companies choose different measurement attributes similar types assets liabilities sfas 159 effective fiscal years beginning november 15 2007 assess impact adoption sfas 159 consolidated financial position results operations 2007 september 2006 fasb issued sfas 157 fair value measurements “sfas 157” defines fair value establishes framework measuring fair value gaap expands disclosures fair value measurements sfas 157 effective fiscal years beginning november 15 2007 interim periods within fiscal years company currently assessing impact adoption sfas 157 consolidated financial position results operations september 2006 securities exchange commission “sec” issued staff accounting bulletin 108 considering effects prior year misstatements quantifying misstatements current year financial statements “sab 108” sab 108 provides guidance effects carryover reversal prior year financial statement misstatements considered quantifying current year misstatement sab 108 describes two approaches assessing materiality misstatements “rollover” approach quantifies misstatements based amount error originating current year income statement “iron curtain” approach quantifies misstatements based effects correcting cumulative effect existing balance sheet end current year either approach misstatements deemed material company required adjust financial statements including correcting prior year financial statements even correction continues immaterial prior year financial statements sab 108 effective fiscal years ending november 15 2006 adopted fiscal year ended december 31 2006 recognized adjustments resulting adoption sab 108 year ended december 31 2006 june 2006 fasb issued interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” interpretation clarifies accounting uncertainty income taxes recognized entity’s financial statements accordance sfas 109 fin 48 prescribes recognition threshold measurement principles financial statement recognition measurement tax positions taken expected taken tax return interpretation effective fiscal years beginning december 15 2006 rhd adopt fin 48 january 1 2007 upon adoption fin 48 anticipate disclosing tax liability 800 million 1000 million uncertain tax positions resulting increase shareholders’ equity january 1 2007 approximately 30 million currently assessing final impact adoption fin 48 consolidated financial position results operations reviewed new accounting standards identified believe new standards material impact financial position operating results 3 acquisitions january 31 2006 completed dex media merger equity purchase price 41 billion pursuant agreement plan merger dated october 3 2005 “merger agreement” issued outstanding share dex media common stock converted 1230 cash 024154 share rhd common stock resulting aggregate cash value 19 billion aggregate stock value 22 billion based 36547381 newly issued shares rhd common stock valued 6182 per share 6182 share price used value common shares issued dex media merger based average closing price rhd’s common stock two business days announcement dex media merger october 3 2005 accordance eitf 9519 determination measurement date market price securities issued purchase business combination additionally assumed dex media’s outstanding indebtedness january 31 2006 fair value rh donnelley corporation notes consolidated financial statements continued 55 billion total allocable purchase price also includes transaction costs 267 million directly related dex media merger severance related costs certain dex media employees 176 million dex media vested equity awards outstanding january 31 2006 estimated fair value 774 million total aggregate purchase price 98 billion upon completion dex media merger company’s stockholders dex media’s former stockholders owned approximately 47 53 company’s common stock respectively results dex media business included company’s operating results commencing february 1 2006 finance dex media merger issued 660 million 6875 senior discount notes due january 15 2013 gross proceeds 6005 million 1210 million 8875 senior notes due january 15 2016 pay cash portion purchase price dex media stockholders september 1 2004 completed acquisition directory publishing business “att directory business” att inc “att” formerly known sbc communications inc “sbc” illinois northwest indiana including att’s interests dontech ii partnership “dontech” 5050 general partnership us att collectively “att directory acquisition” 141 billion cash working capital adjustments settlement 30 million liquidation preference owed us related dontech result att directory acquisition became publisher att branded yellow pages directories illinois northwest indiana transaction consummated pursuant purchase agreement dated july 28 2004 amended among rhd ameritech corporation “ameritech” direct whollyowned subsidiary att ameritech publishing inc “api” direct whollyowned subsidiary ameritech results att directory business included consolidated results commencing september 1 2004 acquired att directory business operates rh donnelley publishing advertising illinois partnership one indirect whollyowned subsidiaries finance att directory acquisition amended restated rhd inc’s credit facility consisting 700 million term loan a2 1650 million term loan b2 175 million revolving credit facility “revolver” aggregate facility 2525 million january 3 2003 completed acquisition directory business “embarq directory business” sprint nextel corporation “sprint” formerly known sprint corporation acquiring outstanding capital stock various entities comprising sprint publishing advertising collectively “embarq acquisition” 223 billion cash result publisher embarq formerly sprint branded yellow pages directories 18 states may 2006 sprint spunoff local telephone business embarq corporation “embarq” connection spinoff entered new agreements embarq replaced related agreements sprint except sprint remains bound certain noncompetition obligations results embarq directory business included consolidated results commencing january 3 2003 embarq directory business operates rh donnelley publishing advertising inc one indirect whollyowned subsidiaries finance embarq acquisition rhd inc entered new 1525 million credit facility consisting 500 million term loan 900 million term loan b 125 million revolver also issued 8875 senior notes 10875 senior subordinated notes additionally issued 200 million preferred stock warrants purchase 165 million shares common stock gs funds september 6 2006 acquired local launch local launch leading local search products platform fulfillment provider enables resellers sell internet advertising solutions local advertisers local launch specializes search publishing distribution directory organic marketing solutions purpose local launch acquisition support expansion current local sem seo offerings provide new innovative solutions enhance local sem seo capabilities results local launch business included consolidated results commencing september 6 2006 local launch business operates direct whollyowned subsidiary rhd connection local launch acquisition identified recorded certain intangible assets estimated fair value including 1 local customer relationships 2 noncompete agreements 3 technology 4 tradenames rh donnelley corporation notes consolidated financial statements continued intangible assets amortized straightline method remaining useful lives ranging 3 7 years purpose acquisitions transform rhd leading publisher yellow pages directories provider online local commercial search services well support expansion current local sem seo offerings provide new innovative solutions enhance local sem seo capabilities acquisitions accounted purchase business combinations accordance sfas 141 business combinations “sfas 141” purchase price allocated related tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values acquisition dates remaining consideration recorded goodwill certain longterm intangible assets identified recorded estimated fair values identifiable intangible assets acquired primarily include directory services agreements company qwest company att company embarq noncompetition agreement company sprint customer relationships acquired trademarks trade names accordance sfas 142 fair values identifiable intangible assets amortized estimated useful lives manner best reflects economic benefits derived assets goodwill amortized subject impairment testing annual basis see note 2 “summary significant accounting policies identifiable intangible assets goodwill” description intangible assets goodwill purchase accounting rules assume record deferred revenue balance associated directories published dex media 1140 million january 31 2006 att directory business 2041 million september 1 2004 embarq directory business 3159 million january 3 2003 amounts represented revenue would recognized subsequent acquisition deferral amortization method absence purchase accounting accordingly record revenue associated directories published prior acquisition well directories published month acquisition completed although deferred revenue balances associated directories published prior acquisition eliminated retained rights associated collection amounts due contractual obligations advertising contracts executed prior acquisitions result billed unbilled accounts receivable balances acquired acquisition became assets company also purchase accounting rules assume record deferred directory costs related directories published prior acquisition well directories published month acquisition completed totaling 2051 million dexbranded directories 1758 million attbranded directories 633 million embarqbranded directories costs represented cost revenue would recognized subsequent acquisitions deferral amortization method absence purchase accounting following table summarizes estimated fair values assets acquired liabilities assumed dex media merger january 31 2006 rh donnelley corporation notes consolidated financial statements continued following unaudited condensed pro forma information prepared accordance sfas 141 years ended december 31 2006 2005 2004 respectively assumes dex media merger related gs repurchase related financing occurred january 1 2005 att directory acquisition related financing occurred january 1 2004 following unaudited condensed pro forma information purport represent company’s results operations would actually dex media merger related gs repurchase fact occurred january 1 2005 att directory acquisition occurred january 1 2004 necessarily representative results operations future period unaudited condensed pro forma financial information year ended december 31 2006 eliminate adverse impact purchase accounting relating dex media merger unaudited condensed pro forma financial information year ended december 31 2005 reflects combination gaap results rhd dex media 4 restructuring impairment charges table shows activity restructuring reserves 2006 2005 2004 result dex media merger integration dex media business approximately 118 employees affected restructuring plan 108 terminated 10 relocated corporate headquarters cary north carolina additionally vacated certain leased dex media facilities colorado minnesota nebraska oregon estimated costs associated terminated employees including dex media executive officers abandonment certain leased facilities net estimated sublease income approximately 189 million costs charged goodwill 2006 payments made respect severance relocation 2006 totaled 108 million payments 05 million made 2006 respect vacated leased dex media facilities remaining lease payments facilities made 2016 rh donnelley corporation notes consolidated financial statements continued first quarter 2005 completed restructuring relating integration att directory business 63 employees affected restructuring 57 terminated first quarter 2005 6 relocated corporate headquarters cary north carolina additionally vacated certain leased facilities chicago illinois estimated costs associated terminated employees abandonment certain leased facilities approximately 88 million costs charged goodwill first quarter 2005 payments made respect severance relocation 2006 2005 01 million 14 million respectively payments 10 million net sublease income made 2006 2005 respect leased facilities chicago illinois remaining lease payments made 2012 2006 formalized plan reoccupy early 2007 portion leased facilities chicago illinois vacated conjunction att directory acquisition result reduced reserve related leased facilities december 31 2006 35 million corresponding offset goodwill following embarq acquisition january 3 2003 consolidated publishing technology operations sales offices administrative personnel relocated headquarters functions overland park kansas purchase new york cary north carolina approximately 140 people affected relocation headquarters functions overland park kansas purchase new york 75 included restructuring reserve remaining 65 people relocated company 2003 29 million charged goodwill representing closure prepress publishing facility operated blountville tennessee severance paid certain embarq executives terminated immediately upon closing embarq acquisition reserve prepress publishing facility 22 million represented remaining lease payments net estimated sublease income net payments 02 million 04 million 09 million made respect former prepress publishing facility 2006 2005 2004 respectively remaining payments made 2012 also 2003 95 million charged earnings primarily representing severance related costs associated consolidation publishing technology operations sales offices administrative personnel relocation headquarters additional reserve 03 million recorded 2004 additional facility related costs well 13 million related severance related costs estimates payments 06 million 36 million made 2005 2004 respectively related severance related costs 2004 several employees included initial reserve estimate redirected within company resulting reduction reserve 12 million additional reserve 23 million recorded second quarter 2004 representing estimated fair value remaining lease payments net estimated sublease income former headquarters office lease purchase new york net payments 04 million 08 million 05 million made respect former headquarters office lease 2006 2005 2004 respectively required payments made respect former headquarters office lease 2006 restructuring charges charged earnings included general administrative expenses consolidated statements operations rh donnelley corporation notes consolidated financial statements continued 5 longterm debt credit facilities notes longterm debt company december 31 2006 including fair value adjustments required gaap result dex media merger december 31 2005 consisted following debt balances acquired result dex media merger obligations rhd december 31 2005 credit facilities rhdi december 31 2006 rhdi’s senior secured credit facility amended restated “rhdi credit facility” consists 3234 million term loan a4 350 million term loan d1 14220 million term loan d2 1750 million revolving credit facility “rhdi revolver” aggregate rhdi credit facility 22704 million term loans require quarterly principal interest payments rhdi credit facility provides new term loan c potential borrowings 400 million proceeds borrowed used fund acquisitions refinance certain indebtedness make certain restricted payments december 31 2006 outstanding balances term loans a4 d1 d2 totaled 18911 million comprised 1586 million 3417 million 13908 million respectively 554 million outstanding rhdi revolver additional 04 million utilized rh donnelley corporation notes consolidated financial statements continued standby letter credit rhdi revolver term loan a4 mature december 2009 term loans d1 d2 mature june 2011 weighted average interest rate outstanding debt rhdi credit facility 686 621 december 31 2006 2005 respectively amended december 31 2006 rhdi’s credit facility bears interest option either • higher base rate determined administrative agent deutsche bank trust company americas ii federal funds effective rate defined plus 050 case plus 025 margin rhdi revolver term loan a4 050 margin term loan d1 term loan d2 • libor rate plus 125 margin rhdi revolver term loan a4 150 margin term loan d1 term loan d2 may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings dex media east december 31 2006 dex media east credit facility amended restated connection dex media merger consists revolving loan commitments “dex media east revolver” term loan commitments dex media east term loans consist tranche term loan initial total principal amount 6900 million tranche b term loan initial total principal amount 4290 million dex media east revolver consists total principal amount 1000 million available general corporate purposes subject certain conditions december 31 2006 principal amounts owing tranche b term loans totaled 6291 million comprised approximately 2259 million 4032 million respectively 275 million outstanding dex media east revolver additional 14 million utilized two standby letters credit dex media east revolver tranche term loan mature november 2008 tranche b term loan mature may 2009 weighted average interest rate outstanding debt dex media east credit facility 685 december 31 2006 amended december 31 2006 dex media east credit facility bears interest option either • higher base rate determined administrative agent jp morgan chase bank na ii federal funds effective rate defined plus 050 case plus 025 margin dex media east revolver term loan 050 margin term loan b • libor rate plus 125 margin dex media east revolver term loan 150 margin term loan b may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings dex media west december 31 2006 dex media west credit facility amended restated connection dex media merger consists revolving loan commitments “dex media west revolver” term loan commitments dex media west term loans consist tranche term loan total principal amount 9600 million tranche b1 term loan total principal amount 5030 million tranche b2 term loan total available principal amount 8343 million dex media west revolver consists total principal amount 1000 million available general corporate purposes subject certain conditions december 31 2006 principal amounts owed tranche b1 tranche b2 term loans totaled 14509 million comprised approximately 2733 million 4063 million 7713 million respectively amounts outstanding rh donnelley corporation notes consolidated financial statements continued dex media west revolver tranche b1 term loan amount 4442 million utilized redeem dex media west’s senior notes put dex media west connection change control offer associated dex media merger fund portion cash consideration paid dex media inc’s stockholders connection dex media merger remaining 588 million longer available tranche term loan dex media west revolver mature september 2009 tranche b1 b2 term loans mature march 2010 weighted average interest rate outstanding debt dex media west credit facility 683 december 31 2006 amended december 31 2006 dex media west credit facility bears interest option either • higher base rate determined administrative agent jp morgan chase bank na ii federal funds effective rate defined plus 050 case plus 025 margin dex media west revolver term loan 050 margin term loan b1 term loan b2 • libor rate plus 125 margin dex media west revolver term loan 150 margin term loan b1 term loan b2 may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings company’s credit facilities indentures governing notes contain usual customary affirmative negative covenants among things place limitations ability incur additional indebtedness ii pay dividends repurchase capital stock iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock subsidiaries vi engage transactions affiliates vii make investments loans advances company’s credit facilities also contain financial covenants relating maximum consolidated leverage minimum interest coverage maximum senior secured leverage defined therein substantially rhdi’s subsidiaries assets including capital stock rhdi subsidiaries pledged secure obligations rhdi credit facility substantially assets dex media east dex media west subsidiaries including equity interests pledged secure obligations respective credit facilities notes rhd issued 300 million 6875 senior notes due january 15 2013 “holdco notes” proceeds used redeem 100303 shares outstanding preferred stock gs funds pay transaction costs repay debt associated rhdi’s credit facility interest payable holdco notes semiannually arrears january 15th july 15th year commencing july 15 2005 december 31 2006 6875 holdco notes fair value 2876 million 6875 holdco notes face value 300 million redeemable option beginning 2009 following prices percentage face value order fund cash portion dex media merger purchase price issued 660 million aggregate principal amount maturity 6005 million gross proceeds 6875 series a2 senior discount rh donnelley corporation notes consolidated financial statements continued notes due january 15 2013 1210 million principal amount 8875 series a3 senior notes due january 15 2016 interest payable semiannually january 15th july 15th year series a2 senior discount notes series a3 senior notes commencing july 15 2006 also issued 365 million aggregate principal amount maturity 3321 million gross proceeds 6875 series a1 senior discount notes due january 15 2013 fund gs repurchase interest payable semiannually january 15th july 15th year commencing july 15 2006 notes unsecured obligations rhd senior right payment future senior subordinated indebtedness rhd structurally subordinated indebtedness subsidiaries december 31 2006 6875 series a1 series a2 senior discount notes 8875 series a3 senior notes fair value 3216 million 5815 million 12705 million respectively 6875 series a1 senior discount notes face value 365 million series a2 senior discount notes face value 660 million redeemable option beginning 2009 following prices percentage face value 8875 series a3 senior notes face value 1210 million redeemable option beginning 2011 following prices percentage face value rhdi connection embarq acquisition rhdi issued 325 million 8875 senior notes due 2010 “senior notes” 600 million 10875 senior subordinated notes due 2012 “subordinated notes” company direct indirect whollyowned subsidiaries rhdi jointly severally fully unconditionally guarantee notes unsecured obligations rhdi interest paid notes semiannually june 15th december 15th december 20 2005 repurchased tender offer exit consent solicitation 3171 million senior notes proceeds rhdi credit facility’s 350 million term loan d1 used fund partial repurchase senior notes call premium 253 million pay transaction costs tender offer partial repurchase senior notes accounted extinguishment debt december 31 2006 8875 senior notes 10875 senior subordinated notes fair value 83 million 6540 million respectively remaining 79 million face value 8875 senior notes redeemable option beginning 2006 following prices percentage face value rh donnelley corporation notes consolidated financial statements continued 10875 senior subordinated notes face value 600 million redeemable option beginning 2007 following prices percentage face value dex media inc dex media inc issued 500 million aggregate principal amount 8 senior notes due 2013 senior notes unsecured obligations dex media inc interest payable may 15th november 15th year december 31 2006 500 million aggregate principal amount outstanding excluding fair value adjustments december 31 2006 8 senior notes fair value 5150 million 8 senior notes face value 500 million redeemable option beginning 2008 following prices percentage face value dex media inc issued 750 million aggregate principal amount 9 senior discount notes due 2013 two indentures first indenture totaling 389 million aggregate principal amount 9 senior discount notes issued original issue discount interest accruing 9 per annum compounded semiannually senior discount notes unsecured obligations dex media inc interest accrues form increased accreted value november 15 2008 “full accretion date” time accreted value equal full principal amount maturity second indenture totaling 361 million aggregate principal amount interest accrues 837 per annum compounded semiannually creates premium full accretion date amortized remainder term november 15 2008 9 senior discount notes bear cash interest 9 per annum payable semiannually may 15th november 15th year senior discount notes unsecured obligations dex media inc cash interest accrue discount notes prior full accretion date december 31 2006 7499 million aggregate principal amount outstanding excluding fair value adjustments december 31 2006 9 senior discount notes fair value 6694 million remaining 7499 million face value 9 senior discount notes redeemable option beginning 2008 following prices percentage face value rh donnelley corporation notes consolidated financial statements continued dex media east dex media east issued 450 million aggregate principal amount 9875 senior notes due 2009 senior notes unsecured obligations dex media east interest payable may 15th november 15th year december 31 2006 4497 million aggregate principal amount outstanding excluding fair value adjustments december 31 2006 9875 senior notes fair value 4714 million remaining 4497 million face value 9875 senior notes redeemable option beginning 2006 following prices percentage face value dex media east issued 525 million aggregate principal amount 12125 senior subordinated notes due 2012 senior subordinated notes unsecured obligations dex media east interest payable may 15th november 15th year december 31 2006 3413 million aggregate principal amount outstanding excluding fair value adjustments december 31 2006 12125 senior subordinated notes fair value 3758 million remaining 3413 million face value 12125 senior subordinated notes redeemable option beginning 2007 following prices percentage face value dex media west dex media west issued 385 million aggregate principal amount 85 senior notes due 2010 senior notes unsecured obligations dex media west interest payable february 15th august 15th year december 31 2006 385 million aggregate principal amount outstanding excluding fair value adjustments december 31 2006 85 senior notes fair value 3999 million 85 senior notes face value 385 million redeemable option beginning 2007 following prices percentage face value dex media west issued 300 million aggregate principal amount 5875 senior notes due 2011 senior notes unsecured obligations dex media west interest payable may 15th november 15th year december 31 2006 87 million aggregate principal amount outstanding excluding fair value adjustments december 31 2006 5875 senior notes fair value 88 million rh donnelley corporation notes consolidated financial statements continued remaining 87 million face value 5875 senior notes redeemable option beginning 2008 following prices percentage face value dex media west issued 780 million aggregate principal amount 9875 senior subordinated notes due 2013 senior subordinated notes unsecured obligations dex media west interest payable february 15th august 15th year december 31 2006 7617 million aggregate principal amount outstanding excluding fair value adjustments december 31 2006 9875 senior subordinated notes fair value 8303 million remaining 7617 million face value 9875 senior subordinated notes redeemable option beginning 2008 following prices percentage face value aggregate maturities longterm debt including current portion excluding fair value adjustments purchase accounting december 31 2006 impact dex media merger completion dex media merger triggered change control offers dex media outstanding notes requiring us make offers repurchase notes 2913 million 5875 dex media west senior notes due 2011 03 million 9875 dex media east senior notes due 2009 02 million 9875 dex media west senior subordinated notes due 2013 01 million 9 dex media inc senior discount notes due 2013 tendered applicable change control offer repurchased us result dex media merger adjustment established record acquired debt fair value january 31 2006 fair value adjustment amortized reduction interest expense remaining term respective debt agreements using effective interest method impact future scheduled interest principal payments amortization fair value adjustment included reduction interest expense 264 million 2006 total premium 2223 million recorded rh donnelley corporation notes consolidated financial statements continued upon consummation dex media merger 1959 million remains unamortized december 31 2006 shown following table rh donnelley corporation notes consolidated financial statements continued 6 derivative financial instruments rhdi credit facility dex media west dex media east credit facilities bear interest variable rates accordingly earnings cash flow affected changes interest rates rhdi credit facility requires maintain hedge agreements provide either fixed interest rate interest rate protection least 50 total outstanding debt dex media east dex media west credit facilities require maintain hedge agreements provide fixed rate least 33 respective indebtedness company entered following interest rate swaps effectively convert approximately 75 company’s variable rate debt fixed rate debt december 31 2006 terms agreements company receives variable interest based threemonth libor pays fixed rate interest 1 consists one swap 2 consists two swaps 3 consists three swaps 4 consists four swaps 5 consists five swaps 6 consists six swaps 7 denotes swaps entered dex media east acquired rhd result dex media merger swaps designated cash flow hedges using derivative financial instruments hedge exposures changes interest rates company exposes credit risk market risk credit risk possible failure counterparty perform terms derivative contract fair value derivative contract positive counterparty owes company creates credit risk company fair value rh donnelley corporation notes consolidated financial statements continued derivative contract negative company owes counterparty therefore subject credit risk company minimizes credit risk derivative financial instruments entering transactions major financial institutions credit ratings higher market risk adverse effect value financial instrument results change interest rates market risk associated interestrate contracts managed establishing monitoring parameters limit types degree market risk may undertaken company’s interest rate swap agreements effectively convert 30 billion variable rate debt fixed rate debt mitigating exposure increases interest rates terms interest rate swap agreements receive variable interest based threemonth libor pay weighted average fixed rate 447 interest rate swaps mature varying dates march 2007 september 2009 weighted average rate received interest rate swaps 536 year ended december 31 2006 periodic payments receipts recorded interest expense interest rate swaps notional value 29 billion total 30 billion interest rate swaps designated cash flow hedges hedge threemonth liborbased interest payments 29 billion bank debt december 31 2006 respective interest rate swaps provided effective hedge threemonth liborbased interest payments 29 billion bank debt may 2006 company entered 10 billion notional value interest rate swaps designated cash flow hedges july 2006 company recorded changes fair value interest rate swaps reduction interest expense 44 million year ended december 31 2006 addition certain interest rate swaps acquired result dex media merger notional amount 425 million designated cash flow hedges fourth quarter 2006 300 million interest rate swaps settled december 31 2006 125 million remain undesignated year ended december 31 2006 company recorded additional interest expense 37 million result change fair value acquired undesignated interest rate swaps years ended december 31 2006 2005 2004 company reclassified 226 million hedging gains 06 million hedging gains 94 million hedging losses earnings respectively december 31 2006 111 million deferred gains net tax derivative instruments recorded accumulated comprehensive loss expected reclassified earnings next 12 months transactions events expected occur next 12 months necessitate reclassifying derivative gains earnings 7 partnership income investment att directory acquisition partnership income included 50 share net profits dontech revenue participation income received directly att based value advertising sales result att directory acquisition att ceased paying us revenue participation income consolidate net profits dontech partnership investment eliminated consequently partnership income longer reported commencing september 1 2004 rather following att directory acquisition revenues expenses income acquired att rh donnelley corporation notes consolidated financial statements continued directory business directly recorded consolidated statements operations partnership income dontech eight months ended august 31 2004 consisted following summarized financial information dontech shown table prior september 1 2004 results consolidated financial statements 8 redeemable preferred stock warrants 10000000 shares preferred stock authorized issuance series transactions related embarq acquisition november 2002 january 2003 issued private placement 200604 shares preferred stock warrants purchase 165 million shares common stock gs funds gross proceeds 200 million january 27 2006 completed gs repurchase result outstanding shares preferred stock december 31 2006 aforementioned warrants remained outstanding following gs repurchase november 2 2006 time repurchased outstanding warrants gs funds december 31 2005 100301 shares preferred stock outstanding prior gs repurchase preferred stock accrued unpaid dividends convertible gs funds common stock time issuance price 2405 per share earned cumulative dividend 8 compounded quarterly could pay cash dividends preferred stock september 30 2005 time dividend accreted accrued cash dividends preferred stock approximately 25 million january 3 2006 included purchase price gs repurchase net proceeds received issuance preferred stock january 2003 november 2002 allocated preferred stock warrants beneficial conversion feature “bcf” preferred stock based relative fair values fair value preferred stock estimated using dividend discount method determines fair value based discounted cash flows security bcf function conversion price preferred stock fair value warrants fair market value underlying common stock date issuance fair value warrants 1218 january 2003 warrants 1043 november 2002 warrants determined based blackscholes model following assumptions rh donnelley corporation notes consolidated financial statements continued connection issuance preferred stock subsequent quarterly dividend date september 30 2005 bcf recorded fair value underlying common stock time issuance greater conversion price preferred stock bcf treated deemed dividend preferred stock convertible common stock immediately issuance commencing october 3 2005 date stock purchase agreement relating gs repurchase preferred stock longer convertible common stock consequently longer recognized bcf preferred stock dividend year ended december 31 2005 117 million consisted stated 8 dividend 101 million including 25 million accrued cash dividends bcf 16 million january 14 2005 repurchased 100303 shares outstanding preferred stock gs funds 2772 million cash order fund repurchase january 14 2005 issued 300 million holdco notes see note 5 “longterm debt credit facilities notes” discussion financing associated transaction connection preferred stock repurchase recorded increase loss available common shareholders consolidated statement operations 1337 million reflect loss repurchase shares year ended december 31 2005 excess cash paid gs funds carrying amount repurchased preferred stock plus amount previously recognized bcf associated shares recognized loss repurchase amount represents return gs funds therefore treated manner similar treatment preferred stock dividend january 27 2006 repurchased remaining 100301 shares outstanding preferred stock gs funds 3361 million cash including accrued cash dividends interest pursuant terms stock purchase support agreement “stock purchase agreement” dated october 3 2005 aggregate purchase price gs repurchase defined stock purchase agreement equal product 6400 number shares company’s common stock outstanding shares preferred stock convertible including september 30 2005 plus ii amount equal amount cash dividends would accrued outstanding shares preferred stock parties entered stock purchase agreement october 1 2005 including earlier date transactions contemplated stock purchase agreement completed january 3 2006 purchase price also included daily interest component defined based number days january 3 2006 repurchase date january 27 2006 order fund gs repurchase issued 365 million aggregate principal amount maturity 3321 million gross proceeds 6875 series a1 senior discount notes due january 15 2013 see note 5 “longterm debt credit facilities notes” discussion financing associated transaction based terms stock purchase agreement repurchase preferred stock became probable event october 3 2005 requiring recorded value preferred stock accreted redemption value 3341 million december 31 2005 3361 million january 27 2006 accretion redemption value 2110 million 20 million represented accrued dividends interest years ended december 31 2005 2006 respectively recorded increase loss available common shareholders consolidated statements operations conjunction gs repurchase also reversed previously recorded bcf related shares recorded decrease loss available common shareholders consolidated statement operations approximately 312 million year ended december 31 2006 result gs repurchase purchase agreement among company gs funds relating preferred stock terminated null void force effect without action company gs funds required ii none gs funds rights designate directors company veto corporate action company provided rh donnelley corporation notes consolidated financial statements continued purchase agreement relating preferred stock otherwise iii registration rights agreement dated november 25 2002 among company gs funds terminated null void force effect without action company gs funds required closing gs repurchase none gs funds registration rights respect securities company including without limitation warrants purchase shares company’s common stock shares company’s common stock may issued issuable upon exercise warrants november 2 2006 repurchased outstanding warrants purchase 165 million shares common stock aggregate purchase price approximately 531 million exercise prices related warrants ranged 2628 2862 per share result value warrants removed shareholders’ equity consolidated balance sheet december 31 2006 may 30 2006 rhd redeemed outstanding preferred stock purchase rights issued pursuant company’s stockholder rights plan redemption price one cent per right total redemption payment 07 million payment recorded charge retained earnings year ended december 31 2006 9 stock incentive plans january 1 2006 company adopted provisions sfas 123r using modified prospective method required record compensation expense statement operations employee stockbased awards granted modified settled date adoption unvested portion previously granted stock awards remain outstanding beginning period adoption based grant date fair values company estimates forfeitures requisite service period recognizing compensation expense estimated forfeitures adjusted extent actual forfeitures differ expected materially differ estimates 2006 company utilized forfeiture rate 5 determining compensation expense year ended december 31 2006 company recognized 433 million stockbased compensation expense related stockbased awards granted various employee nonemployee stock incentive plans total capitalized stockbased compensation 09 million year ended december 31 2006 prior adoption sfas 123r company presented tax benefits deductions resulting exercise stockbased awards operating cash flows consolidated statements cash flows sfas 123r requires cash flows classified financing cash flows year ended december 31 2006 company able utilize tax benefit resulting stockbased award exercises due net operating loss carryforwards neither operating financing cash flows affected stockbased award exercises year ended december 31 2006 sfas 123r fair value stock options sars calculated using blackscholes model time stockbased awards granted amount net estimated forfeitures amortized vesting period stockbased award weighted average fair value per share stock options sars granted year ended december 31 2006 2008 following assumptions used valuing stockbased awards year ended december 31 2006 rh donnelley corporation notes consolidated financial statements continued estimate expected volatility based historical volatility price common stock expected life stockbased awards expected life represents period time stockbased awards granted expected outstanding based historical experience company uses historical data estimate stockbased award exercises employee terminations riskfree interest rate based applicable us treasury yields approximate expected life stockbased awards granted company grants restricted stock certain employees including executive officers nonemployee directors accordance 2005 plan sfas 123r compensation expense related awards measured fair value date grant based number shares granted quoted market price company’s common stock time year ended december 31 2006 granted 18 million stock options sars following table presents summary company’s stock options sars activity related information year ended december 31 2006 includes october 3 2005 grant 11 million sars certain employees including executive officers contingent upon successful completion dex media merger see additional information total intrinsic value stockbased awards vested year ended december 31 2006 344 million total fair value stockbased awards vested year ended december 31 2006 264 million following table summarizes information stockbased awards outstanding exercisable december 31 2006 rh donnelley corporation notes consolidated financial statements continued aggregate intrinsic value exercisable stockbased awards december 31 2006 1000 million following table summarizes status nonvested stock awards december 31 2006 changes year ended december 31 2006 december 31 2006 461 million total unrecognized compensation cost related nonvested stockbased awards cost expected recognized weighted average period approximately two years applying company’s estimated forfeiture rate expect 17 million nonvested stockbased awards vest weighted average period approximately two years intrinsic value december 31 2006 nonvested stockbased awards expected vest 122 million corresponding weighted average grant date exercise price 5576 per share december 13 2006 company granted 01 million shares restricted stock certain executive officers restricted shares settled common stock granted grant price 6064 per share equal market value company’s common stock date grant vesting restricted shares contingent upon common stock equaling exceeding 6500 per share 20 consecutive trading days continued employment company third anniversary date grant accordance sfas 123r recognized noncash compensation expense related restricted shares 01 million year ended december 31 2006 february 21 2006 company granted 01 million shares restricted stock certain employees including executive officers restricted shares settled common stock granted grant price 6426 per share equal market value company’s common stock date grant vest ratably three years accordance sfas 123r recognized noncash compensation expense related restricted shares 28 million year ended december 31 2006 february 21 2006 company granted 06 million sars certain employees including executive officers conjunction annual grant stock incentive awards sars settled common stock granted grant price 6426 per share equal market value company’s common stock grant date vest ratably three years february 24 2005 company granted 05 million sars certain employees including executive officers conjunction annual grant stock incentive awards sars settled common stock granted grant price 5900 per share equal market value company’s common stock grant date vest ratably three years july 28 2004 company granted 09 million sars certain employees including executive officers connection att directory acquisition sars settled common stock granted grant price 4158 per share equal market value company’s common stock grant date initially scheduled vest entirely five years maximum appreciation july 28 2004 rh donnelley corporation notes consolidated financial statements continued february 24 2005 sar grants 100 initial grant price recognized noncash compensation expense related smaller sar grants 139 million 41 million 13 million years ended december 31 2006 2005 2004 respectively connection embarq acquisition company granted 15 million options “founders grant” certain employees including executive officers 2002 options granted october 2002 exercise price equal market value company’s common stock date grant however award options contingent upon successful closing embarq acquisition therefore options subject forfeiture january 3 2003 time market value company’s common stock exceeded exercise price accordingly options accounted compensatory options apb 25 resulted charge 10 million years ended december 31 2005 2004 connection dex media merger company granted october 3 2005 11 million sars certain employees including executive officers sars granted exercise price 6500 prevailing market price common stock vest ratably three years award sars contingent upon successful completion dex media merger therefore identified awards outstanding december 31 2005 recognized noncash compensation expense related sars 91 million year ended december 31 2006 january 31 2006 stockbased awards outstanding existing dex media equity compensation plans totaled 40 million dex media option shares weighted average exercise price 548 per option share result dex media merger outstanding dex media equity awards converted rhd equity awards february 1 2006 upon conversion rhd equity awards number securities issued upon exercise outstanding awards totaled 17 million shares rhd weighted average exercise price 1273 per share december 31 2006 number rhd shares remaining available future issuance totaled 02 million dex media inc 2004 incentive award plan year ended december 31 2006 noncash compensation expense related converted awards totaled 41 million dex media merger triggered change control company’s stock incentive plans accordingly awards granted employees january 31 2006 exception stockbased awards held executive officers members board directors waived change control provisions awards became fully vested addition vesting conditions related july 28 2004 sars grant noted modified result dex media merger sars vest ratably three years date grant year ended december 31 2006 134 million noncash compensation expense included total noncash compensation expense amounts noted recognized result modifications noncash stockbased compensation expense relating existing stock options held executive officers members board directors january 1 2006 modified result dex media merger well noncash stockbased compensation expense smaller grants issued subsequent dex media merger mentioned totaled 133 million year ended december 31 2006 10 income taxes deferred tax assets liabilities determined based estimated future tax effects temporary differences financial statement tax basis assets liabilities measured tax rates temporary differences expected reverse deferred tax expense benefit result changes deferred tax assets liabilities rh donnelley corporation notes consolidated financial statements continued benefit provision income taxes consisted following table summarizes significant differences us federal statutory tax rate effective tax rate applied company’s loss income taxes rh donnelley corporation notes consolidated financial statements continued deferred tax assets liabilities consisted following december 31 2006 2005 2006 income tax benefit 845 million comprised federal deferred tax benefit 1129 million resulting current period taxable loss offset state tax provision 284 million 2006 state tax provision 284 million primarily resulted modification apportioned taxable income loss among various states net operating loss approximately 2163 million generated 2006 primarily result tax amortization expense recorded respect intangible assets acquired dex media merger att directory acquisition embarq acquisition acquired intangible assets resulted deferred tax liability 22 billion december 31 2006 company federal state net operating loss carryforwards approximately 7128 million net carryback 7823 million respectively begin expire 2023 2008 respectively company also 36 million federal alternative minimum tax amt credit carryforward expire portion benefits net operating loss carryforwards reflected additional paidin capital portion net operating loss carryforwards generated deductions related exercise stock options 2006 2005 deduction stock options 834 million 132 million respectively included 834 million deduction stock options 2006 suspended 36 million windfall tax benefit required sfas 123r benefit recognized financial reporting purposes net operating loss utilized assessing realizability deferred tax assets considered whether likely portion deferred tax assets realized ultimate realization deferred tax assets dependent upon generation future taxable income periods temporary rh donnelley corporation notes consolidated financial statements continued differences become deductible making determination applicable financial reporting standards allowed consider scheduled reversal deferred tax liabilities projected future taxable income tax planning strategies company believes likely deferred tax assets resulting capitalized merger stock offering costs associated dex media realized contributing valuation allowance 191 million december 31 2006 additionally portion valuation allowance relates deferred tax asset associated capital loss incurred rhd 2001 2002 2005 provision income taxes 432 million comprised deferred tax provision due taxable loss generated current period 2005 deferred tax provision resulted effective tax rate 390 net operating losses approximately 1686 million related tax deductions amortization expense recorded tax purposes compared book purposes respect intangible assets acquired embarq acquisition att directory acquisition 2005 effective tax rate reflects decrease state local tax rate due integration embarq acquisition att directory acquisition 2004 provision income taxes 459 million comprised current tax benefit 256 million deferred tax provision 715 million 2004 current tax benefit resulted effective tax rate 395 net operating losses approximately 724 million related tax deductions connection embarq acquisition att directory acquisition 2004 deferred tax provision 715 million primarily related difference amortization expense recorded tax purposes compared book purposes respect intangible assets acquired embarq acquisition att directory acquisition 2004 effective tax rate reflects decrease state local tax rate due integration embarq acquisition att directory acquisition company currently federal tax audit internal revenue service taxable years 2003 2004 company believes adequate provisions made respect federal tax audit company believes resolution audit material adverse effect company’s financial position results operations cash flows addition certain state tax returns examination various regulatory authorities continuously review issues raised connection ongoing examinations open tax years evaluate adequacy reserves believe accrued tax liabilities adequate cover probable us federal state income tax loss contingencies 11 benefit plans result dex media merger acquired dex media’s pension plan defined contribution plan postretirement plan three defined benefit pension plans rhd retirement plan dontech retirement plan dex media pension plan two defined contribution plans rhd 401k savings plan dex media savings plan two postretirement plans rhd postretirement plan dex media retirement plan rhd pension plans rhd dontech cash balance defined benefit pension plans cover substantially legacy rhd employees least one year service benefits paid employees based age years service percentage total annual compensation percentage compensation allocated retirement account ranges 30 125 depending age years service “cash balance benefit” benefits certain employees participants predecessor dun bradstreet corporation “db” defined benefit pension plan also determined based participant’s average compensation years service “final average pay benefit” benefits paid equal greater final average pay benefit cash balance benefit annual pension costs determined using projected unit credit actuarial cost method funding policy contribute amount least equal minimum legal funding requirement required make contributions 2006 2005 2004 underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities measurement date december 31 used plan assets rh donnelley corporation notes consolidated financial statements continued also unfunded nonqualified defined benefit pension plan pension benefit equalization plan “pbep” covers senior executives certain key employees benefits based years service compensation including compensation permitted taken account previously mentioned defined benefit pension plan dex media pension plan noncontributory defined benefit pension plan covering substantially management occupational union employees within dex media annual pension costs determined using projected unit credit actuarial cost method funding policy contribute amount least equal minimum legal funding requirement contributions required made 2006 underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities measurement date december 31 used plan assets rhd dex media savings plans rhd plan contribute 50 dollar contributed participating employee maximum 6 participating employee’s salary including bonus commissions contributions plan 30 million 25 million 17 million years ended december 31 2006 2005 2004 respectively management employees dex media plan contribute 100 first 4 participating employee’s salary 50 next 2 management employees company match limited 5 participating employee’s eligible earnings occupational employees dex media plan contribute 81 first 6 participating employee’s salary exceed 486 eligible earnings one pay period company matching contributions limited 4860 per occupational employee annually contributions dex media plan 53 million eleven months ended december 31 2006 rhd dex media postretirement benefits two unfunded postretirement benefit plans provide certain healthcare life insurance benefits certain fulltime employees reach retirement eligibility working respective companies rh donnelley corporation notes consolidated financial statements continued benefit obligation funded status information presented 2006 includes combined amounts legacy rhd benefit plans twelve months ended december 31 2006 acquired dex media plans eleven months ended december 31 2006 information presented 2005 excludes amounts relating dex media plans since obligations rhd time summary funded status benefit plans december 31 2006 2005 follows rh donnelley corporation notes consolidated financial statements continued result dex media merger recorded liability associated dex media’s pension postretirement plans fair value january 31 2006 1194 million net amounts recognized consolidated balance sheets december 31 2006 2005 follows accumulated benefit obligation defined benefit pension plans 2892 million 1127 million december 31 2006 2005 respectively projected benefit obligation accumulated benefit obligation unfunded pbep december 31 2006 2005 follows components net periodic benefit expense net periodic benefit expense pension plans years ended december 31 2006 2005 2004 follows rh donnelley corporation notes consolidated financial statements continued net periodic benefit expense postretirement plans years ended december 31 2006 2005 2004 follows additional information adoption sfas 158 upon initial implementation sfas 158 december 31 2006 recorded previously unrecognized prior service costs actuarial gains losses component accumulated comprehensive loss following table presents incremental effect applying sfas 158 individual line items consolidated balance sheet december 31 2006 following table presents amount previously unrecognized actuarial gains losses prior service cost currently accumulated comprehensive loss expected recognized net periodic benefit expense 2007 amounts recognized accumulated comprehensive loss december 31 2006 consist rh donnelley corporation notes consolidated financial statements continued assumptions following assumptions used determining benefit obligations pension plans postretirement plans discount rate reflects current rate pension postretirement obligations could effectively settled end year 2006 adopted citigroup pension liability index “index” appropriate discount rate defined benefit pension plans index widely used companies throughout united states considered one preferred standards establishing discount rate 2005 discount rate determined using methodology discounts projected plan cash flows measurement date using spot rates provided citigroup pension discount curve single discount rate computed present value benefit cash flows using single rate equaled present value computed using citigroup pension discount curve prior years discount rates developed reference moody’s longterm aa corporate bond yield plan’s measurement date consideration plan’s duration relative duration moody’s aa corporate bond portfolio following assumptions used determining net periodic benefit expense rhd pension plans following assumptions used determining net periodic benefit expense dex media pension plans july 1 2006 thereafter settlements dex media’s pension plan occurred defined sfas 88 “employers’ accounting settlements curtailments defined benefit plans termination benefits” time lump sum payments participants exceeded sum service cost plus interest cost component net periodic benefit costs year settlements resulted recognition 10 million actuarial gains addition 2006 pension expense recomputed based assumptions settlement date resulting increase discount rate 550 625 based index weighted average discount rate used determine net periodic expense rhd postretirement plan 550 575 600 2006 2005 2004 respectively weighted average discount rate used determine net periodic expense dex media postretirement plan 550 2006 rh donnelley corporation notes consolidated financial statements continued following table reflects assumed healthcare cost trend rates used determining net periodic benefit expense benefit obligations postretirement plans assumed healthcare cost trend rates significant effect amounts reported postretirement benefit plans onepercent change assumed healthcare cost trend rate would following effects december 31 2006 plan assets pension plan weightedaverage asset allocation december 31 2006 asset category follows plans’ assets invested accordance investment practices emphasize longterm investment fundamentals plans’ investment objective achieve positive rate return longterm capital appreciation growing stream current income would significantly contribute meeting plans’ current future obligations objectives obtained welldiversified portfolio structure manner consistent plan’s investment policy statement plans’ assets invested marketable equity fixed income securities managed professional investment managers plan assets invested using combination active passive indexed investment strategies plans’ assets broadly diversified asset class investment style number issues issue type factors consistent investment objectives outlined plan’s investment policy statement plans’ assets invested prudent levels risk expectation longterm returns maintain contribute increasing purchasing power plans’ assets net disbursements longterm plans’ assets separately managed accounts may used following purposes short sales purchases letter stock private placements leveraged transactions commodities transactions option rh donnelley corporation notes consolidated financial statements continued strategies purchases real estate investment trusts investments limited partnerships investments managers securities affiliates subsidiaries investment futures use margin investments derivative explicitly permitted plan’s investment policy statement 2006 2005 2004 used rate 825 expected longterm rate return assumption plan assets rhd pension plans basis used determining rate longterm capital market return forecasts asset mix similar plans’ asset allocation target 65 equity securities 35 debt securities 2006 used rate 900 expected longterm rate return assumption plan assets dex media pension plan basis used determining rate also included opportunity active management assets add value long term active management expectation supported calculating historical returns seven investment managers actively manage dex media plan’s assets although review expected longterm rate return assumption annually plan performance one particular year significantly influence evaluation assumption generally revised unless fundamental change one factors upon based target asset allocation longterm capital market return forecasts estimated future benefit payments pension plans benefits postretirement plans benefits expected paid next five fiscal years aggregate five fiscal years thereafter follows expect make contributions approximately 169 million 55 million pension plans postretirement plans respectively 2007 additional information subsequent events august 17 2006 pension protection act 2006 “act” signed law general act requires singleemployer defined benefit plans fully funded within sevenyear period beginning 2008 provisions act effective january 1 2006 however new provisions effective january 1 2008 act replaces prior rules funding new standard based plan’s funded status funding must determined using specified interest rates mortality sums potential limits lump sums adoption new requirements could increase plans’ liabilities required contributions future however cannot estimated time technical guidance issued effective january 1 2007 dontech retirement plan merged rhd retirement plan merger plans streamlines administrative processes materially impact financial statements rh donnelley corporation notes consolidated financial statements continued 12 commitments lease office facilities equipment operating leases noncancelable lease terms expiring various dates 2017 rent lease expense 2006 2005 2004 253 million 100 million 116 million respectively future noncancelable minimum rental payments applicable operating leases december 31 2006 connection att directory acquisition entered internet yellow pages reseller agreement whereby obligated pay att 154 million 5year term agreement connection software system modernization ongoing support services related amdocs software system obligated pay amdocs 886 million periods 2007 2010 conjunction dex media merger obligated pay qwest approximately 172 million years 2007 2009 certain information technology communications billing collection services 13 legal proceedings involved various legal proceedings arising ordinary course business well certain litigation tax matters many matters plaintiffs allege suffered damages errors omissions improper listings contained directories published us periodically assess liabilities contingencies connection matters based upon latest information available us matters probable incurred loss range loss reasonably estimated record reserves consolidated financial statements instances unable make reasonable estimate liability uncertainties related probable outcome amount range loss additional information becomes available adjust assessment estimates liabilities accordingly based review latest information available believe ultimate liability connection pending legal proceedings including tax matters described material adverse effect results operations cash flows financial position described material amounts accrued consolidated financial statements respect matters tax matters order understand potential exposure tax matter described need understand relationship us db certain predecessors affiliates various corporate reorganizations contractual commitments assumed varying degrees responsibility respect matters november 1996 company known dun bradstreet corporation separated spinoff “1996 distribution three separate public companies dun bradstreet corporation acnielsen corporation “acnielsen” cognizant corporation “cognizant” june 1998 dun bradstreet corporation separated spinoff “1998 distribution” two separate public companies rh donnelley corporation formerly dun bradstreet corporation new company changed name dun bradstreet corporation later 1998 cognizant separated spinoff rh donnelley corporation notes consolidated financial statements continued “cognizant distribution” two separate public companies ims health incorporated “ims” nielsen media research inc “nmr” september 2000 dun bradstreet corporation separated two separate public companies moody’s corporation “moody’s” formerly dun bradstreet corporation new company changed name dun bradstreet corporation result form rh donnelley corporation’s separation dun bradstreet corporation 1998 corporate successor technically defendant taxpayer referred db respect matter accruing prior september 30 1998 db entered global taxplanning initiatives normal course business primarily taxfree restructurings foreign domestic operations internal revenue service “irs” time challenged certain tax positions taken db previously reported limited involvement exposure several legacy tax matters although one settled irs liability us one remaining legacy tax matter described “amortization royalty expense deductionsroyalty income 19971998” pursuant series tax sharing agreements collectively “tax sharing agreements” relating spinoffs separations referred db moody’s jointly severally liable amounts resulting matters summarized “amortization royalty expense deductionsroyalty income 19971998” db moody’s unable bear part liabilities would liable extent could satisfy joint several indemnity obligations us amortization royalty expense deductionsroyalty income 1997 1998 beginning fourth quarter 2003 db received behalf several notices irs asserting among things relevant us • certain amortization expense deductions related 1997 partnership transaction claimed db tax returns 1997 1998 disallowed • deductions claimed 1997 1998 tax returns royalties paid partnership disallowed • entire amount royalties received partnership included royalty income db including portions royalties allocated thirdparty partners partnership thus included taxable incomes understand db protested proposed adjustments irs timely basis also understand db believes irs’ stated positions respect treatment royalty expense royalty income mutually inconsistent making unlikely irs prevail positions also understand db nonetheless believes irs may seek issue notices respect inconsistent positions understand db estimates additional tax liability result disallowance 1997 1998 amortization deductions could 458 million tax interest penalties net tax benefits event irs prevail positions respect royalty expense royalty income db believes unlikely db estimates additional tax liability result disallowance 1997 1998 royalty expense deductions inclusion reallocated royalty income relevant years could 1576 million tax interest penalties net tax benefits would addition 458 million noted related amortization expense deduction understand db attempting resolve matters irs proceeding litigation necessary db challenge time irs positions years 1997 1998 us district court us court federal claims rather us tax court disputed rh donnelley corporation notes consolidated financial statements continued amounts applicable year would need paid advance court jurisdiction case cannot assure outcome legacy tax matter management presently believes db moody’s sufficient financial resources borrowing capacity satisfy respective indemnity obligations us therefore management presently believes ultimate resolution legacy tax matter would material adverse effect company’s results operations cash flows financial condition matters company exposed potential defamation breach privacy claims arising publication directories methods collecting processing using advertiser telephone subscriber data determined inaccurate data stored us improperly accessed disseminated us unauthorized persons subjects data users data collect publish could submit claims company although date experienced material claims relating defamation breach privacy may party proceedings future could material adverse effect business based review latest information available believe ultimate liability connection pending threatened legal proceedings material adverse effect results operations cash flows financial position material amounts accrued consolidated financial statements respect matters 14 business segments management reviews analyzes business publishing yellow pages directories related local commercial search one operating segment 15 guarantees rh donnelley inc direct whollyowned subsidiary company issuer senior notes subordinated notes company direct indirect 100 owned subsidiaries rh donnelley inc jointly severally fully unconditionally guarantee debt instruments rhd’s debt instruments guaranteed subsidiaries december 31 2006 rh donnelley inc’s direct whollyowned subsidiaries rh donnelley publishing advertising inc rh donnelley apil inc dontech holdings llc dontech ii partnership rh donnelley publishing advertising illinois holdings llc rh donnelley publishing advertising illinois partnership get digital smartcom inc dex media local launch direct whollyowned subsidiaries company guarantee debt instruments rhd rhdi addition company rhdi local launch guarantee debt instruments dex media direct whollyowned subsidiaries financial results dex media subsidiaries local launch presented tables heading nonguarantor subsidiaries year ended december 31 2006 following condensed consolidating financial statements read conjunction consolidated financial statements company general substantially net assets company subsidiaries restricted paid dividends third party subsidiaries restricted paying dividends loans advances rh donnelley corporation limited exceptions terms credit facilities see note 5 “longterm debt credit facilities notes” description debt instruments rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation condensed consolidating balance sheet december 31 rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation condensed consolidating balance sheet december 31 rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation condensed consolidating statement operations year ended december 31 2006 rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation condensed consolidating statement operations year ended december 31 2005 rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation condensed consolidating statement operations year ended december 31 2004 rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation condensed consolidating statement cash flows year ended december 31 2006 rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation condensed consolidating statement cash flows year ended december 31 2005 rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation condensed consolidating statement cash flows year ended december 31 2004 rh donnelley corporation notes consolidated financial statements continued 16 valuation qualifying accounts 17 quarterly information unaudited rh donnelley corporation notes consolidated financial statements continued 1 revenue sale advertising recognized deferral amortization method whereby revenue advertising sales initially deferred directory published recognized ratably life directory due purchase accounting rules able recognize revenue directories published dex media business att directory business prior acquisition directories published months acquisitions completed 2 similar deferral amortization method revenue recognition certain costs directly related selling production directories initially deferred recognized ratably life directory due purchase accounting rules able recognize expenses directories published dex media business att directory business prior acquisition directories published months acquisitions completed 3 january 14 2005 repurchased 100303 shares outstanding preferred stock gs funds 2772 million cash connection preferred stock repurchase recorded increase loss available common shareholders consolidated statement operations 1337 million reflect loss repurchase shares three months ended march 31 2005 january 27 2006 repurchased remaining 100301 shares outstanding preferred stock gs funds 3361 million cash including accrued cash dividends interest pursuant terms stock purchase agreement based terms stock purchase agreement repurchase preferred stock became probable event october 3 2005 requiring recorded value preferred stock accreted redemption value 3341 million december 31 2005 result gs repurchase 3361 million january 27 2006 accretion redemption value 2110 million 20 million represented accrued dividends interest quarters ended december 31 2005 march 31 2006 respectively recorded increase loss available common shareholders consolidated statements operations conjunction gs repurchase also reversed previously recorded bcf related shares recorded decrease loss available common shareholders consolidated statements operations approximately 312 million quarter ended march 31 2006 item 9item 8 financial statements supplementary data management’s report internal control financial reporting management dex one corporation formerly rh donnelley corporation responsible establishing maintaining adequate internal control company’s financial reporting within meaning rule 13a15f promulgated securities exchange act 1934 inherent limitations internal control financial reporting may prevent detect misstatements financial statements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness rh donnelley corporation’s internal control financial reporting december 31 2009 undertaking assessment management used criteria established committee sponsoring organizations coso treadway commission contained internal control integrated framework based assessment management concluded december 31 2009 company’s internal control financial reporting effective based coso criteria company’s internal control financial reporting december 31 2009 audited kpmg llp independent registered public accounting firm stated report appears page kpmg llp also audited company’s consolidated financial statements r h donnelley subsidiaries year ending december 31 2009 included annual report form 10k stated report appears page report independent registered public accounting firm board directors shareholders dex one corporation audited accompanying consolidated balance sheets rh donnelley corporation subsidiaries december 31 2009 2008 related consolidated statements operations comprehensive income loss cash flows changes shareholders’ equity deficit years threeyear period ended december 31 2009 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position rh donnelley corporation subsidiaries december 31 2009 2008 results operations cash flows years threeyear period ended december 31 2009 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states rh donnelley corporation’s internal control financial reporting december 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso report dated march 12 2010 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp raleigh north carolina march 12 2010 report independent registered public accounting firm board directors shareholders dex one corporation audited rh donnelley corporation’s internal control financial reporting december 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission “coso” rh donnelley corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audit also included performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion rh donnelley corporation maintained material respects effective internal control financial reporting december 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission “coso” also audited accordance standards public company accounting oversight board united states consolidated balance sheets rh donnelley corporation subsidiaries december 31 2009 2008 related consolidated statements operations comprehensive income loss cash flows changes shareholders’ equity deficit years threeyear period ended december 31 2009 report dated march 12 2010 expressed unqualified opinion consolidated financial statements kpmg llp raleigh north carolina march 12 2010 rh donnelley corporation debtor debtorinpossession may 28 2009 consolidated balance sheets accompanying notes integral part consolidated financial statements rh donnelley corporation debtor debtorinpossession may 28 2009 consolidated statements operations comprehensive income loss accompanying notes integral part consolidated financial statements rh donnelley corporation debtor debtorinpossession may 28 2009 consolidated statements cash flows accompanying notes integral part consolidated financial statements rh donnelley corporation debtor debtorinpossession may 28 2009 consolidated statements changes shareholders’ equity deficit accompanying notes integral part consolidated financial statements rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements tabular amounts thousands except per share data percentages otherwise indicated 1 business presentation consolidated financial statements include accounts rh donnelley corporation direct indirect whollyowned subsidiaries “company” “rhd” “we” “us” “our” december 31 2009 rh donnelley inc “rhdi” “rhd inc” dex media inc “dex media” businesscom inc “businesscom” rhd service llc “rhd service” direct whollyowned subsidiaries financial information set forth annual report unless otherwise indicated context may otherwise indicate reflects consolidated results operations financial position rhd year ended december 31 2009 intercompany transactions balances eliminated dex one corporation “dex one” “successor registrant” “company” “we” “us” “our” subsequent effective date became successor registrant rhd upon emergence chapter 11 relief title 11 united states code “bankruptcy code” january 29 2010 “effective date” references dex one successor registrant annual report pertain periods subsequent effective date corporate overview marketing services company helps clients grow business providing marketing products help get found readytobuy consumers marketing services help get chosen competitors dex® advantage clients’ business information published marketed single profile distributed via variety owned operated products local search products dex advantage spans multiple media platforms local advertisers including print dex published directories cobrand brands industry qwest centurylink formerly embarq att online mobile devices dexknowscom® voiceactivated directory search 1800calldextm digital affiliate provided solutions powered dexnettm leverages network partners including premier search engines google® yahoo® leading online sites growing list marketing services include local business market analysis message image creation target market identification advertising digital profile creation keyword search engine optimization strategies programs distribution strategies social strategies tracking reporting filing voluntary petitions chapter 11 may 28 2009 “petition date” company subsidiaries listed collectively company “debtors” filed voluntary petitions chapter 11 relief bankruptcy code united states bankruptcy court district delaware “bankruptcy court” • rhdi • dontech holdings llc • dontech ii partnership • rh donnelley publishing advertising illinois holdings llc • rh donnelley publishing advertising illinois partnership • rh donnelley publishing advertising inc • get digital smartcom inc • rh donnelley apil inc rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued • rhd service llc • dex media inc • dex media east inc • dex media east llc “dex media east” • dex media east finance co • dex media west inc • dex media west llc “dex media west” • dex media west finance co • dex media service llc • businesscom inc • workcom inc confirmed plan reorganization emergence chapter 11 proceedings january 12 2010 bankruptcy court entered findings fact conclusions law order confirming joint plan reorganization company subsidiaries “confirmation order” effective date joint plan reorganization company subsidiaries “plan” became effective accordance terms petition date effective date debtors operated businesses debtorsinpossession accordance bankruptcy code chapter 11 cases debtors collectively “chapter 11 cases” jointly administered caption rh donnelley corporation case 0911833 kg bankr del 2009 restructuring part restructuring conducted connection debtors’ emergence bankruptcy debtors merged consolidated dissolved terminated shortly effective date certain whollyowned subsidiaries set forth • dontech holdings llc rh donnelley publishing advertising illinois holdings llc merged sole member rhdi • dontech ii partnership rh donnelley publishing advertising illinois partnership technically terminated respective partnership agreements due loss second partner • dex media east finance co merged dex media east • dex media west finance co merged dex media west • workcom inc merged businesscom inc • getdigitalsmartcom inc merged rhdi • dex media east merged dex media east inc “dme inc” • dex media west merged dex media west inc “dmw inc” • rh donnelley publishing advertising inc merged rhdi rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued effectuating restructuring transactions dex one became ultimate parent company following surviving subsidiaries rhdi ii dex media inc iii dme inc iv dmw inc v dex media service llc vi dex one service llc subsequently converted delaware corporation name dex one service inc effective march 1 2010 vii businesscom inc viii rh donnelley apil inc consummation plan distributions pursuant plan since effective date company substantially consummated various transactions contemplated confirmed plan particular march 1 2010 company made substantially distributions cash stock securities required made plan date creditors parties allowed claims including limited following plan distributions • effective date accordance plan company issued following number shares dex one common stock approximately 105 million shares representing 210 total outstanding common stock holders notes issued rhd ii approximately 1165 million shares representing 233 total outstanding common stock holders notes issued dex media inc iii approximately 129 million shares representing 258 total outstanding common stock holders notes issued rhdi iv approximately 65 million shares representing 130 total outstanding common stock holders senior notes issued dex media west v approximately 845 million shares representing 169 total outstanding common stock holders senior subordinated notes issued dex media west • effective date accordance terms plan holders dex media west 85 senior notes due 2010 5875 senior notes due 2011 also received pro rata share dex one’s 3000 million aggregate principal amount 1214 senior subordinated notes due 2017 “dex one senior subordinated notes” • march 1 2010 pursuant plan company made distributions cash account substantially allowed claims general unsecured creditors allowed claims general unsecured creditors paid march 1 2010 paid 2010 pursuant terms plan company also obligated make certain additional payments certain creditors including certain distributions may become due owing subsequent initial distribution date certain payments holders administrative expense priority claims fees earned professional advisors chapter 11 cases discharge releases injunctions pursuant plan confirmation order plan confirmation order also contain various discharges injunctive provisions releases became operative upon effective date provisions summarized sections confirmation order fully described article x plan impact longterm debt upon emergence chapter 11 proceedings effective date accordance plan 61 billion senior notes senior discount notes senior subordinated notes collectively “notes default” exchanged 100 reorganized dex one equity b issued 3000 million dex one senior subordinated notes holders dex media west 85 senior notes due 2010 5875 senior notes due 2011 pro rata basis addition share reorganized dex one equity effective date aggregate rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued outstanding debt 34 billion comprised 31 billion outstanding amended restated credit facilities 3000 million dex one senior subordinated notes see note 5 “longterm debt credit facilities notes” details longterm debt accounting matters resulting chapter 11 proceedings filing chapter 11 petitions constituted event default indentures governing company’s notes default debt obligations instruments became automatically immediately due payable although actions enforce payment obligations automatically stayed applicable bankruptcy law based bankruptcy petitions notes default included liabilities subject compromise consolidated balance sheet december 31 2009 filing chapter 11 petitions also constituted event default company’s credit facilities however based upon plan secured lenders would receive 100 principal recovery scheduled amortization interest subsequent filing chapter 11 petitions company determined fair value collateral securing credit facilities exceeded book value credit facilities including accrued interest rate swap liabilities associated credit facilities therefore credit facilities excluded liabilities subject compromise consolidated balance sheet december 31 2009 result filing chapter 11 petitions certain interest rate swaps notional amount 8500 million terminated respective counterparties longer deemed financial instruments measured fair value december 31 2009 interest rate swaps settled liability 299 million net accrued interest recognized accounts payable accrued liabilities consolidated balance sheet december 31 2009 conjunction amendment restatement company’s credit facilities effective date interest rate swaps converted new tranche term loans related credit facilities see note 5 “longterm debt credit facilities notes” additional information addition result filing chapter 11 petitions dex media east interest rate swaps notional amount 1000 million december 31 2009 longer highly effective offsetting changes cash flows accordingly cash flow hedge accounting treatment longer permitted periods subsequent chapter 11 bankruptcy filing financial accounting standards board “fasb” accounting standards codification “asc” 852 reorganizations “fasb asc 852” applied preparing consolidated financial statements fasb asc 852 requires financial statements distinguish transactions events directly associated reorganization ongoing operations business accordingly certain expenses including professional fees realized gains losses provisions losses realized reorganization restructuring process classified reorganization items consolidated statement operations additionally consolidated balance sheet liabilities segregated liabilities subject compromise liabilities subject compromise liabilities subject compromise reported prepetition amounts current unimpaired values even may settled lesser amounts accompanying consolidated financial statements purport reflect provide consequences chapter 11 bankruptcy proceeding particular financial statements purport show assets realizable value liquidation basis availability satisfy liabilities ii prepetition liabilities amounts may allowed claims contingencies status priority thereof iii shareholders’ deficit accounts effects changes may made company’s capitalization iv operations effects changes may made company’s business rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued going concern december 31 2009 total outstanding debt 96 billion 61 billion pertains notes default identified liabilities subject compromise 35 billion pertains existing credit facilities excluded liabilities subject compromise consolidated balance sheet december 31 2009 effective date accordance plan notes default exchanged 100 reorganized dex one equity 300 million dex one senior subordinated notes addition terms conditions existing credit facilities amended restated see note 5 “longterm debt credit facilities notes” additional information result emergence chapter 11 proceedings restructuring outstanding debt believe company generate sufficient cash flow operations satisfy debt obligations according applicable terms conditions reasonable period time see note 16 “subsequent events” information analysis emergence chapter 11 proceedings pro forma impact financial position fresh start accounting company adopt fresh start accounting reporting effective february 1 2010 “fresh start reporting date” accordance fasb asc 852 holders existing voting shares immediately confirmation plan received less 50 emerging entity reorganization value company’s assets less postpetition liabilities allowed claims consolidated financial statements included herein applicable include effect changes capital structure changes fair value assets liabilities result fresh start accounting see note 16 “subsequent events” unaudited proforma presentation impact emergence reorganization fresh start accounting financial position significant financing developments may 28 2009 conjunction plan company repaid aggregate 2000 million principal outstanding balances owed credit facilities follows rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued may 14 2009 company exercised 30day grace period 783 million interest payments due following senior notes senior discount notes april 15 2009 company exercised 30day grace period 546 million interest payments due 8875 series a4 senior notes due 2017 “series a4 senior notes” may 14 2009 company entered forbearance agreements certain noteholders bank lenders “forbearance agreements” respect consequences expiration 30day grace period series a4 senior notes forbearance agreements expired may 28 2009 company make interest payments prior filing chapter 11 petitions exercising grace period constitute event default bond indentures company’s subsidiaries’ debt agreements company make interest payments prior filing chapter 11 petitions result exercising 30day grace period respect series a4 senior notes april 15 2009 certain existing interest rate swaps associated dex media east credit facility notional amount 3500 million required settled may 28 2009 cash settlement payments 264 million made second quarter 2009 associated interest rate swaps result decline certain credit ratings existing interest rate swap associated dex media west credit facility notional amount 500 million required settled april 23 2009 cash settlement payment 05 million made second quarter 2009 associated interest rate swap february 13 2009 company borrowed unused portions rhdi revolving credit facility “rhdi revolver” dex media east revolving credit facility “dex media east revolver” dex media west revolving credit facility “dex media west revolver” totaling 1740 million 970 million 900 million respectively company made borrowings various revolving credit facilities preserve financial flexibility light continuing uncertainty global credit markets 2 summary significant accounting policies revenue recognition advertising revenues earned primarily sale advertising yellow pages directories publish revenue sale advertising deferred directory published net estimated sales claims recognized ratably life directory typically 12 months “deferral amortization method” advertising revenues also include revenues internetbased advertising products including online directories dexknowscom dexnet advertising revenues affected several factors including changes quantity size advertisements acquisition new clients renewal rates rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued existing clients premium advertisements sold changes advertisement pricing introduction new products increase competition fragmentation local business search market general economic factors revenues respect internetbased advertising products sold print advertising initially deferred service delivered fulfilled recognized ratably life contract revenues respect internetbased services sold print advertising dexnet recognized delivered fulfilled revenue deferred revenue sale advertising recorded net allowance sales claims estimated based primarily historical experience increase decrease estimate information circumstances indicate estimate may longer represent amount claims may incur future company recorded sales claims allowances 438 million 453 million 548 million years ended december 31 2009 2008 2007 respectively certain cases company enters agreements clients involve delivery one product service revenue arrangements allocated separate units accounting using relative fair value method accordance fasb asc 60525 revenue recognition multipleelement arrangements deferred directory costs directly related selling production directories initially deferred incurred recognized ratably life directory typically 12 months costs specifically identifiable particular directory include sales commissions print paper initial distribution costs paid prior directory publication classified current assets publication reclassified deferred directory costs cash equivalents cash equivalents include liquid investments maturity less three months time purchase times investments may excess federally insured limits accounts receivable accounts receivable consist balances owed us advertising clients typically enter twelvemonth contract advertising local clients billed pro rata amount contract value monthly basis behalf national clients certified marketing representatives “cmrs” pay company total contract value advertising net commission within 60 days publication month billed receivables represent amount billed clients billed receivables recorded net allowance doubtful accounts sales claims estimated based historical experience increase decrease estimate information circumstances indicate estimate longer appropriately represents amount bad debts sales claims probable incurred unbilled receivables represent contractually owed amounts net allowance sales claims published directories yet billed clients record allowance doubtful accounts receivables billed identifiable intangible assets goodwill result prior acquisitions certain longterm intangible assets identified recorded estimated fair values fair values identifiable intangible assets amortized estimated useful lives manner best reflects economic benefit derived assets excess purchase price resulting acquisitions net tangible identifiable intangible assets rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued acquired recorded goodwill impaired 2008 noted prior goodwill impairment charges goodwill amortized subject impairment testing annual basis frequently believed indicators impairment existed amortization expense related intangible assets years ended december 31 2009 2008 2007 5146 million 4159 million 3883 million respectively amortization expense intangible assets five succeeding years estimated approximately 1847 million 1569 million 1521 million 1530 million 1427 million respectively estimates based significantly reduced book values directory services agreements result impairment charges fourth quarter 2009 partially offset increased amortization expense resulting reduction remaining useful lives associated directory services agreements noted annual amortization intangible assets tax purposes approximately 6159 million acquired longterm intangible assets respective book values december 31 2009 adjusted impairment charges fourth quarter 2009 noted shown following table adjusted book values intangible assets represent new cost basis accumulated amortization prior impairment charges eliminated new cost basis amortized remaining useful lives intangible assets result filing chapter 11 petitions company performed impairment tests definitelived intangible assets longlived assets year ended december 31 2009 fourth quarter 2009 conjunction filing amended plan amended disclosure statement company finalized extensive analysis associated emergence chapter 11 company utilized following information assumptions obtained analysis complete impairment evaluation • historical financial information including revenue profit margins customer attrition data price premiums enjoyed relative competing independent publishers • longterm financial projections including limited revenue trends profit margin trends • intangible asset carrying values impairment test definitelived intangible assets longlived assets performed comparing carrying amount intangible assets longlived assets sum undiscounted expected future cash flows impairment exists sum undiscounted expected future cash flows less carrying amount intangible asset related group assets rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued longlived assets impairment exists impairment charge recognized equal amount carrying value intangible asset related group assets longlived assets exceeds fair value based upon discounted expected future cash flows result impairment tests company recognized impairment charge 73 billion fourth quarter 2009 associated directory services agreements advertiser relationships third party contracts network platforms acquired prior acquisitions components 73 billion impairment charge shown following table fair values intangible assets derived discounted cash flow analysis using discount rate indicative risk market participant would willing accept analysis included review relevant financial metrics peers within industry company evaluates remaining useful lives intangible assets whenever events circumstances indicate revision remaining period amortization warranted estimated remaining useful lives change remaining carrying amount intangible asset would amortized prospectively revised remaining useful life connection impairment testing 2009 company also evaluated remaining useful lives definitelived intangible assets longlived assets considering among things effects obsolescence demand competition takes consideration price premium benefit company competing independent publishers markets result directory services agreements acquired prior acquisitions economic factors including stability industry operate known technological advances legislative actions result uncertain changing regulatory environment expected changes distribution channels december 31 2009 company determined due compression price premium benefit competing independent publishers markets well decline market share year ended december 31 2009 remaining useful lives directory services agreements acquired prior acquisitions reduced 33 years weighted average remaining useful lives 25 years dex media east 26 years dex media west 29 years att 28 years centurylink effective january 1 2010 based assessment future estimated cash flows increased attrition rates impact longterm financial projections remaining useful lives third party contracts advertiser relationships network platforms acquired prior acquisition reduced 1 5 9 years respectively effective january 1 2010 reduction remaining useful lives necessary order better reflect period intangible assets expected contribute future cash flow company anticipates decrease amortization expense 2010 3299 million resulting significantly reduced book values directory services agreements subsequent impairment charges fourth quarter 2009 partially offset increased amortization expense resulting reduction remaining useful lives associated directory services agreements rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued acquired longterm intangible assets respective book values adjusted impairment charges noted december 31 2008 shown following table result decline trading value debt equity securities 2008 continuing negative industry economic trends directly affected business performed impairment tests goodwill definitelived intangible assets longlived assets used estimates assumptions impairment evaluations including limited projected future cash flows revenue growth customer attrition rates impairment test goodwill involved two step process first step involved comparing fair value company carrying amount assets liabilities including goodwill fair value company determined using market based approach reflects market value debt equity securities result testing determined company’s fair value less carrying amount assets liabilities requiring us proceed second step goodwill impairment test second step testing process impairment loss determined comparing implied fair value goodwill recorded amount goodwill implied fair value goodwill derived discounted cash flow analysis company using discount rate results present value assets liabilities equal current fair value company’s debt equity securities based upon impairment test goodwill recognized goodwill impairment charges 25 billion 6602 million three months ended march 31 2008 june 30 2008 respectively total goodwill impairment charges 31 billion year ended december 31 2008 result impairment charges recorded goodwill december 31 2008 addition goodwill impairment charges recognized change goodwill 05 million related prior acquisition year ended december 31 2008 impairment losses recorded related goodwill year ended december 31 2007 addition result tests company recognized impairment charge 7440 million fourth quarter 2008 associated local national customer relationships acquired prior acquisitions fair values intangible assets derived discounted cash flow analysis using discount rate results present value assets liabilities equal current fair value company’s debt equity securities lastly connection launch next version dexknowscom tradenames technology acquired prior acquisition discontinued resulted impairment charge 22 million fourth quarter 2008 total impairment charges rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued related intangible assets excluding goodwill 7462 million year ended december 31 2008 shown following table connection impairment testing definitelived intangible assets longlived assets december 31 2008 evaluated remaining useful lives intangible assets evaluating relevant factors noted based evaluation company recognized reduction remaining useful lives directory services agreements associated prior acquisitions due compression price premium benefit competing independent publishers markets well decline market share year ended december 31 2008 result remaining useful lives directory services agreements reduced 33 years effective january 1 2009 order better reflect period intangible assets expected contribute future cash flow year ended december 31 2007 recorded intangible asset impairment charge 200 million associated tradenames acquired prior acquisition impairment charge resulted change branding strategy utilize new dex market brand print online products across entire footprint discontinued use tradenames acquired prior acquisition impairment charge determined using relief royalty valuation method impairment charges impact current future operating cash flow compliance debt covenants tax attributes connection acquisition dex media january 31 2006 “dex media merger” acquired directory services agreements collectively “dex directory services agreements” dex media entered qwest defined note 3 “acquisitions” including 1 publishing agreement term 50 years commencing november 8 2002 subject automatic renewal additional oneyear terms grants us right exclusive official directory publisher listings classified advertisements qwest’s telephone customers geographic areas states dex media east dex media west operate directory business “qwest states” qwest successors provided local telephone services november 8 2002 well exclusive right use certain qwest branding directories markets 2 noncompetition agreement term 40 years commencing november 8 2002 pursuant qwest behalf affiliates successors agreed sell directory products consisting principally listings classified advertisements subscribers geographic areas qwest states qwest provided local telephone service november 8 2002 directed primarily consumers geographic areas initial fair value assigned dex directory services agreements 73 billion amortized income forecast method based multiperiod excess earnings method using discounted cash flow model whereby projected cash flows intangible asset computed indirectly means future cash flows projected deductions made recognize returns appropriate contributory assets leaving excess residual net cash flow indicative intangible asset fair value income forecast method assumes value derived directory services agreements greater earlier years steadily declines time rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued result dex media merger also acquired 1 advertising commitment agreement whereby qwest agreed purchase aggregate 20 million advertising per year 2017 us pricing terms least favorable offered similar large clients 2 intellectual property contribution agreement pursuant qwest assigned licensed us qwest intellectual property previously used qwest directory services business along 3 trademark license agreement pursuant qwest granted us right november 2007 use qwest dex qwest dex advantage marks connection directory products related marketing material qwest states right use marks connection dexknowscom intangible assets 2 3 collectively “trade names” fair value assigned dex media advertising commitment based multiperiod excess earnings method amortized straightline method 12 years directory services agreements att company include directory services license agreement noncompetition agreement internet yellow pages reseller agreement directory publishing listing agreement collectively “att directory services agreements” certain affiliates att directory services license agreement designates us official exclusive provider yellow pages directory services att successors illinois northwest indiana “territory” grants us exclusive license obligation specified agreement produce publish distribute white pages directories territory att’s agent grants us exclusive license obligation specified agreement use att brand logo print directories territory noncompetition agreement prohibits att affiliates successors certain limited exceptions 1 producing publishing distributing yellow white pages print directories territory 2 soliciting selling local national yellow white pages advertising inclusion directories 3 soliciting selling local internet yellow pages advertising certain internet yellow pages directories territory licensing att marks third party purpose internet yellow pages reseller agreement grants us exclusive right sell local advertisers within territory internet yellow pages advertising focused upon products services offered within territory b nonexclusive right sell local excluding national advertisers within territory internet yellow pages advertising focused upon products services offered outside territory case onto yellowpagescom platform directory publishing listing agreement gives us right purchase use basic att subscriber listing information updates purpose publishing directories att directory services agreements internet yellow pages reseller agreement initial terms 50 years commencing september 2004 subject automatic renewal early termination specified circumstances internet yellow pages reseller agreement term 5 years commencing september 2004 assigned fair value 25 million amortized straight line method fully amortized december 31 2009 initial fair value assigned att directory services agreements 9500 million amortized income forecast method determined based present value estimated future cash flows time att directory acquisition directory services agreements centurylink company executed may 2006 conjunction sprint’s spinoff local telephone business include directory services license agreement trademark license agreement noncompetition agreement certain affiliates centurylink well noncompetition agreement sprint entered january 2003 collectively “centurylink directory services agreements” centurylink directory services agreements replaced previously existing analogous agreements sprint except sprint remained bound noncompetition agreement directory services license agreement grants us exclusive license obligation specified agreement produce publish distribute yellow white pages directories centurylink successors 18 states centurylink provided local telephone service time agreement trademark license agreement grants us exclusive license obligation specified agreement use certain specified centurylink trademarks markets non rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued competition agreements prohibit centurylink sprint respective affiliates successors markets selling local directory advertising certain limited exceptions producing publishing distributing print directories centurylink directory services agreements initial terms 50 years commencing january 2003 subject automatic renewal early termination specified circumstances initial fair value centurylink directory services agreements 16 billion amortized income forecast method determined based present value estimated future cash flows time acquisition centurylink fair values local national customer relationships obtained result prior acquisitions determined based present value estimated future cash flows intangible assets amortized income forecast method assumes value derived customer relationships greater earlier years steadily declines time weighted average useful life relationships subsequent impairment charges noted approximately 20 years fair value acquired trade names obtained result dex media merger determined based “relief royalty” method values trade names based estimated amount company would pay arms length transaction use trade names qwest tradenames amortized straightline method 15 years connection prior acquisition identified recorded certain intangible assets estimated fair value including 1 advertiser relationships 2 third party contracts 3 technology network platforms 4 trade names trademarks 2009 intangible assets amortized remaining useful lives ranging 3 10 years straightline method exception advertiser relationships network platform intangible assets amortized income forecast method noted company reduce remaining useful lives associated advertiser relationships third party contracts network platforms effective january 1 2010 connection prior acquisition identified recorded certain intangible assets estimated fair value including 1 local customer relationships 2 noncompete agreements 3 technology 4 tradenames intangible assets amortized straightline method remaining useful lives ranging 3 7 years noted company decided discontinue use tradenames technology acquired prior acquisition result recognized impairment charge 22 million fourth quarter 2008 industry economic conditions markets continue deteriorate resulting declines advertising sales operating results trading value debt equity securities decline required assess recoverability useful lives longlived assets intangible assets could result additional impairment charges reduction remaining useful lives acceleration amortization expense fixed assets computer software fixed assets computer software recorded cost depreciation amortization provided estimated useful lives assets using straightline method estimated useful lives thirty years buildings five years machinery equipment ten years furniture fixtures three five years computer equipment computer software leasehold improvements amortized straight rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued line basis shorter term lease estimated useful life improvement fixed assets computer software december 31 2009 2008 consisted following depreciation amortization expense fixed assets computer software years ended december 31 2009 2008 2007 follows year ended december 31 2009 identified certain fixed assets longer service resulted acceleration depreciation expense 87 million years ended december 31 2009 2008 retired certain computer software fixed assets resulted impairment charge 04 million 04 million respectively interest expense deferred financing costs contractual interest expense would appeared consolidated statement operations filing chapter 11 petitions 8024 million year ended december 31 2009 interest expense recognized years ended december 31 2009 2008 2007 4898 million 8367 million 8082 million respectively certain costs associated issuance debt instruments capitalized included noncurrent assets consolidated balance sheets costs amortized interest expense terms related debt agreements bond outstanding method used amortize deferred financing costs relating debt instruments respect make accelerated principal payments deferred financing costs amortized using effective interest method amortization deferred financing costs included interest expense 275 million 290 million 232 million 2009 2008 2007 respectively interest expense year ended december 31 2009 includes noncash charge 56 million associated change fair value dex media east interest rate swaps longer deemed financial instruments result filing chapter 11 petitions interest expense year ended december 31 2009 also includes noncash charge 96 million resulting amounts previously charged rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued accumulated comprehensive loss related interest rate swaps amounts previously charged accumulated comprehensive loss related dex media east interest rate swaps amortized interest expense remaining life interest rate swaps based future interest payments probable forecasted transactions occur accordance fresh start accounting reporting unamortized amounts previously charged accumulated comprehensive loss eliminated fresh start reporting date result change fair value interest rate swaps associated amendment rhdi credit facility refinancing former dex media west credit facility june 6 2008 settlement termination certain interest rate swaps second quarter 2009 interest expense includes reduction 107 million year ended december 31 2009 compared noncash charge 37 million year ended december 31 2008 interest expense year ended december 31 2008 also includes noncash charge 210 million resulting amounts previously charged accumulated comprehensive loss related interest rate swaps conjunction dex media merger result purchase accounting required gaap recorded dex media’s debt fair value january 31 2006 recognized offset interest expense period subsequent dex media merger may 28 2009 amortization corresponding fair value adjustment offset interest expense 77 million 176 million 299 million years ended december 31 2009 2008 2007 respectively offset interest expense recognized life respective debt however due filing chapter 11 petitions unamortized fair value adjustments may 28 2009 785 million writtenoff recognized reorganization item consolidated statement operations year ended december 31 2009 certain interest rate swaps acquired result dex media merger designated cash flow hedges interest rate swaps eventually settled december 31 2007 year ended december 31 2007 company recorded additional interest expense 34 million result change fair value acquired undesignated interest rate swaps gain loss debt transactions net effective october 21 2008 obtained waiver rhdi credit facility permit rhdi make voluntary prepayments term loan d1 term loan d2 discount par provided discount acceptable lenders choose participate rhdi obligated make prepayments result voluntary prepayments made year ended december 31 2008 recognized gain 200 million consisting difference face amount term loans repaid voluntary prepayments made offset writeoff unamortized deferred financing costs 02 million following table presents face amount term loans repaid total voluntary prepayments made net gain recognized year ended december 31 2008 rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued october 2008 repurchased 215 million senior notes collectively senior notes senior discount notes repurchased september 2008 noted referred “notes” purchase price 74 million “october 2008 debt repurchases” result october 2008 debt repurchases recognized gain 136 million year ended december 31 2008 consisting difference par value purchase price notes offset writeoff unamortized deferred financing costs 05 million noted following table september 2008 repurchased 1655 million 1599 million accreted value applicable notes purchase price 847 million “september 2008 debt repurchases” result september 2008 debt repurchases recognized gain 724 million year ended december 31 2008 consisting difference accreted value case senior discount notes par value applicable purchase price notes offset writeoff unamortized deferred financing costs 29 million noted following table june 25 2008 rhdi exchanged 5942 million 5857 million accreted value applicable rhd’s senior notes senior discount notes collectively referred “rhd notes” 4129 million aggregate principal amount rhdi’s newly issued 1175 senior notes due may 15 2015 “rhdi senior notes” referred “debt exchanges” following table presents accreted value case rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued senior discount notes par value applicable rhd notes exchanged well gain recognized debt exchanges june 6 2008 conjunction debt exchanges amended rhdi credit facility order among things permit debt exchanges provide additional covenant flexibility addition june 6 2008 refinanced dex media west credit facility year ended december 31 2008 recognized charge 22 million writeoff unamortized deferred financing costs associated refinancing former dex media west credit facility portions amended rhdi credit facility accounted extinguishments debt result financing activities noted recorded net gain 2652 million year ended december 31 2008 year ended december 31 2007 recorded net loss debt transactions 263 million resulting tender redemption premium payments 717 million writeoff unamortized deferred financing costs 168 million associated refinancing transactions conducted fourth quarter 2007 offset accelerated amortization fair value adjustment directly attributable redemption dex media east’s outstanding 9875 senior notes 12125 senior subordinated notes november 26 2007 622 million accounted extinguishment debt advertising expense recognize advertising expenses incurred expenses include media public relations promotional sponsorship costs online advertising total advertising expense 835 million 724 million 552 million 2009 2008 2007 respectively total advertising expense 2009 2008 2007 includes 522 million 398 million 78 million respectively costs associated traffic purchased distributed multiple advertiser landing pages proprietary local search site concentration credit risk approximately 85 directory advertising revenue derived sale advertising local businesses clients typically enter 12month advertising sales contracts make monthly payments term contract clients prepay full amount portion contract value new clients desiring expand advertising programs subject credit review clients qualify may extend credit advertising purchase local businesses tend rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued fewer financial resources higher failure rates large businesses addition full collection delinquent accounts take extended period time involve significant costs require collateral clients although charge interest clients pay specified due dates remaining approximately 15 directory advertising revenue derived sale advertising national large regional chains rental car companies automobile repair shops pizza delivery businesses substantially revenue derived national accounts serviced cmrs accept orders cmrs independent third parties act agents national clients cmrs responsible billing national clients advertising receive payment value advertising placed directory net cmr’s commission directly cmr still exposed credit risk amount losses accounts historically less local accounts clients cases cmrs tend larger companies greater financial resources local clients continue experience adverse bad debt trends attributable economic challenges markets years ended december 31 2009 2008 bad debt expense represented 67 53 net revenue respectively compared 30 year ended december 31 2007 december 31 2009 interest rate swap agreements major financial institutions notional amount 2000 million exposed credit risk event one counterparties agreements cannot meet obligation notional amount used measure interest paid received represent amount exposure credit loss would limited amount would received remaining life swap agreement counterparties swap agreements major financial institutions credit ratings aa higher labor unions approximately 3500 employees approximately 1100 approximately 31 represented labor unions covered two collective bargaining agreements dex media qwest states unionized employees represented either international brotherhood electrical workers america “ibew” represents approximately 400 unionized workforce communication workers america “cwa” represents approximately 700 unionized workforce dex media’s collective bargaining agreement ibew expires may 2012 dex media’s collective bargaining agreement cwa expires september 2012 derivative financial instruments hedging activities march 2008 fasb issued fasb asc 8151065 derivatives hedging “fasb asc 815” fasb asc 815 requires enhanced disclosures derivative instruments hedging activities fair value derivative instruments presentation gains losses tabular format well disclosures regarding credit risks strategies objectives using derivative instruments fasb asc 815 effective fiscal years interim periods beginning november 15 2008 company adopted provisions standard january 1 2009 although fasb asc 815 requires enhanced disclosures adoption impact company’s results operations financial condition company use derivative financial instruments trading speculative purposes derivative financial instruments limited interest rate swap agreements result filing chapter 11 petitions company interest rate swaps designated cash flow hedges december 31 2009 variable rate debt exposes company variability interest payments due changes interest rates management believes prudent mitigate interest rate risk portion variable rate borrowings dex media west dex media east credit facilities require rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued maintain hedge agreements provide fixed rate least 33 respective indebtedness including indebtedness dex media satisfy objectives requirements company entered fixed interest rate swap agreements manage fluctuations cash flows resulting changes interest rates variable rate debt company’s interest rate swap agreements effectively convert 2000 million approximately 6 variable rate debt fixed rate debt mitigating exposure increases interest rates december 31 2009 approximately 37 total debt outstanding consists variable rate debt excluding effect interest rate swaps including effect interest rate swaps total fixed rate debt comprised approximately 65 total debt portfolio december 31 2009 day derivative contract executed company may designate derivative instrument hedge variability cash flows received paid cash flow hedge hedging relationships company formally documents hedging relationship riskmanagement objective strategy undertaking hedge hedging instrument item nature risk hedged hedging instrument’s effectiveness offsetting hedged risk assessed description method measuring ineffectiveness company also formally assesses hedge’s inception ongoing basis whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged items derivative financial instruments recognized either assets liabilities consolidated balance sheets measurement fair value quarterly basis fair values interest rate swaps determined based quoted market prices extent swaps provide effective hedge differences fair value book value swaps recognized accumulated comprehensive loss component shareholders’ deficit derivative financial instruments designated qualify hedged transactions initial fair value subsequent gains losses change fair value reported earnings component interest expense gains losses related quarterly fair value adjustments presented noncash operating activity consolidated statements cash flows company discontinues hedge accounting prospectively determined derivative longer highly effective offsetting changes cash flows hedged item derivative hedged item expired sold terminated exercised management determines designation derivative hedging instrument longer appropriate situations hedge accounting discontinued company continues carry derivative fair value consolidated balance sheet recognizes subsequent changes fair value earnings component interest expense amounts previously recorded accumulated comprehensive loss amortized interest expense periods interest expense underlying debt impacts earnings using derivative financial instruments hedge exposures changes interest rates company exposes credit risk market risk credit risk possible failure counterparty perform terms derivative contract fair value derivative contract positive counterparty owes company creates credit risk company fair value derivative contract negative company owes counterparty therefore subject credit risk company minimizes credit risk derivative financial instruments entering transactions major financial institutions credit ratings aa higher market risk adverse effect value financial instrument results change interest rates market risk associated interestrate contracts managed establishing monitoring parameters limit types degree market risk may undertaken see note 6 “derivative financial instruments” additional information regarding derivative financial instruments hedging activities rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued pension postretirement benefits pension postretirement benefits represent estimated amounts paid employees future accounting benefits reflects recognition benefit costs employee’s approximate service period based terms plan investment funding decisions made determination benefit obligation net periodic pension postretirement benefit costs requires management make assumptions regarding discount rate return retirement plan assets increase future compensation healthcare cost trends changes assumptions significant impact projected benefit obligation funding requirement net periodic benefit cost assumed discount rate pension benefits could settled 2009 utilized mercer pension discount yield curve determine appropriate discount rate defined benefit pension plans company changed mercer pension discount yield curve 2009 better reflect specific cash flows plans determining discount rate 2008 2007 utilized citigroup pension liability index appropriate discount rate defined benefit pension plans expected longterm rate return plan assets based mix assets held plan expected longterm rates return within asset class anticipated trend future healthcare costs based historical experience external factors based upon ratification new collective bargaining agreements cwa november 6 2009 ibew june 12 2009 conjunction comprehensive redesign company’s employee retirement savings pension plans october 21 2008 company froze current defined benefit plans covering cwa ibew represented employees curtailed retiree health care life insurance benefits covering employees october 2008 company froze current defined benefit plans covering nonunion employees curtailed nonunion retiree health care life insurance benefits see note 9 “benefit plans” information regarding benefit plans income taxes account income taxes asset liability method accordance fasb asc 740 income taxes “fasb asc 740” deferred income tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred income tax assets based upon available evidence likely deferred income tax assets realized fasb asc 740 also prescribes recognition threshold measurement principles financial statement recognition measurement tax positions taken expected taken tax return fasb asc 740 impact uncertain income tax position income tax return must recognized largest amount likely sustained upon audit relevant taxing authority uncertain income tax position recognized less 50 likelihood sustained additionally fasb asc 740 provides guidance derecognition classification interest penalties accounting interim periods disclosures transition requirements company’s policy recognize interest penalties related unrecognized tax benefits income tax expense see note 7 “income taxes” additional information regarding provision benefit income taxes rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued earnings loss per share calculation basic diluted earnings loss per share “eps” years ended december 31 2009 2008 2007 respectively presented diluted eps calculated dividing net income loss weighted average common shares outstanding plus dilutive potential common stock potential common stock includes stock options stock appreciation rights “sars” restricted stock dilutive effect calculated using treasury stock method due net loss reported years ended december 31 2009 2008 effect stockbased awards antidilutive therefore included calculation diluted eps years ended december 31 2009 2008 2007 4560 shares 4060 shares 2593 shares respectively stockbased awards exercise prices exceeded average market price company’s common stock respective periods stockbased awards december 31 2009 effective date maintain shareholder approved stock incentive plan 2005 stock award incentive plan “2005 plan” whereby certain employees nonemployee directors eligible receive stock options sars limited stock appreciation rights tandem stock options restricted stock prior adoption 2005 plan maintained shareholder approved stock incentive plan 2001 stock award incentive plan “2001 plan” 2005 plan 2001 plan 5 million 4 million shares respectively originally authorized grant stock awards typically granted market value common stock date grant become exercisable ratable installments otherwise period one five years date grant may exercised maximum ten years date grant company’s compensation benefits committee “committee” determines termination vesting relevant provisions date grant implemented policy issuing treasury shares held company satisfy stock issuances associated stockbased award exercises december 31 2009 effective date nonemployee directors receive options purchase 1500 shares award 1500 shares restricted stock upon election board nonemployee directors also receive annual basis options purchase 1500 shares award rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued 1500 shares restricted stock nonemployee directors may also elect receive additional equity awards lieu portion cash fees company records stockbased compensation expense consolidated statements operations employee stockbased awards based grant date fair values company estimates forfeitures requisite service period recognizing compensation expense estimated forfeitures adjusted extent actual forfeitures differ expected materially differ estimates years ended december 31 2009 2008 2007 company utilized forfeiture rate 102 8 5 respectively determining compensation expense stockbased awards information activity prior emergence chapter 11 discussed note 8 “stock incentive plans” upon emergence chapter 11 pursuant plan outstanding equity securities company including stock options sars restricted stock cancelled see note 16 “subsequent events” additional information conjunction bankruptcy court’s approval plan dex one corporation equity incentive plan “eip” also approved bankruptcy court ratified company’s board directors effective date eip certain employees nonemployee directors dex one eligible receive stock options sars limited stock appreciation rights tandem stock options restricted stock restricted stock units eip 56 million shares dex one common stock authorized grant see note 16 “subsequent events” additional information regarding eip longterm incentive march 9 2009 committee approved 2009 longterm incentive program “2009 ltip” company 2009 ltip cashbased plan designed provide longterm incentive compensation participants based achievement performance goals designated committee pursuant company’s 2005 stock award incentive plan committee administers 2009 ltip sole discretion may subject certain exceptions delegate power authority 2009 ltip chief executive officer executive officer company participants 2009 ltip consist executive officers company affiliates committee sole discretion may select time ii employees company subsidiaries affiliates chief executive officer sole discretion may select time amount award 2009 ltip paid cash dependent upon attainment certain performance measures related amount company’s cumulative free cash flow 2009 2010 2011 fiscal years “performance period” participants executive officers company certain participants designated chief executive officer also eligible receive payment upon achievement restructuring reorganization andor recapitalization relating company’s outstanding indebtedness liabilities “specified actions” performance period payments made following end performance period date specified action case may awards granted executive officers 2009 ltip certain participants designated chief executive officer continue paid subject applicable performance conditions event participant’s employment terminated participant good reason term defined 2009 ltip company without cause term defined 2009 ltip result participant’s death disability payment made participant remained employed company applicable payment date 2009 ltip subject achievement applicable performance conditions participant’s employment company terminated circumstances unpaid amount 2009 ltip forfeited cashbased awards rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued granted participants april 2009 result company recognized compensation expense related 2009 ltip 50 million year ended december 31 2009 treasury stock november 2007 company’s board directors authorized 1000 million stock repurchase plan “repurchase plan” authorization permitted company purchase shares common stock open market pursuant rule 10b18 securities exchange act 1934 block trades otherwise following twelve months based market conditions factors purchases may made suspended time purchases common stock accounted using cost method whereby total cost shares reacquired charged treasury stock contra equity account treasury stock reissued cost shares reissued determined based firstin firstout cost flow assumption charged treasury stock excess reissuance price cost credited additional paidin capital accordance repurchase plan company repurchased total 25 million shares cost 957 million december 2007 61 million funded january 2008 shares common stock repurchased years ended december 31 2009 2008 repurchase plan expired fair value financial instruments december 31 2009 2008 fair value cash equivalents accounts receivable accounts payable accrued liabilities approximated carrying value based shortterm nature instruments result filing chapter 11 petitions plan believe meaningful present fair market value longterm debt december 31 2009 note 5 “longterm debt credit facilities notes” fasb asc 820 fair value measurements disclosures “fasb asc 820” defines fair value establishes fair value hierarchy prioritizes inputs valuation techniques used measure fair value expands disclosures fair value measurements fasb asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy gives highest priority quoted prices active markets comprised following three levels level 1 unadjusted quoted market prices active markets identical assets liabilities level 2 observable inputs level 1 inputs level 2 inputs would typically include quoted prices markets active financial instruments significant inputs observable either directly indirectly level 3 prices valuations require inputs significant measurement unobservable rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued following tables represent assets liabilities measured fair value recurring basis december 31 2009 level within fair value hierarchy fair value measurements included interest rate swaps december 31 2009 company interest rate swaps notional amount 2000 million continue measured fair value recurring basis conjunction classification credit facilities interest rate swap liabilities excluded liabilities subject compromise consolidated balance sheet december 31 2009 credit facilities interest rate swaps fully collateralized fair value collateral exceeded carrying value credit facilities interest rate swaps valuation techniques interest rate swaps fair value marketbased measure considered perspective market participant holds asset owes liability rather entityspecific measure therefore even market assumptions readily available company’s assumptions set reflect market participants would use pricing asset liability measurement date company uses prices inputs current measurement date fair value derivative instruments derived using pricing models pricing models take account relevant observable market inputs market participants would use pricing asset liability pricing models used determine fair value incorporate contract terms including maturity well inputs including limited interest rate yield curves creditworthiness counterparty impact credit rating also considered measuring fair value liabilities credit rating could material impact fair value derivative instruments results operations financial condition particular reporting period december 31 2009 impact applying credit rating determining fair value derivative instruments reduction interest rate swap liability 05 million many pricing models entail material subjectivity methodologies employed necessitate significant judgment pricing inputs observed actively quoted markets case derivative instruments pricing models used company widely accepted financial services industry noted derivative instruments categorized within level 2 fair value hierarchy fair value control processes interest rate swaps company employs control processes validate fair value derivative instruments derived pricing models control processes designed assure values used financial reporting based observable inputs wherever possible event observable inputs available control processes designed assure valuation approach utilized appropriate consistently applied assumptions reasonable rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued benefit plan assets fair values company’s benefit plan assets disclosures required fasb asc 71520 compensation retirement benefits presented note 9 “benefit plans” effective january 1 2009 company adopted provisions fasb asc 820 associated nonfinancial assets liabilities initially measured fair value prior business combinations including intangible assets goodwill estimates preparation financial statements conformity gaap requires management make estimates assumptions affect reported amounts assets liabilities revenues certain expenses disclosure contingent assets liabilities actual results could differ materially estimates assumptions estimates assumptions used determination recoverability longlived assets sales allowances doubtful accounts depreciation amortization employee benefit plans expense restructuring reserves deferred income taxes certain estimates pertaining liabilities fasb asc 740 certain assumptions pertaining stockbased awards certain estimates associated liabilities classified liabilities subject compromise among others new accounting pronouncements september 2009 emerging issues task force “eitf” reached final consensus eitf issue 081 revenue arrangements multiple deliverables “eitf 081” eitf 081 yet incorporated fasb’s codification however currently identified accounting standards update 200913 revenue recognition eitf 081 updates current guidance pertaining multipleelement revenue arrangements included fasb asc 60525 originated eitf 0021 revenue arrangements multiple deliverables eitf 081 addresses determine whether arrangement involving multiple deliverables contains one unit accounting arrangement consideration allocated among separate units accounting eitf 081 effective company annual reporting period beginning january 1 2011 eitf 081 may applied retrospectively prospectively early adoption permitted company expect adoption eitf 081 impact financial position results operations cash flows disclosures june 2009 fasb issued fasb asc 10510 generally accepted accounting principles “fasb asc 105” fasb asc 105 establishes single source authoritative nongovernmental gaap superseding existing fasb american institute certified public accountants “aicpa” eitf related accounting literature fasb asc 105 amend replace rules interpretive releases securities exchange commission “sec” sources authoritative gaap sec registrants fasb asc 105 effective interim annual periods ending september 15 2009 company adopted fasb asc 105 september 30 2009 may 2009 fasb issued fasb asc 855 subsequent events “fasb asc 855” objective establish general standards accounting disclosure events occur balance sheet date financial statements issued available issued particular fasb asc 855 sets forth 1 period balance sheet date management reporting entity evaluate events transactions may occur potential recognition disclosure financial statements 2 circumstances entity recognize events transactions occurring balance sheet date financial statements 3 disclosures entity make events transactions occurred balance sheet date fasb asc 855 effective interim rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued annual financial periods ending june 15 2009 adopted fasb asc 855 june 30 2009 reviewed accounting pronouncements issued december 31 2009 company yet adopted believe pronouncements material impact financial position operating results 3 reorganization items net liabilities subject compromise reorganization items net year ended december 31 2009 company recorded 948 million reorganization items separate line item consolidated statement operations reorganization items represent charges directly associated process reorganizing business chapter 11 bankruptcy code following table displays details reorganization items year ended december 31 2009 company incurred professional fees associated filing chapter 11 petitions 774 million year ended december 31 2009 676 million paid cash professional fees include financial legal valuation services directly associated reorganization process writeoff unamortized deferred financing costs 645 million unamortized net premiums discounts 349 million unamortized fair value adjustments required gaap result dex media merger 785 million may 28 2009 relate longterm debt classified liabilities subject compromise december 31 2009 company recognized 35 million year ended december 31 2009 associated rejected leases abandoned property approved bankruptcy court december 31 2009 part chapter 11 cases december 31 2009 company received operating cash receipts resulting filing chapter 11 petitions liabilities subject compromise liabilities subject compromise generally refer prepetition obligations secured unsecured may impaired plan reorganization fasb asc 852 requires liabilities including became known filing chapter 11 petitions reported amounts expected allowed even may settled lesser amounts liabilities represent estimated amount expected resolved known potential claims chapter 11 process remain subject future adjustments negotiated settlements actions bankruptcy court nonacceptance certain rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued executory contracts unexpired leases liabilities subject compromise also includes items may assumed plan reorganization may subsequently reclassified liabilities subject compromise company classified notes default liabilities subject compromise liabilities subject compromise also include certain prepetition liabilities including accrued interest accounts payable accrued liabilities tax related liabilities lease related liabilities company’s cash flow operations favorably impacted stay payment related accrued interest table identifies principal categories liabilities subject compromise december 31 2009 certain claims included liabilities subject compromise december 31 2009 resolved satisfied effective date others resolved subsequent effective date although allowed amount certain unresolved claims determined liabilities subject compromise associated unresolved claims discharged upon emergence exchange treatment outlined plan company believes entire amount liabilities subject compromise december 31 2009 effectively resolved effective date disclosed unaudited pro forma adjustments note 16 “subsequent events” 4 restructuring charges 2009 initiated restructuring plan included vacating leased facilities headcount reductions “2009 actions” year ended december 31 2009 recognized restructuring charge earnings associated 2009 actions 54 million made payments 24 million first quarter 2009 initiated restructuring plan included outside consulting services assist evaluation capital structure including various balance sheet restructuring alternatives professional fees 23 million previously recognized restructuring charges 2009 actions first quarter 2009 reclassed reorganization items net consolidated statement operations year ended december 31 2009 second quarter 2008 initiated restructuring plan included headcount reductions consolidation responsibilities vacating leased facilities “2008 actions” occurred 2008 continued 2009 years ended december 31 2009 2008 recognized restructuring charge earnings associated 2008 actions 93 million 386 million respectively payments 175 million 284 million made respect outside consulting services severance vacated leased facilities years ended december 31 2009 2008 respectively year ended december 31 2007 recognized restructuring charge earnings 55 million associated headcount reductions consolidation responsibilities effectuated 2008 “2007 actions” year ended december 31 2008 finalized estimate costs associated headcount reductions reversed portion reserve 19 million corresponding credit earnings years ended december 31 2009 2008 made payments rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued 04 million 33 million respectively primarily related severance payments made associated 2007 actions year ended december 31 2007 result dex media merger completed restructuring relating integration dex media business vacated certain leased dex media facilities payments made respect severance relocation year ended december 31 2009 payments made respect severance relocation years ended december 31 2008 2007 totaled 04 million 16 million respectively payments 01 million 17 million 22 million made years ended december 31 2009 2008 2007 respectively respect vacated leased dex media facilities remaining lease payments facilities made 2014 restructuring charges charged credited earnings included general administrative expenses consolidated statements operations 5 longterm debt credit facilities notes effective date accordance plan 61 billion notes default presented longterm debt subject compromise table exchanged 100 reorganized dex one equity b issued 3000 million dex one senior subordinated notes holders dex media west 85 senior notes due 2010 5875 senior notes due 2011 pro rata basis addition share reorganized dex one equity accordance plan company’s existing credit facilities amended restated effective date terms conditions amended restated credit facilities dex one senior subordinated notes presented note 16 “subsequent events” effective date aggregate outstanding debt 34 billion comprised 31 billion outstanding amended restated credit facilities 3000 million dex one senior subordinated notes rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued following table presents carrying value longterm debt december 31 2009 2008 result filing chapter 11 petitions unamortized fair value adjustments required gaap result dex media merger 785 million unamortized net premiums discounts 349 million may 28 2009 writtenoff recognized reorganization items consolidated statement operations year ended december 31 2009 therefore carrying value longterm debt december 31 2009 represents par value carrying value longterm debt december 31 2008 includes 862 million unamortized fair value adjustments result filing chapter 11 petitions plan believe meaningful present fair market value longterm debt december 31 2009 credit facilities may 28 2009 conjunction plan company repaid aggregate 2000 million principal outstanding balances owed rhdi dex media east dex media west credit facilities comprised 777 million 596 million 627 million respectively february 13 2009 company borrowed unused portions rhdi revolver dex media east revolver dex media west revolver totaling 1740 million 970 million 900 million rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued respectively company made borrowings various revolving credit facilities preserve financial flexibility light continuing uncertainty global credit markets rhdi december 31 2009 outstanding balances rhdi credit facility totaled 14240 million comprised 2528 million term loan d1 10062 million term loan d2 1650 million rhdi revolver rhdi credit facility provided uncommitted term loan c potential borrowings 4000 million weighted average interest rate outstanding debt rhdi credit facility 672 677 december 31 2009 2008 respectively december 31 2009 prior amendment restatement terms conditions rhdi credit facility consisted following • term loans required quarterly principal interest payments • interest payments made option either • highest base rate determined administrative agent deutsche bank trust company americas ii federal funds effective rate defined plus 050 iii 40 case plus 250 margin rhdi revolver 275 margin term loan d1 term loan d2 • higher libor rate ii 30 case plus 350 margin new rhdi revolver 375 margin term loan d1 term loan d2 may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings • term loans d1 d2 required accelerated amortization beginning 2010 final maturity june 2011 • 750 million rhdi revolver matured december 2009 1000 million rhdi revolver would matured june 2011 dex media east december 31 2009 outstanding balances dex media east credit facility totaled 10394 million comprised 5727 million term loan 3747 million term loan b 920 million dex media east revolver exclusive 26 million utilized three standby letters credit dex media east credit facility also consisted 2000 million aggregate principal amount uncommitted incremental facility dex media east would right subject obtaining commitments incremental loans one occasions increase term loan term loan b dex media east revolver amount weighted average interest rate outstanding debt dex media east credit facility 208 383 december 31 2009 2008 respectively december 31 2009 prior amendment restatement terms conditions dex media east credit facility consisted following • term loans required quarterly principal interest payments • interest payments made option either • higher base rate determined administrative agent jp morgan chase bank na ii federal funds effective rate defined plus 050 case plus rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued 075 050 leverage ratio less 2 1 margin dex media east revolver term loan 100 margin term loan b • libor rate plus 175 150 leverage ratio less 2 1 margin dex media east revolver term loan 200 margin term loan b may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings • dex media east revolver term loan would matured october 2013 term loan b would matured october 2014 dex media west december 31 2009 outstanding balances dex media west credit facility totaled 10913 million comprised 1138 million term loan 8923 million term loan b 852 million dex media west revolver event 250 million dex media west’s 9875 senior subordinated notes due 2013 refinancing replacement thereof outstanding dex media west revolver term loan term loan b would matured date three months prior final maturity notes dex media west credit facility included 4000 million uncommitted incremental facility “incremental facility” could incurred additional revolving loans additional term loans subject obtaining commitments loans incremental facility fully available used refinance dex media west 85 senior notes due 2010 however limited 2000 million used purpose weighted average interest rate outstanding debt dex media west credit facility 695 710 december 31 2009 2008 respectively december 31 2009 prior amendment restatement terms conditions dex media west credit facility consisted following • term loans required quarterly principal interest payments • interest payments made option either • highest base rate determined administrative agent jp morgan chase bank na ii federal funds effective rate defined plus 050 iii 40 case plus 275 250 leverage ratio less 300 100 margin dex media west revolver term loan 30 margin term loan b • higher libor rate ii 30 plus 375 350 leverage ratio less 300 100 margin dex media west revolver term loan 40 margin term loan b may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings • dex media west revolver term loan would matured october 2013 term loan b would matured october 2014 notes default eliminated upon emergence chapter 11 proceedings december 31 2009 total outstanding notes 60718 million comprised 32536 million outstanding rhd notes 4129 million outstanding rhdi notes 12499 million outstanding dex media inc notes 11554 million outstanding dex media west notes rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued rhd december 31 2009 rhd total outstanding notes 32536 million comprised 2068 million 6875 senior notes 3209 million 6875 series a1 senior discount notes 4833 million 6875 series a2 senior discount notes 10128 million 8875 series a3 senior notes 12298 million 8875 series a4 senior notes december 31 2009 issued 15 billion aggregate principal amount 8875 series a4 senior notes due 2017 interest series a4 notes payable semiannually april 15th october 15th year commencing april 15 2008 series a4 notes senior unsecured obligations rhd senior right payment rhd’s existing future senior subordinated debt future subordinated obligations ranked equally rhd’s existing future senior unsecured debt series a4 notes effectively subordinated rhd’s secured debt including rhd’s guarantee borrowings rhdi credit facility structurally subordinated existing future liabilities including trade payables direct indirect subsidiaries 8875 series a4 notes remaining face value 12298 million redeemable option beginning 2012 following prices percentage face value december 31 2009 issued 3000 million 6875 senior notes due january 15 2013 “holdco notes” interest payable holdco notes semiannually arrears january 15th july 15th year commencing july 15 2005 6875 holdco notes remaining face value 2068 million redeemable option following prices percentage face value december 31 2009 issued 6600 million aggregate principal amount maturity 6005 million gross proceeds 6875 series a2 senior discount notes due january 15 2013 121 billion principal amount 8875 series a3 senior notes due january 15 2016 interest payable semiannually january 15th july 15th year series a2 senior discount notes series a3 senior notes commencing july 15 2006 december 31 2009 also issued 3650 million aggregate principal amount maturity 3321 million gross proceeds 6875 series a1 senior discount notes due january 15 2013 interest payable semiannually january 15th july 15th year commencing july 15 2006 notes unsecured obligations rhd senior right payment future senior subordinated indebtedness rhd structurally subordinated indebtedness subsidiaries rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued 6875 series a1 senior discount notes remaining face value 3209 million series a2 senior discount notes remaining face value 4833 million redeemable option following prices percentage face value 8875 series a3 senior notes remaining face value 10128 million redeemable option beginning 2011 following prices percentage face value rhdi june 25 2008 rhdi exchanged 5942 million 5857 million accreted value applicable certain rhd senior notes senior discount notes collectively referred “rhd notes” 4129 million aggregate principal amount rhdi 1175 senior notes due may 15 2015 “rhdi senior notes” interest rhdi senior notes payable semiannually may 15th november 15th year commencing november 15 2008 rhdi senior notes senior unsecured obligations rhdi ranked equally rhdi’s senior unsecured indebtedness rhdi senior notes fully unconditionally guaranteed rhd rhdi’s subsidiaries guarantee obligations rhdi credit facility general senior unsecured basis rhdi senior notes effectively subordinated right payment rhdi’s existing future secured debt extent value assets securing debt rhdi senior notes also structurally subordinated existing future liabilities including trade payables rhdi’s existing future subsidiaries guarantee rhdi senior notes rhd guarantee respect rhdi senior notes structurally subordinated liabilities rhd’s subsidiaries rhdi subsidiaries guarantee obligations rhdi senior notes claims respect rhdi senior notes structurally senior claims respect outstanding rhd notes rhdi senior notes remaining face value 4129 million redeemable option beginning 2012 following prices percentage face value dex media inc december 31 2009 dex media inc total outstanding notes 12499 million comprised 5000 million 8 senior notes 7499 million 9 senior discount notes december 31 2009 dex media inc issued 5000 million aggregate principal amount 8 senior notes due 2013 senior notes unsecured obligations dex media inc interest rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued payable may 15th november 15th year december 31 2009 5000 million aggregate principal amount outstanding 8 senior notes remaining face value 5000 million redeemable option following prices percentage face value december 31 2009 dex media inc issued 750 million aggregate principal amount 9 senior discount notes due 2013 two indentures first indenture totaling 3890 million aggregate principal amount 9 senior discount notes issued original issue discount interest accruing 9 per annum compounded semiannually senior discount notes unsecured obligations dex media inc interest accrued form increased accreted value november 15 2008 “full accretion date” time accreted value equal full principal amount maturity second indenture totaling 3610 million aggregate principal amount interest accrued 837 per annum compounded semiannually created premium full accretion date would amortized remainder term november 15 2008 9 senior discount notes bore cash interest 9 per annum payable semiannually may 15th november 15th year senior discount notes unsecured obligations dex media inc cash interest accrued discount notes prior full accretion date december 31 2009 750 million aggregate principal amount outstanding 9 senior discount notes remaining face value 7499 million redeemable option following prices percentage face value dex media west december 31 2009 dex media west total outstanding notes 11554 million comprised 3850 million 85 senior notes 87 million 5875 senior notes 7617 million senior subordinated notes december 31 2009 dex media west issued 3850 million aggregate principal amount 85 senior notes due 2010 senior notes unsecured obligations dex media west interest payable february 15th august 15th year december 31 2009 3850 million aggregate principal amount outstanding 85 senior notes remaining face value 3850 million redeemable option following prices percentage face value december 31 2009 dex media west issued 3000 million aggregate principal amount 5875 senior notes due 2011 senior notes unsecured obligations dex media west rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued interest payable may 15th november 15th year december 31 2009 87 million aggregate principal amount outstanding 5875 senior notes remaining face value 87 million redeemable option following prices percentage face value december 31 2009 dex media west issued 780 million aggregate principal amount 9875 senior subordinated notes due 2013 senior subordinated notes unsecured obligations dex media west interest payable february 15th august 15th year december 31 2009 7617 million aggregate principal amount outstanding 9875 senior subordinated notes remaining face value 7617 million redeemable option following prices percentage face value result emergence chapter 11 effective date believe meaningful present aggregate maturities longterm debt december 31 2009 following table presents aggregate maturities amended restated credit facilities dex one senior subordinated notes including current portion effective date impact dex media merger result dex media merger adjustment established record acquired debt fair value january 31 2006 fair value adjustment amortized reduction interest expense using effective interest method may 28 2009 impact future scheduled interest principal payments amortization fair value adjustment included reduction interest expense loss debt transactions applicable 77 million 176 million 921 million including 622 million related redemption dex media east’s senior notes senior subordinated notes 2007 recorded loss debt transactions years ended december 31 2009 2008 2007 respectively offset interest expense recognized life respective debt however due filing chapter 11 petitions unamortized fair value adjustments 785 million may 28 2009 writtenoff recognized reorganization item consolidated statement operations year ended december 31 2009 rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued 6 derivative financial instruments rhdi credit facility dex media west dex media east credit facilities bear interest variable rates accordingly earnings cash flow affected changes interest rates company entered following interest rate swaps effectively convert approximately 2000 million company’s variable rate debt fixed rate debt december 31 2009 1 consists one swap result filing chapter 11 petitions company interest rate swaps designated cash flow hedges december 31 2009 terms interest rate swap agreements receive variable interest based threemonth libor pay weighted average fixed rate 34 weighted average rate received interest rate swaps 025 december 31 2009 periodic payments receipts recorded interest expense following table presents fair value interest rate swaps december 31 2009 fair value interest rate swaps presented accounts payable accrued liabilities noncurrent liabilities consolidated balance sheet december 31 2009 following table also presents gain loss recognized interest expense change fair value interest rate swaps gain loss recognized accumulated comprehensive loss effective interest rate swaps year ended december 31 2009 years ended december 31 2009 2008 2007 company reclassified 410 million 571 million hedging losses 152 million hedging gains earnings respectively related interest rate swaps december 31 2009 232 million deferred losses net tax derivative instruments recorded accumulated comprehensive loss expected reclassified earnings hedged transactions occur accordance fresh start accounting reporting unamortized amounts previously charged accumulated comprehensive loss eliminated fresh start reporting date 7 income taxes deferred income tax assets liabilities determined based estimated future tax effects temporary differences financial statement tax basis assets liabilities measured rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued tax rates temporary differences expected reverse deferred income tax benefit provision result changes deferred income tax assets liabilities benefit provision income taxes consisted following table summarizes significant differences us federal statutory tax rate effective tax rate applied company’s income loss income taxes rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued deferred income tax assets liabilities consisted following december 31 2009 2008 result filing chapter 11 petitions company reclassified certain income tax liabilities relating tax periods prior petition date 288 million liabilities subject compromise consolidated balance sheet december 31 2009 see note 3 “reorganization items net liabilities subject compromise” additional information 2009 income tax benefit 9285 million comprised federal tax benefit 7835 million state tax benefit 1450 million 2009 federal tax benefit comprised current tax benefit 29 million primarily related decrease federal tax accrual due amended return filings deferred tax benefit 7807 million primarily related noncash intangible asset impairment charges 2009 offset part valuation allowance discussed 2009 state tax benefit 1450 million comprised current tax benefit 118 million relates favorable settlement prior year state tax audits 2009 reversal associated state liabilities deferred tax benefit 1332 million primarily related noncash intangible asset impairment charges 2009 offset part valuation allowance discussed december 31 2009 company federal state net operating loss carryforwards approximately 13154 million net carryback 16859 million respectively begin expire 2020 2010 respectively amounts include consideration net operating losses expected rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued expire unused due internal revenue code section 382 “section 382” limitation changes ownership company believes occurred march 6 2009 section 382 potential limitations triggered ownership change generally defined greater 50 change stock ownership value threeyear period change ownership restrict company’s ability use certain net operating losses corporate tax attributes future however ownership change constitute change control company’s debt agreements contracts portion benefits net operating loss carryforwards reflected additional paidin capital portion net operating loss carryforwards generated deductions related exercise stock awards 2009 2008 deduction stock awards less 01 million 06 million respectively addition company alternative minimum tax credit carryforwards approximately 07 million available reduce future federal income taxes indefinite period total deferred tax assets valuation allowance 19890 million total deferred tax liabilities 1654 million deferred tax assets 12461 million represent tax deductible internal revenue code section 197 intangible assets amortizing 15 year period approximately 8 15 years remain assessing amount deferred tax assets likely realized financial reporting standards allow us consider four possible sources taxable income future reversals existing taxable differences projected future taxable income taxable income net operating loss carryback years tax planning strategies analyzing factors company concluded sufficient positive evidence future sources taxable income realize full benefit deferred tax assets result company established valuation allowance deferred tax assets extent supported future reversals existing taxable temporary differences taxable income net operating loss carryback years certain liabilities required asc 740 provided full valuation allowances state federal net operating loss tax credit carryforwards extent likely deferred tax benefits realized december 31 2009 accordance fasb asc 740 upon evaluation future reversals existing taxable differences taxable income net operating loss carryback years liabilities required asc 740 recorded valuation allowance 15319 million deferred tax assets 2008 income tax benefit 12777 million comprised federal tax benefit 11287 million state tax benefit 1490 million 2008 federal tax benefit comprised current tax provision 239 million primarily related increase fasb asc 740 liability offset deferred income tax benefit 11526 million primarily related goodwill impairment charges 2008 state tax benefit 1490 million comprised current tax provision 103 million relates taxes due states subsidiaries company file separate tax returns well increase fasb asc 740 liability offset deferred income tax benefit 1593 million primarily related goodwill impairment charges 2008 company utilized federal net operating losses income tax purposes 41 million primarily resulting taxable gains associated certain financing activities conducted 2008 income tax benefit includes income tax benefit 203 million correcting overstated income tax expense fiscal years 2004 2007 evaluated materiality correction concluded material 2008 earlier financial statements accordingly recorded correction fourth quarter 2008 2007 provision income taxes 290 million comprised federal tax provision 275 million resulting current tax provision 118 million relating internal revenue service “irs” settlement deferred income tax provision 157 million resulting current year taxable loss 2007 state tax provision 15 million results current tax provision 85 million relating rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued taxes due states subsidiaries company file separate company returns offset deferred state tax benefit 70 million relating apportioned taxable income loss among various states federal net operating loss income tax purposes approximately 3033 million generated 2007 primarily result tax amortization expense recorded respect intangible assets acquired prior acquisitions acquired intangible assets resulted deferred income tax liability 26 billion december 31 2007 noted detail july 2007 effectively settled issues consideration irs related audit taxable years 2003 2004 therefore tax years 2006 2007 2008 still subject examination irs certain state tax returns examination various regulatory authorities continuously review issues raised connection ongoing examinations open tax years evaluate adequacy reserves believe accrued tax liabilities fasb asc 740 adequate cover uncertain tax positions related us federal state income taxes reconciliation beginning ending amount gross unrecognized tax benefits follows included balance unrecognized tax benefits december 31 2009 2008 2889 million 346 million respectively tax benefits recognized would favorably affect effective tax rate policy recognize interest penalties related unrecognized tax benefits income tax expense years ended december 31 2009 2008 2007 company recognized approximately 33 million 44 million 15 million respectively interest penalties due unrecognized tax benefits december 31 2009 2008 accrued 75 million 118 million respectively related interest amounts accrued tax penalties december 31 2009 14 million accrued tax penalties december 31 2008 december 2009 effectively settled issues consideration department finance new york state audit tax years 2000 2006 department revenue north carolina audit tax years 2003 2008 result settlements unrecognized tax benefit associated uncertain state tax positions decreased 76 million new york state 97 million north carolina year ended december 31 2009 decrease unrecognized tax benefits decreased effective tax rate year ended december 31 2009 unrecognized tax benefits impacted new york state north carolina audits primarily related apportionment allocation income among legal entities 2009 company increased liability unrecognized tax benefits 2764 million reflecting uncertainty whether ownership change section 382 discussed occurred prior date elected modify tax classification two subsidiaries date change ownership question balance sheet date company able confirm actual date ownership change sec forms 13g filed stockholders forty five days following end calendar year file forms sec based due date actual ownership change date confirmed february 15 2010 addition increased liability unrecognized tax benefits 15 million relating uncertainty surrounding deductibility certain accrued expenses rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued reasonably possible amount unrecognized tax benefits could decrease within next twelve months previously mentioned increased liability unrecognized tax benefits 2764 million section 382 limitations actual date ownership change irc section 382 resolved within next twelve months total amount unrecognized tax benefits could decrease 2764 million september 2008 effectively settled issues consideration department finance new york city related audit taxable year 2000 result settlement unrecognized tax benefits associated uncertain state tax positions decreased 09 million year ended december 31 2008 decrease unrecognized tax benefits decreased effective tax rate year ended december 31 2008 unrecognized tax benefits impacted new york city audit primarily related allocation income among legal entities july 2007 effectively settled issues consideration irs related audit taxable years 2003 2004 result settlement unrecognized tax benefits associated uncertain federal tax positions decreased 1670 million year ended december 31 2007 result irs settlement recognized additional interest expense 16 million 12 million related taxable years 2004 2005 respectively recognition interest expense within tax provision net tax benefit increased effective tax rate year ended december 31 2007 unrecognized tax benefits impacted irs audit primarily related items ultimate deductibility highly certain uncertainty regarding timing deductibility addition certain state tax returns examination various regulatory authorities state tax return years open examination average three years however certain jurisdictions remain open examination longer three years due existence net operating loss carryforwards statutory waivers 8 stock incentive plans years ended december 31 2009 2008 2007 company recognized 114 million 295 million 390 million respectively stockbased compensation expense related stockbased awards granted various employee nonemployee stock incentive plans upon emergence chapter 11 pursuant plan outstanding equity securities company including stock options sars restricted stock cancelled see note 16 “subsequent events” additional information years ended december 31 2009 2008 2007 company able utilize tax benefit resulting stockbased award exercises due net operating loss carryforwards neither operating financing cash flows affected tax impact stockbased award exercises years ended december 31 2009 2008 2007 fair value stock options sars calculated using blackscholes model time stockbased awards granted amount net estimated forfeitures amortized vesting period stockbased award company grant stockbased awards year ended december 31 2009 weighted average fair value per share stock options sars granted years ended december 31 2008 2007 249 2247 respectively following rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued assumptions used valuing stockbased awards years ended december 31 2008 2007 respectively estimate expected volatility based historical volatility price common stock expected life stockbased awards expected life represents period time stockbased awards granted expected outstanding estimate expected life using simplified method permitted staff accounting bulletin 110 use simplified method developing expected term share options stockbased awards satisfy “plain vanilla” criteria simplified method calculates expected life average vesting contractual terms award riskfree interest rate based applicable us treasury yields approximate expected life stockbased awards granted company grants restricted stock certain employees including executive officers nonemployee directors accordance 2005 plan compensation expense related awards measured fair value date grant based number shares granted quoted market price company’s common stock time following table presents summary company’s stock options sars activity related information year ended december 31 2009 1 shares available future grants december 31 2009 cancelled upon emergence chapter 11 pursuant plan see note 16 “subsequent events” information regarding dex one’s new eip intrinsic value stockbased awards vested december 31 2009 total intrinsic value stockbased awards vested december 31 2008 less 01million total fair value stockbased awards vested december 31 2009 2008 40 million 166 million respectively rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued following table summarizes information stockbased awards outstanding exercisable december 31 2009 aggregate intrinsic value exercisable stockbased awards december 31 2009 following table summarizes status nonvested stock awards december 31 2009 changes year ended december 31 2009 december 31 2009 27 million total unrecognized compensation cost related nonvested stockbased awards result emergence chapter 11 stock options sars restricted stock immediately vested company recognize 25 million remaining unrecognized compensation cost january 2010 intrinsic value nonvested stockbased awards expected vest december 31 2009 corresponding weighted average grant date exercise price 648 per share april 2009 company increased estimated forfeiture rate determining compensation expense 8 102 adjustment based review historical forfeiture information resulted reduction compensation expense 04 million year ended december 31 2009 march 4 2008 company granted 22 million sars certain employees including executive officers conjunction annual grant stock incentive awards sars settled common stock granted grant price 711 per share equal market value company’s common stock grant date vest ratably three years recognized compensation rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued expense related sars 22 million 43 million years ended december 31 2009 2008 respectively february 27 2007 company granted 11 million sars certain employees including executive officers conjunction annual grant stock incentive awards sars settled common stock granted grant price 7431 per share equal market value company’s common stock grant date vest ratably three years recognized compensation expense related sars 52 million 55 million 112 million years ended december 31 2009 2008 2007 respectively result businesscom acquisition 42 million outstanding businesscom equity awards converted 02 million rhd equity awards august 23 2007 years ended december 31 2009 2008 2007 recognized compensation expense related converted equity awards 03 million 37 million 40 million respectively december 13 2006 company granted 01 million shares restricted stock certain executive officers restricted shares settled common stock granted grant price 6064 per share equal market value company’s common stock date grant vesting restricted shares contingent upon common stock equaling exceeding 6500 per share 20 consecutive trading days continued employment company third anniversary date grant recognized compensation expense related restricted shares 07 million 07 million 24 million years ended december 31 2009 2008 2007 respectively february 21 2006 company granted 01 million shares restricted stock certain employees including executive officers restricted shares settled common stock granted grant price 6426 per share equal market value company’s common stock date grant vest ratably three years recognized compensation expense related restricted shares 03 million 16 million 17 million years ended december 31 2009 2008 2007 respectively february 21 2006 company granted 06 million sars certain employees including executive officers conjunction annual grant stock incentive awards sars settled common stock granted grant price 6426 per share equal market value company’s common stock grant date vest ratably three years recognized compensation expense related smaller sar grants 06 million 36 million 72 million years ended december 31 2009 2008 2007 respectively connection dex media merger company granted october 3 2005 11 million sars certain employees including executive officers sars granted exercise price 6500 prevailing market price common stock vest ratably three years award sars contingent upon successful completion dex media merger therefore identified awards outstanding december 31 2005 sars became fully vested 2008 compensation expense recognized year ended december 31 2009 recognized compensation expense related sars 54 million 70 million years ended december 31 2008 2007 respectively january 31 2006 stockbased awards outstanding existing dex media equity compensation plans totaled 40 million dex media option shares weighted average exercise price 548 per option share result dex media merger outstanding dex media equity awards converted rhd equity awards february 1 2006 upon conversion rhd equity awards number securities issued upon exercise outstanding awards totaled 17 million shares rhd weighted rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued average exercise price 1273 per share december 31 2009 number rhd shares remaining available future issuance totaled 05 million dex media inc 2004 incentive award plan company recognize compensation expense related converted awards year ended december 31 2009 years ended december 31 2008 2007 compensation expense related converted awards totaled 18 million 26 million respectively dex media merger triggered change control company’s stock incentive plans accordingly awards granted employees january 31 2006 exception stockbased awards held executive officers members board directors waived change control provisions awards became fully vested company recognize compensation expense related modifications year ended december 31 2009 years ended december 31 2008 2007 02 million 23 million respectively compensation expense included total compensation expense amounts noted recognized result modifications stockbased compensation expense relating existing stock options held executive officers members board directors january 1 2006 modified result dex media merger well stockbased compensation expense smaller grants issued subsequent dex media merger mentioned totaled 21 million 28 million 29 million years ended december 31 2009 2008 2007 respectively 9 benefit plans based ratification new collective bargaining agreements cwa november 6 2009 ibew june 12 2009 conjunction comprehensive redesign company’s employee retirement savings pension plans approved compensation benefits committee company’s board directors october 21 2008 following plan changes approved cwa ibew represented employees • effective december 31 2009 company froze dex media inc pension plan covering cwa ibew represented employees connection freeze pension plan benefit accruals cwa ibew plan participants cease december 31 2009 however plan balances remain intact interest credits participant account balances account balance formula well service credits vesting retirement eligibility continue accordance terms plan addition supplemental transition credits provided certain plan participants nearing retirement would otherwise lose portion anticipated pension benefit age 65 result freezing current plan • elimination access retiree health care life insurance benefits ibew represented employees retiring may 8 2009 cwa represented employees retiring october 2 2009 • elimination retiree life insurance benefits effective january 1 2010 • phase subsidized retiree health care benefits twoyear period beginning january 1 2010 • elimination retiree health care benefits retirees effective january 1 2012 result implementing freeze dex media inc pension plan covering cwa ibew represented employees recognized onetime net curtailment gain 42 million year ended december 31 2009 entirely offset losses incurred plan assets previously unrecognized prior service costs charged accumulated comprehensive loss result eliminating retiree health care life insurance benefits cwa ibew represented employees rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued recognized onetime curtailment gain 520 million included general administrative expenses consolidated statement operations year ended december 31 2009 result actions longer incur funding expenses administrative costs associated retiree health care life insurance plans cwa ibew represented employees effective january 1 2009 conjunction comprehensive redesign company’s employee retirement savings pension plans october 21 2008 except described sole retirement benefit available nonunion employees company employed businesscom provided single defined contribution plan unified 401k plan replaced preexisting rh donnelley dex media 401k savings plans nonunion employees new unified 401k plan contribute 100 dollar contributed participating employee maximum 6 participating employee’s salary including bonus commissions contributions made company fully vested participants completed one year service company businesscom employees continue eligible participate businesscom 401k plan time company able efficiently transition new unified 401k plan company continues maintain rh donnelley 401k restoration plan employees compensation excess irs annual limits conjunction establishing unified nonunion defined contribution plan company froze current defined benefit plans covering nonunion employees rh donnelley corporation retirement account dex media inc pension plan rh donnelley pension benefit equalization plan case effective december 31 2008 connection freeze pension plan benefit accruals nonunion plan participants ceased december 31 2008 however plan balances remained intact interest credits participant account balances account balance formula well service credits vesting retirement eligibility continue accordance terms respective plans addition supplemental transition credits defined contribution plan provided certain plan participants nearing retirement would otherwise lose portion anticipated pension benefit age 65 result freezing current plans similar supplemental transition credits provided certain plan participants grandfathered final average pay formula defined benefit plans previously converted traditional pension plans cash balance plans additionally october 21 2008 compensation benefits committee company’s board directors approved nonunion employees elimination nonsubsidized access retiree health care life insurance benefits effective january 1 2009 ii elimination subsidized retiree health care benefits medicareeligible retirees effective january 1 2009 iii phase subsidized retiree health care benefits threeyear period beginning january 1 2009 nonunion retiree health care benefits terminating december 31 2011 except continued nonsubsidized access retiree benefits retirees enrolled december 31 2008 respect phase subsidized retiree health care benefits eligible retiree becomes medicareeligible point time phase process noted retiree longer eligible retiree health care coverage result implementing freeze company’s defined benefit plans covering nonunion employees recognized onetime net curtailment loss 16 million year ended december 31 2008 consisting curtailment gain 136 million entirely offset losses incurred plan assets recognition previously unrecognized prior service costs charged accumulated comprehensive loss result eliminating retiree health care life insurance benefits nonunion employees recognized onetime curtailment gain 396 million included general administrative expenses consolidated statement operations year ended december 31 2008 result actions longer incur funding expenses administrative costs associated retiree health care life insurance plans nonunion employees rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued prior redesign company’s employee retirement savings pension plans october 2008 two defined benefit pension plans rhd retirement plan dex media pension plan defined three defined contribution plans rhd 401k savings plan dex media employee savings plan businesscom inc 401k plan two postretirement plans rhd group benefit plan dex media group benefit plan became effective january 1 2008 summary plans prior redesign provided redesign effective january 1 2009 rhd pension plan rhd cash balance defined benefit pension plan “rhd retirement plan” covers substantially legacy rhd employees least one year service benefits paid employees based age years service percentage total annual compensation percentage compensation allocated retirement account ranges 30 125 depending age years service “cash balance benefit” benefits certain employees participants predecessor dun bradstreet corporation “db” defined benefit pension plan also determined based participant’s average compensation years service “final average pay benefit” benefits paid equal greater final average pay benefit cash balance benefit annual pension costs determined using projected unit credit actuarial cost method funding policy contribute amount least equal minimum legal funding requirement required make contributions 102 million 57 million 36 million rhd retirement plan 2009 2008 2007 respectively underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities measurement date december 31 used plan assets also unfunded nonqualified defined benefit pension plan pension benefit equalization plan “pbep” covers senior executives certain key employees benefits based years service compensation including compensation permitted taken account previously mentioned defined benefit pension plan dex media pension plan noncontributory defined benefit pension plan covering substantially nonunion union employees within dex media “dex media pension plan” annual pension costs determined using projected unit credit actuarial cost method funding policy contribute amount least equal minimum legal funding requirement made contributions 398 million 95 million 128 million dex media pension plan 2009 2008 2007 respectively underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities measurement date december 31 used plan assets rhd dex media businesscom savings plans effective january 1 2009 unified 401k plan covering nonunion employees contribute 100 dollar contributed participating employees maximum 6 participating employee’s salary including bonus commissions previously rhd plan contributed 50 dollar contributed participating employee maximum 6 participating employee’s salary including bonus commissions contributions plan 88 million 27 million 25 million years ended december 31 2009 2008 2007 respectively effective january 1 2009 participation assets relating nonunion employees dex media plan transferred unified 401k plan prior january 1 2009 nonunion employees dex media plan contributed 100 first 4 participating employee’s salary 50 next 2 nonunion employees match limited 5 participating employee’s eligible earnings union employees dex media plan contributed 81 first 6 participating employee’s salary exceed 486 eligible earnings one pay period matching contributions limited 4860 per union employee annually contributions dex media plan 23 million 51 million 57 million years ended december 31 2009 2008 2007 respectively effective january 1 2010 unified 401k plan covering union employees contribute 100 dollar contributed participating rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued employees maximum 6 participating employee’s salary including bonus commissions effective january 1 2009 businesscom plan contribute 100 dollar contributed participating employee maximum 3 participating employee’s salary previously matching contributions made discretion board directors contributions businesscom plan 05 million year ended december 31 2009 contributions made businesscom plan 2008 subsequent businesscom acquisition 2007 benefit obligation funded status summary funded status benefit plans december 31 2009 2008 follows net amounts recognized consolidated balance sheets december 31 2009 2008 follows rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued accumulated benefit obligation qualified defined benefit pension plans 2496 million 2729 million december 31 2009 2008 respectively projected benefit obligation accumulated benefit obligation unfunded pbep december 31 2009 2008 follows components net periodic benefit expense net periodic benefit expense pension plans years ended december 31 2009 2008 2007 follows net periodic benefit expense postretirement plans years ended december 31 2009 2008 2007 follows following table presents amount previously unrecognized actuarial gains losses prior service cost credit currently accumulated comprehensive loss expected recognized net periodic benefit expense 2010 rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued accordance fresh start accounting reporting unamortized amounts previously charged accumulated comprehensive loss eliminated fresh start reporting date amounts recognized accumulated comprehensive loss december 31 2009 2008 consist assumptions following assumptions used determining benefit obligations pension plans postretirement plans discount rate reflects current rate pension postretirement obligations could effectively settled end year 2009 utilized mercer pension discount yield curve determine appropriate discount rate defined benefit pension plans company changed mercer pension discount yield curve 2009 better reflect specific cash flows plans determining discount rate 2008 2007 utilized citigroup pension liability index appropriate discount rate defined benefit pension plans since pension plans frozen rate increase future compensation utilized calculate benefit obligations december 31 2009 ratification freeze company’s defined benefit plans november 6 2009 june 12 2009 “ratification dates” october 21 2008 “notification date” resulted curtailments required remeasurement plans’ liabilities net periodic benefit expense december 31 2009 july 1 2009 november 1 2008 may 31 2009 settlement rhd’s pbep occurred time lump sum payments participants exceeded sum service cost plus interest cost components net periodic benefit expense year settlement resulted recognition actuarial gain less 01 million year ended december 31 2009 pension expense rhd’s pbep recomputed based assumptions june 1 2009 december 31 2009 resulting increase discount rate 587 687 december 31 2009 june 1 2009 april 1 2009 december 31 2008 october 31 2008 july 1 2008 december 1 2007 thereafter settlements dex media’s pension plan occurred time lump sum payments participants exceeded sum service cost plus interest cost components net periodic benefit expense year settlements resulted recognition actuarial loss 61 million 35 million years ended december 31 2009 2008 respectively actuarial gains 15 million year ended december 31 2007 pension expense 2009 recomputed based assumptions june 1 2009 december 31 2009 resulting increase discount rate 587 687 pension expense 2008 recomputed based assumptions july 1 2008 november 1 2008 settlement dates resulting increase discount rate 648 682 finally 801 rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued following assumptions used determining net periodic benefit expense rhd pension plans following assumptions used determining net periodic benefit expense dex media pension plan elimination retiree health care life insurance benefits ratification dates notification date resulted curtailments required remeasurement plans’ liabilities net periodic benefit expense june 1 2009 december 31 2009 november 1 2008 weighted average discount rate used determine net periodic benefit expense rhd postretirement plan 587 2009 801 period november 1 2008 december 31 2008 648 january 1 2008 october 31 2008 590 2007 respectively weighted average discount rate used determine net periodic benefit expense dex media postretirement plan 687 period june 1 2009 december 31 2009 587 period january 1 2009 may 31 2009 801 period november 1 2008 december 31 2008 682 july 1 2008 october 31 2008 648 january 1 2008 june 30 2008 590 2007 respectively following table reflects assumed healthcare cost trend rates used determining net periodic benefit expense postretirement plans rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued following table reflects assumed healthcare cost trend rates used determining benefit obligations postretirement plans plan assets effective january 1 2009 dex media pension plan began participate rhd retirement account master trust “master trust” previously established investment assets rhd retirement plan fair value assets held master trust december 31 2009 asset category follows category includes investments us government bonds government mortgagebacked securities indexlinked government bonds guaranteed commercial paper shortterm treasury bills notes fair value assets determined using bid evaluation process observable market based inputs effective last business day plan year b category includes investments two commoncollective funds 79 invested stocks comprising russell 1000 equity index remaining 21 comprised shortterm investments fair value assets determined based contract value based provisions underlying guaranteed investment contracts c category includes investments corporate bonds commercial mortgagebacked assetbacked securities collateralized mortgage obligations commercial paper fair value assets determined using bid evaluation process observable market based inputs effective last business day plan year rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued category includes investments small cap stocks u issuers across diverse industries fair value assets determined using quoted market prices recognized securities exchange last reported trading price last business day plan year e category comprised two mutual funds one invests valueoriented international stocks across diverse industries one invests intermediate term fixed income instruments treasuries high grade corporate bonds fair value assets determined using quoted market prices recognized securities exchange last reported trading price last business day plan year f category comprised healthcare real estate investment trust fair value assets determined based traded market prices g category includes investments combination 5 10 30 year us treasury bond futures credit default swaps fair value assets determined based either settlement prices recognized securities exchange midbid evaluation process using observable market based inputs pension plan weightedaverage asset allocation december 31 2009 asset category weighted average basis follows pension plan weightedaverage asset allocation december 31 2008 asset category weighted average basis follows asset management committee “amc” appointed compensation benefits committee company’s board directors named fiduciary plan matters relating plan investments asset management amc authority appoint retain monitor remove custodian investment manager responsible establishing maintaining funding investment policy master trust plans’ assets invested accordance investment practices emphasize longterm investment fundamentals plans’ investment objective achieve positive rate return long term capital appreciation growing stream current income would significantly contribute meeting plans’ current future obligations objectives obtained welldiversified portfolio structure manner consistent plan’s investment policy statement plans’ assets invested marketable equity fixed income securities managed professional investment managers plan assets invested using combination active passive indexed investment rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued strategies plans’ assets broadly diversified asset class investment style number issues issue type factors consistent investment objectives outlined plan’s investment policy statement plans’ assets invested prudent levels risk expectation longterm returns maintain contribute increasing purchasing power plans’ assets net disbursements long term plans’ assets separately managed accounts may used following purposes short sales purchases letter stock private placements leveraged transactions commodities transactions option strategies investments limited partnerships investments managers securities affiliates subsidiaries investment futures use margin investments derivative explicitly permitted plan’s investment policy statement plans’ fixed income manager uses derivative financial instruments normal course investing activities hedge adverse changes fixed income market achieve overall investment portfolio objectives financial instruments include us treasury futures contracts credit default swaps futures held combination 5 10 30 year futures used manage duration exposure portfolio credit default swaps held hedge declines certain bond markets vehicle take advantage opportunities certain segments fixed income market plans’ investment policy statements allow use derivatives leverage portfolio speculative purposes use derivatives believed materially increase credit market risk plans’ investments 2009 2008 2007 used rate 800 850 825 respectively expected longterm rate return assumption plan assets rhd pension plans basis used determining rate longterm capital market return forecasts asset mix similar plan’s asset allocation target 65 equity securities 35 debt securities beginning year decrease rate 2009 result study based relevant market information increase rate 2008 result adding active management assets expected add value long term 2009 2008 2007 used rate 800 850 respectively expected longterm rate return assumption plan assets dex media pension plan basis used determining rates also included opportunity active management assets add value long term active management expectation supported calculating historical returns seven investment managers actively managed dex media plan’s assets decrease rate 2009 result study based relevant market information although review expected longterm rate return assumption annually performance one particular year significantly influence evaluation assumption generally revised unless fundamental change one factors upon based target asset allocation longterm capital market return forecasts rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued estimated future benefit payments pension plans benefits postretirement plans benefits expected paid next five fiscal years aggregate five fiscal years thereafter follows expect make contributions approximately 36 million 29 million pension plans postretirement plans respectively 2010 10 commitments lease office facilities equipment operating leases noncancelable lease terms expiring various dates 2016 rent lease expense 2009 2008 2007 277 million 268 million 264 million respectively future noncancelable minimum rental payments applicable operating leases december 31 2009 connection software system modernization ongoing support services related amdocs software system obligated pay amdocs approximately 683 million years 2010 2012 effective january 1 2010 amended restated internet yellow pages reseller agreement whereby obligated pay att 318 million years 2010 2012 entered directory advertisement agreement cmr cover advertising placed company cmr behalf qwest agreement obligated pay cmr approximately 65 million commissions years 2010 2014 11 legal proceedings involved various legal proceedings arising ordinary course business well certain litigation tax matters many matters plaintiffs allege suffered damages errors omissions advertising improper listings case contained directories published us beginning october 23 2009 series putative securities class action lawsuits commenced united states district court district delaware behalf persons purchased otherwise acquired company’s publicly traded securities july 26 2007 time company rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued filed bankruptcy may 28 2009 alleging certain company officers issued false misleading statements regarding company’s business financial condition seeking damages equitable relief december 7 2009 putative erisa class action lawsuit commenced united states district court northern district illinois behalf certain participants beneficiaries rh donnelley 401k savings plan time july 26 2007 time lawsuit filed whose plan accounts included investments rh donnelley common stock putative erisa class action complaint contains allegations certain current former company directors officers employees similar set forth putative securities class action lawsuit well allegations breaches fiduciary duties erisa seeks damages equitable relief december 18 2009 lawsuit filed california state court certain former shareholders company alleging certain company officers issued false misleading statements regarding company’s business financial condition seeking damages equitable relief case removed united states district court central district california february 4 2010 company believes allegations set forth lawsuits without merit intends vigorously defend actions pursued company andor current former officers employees directors also exposed potential defamation breach privacy claims arising publication directories methods collecting processing using advertiser telephone subscriber data determined inaccurate data stored us improperly accessed disseminated us unauthorized persons subjects data users data collect publish could submit claims company although date experienced material claims relating defamation breach privacy may party proceedings future could material adverse effect business periodically assess liabilities contingencies connection matters based upon latest information available us matters probable incurred loss range loss reasonably estimated record liability consolidated financial statements instances unable make reasonable estimate liability uncertainties related probable outcome amount range loss additional information becomes available adjust assessment estimates liabilities accordingly based review latest information available believe ultimate liability connection pending threatened legal proceedings material effect results operations cash flows financial position material amounts accrued consolidated financial statements respect matters 12 business segments management reviews analyzes business providing marketing products marketing services one operating segment 13 rh donnelley corporation “parent company” financial statements following condensed parent company financial statements read conjunction consolidated financial statements rhd general substantially net assets company subsidiaries restricted paid dividends third party subsidiaries restricted paying dividends loans advances us limited exceptions terms credit facilities see note 5 “longterm debt credit facilities notes” description debt instruments rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued rh donnelley corporation condensed parent company balance sheets rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued rh donnelley corporation condensed parent company statements operations rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued rh donnelley corporation condensed parent company statements cash flows rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued 14 valuation qualifying accounts 15 quarterly information unaudited 1 recognized impairment charge 73 billion fourth quarter 2009 associated directory services agreements advertiser relationships third party contracts network platforms acquired prior acquisitions recognized goodwill impairment charges 25 billion 6602 million first second quarters 2008 respectively fourth quarter 2008 recognized impairment charge 7462 million associated certain local national customer rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued relationships tradenames technology acquired prior acquisitions fourth quarter 2008 also retired certain computer software fixed assets resulted impairment charge 04 million see note 2 “summary significant accounting policies identifiable intangible assets goodwill” discussion 2 reorganization items net represent charges directly associated process reorganizing business chapter 11 bankruptcy code see note 3 “reorganization items net liabilities subject compromise” discussion 3 see note 2 “summary significant accounting policies gain loss debt transactions net” details regarding debt transactions related accounting treatment 4 fourth quarter 2008 income tax benefit includes income tax benefit 203 million correcting overstated income tax expense fiscal years 2004 2007 evaluated materiality correction concluded material current prior year financial statements accordingly recorded correction fourth quarter 2008 16 subsequent events reorganization fresh start accounting pro forma adjustments unaudited fresh start accounting reporting provisions applied pursuant fasb asc 852 plan confirmed bankruptcy court remaining contingencies material completing implementation plan conditions required adoption fresh start accounting reporting satisfied company effective date company required adopt fresh start accounting reporting effective date however light proximity date accounting period close immediately effective date january 31 2010 well results materiality assessment discussed elected adopt fresh start accounting reporting february 1 2010 financial statements fresh start reporting date subsequent periods report results dex one beginning retained earnings accumulated deficit presentation dex one represents financial position results operations new reporting entity comparable prior periods presented rhd dex one performed quantitative qualitative materiality assessment accordance staff accounting bulletin 99 materiality order determine appropriateness choosing fresh start reporting date accounting reporting purposes instead effective date rhd dex one concluded quantitative assessment material impact rhd one month ended january 31 2010 dex one two months ended march 31 2010 qualitative factors would preclude use fresh start reporting date accounting reporting purposes accordance fasb asc 852 results operations rhd prior fresh start reporting date include preemergence gain approximately 46 billion resulting discharge liabilities plan ii preemergence charges earnings recorded reorganization items resulting certain costs expenses relating plan becoming effective iii preemergence increase earnings 23 billion resulting aggregate changes net carrying value preemergence assets liabilities reflect fair values fresh start accounting fasb asc 852 provides among things determination value assigned assets reorganized dex one date selected financial reporting purposes following proforma condensed consolidated balance sheet december 31 2009 dex one estimated reorganization value 57 billion fresh start accounting reorganization value allocated dex one’s assets based respective fair values conformity purchase method accounting business combinations included fasb asc 805 business combinations valuations required determine fair value certain dex one’s assets presented represent preliminary results rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued valuation procedures performed preliminary results subject revisions adjustments could material impact financial information presented reorganization value represents amount resources available become available satisfaction postpetition liabilities allowed claims negotiated company creditors “interested parties” value along terms plan determined extensive armslength negotiations interested parties interested party developed view value based upon expected future cash flows business emergence chapter 11 discounted rates reflecting perceived business financial risks value viewed fair value entity considering liabilities intended approximate amount willing buyer would pay assets dex one immediately restructuring based current anticipated economic conditions direct impact conditions business estimated reorganization value presented midpoint valuation ranges provided valuation specialists adjustments presented unaudited proforma basis december 31 2009 differs fresh start reporting date accordingly estimates preliminary subject revisions adjustments based updated valuations actual amounts applicable economic conditions fresh start reporting date results operations fresh start reporting date dex one’s actual fresh start accounting adjustments may vary materially presented audited balance sheet unaudited pro forma adjustments presented summarize impact plan adoption fresh start accounting date emergence occurred december 31 2009 rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued rh donnelley corporation pro forma reorganized condensed consolidated balance sheet december 31 2009 unaudited 1 represents amounts recorded fresh start reporting date implementation plan including settlement liabilities subject compromise related payments distributions cash rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued new shares dex one common stock prepetition creditors cancellation rhd common stock reorganization adjustments also include establishment dex one additional paidin capital resulting reorganization adjustments 2 represents adjustments fresh start accounting primarily related recording intangible assets accounts receivable fixed assets computer software fair value related deferred income taxes accordance asc 805 additionally fresh start adjustments reflect elimination substantially deferred directory costs related deferred directory revenue based minimal obligations subsequent fresh start reporting date directories published prior fresh start reporting date estimates fair value preliminary subject change fresh start adjustments also include elimination rhd’s accumulated deficit treasury stock accumulated comprehensive loss deferred rent excess reorganization value fair value assets estimated 19 billion recorded goodwill 3 reflects cash payments items debt repayments professional fees additional payments made post emergence approximately 750 million reflected accounts payable accrued liabilities payments made expected cash balance approximate 1250 million changes working capital adjustments fresh start reporting date accrued interest associated credit facilities interest rate swaps december 31 2009 either paid converted new tranche term loans amended restated credit facilities 4 reflects amendment restatement credit facilities well issuance 3000 million dex one senior subordinated notes effective date 5 reflects discharge rhd’s prepetition liabilities accordance plan 6 reflects issuance new dex one common stock prepetition creditors cancellation rhd common stock elimination rhd additional paidin capital gain discharge liabilities subject compromise 7 represents adjustment record longterm debt fair value fresh start reporting date 8 represents interest rate swap liabilities related interest receivables converted new tranche term loans amended restated credit facilities well reclass certain liabilities subject compromise 9 represents elimination deferred financing costs associated existing credit facilities amended restated credit facilities upon emergence chapter 11 proceedings accordance plan company’s exiting credit facilities amended restated effective date terms conditions amended restated rhdi credit facility “rhdi amended restated credit facility” consist following • balances existing term loan d1 term loan d2 rhdi revolver well 136 million associated unsettled outstanding interest rate swap liabilities converted new tranche term loans provides initial prepayment loans effective date aggregate outstanding balance term loans rhdi amended restated credit facility 12249 million • rhdi amended restated credit facility requires quarterly principal interest payments matures october 24 2014 rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued • interest payments made option either • highest subject floor 400 prime rate ii federal funds effective rate plus 050 z one month libor plus 100 case plus interest rate margin base rate loans interest rate margin base rate loans initially 525 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 525 per annum rhdi’s consolidated leverage ratio greater equal 425 100 equal 500 per annum rhdi’s consolidated leverage ratio less 425 100 • higher libor rate ii 300 case plus interest rate margin libor loans interest rate margin libor loans initially 625 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 625 per annum rhdi’s consolidated leverage ratio greater equal 425 100 equal 600 per annum rhdi’s consolidated leverage ratio less 425 100 rhdi may elect interest periods 1 2 3 6 months libor borrowings terms conditions amended restated dex media east credit facility “dex media east amended restated credit facility” consist following • balances existing term loan term loan b dex media east revolver well 267 million associated unsettled outstanding interest rate swap liabilities converted new tranche term loans provides initial prepayment loans effective date aggregate outstanding balance term loans dex media east amended restated credit facility 9562 million • dex media east amended restated credit facility requires quarterly principal interest payments matures october 24 2014 • interest payments made option either • highest prime rate ii federal funds effective rate plus 050 z one month libor plus 100 case plus interest rate margin base rate loans interest rate margin base rate loans initially 150 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 150 per annum dme inc’s consolidated leverage ratio greater equal 275 100 equal 125 per annum dme inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 100 per annum dme inc’s consolidated leverage ratio less 250 100 • libor rate plus interest rate margin libor loans interest rate margin libor loans initially 250 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 250 per annum dme inc’s consolidated leverage ratio greater equal 275 100 equal 225 per annum dme inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 200 per annum dme inc’s consolidated leverage ratio less 250 100 dme inc may elect interest periods 1 2 3 6 months libor borrowings terms conditions amended restated dex media west credit facility “dex media west amended restated credit facility” consist following • balances existing term loan term loan b dex media west revolver well 10 million associated unsettled outstanding interest rate swap liabilities converted new tranche term loans provides initial prepayment loans rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued effective date aggregate outstanding balance term loans dex media west amended restated credit facility 9037 million • dex media west amended restated credit facility requires quarterly principal interest payments matures october 24 2014 • interest payments made option either • highest subject floor 400 prime rate ii federal funds effective rate plus 050 z one month libor plus 100 case plus interest rate margin base rate loans interest rate margin base rate loans initially 350 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 350 per annum dmw inc’s consolidated leverage ratio greater equal 275 100 equal 325 per annum dmw inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 300 per annum dmw inc’s consolidated leverage ratio less 250 100 • higher libor rate ii 300 case plus interest rate margin libor loans interest rate margin libor loans initially 450 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 450 per annum dmw inc’s consolidated leverage ratio greater equal 275 100 equal 425 per annum dmw inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 400 per annum dmw inc’s consolidated leverage ratio less 250 100 dmw inc may elect interest periods 1 2 3 6 months libor borrowings company’s amended restated credit facilitates includes uncommitted revolving credit facility available borrowings 400 million availability uncommitted revolving credit facility subject certain conditions including prepayment term loans amended restated credit facilities amount equal revolving credit facility amended restated credit facilities contain provisions prepayment net proceeds asset dispositions equity issuances debt issuances subject certain exceptions ratable portion net proceeds received company asset dispositions company subject certain exceptions portion excess cash flow company’s amended restated credit facilities contain certain covenants subject exceptions limit restrict borrower subsidiaries’ incurrence liens investments including acquisitions sales assets indebtedness payment dividends distributions payments certain indebtedness sale leaseback transactions swap transactions affiliate transactions capital expenditures mergers liquidations consolidations amended restated credit facility also contains certain covenants subject exceptions limit restrict borrowers incurrence liens indebtedness ownership assets sales assets payment dividends distributions modifications dex one senior subordinated notes borrower required maintain compliance consolidated leverage ratio covenant rhdi dmw inc also required maintain compliance consolidated interest coverage ratio covenant dmw inc also required maintain compliance consolidated senior secured leverage ratio covenant dex media west amended restated credit agreement includes option additional covenant relief senor secured leverage covenant fourth quarter 2011 subject increased amortization loans first quarter 2012 increase excess cash flow sweep 2010 2011 payment 25 basis point fee ratably lenders dex media west amended restated credit agreement rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued obligations amended restated credit facilitates guaranteed subsidiaries borrower secured lien substantially borrower’s subsidiaries’ tangible intangible assets including pledge stock respective subsidiaries well mortgage certain real property pursuant shared guaranty collateral agreement subject intercreditor agreement among administrative agents amended restated credit facilitates company subject certain exceptions certain subsidiaries company guaranty obligations amended restated credit facilitates obligations secured lien substantially guarantors’ tangible intangible assets including pledge stock respective subsidiaries well mortgage certain real property notes issued upon emergence chapter 11 proceedings effective date issued 3000 million dex one senior subordinated notes exchange dex media west 85 senior notes due 2010 5875 senior notes due 2011 interest dex one senior subordinated notes payable semiannually march 31st september 30th year commencing march 31 2010 january 2017 dex one senior subordinated notes accrue interest annual rate 12 cash interest payments 14 company elects paidinkind “pik” interest payments company may elect prior start interest payment period whether make interest payment dex one senior subordinated notes entirely cash ii 50 cash 50 pik interest capitalized incremental additional senior secured notes interest rate dex one senior subordinated notes may subject adjustment event company incurs certain specified debt higher effective yield maturity yield maturity dex one senior subordinated notes dex one senior subordinated notes unsecured obligations company effectively subordinated right payment company’s existing future secured debt including dex one’s guarantee borrowings amended restated credit facilities structurally subordinated existing future liabilities including trade payables direct indirect subsidiaries dex one senior subordinated notes contain certain covenants subject certain exceptions among things limit restrict company’s certain cases company’s restricted subsidiaries’ incurrence indebtedness making certain restricted payments incurrence liens entry transactions affiliates conduct business merger consolidation sale substantially property dex one senior subordinated notes also require company offer repurchase dex one senior subordinated notes par certain changes control involving company sale substantially assets company holders dex one senior subordinated notes also may cause company repurchase dex one senior subordinated notes price 101 principal amount upon incurrence company certain acquisition indebtedness dex one senior subordinated notes redeemable option beginning 2011 following prices percentage face value rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued interest rate swaps caps subsequent amendment restatement company’s credit facilities entered following interest rate swap interest rate cap agreements designated cash flow hedges manage fluctuations cash flows resulting changes interest rates dex media east amended restated credit facility rhdi amended restated credit facility respectively interest rate swaps dex media east interest rate caps rhdi 1 consists one swap 2 consists three swaps 3 consists two caps 4 consists one cap issuance new common stock upon emergence chapter 11 pursuant plan issued outstanding shares rhd common stock outstanding equity securities rhd including stock options stock appreciation rights restricted stock cancelled effective date dex one issued aggregate amount 50000001 shares new common stock par value 001 per share registration rights agreement effective date pursuant plan company entered registration rights agreement “agreement” requiring company register sec certain shares common stock andor dex one senior subordinated notes upon request one eligible holders defined agreement accordance terms conditions set forth therein company also required pursuant agreement file shelf registration statement covering resale registerable securities defined within 30 days company’s filing annual report form 10k year ended december 31 2009 use commercially reasonable efforts cause shelf registration statement become effective within 75 days filing agreement also provides eligible holders certain piggyback registration rights connection registration securities company rh donnelley corporation debtor debtorinpossession may 28 2009 notes consolidated financial statements continued dex one equity incentive plan effective date company’s board directors ratified eip certain employees nonemployee directors dex one eligible receive stock options sars limited stock appreciation rights tandem stock options restricted stock restricted stock units eip 56 million shares dex one common stock authorized grant extent shares dex one common stock issued delivered reason expiration termination cancellation forfeiture award certain exceptions ii settlement award cash shares dex one common stock shall available eip stock awards typically granted market value dex one’s common stock date grant become exercisable ratable installments otherwise period one five years date grant may exercised maximum ten years date grant dex one’s compensation benefits committee determine termination vesting relevant provisions date grant dex one implement policy issuing treasury shares held satisfy stock issuances associated stockbased award exercises march 1 2010 company granted 13 million sars certain employees including executive officers intended plan conjunction eip sars settled dex one common stock granted grant price 2868 per share equal market value dex one’s common stock grant date vest ratably three years income taxes based upon closing sec filing period forms 13g review forms filed february 15 2010 company determined became morelikelythan check box election effective prior actual date ownership change section 382 result company record tax benefit reversal liability unrecognized tax benefit 2764 million dex one statements financial condition results operations period ended march 31 2010 item 9item 8 financial statements supplementary data dex one corporation report independent registered public accounting firm board directors shareholders dex one corporation audited accompanying consolidated balance sheets dex one corporation subsidiaries december 31 2010 successor rh donnelley corporation subsidiaries december 31 2009 predecessor related consolidated statements operations comprehensive income loss cash flows changes shareholders’ equity deficit elevenmonth period ended december 31 2010 successor onemonth period ended january 31 2010 predecessor years ended december 31 2009 2008 predecessor consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position dex one corporation subsidiaries december 31 2010 successor rh donnelley corporation subsidiaries december 31 2009 predecessor results operations cash flows elevenmonth period ended december 31 2010 successor onemonth period ended january 31 2010 predecessor years ended december 31 2009 2008 predecessor conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states dex one corporation’s internal control financial reporting december 31 2010 successor based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso report dated march 4 2011 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp raleigh north carolina march 4 2011 report independent registered public accounting firm board directors shareholders dex one corporation audited dex one corporation’s internal control financial reporting december 31 2010 successor based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso dex one corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audit also included performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion dex one corporation maintained material respects effective internal control financial reporting december 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states consolidated balance sheets dex one corporation subsidiaries december 31 2010 successor rh donnelley corporation subsidiaries december 31 2009 predecessor related consolidated statements operations comprehensive income loss cash flows changes shareholders’ equity deficit elevenmonth period ended december 31 2010 successor onemonth period ended january 31 2010 predecessor years ended december 31 2009 2008 predecessor report dated march 4 2011 expressed unqualified opinion consolidated financial statements kpmg llp raleigh north carolina march 4 2011 dex one corporation consolidated balance sheets accompanying notes integral part consolidated financial statements dex one corporation consolidated statements operations comprehensive income loss accompanying notes integral part consolidated financial statements dex onecorporation consolidated statements cash flows accompanying notes integral part consolidated financial statements dex one corporation consolidated statements changes shareholders’ equity deficit accompanying notes integral part consolidated financial statements dex one corporation notes consolidated financial statements tabular amounts thousands except per share data percentages otherwise indicated 1 business basis presentation consolidated financial statements include accounts dex one corporation direct indirect whollyowned subsidiaries “dex one” “successor company” “company” “we” “us” “our” subsequent effective date defined december 31 2010 rh donnelley corporation rh donnelley inc “rhdi” “rhd inc” dex media inc “dex media” businesscom inc “businesscom” dex one service inc “dex one service” direct whollyowned subsidiaries financial information set forth annual report unless otherwise indicated context may otherwise indicate reflects consolidated results operations financial position dex one eleven months ended december 31 2010 intercompany transactions balances eliminated dex one became successor registrant rh donnelley corporation “rhd” “predecessor company” “we” “us” “our” operations prior january 29 2010 “effective date” upon emergence chapter 11 proceedings title 11 united states code “chapter 11” effective date financial information set forth annual report unless otherwise indicated context may otherwise indicate reflects consolidated results operations financial position rhd one month ended january 31 2010 years two year period ended december 31 2009 see note 3 “fresh start accounting” presentation impact emergence reorganization fresh start accounting financial position results operations cash flows corporate overview marketing solutions company helps local businesses generate leads manage presence among consumers markets serve marketing solutions combine multiple media platforms drive large volumes leads clients locally based marketing consultants offer local businesses personalized marketing consulting services exposure across media platforms including print online mobile yellow pages search solutions well major search engines proprietary marketing solutions include dex published yellow pages directories cobrand recognizable brands industry qwest centurylink att internet yellow pages site dexknowscom ® mobile application dex mobile ® growing list marketing solutions also include local business market analysis message image creation target market identification advertising digital profile creation keyword search engine optimization strategies programs distribution strategies social strategies tracking reporting digital affiliate marketing solutions powered search engine marketing product dexnet™ extends clients’ reach leading internet mobile partners attract consumers searching local products services within markets new chief executive officer president september 6 2010 company’s board directors “board” appointed alfred mockett chief executive officer president dex one well member board effective september 13 2010 mr mockett’s employment agreement expires december 31 2014 requires receive annual base salary 975000 makes eligible participate company’s annual incentive program mr mockett’s annual cash bonus target amount 100 base salary based upon attainment preestablished performance goals established board committee thereof consultation mr mockett prorated partial fiscal year term employment accordance mr mockett’s employment agreement september 13 2010 awarded 200000 shares company’s common stock form restricted stock award grant price 962 per share closing price company’s common stock september 13 2010 vest ratably three years september 13 2010 also granted fair market value option purchase 200000 shares company’s common stock exercise price 975 per share closing price company’s common stock september 3 2010 vest ratably four years fully vested premium priced options purchase 600000 shares company’s common stock third shares exercise price 15 per share third shares exercise price 23 per share third shares exercise price 32 per share collectively “ceo stockbased awards” departure former chairman chief executive officer effective may 28 2010 “separation date” former chairman chief executive officer david c swanson left company connection mr swanson’s departure company entered separation agreement mr swanson “separation agreement” may 20 2010 separation agreement provides mr swanson receive severance benefits entitled amended restated employment agreement “employment agreement” connection termination cause following change control terms defined employment agreement accordance separation agreement mr swanson received lumpsum separation payment 64 million plus accrued unpaid salary vacation days totaling 05 million second quarter 2010 receive pro rata portion 2010 annual bonus approximately 03 million later march 15 2011 result mr swanson’s departure company recognized onetime charges 95 million offset curtailment gain 38 million second quarter 2010 fourth quarter 2010 mr swanson received 57 million full satisfaction amounts due certain nonqualified pension plans 05 million associated vested benefits company’s qualified pension plan rh donnelley corporation restoration plan following separation date mr swanson equity interest company affiliates subsidiaries 25320 previously issued currently vested stock appreciation rights company unvested stock appreciation rights held mr swanson terminated mr swanson continue participate company’s 2009 long term incentive plan “2009 ltip” eligible receive payment 35 million 2009 ltip subject satisfaction performance standards contained 2009 ltip reclassifications certain prior period amounts included consolidated statements operations reclassified conform current period’s presentation purchased traffic costs incurred direct traffic online properties reclassified advertising expense component selling support expenses production distribution expenses consolidated statements operations addition information technology expenses reclassified production distribution expenses general administrative expenses consolidated statements operations reclassifications impact operating loss net loss years ended december 31 2009 2008 tables summarize reclassifications addition certain prior period amounts associated accounts receivable included consolidated balance sheets restructuring expenses included consolidated statements cash flows reclassified conform current period’s presentation filing voluntary petitions chapter 11 may 28 2009 “petition date” predecessor company subsidiaries collectively predecessor company “debtors” filed voluntary petitions chapter 11 relief united states bankruptcy court district delaware “bankruptcy court” confirmed plan reorganization emergence chapter 11 proceedings january 12 2010 bankruptcy court entered findings fact conclusions law order confirming joint plan reorganization predecessor company subsidiaries “confirmation order” effective date joint plan reorganization predecessor company subsidiaries “plan” became effective accordance terms petition date effective date debtors operated businesses debtorsinpossession accordance bankruptcy code chapter 11 cases debtors collectively “chapter 11 cases” jointly administered caption rh donnelley corporation case 0911833 kg bankr del 2009 restructuring part restructuring conducted connection debtors’ emergence bankruptcy debtors merged consolidated dissolved terminated shortly effective date certain whollyowned subsidiaries set forth • dontech holdings llc rh donnelley publishing advertising illinois holdings llc merged sole member rhdi • dontech ii partnership rh donnelley publishing advertising illinois partnership technically terminated respective partnership agreements due loss second partner • dex media east finance co merged dex media east llc • dex media west finance co merged dex media west llc • workcom inc merged businesscom inc • getdigitalsmartcom inc merged rhdi • dex media east llc merged dex media east inc “dme inc” • dex media west llc merged dex media west inc “dmw inc” • rh donnelley publishing advertising inc merged rhdi effectuating restructuring transactions dex one became ultimate parent company following surviving subsidiaries rh donnelley corporation newly formed subsidiary dex one ii rhdi iii dex media iv dme inc v dmw inc vi dex media service llc vii dex one service llc subsequently converted delaware corporation name dex one service effective march 1 2010 viii businesscom ix rh donnelley apil inc consummation plan issuance new common stock upon emergence chapter 11 pursuant plan issued outstanding shares predecessor company’s common stock outstanding equity securities predecessor company including stock options stock appreciation rights “sars” restricted stock cancelled effective date company issued aggregate amount 50000001 shares new common stock par value 001 per share see note 15 “capital stock” additional information regarding new common stock distributions pursuant plan since effective date company consummated various transactions contemplated confirmed plan company made following distributions stock securities required made plan creditors allowed claims december 31 2010 pursuant plan company made distributions cash account allowed claims general unsecured creditors pursuant terms plan company also made certain additional payments certain creditors including certain distributions became due owing subsequent initial distribution date certain payments holders administrative expense priority claims fees earned professional advisors chapter 11 cases discharge releases injunctions pursuant plan confirmation order plan confirmation order also contain various discharges injunctive provisions releases became operative upon effective date provisions summarized sections confirmation order fully described article x plan registration rights agreement effective date pursuant plan company entered registration rights agreement “agreement” requiring company register securities exchange commission “sec” certain shares common stock andor dex one senior subordinated notes upon request one eligible holders defined agreement accordance terms conditions set forth therein april 8 2010 pursuant agreement company filed shelf registration statement register resale franklin advisers inc certain affiliates 15262488 shares common stock 1166 million aggregate principal amount dex one senior subordinated notes securities registered pursuant agreement permit sale securities time fixed prices prevailing market prices times sale prices related prevailing market prices varying prices determined times sale negotiated prices shelf registration statement became effective april 16 2010 impact longterm debt upon emergence chapter 11 proceedings effective date accordance plan 61 billion predecessor company’s senior notes senior discount notes senior subordinated notes collectively “notes default” exchanged 100 reorganized dex one equity b 3000 million dex one senior subordinated notes issued holders dex media west 85 senior notes due 2010 5875 senior notes due 2011 pro rata basis addition share reorganized dex one equity see note 6 “longterm debt credit facilities notes” details longterm debt accounting matters resulting chapter 11 proceedings filing chapter 11 petitions constituted event default indentures governing predecessor company’s notes default debt obligations instruments became automatically immediately due payable although actions enforce payment obligations automatically stayed applicable bankruptcy laws based bankruptcy petitions notes default included liabilities subject compromise consolidated balance sheet december 31 2009 filing chapter 11 petitions also constituted event default predecessor company’s credit facilities however pursuant plan secured lenders received 100 principal recovery scheduled amortization interest subsequent filing chapter 11 petitions predecessor company determined fair value collateral securing credit facilities exceeded book value credit facilities including accrued interest rate swap liabilities associated credit facilities therefore credit facilities excluded liabilities subject compromise consolidated balance sheet december 31 2009 result filing chapter 11 petitions certain interest rate swaps terminated respective counterparties longer deemed financial instruments measured fair value interest rate swaps settled prior effective date conjunction amendment restatement predecessor company’s credit facilities effective date interest rate swaps converted new tranche term loans related credit facilities see note 7 “derivative financial instruments” additional information periods subsequent chapter 11 bankruptcy filing financial accounting standards board “fasb” accounting standards codification “asc” 852 reorganizations “fasb asc 852” applied preparing predecessor company’s consolidated financial statements fasb asc 852 requires financial statements distinguish transactions events directly associated reorganization ongoing operations business accordingly certain expenses including professional fees realized gains losses provisions losses realized reorganization restructuring process classified reorganization items consolidated statement operations additionally consolidated balance sheet december 31 2009 liabilities segregated liabilities subject compromise liabilities subject compromise liabilities subject compromise reported prepetition amounts current unimpaired values even settled lesser amounts predecessor company’s financial statements included annual report purport reflect provide consequences chapter 11 bankruptcy proceeding particular financial statements purport show assets realizable value liquidation basis availability satisfy liabilities ii prepetition liabilities amounts may allowed claims contingencies status priority thereof iii shareholders’ deficit accounts effects changes may made predecessor company’s capitalization iv operations effects changes may made predecessor company’s business going concern result emergence chapter 11 proceedings restructuring predecessor company’s outstanding debt believe dex one generate sufficient cash flow operations satisfy debt obligations according applicable terms conditions reasonable period time see note 3 “fresh start accounting” information analysis emergence chapter 11 proceedings impact financial position company’s goodwill nongoodwill intangible asset impairment charges eleven months ended december 31 2010 affect ability continue going concern permitted exclude charges debt covenant evaluations 2 summary significant accounting policies fresh start accounting reporting permits company select appropriate accounting policies february 1 2010 “fresh start reporting date” company adopted predecessor company’s significant accounting policies disclosed result separate distinction significant accounting policies company predecessor company present financial results respective reporting periods revenue recognition advertising revenues earned primarily sale advertising yellow pages directories publish advertising revenues also include revenues internetbased advertising products including online directories dexknowscom dexnet advertising revenues affected several factors including changes quantity size advertisements acquisition new clients renewal rates existing clients premium advertisements sold changes advertisement pricing introduction new products increase competition fragmentation local business search market general economic factors revenues respect print advertising internetbased advertising products sold print advertising recognized deferral amortization method revenues related print advertising internetbased advertising products sold print advertising initially deferred directory published net sales claims allowances recognized ratably directory’s life typically 12 months revenues respect internetbased services sold standalone dexnet recognized delivered fulfilled revenues respect advertising products nonperformance based recognized ratably life contract commencing first delivered fulfilled revenues respect advertising products performancebased recognized service delivered fulfilled revenue deferred revenue sale advertising recorded net allowance sales claims estimated based primarily historical experience increase decrease estimate information circumstances indicate estimate may longer represent amount claims may incur future company recorded sales claims allowances 99 million eleven months ended december 31 2010 predecessor company recorded sales claims allowances 35 million 438 million 453 million one month ended january 31 2010 years ended december 31 2009 2008 respectively certain cases company enters agreements clients involve delivery one product service revenue arrangements allocated separate units accounting using relative fair value method accordance fasb asc 60525 revenue recognition multipleelement arrangements deferred directory costs directly related selling production directories initially deferred incurred recognized ratably life directory typically 12 months costs specifically identifiable particular directory include sales commissions print paper initial distribution costs paid prior directory publication classified current assets publication reclassified deferred directory costs cash equivalents cash equivalents include liquid investments maturity less three months time purchase times investments may excess federally insured limits accounts receivable accounts receivable consist balances owed us advertising clients typically enter twelvemonth contract advertising local clients billed pro rata amount contract value monthly basis behalf national clients certified marketing representatives “cmrs” pay company total contract value advertising net commission within 60 days publication month billed receivables represent amount billed clients billed receivables recorded net allowance doubtful accounts sales claims estimated based historical experience increase decrease estimate information circumstances indicate estimate longer appropriately represents amount bad debts sales claims probable incurred unbilled receivables represent contractually owed amounts net allowance doubtful accounts sales claims published directories yet billed clients company’s writeoff policy accounts receivables associated local clients designed secure collection pastdue funds part sales renewal cycle writeoff policy national clients determined based delinquency stage combined cmr responsiveness collection requests generally local client accounts receivable balances considered eligible writeoff following completion annual sales renewal cycle identification local clients past due accounts receivable balances renewed contracts company following year management deemed collectability pastdue accounts receivables impaired exceptions company’s standard writeoff policy include 1 acceleration writeoff clients business demonstrated via disconnected phone lines declaring bankruptcy 2 deferral writeoffs clients prepaying full new advertising commitment pay pastdue balances 3 deferral writeoff clients continuing make payments pastdue accounts receivables even client renewed contract following year company either threshold dollar amount aging period trigger accounts receivable balance writeoff collection processes performed accordance fair debt collections practices act appropriate contacts clients made defined time intervals solicit payment andor determine payment made appropriate collection process clients transferred company designated resources resolve outstanding issues file claims adjustments accounts receivable balances company’s bad debt policy includes guidelines writeoff accounts well authorization approval requirements process estimating ultimate collection accounts receivables involves significant assumptions judgments regarding writeoff accounts receivables estimates recovery expectations relative bad debt writeoffs company believes credit collection bad debt recovery reserve processes combined monitoring billing process help reduce risk associated material revisions reserve estimates resulting adverse changes reimbursement experience company recently initiated update credit policies associated accounts receivables whereby may extend partial full open credit terms clients bad debt writeoffs associated prior year contracts terms program require clients either complete credit application review andor satisfy defined advance payment personal guarantee requirements terms program accounts receivable balances previously designated bad debt writeoffs continue pursued full recovery designated outside collection agencies identifiable intangible assets goodwill successor company goodwill 21 billion recorded connection company’s adoption fresh start accounting discussed note 3 “fresh start accounting” represented excess reorganization value dex one fair value identified tangible intangible assets goodwill amortized subject impairment testing annual basis october 31st frequently indicators potential impairment exist goodwill tested impairment reporting unit level represents one level operating segment accordance fasb asc 350 intangibles goodwill “fasb asc 350” december 31 2010 company’s reporting units rhdi dme inc dmw inc company performed annual impairment test goodwill october 31 2010 result identifying indicators impairment noted impairment test goodwill september 30 2010 june 30 2010 accordance fasb asc 350 result identifying indicators impairment conjunction impairment test goodwill september 30 2010 june 30 2010 also performed impairment test definitelived intangible assets longlived assets accordance fasb asc 360 property plant equipment “fasb asc 360” results tests discussed company predecessor company review carrying value goodwill definitelived intangible assets longlived assets whenever events circumstances indicate carrying amount may recoverable company predecessor company reviewed following information estimates assumptions determine indicators impairment existed eleven months ended december 31 2010 one month ended january 31 2010 respectively • historical financial information including revenue profit margins customer attrition data price premiums enjoyed relative competing independent publishers • longterm financial projections including limited revenue trends profit margin trends • intangible asset longlived asset carrying values changes current future use • trading values debt equity securities • industry economic trends • companyspecific predecessor companyspecific information based upon decline trading value debt equity securities three months ended september 30 2010 among indicators company concluded indicators impairment three months ended september 30 2010 addition based upon decline trading value debt equity securities three months ended june 30 2010 departure chairman chief executive officer may 28 2010 among indicators company concluded indicators impairment three months ended june 30 2010 company predecessor company concluded indicators impairment three months ended december 31 2010 two months ended march 31 2010 one month ended january 31 2010 respectively impairment tests goodwill definitelived intangible assets longlived assets performed using information estimates assumptions described company’s definitelived intangible assets longlived assets assigned respective reporting unit represent impairment testing fair values definitelived intangible assets determined using unobservable inputs level 3 fair value hierarchy based discounted cash flow valuation technique see note 3 “fresh start accounting” additional information fair values intangible assets determined impairment testing similar methodology process used conjunction adoption fresh start accounting impairment test definitelived intangible assets longlived assets performed comparing carrying amount asset groups including definitelived intangible assets longlived assets including goodwill sum undiscounted expected future cash flows accordance fasb asc 360 impairment exists sum undiscounted expected future cash flows less carrying amount intangible asset related group assets longlived assets testing results definitelived intangible assets longlived assets resulted impairment charge associated trade names trademarks technology local customer relationships former businesscom reporting unit 43 million 173 million three months ended september 30 2010 june 30 2010 respectively total nongoodwill intangible asset impairment charge 216 million eleven months ended december 31 2010 impairment test goodwill performed reporting unit level involved twostep process first step involved comparing fair value reporting unit carrying amount assets liabilities including goodwill specifically assigned reporting units upon adoption fresh start accounting fair value determined valuing company’s debt securities par value respective debt agreements include provisions would require debt securities repaid par value upon change control using market based approach company’s publicly traded common stock included trailing 20day average closing market price common stock ending october 31 2010 september 30 2010 june 30 2010 respectively aggregate debt equity values used arrive consolidated business enterprise value “bev” company since reporting units’ equity securities publicly traded observable market information securities impairment test october 31 2010 september 30 2010 calculated bev rhdi dme inc dmw inc reporting units using unobservable inputs level 3 fair value hierarchy based discounted cash flow valuation technique impairment test september 30 2010 calculated bev former businesscom reporting unit using unobservable inputs level 3 fair value hierarchy based fair value net asset approach fair value net asset approach deemed appropriate based revised financial projections 2014 former businesscom reporting unit impairment test june 30 2010 calculated bev reporting units using unobservable inputs level 3 fair value hierarchy based discounted cash flow valuation technique company ensured sum individual reporting units’ bevs consistent company’s consolidated bev using observable market pricing result annual impairment test goodwill determined reporting unit’s fair value exceeded carrying amount assets liabilities therefore second step goodwill impairment test required performed however impairment test goodwill september 30 2010 june 30 2010 determined reporting unit’s fair value less carrying amount assets liabilities requiring us proceed second step goodwill impairment test second step testing process impairment loss determined comparing implied fair value reporting unit’s goodwill recorded amount goodwill determining implied fair value reporting unit requires judgment use significant estimates assumptions noted well inputs discount rates terminal growth rates applicable believe estimates assumptions used impairment assessments reasonable based available market information variations assumptions could result materially different calculations fair value determinations whether impairment indicated amount impairment recorded determination reporting unit fair value using discounted cash flow method based estimated future cash flows reporting unit discounted present value using riskadjusted discount rates reflect overall level inherent risk reporting unit rate return outside investor would expect earn cash flow projections impairment test october 31 2010 derived management’s financial projections period 2010 2015 cash flow projections impairment test september 30 2010 derived management’s financial projections period 2010 2014 cash flow projections impairment test june 30 2010 derived management’s financial projections period 2010 2013 subsequent period cash flows developed reporting unit using growth rates company believes reasonably likely occur along terminal value derived reporting unit’s earnings interest taxes depreciation amortization supporting analyses used determine reporting unit’s fair value included comparison selected financial data company similar data publicly held companies businesses similar b assessment tax attributes detailed discussion discounted cash flow methodology supporting analyses used development company’s business plan longterm financial projections presented note 3 “fresh start accounting methodology analysis assumptions” similar methodology process utilized value company fresh start accounting february 1 2010 fair value net assets approach used valuation former businesscom reporting unit september 30 2010 included review businesscom’s balance sheet september 30 2010 resulted adjustment certain amounts respective fair value methodology assumptions used determine fair value businesscom’s net assets september 30 2010 similar methodology assumptions used value net assets fresh start accounting february 1 2010 see note 3 “fresh start accounting final enterprise value accounting policies reorganized consolidated balance sheet” information methodologies assumptions used value net assets fresh start accounting september 30 2010 determined remaining goodwill assigned former businesscom reporting unit fully impaired based upon analysis recognized goodwill impairment charge 3853 million 7523 million three months ended september 30 2010 june 30 2010 respectively total goodwill impairment charge 11376 million eleven months ended december 31 2010 recorded reporting units follows following tables present summary company’s goodwill reporting unit well critical assumptions used valuation reporting units october 31 2010 september 30 2010 june 30 2010 respectively na applicable fair value net assets approach used valuation former businesscom reporting unit change carrying amount goodwill eleven months ended december 31 2010 follows sum goodwill nongoodwill intangible asset impairment charges totaled 11593 million eleven months ended december 31 2010 impairment charges impact current future operating cash flow compliance debt covenants tax attributes three months ended december 31 2010 company recognized reduction goodwill 1584 million related finalization cancellation indebtedness income “codi” tax attribute reduction calculations required performed december 31 2010 associated fresh start accounting allocation goodwill reporting unit december 31 2010 follows connection company’s adoption fresh start accounting identifiable intangible assets either developed predecessor company acquired predecessor company prior acquisitions recorded estimated fair value amortized estimated useful lives manner best reflects economic benefit derived assets see note 3 “fresh start accounting” additional information fair values intangible assets determined amortization expense related company’s intangible assets 1670 million eleven months ended december 31 2010 impacted increase fair value intangible assets establishment estimated useful lives resulting adoption fresh start accounting amortization expense intangible assets five succeeding years estimated approximately 1528 million 1522 million 1634 million 1529 million 1427 million respectively amortization intangible assets tax purposes approximately 4810 million 2010 identifiable intangible assets respective book values december 31 2010 shown following table adjusted impairment charges eleven months ended december 31 2010 noted adjusted book values intangible assets represent new cost basis accumulated amortization prior impairment charges eliminated new cost basis amortized remaining useful lives intangible assets combined weighted average useful life identifiable intangible assets december 31 2010 21 years weighted average useful lives amortization methodology identifiable intangible assets december 31 2010 shown following table weighted average intangible asset useful lives amortization methodology directory services agreements 26 years income forecast method 1 local customer relationships 14 years income forecast method 1 national customer relationships 25 years income forecast method 1 trade names trademarks 14 years straightline method technology advertising commitments 8 years income forecast method 1 identifiable intangible assets amortized income forecast method assumes value derived intangible assets greater earlier years steadily declines time company predecessor company evaluate remaining useful lives identifiable intangible assets longlived assets whenever events circumstances indicate revision remaining period amortization warranted estimated remaining useful lives change remaining carrying amount intangible assets longlived assets would amortized prospectively revised remaining useful life conjunction impairment testing eleven months ended december 31 2010 company evaluated remaining useful lives identifiable intangible assets longlived assets considering among things effects obsolescence demand competition takes consideration price premium benefit competing independent publishers markets result directory services agreements acquired prior acquisitions economic factors including stability industry operate known technological advances legislative actions result uncertain changing regulatory environment expected changes distribution channels addition conjunction adoption fresh start accounting determination fair value assets liabilities first quarter 2010 evaluated remaining useful lives identifiable intangible assets longlived assets considering factors noted based evaluation company determined estimated useful lives intangible assets presented reflect period expected contribute future cash flows therefore deemed appropriate industry local business conditions markets deteriorate excess current estimates potentially resulting declines advertising sales operating results trading value debt equity securities decline significantly required assess recoverability goodwill addition annual evaluation recoverability useful lives intangible assets longlived assets factors including changes assumptions used impairment analysis result factors could result future impairment charges reduction remaining useful lives associated intangible assets longlived assets acceleration amortization expense predecessor company result prior acquisitions certain longterm intangible assets identified recorded estimated fair values excess purchase price resulting acquisitions net tangible identifiable intangible assets acquired recorded goodwill impaired 2008 noted amortization expense related predecessor company’s intangible assets 156 million one month ended january 31 2010 impacted reduced carrying values intangible assets resulting impairment charges recorded predecessor company fourth quarter 2009 associated reduction remaining useful lives effective january 1 2010 noted amortization expense related predecessor company’s intangible assets 5146 million 4159 million years ended december 31 2009 2008 respectively acquired longterm intangible assets respective book values december 31 2009 adjusted impairment charges fourth quarter 2009 noted shown following table result filing chapter 11 petitions predecessor company performed impairment tests definitelived intangible assets longlived assets year ended december 31 2009 fourth quarter 2009 conjunction filing amended plan amended disclosure statement predecessor company finalized extensive analysis associated emergence chapter 11 predecessor company utilized information assumptions discussed obtained analysis complete impairment evaluation result impairment evaluation predecessor company recognized impairment charge 73 billion fourth quarter 2009 associated directory services agreements advertiser relationships third party contracts network platforms acquired prior acquisitions fair values intangible assets derived discounted cash flow analysis using discount rate indicative risk market participant would willing accept analysis included review relevant financial metrics peers within industry connection predecessor company’s impairment evaluation 2009 predecessor company also evaluated remaining useful lives definitelived intangible assets longlived assets considering relevant factors noted december 31 2009 predecessor company determined due compression price premium benefit competing independent publishers markets well decline market share year ended december 31 2009 remaining useful lives directory services agreements acquired prior acquisitions reduced 33 years weighted average remaining useful lives 25 years dex media east 26 years dex media west 29 years att 28 years centurylink effective january 1 2010 based assessment future estimated cash flows increased attrition rates impact longterm financial projections remaining useful lives third party contracts advertiser relationships network platforms acquired prior acquisition reduced 1 5 9 years respectively effective january 1 2010 reduction remaining useful lives necessary order better reflect period intangible assets expected contribute future cash flow result decline trading value predecessor company’s debt equity securities 2008 continuing negative industry economic trends directly affected business predecessor company performed impairment tests goodwill definitelived intangible assets longlived assets predecessor company used estimates assumptions noted impairment evaluation based upon impairment test goodwill predecessor company recognized goodwill impairment charges 25 billion 6602 million three months ended march 31 2008 june 30 2008 respectively total goodwill impairment charges 31 billion year ended december 31 2008 result impairment charges predecessor company recorded goodwill december 31 2008 addition result tests predecessor company recognized impairment charge 7440 million fourth quarter 2008 associated local national customer relationships acquired prior acquisitions fair values intangible assets derived discounted cash flow analysis using discount rate results present value assets liabilities equal current fair value predecessor company’s debt equity securities lastly connection launch next version dexknowscom tradenames technology acquired prior acquisition discontinued resulted impairment charge 22 million fourth quarter 2008 total impairment charges related predecessor company’s intangible assets excluding goodwill 7462 million year ended december 31 2008 additional information connection acquisition dex media january 31 2006 “dex media merger” acquired directory services agreements collectively “dex directory services agreements” dex media entered qwest including 1 publishing agreement term 50 years commencing november 8 2002 subject automatic renewal additional oneyear terms grants us right exclusive official directory publisher listings classified advertisements qwest’s telephone customers geographic areas states dex media east dex media west operate directory business “qwest states” qwest successors provided local telephone services november 8 2002 well exclusive right use certain qwest branding directories markets 2 noncompetition agreement term 40 years commencing november 8 2002 pursuant qwest behalf affiliates successors agreed sell directory products consisting principally listings classified advertisements subscribers geographic areas qwest states qwest provided local telephone service november 8 2002 directed primarily consumers geographic areas result dex media merger also acquired 1 advertising commitment agreement whereby qwest agreed purchase aggregate 20 million advertising per year 2017 us pricing terms least favorable offered similar large clients 2 intellectual property contribution agreement pursuant qwest assigned licensed us qwest intellectual property previously used qwest directory services business along 3 trademark license agreement pursuant qwest granted us right november 2007 use qwest dex qwest dex advantage marks connection directory products related marketing material qwest states right use marks connection dexknowscom intangible assets 2 3 collectively “trade names” directory services agreements att company include directory services license agreement noncompetition agreement internet yellow pages reseller agreement directory publishing listing agreement collectively “att directory services agreements” certain affiliates att directory services license agreement designates us official exclusive provider yellow pages directory services att successors illinois northwest indiana “territory” grants us exclusive license obligation specified agreement produce publish distribute white pages directories territory att’s agent grants us exclusive license obligation specified agreement use att brand logo print directories territory noncompetition agreement prohibits att affiliates successors certain limited exceptions 1 producing publishing distributing yellow white pages print directories territory 2 soliciting selling local national yellow white pages advertising inclusion directories 3 soliciting selling local internet yellow pages advertising certain internet yellow pages directories territory licensing att marks third party purpose internet yellow pages reseller agreement grants us exclusive right sell local advertisers within territory internet yellow pages advertising focused upon products services offered within territory b nonexclusive right sell local excluding national advertisers within territory internet yellow pages advertising focused upon products services offered outside territory case onto yellowpagescom platform directory publishing listing agreement gives us right purchase use basic att subscriber listing information updates purpose publishing directories att directory services agreements internet yellow pages reseller agreement initial terms 50 years commencing september 2004 subject automatic renewal early termination specified circumstances internet yellow pages reseller agreement term 5 years commenced september 2004 directory services agreements centurylink company executed may 2006 conjunction sprint’s spinoff local telephone business include directory services license agreement trademark license agreement noncompetition agreement certain affiliates centurylink well noncompetition agreement sprint entered january 2003 collectively “centurylink directory services agreements” centurylink directory services agreements replaced previously existing analogous agreements sprint except sprint remained bound noncompetition agreement directory services license agreement grants us exclusive license obligation specified agreement produce publish distribute yellow white pages directories centurylink successors 18 states centurylink provided local telephone service time agreement trademark license agreement grants us exclusive license obligation specified agreement use certain specified centurylink trademarks markets noncompetition agreements prohibit centurylink sprint respective affiliates successors markets selling local directory advertising certain limited exceptions producing publishing distributing print directories centurylink directory services agreements initial terms 50 years commencing january 2003 subject automatic renewal early termination specified circumstances fixed assets computer software fixed assets computer software recorded cost depreciation amortization provided estimated useful lives assets using straightline method estimated useful lives thirty years buildings five years machinery equipment ten years furniture fixtures three five years computer equipment computer software leasehold improvements amortized straightline basis shorter term lease estimated useful life improvement fixed assets computer software successor company december 31 2010 predecessor company december 31 2009 consisted following depreciation amortization expense fixed assets computer software successor company eleven months ended december 31 2010 predecessor company one month ended january 31 2010 years ended december 31 2009 2008 follows year ended december 31 2009 predecessor company identified certain fixed assets longer service resulted acceleration depreciation expense 87 million years ended december 31 2009 2008 predecessor company retired certain computer software fixed assets resulted impairment charge 04 million 04 million respectively interest expense deferred financing costs successor company gross interest expense eleven months ended december 31 2010 2497 million conjunction adoption fresh start accounting reporting fresh start reporting date adjustment established record outstanding debt fair value fresh start reporting date fair value adjustment amortized increase interest expense remaining term respective debt agreements using effective interest method impact future scheduled interest principal payments amortization fair value adjustment included increase interest expense 293 million eleven months ended december 31 2010 see note 3 “fresh start accounting” additional information connection amendment restatement dex media east llc rhdi credit facilities effective date entered interest rate swap interest rate cap agreements first quarter 2010 designated cash flow hedges company’s interest expense eleven months ended december 31 2010 includes expense 82 million resulting change fair value interest rate swaps interest rate caps predecessor company contractual interest expense would appeared predecessor company’s consolidated statement operations filing chapter 11 petitions 659 million 8024 million one month ended january 31 2010 year ended december 31 2009 respectively gross interest expense recognized one month ended january 31 2010 years ended december 31 2009 2008 197 million 4898 million 8367 million respectively certain costs associated issuance debt instruments capitalized included noncurrent assets consolidated balance sheets costs amortized interest expense terms related debt agreements bond outstanding method used amortize deferred financing costs relating debt instruments respect made accelerated principal payments deferred financing costs amortized using effective interest method amortization deferred financing costs included interest expense 18 million 275 million 290 million one month ended january 31 2010 years ended december 31 2009 2008 respectively predecessor company’s interest expense one month ended january 31 2010 year ended december 31 2009 includes expense 08 million 56 million respectively associated change fair value dex media east llc interest rate swaps longer deemed financial instruments result filing chapter 11 petitions predecessor company’s interest expense one month ended january 31 2010 year ended december 31 2009 also includes expense 11 million 96 million respectively resulting amounts previously charged accumulated comprehensive loss related interest rate swaps amounts previously charged accumulated comprehensive loss related dex media east llc interest rate swaps amortized interest expense remaining life interest rate swaps based future interest payments probable forecasted transactions would occur accordance fresh start accounting reporting unamortized amounts previously charged accumulated comprehensive loss related interest rate swaps eliminated fresh start reporting date see note 3 “fresh start accounting” additional information result amendment rhdi credit facility refinancing former dex media west llc credit facility june 6 2008 predecessor company’s interest rate swaps associated two debt arrangements longer highly effective offsetting changes cash flows accordingly cash flow hedge accounting treatment longer permitted addition result filing chapter 11 petitions interest rate swaps required settled terminated 2009 result change fair value interest rate swaps prior effective date predecessor company’s interest expense includes expense 04 million one month ended january 31 2010 reduction 107 million year ended december 31 2009 expense 37 million year ended december 31 2008 interest expense year ended december 31 2008 also includes noncash charge 210 million resulting amounts previously charged accumulated comprehensive loss related interest rate swaps conjunction dex media merger result purchase accounting required generally accepted accounting principles “gaap” predecessor company recorded dex media’s debt fair value january 31 2006 predecessor company recognized offset interest expense period subsequent dex media merger may 28 2009 amortization corresponding fair value adjustment offset interest expense 77 million 176 million years ended december 31 2009 2008 respectively offset interest expense recognized life respective debt however due filing chapter 11 petitions unamortized fair value adjustments may 28 2009 785 million writtenoff recognized reorganization item consolidated statement operations year ended december 31 2009 gain debt transactions net predecessor company effective october 21 2008 predecessor company obtained waiver rhdi credit facility permit rhdi make voluntary prepayments term loan d1 term loan d2 discount par provided discount acceptable lenders choose participate rhdi obligated make prepayments result voluntary prepayments made year ended december 31 2008 predecessor company recognized gain 200 million consisting difference face amount term loans repaid voluntary prepayments made offset writeoff unamortized deferred financing costs 02 million october 2008 predecessor company repurchased 215 million senior notes collectively senior notes senior discount notes repurchased september 2008 noted referred “notes” purchase price 74 million “october 2008 debt repurchases” result october 2008 debt repurchases predecessor company recognized gain 136 million year ended december 31 2008 consisting difference par value purchase price notes offset writeoff unamortized deferred financing costs 05 million september 2008 predecessor company repurchased 1655 million 1599 million accreted value applicable notes purchase price 847 million “september 2008 debt repurchases” result september 2008 debt repurchases predecessor company recognized gain 724 million year ended december 31 2008 consisting difference accreted value case senior discount notes par value applicable purchase price notes offset writeoff unamortized deferred financing costs 29 million june 25 2008 rhdi exchanged 5942 million 5857 million accreted value applicable rhd’s senior notes senior discount notes collectively referred “rhd notes” 4129 million aggregate principal amount rhdi’s newly issued 1175 senior notes due may 15 2015 “rhdi senior notes” referred “debt exchanges” result debt exchanges predecessor company’s outstanding debt reduced 1728 million gain 1613 million recognized year ended december 31 2008 june 6 2008 conjunction debt exchanges predecessor company amended rhdi credit facility order among things permit debt exchanges provide additional covenant flexibility addition june 6 2008 predecessor company refinanced dex media west llc credit facility year ended december 31 2008 predecessor company recognized charge 22 million writeoff unamortized deferred financing costs associated refinancing former dex media west llc credit facility portions amended rhdi credit facility accounted extinguishments debt result financing activities noted predecessor company recorded net gain 2652 million year ended december 31 2008 advertising expense company predecessor company recognize advertising expenses incurred expenses include media public relations promotional sponsorship costs online advertising total advertising expense successor company eleven months ended december 31 2010 279 million total advertising expense predecessor company one month ended january 31 2010 years ended december 31 2009 2008 10 million 310 million 327 million respectively concentration credit risk trade receivables approximately 85 advertising revenue derived sale marketing solutions local businesses clients typically enter 12month advertising sales contracts make monthly payments term contract clients prepay full amount portion contract value new clients desiring expand advertising programs subject credit review clients qualify may extend credit form trade receivable advertising purchase local businesses tend fewer financial resources higher failure rates large businesses addition full collection delinquent accounts take extended period time involve significant costs require collateral clients although charge late fees clients pay specified due dates remaining approximately 15 advertising revenue derived sale marketing solutions national large regional chains rental car companies automobile repair shops pizza delivery businesses substantially revenue derived national accounts serviced cmrs accept orders cmrs independent third parties act agents national clients cmrs responsible billing national clients advertising receive payment value advertising placed directory net cmr’s commission directly cmr still exposed credit risk associated trade receivables amount losses accounts historically less local accounts clients cases cmrs tend larger companies greater financial resources local clients however fourth quarter 2010 bad debt provision negatively impacted delinquent balances associated cmr derivative financial instruments december 31 2010 interest rate swap interest rate cap agreements major financial institutions notional amount 5000 million 4000 million respectively exposed credit risk event one counterparties agreements cannot meet obligation notional amount interest rate swaps used measure interest paid received represent amount exposure credit loss would limited amount would received remaining life interest rate swap agreement terms interest rate cap agreements company receive payments based spread rates threemonth libor rate increases negotiated cap rates loss would limited amount would received based spread rates remaining life interest rate cap agreement counterparties interest rate swap interest rate cap agreements major financial institutions credit ratings aa higher equivalent dependent upon credit rating agency labor unions approximately 32 employees represented labor unions covered two collective bargaining agreements dex media qwest states unionized employees represented either international brotherhood electrical workers america “ibew” communication workers america “cwa” dex media’s collective bargaining agreement ibew expires may 2012 dex media’s collective bargaining agreement cwa expires september 2012 derivative financial instruments hedging activities use derivative financial instruments trading speculative purposes derivative financial instruments limited interest rate swap interest rate cap agreements company utilizes combination fixed rate debt variable rate debt finance operations variable rate debt exposes company variability interest payments due changes interest rates management believes prudent mitigate interest rate risk portion variable rate borrowings satisfy objectives requirements company entered interest rate swap interest rate cap agreements designated cash flow hedges manage exposure interest rate fluctuations variable rate debt day derivative contract executed company may designate derivative instrument hedge variability cash flows received paid cash flow hedge designated hedging relationships company would formally document hedging relationship riskmanagement objective strategy undertaking hedge hedging instrument item nature risk hedged hedging instrument’s effectiveness offsetting hedged risk assessed description method measuring ineffectiveness company would also formally assess hedge’s inception ongoing basis whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged items derivative financial instruments recognized either assets liabilities consolidated balance sheets measurement fair value quarterly basis fair values interest rate swaps interest rate caps determined based quoted market prices derivative instruments designated cash flow hedges initial fair value subsequent gains losses change fair value interest rate swaps interest rate caps reported earnings component interest expense gains losses related quarterly fair value adjustments presented operating activity consolidated statements cash flows derivative instruments designated cash flow hedges determined provide effective hedge differences fair value book value derivative instruments recognized accumulated comprehensive income loss component shareholders’ equity deficit company discontinues hedge accounting prospectively determined derivative longer highly effective offsetting changes cash flows hedged item derivative hedged item expired sold terminated exercised management determines designation derivative hedging instrument longer appropriate situations hedge accounting discontinued company continues carry derivative fair value consolidated balance sheet recognizes subsequent changes fair value earnings component interest expense amounts previously recorded accumulated comprehensive income loss amortized interest expense periods interest expense underlying debt impacts earnings using derivative financial instruments hedge exposures changes interest rates company exposes credit risk market risk credit risk possible failure counterparty perform terms derivative contract fair value derivative contract positive counterparty owes company creates credit risk company fair value derivative contract negative company owes counterparty therefore subject credit risk company minimizes credit risk derivative financial instruments entering transactions major financial institutions credit ratings aa higher equivalent dependent upon credit rating agency market risk adverse effect value financial instrument results change interest rates market risk associated interestrate contracts managed establishing monitoring parameters limit types degree market risk may undertaken see note 7 “derivative financial instruments” additional information regarding derivative financial instruments hedging activities pension postretirement benefits pension postretirement benefits represent estimated amounts paid employees future accounting benefits reflects recognition benefit costs employee’s approximate service period based terms plan investment funding decisions made determination benefit obligation net periodic pension postretirement benefit costs requires management make assumptions regarding discount rate return retirement plan assets healthcare cost trends changes assumptions significant impact projected benefit obligation funding requirement net periodic benefit cost assumed discount rate pension benefits could settled eleven months ended december 31 2010 company utilized outsource provider’s yield curve determine appropriate discount rate defined benefit pension plans based individual plans’ expected future cash flows january 2010 year ended december 31 2009 predecessor company utilized outsource provider’s yield curve determine appropriate discount rate defined benefit pension plans year ended december 31 2008 predecessor company utilized citigroup pension liability index appropriate discount rate defined benefit pension plans predecessor company changed outsource provider’s yield curve 2009 better reflect specific cash flows plans determining discount rate expected longterm rate return plan assets based mix assets held plan expected longterm rates return within asset class anticipated trend future healthcare costs based historical experience external factors see note 10 “benefit plans” information regarding benefit plans income taxes account income taxes asset liability method accordance fasb asc 740 income taxes “fasb asc 740” deferred income tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred income tax assets based upon available evidence likely deferred income tax assets realized fasb asc 740 also prescribes recognition threshold measurement principles financial statement recognition measurement tax positions taken expected taken tax return fasb asc 740 impact uncertain income tax position income tax return must recognized largest amount likely sustained upon audit relevant taxing authority uncertain income tax position recognized less 50 likelihood sustained additionally fasb asc 740 provides guidance derecognition classification interest penalties accounting interim periods disclosures transition requirements company’s policy recognize interest penalties related unrecognized tax benefits income tax expense see note 8 “income taxes” additional information regarding provision benefit income taxes earnings loss per share calculation basic diluted earnings loss per share “eps” successor company eleven months ended december 31 2010 predecessor company one month ended january 31 2010 years ended december 31 2009 2008 respectively presented diluted eps calculated dividing net income weighted average common shares outstanding plus dilutive potential common stock potential common stock includes stock options stock appreciation rights “sars” restricted stock dilutive effect calculated using treasury stock method due company’s reported net loss eleven months ended december 31 2010 predecessor company’s reported net loss years ended december 31 2009 2008 effect stockbased awards antidilutive therefore included calculation diluted eps eleven months ended december 31 2010 13 million shares successor company’s stockbased awards exercise prices exceeded average market price successor company’s common stock period one month ended january 31 2010 years ended december 31 2009 2008 46 million shares 46 million shares 41 million shares respectively predecessor company’s stockbased awards exercise prices exceeded average market price predecessor company’s common stock respective period stockbased awards effective date company’s board directors ratified dex one equity incentive plan “eip” previously approved part confirmation order eip certain employees nonemployee directors company eligible receive stock options sars limited stock appreciation rights tandem stock options restricted stock restricted stock units eip 56 million shares common stock authorized grant extent shares common stock issued delivered reason expiration termination cancellation forfeiture award certain exceptions ii settlement award cash shares common stock shall available eip stock awards typically granted market value common stock date grant become exercisable ratable installments otherwise period one four years date grant may exercised maximum ten years date grant company’s compensation benefits committee determines termination vesting relevant provisions date grant nonemployee directors company eligible receive stockbased awards annual basis grant date value equal 75000 upon emergence chapter 11 pursuant plan outstanding equity securities predecessor company including stock options sars restricted stock cancelled periods prior effective date predecessor company maintained shareholder approved stock incentive plan 2005 stock award incentive plan “2005 plan” whereby certain employees nonemployee directors eligible receive stock options sars limited stock appreciation rights tandem stock options restricted stock prior adoption 2005 plan predecessor company maintained shareholder approved stock incentive plan 2001 stock award incentive plan “2001 plan” 2005 plan 2001 plan 5 million 4 million shares respectively originally authorized grant stock awards typically granted market value predecessor company’s common stock date grant became exercisable ratable installments otherwise period one five years date grant able exercised maximum ten years date grant predecessor company’s compensation benefits committee determined termination vesting relevant provisions date grant predecessor company implemented policy issuing treasury shares satisfy stock issuances associated stockbased award exercises company predecessor company record stockbased compensation expense consolidated statements operations employee stockbased awards based grant date fair values company predecessor company estimate forfeitures requisite service period recognizing compensation expense estimated forfeitures adjusted extent actual forfeitures differ expected materially differ estimates company used estimated weighted average forfeiture rate determining stockbased compensation expense 89 eleven months ended december 31 2010 predecessor company used estimated forfeiture rate determining stockbased compensation expense 80 first quarter 2009 102 remainder 2009 january 2010 year ended december 31 2008 predecessor company utilized estimated forfeiture rate 8 determining stockbased compensation expense see note 9 “stock incentive plans” additional information regarding company’s predecessor company’s stock incentive plans 2009 longterm incentive plan executive officers company’s 2009 ltip cashbased plan designed provide longterm incentive compensation participants based achievement performance goals 2009 ltip originally approved predecessor company’s compensation benefits committee 2009 bankruptcy proceedings bankruptcy court approved 2009 ltip carried forward company upon emergence chapter 11 company’s compensation benefits committee administers 2009 ltip sole discretion may subject certain exceptions delegate power authority 2009 ltip chief executive officer executive officer company participants 2009 ltip consist executive officers company predecessor company affiliates compensation benefits committee sole discretion may select time ii employees company predecessor company subsidiaries affiliates chief executive officer sole discretion may select time amount award 2009 ltip paid cash dependent upon attainment certain performance measures related amount company’s predecessor company’s cumulative free cash flow 2009 2010 2011 fiscal years “performance period” participants executive officers company predecessor company certain participants designated chief executive officer also eligible receive payment upon achievement restructuring reorganization andor recapitalization relating predecessor company’s outstanding indebtedness liabilities “specified actions” performance period payments made following end performance period date specified action case may upon emergence chapter 11 achievement specified actions company made cash payments associated 2009 ltip 80 million eleven months ended december 31 2010 cashbased awards granted participants april 2009 company recognized compensation expense related 2009 ltip 48 million eleven months ended december 31 2010 includes 23 million accelerated compensation expense associated departure former chief executive officer predecessor company recognized compensation expense related 2009 ltip 05 million 50 million one month ended january 31 2010 year ended december 31 2009 respectively fair value financial instruments december 31 2010 2009 fair value cash equivalents accounts receivable accounts payable accrued liabilities approximated carrying value based net shortterm nature instruments discussed note 3 “fresh start accounting” company’s assets liabilities fair valued fresh start reporting date connection adoption fresh start accounting company utilized quoted market prices available compute fair market value longterm debt december 31 2010 disclosed note 6 “longterm debt credit facilities notes” estimates fair value may affected assumptions made accordingly necessarily indicative amounts company could realize current market exchange result filing chapter 11 petitions plan predecessor company believe meaningful present fair market value longterm debt december 31 2009 fasb asc 820 fair value measurements disclosures “fasb asc 820” defines fair value establishes fair value hierarchy prioritizes inputs valuation techniques used measure fair value expands disclosures fair value measurements fasb asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy gives highest priority quoted prices active markets comprised following three levels level 1 unadjusted quoted market prices active markets identical assets liabilities level 2 observable inputs level 1 inputs quoted prices similar assets liabilities quoted prices markets insufficient volume infrequent transactions modelderived valuations significant inputs observable derived principally corroborated observable market data substantially full term assets liabilities level 3 prices valuations require inputs significant measurement unobservable required fasb asc 820 assets liabilities classified based lowest level input significant fair value measurement company’s predecessor company’s assessment significance particular input fair value measurement requires judgment may affect valuation fair value assets liabilities placement within fair value hierarchy levels company predecessor company interest rate swaps notional amount 5000 million 2000 million december 31 2010 2009 respectively measured fair value recurring basis december 31 2010 company interest rate caps notional amount 4000 million measured fair value recurring basis following table presents company’s predecessor company’s assets liabilities measured fair value recurring basis december 31 2010 2009 respectively level within fair value hierarchy fair value measurements included transfers assets liabilities level 2 eleven months ended december 31 2010 one month ended january 31 2010 year ended december 31 2009 company established policy recognizing transfers levels fair value hierarchy end reporting period conjunction classification predecessor company’s credit facilities december 31 2009 interest rate swap liabilities excluded liabilities subject compromise consolidated balance sheet december 31 2009 predecessor company’s credit facilities interest rate swaps fully collateralized fair value collateral exceeded carrying value credit facilities interest rate swaps valuation techniques interest rate swaps interest rate caps fair value marketbased measure considered perspective market participant holds asset owes liability rather entityspecific measure therefore even market assumptions readily available company’s predecessor company’s assumptions set reflect market participants would use pricing asset liability measurement date company predecessor company use prices inputs current measurement date fair value derivative instruments derived using pricing models based market approach pricing models take account relevant observable market inputs market participants would use pricing asset liability pricing models used determine fair value derivative instruments incorporate specific contract terms valuation inputs including effective dates maturity dates interest rate swap pay rates interest rate cap rates notional amounts disclosed presented note 7 “derivative financial instruments” interest rate yield curves creditworthiness counterparty company counterparty credit risk company’s credit risk could material impact fair value derivative instruments results operations financial condition particular reporting period december 31 2010 impact applying counterparty credit risk determining fair value derivative instruments increase derivative instruments liability less 01 million december 31 2010 impact applying company’s credit risk determining fair value derivative instruments decrease derivative instruments liability 12 million many pricing models entail material subjectivity methodologies employed necessitate significant judgment pricing inputs observed actively quoted markets case derivative instruments pricing models used company predecessor company widely accepted financial services industry noted derivative instruments categorized within level 2 fair value hierarchy fair value control processes interest rate swaps interest rate caps company predecessor company employ control processes validate fair value derivative instruments derived pricing models control processes designed assure values used financial reporting based observable inputs wherever possible event observable inputs available control processes designed assure valuation approach utilized appropriate consistently applied assumptions reasonable benefit plan assets fair values company’s predecessor company’s benefit plan assets disclosures required fasb asc 71520 compensation retirement benefits presented note 10 “benefit plans” estimates preparation financial statements conformity gaap requires management make estimates assumptions affect reported amounts assets liabilities revenues certain expenses disclosure contingent assets liabilities actual results could differ materially estimates assumptions estimates assumptions used determination recoverability longlived assets sales allowances doubtful accounts depreciation amortization employee benefit plans expense restructuring expense accruals deferred income taxes certain assumptions pertaining stockbased awards certain estimates associated liabilities classified liabilities subject compromise certain estimates assumptions used impairment evaluation goodwill definitelived intangible assets longlived assets among others new accounting pronouncements july 2010 fasb issued accounting standards update “asu” 201020 disclosures credit quality financing receivables allowance credit losses “asu 201020” asu 201020 improves disclosures entity provides credit quality financing receivables related allowance credit losses objective enhancing disclosures improve financial statement users’ understanding nature entity’s credit risk associated financing receivables entity’s assessment risk estimating allowance credit losses well changes allowance reasons changes enhanced disclosure requirements provided asu 201020 required shortterm receivables maturity dates less one year credit card receivables public entities disclosures end reporting period effective interim annual reporting periods ending december 15 2010 disclosures activity occurs reporting period effective interim annual reporting periods beginning december 15 2010 company adopted disclosure provisions asu 201020 effective interim annual reporting periods ending december 15 2010 excluding credit card receivables immaterial operations financing receivables maturity dates less one year therefore certain enhanced disclosure requirements asu 201020 applicable company provided january 2010 fasb issued asu 201006 improving disclosures fair value measurements “asu 201006” asu 201006 amends fasb asc 820 clarify existing disclosure requirements require additional disclosure fair value measurements asu 201006 clarifies existing fair value disclosures level disaggregation presented inputs valuation techniques used measure fair value measurements fall either level 2 level 3 fair value hierarchy additional disclosure requirements include disclosure regarding amounts reasons significant transfers level 1 level 2 fair value hierarchy separate presentation purchases sales issuances settlements items within level 3 fair value hierarchy asu 201006 effective interim annual reporting periods beginning december 15 2009 except disclosures level 3 activity purchases sales issuances settlements effective interim annual reporting periods beginning december 15 2010 effective january 1 2010 adopted disclosure provisions asu 201006 effective interim annual reporting periods beginning december 15 2009 disclosures required provided prospective basis september 2009 fasb issued asu 200913 revenue recognition topic 605 multipledeliverable revenue arrangements consensus fasb emerging issues task force “asu 200913” updates current guidance pertaining multipleelement revenue arrangements included fasb asc 60525 revenue recognition multiple element arrangements asu 200913 addresses determine whether arrangement involving multiple deliverables contains one unit accounting arrangement consideration allocated among separate units accounting asu 200913 effective company annual reporting period beginning january 1 2011 asu 200913 may applied retrospectively prospectively early adoption permitted company expect adoption asu 200913 impact financial position results operations cash flows reviewed accounting pronouncements issued december 31 2010 company yet adopted believe pronouncements material impact financial position operating results 3 fresh start accounting company adopted fresh start accounting reporting effective february 1 2010 fresh start reporting date accordance fasb asc 852 holders existing voting shares immediately confirmation plan received less 50 voting shares emerging entity reorganization value company’s assets immediately date confirmation less postpetition liabilities allowed claims company required adopt fresh start accounting reporting january 29 2010 effective date however light proximity date accounting period close immediately effective date january 31 2010 well results materiality assessment discussed elected adopt fresh start accounting reporting february 1 2010 financial statements fresh start reporting date report results dex one beginning retained earnings accumulated deficit presentation dex one represents financial position results operations new reporting entity comparable prior periods presented rhd consolidated financial statements periods ended prior fresh start reporting date include effect changes capital structure changes fair value assets liabilities result fresh start accounting company performed quantitative qualitative materiality assessment accordance staff accounting bulletin “sab” 99 materiality sab 108 considering effects prior year misstatements quantifying misstatements current year financial statements order determine appropriateness choosing fresh start reporting date accounting reporting purposes instead effective date rhd dex one concluded quantitative assessment material impact either rhd one month ended january 31 2010 dex one two months ended march 31 2010 eight months ended september 30 2010 qualitative factors would preclude use fresh start reporting date accounting reporting purposes accordance fasb asc 852 results operations rhd prior fresh start reporting date include preemergence gain approximately 45 billion resulting discharge liabilities plan partially offset issuance new dex one common stock additional paidin capital dex one senior subordinated notes ii preemergence charges earnings recorded reorganization items resulting certain costs expenses relating plan becoming effective iii preemergence increase earnings 33 billion resulting aggregate changes net carrying value preemergence assets liabilities reflect fair values fresh start accounting well recognition goodwill see note 4 “reorganization items net liabilities subject compromise” additional information enterprise value reorganization value determination enterprise value represented fair value entity’s interestbearing debt shareholders’ equity disclosure statement associated plan confirmed bankruptcy court estimated range enterprise values 42 billion 53 billion midpoint 48 billion based current anticipated economic conditions direct impact conditions business deemed appropriate use midpoint low end range overall midpoint range determine final enterprise value 45 billion comprised debt valued 33 billion equity valued 13 billion less cash required hand result plan 1250 million fasb asc 852 provides among things determination value assigned assets reorganized company date selected financial reporting purposes company adjusted enterprise value 45 billion certain items postpetition liabilities deferred income taxes cash hand post emergence determine reorganization value 59 billion fresh start accounting reorganization value allocated dex one’s assets based respective fair values conformity purchase method accounting business combinations included fasb asc 805 business combinations excess reorganization value fair value identified tangible intangible assets 21 billion recorded goodwill reorganization value represents amount resources available become available satisfaction postpetition liabilities allowed claims negotiated company creditors “interested parties” value along terms plan determined extensive armslength negotiations interested parties interested party developed view value based upon expected future cash flows business emergence chapter 11 discounted rates reflecting perceived business financial risks value viewed fair value entity considering liabilities intended approximate amount willing buyer would pay assets dex one immediately restructuring reorganization value determined using numerous projections assumptions inherently subject significant uncertainties resolution contingencies beyond control company accordingly assurance estimates assumptions amounts reflected valuation realized methodology analysis assumptions dex one’s valuation based upon discounted cash flow methodology included calculation present value expected unlevered aftertax free cash flows reflected longterm financial projections including calculation present value terminal value cash flows supporting analysis included comparison selected financial data company similar data publicly held companies businesses similar b analysis comparable valuations indicated precedent mergers acquisitions companies c valuation postemergence tax attributes detailed discussion methodology supporting analysis presented company’s business plan foundation developing longterm financial projections used valuation business specific operating financial metrics drive inform longterm financial projections include limited customer numbers customer behaviors average spend per customer product usage sales representative productivity business planning forecasting process also included review company industry macroeconomic factors including limited achievement future financial results projected changes associated reorganization initiatives anticipated changes general market conditions including variations market regions known new business opportunities challenges detailed research forecast materials leading industry economic analysts also used form assumptions provide context business plan longterm financial projections planning forecasting process included sensitivity analyses related key company industry macroeconomic variables following represents detailed discussion methodology supporting analysis used value business using business plan longterm financial projections developed company discounted cash flow methodology discounted cash flow “dcf” analysis forwardlooking enterprise valuation methodology relates value asset business present value expected future cash flows generated asset business methodology projected future cash flows discounted business’ weighted average cost capital “wacc” wacc reflects estimated blended rate return debt equity investors would require invest business based capital structure dcf analysis three components 1 present value expected unlevered aftertax free cash flows determined period 2 present value terminal value cash flows represents firm value beyond time horizon longterm financial projections 3 present value market cost secured debt dex media east dex media west term relevant securities dcf calculation based management’s financial projections unlevered aftertax free cash flows period 2010 2014 company used range waccs discount future cash flows terminal values 90 110 midpoint 100 ranges determined based upon market cost debt rather anticipated cost debt reorganized company upon emergence bankruptcy market cost equity using capital asset pricing model assumptions used dcf analysis including appropriate components wacc deemed “market participants” upon analysis peer groups’ capital structures conjunction analysis publicly traded companies described company used range exit multiples 2014 earnings interest taxes depreciation amortization “ebitda” 475 625 marginally lower midpoint 513 exit multiple selected determine present value terminal value cash flows period 2014 chosen represents maturity date secured debt held dex media east dex media west period company recognize benefit recording secured debt market cost present value market cost secured debt dex media east dex media west determined using pricing new rhdi secured debt time valuation performed proxy market cost similar debt company measured difference actual cost debt dex media east dex media west assumed market cost debt discounted difference using range waccs 90 110 midpoint 100 upon emergence determined pricing new rhdi secured debt also market cost recorded company accordingly sum present value projected unlevered aftertax free cash flows added present value terminal value cash flows present value market cost secured debt dex media east dex media west determine company’s enterprise value publicly traded company analysis part valuation analysis company identified publicly traded companies whose businesses relatively similar comparable operational characteristics derive comparable revenue ebitda multiples dcf analysis criteria selecting comparable companies analysis included among relevant characteristics similar lines businesses business risks growth prospects maturity businesses market presence size scale operations analysis included detailed multiyear financial comparison company’s income statement balance sheet statement cash flows addition company’s performance profitability margins leverage business trends also examined based analyses number financial multiples ratios calculated gauge company’s relative performance valuation ranges ratios derived applied company’s projected financial results develop range implied values selected range ratios 475 625 marginally lower midpoint 513 exit multiple selected precedent transaction analysis additionally company utilized precedent transaction analysis estimates value examining public merger acquisition transactions valuations paid transactions analyzed ratios various financial results transaction multiples calculated based purchase price paid acquire companies comparable us also observed historical expected synergies enterprise premiums paid selected transactions analysis postemergence tax attributes following emergence chapter 11 company permitted retain tax attributes extent company’s tax attributes petition date exceeded cancellation debt income company valued tax attributes calculating present value tax savings expected provided relative taxes company would otherwise pay absent availability attributes cash flows discounted range discount rates based company’s relevant cost capital cost equity furthermore company took account variety qualitative factors estimating value tax attributes including factors implementation utilization risk final enterprise value accounting policies reorganized consolidated balance sheet determining final enterprise value attributed company 45 billion blended publicly traded company analysis precedent transaction analysis dcf methodology factored postemergence tax attributes analysis emphasis dcf methodology fresh start accounting reporting permits selection appropriate accounting policies dex one predecessor company’s significant accounting policies disclosed annual report form 10k year ended december 31 2009 adopted dex one fresh start reporting date though many account balances affected reorganization fresh start adjustments presented adjustments presented made january 31 2010 condensed consolidated balance sheet condensed consolidated balance sheet reorganization adjustments fresh start adjustments presented summarize impact plan adoption fresh start accounting fresh start reporting date reorganized condensed consolidated balance sheet january 31 2010 1 represents amounts recorded fresh start reporting date implementation plan including settlement liabilities subject compromise related payments distributions cash new shares dex one common stock prepetition creditors cancellation rhd common stock elimination predecessor company’s additional paidin capital portion accumulated deficit treasury stock accumulated comprehensive loss reorganization adjustments also include establishment dex one additional paidin capital 15 billion based fair value equity 15 billion less par value dex one common stock less 01 million common shares outstanding predecessor company immediately prior cancellation effective date 69058991 2 represents adjustments fresh start accounting primarily related recording goodwill recording intangible assets accounts receivable fixed assets computer software assets liabilities fair value related deferred income taxes accordance asc 805 additionally fresh start accounting adjustments reflect elimination substantially deferred directory revenue 7910 million related deferred directory costs 1355 million based minimal obligations subsequent fresh start reporting date advertising sales fulfilled prior fresh start reporting date remaining deferred directory revenues 210 million recorded fair value fresh start accounting pertain billings ahead publications revenues associated internet products services future obligations subsequent fresh start reporting date prepaid expenses current assets include 144 million costuplift defined discussed fresh start accounting adjustments also include elimination 1 remaining portion predecessor company’s accumulated deficit 2 prepaid director officer insurance included prepaid expenses current assets 3 deferred rent included accounts payable accrued liabilities well noncurrent liabilities following table represents reconciliation enterprise value attributed dex one assets determination total reorganization value allocated assets determination goodwill table also presents reconciliation total reorganization value allocated assets new dex one common stock additional paidin capital following table represents impact fresh start accounting adjustments retained earnings determination fair value intangible assets resulted 4151 million net increase intangible assets reorganized condensed consolidated balance sheet january 31 2010 following table presents increase decrease fair value intangible assets category 3 accordance plan cash disbursements 5265 million made effective date related repayment principal accrued interest outstanding debt 4 reflects amendment restatement credit facilities well issuance 3000 million dex one senior subordinated notes completed effective date following tables present reconciliation outstanding debt including current portion january 31 2010 reorganized outstanding debt including current portion january 31 2010 5 liabilities subject compromise generally refer prepetition obligations secured unsecured may impaired plan reorganization fasb asc 852 requires liabilities including became known filing chapter 11 petitions reported amounts expected allowed even may settled lesser amounts liabilities represented estimated amount expected resolved known potential claims chapter 11 process liabilities subject compromise also includes items may assumed plan reorganization may subsequently reclassified liabilities subject compromise company classified notes default liabilities subject compromise january 31 2010 liabilities subject compromise also include certain prepetition liabilities including accrued interest accounts payable accrued liabilities tax related liabilities lease related liabilities table identifies principal categories liabilities subject compromise january 31 2010 liabilities subject compromise january 31 2010 either settled issuance new dex one common stock issuance dex one senior subordinated notes cash disbursements reclassified liabilities subject compromise appropriate balance sheet accounts result extinguishment liabilities subject compromise predecessor company recorded gain reorganization 45 billion one month ended january 31 2010 components presented following table 6 represents impact reorganization adjustments accumulated deficit connection company’s adoption fresh start accounting following table presents amounts included accumulated comprehensive loss january 31 2010 eliminated part fresh start accounting adjustments 7 represents reorganization adjustments associated predecessor company’s deferred income taxes interest rate swap liabilities related interest receivables converted new tranche term loans amended restated credit facilities reclass certain liabilities subject compromise 8 represents adjustment record longterm debt including current portion fair value fresh start reporting date see note 2 “summary significant accounting policies interest expense deferred financing costs” note 6 “longterm debt credit facilities notes” additional information following tables present fair value adjustments longterm debt including current portion issuance 9 represents elimination deferred financing costs associated predecessor company’s existing credit facilities writeoff noncurrent assets result fresh start accounting 10 following table summarizes allocation fair values predecessor company’s assets liabilities shown reorganized condensed consolidated balance sheet january 31 2010 company utilized following methodologies assumptions value assets connection fresh start accounting cash equivalents predecessor company carried forward dex one’s opening balance sheet valuation adjustments necessary book value reasonable estimate fair value accounts receivable accounts receivable balances valued fair value using net realizable value approach net realizable value approach determined reducing gross receivable balance allowance doubtful accounts sales claims due relatively short collection period net realizable value approach determined result reasonable indication fair value assets company reestablish allowance doubtful accounts receivable billed 2010 based upon collection history estimate uncollectible accounts management exercise judgment adjusting allowance known items current local business conditions credit trends deferred directory costs unamortized deferred directory costs predecessor company eliminated dex one’s opening balance sheet represent assets dex one deferred directory costs relate entirely directories already published predecessor company fresh start reporting date dex one begin record deferred directory costs associated directories published subsequent fresh start reporting date deferred income taxes net deferred income taxes net associated predecessor company eliminated dex one’s opening balance sheet result fresh start accounting dex one recorded deferred taxes applicable related temporary differences tax carryforwards uncertain tax positions accordance asc 740 income taxes commencing fresh start reporting date summary company’s deferred tax balances february 1 2010 predecessor company’s deferred tax balances december 31 2009 follows see note 8 “income taxes” additional information prepaid expenses current assets prepaid directory costs relate directories yet published fresh start reporting date prepaid directory costs recorded fair value determined estimated billable value published directory less b expected costs complete directory plus c normal profit margin incremental adjustment step recorded value prepaid directory costs fair value hereby referred “costuplift” fair value costs determined 144 million recorded fresh start accounting adjustment dex one’s opening balance sheet costuplift reclassified prepaid expenses current assets deferred directory costs directories associated costs published prepaid expenses current assets carried forward dex one’s opening balance sheet nature items relate predominantly prepaid deposits rents amounts paid advance cash amortized 12 month period match timing use related assets valuation adjustments necessary items book value reasonable estimate fair value fixed assets fixed assets measured fair value amounts accumulated depreciation reduced zero establishing fair value used cost approach current replacement cost fixed asset appraised adjusted loss value caused physical deterioration functional obsolescence economic obsolescence ii thirdparty appraisals certain fixed assets buildings company carried forward useful lives fixed assets predecessor company reviewed predecessor company december 31 2009 approach deemed reasonable since information used analysis performed determine useful lives materially differ january 31 2010 noncurrent assets historically noncurrent assets comprised unamortized deferred financing costs well various items unamortized deferred financing costs associated predecessor company’s credit facilities written fresh start accounting throughout bankruptcy adoption fresh start accounting credit facilities subject compromise condensed consolidated balance sheet therefore unamortized deferred financing costs associated credit facilities written reorganization items net consolidated statement operations fresh start reporting date intangible assets financial information assumptions used determine fair value individual intangible assets consistent information assumptions used estimating enterprise value dex one following summary methodology used valuation category intangible asset directory services agreements company acquired directory services agreements prior acquisitions see note 2 “summary significant accounting policies identifiable intangible assets goodwill” additional information directory services agreements directory services agreements direct contribution financial performance business company utilized multiperiod excess earnings method variant income approach assign fair value assets multiperiod excess earnings method uses discounted cash flow model whereby projected cash flows intangible asset computed indirectly means future cash flows projected deductions made recognize returns appropriate contributory assets leaving excess residual net cash flow indicative intangible asset fair value multiperiod excess earnings method assumes value derived respective asset greater earlier years steadily declines time local national customer relationships company acquired significant local national customer relationships prior acquisitions also developed significant new local national customer relationships local national customer relationships provide ongoing repeat business company given direct contribution made local national customer relationships financial performance business company utilized multiperiod excess earnings method assign fair value assets trade names trademarks fair value trade names trademarks obtained result prior acquisitions determined based income approach known “relief royalty” method values trade names trademarks based estimated amount company would pay arms length transaction use significant assumptions utilized value assets forecasted revenue streams estimated applicable royalty rates applicable income tax rates appropriate discount rates royalty rates estimated based assessment risk return investment factors comparable transactions technology advertising commitments company’s developed software technology content direct contribution financial performance business valued using cost approach cost approach measures value intangible asset quantifying aggregate expenditures would required replace asset given future service capability advertising commitments includes thirdparty contracts valued using multiperiod excess earnings method company established useful lives intangible assets noted conjunction fair value determination fresh start accounting see note 2 “summary significant accounting policies identifiable intangible assets goodwill” information useful lives analysis performed 4 reorganization items net liabilities subject compromise reorganization items net reorganization items directly associated process reorganizing business chapter 11 recorded separate line item consolidated statement operations predecessor company recorded 78 billion reorganization items one month ended january 31 2010 comprised 45 billion gain reorganization settlement liabilities subject compromise fresh start accounting adjustments 33 billion following table displays details reorganization items one month ended january 31 2010 see note 3 “fresh start accounting” information gain reorganization settlement liabilities subject compromise fresh start accounting adjustments presented year ended december 31 2009 predecessor company recorded 948 million reorganization items separate line item consolidated statement operations following table displays details reorganization items year ended december 31 2009 predecessor company incurred professional fees associated filing chapter 11 petitions 774 million year ended december 31 2009 676 million paid cash professional fees include financial legal valuation services directly associated reorganization process writeoff unamortized deferred financing costs 645 million unamortized net premiums discounts 349 million unamortized fair value adjustments required gaap result dex media merger 785 million may 28 2009 relate longterm debt classified liabilities subject compromise december 31 2009 predecessor company recognized 35 million year ended december 31 2009 associated rejected leases abandoned property approved bankruptcy court december 31 2009 part chapter 11 cases 2009 predecessor company receive operating cash receipts resulting filing chapter 11 petitions liabilities subject compromise see note 3 “fresh start accounting” information accounting reporting items identified liabilities subject compromise table identifies principal categories liabilities subject compromise december 31 2009 5 restructuring charges successor company actions fourth quarter 2010 company initiated restructuring plan includes headcount reductions consolidation responsibilities vacating leased facilities “2010 actions” continue 2011 employees affected result 2010 actions notified termination fourth quarter 2010 none leased facilities vacated result 2010 actions recognized restructuring charge earnings 186 million made payments 07 million eleven months ended december 31 2010 related severance following table shows activity restructuring reserve associated 2010 actions company anticipates additional charges earnings related severance charges earnings associated vacating leased facilities conjunction 2010 actions 2011 amounts determined time predecessor company actions 2009 predecessor company initiated restructuring plan included vacating leased facilities headcount reductions “2009 actions” eleven months ended december 31 2010 company relieved remaining restructuring reserve associated 2009 actions 02 million earnings company made payments associated 2009 actions 03 million eleven months ended december 31 2010 one month ended january 31 2010 predecessor company relieved portion restructuring reserve associated 2009 actions 06 million corresponding credit earnings predecessor company make payments associated 2009 actions one month ended january 31 2010 year ended december 31 2009 predecessor company recognized restructuring charge earnings associated 2009 actions 54 million made payments 24 million second quarter 2008 predecessor company initiated restructuring plan included headcount reductions consolidation responsibilities vacating leased facilities “2008 actions” occurred 2008 continued 2009 years ended december 31 2009 2008 predecessor company recognized restructuring charge earnings associated 2008 actions 93 million 386 million respectively payments 175 million 284 million made respect outside consulting services severance vacated leased facilities years ended december 31 2009 2008 respectively restructuring charges credited charged earnings included production distribution expenses selling support expenses general administrative expenses consolidated statements operations applicable 6 longterm debt credit facilities notes successor company following table presents fair market value longterm debt december 31 2010 based quoted market prices date well carrying value longterm debt december 31 2010 includes 910 million unamortized fair value discount adjustments required gaap connection company’s adoption fresh start accounting fresh start reporting date see note 3 “fresh start accounting” additional information credit facilities rhdi amended restated credit facility december 31 2010 outstanding balance amended restated rhdi credit facility “rhdi amended restated credit facility” totaled 10145 million rhdi amended restated credit facility requires quarterly principal interest payments option either rhdi amended restated credit facility matures october 24 2014 weighted average interest rate outstanding debt rhdi amended restated credit facility 90 december 31 2010 dex media east amended restated credit facility december 31 2010 outstanding balance amended restated dex media east credit facility “dex media east amended restated credit facility” totaled 7391 million dex media east amended restated credit facility requires quarterly principal interest payments option either dex media east amended restated credit facility matures october 24 2014 weighted average interest rate outstanding debt dex media east amended restated credit facility 28 december 31 2010 dex media west amended restated credit facility december 31 2010 outstanding balance amended restated dex media west credit facility “dex media west amended restated credit facility” totaled 6836 million dex media west amended restated credit facility requires quarterly principal interest payments option either dex media west amended restated credit facility matures october 24 2014 weighted average interest rate outstanding debt dex media west amended restated credit facility 70 december 31 2010 amended restated credit facilities described includes uncommitted revolving credit facility available borrowings 400 million availability uncommitted revolving credit facility subject certain conditions including prepayment term loans amended restated credit facilities amount equal revolving credit facility amended restated credit facilities contain provisions prepayment net proceeds asset dispositions equity issuances debt issuances subject certain exceptions ratable portion net proceeds received company asset dispositions company subject certain exceptions portion excess cash flow amended restated credit facilities described contain certain covenants subject exceptions limit restrict borrower subsidiaries’ incurrence liens investments including acquisitions sales assets indebtedness payment dividends distributions payments certain indebtedness sale leaseback transactions swap transactions affiliate transactions capital expenditures mergers liquidations consolidations amended restated credit facility also contains certain covenants subject exceptions limit restrict borrower’s incurrence liens indebtedness ownership assets sales assets payment dividends distributions modifications dex one senior subordinated notes borrower required maintain compliance consolidated leverage ratio covenant rhdi dmw inc also required maintain compliance consolidated interest coverage ratio covenant dmw inc also required maintain compliance consolidated senior secured leverage ratio covenant dex media west amended restated credit agreement includes option additional covenant relief senior secured leverage covenant fourth quarter 2011 subject increased amortization loans first quarter 2012 increase excess cash flow sweep 2011 payment 25 basis point fee ratably lenders dex media west amended restated credit agreement march 31 2010 company exercised senior secured leverage ratio election defined dex media west amended restated credit agreement company incurred fee 21 million exercise option obligations amended restated credit facilities guaranteed subsidiaries secured lien substantially subsidiaries’ tangible intangible assets including pledge stock respective subsidiaries well mortgage certain real property pursuant shared guaranty collateral agreement subject intercreditor agreement among administrative agents amended restated credit facilities company subject certain exceptions certain subsidiaries company guaranty obligations amended restated credit facilities obligations secured lien substantially guarantors’ tangible intangible assets company’s subsidiary businesscom including pledge stock respective subsidiaries well mortgage certain real property notes dex one senior subordinated notes effective date issued 3000 million dex one senior subordinated notes exchange dex media west 85 senior notes due 2010 5875 senior notes due 2011 interest dex one senior subordinated notes payable semiannually march 31st september 30th year commencing march 31 2010 january 2017 dex one senior subordinated notes accrue interest annual rate 12 cash interest payments 14 company elects paidinkind “pik” interest payments company may elect prior start interest payment period whether make interest payment dex one senior subordinated notes entirely cash ii 50 cash 50 pik interest capitalized incremental additional senior secured notes eleven months ended december 31 2010 company elected make interest payments entirely cash interest rate dex one senior subordinated notes may subject adjustment event company incurs certain specified debt higher effective yield maturity yield maturity dex one senior subordinated notes dex one senior subordinated notes unsecured obligations company effectively subordinated right payment company’s existing future secured debt including dex one’s guarantee borrowings amended restated credit facilities structurally subordinated existing future liabilities including trade payables direct indirect subsidiaries indenture governing dex one senior subordinated notes contains certain covenants subject certain exceptions among things limit restrict company’s certain cases company’s restricted subsidiaries’ incurrence indebtedness making certain restricted payments incurrence liens entry transactions affiliates conduct business merger consolidation sale substantially property indenture governing dex one senior subordinated notes also requires company offer repurchase dex one senior subordinated notes par certain changes control involving company sale substantially assets company holders dex one senior subordinated notes also may cause company repurchase dex one senior subordinated notes price 101 principal amount upon incurrence company certain acquisition indebtedness dex one senior subordinated notes remaining face value 3000 million december 31 2010 redeemable option beginning 2011 following prices percentage face value aggregate maturities longterm debt including current portion excluding fair value adjustments result fresh start accounting december 31 2010 follows impact fresh start accounting conjunction adoption fresh start accounting adjustment established record outstanding debt fair value fresh start reporting date company required record amended restated credit facilities discount result fair value fresh start reporting date therefore carrying amount debt obligations lower principal amount due maturity total discount 1202 million recorded upon adoption fresh start accounting associated amended restated credit facilities 910 million remains unamortized december 31 2010 shown following table predecessor company effective date accordance plan 61 billion predecessor company’s notes default presented longterm debt subject compromise table exchanged 100 reorganized dex one equity b 3000 million dex one senior subordinated notes issued holders dex media west 85 senior notes due 2010 5875 senior notes due 2011 pro rata basis addition share reorganized dex one equity accordance plan predecessor company’s existing credit facilities amended restated effective date terms conditions noted following table presents carrying value predecessor company’s longterm debt december 31 2009 result filing chapter 11 petitions plan believe meaningful present fair market value predecessor company’s longterm debt december 31 2009 7 derivative financial instruments successor company entered following interest rate swaps effectively convert 5000 million 21 company’s variable rate debt fixed rate debt december 31 2010 since rhdi amended restated credit facility dex media west amended restated credit facility subject libor floor 300 libor rate floor december 31 2010 credit facilities effectively fixed rate debt time libor exceeds stated floor december 31 2010 approximately 89 total debt outstanding consisted variable rate debt excluding effect interest rate swaps including effect interest rate swaps total fixed rate debt comprised approximately 29 total debt portfolio december 31 2010 interest rate swaps mature varying dates february 2012 february 2013 interest rate swaps dex media east terms interest rate swap agreements receive variable interest based threemonth libor pay weighted average fixed rate 15 weighted average rate received interest rate swaps 03 eleven months ended december 31 2010 periodic payments receipts recorded interest expense terms interest rate cap agreements company receive payments based spread rates threemonth libor rate increases cap rates noted table company paid 21 million interest rate cap agreements entered first quarter 2010 required make future payments related interest rate cap agreements interest rate caps rhdi following tables present fair value interest rate swaps interest rate caps december 31 2010 fair value interest rate swaps presented accounts payable accrued liabilities noncurrent liabilities fair value interest rate caps presented prepaid expenses current assets noncurrent assets consolidated balance sheet december 31 2010 following tables also present loss recognized interest expense change fair value interest rate swaps interest rate caps eleven months ended december 31 2010 eleven months ended december 31 2010 company recorded 132 million losses related interest rate swaps interest rate caps earnings including accrued interest predecessor company result filing chapter 11 petitions predecessor company interest rate swaps designated cash flow hedges following table presents fair value predecessor company’s interest rate swaps december 31 2009 fair value predecessor company’s interest rate swaps presented accounts payable accrued liabilities noncurrent liabilities consolidated balance sheet december 31 2009 following table also presents gain loss recognized interest expense change fair value predecessor company’s interest rate swaps one month ended january 31 2010 year ended december 31 2009 gain loss recognized accumulated comprehensive loss effective interest rate swaps year ended december 31 2009 one month ended january 31 2010 predecessor company recorded 30 million losses related interest rate swaps earnings including accrued interest accordance fresh start accounting unamortized amounts previously charged accumulated comprehensive loss 153 million related predecessor company’s interest rate swaps eliminated fresh start reporting date see note 3 “fresh start accounting” additional information years ended december 31 2009 2008 predecessor company recorded 410 million 571 million losses related interest rate swaps earnings including accrued interest effective date liabilities associated predecessor company’s unsettled terminated interest rate swaps 378 million excluding accrued interest converted new tranche term loans company’s amended restated credit facilities follows april 15 2009 predecessor company exercised 30day grace period interest payments due 8875 series a4 senior notes due 2017 result exercising 30day grace period certain existing dex media east llc interest rate swaps required settled may 28 2009 cash settlement payments 264 million made second quarter 2009 associated interest rate swaps result decline certain predecessor company’s credit ratings existing dex media west llc interest rate swap required settled april 23 2009 cash settlement payment 05 million made second quarter 2009 associated interest rate swap 8 income taxes current income tax provision benefit represents estimated taxes payable refundable current year based enacted tax laws rates deferred income tax assets liabilities determined based estimated future tax effects temporary differences financial statement tax basis assets liabilities measured tax rates temporary differences expected reverse deferred income tax provision benefit result changes deferred income tax assets liabilities valuation allowance recognized reduce gross deferred tax assets amount likely realized components provision benefit income taxes reconciliation statutory federal tax rate effective tax rate components deferred tax assets liabilities reconciliation gross unrecognized tax benefits successor company components benefit income taxes income tax benefit 6201 million eleven months ended december 31 2010 comprised federal tax benefit 5677 million state tax benefit 524 million federal tax benefit 5677 million comprised current tax provision 13 million primarily related unrecognized tax benefits deferred tax benefit 5690 million primarily related current year net operating loss recognition unrecognized tax position goodwill impairment charges eleven months ended december 31 2010 state tax benefit 524 million comprised current tax benefit 38 million primarily related expected state tax refunds deferred tax benefit 486 million primarily related recognition unrecognized tax position eleven months ended december 31 2010 reconciliation statutory federal tax rate effective tax rate effective tax rate benefit 402 higher federal statutory tax rate 350 primarily due increases income tax benefits recognition unrecognized tax position offset part increase income tax expense related nondeductible impairment charge components deferred tax assets liabilities total deferred tax assets valuation allowance 3033 million total deferred tax liabilities 3273 million december 31 2010 deferred tax assets 2128 million represent net operating loss credit carryforwards assessing amount deferred tax assets likely realized established valuation allowance 976 million representing extent deferred tax assets supported future reversals existing taxable temporary differences reconciliation gross unrecognized tax benefits tax years 2007 2009 subject examination internal revenue service “irs” certain state tax returns examination various regulatory authorities state tax return years open examination average three years however certain jurisdictions remain open examination longer three years due existence net operating loss carryforwards statutory waivers continually review issues raised connection ongoing examinations open tax years evaluate adequacy reserves believe accrued tax liabilities fasb asc 740 adequate cover uncertain tax positions related federal state income taxes included balance unrecognized tax benefits december 31 2010 246 million tax benefits recognized would favorably affect effective tax rate policy recognize interest penalties related unrecognized tax benefits income tax expense eleven months ended december 31 2010 company recognized 05 million interest penalties due unrecognized tax benefits december 31 2010 accrued 80 million related interest amounts accrued tax penalties december 31 2010 eleven months ended december 31 2010 decreased liability unrecognized tax benefits 3706 million primarily related internal revenue code section 382 “section 382” limitations see “other” additional information impact decrease liability unrecognized tax benefits effective tax rate eleven months ended december 31 2010 reasonably possible 203 million unrecognized tax benefits december 31 2010 could decrease within next twelve months amount relates uncertainty surrounding deductibility certain accrued expenses reasonably possible applicable statute limitations may lapse within next twelve months could require reduction unrecognized tax benefits december 31 2010 company federal state net operating loss carryforwards approximately 3598 million 19561 million respectively begin expire 2030 2011 respectively 2009 predecessor company accrued unrecognized tax benefit uncertainty surrounding potential ownership change section 382 occurred prior date made “checkthebox” election two subsidiaries date change ownership question since december 31 2009 balance sheet date predecessor company unable confirm actual date ownership change sec forms 13g filed however based upon closing sec filing period schedules 13g review schedules filed february 15 2010 company determined likely certain “checkthebox” elections effective prior date 2009 ownership change section 382 result company recorded tax benefit reversal liability unrecognized tax benefit 3523 million company’s statement operations eleven months ended december 31 2010 significantly impacted effective tax rate period result goodwill nongoodwill intangible asset impairment charges eleven months ended december 31 2010 recognized nondeductible adjustment effective tax rate 195 2999 million certificate incorporation contains provisions generally prohibiting acquisition 49 common stock one person group persons whose shares would aggregated pursuant section 382 ii acquisition additional common stock persons already owning 49 common stock case february 2 2011 shorter period may determined board directors without restrictions possible certain changes ownership common stock could result imposition limitations ability company subsidiaries fully utilize net operating losses tax attributes currently available us federal state income tax purposes connection company’s adoption fresh start accounting evaluated temporary differences company recorded significant deferred tax liabilities associated intangible assets deferred revenue reduced deferred tax liabilities zero related interest costs deferred tax assets zero related deferred financing costs recognized though cancellation debt due reduction tax basis incremental deferred tax liability created utilized company’s valuation allowance assessment result company reduced valuation allowance net deferred tax liability position 1217 million december 31 2010 discharge debt conjunction emergence chapter 11 resulted tax gain 50166 million generally discharge debt obligation amount less adjusted issue price creates cancellation indebtedness income “codi” must included company’s taxable income however recognition codi limited taxpayer debtor reorganization case discharge granted bankruptcy court pursuant plan reorganization approved bankruptcy court plan enabled predecessor company qualify bankruptcy exclusion rule exclude gain settlement debt obligations derivative liabilities taxable income however accordance internal revenue code “irc” section 108 lieu recognizing taxable income bankruptcyrelated codi company required reduce existing tax attributes result upon emergence bankruptcy company adjusted certain deferred tax assets liabilities reflect estimated future reductions certain tax attributes primarily net operating loss carryforwards intangible asset basis subsidiary stock basis accordance fasb asc 852 company truedup previous attribute reduction estimates january 31 2010 reflect actual attribute reduction december 31 2010 resulting 1584 million decrease deferred tax liabilities goodwill predecessor company one month ended january 31 2010 components provision income taxes income tax provision 9175 million one month ended january 31 2010 comprised federal tax provision 7928 million state tax provision 1248 million federal tax provision comprised current tax provision 06 million primarily related increase federal tax accrual related unrecognized tax benefits deferred tax provision 7922 million primarily related reduction predecessor company’s tax attributes accordance irc section 108 state tax provision 1248 million comprised current tax provision less 01 million deferred tax provision 1247 million primarily related reduction predecessor company’s tax attributes accordance irc section 108 reconciliation statutory federal tax rate effective tax rate effective tax rate provision 117 lower statutory federal tax rate 350 primarily due decreases income tax expense nontaxable fresh start adjustments release valuation allowance offset part increases income tax expense estimated loss tax attributes due cancellation debt income emergence impact state taxes reconciliation gross unrecognized tax benefits included balance unrecognized tax benefits january 31 2010 3770 million tax benefits recognized would favorably affect effective tax rate one month ended january 31 2010 predecessor company recognized 04 million interest penalties due unrecognized tax benefits january 31 2010 predecessor company accrued 83 million related interest amounts accrued tax penalties january 31 2010 predecessor company year ended december 31 2009 components benefit income taxes 2009 income tax benefit 9285 million comprised federal tax benefit 7835 million state tax benefit 1450 million 2009 federal tax benefit comprised current tax benefit 29 million primarily related decrease federal tax accrual due amended return filings deferred tax benefit 7807 million primarily related intangible asset impairment charges 2009 offset part valuation allowance discussed 2009 state tax benefit 1450 million comprised current tax benefit 118 million relates favorable settlement prior year state tax audits 2009 reversal associated state liabilities deferred tax benefit 1332 million primarily related intangible asset impairment charges 2009 offset part valuation allowance discussed result filing chapter 11 petitions predecessor company reclassified certain income tax liabilities relating tax periods prior petition date 288 million liabilities subject compromise consolidated balance sheet december 31 2009 see note 3 “reorganization items net liabilities subject compromise” additional information reconciliation statutory federal tax rate effective tax rate 2009 effective tax rate benefit 126 lower statutory federal tax rate 350 primarily due recording valuation allowance deferred tax assets irc section 382 limitation loss carryforwards offset part impact state taxes components deferred tax assets liabilities total deferred tax assets valuation allowance 19890 million total deferred tax liabilities 1654 million deferred tax assets 12461 million represent tax deductible irc section 197 intangible assets amortizing 15year period approximately 8 15 years remain assessing amount deferred tax assets likely realized established full valuation allowance 15319 million representing extent deferred tax assets supported future reversals existing taxable temporary differences taxable income net operating loss carryback years unrecognized tax benefits reconciliation gross unrecognized tax benefits included balance unrecognized tax benefits december 31 2009 2889 million tax benefits recognized would favorably affect effective tax rate year ended december 31 2009 predecessor company recognized 33 million interest penalties due unrecognized tax benefits december 31 2009 predecessor company accrued 75 million related interest amounts accrued tax penalties december 31 2009 december 2009 predecessor company effectively settled issues consideration department finance new york state audit tax years 2000 2006 department revenue north carolina audit tax years 2003 2008 result settlements unrecognized tax benefit associated predecessor company’s uncertain state tax positions decreased 76 million new york state 97 million north carolina year ended december 31 2009 decrease unrecognized tax benefits decreased predecessor company’s effective tax rate year ended december 31 2009 unrecognized tax benefits impacted new york state north carolina audits primarily related apportionment allocation income among predecessor company’s legal entities 2009 predecessor company increased liability unrecognized tax benefits 2764 million reflecting uncertainty whether ownership change section 382 occurred prior date elected modify tax classification two subsidiaries date change ownership question balance sheet date predecessor company able confirm actual date ownership change sec forms 13g filed stockholders forty five days following end calendar year file forms sec based due date actual ownership change date confirmed february 15 2010 addition predecessor company increased liability unrecognized tax benefits 15 million relating uncertainty surrounding deductibility certain accrued expenses predecessor company year ended december 31 2008 components benefit income taxes 2008 income tax benefit 12777 million comprised federal tax benefit 11287 million state tax benefit 1490 million 2008 federal tax benefit comprised current tax provision 239 million primarily related increase predecessor company’s liability unrecognized tax benefit offset deferred income tax benefit 11526 million primarily related goodwill impairment charges 2008 state tax benefit 1490 million comprised current tax provision 103 million relates taxes due states subsidiaries predecessor company file separate tax returns well increase predecessor company’s liability unrecognized tax benefit offset deferred income tax benefit 1593 million primarily related goodwill impairment charges 2008 predecessor company utilized federal net operating losses income tax purposes 41 million primarily resulting taxable gains associated certain financing activities conducted 2008 income tax benefit includes income tax benefit 203 million correcting overstated income tax expense fiscal years 2004 2007 predecessor company evaluated materiality correction concluded material 2008 earlier financial statements accordingly predecessor company recorded correction fourth quarter 2008 reconciliation statutory federal tax rate effective tax rate effective tax rate benefit 357 slightly higher federal statutory tax rate 350 primarily due impact state income taxes permanent booktax differences offset part nondeductible impairment expenses reconciliation gross unrecognized tax benefits included balance unrecognized benefits december 31 2008 346 million tax benefits recognized would favorably affect effective tax rate year ended december 31 2008 company recognized approximately 44 million interest penalties due unrecognized tax benefits 9 stock incentive plans eleven months ended december 31 2010 company recognized 45 million stockbased compensation expense related stockbased awards granted eip ceo stockbased awards prior cancellation equity awards predecessor company recognized stockbased compensation expense related stockbased awards granted various employee nonemployee stock incentive plans 06 million 114 million 295 million one month ended january 31 2010 years ended december 31 2009 2008 respectively fair value company’s predecessor company’s stock options sars market condition calculated using blackscholes model time stockbased awards granted fair value company’s stock options sars market condition calculated using monte carlo model time stockbased awards granted fair value net estimated forfeitures amortized vesting period respective stockbased award compensation expense related restricted stock granted employees including executive officers nonemployee directors measured fair value date grant based number shares granted quoted market price company’s predecessor company’s common stock time fair value net estimated forfeitures amortized vesting period respective stockbased award company granted 21 million stock options sars 02 million shares restricted stock eleven months ended december 31 2010 predecessor company grant stock options sars restricted stock one month ended january 31 2010 year ended december 31 2009 weighted average fair value per share stock options sars granted company eleven months ended december 31 2010 813 weighted average fair value per share stock options sars granted predecessor company year ended december 31 2008 249 following assumptions used valuing stockbased awards recognition allocation stockbased compensation expense eleven months ended december 31 2010 year ended december 31 2008 respectively since company recently emerged bankruptcy sufficient companyspecific historical data order determine certain assumptions used valuing stockbased awards company utilized data industry sources peer competitive company data order estimate expected volatility assumption used valuing stock based awards eleven months ended december 31 2010 predecessor company estimated expected volatility based historical volatility price common stock expected life stockbased awards expected life represents period time stockbased awards granted expected outstanding company predecessor company estimated expected life using simplified method permitted staff accounting bulletin 110 use simplified method developing expected term share options stockbased awards satisfied “plain vanilla” criteria simplified method calculates expected life average vesting contractual terms award riskfree interest rate company predecessor company based applicable us treasury yields approximate expected life stockbased awards granted company predecessor company eleven months ended december 31 2010 company used actual voluntary turnover data first quarter 2010 estimate weighted average forfeiture rate predecessor company used historical data estimate forfeiture rate one month ended january 31 2010 years ended december 31 2009 2008 estimated forfeitures adjusted extent actual forfeitures differ expected materially differ estimates derived service periods associated stockbased awards market condition calculated determining average time company’s stock price reached given exercise price across monte carlo simulations stock price reach exercise price company excluded paths following table presents summary predecessor company’s successor company’s stock options sars activity related information one month ended january 31 2010 eleven months ended december 31 2010 respectively 1 upon emergence chapter 11 pursuant plan outstanding equity securities predecessor company including stock options sars restricted stock cancelled intrinsic value company’s predecessor company’s stock options sars vested december 31 2010 december 31 2009 respectively total fair value company’s stock options sars vested year ended december 31 2010 20 million total fair value predecessor company’s stock options sars vested one month ended january 31 2010 year ended december 31 2009 37 million 40 million respectively following table summarizes information company’s stockbased awards outstanding exercisable december 31 2010 aggregate intrinsic value company’s exercisable stockbased awards december 31 2010 following table summarizes status predecessor company’s successor company’s nonvested stock awards january 31 2010 december 31 2010 respectively changes one month ended january 31 2010 eleven months ended december 31 2010 respectively december 31 2010 102 million total unrecognized compensation cost related nonvested stockbased awards intrinsic value nonvested stockbased awards expected vest december 31 2010 corresponding weighted average grant date exercise price 2512 per share components successor company stockbased compensation expense ceo stockbased awards grant date accounting reporting purposes september 13 2010 represents date grant date determination provisions outlined fasb asc 718 compensation stock compensation satisfied see note 1 “business basis presentation new chief executive officer president” information ceo stockbased awards eleven months ended december 31 2010 recognized stockbased compensation expense 04 million associated ceo stockbased awards september 13 2010 company issued less 01 million shares common stock members executive oversight committee “eoc” service eoc shares common stock vested immediately upon issuance company recorded 02 million stockbased compensation expense related issuance eleven months ended december 31 2010 march 1 2010 pursuant plan company granted 13 million sars certain employees including executive officers intended plan conjunction eip sars settled common stock granted grant price 2868 per share equal volume weighted average market value common stock first thirty calendar days upon emergence chapter 11 vest ratably three years march 1 2010 company also issued less 01 million shares common stock members board directors shares common stock vested immediately upon issuance company recorded 39 million stockbased compensation expense related march 1 2010 grants eleven months ended december 31 2010 components predecessor company stockbased compensation expense upon emergence chapter 11 pursuant plan outstanding equity securities predecessor company including stock options sars restricted stock cancelled result predecessor company recognized 19 million remaining unrecognized compensation expense related stockbased awards reorganization items net one month ended january 31 2010 april 2009 predecessor company increased estimated forfeiture rate determining compensation expense 8 102 adjustment based review historical forfeiture information resulted reduction compensation expense 04 million year ended december 31 2009 march 4 2008 predecessor company granted 22 million sars certain employees including executive officers conjunction annual grant stock incentive awards sars granted grant price 711 per share equal market value predecessor company’s common stock grant date vested ratably three years predecessor company recognized compensation expense related sars 01 million 22 million 43 million one month ended january 31 2010 years ended december 31 2009 2008 respectively february 27 2007 predecessor company granted 11 million sars certain employees including executive officers conjunction annual grant stock incentive awards sars granted grant price 7431 per share equal market value predecessor company’s common stock grant date vested ratably three years predecessor company recognized compensation expense related sars 04 million 52 million 55 million one month ended january 31 2010 years ended december 31 2009 2008 respectively result businesscom acquisition 42 million outstanding businesscom equity awards converted 02 million rhd equity awards august 23 2007 one month ended january 31 2010 years ended december 31 2009 2008 predecessor company recognized compensation expense related converted equity awards 01 million 03 million 37 million respectively december 13 2006 predecessor company granted 01 million shares restricted stock certain executive officers restricted shares granted grant price 6064 per share equal market value predecessor company’s common stock date grant vesting restricted shares contingent upon predecessor company’s common stock equaling exceeding 6500 per share 20 consecutive trading days continued employment predecessor company third anniversary date grant predecessor company recognized compensation expense related restricted shares 07 million years ended december 31 2009 2008 february 21 2006 predecessor company granted 01 million shares restricted stock certain employees including executive officers restricted shares granted grant price 6426 per share equal market value predecessor company’s common stock date grant vested ratably three years predecessor company recognized compensation expense related restricted shares 03 million 16 million years ended december 31 2009 2008 respectively february 21 2006 predecessor company granted 06 million sars certain employees including executive officers conjunction annual grant stock incentive awards sars granted grant price 6426 per share equal market value predecessor company’s common stock grant date vested ratably three years predecessor company recognized compensation expense related smaller sar grants 06 million 36 million years ended december 31 2009 2008 respectively connection dex media merger predecessor company granted october 3 2005 11 million sars certain employees including executive officers sars granted exercise price 6500 prevailing market price predecessor company’s common stock vested ratably three years award sars contingent upon successful completion dex media merger sars became fully vested 2008 compensation expense recognized year ended december 31 2009 predecessor company recognized compensation expense related sars 54 million year ended december 31 2008 result dex media merger outstanding dex media equity awards converted rhd equity awards february 1 2006 predecessor company recognize compensation expense related converted awards year ended december 31 2009 year ended december 31 2008 compensation expense related converted awards totaled 18 million dex media merger triggered change control predecessor company’s stock incentive plans accordingly awards granted employees january 31 2006 exception stockbased awards held executive officers members board directors waived change control provisions awards became fully vested predecessor company recognize compensation expense related modifications year ended december 31 2009 year ended december 31 2008 02 million compensation expense included total compensation expense amounts noted recognized result modifications stockbased compensation expense relating existing stock options held executive officers members predecessor company’s board directors january 1 2006 modified result dex media merger well stockbased compensation expense smaller grants issued subsequent dex media merger mentioned totaled 21 million 28 million years ended december 31 2009 2008 respectively 10 benefit plans company two defined benefit pension plans dex one retirement plan formerly rhd retirement plan dex media pension plan defined participate dex one corporation retirement account master trust “master trust” three defined contribution plans dex one 401k savings plan dex media inc employee savings plan businesscom inc 401k plan two postretirement plans dex one group benefit plan dex media group benefit plan summary plans provided dex one retirement plan dex one cash balance defined benefit pension plan “dex one retirement plan” covers substantially legacy dex one employees least one year service benefits paid employees based age years service percentage total annual compensation percentage compensation allocated retirement account ranges 30 125 depending age years service “cash balance benefit” benefits certain employees participants predecessor dun bradstreet corporation “db” defined benefit pension plan also determined based participant’s average compensation years service “final average pay benefit” benefits paid equal greater final average pay benefit cash balance benefit annual pension costs determined using projected unit credit actuarial cost method funding policy contribute amount least equal minimum legal funding requirement company required make contributions 10 million dex one retirement plan eleven months ended december 31 2010 predecessor company required make contributions dex one retirement plan one month ended january 31 2010 predecessor company required make contributions 102 million 57 million dex one retirement plan years ended december 31 2009 2008 respectively underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities measurement date december 31 used plan assets also unfunded nonqualified defined benefit pension plan pension benefit equalization plan “pbep” covers senior executives certain key employees benefits based years service compensation including compensation permitted taken account previously mentioned defined benefit pension plan dex media pension plan noncontributory defined benefit pension plan covering substantially nonunion union employees within dex media “dex media pension plan” annual pension costs determined using projected unit credit actuarial cost method funding policy contribute amount least equal minimum legal funding requirement company required make contributions 88 million dex media pension plan eleven months ended december 31 2010 predecessor company required make contributions dex media pension plan one month ended january 31 2010 predecessor company required make contributions 398 million 95 million dex media pension plan years ended december 31 2009 2008 respectively underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities measurement date december 31 used plan assets company frozen dex media pension plan covering cwa ibew represented employees dex one retirement plan dex media pension plan covering nonunion employees connection freeze pension plan benefit accruals cwa ibew plan participants ceased december 31 2009 pension plan benefit accruals nonunion plan participants ceased december 31 2008 however plan balances remained intact interest credits participant account balances account balance formula well service credits vesting retirement eligibility continue accordance terms plans addition supplemental transition credits provided certain plan participants nearing retirement would otherwise lose portion anticipated pension benefit age 65 result freezing current plans similar supplemental transition credits provided certain plan participants grandfathered final average pay formula defined benefit plans previously converted traditional pension plans cash balance plans dex one dex media businesscom savings plans savings plans contribute 100 dollar contributed participating employees maximum 6 participating employee’s salary including bonus commissions contributions made company fully vested participants completed one year service company made contributions dex one 401k savings plan 87 million dex media inc employee savings plan 47 million businesscom inc 401k plan 03 million eleven months ended december 31 2010 contributions made predecessor company dex one 401k savings plan 05 million 88 million 27 million one month ended january 31 2010 years ended december 31 2009 2008 respectively contributions made predecessor company dex media inc employee savings plan 04 million 23 million 51 million one month ended january 31 2010 years ended december 31 2009 2008 respectively contributions made predecessor company businesscom inc 401k plan 01 million 05 million one month ended january 31 2010 year ended december 31 2009 respectively contributions made predecessor company businesscom inc 401k plan 2008 company maintains dex one 401k restoration plan employees compensation excess irs annual limits benefits information union employees benefits information nonunion employees • nonsubsidized access retiree health care life insurance benefits eliminated effective january 1 2009 • subsidized retiree health care benefits medicareeligible retirees eliminated effective january 1 2009 • threeyear phase subsidized retiree health care benefits commenced january 1 2009 nonunion retiree health care benefits terminating december 31 2011 except continued nonsubsidized access retiree benefits retirees enrolled december 31 2008 respect phase subsidized retiree health care benefits eligible retiree becomes medicareeligible point time phase process noted retiree longer eligible retiree health care coverage second quarter 2010 recognized onetime curtailment gain 38 million associated departure company’s former chief executive officer included general administrative expenses consolidated statement operations eleven months ended december 31 2010 result implementing freeze dex media pension plan covering cwa ibew represented employees predecessor company recognized onetime net curtailment gain 42 million year ended december 31 2009 entirely offset losses incurred plan assets previously unrecognized prior service costs charged accumulated comprehensive loss result eliminating retiree health care life insurance benefits cwa ibew represented employees predecessor company recognized onetime curtailment gain 520 million included general administrative expenses consolidated statement operations year ended december 31 2009 result actions longer incur funding expenses administrative costs associated retiree health care life insurance plans cwa ibew represented employees result implementing freeze defined benefit plans covering nonunion employees predecessor company recognized onetime net curtailment loss 16 million year ended december 31 2008 consisting curtailment gain 136 million entirely offset losses incurred plan assets recognition previously unrecognized prior service costs charged accumulated comprehensive loss result eliminating retiree health care life insurance benefits nonunion employees predecessor company recognized onetime curtailment gain 396 million included general administrative expenses consolidated statement operations year ended december 31 2008 result actions longer incur funding expenses administrative costs associated retiree health care life insurance plans nonunion employees benefit obligation funded status summary funded status company’s benefit plans december 31 2010 predecessor company’s benefit plans december 31 2009 follows net amounts recognized company’s consolidated balance sheet december 31 2010 predecessor company’s consolidated balance sheet december 31 2009 follows accumulated benefit obligation qualified defined benefit pension plans company 2572 million december 31 2010 accumulated benefit obligation qualified defined benefit pension plans predecessor company 2496 million december 31 2009 company’s predecessor company’s projected benefit obligation accumulated benefit obligation unfunded pbep december 31 2010 2009 follows components net periodic benefit income expense net periodic benefit income expense company’s pension plans eleven months ended december 31 2010 predecessor company’s pension plans one month ended january 31 2010 years ended december 31 2009 2008 follows net periodic benefit income expense company’s postretirement plans eleven months ended december 31 2010 predecessor company’s postretirement plans one month ended january 31 2010 years ended december 31 2009 2008 follows accordance fresh start accounting reporting unamortized amounts previously charged accumulated comprehensive loss eliminated fresh start reporting date see note 3 “fresh start accounting” additional information december 31 2010 previously unrecognized actuarial gains losses prior service cost accumulated comprehensive loss expected recognized net periodic benefit expense 2011 amounts recognized accumulated comprehensive loss company december 31 2010 predecessor company december 31 2009 consist following assumptions conjunction emergence chapter 11 predecessor company performed remeasurement pension postretirement obligations january 31 2010 following assumptions used determining benefit obligations company’s pension plans postretirement plans eleven months ended december 31 2010 predecessor company’s pension plans postretirement plans one month ended january 31 2010 year ended december 31 2009 discount rate reflects current rate pension postretirement obligations could effectively settled end year eleven months ended december 31 2010 company utilized outsource provider’s yield curve determine appropriate discount rate defined benefit pension plans based individual plans’ expected future cash flows january 2010 year ended december 31 2009 predecessor company utilized outsource provider’s yield curve determine appropriate discount rate defined benefit pension plans year ended december 31 2008 predecessor company utilized citigroup pension liability index appropriate discount rate defined benefit pension plans predecessor company changed outsource provider’s yield curve 2009 better reflect specific cash flows plans determining discount rate since pension plans frozen rate increase future compensation utilized calculate benefit obligations company december 31 2010 predecessor company december 31 2009 ratification freeze predecessor company’s defined benefit plans november 6 2009 june 12 2009 “ratification dates” october 21 2008 “notification date” resulted curtailments required remeasurement plans’ liabilities net periodic benefit expense december 31 2009 july 1 2009 november 1 2008 december 31 2010 may 31 2009 settlements dex one’s pbep occurred time lump sum payments participants exceeded sum service cost plus interest cost components net periodic benefit expense year settlements resulted recognition actuarial loss less 01 million eleven months ended december 31 2010 actuarial gain less 01 million year ended december 31 2009 pension expense dex one’s pbep recomputed based assumptions june 1 2009 december 31 2009 resulting increase discount rate 587 687 december 31 2009 june 1 2009 april 1 2009 december 31 2008 october 31 2008 july 1 2008 thereafter settlements dex media’s pension plan occurred time lump sum payments participants exceeded sum service cost plus interest cost components net periodic benefit expense year settlements resulted recognition actuarial losses 61 million 35 million years ended december 31 2009 2008 respectively pension expense one month ended january 31 2010 recomputed based assumptions january 31 2010 resulting decrease discount rate 572 570 pension expense 2009 recomputed based assumptions june 1 2009 december 31 2009 resulting increase discount rate 587 687 pension expense 2008 recomputed based assumptions july 1 2008 november 1 2008 settlement dates resulting increase discount rate 648 682 finally 801 following assumptions used determining company’s net periodic benefit expense dex one retirement plan dex media pension plan eleven months ended december 31 2010 following assumptions used determining predecessor company’s net periodic benefit expense dex one retirement plan following assumptions used determining predecessor company’s net periodic benefit expense dex media pension plan weighted average discount rate used company determine net periodic benefit expense dex one postretirement plan dex media postretirement plan 570 eleven months ended december 31 2010 elimination retiree health care life insurance benefits ratification dates notification date resulted curtailments required remeasurement plans’ liabilities net periodic benefit expense june 1 2009 december 31 2009 november 1 2008 weighted average discount rate used predecessor company determine net periodic benefit expense dex one postretirement plan 570 one month ended january 31 2010 587 2009 801 period november 1 2008 december 31 2008 648 january 1 2008 october 31 2008 respectively weighted average discount rate used predecessor company determine net periodic benefit expense dex media postretirement plan 570 one month ended january 31 2010 687 period june 1 2009 december 31 2009 587 period january 1 2009 may 31 2009 801 period november 1 2008 december 31 2008 682 july 1 2008 october 31 2008 648 january 1 2008 june 30 2008 respectively healthcare cost trend rate assumptions longer required since company terminated postretirement plans following table reflects assumed healthcare cost trend rates used determining net periodic benefit expense benefit obligations predecessor company’s postretirement plans prior termination plan assets fair value assets held master trust december 31 2010 2009 asset category follows category includes investments us government bonds government mortgagebacked securities indexlinked government bonds guaranteed commercial paper shortterm treasury bills notes fair value assets determined using bid evaluation process observable market based inputs effective last business day plan year b category includes investments two commoncollective funds 89 invested stocks comprising russell 1000 equity index remaining 11 comprised shortterm investments december 31 2010 fair value assets determined based contract value based provisions underlying guaranteed investment contracts c category includes investments corporate bonds commercial mortgagebacked assetbacked securities collateralized mortgage obligations commercial paper fair value assets determined using bid evaluation process observable market based inputs effective last business day plan year category includes investments small cap stocks u issuers across diverse industries fair value assets determined using quoted market prices recognized securities exchange last reported trading price last business day plan year e category comprised two mutual funds one fund invests valueoriented international stocks across diverse industries one invests intermediate term fixed income instruments treasuries high grade corporate bonds fair value assets determined using quoted market prices recognized securities exchange last reported trading price last business day plan year f category comprised healthcare real estate investment trust fair value assets determined based traded market prices g category includes investments combination 5 10 30 year us treasury notes bond futures credit default swaps fair value assets determined based either settlement prices recognized securities exchange midbid evaluation process using observable market based inputs h category includes investments passively managed funds composed international stocks across diverse industries fair value assets calculated based upon compilation observable market information company’s pension plan weightedaverage asset allocation december 31 2010 asset category weighted average basis follows predecessor company’s pension plan weightedaverage asset allocation december 31 2009 asset category weighted average basis follows asset management committee “amc” appointed compensation benefits committee company’s board directors named fiduciary plan matters relating plan investments asset management amc authority appoint retain monitor remove custodian investment manager responsible establishing maintaining funding investment policy master trust plans’ assets invested accordance investment practices emphasize longterm investment fundamentals plans’ investment objective achieve positive rate return long term capital appreciation growing stream current income would significantly contribute meeting plans’ current future obligations objectives obtained welldiversified portfolio structure manner consistent plan’s investment policy statement plans’ assets invested marketable equity fixed income securities managed professional investment managers plan assets invested using combination active passive indexed investment strategies plans’ assets broadly diversified asset class investment style number issues issue type factors consistent investment objectives outlined plan’s investment policy statement plans’ assets invested prudent levels risk expectation longterm returns maintain contribute increasing purchasing power plans’ assets net disbursements long term plans’ assets separately managed accounts may used following purposes short sales purchases letter stock private placements leveraged transactions commodities transactions option strategies investments limited partnerships investments managers securities affiliates subsidiaries investment futures use margin investments derivative explicitly permitted plan’s investment policy statement plans’ fixed income manager uses derivative financial instruments normal course investing activities hedge adverse changes fixed income market achieve overall investment portfolio objectives financial instruments include us treasury futures contracts credit default swaps futures held combination 5 10 30 year futures used manage duration exposure portfolio credit default swaps held hedge declines certain bond markets vehicle take advantage opportunities certain segments fixed income market plans’ investment policy statements allow use derivatives leverage portfolio speculative purposes use derivatives believed materially increase credit market risk plans’ investments eleven months ended december 31 2010 company used rate 800 expected longterm rate return assumption plan assets dex one retirement plan dex media pension plan one month ended january 31 2010 years ended december 31 2009 2008 predecessor company used rate 800 850 respectively expected longterm rate return assumption plan assets dex one retirement plan dex media pension plan basis used determining rates longterm capital market return forecasts asset mix similar plans’ asset allocation target 65 equity securities 35 debt securities beginning year basis used determining rates also included opportunity active management assets add value long term active management expectation supported calculating historical returns investment managers actively managed plans’ assets although review expected longterm rate return assumption annually performance one particular year significantly influence evaluation assumption generally revised unless fundamental change one factors upon based target asset allocation longterm capital market return forecasts estimated future benefit payments company’s pension plans benefits postretirement plans benefits expected paid next five fiscal years aggregate five fiscal years thereafter follows expect make contributions approximately 160 million 11 million pension plans postretirement plans respectively 2011 subsequent events january 2011 businesscom inc 401k plan merged dex one 401k savings plan effective january 1 2011 dex one 401k restoration plan amended eliminate matching credits 11 commitments lease office facilities equipment operating leases noncancelable lease terms expiring various dates 2016 rent lease expense company eleven months ended december 31 2010 221 million rent lease expense predecessor company one month ended january 31 2010 years ended december 31 2009 2008 16 million 277 million 268 million respectively future noncancelable minimum rental payments applicable operating leases december 31 2010 connection software system modernization ongoing support services obligated pay outsource service provider approximately 450 million years 2011 2012 effective january 1 2010 internet yellow pages reseller agreement amended restated whereby obligated pay att 218 million years 2011 2012 entered directory advertisement agreement cmr cover advertising placed company cmr behalf qwest agreement obligated pay cmr approximately 52 million commissions years 2011 2014 12 legal proceedings subject various lawsuits claims regulatory administrative proceedings arising business covering matters general commercial governmental regulations intellectual property employment tax actions opinion management ultimate resolution matters including two cases described material adverse effect results operations cash flows financial position beginning october 23 2009 series putative securities class action lawsuits commenced united states district court district delaware behalf persons purchased otherwise acquired publicly traded securities july 26 2007 time filed bankruptcy may 28 2009 alleging certain officers issued false misleading statements regarding business financial condition seeking damages equitable relief august 19 2010 amended consolidated class action complaint filed operative securities class action complaint “securities class action complaint” securities class action complaint extends class include persons purchased otherwise acquired publicly traded securities october 26 2006 may 28 2009 december 7 2009 putative erisa class action lawsuit commenced united states district court northern district illinois behalf certain participants beneficiaries rh donnelley 401k savings plan time july 26 2007 time lawsuit filed whose plan accounts included investments rh donnelley common stock putative erisa class action complaint contains allegations certain current former directors officers employees similar set forth securities class action complaint well allegations breaches fiduciary duties erisa seeks damages equitable relief believe allegations set forth lawsuits without merit vigorously defending suits 13 business segments management reviews analyzes business providing marketing solutions one operating segment 14 dex one corporation “parent company” financial statements following condensed parent company financial statements read conjunction consolidated financial statements company predecessor company provided amended restated credit facilities company’s operating subsidiaries permitted fund share parent company’s interest obligations dex one senior subordinated notes addition operating subsidiaries permitted send 5 million annually parent company use unrestricted basis funds based percentage operating subsidiaries’ excess cash flow defined credit agreement may provided parent company fund specific activities acquisitions lastly operating subsidiaries fund proportionate basis expenses paid parent company fund daily operations operating subsidiaries excluding limited exceptions noted net assets company subsidiaries restricted paid dividends third party subsidiaries restricted paying dividends loans advances us terms amended restated credit facilities see note 6 “longterm debt credit facilities notes” description debt instruments condensed parent company balance sheets condensed parent company statements operations condensed parent company statements cash flows 15 capital stock company authority issue 300000000 shares common stock 001 par value per share “common stock” ii 10000000 shares preferred stock 001 par value per share “preferred stock” powers preferences rights holders shares common stock subject may adversely affected powers preferences rights holders shares series preferred stock may designate issue future without stockholder approval december 31 2010 company issued shares preferred stock 16 valuation qualifying accounts 17 quarterly information f 77 1 recognized goodwill impairment charges 7523 million 3853 million second third quarters 2010 nongoodwill intangible asset impairment charges 173 million 43 million recognized second third quarters 2010 associated trade names trademarks technology local customer relationships former businesscom reporting unit recognized nongoodwill intangible asset impairment charge 73 billion fourth quarter 2009 associated directory services agreements advertiser relationships third party contracts network platforms acquired prior acquisitions see note 2 “summary significant accounting policies identifiable intangible assets goodwill” discussion 2 reorganization items net represent charges directly associated process reorganizing business chapter 11 see note 3 “fresh start accounting” note 4 “reorganization items net liabilities subject compromise” discussion f 78 item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders dex one corporation audited accompanying consolidated balance sheets dex one corporation subsidiaries december 31 2011 december 31 2010 related consolidated statements operations comprehensive income loss cash flows changes shareholders’ equity deficit year ended december 31 2011 successor elevenmonth period ended december 31 2010 successor onemonth period ended january 31 2010 predecessor year ended december 31 2009 predecessor consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position dex one corporation subsidiaries december 31 2011 december 31 2010 results operations cash flows year ended december 31 2011 successor elevenmonth period ended december 31 2010 successor onemonth period ended january 31 2010 predecessor year ended december 31 2009 predecessor conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states dex one corporation’s internal control financial reporting december 31 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso report dated march 1 2012 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp raleigh north carolina march 1 2012 report independent registered public accounting firm board directors shareholders dex one corporation audited dex one corporation’s internal control financial reporting december 31 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso dex one corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audit also included performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion dex one corporation maintained material respects effective internal control financial reporting december 31 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states consolidated balance sheets dex one corporation subsidiaries december 31 2011 december 31 2010 related consolidated statements operations comprehensive income loss cash flows changes shareholders’ equity deficit year ended december 31 2011 successor elevenmonth period ended december 31 2010 successor onemonth period ended january 31 2010 predecessor year ended december 31 2009 predecessor report dated march 1 2012 expressed unqualified opinion consolidated financial statements kpmg llp raleigh north carolina march 1 2012 dex one corporation consolidated balance sheets accompanying notes integral part consolidated financial statements dex one corporation consolidated statements operations comprehensive income loss accompanying notes integral part consolidated financial statements dex onecorporation consolidated statements cash flows accompanying notes integral part consolidated financial statements dex one corporation consolidated statements changes shareholders equity deficit accompanying notes integral part consolidated financial statements dex one corporation notes consolidated financial statements tabular amounts thousands except per share data percentages otherwise indicated 1 business basis presentation consolidated financial statements include accounts dex one corporation direct indirect whollyowned subsidiaries “dex one” “successor company” “company” “parent company” “we” “us” “our” subsequent effective date defined december 31 2011 rh donnelley corporation rh donnelley inc “rhdi” “rhd inc” dex media inc “dex media” dex one digital inc “dex one digital” formally known businesscom inc “businesscom” dex one service inc “dex one service” direct whollyowned subsidiaries financial information set forth annual report unless otherwise indicated context may otherwise indicate reflects consolidated results operations financial position dex one year ended december 31 2011 eleven months ended december 31 2010 intercompany transactions balances eliminated dex one became successor registrant rh donnelley corporation “rhd” “predecessor company” “we” “us” “our” operations prior january 29 2010 “effective date” upon emergence chapter 11 proceedings title 11 united states code “chapter 11” effective date financial information set forth annual report unless otherwise indicated context may otherwise indicate reflects consolidated results operations financial position rhd one month ended january 31 2010 year ended december 31 2009 see note 3 “fresh start accounting reorganization items net” information impact emergence reorganization adoption fresh start accounting financial position results operations business overview marketing solutions company helps local businesses consumers connect proprietary affiliate provided marketing solutions combine multiple media platforms help drive large volumes consumer leads customers assist customers managing presence among consumers marketing consultants strive trusted advisors offer local businesses personalized marketing consulting services exposure across leading media platforms used consumers searching local businesses platforms include online mobile local search solutions major search engines print directories proprietary marketing solutions include dex published yellow pages directories cobrand recognizable brands industry centurylink att internet yellow pages site dexknowscom mobile applications dex mobile citycentral growing list marketing solutions also includes local business market analysis message image creation target market identification advertising digital profile creation web sites mobile web sites reputation management online video development promotion keyword optimization strategies programs distribution strategies social strategies tracking reporting digital lead generation solutions powered search engine marketing product dexnet extends customers’ reach leading internet mobile partners attract consumers searching local businesses products services within markets chapter 11 emergence bankruptcy may 28 2009 predecessor company subsidiaries filed voluntary petitions chapter 11 relief united states bankruptcy court district delaware “bankruptcy court” january 12 2010 bankruptcy court entered findings fact conclusions law order confirming joint plan reorganization predecessor company subsidiaries “plan” plan became effective accordance terms effective date see annual report form 10k year ended december 31 2010 detailed information following matters associated chapter 11 proceedings • predecessor company’s filing voluntary positions chapter 11 • confirmed plan emergence chapter 11 proceedings • restructuring conducted connection emergence chapter 11 proceedings • consummation plan • impact longterm debt upon emergence chapter 11 proceedings • accounting matters resulting chapter 11 proceedings reclassifications conjunction restructuring plan commenced fourth quarter 2010 resulting changes organizational structure certain prior period amounts included consolidated statements operations reclassified conform current period’s presentation see note 4 “restructuring charges” additional information reclassifications impact operating income loss net income loss eleven months ended december 31 2010 one month ended january 31 2010 year ended december 31 2009 labor unions approximately 31 employees represented labor unions covered two collective bargaining agreements dex media unionized employees represented either international brotherhood electrical workers america “ibew” communication workers america “cwa” dex media’s collective bargaining agreement ibew expires may 2012 dex media’s collective bargaining agreement cwa expires september 2012 april 2011 centurylink inc “centurylink” completed acquisition qwest communications international inc “qwest” historically cobranded directories directory publishing agreements bound commercial arrangements centurylink qwest purposes defining markets centurylink qwest provided local telephone service prior acquisition legacy centurylink markets hereby referred “centurylink east” markets legacy qwest markets “centurylink west” markets directory publishing agreement commercial arrangements company entered qwest remain contractual obligations qwest substantive revisions amendments made terms conditions arrangements 2 summary significant accounting policies fresh start accounting reporting permits company select appropriate accounting policies february 1 2010 “fresh start reporting date” company adopted predecessor company’s significant accounting policies disclosed result separate distinction significant accounting policies company predecessor company present financial results respective reporting periods revenue recognition advertising revenues earned primarily sale advertising yellow pages directories publish advertising revenues also include revenues internetbased marketing solutions including online directories dexknowscom dexnet advertising revenues affected several factors including changes quantity size characteristics advertisements acquisition new customers renewal rates existing customers premium advertisements sold changes advertisement pricing introduction new marketing solutions increase competition fragmentation local business search market general economic factors revenues respect print advertising internetbased marketing solutions sold print advertising recognized deferral amortization method whereby revenues initially deferred directory published net sales claims allowances recognized ratably directory’s life typically 12 months revenues respect internetbased marketing solutions sold standalone dexnet recognized ratably life contract commencing first delivered fulfilled revenues respect marketing solutions nonperformance based recognized ratably life contract commencing first delivered fulfilled revenues respect marketing solutions performancebased recognized service delivered fulfilled commencing late 2011 company began offer customers ability purchase digital marketing solutions shorter time frames standard one year contract specifically recognize revenue following criteria met • persuasive evidence arrangement exists criterion satisfied execution signed contract company client contract includes specifications must adhered term agreement parties • delivery occurred criterion satisfied print marketing solutions physical distribution given print directory substantially complete criterion satisfied internetbased marketing solutions upon fulfillment • fee fixed determinable criterion satisfied execution signed contract company client including final negotiated price • collectability reasonably assured criterion satisfied performing credit evaluations customers signed contract executed requiring customers prepay full marketing solutions reasonable assurance collection also evidenced review client’s payment history revenue deferred revenue sale advertising recorded net allowance sales claims estimated based primarily historical experience update estimate information circumstances indicate estimate may longer represent amount claims may incur future company recorded sales claims allowances 159 million 99 million year ended december 31 2011 eleven months ended december 31 2010 respectively predecessor company recorded sales claims allowances 35 million 438 million one month ended january 31 2010 year ended december 31 2009 respectively september 2009 financial accounting standards board “fasb” issued accounting standards update “asu” 200913 revenue recognition topic 605 multipledeliverable revenue arrangements consensus fasb emerging issues task force “asu 200913” asu 200913 amends current guidance pertaining multipledeliverable revenue arrangements included fasb accounting standards codification “asc” 60525 revenue recognition multiple element arrangements • provide updated guidance determining whether multiple deliverables exist deliverables arrangement separated consideration allocated • require entity allocate revenue multiple element arrangement using selling price hierarchy 1 vendor specific objective evidence selling price “vsoe” available 2 third party evidence selling price “tpe” vsoe available 3 estimated selling price vendor either vsoe tpe • eliminate use residual method revenue recognition require entity allocate revenue using relative selling price method company adopted asu 200913 effective january 1 2011 prospective basis adoption asu 200913 impact financial position results operations cash flows enter multipledeliverable revenue arrangements may include combination print internetbased marketing solutions designed specifically meet needs customers print internetbased marketing solutions also sold standalone basis timing delivery fulfillment marketing solutions multipledeliverable arrangement may differ whereby fulfillment internetbased marketing solutions typically precedes delivery print marketing solutions due length time required produce final print product addition multiple print directories included multipledeliverable arrangement may published different times throughout year limit amount revenue recognized delivered elements amount contingent future delivery fulfillment marketing solutions included multipledeliverable arrangement print internetbased marketing solutions interdependent account multiple arrangements single client one arrangement contractual terms andor substance arrangements indicate may closely related effect parts single arrangement evaluate deliverable multipledeliverable revenue arrangement determine whether represent separate units accounting using following criteria • delivered items value customer standalone basis • arrangement includes general right return relative delivered items delivery performance undelivered items considered probable substantially control company print internetbased marketing solutions qualify separate units accounting since sold standalone basis allocate multipledeliverable arrangement consideration deliverable based relative selling price determined using vsoe sales contracts generally include provisions cancellation termination right return refunds would significantly impact recognized revenue objective vsoe determine price company would transact sale product service sold standalone basis determining vsoe require substantial majority selling prices consistent normal pricing discounting policies established management relevant authority specific marketing solution sold standalone basis ensure consistency performing analysis annual basis often necessary determining relative selling prices marketing solutions sold standalone basis consider among things 1 geographies marketing solutions sold 2 economic factors 3 local business conditions 4 competition markets 5 advertiser consumer behavior classifications 6 gross margin objectives 7 historical pricing practices selling prices analyzed frequent basis changes factors material impact pricing discounting policies significant changes selling prices methods used determine vsoe year ended december 31 2011 however may modify pricing discounting policies implement new gotomarket strategies future could result changes selling prices methodology used determine vsoe use another method selling price hierarchy allocate arrangement consideration multipledeliverable arrangements entered prior january 1 2011 marketing solutions qualified separate units accounting arrangement consideration allocated respective deliverable based relative fair value method using vsoe determined using methodology described asu 200913 effective applied multipledeliverable arrangements prior reporting periods would impact revenue recognized periods deferred directory costs directly related selling production directories initially deferred incurred recognized ratably life directory typically 12 months costs specifically identifiable particular directory include sales commissions print paper initial distribution costs paid prior directory publication classified current assets publication reclassified deferred directory costs cash equivalents cash equivalents include liquid investments maturity less three months time purchase times investments may excess federally insured limits accounts receivable accounts receivable consist balances owed us advertising customers billed receivables represent amount billed advertising customers billed receivables recorded net allowance doubtful accounts sales claims estimated based historical experience update estimate information circumstances indicate estimate longer appropriately represents amount bad debts sales claims probable incurred unbilled receivables represent contractually owed amounts net allowance doubtful accounts sales claims published directories yet billed customers new local customers subject credit review signed contract executed credit review includes evaluation credit payment history us third party credit scoring credit checks vendors local customers billed pro rata amount contract value monthly basis however appropriate advance payments whole part andor personal guarantees local customers may required prior extension credit select advertisers behalf national customers certified marketing representatives “cmrs” pay company total contract value advertising net commission within 60 days publication month new cmrs subject credit review signed contract executed cmrs designated high risk subject prepayment requirements twelve months company’s writeoff policy accounts receivables associated local customers designed secure collection pastdue funds part sales renewal cycle writeoff policy national customers determined based delinquency stage combined cmr responsiveness collection requests generally local client accounts receivable balances considered eligible writeoff following completion annual sales renewal cycle customers greater 300 days pastdue oldest advertising charges nonresponsive payment demands renew contracts future advertising services management deemed collectability pastdue accounts receivables impaired accounts receivable balances associated cmrs writtenoff 240 days pastdue company’s standard writeoff policy also includes provisions allow writeoff acceleration customers business demonstrated via disconnected phone lines declaring bankruptcy deferral writeoffs customers prepaying full new advertising company threshold dollar amount trigger accounts receivable balance writeoff collection processes performed accordance fair debt collections practices act appropriate contacts customers made defined time intervals solicit payment andor determine payment made appropriate collection process customers transferred company designated resources resolve outstanding issues file claims adjustments accounts receivable balances company’s bad debt policy includes guidelines writeoff accounts well authorization approval requirements process estimating ultimate collection accounts receivables involves significant assumptions judgments regarding writeoff accounts receivables estimates recovery expectations relative bad debt writeoffs company believes credit collection bad debt recovery reserve processes combined monitoring billing process help reduce risk associated material revisions reserve estimates resulting adverse changes reimbursement experience company initiated program 2011 extend partial full open credit terms customers bad debt writeoffs associated prior year contracts terms program require customers either complete credit application review andor satisfy defined advance payment requirements terms program accounts receivable balances previously designated bad debt writeoffs continue pursued full recovery designated outside collection agencies identifiable intangible assets goodwill successor company impairment evaluation goodwill 21 billion recorded connection company’s adoption fresh start accounting discussed note 3 “fresh start accounting reorganization items net” represented excess reorganization value dex one fair value identified tangible intangible assets goodwill amortized subject impairment testing annual basis october 31st frequently indicators potential impairment exist goodwill tested impairment reporting unit level represents one level operating segment accordance fasb asc 350 intangibles goodwill “fasb asc 350” december 31 2011 company’s reporting units rhdi dex media east inc “dme inc” dex media west inc “dmw inc” company reviews carrying value goodwill definitelived intangible assets longlived assets whenever events circumstances indicate carrying amount may recoverable company reviewed following information estimates assumptions determine indicators impairment existed year ended december 31 2011 • historical financial information including revenue profit margins customer attrition data price premiums enjoyed relative competing independent publishers • longterm financial projections including limited revenue trends profit margin trends • intangible asset longlived asset carrying values changes current future use • trading values debt equity securities • companyspecific information company concluded triggering events measure impairment three months ended december 31 2011 september 30 2011 one month ended june 30 2011 three months ended march 31 2011 respectively based upon continued decline trading value debt equity securities revisions made longterm forecast changes management company concluded indicators impairment may 31 2011 result identifying indicators impairment performed impairment test goodwill accordance fasb asc 350 impairment recoverability test definitelived intangible assets longlived assets accordance fasb asc 360 property plant equipment “fasb asc 360” may 31 2011 impairment tests goodwill definitelived intangible assets longlived assets performed using information estimates assumptions noted described company’s goodwill definitelived intangible assets longlived assets assigned respective reporting unit represent impairment testing analysis definitelived intangible assets longlived assets impairment recoverability test definitelived intangible assets longlived assets performed comparing carrying amount asset groups including definitelived intangible assets longlived assets including goodwill sum undiscounted expected future cash flows accordance fasb asc 360 impairment exists sum undiscounted expected future cash flows less carrying amount intangible asset related group assets longlived assets testing results definitelived intangible assets longlived assets indicated recoverable thus impairment test required may 31 2011 fair values definitelived intangible assets longlived assets used impairment testing determined using unobservable inputs level 3 fair value hierarchy following summary methodology used valuation category definitelived intangible assets longlived assets directory services agreements company acquired directory services agreements prior acquisitions directory services agreements direct contribution financial performance business company utilized multiperiod excess earnings method variant income approach assign fair value assets multiperiod excess earnings method uses discounted cash flow model whereby projected cash flows intangible asset computed indirectly means future cash flows projected deductions made recognize returns appropriate contributory assets leaving excess residual net cash flow indicative intangible asset fair value multiperiod excess earnings method assumes value derived respective asset greater earlier years steadily declines time local national customer relationships company acquired significant local national customer relationships prior acquisitions also developed significant new local national customer relationships local national customer relationships provide ongoing repeat business company given direct contribution made local national customer relationships financial performance business company utilized multiperiod excess earnings method assign fair value assets trade names trademarks fair value trade names trademarks obtained result prior acquisitions determined based variant income approach known “relief royalty” method trade names trademarks valued based estimated amount royalty fee company would pay hypothetical arms length transaction license assets owned significant assumptions utilized value assets forecasted revenue streams estimated applicable royalty rates applicable income tax rates appropriate discount rates royalty rates estimated based assessment risk return investment factors comparable transactions technology advertising commitments certain company’s developed software technology content assets direct contribution financial performance business valued using relief royalty method discussed software related assets focused internal operations valued cost approach measures value asset estimating expenditures would required replace asset given future service capability advertising commitments assets valued using multiperiod excess earnings method fixed assets establishing fair value fixed assets used cost approach current replacement cost fixed asset appraised adjusted loss value caused physical deterioration functional obsolescence economic obsolescence addition cost approach certain assets active secondary market valued using market approach whereby marketbased depreciation curve applied assets’ original cost analysis goodwill impairment test goodwill performed reporting unit level involved twostep process first step involved comparing fair value reporting unit carrying amount assets liabilities including goodwill specifically assigned reporting units upon adoption fresh start accounting 2010 fair value determined valuing company’s debt securities trading value using market based approach company’s publicly traded common stock included trailing 20day average closing market price common stock ending may 31 2011 aggregate debt equity values used arrive consolidated business enterprise value “bev” company since reporting units’ equity securities publicly traded observable market information securities impairment test may 31 2011 calculated bev reporting units using unobservable inputs level 3 fair value hierarchy based discounted cash flow “dcf” valuation technique company ensured sum individual reporting units’ bevs consistent company’s consolidated bev using observable market pricing fair value reporting units determined using dcf analysis forwardlooking valuation methodology relates value asset business present value expected future cash flows generated asset business methodology projected future cash flows discounted business’ weighted average cost capital “wacc” wacc reflects estimated blended rate return debt equity investors would require invest business based capital structure dcf calculation based management’s financial projections unlevered aftertax free cash flows period 2011 2014 longterm financial projections used valuation based specific operating financial metrics include limited customer count trends behaviors average spend per customer product usage sales representative productivity forecasting process also included review company industry macroeconomic factors including limited achievement future financial results anticipated changes general market conditions including variations market regions known new business opportunities challenges detailed research forecast materials leading industry economic analysts also used form assumptions provide context longterm financial projections forecasting process included sensitivity analyses related key company industry macroeconomic variables capture reporting units’ residual value beyond 2014 used widely accepted dividend growth model factors assumptions long term cash flow growth wacc also estimated value reporting units’ beneficial tax attributes represent tax amortization net operating losses likely reflected hypothetical exit price reporting unit fair value tax attributes calculated measuring present value tax savings expected provided relative taxes company would otherwise pay absent availability attributes cash flows discounted using determined wacc furthermore company took account variety qualitative factors estimating value tax attributes including factors implementation utilization risk company used wacc 135 various dcf analyses noted may 31 2011 wacc determined based primarily company’s actual market cost debt equity well current capital structure cost equity measured using widely accepted capital asset pricing model various key company specific inputs used wacc computation also validated comparison observed within group publicly traded market participants result impairment test goodwill determined reporting unit’s fair value less carrying amount assets liabilities requiring us proceed second step goodwill impairment test second step testing process impairment loss determined comparing implied fair value reporting unit’s goodwill recorded amount goodwill may 31 2011 determining implied fair value reporting unit requires judgment use significant estimates assumptions noted believe estimates assumptions used impairment assessments reasonable based available market information variations assumptions could result materially different calculations fair value determinations whether impairment indicated amount impairment recorded based upon analysis determined remaining goodwill assigned reporting units fully impaired thus recognized aggregate goodwill impairment charge 8011 million second quarter 2011 goodwill impairment charge recorded reporting units follows following table presents critical assumptions used valuation reporting units may 31 2011 1 terminal growth rate determined reconciling market value debt equity securities may 31 2011 company’s longterm financial projections goodwill impairment charge impact current future operating cash flow compliance debt covenants since remaining goodwill assigned reporting units fully impaired second quarter 2011 annual impairment test goodwill performed october 31 2011 december 31 2011 company recorded goodwill reporting units three months ended september 30 2010 june 30 2010 company concluded indicators impairment result performed impairment tests goodwill definitelived intangible assets longlived assets september 30 2010 june 30 2010 testing results definitelived intangible assets longlived assets resulted nongoodwill intangible asset impairment charge 43 million 173 million three months ended september 30 2010 june 30 2010 respectively total nongoodwill intangible asset impairment charge 216 million eleven months ended december 31 2010 associated trade names trademarks technology local customer relationships former businesscom reporting unit company also recognized goodwill impairment charge 3853 million 7523 million three months ended september 30 2010 june 30 2010 respectively total goodwill impairment charge 11376 million eleven months ended december 31 2010 resulting impairment testing recorded reporting units sum goodwill nongoodwill intangible asset impairment charges totaled 11593 million eleven months ended december 31 2010 please refer annual report form 10k year ended december 31 2010 additional information including methodology estimates assumptions used impairment testing periods well annual impairment test goodwill october 31 2010 fourth quarter 2010 company recognized reduction goodwill 1584 million related finalization cancellation indebtedness income tax attribute reduction calculations required performed december 31 2010 associated fresh start accounting change carrying amount goodwill since established fresh start accounting fresh start reporting date follows successor company intangible assets amortization expense related company’s intangible assets 1871 million 1670 million year ended december 31 2011 eleven months ended december 31 2010 respectively amortization expense intangible assets five succeeding years estimated approximately 1878 million 1536 million 1417 million 1406 million 1382 million respectively amortization intangible assets tax purposes approximately 1798 million 2011 identifiable intangible assets respective book values december 31 2011 shown following table combined weighted average useful life identifiable intangible assets december 31 2011 20 years weighted average useful lives amortization methodology identifiable intangible assets december 31 2011 shown following table 1 identifiable intangible assets amortized income forecast method assumes value derived intangible assets greater earlier years steadily declines time company evaluates remaining useful lives identifiable intangible assets longlived assets whenever events circumstances indicate revision remaining period amortization warranted estimated remaining useful lives change remaining carrying amount intangible assets longlived assets would amortized prospectively revised remaining useful life company evaluated remaining useful lives identifiable intangible assets longlived assets year ended december 31 2011 considering among things effects obsolescence demand competition takes consideration price premium benefit competing independent publishers markets result directory services agreements acquired prior acquisitions economic factors including stability industry operate known technological advances legislative actions result uncertain changing regulatory environment expected changes distribution channels based evaluation december 31 2011 company determined estimated useful lives intangible assets presented reflect period expected contribute future cash flows therefore deemed appropriate conjunction impairment testing may 31 2011 evaluation remaining useful lives identifiable intangible assets longlived assets company determined estimated useful lives intangible assets continued deemed appropriate however revisions longterm forecast used impairment testing may 31 2011 direct impact timing amortization expense associated intangible assets amortized using income forecast method company experienced increase amortization expense 343 million 2011 resulting changes identifiable intangible assets respective book values december 31 2010 adjusted impairment charges eleven months ended december 31 2010 noted shown following table adjusted book values intangible assets represent new cost basis accumulated amortization prior impairment charges eliminated new cost basis amortized remaining useful lives intangible assets industry local business conditions markets deteriorate excess current estimates potentially resulting declines advertising sales operating results trading value debt equity securities continue decline significantly required assess recoverability useful lives intangible assets longlived assets factors including changes assumptions used impairment analysis result factors could result future impairment charges reduction remaining useful lives associated intangible assets longlived assets acceleration amortization expense predecessor company impairment evaluation result filing chapter 11 petitions predecessor company performed impairment tests definitelived intangible assets longlived assets year ended december 31 2009 fourth quarter 2009 conjunction filing amended plan amended disclosure statement predecessor company finalized extensive analysis associated emergence chapter 11 predecessor company utilized information assumptions discussed obtained analysis complete impairment evaluation result impairment evaluation predecessor company recognized impairment charge 73 billion fourth quarter 2009 associated directory services agreements advertiser relationships third party contracts network platforms acquired prior acquisitions fair values intangible assets derived discounted cash flow analysis using discount rate indicative risk market participant would willing accept analysis included review relevant financial metrics peers within industry predecessor company intangible assets amortization expense related predecessor company’s intangible assets 156 million 5146 million one month ended january 31 2010 year ended december 31 2009 respectively additional information connection acquisition dex media january 31 2006 “dex media merger” acquired directory services agreements collectively “dex directory services agreements” dex media entered qwest including 1 publishing agreement term 50 years commencing november 8 2002 subject automatic renewal additional oneyear terms grants us right exclusive official directory publisher listings classified advertisements qwest’s telephone customers geographic areas states dex media east dex media west operate directory business “centurylink west states” qwest successors provided local telephone services november 8 2002 well exclusive right use certain qwest branding directories markets 2 noncompetition agreement term 40 years commencing november 8 2002 pursuant qwest behalf affiliates successors agreed sell directory products consisting principally listings classified advertisements subscribers geographic areas centurylink west states qwest provided local telephone service november 8 2002 directed primarily consumers geographic areas result dex media merger also acquired 1 advertising commitment agreement whereby qwest agreed purchase aggregate 20 million advertising per year 2017 us pricing terms least favorable offered similar large customers 2 intellectual property contribution agreement pursuant qwest assigned licensed us qwest intellectual property previously used qwest directory services business along 3 trademark license agreement pursuant qwest granted us right november 2007 use qwest dex qwest dex advantage marks connection directory products related marketing material centurylink west states right use marks connection dexknowscom intangible assets 2 3 collectively “trade names” directory services agreements att company include directory services license agreement noncompetition agreement internet yellow pages reseller agreement directory publishing listing agreement collectively “att directory services agreements” certain affiliates att directory services license agreement designates us official exclusive provider yellow pages directory services att successors illinois northwest indiana “territory” grants us exclusive license obligation specified agreement produce publish distribute white pages directories territory att’s agent grants us exclusive license obligation specified agreement use att brand logo print directories territory noncompetition agreement prohibits att affiliates successors certain limited exceptions 1 producing publishing distributing yellow white pages print directories territory 2 soliciting selling local national yellow white pages advertising inclusion directories 3 soliciting selling local internet yellow pages advertising certain internet yellow pages directories territory licensing att marks third party purpose internet yellow pages reseller agreement grants us exclusive right sell local advertisers within territory internet yellow pages advertising focused upon products services offered within territory b nonexclusive right sell local excluding national advertisers within territory internet yellow pages advertising focused upon products services offered outside territory case onto yellowpagescom platform directory publishing listing agreement gives us right purchase use basic att subscriber listing information updates purpose publishing directories att directory services agreements internet yellow pages reseller agreement initial terms 50 years commencing september 2004 subject automatic renewal early termination specified circumstances internet yellow pages reseller agreement term 5 years commenced september 2004 directory services agreements centurylink company executed may 2006 conjunction sprint’s spinoff local telephone business include directory services license agreement trademark license agreement noncompetition agreement certain affiliates centurylink well noncompetition agreement sprint entered january 2003 collectively “centurylink directory services agreements” centurylink directory services agreements replaced previously existing analogous agreements sprint except sprint remained bound noncompetition agreement directory services license agreement grants us exclusive license obligation specified agreement produce publish distribute yellow white pages directories centurylink successors 18 states centurylink provided local telephone service time agreement trademark license agreement grants us exclusive license obligation specified agreement use certain specified centurylink trademarks markets noncompetition agreements prohibit centurylink sprint respective affiliates successors markets selling local directory advertising certain limited exceptions producing publishing distributing print directories centurylink directory services agreements initial terms 50 years commencing january 2003 subject automatic renewal early termination specified circumstances fixed assets computer software fixed assets computer software recorded cost depreciation amortization provided estimated useful lives assets using straightline method estimated useful lives thirty years buildings five years machinery equipment ten years furniture fixtures three five years computer equipment computer software leasehold improvements amortized straightline basis shorter term lease estimated useful life improvement fixed assets computer software company december 31 2011 2010 consisted following depreciation amortization expense fixed assets computer software company year ended december 31 2011 eleven months ended december 31 2010 predecessor company one month ended january 31 2010 year ended december 31 2009 follows year ended december 31 2009 predecessor company identified certain fixed assets longer service resulted acceleration depreciation expense 87 million year ended december 31 2009 predecessor company retired certain computer software fixed assets resulted impairment charge 04 million interest expense deferred financing costs successor company gross interest expense year ended december 31 2011 eleven months ended december 31 2010 2269 million 2497 million respectively conjunction adoption fresh start accounting reporting fresh start reporting date adjustment established record outstanding debt fair value fresh start reporting date fair value adjustment amortized increase interest expense remaining term respective debt agreements using effective interest method impact future scheduled interest principal payments amortization fair value adjustment included increase interest expense 278 million 293 million year ended december 31 2011 eleven months ended december 31 2010 respectively see note 5 “longterm debt credit facilities notes” additional information first quarter 2010 entered interest rate swap interest rate cap agreements designated cash flow hedges company’s interest expense includes income 34 million expense 82 million year ended december 31 2011 eleven months ended december 31 2010 respectively resulting change fair value interest rate swaps interest rate caps predecessor company contractual interest expense would appeared predecessor company’s consolidated statement operations filing chapter 11 petitions 659 million 8024 million one month ended january 31 2010 year ended december 31 2009 respectively gross interest expense recognized one month ended january 31 2010 year ended december 31 2009 197 million 4898 million respectively certain costs associated issuance debt instruments capitalized included noncurrent assets consolidated balance sheets costs amortized interest expense terms related debt agreements bond outstanding method used amortize deferred financing costs relating debt instruments respect made accelerated principal payments deferred financing costs amortized using effective interest method amortization deferred financing costs included interest expense 18 million 275 million one month ended january 31 2010 year ended december 31 2009 respectively predecessor company’s interest expense one month ended january 31 2010 year ended december 31 2009 includes expense 08 million 56 million respectively associated change fair value dex media east llc interest rate swaps longer deemed financial instruments result filing chapter 11 petitions predecessor company’s interest expense one month ended january 31 2010 year ended december 31 2009 also includes expense 11 million 96 million respectively resulting amounts previously charged accumulated comprehensive loss related interest rate swaps amounts previously charged accumulated comprehensive loss related dex media east llc interest rate swaps amortized interest expense remaining life interest rate swaps based future interest payments probable forecasted transactions would occur accordance fresh start accounting reporting unamortized amounts previously charged accumulated comprehensive loss related interest rate swaps 153 million eliminated fresh start reporting date result amendment rhdi credit facility refinancing former dex media west llc credit facility june 6 2008 predecessor company’s interest rate swaps associated two debt arrangements longer highly effective offsetting changes cash flows accordingly cash flow hedge accounting treatment longer permitted addition result filing chapter 11 petitions interest rate swaps required settled terminated 2009 result change fair value interest rate swaps prior effective date predecessor company’s interest expense included expense 04 million one month ended january 31 2010 income 107 million year ended december 31 2009 conjunction dex media merger result purchase accounting required generally accepted accounting principles “gaap” predecessor company recorded dex media’s debt fair value january 31 2006 predecessor company recognized offset interest expense period subsequent dex media merger may 28 2009 amortization corresponding fair value adjustment offset interest expense 77 million year ended december 31 2009 offset interest expense recognized life respective debt however due filing chapter 11 petitions unamortized fair value adjustments may 28 2009 785 million writtenoff recognized reorganization item consolidated statement operations year ended december 31 2009 advertising expense company predecessor company recognize advertising expenses incurred expenses include media public relations promotional branding sponsorship costs online advertising total advertising expense company 177 million 279 million year ended december 31 2011 eleven months ended december 31 2010 respectively total advertising expense predecessor company 10 million 310 million one month ended january 31 2010 year ended december 31 2009 respectively concentration credit risk trade receivables approximately 85 advertising revenue derived sale marketing solutions local businesses customers typically enter 12month advertising sales contracts make monthly payments term contract commencing late 2011 company began offer variable term contracts advertising customers prepay full amount portion contract value new customers desiring expand advertising programs subject credit review customers qualify may extend credit form trade receivable advertising purchase local businesses tend fewer financial resources higher failure rates large businesses addition full collection delinquent accounts take extended period time involve significant costs require collateral customers although charge late fees customers pay specified due dates remaining approximately 15 advertising revenue derived sale marketing solutions national large regional chains substantially revenue derived national accounts serviced cmrs accept orders cmrs independent third parties act agents national customers cmrs responsible billing national customers advertising receive payment value advertising placed directories net cmr’s commission directly cmr derivative financial instruments december 31 2011 interest rate swap interest rate cap agreements major financial institutions notional amount 5000 million 4000 million respectively exposed credit risk event one counterparties agreements cannot meet obligation notional amount interest rate swaps used measure interest paid received represent amount exposure credit loss would limited amount would received remaining life interest rate swap agreement terms interest rate cap agreements company receive payments based spread rates threemonth libor rate increases negotiated cap rates loss would limited amount would received based spread rates remaining life interest rate cap agreement counterparties interest rate swap interest rate cap agreements major financial institutions credit ratings aa higher equivalent dependent upon credit rating agency derivative financial instruments hedging activities use derivative financial instruments trading speculative purposes derivative financial instruments limited interest rate swap interest rate cap agreements company utilizes combination fixed rate debt variable rate debt finance operations variable rate debt exposes company variability interest payments due changes interest rates management believes prudent mitigate interest rate risk portion variable rate borrowings satisfy objectives requirements company entered interest rate swap interest rate cap agreements designated cash flow hedges manage exposure interest rate fluctuations variable rate debt day derivative contract executed company may designate derivative instrument hedge variability cash flows received paid cash flow hedge designated hedging relationships company would formally document hedging relationship riskmanagement objective strategy undertaking hedge hedging instrument item nature risk hedged hedging instrument’s effectiveness offsetting hedged risk assessed description method measuring ineffectiveness company would also formally assess hedge’s inception ongoing basis whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged items derivative financial instruments recognized either assets liabilities consolidated balance sheets measurement fair value quarterly basis fair values interest rate swaps interest rate caps determined based quoted market prices derivative instruments designated cash flow hedges initial fair value subsequent gains losses change fair value interest rate swaps interest rate caps reported earnings component interest expense gains losses related quarterly fair value adjustments presented noncash operating activity consolidated statements cash flows derivative instruments designated cash flow hedges determined provide effective hedge differences fair value book value derivative instruments recognized accumulated comprehensive income loss component shareholders equity deficit company discontinues hedge accounting prospectively determined derivative longer highly effective offsetting changes cash flows hedged item derivative hedged item expired sold terminated exercised management determines designation derivative hedging instrument longer appropriate situations hedge accounting discontinued company continues carry derivative fair value consolidated balance sheet recognizes subsequent changes fair value earnings component interest expense amounts previously recorded accumulated comprehensive income loss amortized interest expense periods interest expense underlying debt impacts earnings using derivative financial instruments hedge exposures changes interest rates company exposes credit risk market risk credit risk possible failure counterparty perform terms derivative contract fair value derivative contract positive counterparty owes company creates credit risk company fair value derivative contract negative company owes counterparty therefore subject credit risk company minimizes credit risk derivative financial instruments entering transactions major financial institutions credit ratings aa higher equivalent dependent upon credit rating agency market risk adverse effect value financial instrument results change interest rates market risk associated interestrate contracts managed establishing monitoring parameters limit types degree market risk may undertaken see note 6 “derivative financial instruments” additional information regarding interest rate swaps interest rate caps pension postretirement benefits pension postretirement benefits represent estimated amounts paid employees future accounting benefits reflects recognition benefit costs employee’s approximate service period based terms plan investment funding decisions made determination benefit obligation net periodic pension postretirement benefit costs requires management make assumptions regarding discount rate return retirement plan assets healthcare cost trends changes assumptions significant impact projected benefit obligation funding requirement net periodic benefit cost assumed discount rate pension benefits could settled year ended december 31 2011 eleven months ended december 31 2010 one month ended january 31 2010 year ended december 31 2009 company predecessor company utilized outsource provider’s yield curve determine appropriate discount rate defined benefit pension plans based individual plans’ expected future cash flows expected longterm rate return plan assets based mix assets held plan expected longterm rates return within asset class anticipated trend future healthcare costs based historical experience external factors see note 9 “benefit plans” information regarding benefit plans income taxes account income taxes asset liability method accordance fasb asc 740 income taxes “fasb asc 740” deferred income tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting adjust deferred income tax liabilities assets appropriate reflect changes tax rates expected effect temporary differences reverse establish valuation allowance offset deferred income tax assets based available evidence likely deferred income tax assets realized recognize uncertain income tax positions taken expected taken tax returns largest amount likely sustained upon audit relevant taxing authority uncertain income tax position recognized less 50 likelihood sustained company’s policy recognize interest penalties related unrecognized tax benefits income tax expense see note 7 “income taxes” additional information regarding provision benefit income taxes earnings loss per share calculation basic diluted earnings loss per share “eps” company year ended december 31 2011 eleven months ended december 31 2010 predecessor company one month ended january 31 2010 year ended december 31 2009 respectively presented diluted eps calculated dividing net income weighted average common shares outstanding plus dilutive potential common stock potential common stock includes stock options stock appreciation rights “sars” restricted stock dilutive effect calculated using treasury stock method due company’s reported net loss year ended december 31 2011 eleven months ended december 31 2010 predecessor company’s reported net loss year ended december 31 2009 effect stockbased awards antidilutive therefore included calculation diluted eps year ended december 31 2011 eleven months ended december 31 2010 27 million shares 13 million shares respectively company’s stockbased awards exercise prices exceeded average market price company’s common stock period one month ended january 31 2010 year ended december 31 2009 46 million shares predecessor company’s stockbased awards exercise prices exceeded average market price predecessor company’s common stock respective period stockbased awards company maintains dex one equity incentive plan “eip” whereby certain employees nonemployee directors company eligible receive stock options sars limited stock appreciation rights tandem stock options restricted stock restricted stock units eip 56 million shares common stock originally authorized grant extent shares common stock issued delivered reason expiration termination cancellation forfeiture award certain exceptions shares acquired employees satisfy minimum tax obligations related vesting restricted stock awards ii settlement award cash shares common stock shall available eip stock awards typically granted closing market value common stock date grant become exercisable ratable installments otherwise period one four years date grant may exercised maximum ten years date grant company’s compensation benefits committee determines termination vesting relevant provisions date grant nonemployee directors company eligible receive stockbased awards annual basis grant date value equal 75000 upon emergence chapter 11 pursuant plan outstanding equity securities predecessor company including stock options sars restricted stock cancelled periods prior effective date predecessor company maintained shareholder approved stock incentive plan 2005 stock award incentive plan “2005 plan” whereby certain employees nonemployee directors eligible receive stock options sars limited stock appreciation rights tandem stock options restricted stock prior adoption 2005 plan predecessor company maintained shareholder approved stock incentive plan 2001 stock award incentive plan “2001 plan” 2005 plan 2001 plan 5 million 4 million shares respectively originally authorized grant stock awards typically granted market value predecessor company’s common stock date grant became exercisable ratable installments otherwise period one five years date grant able exercised maximum ten years date grant predecessor company’s compensation benefits committee determined termination vesting relevant provisions date grant predecessor company implemented policy issuing treasury shares satisfy stock issuances associated stockbased award exercises company predecessor company record stockbased compensation expense consolidated statements operations employee stockbased awards based grant date fair values company predecessor company estimate forfeitures requisite service period recognizing compensation expense estimated forfeitures adjusted extent actual forfeitures differ expected materially differ estimates company used estimated weighted average forfeiture rate determining stockbased compensation expense 63 89 year ended december 31 2011 eleven months ended december 31 2010 respectively predecessor company used estimated weighted average forfeiture rate determining stockbased compensation expense 80 first quarter 2009 102 remainder 2009 january 2010 see note 8 “stock incentive plans” additional information regarding company’s predecessor company’s stock incentive plans 2009 longterm incentive plan executive officers company’s 2009 longterm incentive plan executive officers “2009 ltip” cashbased plan designed provide longterm incentive compensation participants based achievement performance goals 2009 ltip originally approved predecessor company’s compensation benefits committee 2009 bankruptcy proceedings bankruptcy court approved 2009 ltip carried forward company upon emergence chapter 11 company’s compensation benefits committee administers 2009 ltip sole discretion may subject certain exceptions delegate power authority 2009 ltip chief executive officer executive officer company participants 2009 ltip consist executive officers company predecessor company affiliates compensation benefits committee sole discretion may select time ii employees company predecessor company subsidiaries affiliates chief executive officer sole discretion may select time amount award 2009 ltip paid cash dependent upon attainment certain performance measures related amount company’s predecessor company’s cumulative free cash flow 2009 2010 2011 fiscal years “performance period” participants executive officers company predecessor company certain participants designated chief executive officer also eligible receive payment upon achievement restructuring reorganization andor recapitalization relating predecessor company’s outstanding indebtedness liabilities “specified actions” performance period payments made following end performance period date specified action case may upon emergence chapter 11 achievement specified actions company made cash payments associated 2009 ltip 80 million eleven months ended december 31 2010 cashbased awards granted participants april 2009 company recognized compensation expense related 2009 ltip 12 million 48 million year ended december 31 2011 eleven months ended december 31 2010 respectively predecessor company recognized compensation expense related 2009 ltip 05 million 50 million one month ended january 31 2010 year ended december 31 2009 respectively fair value financial instruments december 31 2011 2010 fair value cash equivalents accounts receivable net accounts payable accrued liabilities approximated carrying value based net shortterm nature instruments company’s assets liabilities fair valued fresh start reporting date connection adoption fresh start accounting see annual report form 10k year ended december 31 2010 detailed information methodology assumptions used value assets liabilities conjunction adoption fresh start accounting estimates fair value may affected assumptions made accordingly necessarily indicative amounts company could realize current market exchange fasb asc 820 fair value measurements disclosures “fasb asc 820” defines fair value establishes fair value hierarchy prioritizes inputs valuation techniques used measure fair value expands disclosures fair value measurements fasb asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy gives highest priority quoted prices active markets comprised following three levels • level 1 unadjusted quoted market prices active markets identical assets liabilities • level 2 observable inputs level 1 inputs quoted prices similar assets liabilities quoted prices markets insufficient volume infrequent transactions modelderived valuations significant inputs observable derived principally corroborated observable market data substantially full term assets liabilities • level 3 prices valuations require inputs significant measurement unobservable required fasb asc 820 assets liabilities classified based lowest level input significant fair value measurement company’s assessment significance particular input fair value measurement requires judgment may affect valuation fair value assets liabilities placement within fair value hierarchy levels company interest rate swaps notional amount 5000 million interest rate caps notional amount 4000 million december 31 2011 2010 measured fair value recurring basis following table presents company’s assets liabilities measured fair value recurring basis december 31 2011 2010 respectively level within fair value hierarchy fair value measurements included transfers assets liabilities levels 1 2 3 year ended december 31 2011 eleven months ended december 31 2010 company established policy recognizing transfers levels fair value hierarchy end reporting period company’s longterm debt obligations measured fair value recurring basis however present fair value dex one senior subordinated notes defined note 3 “fresh start accounting reorganization items net” amended restated credit facilities note 5 “longterm debt credit facilities notes” company utilized quoted market prices available compute fair market value longterm debt obligations december 31 2011 2010 dex one senior subordinated notes categorized within level 1 fair value hierarchy amended restated credit facilities categorized within level 2 fair value hierarchy valuation techniques interest rate swaps interest rate caps fair value marketbased measure considered perspective market participant holds asset owes liability rather entityspecific measure therefore even market assumptions readily available company’s assumptions set reflect market participants would use pricing asset liability measurement date company uses prices inputs current measurement date fair value derivative instruments derived using pricing models based market approach pricing models take account relevant observable market inputs market participants would use pricing asset liability pricing models used determine fair value derivative instruments incorporate specific contract terms valuation inputs including effective dates maturity dates interest rate swap pay rates interest rate cap rates notional amounts disclosed presented note 6 “derivative financial instruments” interest rate yield curves creditworthiness counterparty company counterparty credit risk company’s credit risk could material impact fair value derivative instruments results operations financial condition particular reporting period december 31 2011 impact applying counterparty credit risk determining fair value derivative instruments increase derivative instruments liability less 01 million december 31 2011 impact applying company’s credit risk determining fair value derivative instruments decrease derivative instruments liability 11 million many pricing models entail material subjectivity methodologies employed necessitate significant judgment pricing inputs observed actively quoted markets case derivative instruments pricing models used company widely accepted financial services industry noted derivative instruments categorized within level 2 fair value hierarchy fair value control processes interest rate swaps interest rate caps company employs control processes validate fair value derivative instruments derived pricing models control processes designed assure values used financial reporting based observable inputs wherever possible event observable inputs available control processes designed assure valuation approach utilized appropriate consistently applied assumptions reasonable benefit plan assets fair values company’s benefit plan assets disclosures required fasb asc 71520 compensation retirement benefits presented note 9 “benefit plans” estimates preparation financial statements conformity gaap requires management make estimates assumptions affect reported amounts assets liabilities revenues certain expenses disclosure contingent assets liabilities actual results could differ materially estimates assumptions estimates assumptions used determination recoverability longlived assets sales allowances doubtful accounts depreciation amortization employee benefit plans expense restructuring expense accruals deferred income taxes certain assumptions pertaining stockbased awards certain estimates assumptions used impairment evaluation goodwill definitelived intangible assets longlived assets among others new accounting pronouncements september 2011 fasb issued asu 201108 intangibles goodwill topic 350 testing goodwill impairment “asu 201108” asu 201108 simplifies entities test goodwill impairment permitting entities first assess qualitative factors determine whether likely fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test described topic 350 likely threshold defined likelihood 50 percent entity required calculate fair value reporting unit unless entity determines based qualitative assessment likely fair value less carrying amount asu 201108 also improves previous guidance expanding upon examples events circumstances entity consider annual impairment tests determining whether likely fair value reporting unit less carrying amountasu 201108 effective annual interim goodwill impairment tests performed fiscal years beginning december 15 2011 early adoption permitted company’s goodwill fully impaired second quarter 2011 time adoption asu 201108 impact financial position result operations june 2011 fasb issued asu 201105 comprehensive income topic 220 presentation comprehensive income “asu 201105” asu 201105 allows entity option present total comprehensive income components net income components comprehensive income either single continuous statement comprehensive income two separate consecutive statements choices entity required present component net income along total net income component comprehensive income along total comprehensive income total amount comprehensive income asu 201105 eliminates option present components comprehensive income part statement changes shareholders equity asu 201105 change items must reported comprehensive income item comprehensive income must reclassified net income asu 201105 applied retrospectively effective fiscal years interim periods within years beginning december 15 2011 december 2011 fasb issued asu 201112 comprehensive income topic 220 deferral effective date amendments presentation reclassifications items accumulated comprehensive income accounting standards update 201105 asu 201112 asu 201112 defers effective date provisions included asu 201105 require entities present reclassification adjustments accumulated comprehensive income component statement net income presented statement comprehensive income presented interim annual financial statements asu 201112 states entities must continue report reclassification adjustments accumulated comprehensive income consistent presentation requirements effect asu 201105 adoption asu 201105 affect reporting information noted impact financial position result operations company currently evaluating presentation alternatives noted asu 201105 monitoring fasbs deliberations regarding asu 201112 may 2011 fasb issued asu 201104 fair value measurement topic 820 amendments achieve common fair value measurement disclosure requirements us gaap ifrss “asu 201104’ asu 201104 issued provide consistent definition fair value ensure fair value measurement disclosure requirements similar us gaap international financial reporting standards asu 201104 clarifies fasb’s intent application existing fair value measurement disclosure requirements changes certain fair value measurement principles enhances fair value disclosure requirements asu 201104 effective interim annual reporting periods beginning december 15 2011 applied prospectively company expect adoption asu 201104 impact financial position results operations reviewed accounting pronouncements issued december 31 2011 company yet adopted believe pronouncements material impact financial position operating results 3 fresh start accounting reorganization items net company adopted fresh start accounting reporting effective february 1 2010 fresh start reporting date accordance fasb asc 852 reorganizations “fasb asc 852” holders existing voting shares immediately confirmation plan received less 50 voting shares emerging entity reorganization value company’s assets immediately date confirmation less postpetition liabilities allowed claims company required adopt fresh start accounting reporting january 29 2010 effective date however light proximity date accounting period close immediately effective date january 31 2010 well results materiality assessment elected adopt fresh start accounting reporting february 1 2010 financial statements fresh start reporting date report results dex one beginning retained earnings accumulated deficit presentation dex one represents financial position results operations new reporting entity comparable prior periods presented rhd consolidated financial statements periods ended prior fresh start reporting date purport reflect provide consequences chapter 11 proceedings include effect changes predecessor company’s capital structure changes fair value assets liabilities result fresh start accounting fasb asc 852 requires financial statements distinguish transactions events directly associated process reorganizing business chapter 11 ongoing operations business reorganization items include certain expenses professional fees realized gains losses provisions losses realized reorganization restructuring process predecessor company classified items reorganization items net consolidated statement operations predecessor company recorded 78 billion reorganization items one month ended january 31 2010 comprised preemergence gain 45 billion resulting discharge liabilities plan partially offset issuance new dex one common stock establishment additional paidin capital issuance 3000 million aggregate principal amount 1214 senior subordinated notes due 2017 “dex one senior subordinated notes” ii preemergence charges earnings recorded reorganization items resulting certain costs expenses relating plan becoming effective iii preemergence increase earnings 33 billion resulting aggregate changes net carrying value preemergence assets liabilities reflect fair values fresh start accounting well recognition goodwill following table displays details reorganization items one month ended january 31 2010 1 liabilities subject compromise generally refer prepetition obligations secured unsecured may impaired plan reorganization fasb asc 852 requires liabilities including became known filing chapter 11 petitions reported amounts expected allowed even may settled lesser amounts table identifies principal categories liabilities subject compromise january 31 2010 subsequently discharged plan 2 effective date company issued aggregate amount 500 million shares new common stock par value 001 per share established additional paidin capital 15 billion based fair value equity less par value dex one common stock 3 effective date accordance plan issued dex one senior subordinated notes holders dex media west 85 senior notes due 2010 5875 senior notes due 2011 pro rata basis addition share reorganized dex one equity 4 represents liabilities originally classified liabilities subject compromise assumed plan reclassified liabilities subject compromise 5 predecessor company incurred professional fees associated filing chapter 11 petitions 306 million one month ended january 31 2010 227 million paid cash one month ended january 31 2010 professional fees included financial legal valuation services directly associated reorganization process one month ended january 31 2010 predecessor company receive operating cash receipts resulting filing chapter 11 petitions 6 excess reorganization value fair value identified tangible intangible assets 21 billion recorded goodwill see “enterprise value reorganization value determination” additional information 7 adoption fresh start accounting significant impact results operations company commencing fresh start reporting date result deferral amortization method revenue recognition recognized advertising revenues reflect amortization advertising sales consummated prior periods well current period fresh start accounting precluded us recognizing substantially deferred advertising revenue 7910 million related deferred directory costs 1355 million based minimal obligations subsequent fresh start reporting date associated advertising sales fulfilled prior fresh start reporting date 8 determination fair value intangible assets resulted 4151 million net increase intangible assets reorganized condensed consolidated balance sheet january 31 2010 determination fair value fixed assets computer software resulted 498 million net increase fixed assets computer software reorganized condensed consolidated balance sheet january 31 2010 9 conjunction adoption fresh start accounting adjustment established record outstanding debt fair value fresh start reporting date total discount 1202 million recorded upon adoption fresh start accounting associated amended restated credit facilities see note 2 “summary significant accounting policies interest expense deferred financing costs” note 5 “longterm debt credit facilities notes” additional information 10 result fresh start accounting deferred financing costs 484 million associated predecessor company’s existing credit facilities eliminated 11 represents various fresh start accounting adjustments including adjustments deferred rent prepaid expenses current assets year ended december 31 2009 predecessor company recorded 948 million reorganization items net consolidated statement operations following table displays details reorganization items year ended december 31 2009 1 predecessor company incurred professional fees associated filing chapter 11 petitions 774 million year ended december 31 2009 676 million paid cash 2 writeoff unamortized deferred financing costs 645 million unamortized net premiums discounts 349 million unamortized fair value adjustments required gaap result dex media merger 785 million may 28 2009 relate longterm debt classified liabilities subject compromise december 31 2009 3 predecessor company recognized 35 million year ended december 31 2009 associated rejected leases abandoned property approved bankruptcy court december 31 2009 part chapter 11 proceedings 2009 predecessor company receive operating cash receipts resulting filing chapter 11 petitions enterprise value reorganization value determination enterprise value represents fair value entity’s interestbearing debt shareholders’ equity disclosure statement associated plan confirmed bankruptcy court estimated range enterprise values 42 billion 53 billion midpoint 48 billion based current anticipated economic conditions direct impact conditions business deemed appropriate use midpoint low end range overall midpoint range determine final enterprise value 45 billion comprised debt valued 33 billion equity valued 13 billion less cash required hand result plan 1250 million fasb asc 852 provides among things determination value assigned assets reorganized company date selected financial reporting purposes company adjusted enterprise value 45 billion certain items postpetition liabilities deferred income taxes cash hand post emergence determine reorganization value 59 billion fresh start accounting reorganization value allocated dex one’s assets based respective fair values conformity purchase method accounting business combinations included fasb asc 805 business combinations excess reorganization value fair value identified tangible intangible assets 21 billion recorded goodwill see annual report form 10k year ended december 31 2010 detailed information critical estimates assumptions methodologies used determining company’s enterprise value reorganization value fair values assets liabilities fresh start accounting well impact emergence reorganization fresh start accounting financial position results operations cash flows 4 restructuring charges successor company actions fourth quarter 2010 company initiated restructuring plan includes headcount reductions consolidation responsibilities vacating leased facilities “restructuring actions” continued throughout 2011 employees impacted restructuring actions notified termination fourth quarter 2010 throughout 2011 addition company vacated certain leased facilities 2011 result restructuring actions recognized restructuring charge earnings 250 million 186 million made payments 319 million 07 million year ended december 31 2011 eleven months ended december 31 2010 respectively related severance vacating leased facilities related restructuring activities following table shows activity restructuring reserve associated restructuring actions since inception predecessor company actions 2009 predecessor company initiated restructuring plan included vacating leased facilities headcount reductions “2009 actions” eleven months ended december 31 2010 company relieved remaining restructuring reserve associated 2009 actions 02 million earnings company made payments associated 2009 actions 03 million eleven months ended december 31 2010 one month ended january 31 2010 predecessor company relieved portion restructuring reserve associated 2009 actions 06 million corresponding credit earnings predecessor company make payments associated 2009 actions one month ended january 31 2010 year ended december 31 2009 predecessor company recognized restructuring charge earnings associated 2009 actions 54 million made payments 24 million second quarter 2008 predecessor company initiated restructuring plan included headcount reductions consolidation responsibilities vacating leased facilities “2008 actions” occurred 2008 continued 2009 year ended december 31 2009 predecessor company recognized restructuring charge earnings associated 2008 actions 93 million made payments 175 million restructuring charges charged credited earnings included production distribution expenses selling support expenses general administrative expenses consolidated statements operations applicable 5 longterm debt credit facilities notes following table presents fair market value longterm debt december 31 2011 2010 based quoted market prices dates well carrying value longterm debt december 31 2011 2010 includes 632 million 910 million respectively unamortized fair value discount adjustments required gaap connection company’s adoption fresh start accounting fresh start reporting date credit facilities rhdi amended restated credit facility december 31 2011 outstanding balance amended restated rhdi credit facility “rhdi amended restated credit facility” totaled 9472 million rhdi amended restated credit facility requires quarterly principal interest payments option either ◦ highest subject floor 400 prime rate defined rhdi amended restated credit facility ii federal funds effective rate defined rhdi amended restated credit facility plus 050 iii one month libor plus 100 case plus interest rate margin base rate loans interest rate margin base rate loans initially 525 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 525 per annum rhdi’s consolidated leverage ratio greater equal 425 100 equal 500 per annum rhdi’s consolidated leverage ratio less 425 100 ◦ higher libor rate ii 300 case plus interest rate margin eurodollar loans interest rate margin eurodollar loans initially 625 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 625 per annum rhdi’s consolidated leverage ratio greater equal 425 100 equal 600 per annum rhdi’s consolidated leverage ratio less 425 100 rhdi may elect interest periods one two three six months libor borrowings rhdi amended restated credit facility matures october 24 2014 weighted average interest rate outstanding debt rhdi amended restated credit facility 90 december 31 2011 dex media east amended restated credit facility december 31 2011 outstanding balance amended restated dex media east credit facility “dex media east amended restated credit facility” totaled 6516 million dex media east amended restated credit facility requires quarterly principal interest payments option either ◦ highest prime rate defined dex media east amended restated credit facility ii federal funds effective rate defined dex media east amended restated credit facility plus 050 iii one month libor plus 100 case plus interest rate margin base rate loans interest rate margin base rate loans initially 150 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 150 per annum dme inc’s consolidated leverage ratio greater equal 275 100 equal 125 per annum dme inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 100 per annum dme inc’s consolidated leverage ratio less 250 100 ◦ libor rate plus interest rate margin eurodollar loans interest rate margin eurodollar loans initially 250 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 250 per annum dme inc’s consolidated leverage ratio greater equal 275 100 equal 225 per annum dme inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 200 per annum dme inc’s consolidated leverage ratio less 250 100 dme inc may elect interest periods one two three six months libor borrowings dex media east amended restated credit facility matures october 24 2014 weighted average interest rate outstanding debt dex media east amended restated credit facility 30 december 31 2011 dex media west amended restated credit facility december 31 2011 outstanding balance amended restated dex media west credit facility “dex media west amended restated credit facility” totaled 6116 million dex media west amended restated credit facility requires quarterly principal interest payments option either ◦ highest subject floor 400 prime rate defined dex media west amended restated credit facility ii federal funds effective rate defined dex media west amended restated credit facility plus 050 iii one month libor plus 100 case plus interest rate margin base rate loans interest rate margin base rate loans initially 350 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 350 per annum dmw inc’s consolidated leverage ratio greater equal 275 100 equal 325 per annum dmw inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 300 per annum dmw inc’s consolidated leverage ratio less 250 100 ◦ higher libor rate ii 300 case plus interest rate margin eurodollar loans interest rate margin eurodollar loans initially 450 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 450 per annum dmw inc’s consolidated leverage ratio greater equal 275 100 equal 425 per annum dmw inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 400 per annum dmw inc’s consolidated leverage ratio less 250 100 dmw inc may elect interest periods one two three six months libor borrowings dex media west amended restated credit facility matures october 24 2014 weighted average interest rate outstanding debt dex media west amended restated credit facility 72 december 31 2011 amended restated credit facilities described includes uncommitted revolving credit facility available borrowings 400 million availability uncommitted revolving credit facility subject certain conditions including prepayment term loans amended restated credit facilities amount equal revolving credit facility amended restated credit facilities contain provisions prepayment net proceeds asset dispositions equity issuances debt issuances subject certain exceptions ratable portion net proceeds received company asset dispositions company subject certain exceptions portion excess cash flow amended restated credit facilities described contain certain covenants subject exceptions limit restrict borrower subsidiaries’ incurrence liens investments including acquisitions sales assets indebtedness payment dividends distributions payments certain indebtedness sale leaseback transactions swap transactions affiliate transactions capital expenditures mergers liquidations consolidations amended restated credit facility also contains certain covenants subject exceptions limit restrict borrower’s incurrence liens indebtedness ownership assets sales assets payment dividends distributions modifications dex one senior subordinated notes borrower required maintain compliance consolidated leverage ratio covenant rhdi dmw inc also required maintain compliance consolidated interest coverage ratio covenant dmw inc also required maintain compliance consolidated senior secured leverage ratio covenant dex media west amended restated credit agreement includes option additional covenant relief senior secured leverage covenant fourth quarter 2011 subject increased amortization loans first quarter 2012 increase excess cash flow sweep 2011 payment 25 basis point fee ratably lenders dex media west amended restated credit agreement march 31 2010 company exercised senior secured leverage ratio election defined dex media west amended restated credit agreement company incurred fee 21 million exercise option obligations amended restated credit facilities guaranteed subsidiaries secured lien substantially subsidiaries’ tangible intangible assets including pledge stock respective subsidiaries well mortgage certain real property pursuant shared guaranty collateral agreement subject intercreditor agreement among administrative agents amended restated credit facilities company subject certain exceptions certain subsidiaries company guaranty obligations amended restated credit facilities obligations secured lien substantially guarantors’ tangible intangible assets company’s subsidiary dex one digital including pledge stock respective subsidiaries well mortgage certain real property notes dex one senior subordinated notes effective date issued 3000 million dex one senior subordinated notes exchange dex media west 85 senior notes due 2010 5875 senior notes due 2011 interest dex one senior subordinated notes payable semiannually march 31st september 30th year commencing march 31 2010 january 29 2017 dex one senior subordinated notes accrue interest annual rate 12 cash interest payments 14 company elects paidinkind “pik” interest payments company may elect later two business days prior beginning semiannual interest period whether make interest payment dex one senior subordinated notes entirely cash ii 50 cash 50 pik interest capitalized incremental additional senior subordinated notes year ended december 31 2011 company made interest payments entirely cash september 2011 company elected pay interest amounts dex one senior subordinated notes 50 cash 50 pik interest lieu making interest payments entirely cash semiannual interest period ending march 31 2012 permitted indenture governing dex one senior subordinated notes subsequent semiannual interest periods company may make election within prescribed timeframe noted absence election subsequent semiannual interest period interest dex one senior subordinated notes payable form interest payment semiannual interest period immediately preceding subsequent semiannual interest period interest rate dex one senior subordinated notes may subject adjustment event company incurs certain specified debt higher effective yield maturity yield maturity dex one senior subordinated notes dex one senior subordinated notes unsecured obligations company effectively subordinated right payment company’s existing future secured debt including dex one’s guarantee borrowings amended restated credit facilities structurally subordinated existing future liabilities including trade payables direct indirect subsidiaries indenture governing dex one senior subordinated notes contains certain covenants subject certain exceptions among things limit restrict company’s certain cases company’s restricted subsidiaries’ incurrence indebtedness making certain restricted payments incurrence liens entry transactions affiliates conduct business merger consolidation sale substantially property indenture governing dex one senior subordinated notes also requires company offer repurchase dex one senior subordinated notes par certain changes control involving company sale substantially assets company holders dex one senior subordinated notes also may cause company repurchase dex one senior subordinated notes price 101 principal amount upon incurrence company certain acquisition indebtedness dex one senior subordinated notes remaining face value 3000 million december 31 2011 redeemable option following prices percentage face value following table presents aggregate maturities longterm debt december 31 2011 1 includes current portion 2 excludes fair value adjustments result fresh start accounting 3 assumes issuance additional dex one senior subordinated notes result companys election make pik interest payments commencing semiannual interest period ending march 31 2012 maturity impact fresh start accounting conjunction adoption fresh start accounting adjustment established record outstanding debt fair value fresh start reporting date company required record amended restated credit facilities discount result fair value fresh start reporting date therefore carrying amount debt obligations lower principal amount due maturity total discount 1202 million recorded upon adoption fresh start accounting associated amended restated credit facilities 632 million remains unamortized december 31 2011 shown following table 6 derivative financial instruments successor company entered following interest rate swaps effectively convert 5000 million approximately 23 company’s variable rate debt fixed rate debt december 31 2011 since rhdi amended restated credit facility dex media west amended restated credit facility subject libor floor 300 libor rate floor december 31 2011 credit facilities effectively fixed rate debt time libor exceeds stated floor december 31 2011 approximately 88 total debt outstanding consisted variable rate debt excluding effect interest rate swaps including effect interest rate swaps total fixed rate debt comprised approximately 32 total debt portfolio december 31 2011 interest rate swaps mature varying dates february 2012 february 2013 interest rate swaps dex media east terms interest rate swap agreements receive variable interest based threemonth libor pay weighted average fixed rate 15 weighted average rate received interest rate swaps 05 year ended december 31 2011 periodic payments receipts recorded interest expense terms interest rate cap agreements company receive payments based spread rates threemonth libor rate increases cap rates noted table company paid 21 million interest rate cap agreements entered first quarter 2010 required make future payments related interest rate cap agreements interest rate caps rhdi 1 consists one swap 2 consists three swaps 3 consists two caps 4 consists one cap following tables present fair value interest rate swaps interest rate caps december 31 2011 2010 fair value interest rate swaps presented accounts payable accrued liabilities noncurrent liabilities fair value interest rate caps presented prepaid expenses current assets noncurrent assets consolidated balance sheet december 31 2011 2010 following tables also present gain loss recognized interest expense change fair value interest rate swaps interest rate caps year ended december 31 2011 eleven months ended december 31 2010 company recognized expense related interest rate swaps interest rate caps earnings including accrued interest 28 million 132 million year ended december 31 2011 eleven months ended december 31 2010 respectively predecessor company result filing chapter 11 petitions predecessor company interest rate swaps designated cash flow hedges one month ended january 31 2010 year ended december 31 2009 predecessor company recognized interest expense 23 million 45 million respectively associated change fair value interest rate swaps one month ended january 31 2010 year ended december 31 2009 predecessor company recognized expense 30 million 410 million respectively related interest rate swaps earnings including accrued interest year ended december 31 2009 predecessor company recognized gain accumulated comprehensive loss 37 million effective interest rate swaps accordance fresh start accounting unamortized amounts previously charged accumulated comprehensive loss 153 million related predecessor company’s interest rate swaps eliminated fresh start reporting date 7 income taxes current income tax provision benefit represents estimated taxes payable refundable current year based enacted tax laws rates deferred income tax assets liabilities determined based estimated future tax effects temporary differences financial statement carrying amount tax basis assets liabilities measured tax rates temporary differences expected reverse deferred income tax provision benefit result changes deferred income tax assets liabilities valuation allowance recognized reduce gross deferred tax assets amount likely realized components provision benefit income taxes reconciliation statutory federal tax rate effective tax rate components deferred tax assets liabilities reconciliation gross unrecognized tax benefits successor company components benefit income taxes income tax benefit 1248 million year ended december 31 2011 comprised federal tax benefit 929 million state tax benefit 318 million federal tax benefit 929 million comprised current tax benefit 189 million primarily related decreases liability unrecognized tax benefits deferred tax benefit 740 million due changes temporary differences related goodwill impairment changes deferred tax liabilities relating stock basis subsidiaries internal revenue code irc section 1245 recapture changes recorded valuation allowances year ended december 31 2011 state tax benefit 318 million comprised current tax provision 29 million primarily related suspension net operating loss carryforwards certain states deferred tax benefit 347 million primarily due changes temporary differences related goodwill impairment changes liabilities relating stock basis subsidiaries irc section 1245 recapture year ended december 31 2011 company recorded goodwill impairment charge 8011 million second quarter 2011 4572 million related nondeductible goodwill impairment nondeductible goodwill reduced income tax benefit impairment 1772 million decreased effective tax rate 275 year ended december 31 2011 goodwill impairment charge recognized second quarter 2011 gave rise deferred tax asset whose realization meet morelikelythannot threshold therefore requiring valuation allowance addition changes deferred tax assets liabilities primarily related filing 2010 consolidated federal tax return resulted increases valuation allowance year ended december 31 2011 resulting increase income tax expense year ended december 31 2011 512 million decreased effective tax rate 80 year ended december 31 2011 upon emergence bankruptcy company recorded deferred tax liabilities related excess financial statement carrying amount tax basis investments certain subsidiaries irc section 1245 recapture goodwill impairment charge reduced financial statement carrying amount investments certain subsidiaries also caused reduction deferred tax liabilities resulting reduction income tax expense year ended december 31 2011 related change deferred tax liabilities 811 million increased effective tax rate 126 year ended december 31 2011 discharge debt conjunction emergence chapter 11 resulted tax gain 50166 million generally discharge debt obligation amount less adjusted issue price creates cancellation debt income codi must included taxpayers taxable income accordance irc section 108 lieu recognizing taxable income bankruptcyrelated codi company required reduce existing tax attributes conjunction filing consolidated federal tax return year ended december 31 2010 company made election irc section 108b5 first apply reduction certain amortizable depreciable property certain subsidiaries result election adjustments related filing federal consolidated tax return company recognized increase deferred tax assets related net operating losses approximately 3287 million increases primarily offset decreases basis amortizable depreciable property income tax benefit 6201 million eleven months ended december 31 2010 comprised federal tax benefit 5677 million state tax benefit 524 million federal tax benefit 5677 million comprised current tax provision 13 million primarily related unrecognized tax benefits deferred tax benefit 5690 million primarily related current year net operating loss recognition unrecognized tax position goodwill impairment charges eleven months ended december 31 2010 state tax benefit 524 million comprised current tax benefit 38 million primarily related expected state tax refunds deferred tax benefit 486 million primarily related recognition unrecognized tax position eleven months ended december 31 2010 reconciliation statutory federal tax rate effective tax rate effective tax rate benefit 194 year ended december 31 2011 differs federal statutory rate 350 primarily due state income taxes nondeductible goodwill impairment changes deferred tax liabilities related stock basis subsidiaries irc section 1245 recapture changes recorded valuation allowances decreases liability unrecognized tax benefits adjustments related filing consolidated federal income tax return effective tax rate benefit 402 eleven months ended december 31 2010 higher federal statutory tax rate 350 primarily due increases income tax benefits recognition unrecognized tax position offset part increase income tax expense related nondeductible impairment charge components deferred tax assets liabilities total deferred tax assets valuation allowance 5780 million total deferred tax liabilities 4285 million december 31 2011 deferred tax assets 5005 million represent net operating loss credit carryforwards assessing amount deferred tax assets likely realized established valuation allowance 1572 million representing extent deferred tax assets supported future reversals existing taxable temporary differences total deferred tax assets valuation allowance 3033 million total deferred tax liabilities 3273 million december 31 2010 deferred tax assets 2128 million represent net operating loss credit carryforwards assessing amount deferred tax assets likely realized established valuation allowance 976 million representing extent deferred tax assets supported future reversals existing taxable temporary differences reconciliation gross unrecognized tax benefits june 15 2011 federal statute limitations closed tax year prior uncertain tax position related revenue recognition established result company decreased liability unrecognized tax benefits associated federal state uncertain tax position 282 million recorded tax benefit 240 million year ended december 31 2011 increased effective tax rate 37 year ended december 31 2011 year ended december 31 2011 company increased liability unrecognized tax benefits 52 million primarily related uncertainty realization certain tax attributes available reduction irc section 108 reduced income tax benefit 51 million decreased effective tax rate 08 year ended december 31 2011 third quarter 2011 company increased liability unrecognized tax benefits 18 million related exclusion nonbusiness income state illinois fourth quarter 2011 company reached settlement state illinois eliminated related liability unrecognized tax benefits tax years 2008 2010 subject examination internal revenue service “irs” certain state tax returns examination various regulatory authorities state tax return years open examination average three years however certain jurisdictions remain open examination longer three years due existence net operating loss carryforwards statutory waivers continually review issues raised connection ongoing examinations open tax years evaluate adequacy reserves believe accrued tax liabilities fasb asc 740 adequate cover uncertain tax positions related federal state income taxes included balance unrecognized tax benefits december 31 2011 2010 57 million 246 million respectively tax benefits recognized would favorably affect effective tax rate company believe reasonably possible unrecognized tax benefits december 31 2011 could decrease within next twelve months policy recognize interest penalties related unrecognized tax benefits income tax expense year ended december 31 2011 eleven months ended december 31 2010 company recognized 48 million 05 million respectively interest penalties due unrecognized tax benefits december 31 2011 accrued amount related interest december 31 2010 accrued 80 million related interest amounts accrued tax penalties december 31 2011 2010 eleven months ended december 31 2010 decreased liability unrecognized tax benefits 3706 million primarily related internal revenue code section 382 “section 382” limitations see “other” additional information impact decrease liability unrecognized tax benefits effective tax rate eleven months ended december 31 2010 december 31 2011 company federal state net operating loss carryforwards approximately 11471 million 20859 million respectively begin expire 2029 2012 respectively 2009 predecessor company accrued unrecognized tax benefit uncertainty surrounding potential ownership change section 382 occurred prior date made “checkthebox” election two subsidiaries date change ownership question since december 31 2009 balance sheet date predecessor company unable confirm actual date ownership change sec forms 13g filed however based upon closing sec filing period schedules 13g review schedules filed february 15 2010 company determined likely certain “checkthebox” elections effective prior date 2009 ownership change section 382 result company recorded tax benefit reversal liability unrecognized tax benefit 3523 million company’s statement operations eleven months ended december 31 2010 significantly impacted effective tax rate period result goodwill nongoodwill intangible asset impairment charges eleven months ended december 31 2010 recognized nondeductible adjustment effective tax rate 195 2999 million respectively certificate incorporation contains provisions generally prohibiting acquisition 49 common stock one person group persons whose shares would aggregated pursuant section 382 ii acquisition additional common stock persons already owning 49 common stock case february 2 2011 shorter period may determined board directors without restrictions possible certain changes ownership common stock could result imposition limitations ability company subsidiaries fully utilize net operating losses tax attributes currently available us federal state income tax purposes connection company’s adoption fresh start accounting evaluated temporary differences company recorded significant deferred tax liabilities associated intangible assets deferred revenue reduced deferred tax liabilities zero related interest costs deferred tax assets zero related deferred financing costs recognized though cancellation debt due reduction tax basis incremental deferred tax liability created utilized companys valuation allowance assessment result company reduced valuation allowance net deferred tax liability position 1217 million december 31 2010 upon emergence bankruptcy company adjusted certain deferred tax assets liabilities reflect estimated future reductions certain tax attributes primarily net operating loss carryforwards intangible asset basis subsidiary stock basis accordance fasb asc 852 company truedup previous attribute reduction estimates january 31 2010 reflect actual attribute reduction december 31 2010 resulting 1584 million decrease deferred tax liabilities goodwill predecessor company one month ended january 31 2010 components provision income taxes income tax provision 9175 million one month ended january 31 2010 comprised federal tax provision 7928 million state tax provision 1248 million federal tax provision comprised current tax provision 06 million primarily related increase federal tax accrual related unrecognized tax benefits deferred tax provision 7922 million primarily related reduction predecessor company’s tax attributes accordance irc section 108 state tax provision 1248 million comprised current tax provision less 01 million deferred tax provision 1247 million primarily related reduction predecessor company’s tax attributes accordance irc section 108 reconciliation statutory federal tax rate effective tax rate effective tax rate provision 117 lower statutory federal tax rate 350 primarily due decreases income tax expense nontaxable fresh start adjustments release valuation allowance offset part increases income tax expense estimated loss tax attributes due cancellation debt income emergence impact state taxes reconciliation gross unrecognized tax benefits included balance unrecognized tax benefits january 31 2010 3770 million tax benefits recognized would favorably affect effective tax rate one month ended january 31 2010 predecessor company recognized 04 million interest penalties due unrecognized tax benefits january 31 2010 predecessor company accrued 83 million related interest amounts accrued tax penalties january 31 2010 predecessor company year ended december 31 2009 components benefit income taxes 2009 income tax benefit 9285 million comprised federal tax benefit 7835 million state tax benefit 1450 million 2009 federal tax benefit comprised current tax benefit 29 million primarily related decrease federal tax accrual due amended return filings deferred tax benefit 7807 million primarily related intangible asset impairment charges 2009 offset part valuation allowance discussed 2009 state tax benefit 1450 million comprised current tax benefit 118 million relates favorable settlement prior year state tax audits 2009 reversal associated state liabilities deferred tax benefit 1332 million primarily related intangible asset impairment charges 2009 offset part valuation allowance discussed reconciliation statutory federal tax rate effective tax rate 2009 effective tax rate benefit 126 lower statutory federal tax rate 350 primarily due recording valuation allowance deferred tax assets irc section 382 limitation loss carryforwards offset part impact state taxes components deferred tax assets liabilities total deferred tax assets valuation allowance 19890 million total deferred tax liabilities 1654 million deferred tax assets 12461 million represent tax deductible irc section 197 intangible assets amortizing 15year period approximately 8 15 years remain assessing amount deferred tax assets likely realized established full valuation allowance 15319 million representing extent deferred tax assets supported future reversals existing taxable temporary differences taxable income net operating loss carryback years unrecognized tax benefits reconciliation gross unrecognized tax benefits included balance unrecognized tax benefits december 31 2009 2889 million tax benefits recognized would favorably affect effective tax rate year ended december 31 2009 predecessor company recognized 33 million interest penalties due unrecognized tax benefits december 31 2009 predecessor company accrued 75 million related interest amounts accrued tax penalties december 31 2009 december 2009 predecessor company effectively settled issues consideration department finance new york state audit tax years 2000 2006 department revenue north carolina audit tax years 2003 2008 result settlements unrecognized tax benefit associated predecessor company’s uncertain state tax positions decreased 76 million new york state 97 million north carolina year ended december 31 2009 decrease unrecognized tax benefits decreased predecessor company’s effective tax rate year ended december 31 2009 unrecognized tax benefits impacted new york state north carolina audits primarily related apportionment allocation income among predecessor company’s legal entities 2009 predecessor company increased liability unrecognized tax benefits 2764 million reflecting uncertainty whether ownership change section 382 occurred prior date elected modify tax classification two subsidiaries date change ownership question balance sheet date predecessor company able confirm actual date ownership change sec forms 13g filed stockholders forty five days following end calendar year file forms sec based due date actual ownership change date confirmed february 15 2010 addition predecessor company increased liability unrecognized tax benefits 15 million relating uncertainty surrounding deductibility certain accrued expenses 8 stock incentive plans year ended december 31 2011 eleven months ended december 31 2010 company recognized 48 million 45 million respectively stockbased compensation expense related stockbased awards prior cancellation equity awards predecessor company recognized stockbased compensation expense related stockbased awards 06 million 114 million one month ended january 31 2010 year ended december 31 2009 respectively fair value company’s predecessor company’s stock options sars market condition calculated using blackscholes model time stockbased awards granted fair value company’s stock options sars market condition calculated using monte carlo model time stockbased awards granted fair value net estimated forfeitures amortized vesting period respective stockbased award compensation expense related restricted stock granted employees including executive officers nonemployee directors measured fair value date grant based number shares granted quoted market price company’s predecessor company’s common stock time fair value net estimated forfeitures amortized vesting period respective stockbased award company granted 18 million 21 million stock options sars year ended december 31 2011 eleven months ended december 31 2010 respectively company granted 06 million 02 million shares restricted stock year ended december 31 2011 eleven months ended december 31 2010 respectively predecessor company grant stock options sars restricted stock one month ended january 31 2010 year ended december 31 2009 weighted average fair value per share stock options sars granted company year ended december 31 2011 eleven months ended december 31 2010 184 813 respectively following assumptions used valuing stockbased awards recognition allocation stockbased compensation expense year ended december 31 2011 eleven months ended december 31 2010 respectively since company recently emerged bankruptcy sufficient companyspecific historical data order determine certain assumptions used valuing stockbased awards company utilized data industry sources peer competitive company data order estimate expected volatility assumption used valuing stockbased awards year ended december 31 2011 eleven months ended december 31 2010 expected life represents period time stockbased awards granted expected outstanding company estimated expected life using simplified method permitted staff accounting bulletin 110 use simplified method developing expected term share options stockbased awards satisfied “plain vanilla” criteria simplified method calculates expected life average vesting contractual terms award riskfree interest rate based applicable us treasury yields approximate expected life stockbased awards granted company year ended december 31 2011 eleven months ended december 31 2010 company used actual voluntary turnover data estimate weighted average forfeiture rate predecessor company used historical data estimate weighted average forfeiture rate one month ended january 31 2010 year ended december 31 2009 estimated forfeitures adjusted extent actual forfeitures differ expected materially differ estimates derived service periods associated stockbased awards market condition calculated determining average time company’s stock price reached given exercise price across monte carlo simulations stock price reach exercise price company excluded paths following table presents summary company’s stock options sars activity related information year ended december 31 2011 23 million shares available future grant eip december 31 2011 total intrinsic value company’s stock options sars vested expected vest december 31 2011 02 million intrinsic value companys stock options sars vested expected vest december 31 2010 stock options sars exercised year ended december 31 2011 eleven months ended december 31 2010 one month ended january 31 2010 year ended december 31 2009 total fair value company’s stock options sars vested year ended december 31 2011 eleven months ended december 31 2010 30 million 20 million respectively total fair value predecessor company’s stock options sars vested one month ended january 31 2010 37 million following table summarizes information company’s stockbased awards outstanding exercisable december 31 2011 aggregate intrinsic value company’s exercisable stockbased awards december 31 2011 following table summarizes status company’s nonvested stock awards december 31 2011 changes year ended december 31 2011 december 31 2011 75 million total unrecognized compensation cost related nonvested stockbased awards expected recognized weighted average period approximately 25 years components successor company stockbased compensation expense following table summarizes stockbased awards granted year ended december 31 2011 stockbased compensation expense recognized year ended december 31 2011 related grants grant prices stockbased awards based closing market value company’s common stock date grant stock based awards settled common stock following table summarizes stockbased awards granted eleven months ended december 31 2010 stockbased compensation expense recognized year ended december 31 2011 eleven months ended december 31 2010 related grants grant prices stockbased awards based closing market value company’s common stock date grant except otherwise indicated stock based awards settled common stock ceo stockbased awards grant date accounting reporting purposes september 13 2010 represents date grant date determination provisions outlined fasb asc 718 compensation stock compensation satisfied components predecessor company stockbased compensation expense upon emergence chapter 11 pursuant plan outstanding equity securities predecessor company including stock options sars restricted stock cancelled result predecessor company recognized 19 million remaining unrecognized compensation expense related stockbased awards reorganization items net one month ended january 31 2010 april 2009 predecessor company increased estimated forfeiture rate determining compensation expense 8 102 adjustment based review historical forfeiture information resulted reduction compensation expense 04 million year ended december 31 2009 march 4 2008 predecessor company granted 22 million sars certain employees including executive officers conjunction annual grant stock incentive awards sars granted grant price 711 per share equal market value predecessor company’s common stock grant date vested ratably three years predecessor company recognized compensation expense related sars 01 million 22 million one month ended january 31 2010 year ended december 31 2009 respectively february 27 2007 predecessor company granted 11 million sars certain employees including executive officers conjunction annual grant stock incentive awards sars granted grant price 7431 per share equal market value predecessor company’s common stock grant date vested ratably three years predecessor company recognized compensation expense related sars 04 million 52 million one month ended january 31 2010 year ended december 31 2009 respectively conjunction rhd’s acquisition businesscom 42 million outstanding businesscom equity awards converted 02 million rhd equity awards august 23 2007 one month ended january 31 2010 year ended december 31 2009 predecessor company recognized compensation expense related converted equity awards 01 million 03 million respectively conjunction rhd’s acquisition dex media change control provision triggered predecessor company’s stock incentive plans accordingly awards granted employees january 31 2006 exception stockbased awards held executive officers members board directors waived change control provisions awards became fully vested stockbased compensation expense relating existing stock options held executive officers members predecessor company’s board directors january 1 2006 modified result change control provision well stockbased compensation expense smaller grants issued 2006 totaled 37 million year ended december 31 2009 9 benefit plans december 31 2011 company two defined benefit pension plans dex one retirement plan dex media inc pension plan defined participate dex one corporation retirement account master trust “master trust” two defined contribution plans dex one 401k savings plan dex media inc employee savings plan summary plans provided businesscom inc 401k plan merged dex one 401k savings plan effective february 1 2011 former employees company able participate two postretirement plans dex one group benefit plan dex media group benefit plan effective january 1 2011 participants elected continue coverage dex one group benefit plan became responsible making individual premium payments associated plan although dex one group benefit plan remains active participants company future benefit obligation associated plan company terminated dex media group benefit plan effective january 1 2012 therefore future benefit obligation associated plan dex one retirement plan dex one cash balance defined benefit pension plan “dex one retirement plan” formerly rhd retirement plan covers substantially legacy dex one employees least one year service benefits paid employees based age years service percentage total annual compensation percentage compensation allocated retirement account ranges 30 125 depending age years service “cash balance benefit” benefits certain employees participants predecessor dun bradstreet corporation “db” defined benefit pension plan also determined based participant’s average compensation years service “final average pay benefit” benefits paid equal greater final average pay benefit cash balance benefit annual pension costs determined using projected unit credit actuarial cost method funding policy contribute amount least equal minimum legal funding requirement company required make contributions 31 million 10 million dex one retirement plan year ended december 31 2011 eleven months ended december 31 2010 respectively predecessor company required make contributions dex one retirement plan one month ended january 31 2010 predecessor company required make contributions 102 million dex one retirement plan year ended december 31 2009 underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities measurement date december 31 used plan assets also unfunded nonqualified defined benefit pension plan pension benefit equalization plan “pbep” covers senior executives certain key employees benefits based years service compensation including compensation permitted taken account previously mentioned defined benefit pension plan company made contributions 06 million 19 million pbep year ended december 31 2011 eleven months ended december 31 2010 respectively predecessor company make contributions pbep one month ended january 31 2010 made contributions 06 million year ended december 31 2009 dex media pension plan noncontributory defined benefit pension plan covering substantially nonunion union employees within dex media “dex media pension plan” annual pension costs determined using projected unit credit actuarial cost method funding policy contribute amount least equal minimum legal funding requirement company required make contributions 136 million 88 million dex media pension plan year ended december 31 2011 eleven months ended december 31 2010 respectively predecessor company required make contributions dex media pension plan one month ended january 31 2010 predecessor company required make contributions 398 million dex media pension plan year ended december 31 2009 underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities measurement date december 31 used plan assets company frozen dex media pension plan covering cwa ibew represented employees dex one retirement plan dex media pension plan covering nonunion employees connection freeze pension plan benefit accruals cwa ibew plan participants ceased december 31 2009 pension plan benefit accruals nonunion plan participants ceased december 31 2008 however plan balances remained intact interest credits participant account balances account balance formula well service credits vesting retirement eligibility continue accordance terms plans addition supplemental transition credits provided certain plan participants nearing retirement would otherwise lose portion anticipated pension benefit age 65 result freezing current plans similar supplemental transition credits provided certain plan participants grandfathered final average pay formula defined benefit plans previously converted traditional pension plans cash balance plans savings plans savings plans contribute 100 dollar contributed participating employees maximum 6 participating employee’s salary including bonus commissions contributions made company fully vested participants completed one year service company made contributions dex one 401k savings plan 90 million 87 million year ended december 31 2011 eleven months ended december 31 2010 respectively dex media inc employee savings plan 24 million 47 million year ended december 31 2011 eleven months ended december 31 2010 respectively businesscom inc 401k plan 03 million eleven months ended december 31 2010 contributions made businesscom inc 401k plan year ended december 31 2011 contributions made predecessor company dex one 401k savings plan 05 million 88 million one month ended january 31 2010 year ended december 31 2009 respectively contributions made predecessor company dex media inc employee savings plan 04 million 23 million one month ended january 31 2010 year ended december 31 2009 respectively contributions made predecessor company businesscom inc 401k plan 01 million 05 million one month ended january 31 2010 year ended december 31 2009 respectively company maintains dex one 401k restoration plan employees compensation excess irs annual limits effective january 1 2011 dex one 401k restoration plan amended eliminate matching credits benefits information union employees • access retiree health care life insurance benefits eliminated ibew represented employees retiring may 8 2009 cwa represented employees retiring october 2 2009 • retiree life insurance benefits eliminated effective january 1 2010 • twoyear phase subsidized retiree health care benefits commenced january 1 2010 • effective january 1 2012 retiree health care benefits eliminated retirees benefits information nonunion employees • nonsubsidized access retiree health care life insurance benefits eliminated effective january 1 2009 • subsidized retiree health care benefits medicareeligible retirees eliminated effective january 1 2009 • threeyear phase subsidized retiree health care benefits commenced january 1 2009 nonunion retiree health care benefits terminating december 31 2011 except continued nonsubsidized access retiree benefits retirees enrolled december 31 2008 respect phase subsidized retiree health care benefits eligible retiree becomes medicareeligible point time phase process noted retiree longer eligible retiree health care coverage second quarter 2010 recognized onetime curtailment gain 38 million associated departure company’s former chief executive officer included general administrative expenses consolidated statement operations eleven months ended december 31 2010 result implementing freeze dex media pension plan covering cwa ibew represented employees predecessor company recognized onetime net curtailment gain 42 million year ended december 31 2009 entirely offset losses incurred plan assets previously unrecognized prior service costs charged accumulated comprehensive loss result eliminating retiree health care life insurance benefits cwa ibew represented employees predecessor company recognized onetime curtailment gain 520 million included general administrative expenses consolidated statement operations year ended december 31 2009 result actions longer incur funding expenses administrative costs associated retiree health care life insurance plans cwa ibew represented employees benefit obligation funded status summary funded status company’s benefit plans december 31 2011 2010 follows net amounts recognized company’s consolidated balance sheet december 31 2011 2010 follows accumulated benefit obligation qualified defined benefit pension plans company 2492 million 2572 million december 31 2011 2010 respectively components net periodic benefit expense income net periodic benefit expense income company’s pension plans year ended december 31 2011 eleven months ended december 31 2010 predecessor company’s pension plans one month ended january 31 2010 year ended december 31 2009 follows net periodic benefit income company’s postretirement plans year ended december 31 2011 eleven months ended december 31 2010 predecessor company’s postretirement plans one month ended january 31 2010 year ended december 31 2009 follows accordance fresh start accounting reporting unamortized amounts previously charged accumulated comprehensive loss 447 million eliminated fresh start reporting date december 31 2011 approximately 10 million previously unrecognized actuarial losses accumulated comprehensive loss expected recognized net periodic benefit expense 2012 amounts recognized accumulated comprehensive loss company december 31 2011 2010 consist following assumptions conjunction emergence chapter 11 predecessor company performed remeasurement pension postretirement obligations january 31 2010 following assumptions used determining benefit obligations company’s pension plans postretirement plans year ended december 31 2011 eleven months ended december 31 2010 predecessor company’s pension plans postretirement plans one month ended january 31 2010 discount rate reflects current rate pension postretirement obligations could effectively settled end year ended december 31 2011 eleven months ended december 31 2010 one month ended january 31 2010 year ended december 31 2009 company predecessor company utilized outsource provider’s yield curve determine appropriate discount rate defined benefit pension plans based individual plans’ expected future cash flows since pension plans frozen rate increase future compensation utilized calculate benefit obligations company december 31 2011 2010 ratification freeze predecessor company’s defined benefit plans november 6 2009 june 12 2009 “ratification dates” resulted curtailments required remeasurement plans’ liabilities net periodic benefit expense december 31 2009 july 1 2009 december 31 2011 2010 may 31 2009 settlements dex one’s pbep occurred result restructuring actions time lump sum payments participants exceeded sum service cost plus interest cost components net periodic benefit expense year settlements resulted recognition actuarial loss less 01 million year ended december 31 2011 eleven months ended december 31 2010 respectively actuarial gain less 01 million year ended december 31 2009 pension expense dex one’s pbep recomputed based assumptions december 31 2011 resulting decrease discount rate 570 december 31 2010 530 pension expense dex one’s pbep recomputed based assumptions december 31 2010 resulting decrease discount rate 687 december 31 2009 570 pension expense dex one’s pbep recomputed based assumptions june 1 2009 resulting increase discount rate 587 687 december 31 2011 settlements dex one retirement plan dex media pension plan occurred result restructuring actions may 31 2011 december 31 2009 june 1 2009 april 1 2009 settlements dex media pension plan occurred result restructuring actions time lump sum payments participants exceeded sum service cost plus interest cost components net periodic benefit expense year settlements resulted recognition actuarial losses 27 million 61 million years ended december 31 2011 2009 respectively pension expense dex one retirement plan recomputed based assumptions december 31 2011 resulting decrease discount rate 570 december 31 2010 530 pension expense dex media pension plan recomputed based assumptions december 31 2011 resulting decrease discount rate 506 may 31 2011 495 pension expense dex media pension plan recomputed based assumptions may 31 2011 resulting decrease discount rate 570 december 31 2010 506 pension expense 2009 recomputed based assumptions june 1 2009 december 31 2009 resulting increase discount rate 587 687 following assumptions used determining company’s net periodic benefit expense income dex one retirement plan dex media pension plan following assumptions used determining predecessor company’s net periodic benefit expense income dex one retirement plan dex media pension plan following assumptions used determining company’s net periodic benefit expense dex one postretirement plan dex media postretirement plan elimination retiree health care life insurance benefits ratification dates resulted curtailments required remeasurement postretirement plans’ liabilities net periodic benefit expense june 1 2009 december 31 2009 following assumptions used determining predecessor company’s net periodic benefit expense dex one postretirement plan dex media postretirement plan healthcare cost trend rate assumptions longer required since company terminated postretirement plans following table reflects assumed healthcare cost trend rates used determining net periodic benefit expense benefit obligations predecessor company’s postretirement plans prior termination plan assets fair value assets held master trust december 31 2011 2010 asset category follows category includes investments us government bonds government mortgagebacked securities indexlinked government bonds guaranteed commercial paper shortterm treasury bills notes fair value assets determined using bid evaluation process observable market based inputs effective last business day plan year b category includes investments two commoncollective funds 82 invested stocks comprising russell 1000 equity index remaining 18 comprised shortterm investments december 31 2011 89 invested stocks comprising russell 1000 equity index remaining 11 comprised shortterm investments december 31 2010 fair value assets calculated based upon compilation observable market information c category includes investments corporate bonds commercial mortgagebacked assetbacked securities collateralized mortgage obligations commercial paper fair value assets determined using bid evaluation process observable market based inputs effective last business day plan year category includes investments small cap stocks across diverse industries fair value assets determined using quoted market prices recognized securities exchange last reported trading price last business day plan year e category comprised one mutual fund invests intermediate term fixed income instruments treasuries high grade corporate bonds fair value assets determined using quoted market prices recognized securities exchange last reported trading price last business day plan year f category comprised healthcare real estate investment trust fair value assets determined based exchange traded market prices g category includes investments combination 5 10 20 year us treasury bond futures equity index futures credit default swaps fair value assets determined based either settlement prices recognized securities exchange midbid evaluation process using observable market based inputs h category includes investments passively managed funds composed international stocks across diverse industries fair value assets calculated based upon compilation observable market information company’s pension plan weightedaverage asset allocation master trust december 31 2011 2010 asset category weighted average basis follows asset management committee “amc” appointed compensation benefits committee company’s board directors named fiduciary plan matters relating plan investments asset management amc authority appoint retain monitor remove custodian investment manager responsible establishing maintaining funding investment policy master trust plans’ assets invested accordance investment practices emphasize longterm investment fundamentals plans’ investment objective achieve positive rate return long term capital appreciation growing stream current income would significantly contribute meeting plans’ current future obligations objectives obtained welldiversified portfolio structure manner consistent plan’s investment policy statement plans’ assets invested marketable equity fixed income securities managed professional investment managers plan assets invested using combination active passive indexed investment strategies plans’ assets broadly diversified asset class investment style number issues issue type factors consistent investment objectives outlined plan’s investment policy statement plans’ assets invested prudent levels risk expectation longterm returns maintain contribute increasing purchasing power plans’ assets net disbursements long term plans’ assets separately managed accounts may used following purposes short sales purchases letter stock private placements leveraged transactions commodities transactions option strategies investments limited partnerships investments managers securities affiliates subsidiaries investment futures use margin investments derivative explicitly permitted plan’s investment policy statement plans’ fixed income manager uses derivative financial instruments normal course investing activities hedge adverse changes fixed income market achieve overall investment portfolio objectives financial instruments include us treasury futures contracts equity futures contracts credit default swaps futures held combination 5 10 20 year futures used manage duration exposure portfolio plans’ investment managers synthetically invest cash primarily held fund benefit payments use equity fixed income index futures contracts use specific futures contracts guided master trust’s asset allocation targets consequently strategy enables master trust achieve asset allocation targets maintaining sufficient liquidity meet benefit payments credit default swaps held hedge declines certain bond markets vehicle take advantage opportunities certain segments fixed income market plans’ investment policy statements allow use derivatives leverage portfolio speculative purposes use derivatives believed materially increase credit market risk plans’ investments year ended december 31 2011 eleven months ended december 31 2010 company used rate 800 expected longterm rate return assumption plan assets dex one retirement plan dex media pension plan one month ended january 31 2010 year ended december 31 2009 predecessor company used rate 800 expected longterm rate return assumption plan assets dex one retirement plan dex media pension plan basis used determining rates longterm capital market return forecasts asset mix similar plans’ asset allocation target 65 equity securities 35 debt securities beginning year basis used determining rates also included opportunity active management assets add value long term active management expectation supported calculating historical returns investment managers actively managed plans’ assets although review expected longterm rate return assumption annually performance one particular year significantly influence evaluation assumption generally revised unless fundamental change one factors upon based target asset allocation longterm capital market return forecasts estimated future benefit payments company’s pension plans benefits expected paid next five fiscal years aggregate five fiscal years thereafter follows expect make contributions approximately 125 million pension plans 2012 10 commitments lease office facilities equipment operating leases noncancelable lease terms expiring various dates 2017 rent lease expense company year ended december 31 2011 eleven months ended december 31 2010 227 million 221 million respectively rent lease expense predecessor company one month ended january 31 2010 year ended december 31 2009 16 million 277 million respectively future noncancelable minimum rental payments applicable operating leases december 31 2011 follows connection ongoing support services associated software system obligated pay outsource service provider approximately 56 million 2012 internet yellow pages reseller agreement obligated pay att 112 million 2012 entered commercial agreement outsource service provider various telecommunications hosting services whereby obligated pay approximately 13 million 2012 11 legal proceedings subject various lawsuits claims regulatory administrative proceedings arising business covering matters general commercial governmental regulations intellectual property employment tax actions opinion management ultimate resolution matters including two cases described material adverse effect results operations cash flows financial position beginning october 23 2009 series putative securities class action lawsuits commenced certain current former company officers united states district court district delaware behalf persons purchased otherwise acquired publicly traded securities july 26 2007 time filed bankruptcy may 28 2009 alleging officers issued false misleading statements regarding business financial condition seeking damages equitable relief august 19 2010 amended consolidated class action complaint filed operative securities class action complaint “securities class action complaint” company named defendant securities class action complaint december 30 2011 parties securities class action complaint entered memorandum understanding containing essential terms settlement disputes february 17 2012 formal stipulation settlement filed court pursuant stipulation settlement exchange complete release claims companys directors officers liability insurers create 25 million settlement fund benefit settlement class stipulation settlement subject court approval expect receive second quarter 2012 december 7 2009 putative erisa class action lawsuit commenced united states district court northern district illinois behalf certain participants beneficiaries rh donnelley 401k savings plan time july 26 2007 time lawsuit filed whose plan accounts included investments rh donnelley common stock putative erisa class action complaint contains allegations certain current former directors officers employees similar set forth securities class action complaint well allegations breaches fiduciary duties erisa seeks damages equitable relief company named defendant erisa class action believe allegations set forth erisa class action without merit vigorously defending suit 12 business segments periods covered annual report management reviews analyzes business providing marketing solutions one operating segment 13 information february 14 2011 completed sale substantially net assets businesscom including longlived assets domain names trademarks brands intellectual property related content technology platform result recognized gain sale assets 134 million first quarter 2011 14 parent company financial statements following condensed parent company financial statements read conjunction consolidated financial statements company predecessor company provided amended restated credit facilities company’s operating subsidiaries permitted fund share parent company’s interest obligations dex one senior subordinated notes funds based percentage operating subsidiaries’ excess cash flow defined credit agreement may provided parent company fund specific activities acquisitions addition operating subsidiaries permitted send 5 million annually parent company lastly operating subsidiaries fund proportionate basis expenses paid parent company fund daily operations operating subsidiaries except certain limited situations including noted amended restated credit facilities restrict ability company subsidiaries dividend assets third party subsidiaries pay dividends loans advances us see note 5 “longterm debt credit facilities notes” description debt instruments 15 valuation qualifying accounts 16 quarterly information 1 recognized goodwill impairment charges 8011 million second quarter 2011 7523 million 3853 million second third quarters 2010 respectively nongoodwill intangible asset impairment charges 173 million 43 million recognized second third quarters 2010 associated trade names trademarks technology local customer relationships former businesscom reporting unit see note 2 “summary significant accounting policies identifiable intangible assets goodwill” discussion 2 first quarter 2011 recognized gain sale substantially net assets businesscom 134 million see note 13 “other information” discussion 3 fourth quarter 2011 income tax provision includes benefit 35 million correcting overstated income tax expense eleven months ended december 31 2010 year ended december 31 2011 evaluated materiality correction concluded material current prior year financial statements accordingly recorded correction fourth quarter 2011 4 reorganization items net represent charges directly associated process reorganizing business chapter 11 see note 3 “fresh start accounting reorganization items net” discussion item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders dex one corporation audited accompanying consolidated balance sheets dex one corporation subsidiaries company december 31 2012 2011 related consolidated statements comprehensive income loss cash flows changes shareholders’ equity deficit years ended december 31 2012 2011 successor elevenmonth period ended december 31 2010 successor onemonth period ended january 31 2010 predecessor consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position dex one corporation subsidiaries december 31 2012 2011 results operations cash flows years ended december 31 2012 2011 successor elevenmonth period ended december 31 2010 successor onemonth period ended january 31 2010 predecessor conformity us generally accepted accounting principles accompanying consolidated financial statements prepared assuming dex one corporation subsidiaries continue going concern discussed note 1 consolidated financial statements dex one corporation subsidiaries voluntarily filed chapter 11 bankruptcy march 18 2013 highly leveraged capital structure experienced decline operating results cash flows raise substantial doubt ability continue going concern managements plans regard matters also described note 1 consolidated financial statements financial statement schedules include adjustments might result outcome uncertainty also audited accordance standards public company accounting oversight board united states dex one corporation’s internal control financial reporting december 31 2012 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso report dated march 18 2013 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp raleigh north carolina march 18 2013 report independent registered public accounting firm board directors shareholders dex one corporation audited dex one corporation’s internal control financial reporting december 31 2012 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso dex one corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audit also included performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion dex one corporation maintained material respects effective internal control financial reporting december 31 2012 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states consolidated balance sheets dex one corporation subsidiaries december 31 2012 2011 related consolidated statements comprehensive income loss cash flows changes shareholders’ equity deficit years ended december 31 2012 2011 successor elevenmonth period ended december 31 2010 successor onemonth period ended january 31 2010 predecessor report dated march 18 2013 expressed unqualified opinion consolidated financial statements kpmg llp raleigh north carolina march 18 2013 accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements dex one corporation consolidated statements changes shareholders equity deficit accompanying notes integral part consolidated financial statements dex one corporation notes consolidated financial statements tabular amounts thousands except per share data percentages otherwise indicated 1 business basis presentation consolidated financial statements include accounts dex one corporation direct indirect whollyowned subsidiaries “dex one” “successor company” “company” “parent company” “we” “us” “our” subsequent effective date defined december 31 2012 rh donnelley corporation rh donnelley inc “rhdi” “rhd inc” dex media inc dex one digital inc “dex one digital” formally known businesscom inc “businesscom” dex one service inc “dex one service” newdex inc newdex direct whollyowned subsidiaries financial information set forth annual report unless otherwise indicated context may otherwise indicate reflects consolidated results operations financial position dex one years ended december 31 2012 2011 eleven months ended december 31 2010 intercompany transactions balances eliminated dex one became successor registrant rh donnelley corporation “rhd” “predecessor company” “we” “us” “our” operations prior january 29 2010 “effective date” upon emergence chapter 11 proceedings title 11 united states code “chapter 11” bankruptcy code effective date financial information set forth annual report unless otherwise indicated context may otherwise indicate reflects consolidated results operations financial position rhd one month ended january 31 2010 see note 3 “fresh start accounting reorganization items net” information impact emergence reorganization adoption fresh start accounting financial position results operations business overview marketing solutions company helps local businesses consumers connect proprietary affiliate provided marketing solutions combine multiple media platforms drive large volumes consumer leads customers assist customers managing messaging consumers marketing consultants strive trusted advisors offer local businesses personalized marketing consulting services exposure across leading media platforms used consumers searching local businesses platforms include online mobile local search solutions major search engines print directories proprietary marketing solutions include dex published yellow pages directories cobrand recognizable brands industry centurylink yp formerly att yp att internet yellow pages site dexknowscom mobile application dex mobile growing list marketing solutions also includes local business market analysis message image creation target market identification advertising digital profile creation web sites mobile web sites reputation management network display ads online video development promotion keyword optimization strategies programs distribution strategies social media marketing tracking reporting digital lead generation solutions powered search engine marketing product dexnet extends customers’ reach leading internet mobile partners attract consumers searching local businesses products services within markets agreement plan merger august 20 2012 dex one entered agreement plan merger “merger agreement” supermedia inc “supermedia” newdex spruce acquisition sub inc direct wholly owned subsidiary newdex “merger sub” collectively merger entities providing business combination dex one supermedia merger agreement provides upon terms subject conditions set forth therein dex one merge newdex surviving entity “dex merger” ii immediately following consummation dex merger sub merge supermedia surviving entity becoming direct wholly owned subsidiary newdex “supermedia merger” together dex merger “mergers” result mergers newdex successor dex one renamed dex media inc “dex media” become newly listed company effective time dex merger share dex one common stock converted 02 fully paid nonassessable shares common stock par value 0001 per share newdex “newdex common stock” reflects 1for5 reverse stock split dex ones common stock effective time supermedia merger share supermedia common stock converted 04386 fully paid nonassessable shares newdex common stock immediately following mergers dex ones stockholders hold approximately 60 newdex common stock supermedia stockholders hold approximately 40 newdex common stock december 5 2012 merger entities entered amended restated agreement plan merger “amended restated merger agreement” upholds basic economic terms strategic merits mergers included original merger agreement among things extends date party may unilaterally terminate amended restated merger agreement december 31 2012 june 30 2013 ii reduces number directors dex media effectiveness mergers eleven ten iii provides either dex one supermedia unable obtain requisite consents mergers stockholders contemplated amendments respective financing agreements senior secured lenders mergers may effected voluntary prepackaged plans chapter 11 bankruptcy code unable obtain requisite consents contemplated amendments financing agreements senior secured lenders effectuate mergers company voluntarily filed prepackaged bankruptcy chapter 11 march 18 2013 see filing voluntary petitions chapter 11 result filing chapter 11 completion mergers subject certain conditions including among others bankruptcy court confirmed prepackaged plan reorganization party substantially form provided amended restated merger agreement ii dex one supermedia certain respective subsidiaries entered tax sharing agreement shared services agreement iii authorization obtained listing newdex common stock issued consideration mergers new york stock exchange nasdaq stock market companys registration statement form s4 used register newdex common stock declared effective securities exchange commission sec january 31 2013 amended restated merger agreement provides upon consummation mergers chairman board directors dex media current director chairman dex one president chief executive officer dex media current chief executive officer supermedia amended restated merger agreement provides upon consummation mergers board directors dex media consist ten directors comprising five current nonemployee dex one directors ii four current nonemployee supermedia directors designated supermedia iii president chief executive officer dex media amended restated merger agreement may terminated either dex one supermedia certain circumstances including among others mergers consummated june 30 2013 amended restated merger agreement terminated either party may required certain circumstances specified amended restated merger agreement pay party expense reimbursement maximum amount 75 million please refer amended restated merger agreement filed current report form 8k sec december 6 2012 additional information terms conditions amended restated merger agreement upon completion mergers accounted business combination using acquisition method accounting accordance accounting standards codification asc topic 805 business combinations fasb asc 805 dex one identified accounting acquirer dex one considered acquiring entity accounting purposes based certain criteria including limited following 1 upon consummation mergers dex one stockholders hold approximately 60 common stock dex media compared 40 held supermedia stockholders 2 dex ones current chairman board directors continue serve chairman board directors dex media support limited waiver agreement december 5 2012 dex one also entered support limited waiver agreement “support agreement” certain lenders administrative agents collateral agents senior secured credit facilities support agreement dex one agreed consistent obligations amended restated merger agreement take reasonably necessary appropriate actions furtherance mergers financing amendments senior secured credit facilities ii distribute disclosure statement lenders senior secured credit facilities solicit votes accept dex ones prepackaged plan reorganization iii dex one elects effect mergers financing amendments chapter 11 case file chapter 11 seek confirmation prepackaged plan bankruptcy court lenders party support agreement agreed subject certain conditions support take reasonable action furtherance proposed financing amendments support agreement ii timely vote accept dex ones prepackaged plan iii event dex one elects effect mergers financing amendments chapter 11 cases support approval dex ones lender disclosure statement confirmation dex ones prepackaged plan b support certain relief dex one request bankruptcy court upon filing bankruptcy c refrain taking action inconsistent confirmation dex ones prepackaged plan propose support solicit participate formulation plan dex ones prepackaged plan support agreement terminate automatically upon occurrence certain circumstances events noted support agreement upon termination date support agreement votes lenders support agreement cast accept dex ones prepackaged plan signature pages dex ones financing amendments withdrawn deemed null void purposes unless lender provides notice within five business days lenders vote continue effective please refer support agreement filed current report form 8k sec december 6 2012 detailed information terms conditions support agreement filing voluntary petitions chapter 11 march 18 2013 petition date dex one certain subsidiaries collectively “debtors” filed voluntary petitions united states bankruptcy court district delaware “bankruptcy court” seeking chapter 11 relief provisions bankruptcy code chapter 11 cases jointly administered caption dex one corporation et al “chapter 11 cases” debtors continue operate businesses manage properties debtors possession jurisdiction bankruptcy court accordance applicable provisions bankruptcy code connection chapter 11 cases company made information available website wwwdexonecom including proposed plan reorganization disclosure statement describing terms plan reorganization information concerning company filing chapter 11 cases triggered event default rendered remaining financial obligations companys 3000 million initial aggregate principal amount 1214 senior subordinated notes due 2017 “dex one senior subordinated notes” senior secured credit facilities automatically immediately due payable debtors believe efforts enforce financial obligations dex one senior subordinated notes senior secured credit facilities stayed result filing chapter 11 cases bankruptcy court going concern companys financial statements prepared using accounting principles generally accepted united states applicable going concern contemplates realization assets liquidation liabilities normal course business accompanying historical consolidated financial statements include adjustments might necessary company unable continue going concern assessment ability continue going concern made management considering among factors 1 companys voluntary chapter 11 bankruptcy filing march 18 2013 impact could outstanding debt 2 companys highly leveraged capital structure current maturity date senior secured credit facilities october 24 2014 3 significant negative impact operating results cash flows associated print products primarily result customer attrition ii declines overall advertising spending customers iii significant impact weak local business conditions consumer spending clients markets iv increase competition fragmentation local business search v migration customers digital marketing solutions noted company unable obtain requisite consents contemplated amendments financing agreements senior secured lenders effectuate mergers company voluntarily filed prepackaged bankruptcy chapter 11 filing chapter 11 cases triggered event default rendered remaining financial obligations dex one senior subordinated notes senior secured credit facilities automatically immediately due payable certain senior secured lenders party support agreement however agreed conditional waiver whereby accelerate financial obligations senior secured credit facilities upon companys chapter 11 filing support agreement including conditional waiver noted obligations parties support agreement may terminate automatically upon occurrence certain circumstances events circumstance event cured company waived unconditionally consenting lenders nonetheless efforts enforce acceleration provisions outstanding debt automatically stayed result filing chapter 11 cases bankruptcy court pendency filing chapter 11 cases unless bankruptcy court approves motion enforce provisions believe unlikely bankruptcy court would approve motion however assurance occur event bankruptcy court permit modification stay allows acceleration outstanding debt company would adequate cash hand financial resources satisfy debt obligations circumstances raises substantial doubt whether company able continue going concern reasonable period time accordingly classified outstanding debt current obligations december 31 2012 since filing chapter 11 done solely effectuate contemplated amendments financing agreements mergers expect unsecured creditors company impacted result filing chapter 11 stated plan reorganization anticipate filing chapter 11 significantly impact financial position results operations cash flows chapter 11 proceedings bankruptcy courts stay acceleration provisions outstanding debt remains effect emergence chapter 11 expected current financial projections indicate management expects able continue generate cash flows operations amounts sufficient fund operations meet debt service requirements chapter 11 proceedings least next 1215 months however assurances made expectations noted regarding results impact chapter 11 proceedings occur business generate sufficient cash flows operations enable us fund companys cash requirements since current information used financial projections could change future result changes estimates assumptions well risks noted item 1a “risk factors” managements objectives proposed merger contemplated amendments financing agreements position company operate going concern upon emergence chapter 11 reasonable period time thereafter however assurances made objectives attained significant financing developments march 20 2012 company announced commencement cash tender offer purchase maximum aggregate principal amount outstanding dex one senior subordinated notes 260 million offer purchase included purchase price range 270 300 per 1000 principal amount dex one senior subordinated notes plus amount cash lieu accrued unpaid interest calculated rate 12 per annum aggregate principal amount dex one senior subordinated notes march 31 2012 including payment date cash tender offer expired april 19 2012 april 19 2012 terms conditions offer purchase company utilized cash hand 265 million repurchase 982 million aggregate principal amount dex one senior subordinated notes representing 27 par value note repurchases note repurchases accounted extinguishment debt resulting noncash pretax gain 708 million year ended december 31 2012 consisting difference par value purchase price dex one senior subordinated notes offset fees associated note repurchases following table provides calculation net gain note repurchases year ended december 31 2012 march 9 2012 rhdi dex media east inc dme inc dex media west inc dmw inc entered first amendment amendments amended restated rhdi credit facility “rhdi amended restated credit facility” amended restated dme inc credit facility “dex media east amended restated credit facility” amended restated dmw inc credit facility “dex media west amended restated credit facility” collectively credit facilities respectively certain financial institutions amendments permit rhdi dme inc dmw inc make open market repurchases retire loans respective credit facilities discount par december 31 2013 provided discount acceptable lenders choose participate repurchases may made existing cash hand subject certain restrictions terms noted amendments rhdi dme inc dmw inc obligation make repurchases time throughout term noted amendments march 14 2012 terms conditions amendments rhdi commenced offer utilize 40 million repurchase loans rhdi amended restated credit facility price 415 455 par dme inc commenced offer utilize 125 million repurchase loans dex media east amended restated credit facility price 505 545 par dmw inc commenced offer utilize 235 million repurchase loans dex media west amended restated credit facility price 600 640 par offers expired march 21 2012 march 23 2012 rhdi dme inc dmw inc collectively utilized cash hand 695 million repurchase loans credit facilities 1421 million credit facility repurchases credit facility repurchases accounted extinguishment debt resulting noncash pretax gain 688 million year ended december 31 2012 consisting difference par value purchase price credit facilities offset accelerated amortization fair value adjustments credit facilities recognized conjunction adoption fresh start accounting fees associated credit facility repurchases following table provides detail credit facility repurchases calculation net gain credit facility repurchases year ended december 31 2012 note repurchases credit facility repurchases hereby collectively referred debt repurchases net gains debt repurchases year ended december 31 2012 1396 million included gain debt repurchases net consolidated statement comprehensive income loss predecessor company chapter 11 filing emergence bankruptcy may 28 2009 predecessor company subsidiaries filed voluntary petitions chapter 11 relief bankruptcy court january 12 2010 bankruptcy court entered findings fact conclusions law order confirming joint plan reorganization predecessor company subsidiaries “plan” plan became effective accordance terms effective date see annual report form 10k year ended december 31 2010 detailed information matters associated chapter 11 proceedings labor unions approximately 30 employees represented labor unions covered two collective bargaining agreements unionized employees represented either international brotherhood electrical workers america “ibew” communication workers america “cwa” collective bargaining agreement ibew expires may 2015 collective bargaining agreement cwa expires march 2016 2 summary significant accounting policies revenue recognition advertising revenues earned primarily sale advertising yellow pages directories publish advertising revenues also include revenues internetbased marketing solutions including online directories dexknowscom dexnet advertising revenues affected several factors including changes quantity size characteristics advertisements acquisition new customers renewal rates existing customers premium advertisements sold changes advertisement pricing introduction new marketing solutions increase competition fragmentation local business search market general economic factors revenues respect print advertising internetbased marketing solutions sold print advertising recognized deferral amortization method whereby revenues initially deferred directory published net sales claims allowances recognized ratably directory’s life typically 12 months revenues respect internetbased marketing solutions sold standalone dexnet recognized ratably life contract commencing first delivered fulfilled revenues respect marketing solutions performancebased recognized service delivered fulfilled company also offers customers ability purchase digital marketing solutions shorter time frames standard one year contract specifically recognize revenue following criteria met • persuasive evidence arrangement exists criterion satisfied execution signed contract company client contract includes specifications must adhered term agreement parties • delivery occurred criterion satisfied print marketing solutions physical distribution given print directory substantially complete criterion satisfied internetbased marketing solutions upon fulfillment • fee fixed determinable criterion satisfied execution signed contract company client including final negotiated price • collectability reasonably assured criterion satisfied performing credit evaluations customers signed contract executed requiring customers prepay full marketing solutions reasonable assurance collection also evidenced review client’s payment history revenue deferred revenue sale advertising recorded net allowance sales claims estimated based primarily historical experience update estimate information circumstances indicate estimate may longer represent amount claims may incur future company recorded sales claims allowances 133 million 159 million 99 million years ended december 31 2012 2011 eleven months ended december 31 2010 respectively predecessor company recorded sales claims allowances 35 million one month ended january 31 2010 enter multipledeliverable revenue arrangements may include combination print internetbased marketing solutions designed specifically meet needs customers print internetbased marketing solutions also sold standalone basis timing delivery fulfillment marketing solutions multipledeliverable arrangement may differ whereby fulfillment internetbased marketing solutions typically precedes delivery print marketing solutions due length time required produce final print product addition multiple print directories included multipledeliverable arrangement may published different times throughout year limit amount revenue recognized delivered elements amount contingent future delivery fulfillment marketing solutions included multipledeliverable arrangement print internetbased marketing solutions interdependent account multiple arrangements single client one arrangement contractual terms andor substance arrangements indicate may closely related effect parts single arrangement evaluate deliverable multipledeliverable revenue arrangement determine whether represent separate units accounting using following criteria • delivered items value customer standalone basis • arrangement includes general right return relative delivered items delivery performance undelivered items considered probable substantially control company print internetbased marketing solutions qualify separate units accounting since sold standalone basis allocate multipledeliverable arrangement consideration deliverable based relative selling price determined using vendor specific objective evidence “vsoe” sales contracts generally include provisions cancellation termination right return refunds would significantly impact recognized revenue objective vsoe determine price company would transact sale product service sold standalone basis determining vsoe require substantial majority selling prices consistent normal pricing discounting policies established management relevant authority specific marketing solution sold standalone basis ensure consistency performing analysis annual basis often necessary determining relative selling prices marketing solutions sold standalone basis consider among things 1 geographies marketing solutions sold 2 economic factors 3 local business conditions 4 competition markets 5 advertiser consumer behavior classifications 6 gross margin objectives 7 historical pricing practices selling prices analyzed frequent basis changes factors material impact pricing discounting policies changes selling prices methods used determine vsoe significant effect allocation total arrangement consideration year ended december 31 2012 however may modify pricing discounting policies implement new gotomarket strategies future could result changes selling prices methodology used determine vsoe use another method selling price hierarchy allocate arrangement consideration multipledeliverable arrangements entered prior january 1 2011 effective date accounting standards update “asu” 200913 revenue recognition topic 605 multipledeliverable revenue arrangements consensus fasb emerging issues task force “asu 200913” marketing solutions qualified separate units accounting arrangement consideration allocated respective deliverable based relative fair value method using vsoe determined using methodology described asu 200913 effective applied multipledeliverable arrangements prior reporting periods would impact revenue recognized periods deferred directory costs directly related selling production directories initially deferred incurred recognized ratably life directory typically 12 months costs specifically identifiable particular directory include sales commissions print paper initial distribution costs paid prior directory publication classified prepaid expenses current assets publication reclassified deferred directory costs cash equivalents cash equivalents include liquid investments maturity less three months time purchase times investments may excess federally insured limits accounts receivable accounts receivable consist balances owed us advertising customers billed receivables represent amount billed advertising customers billed receivables recorded net allowance doubtful accounts sales claims estimated based historical experience update estimate information circumstances indicate estimate longer appropriately represents amount bad debts sales claims probable incurred unbilled receivables represent contractually owed amounts net allowance doubtful accounts sales claims published directories yet billed customers local customers subject credit review partial advance payment signed contract executed credit review partial advance payment requirement dependent spend thresholds type business credit review includes evaluation credit payment history us third party credit scoring credit checks vendors local customers billed pro rata amount contract value monthly basis however appropriate advance payments whole part andor personal guarantees local customers may required prior extension credit select advertisers behalf national customers certified marketing representatives “cmrs” pay company total contract value advertising net commission within 60 days publication month new cmrs subject credit review signed contract executed cmrs designated high risk subject prepayment requirements twelve months company’s writeoff policy accounts receivables associated local customers designed secure collection pastdue funds part sales renewal cycle writeoff policy national customers determined based delinquency stage combined cmr responsiveness collection requests generally local customer accounts receivable balances considered eligible writeoff following completion annual sales renewal cycle customers greater 90 days pastdue oldest advertising charges nonresponsive payment demands renew contracts future advertising services future billing charges exist management deemed collectability pastdue accounts receivables impaired accounts receivable balances associated cmrs generally writtenoff 240 days pastdue company’s standard writeoff policy also includes provisions allow writeoff acceleration customers business demonstrated via disconnected phone lines declaring bankruptcy company threshold dollar amount trigger accounts receivable balance writeoff collection processes performed accordance fair debt collections practices act appropriate contacts customers made defined time intervals solicit payment andor determine company actions may assist obtaining payment appropriate collection process customers transferred company designated resources resolve outstanding issues file claims adjustments accounts receivable balances company’s bad debt policy includes guidelines writeoff accounts well authorization approval requirements process estimating ultimate collection accounts receivables involves significant assumptions judgments regarding writeoff accounts receivables estimates recovery expectations relative bad debt writeoffs company believes credit collection bad debt recovery reserve processes combined monitoring billing process help reduce risk associated material revisions reserve estimates resulting adverse changes reimbursement experience company initiated program 2011 extend partial full open credit terms customers bad debt writeoffs associated prior year contracts terms program require customers either complete credit application review andor satisfy defined advance payment requirements terms program accounts receivable balances previously designated bad debt writeoffs continue pursued full recovery designated outside collection agencies identifiable intangible assets goodwill identifiable intangible assets company reviews carrying value definitelived intangible assets longlived assets whenever events circumstances indicate carrying amount may recoverable company reviewed following information estimates assumptions year ended december 31 2012 determine carrying amounts definitelived intangible assets longlived assets recoverable • historical financial information including revenue profit margins customer attrition data price premiums enjoyed relative competing independent publishers • longterm financial projections including limited revenue trends profit margin trends • intangible asset longlived asset carrying values changes current future use • trading values debt equity securities • companyspecific information based evaluation year ended december 31 2012 concluded carrying amounts definitelived intangible assets longlived assets recoverable amortization expense related company’s intangible assets 3494 million 1871 million 1670 million years ended december 31 2012 2011 eleven months ended december 31 2010 respectively amortization expense related predecessor company’s intangible assets 156 million one month ended january 31 2010 amortization expense intangible assets five succeeding years estimated approximately 3016 million 2575 million 2171 million 2104 million 2062 million respectively amortization intangible assets tax purposes approximately 3159 million 2012 identifiable intangible assets respective book values december 31 2012 shown following table combined weighted average useful life identifiable intangible assets december 31 2012 9 years weighted average useful lives amortization methodology identifiable intangible assets december 31 2012 shown following table 1 identifiable intangible assets amortized income forecast method assumes value derived intangible assets greater earlier years steadily declines time company evaluates remaining useful lives definitelived intangible assets longlived assets whenever events circumstances indicate revision remaining period amortization warranted estimated remaining useful lives change remaining carrying amount intangible assets longlived assets would amortized prospectively revised remaining useful life company evaluated remaining useful lives definitelived intangible assets longlived assets december 31 2012 considering among things effects obsolescence demand competition takes consideration price premium benefit competing independent publishers markets result directory services agreements acquired prior acquisitions economic factors including stability industry operate known technological advances legislative actions result uncertain changing regulatory environment expected changes distribution channels based evaluation factors december 31 2012 company determined estimated useful lives intangible assets presented reflect period expected contribute future cash flows therefore deemed appropriate first quarter 2012 company performed evaluation remaining useful lives definitelived intangible assets longlived assets based evaluation factors first quarter 2012 company determined estimated useful lives directory services agreements local national customer relationships tradenames trademarks longer reflected period expected contribute future cash flows therefore company reduced estimated useful lives intangible assets shown following table result reducing estimated useful lives intangible assets noted company experienced increase amortization expense 1616 million 2012 identifiable intangible assets respective book values december 31 2011 shown following table goodwill 21 billion recorded connection company’s adoption fresh start accounting discussed note 3 “fresh start accounting reorganization items net” represented excess reorganization value dex one fair value identified tangible intangible assets december 31 2012 company recorded goodwill reporting units historically goodwill amortized subject impairment testing annual basis october 31st frequently indicators potential impairment existed goodwill tested impairment reporting unit level represents one level operating segment accordance financial accounting standards board fasb asc 350 intangibles goodwill “fasb asc 350” december 31 2012 company’s reporting units rhdi dex media east inc “dme inc” dex media west inc “dmw inc” impairment evaluation second quarter 2011 company concluded indicators impairment result performed impairment test goodwill impairment recoverability test definitelived intangible assets longlived assets testing results definitelived intangible assets longlived assets indicated recoverable thus impairment test required based upon testing results goodwill determined remaining goodwill assigned reporting units fully impaired thus recognized aggregate goodwill impairment charge 8011 million year ended december 31 2011 please refer annual report 10k year ended december 31 2011 additional information including methodology estimates assumptions used impairment testing three months ended september 30 2010 june 30 2010 company concluded indicators impairment result performed impairment tests goodwill definitelived intangible assets longlived assets september 30 2010 june 30 2010 testing results definitelived intangible assets longlived assets resulted nongoodwill intangible asset impairment charge 43 million 173 million three months ended september 30 2010 june 30 2010 respectively total nongoodwill intangible asset impairment charge 216 million eleven months ended december 31 2010 associated trade names trademarks technology local customer relationships former businesscom reporting unit company also recognized goodwill impairment charge 3853 million 7523 million three months ended september 30 2010 june 30 2010 respectively total goodwill impairment charge 11376 million eleven months ended december 31 2010 resulting impairment testing recorded reporting units sum goodwill nongoodwill intangible asset impairment charges totaled 11593 million eleven months ended december 31 2010 please refer annual report form 10k year ended december 31 2010 additional information including methodology estimates assumptions used impairment testing periods well annual impairment test goodwill october 31 2010 fourth quarter 2010 company recognized reduction goodwill 1584 million related finalization cancellation indebtedness income tax attribute reduction calculations required performed december 31 2010 associated fresh start accounting change carrying amount goodwill since established fresh start accounting february 1 2010 “fresh start reporting date” follows industry local business conditions markets deteriorate excess current estimates potentially resulting declines advertising sales operating results trading value debt equity securities continue decline significantly required assess recoverability useful lives intangible assets longlived assets factors including changes assumptions used impairment analysis result factors could result future impairment charges reduction remaining useful lives associated intangible assets longlived assets acceleration amortization expense additional information connection acquisition dex media january 31 2006 “dex media merger” acquired directory services agreements collectively “dex directory services agreements” dex media entered qwest including 1 publishing agreement term 50 years commencing november 8 2002 subject automatic renewal additional oneyear terms grants us right exclusive official directory publisher listings classified advertisements qwest’s telephone customers geographic areas states dex media east dex media west operate directory business qwest successors provided local telephone services november 8 2002 well exclusive right use certain qwest branding directories markets 2 noncompetition agreement term 40 years commencing november 8 2002 pursuant qwest behalf affiliates successors agreed sell directory products consisting principally listings classified advertisements subscribers geographic areas states dex media east dex media west operate directory business qwest provided local telephone service november 8 2002 directed primarily consumers geographic areas result dex media merger also acquired 1 advertising commitment agreement whereby qwest agreed purchase aggregate 20 million advertising per year 2017 us pricing terms least favorable offered similar large customers 2 intellectual property contribution agreement pursuant qwest assigned licensed us qwest intellectual property previously used qwest directory services business along 3 trademark license agreement pursuant qwest granted us right november 2007 use qwest dex qwest dex advantage marks connection directory products related marketing material states dex media east dex media west operate directory business right use marks connection dexknowscom intangible assets 2 3 collectively “trade names” directory services agreements att company include directory services license agreement noncompetition agreement internet yellow pages reseller agreement directory publishing listing agreement collectively “att directory services agreements” certain affiliates att directory services license agreement designates us official exclusive provider yellow pages directory services att successors illinois northwest indiana “territory” grants us exclusive license obligation specified agreement produce publish distribute white pages directories territory att’s agent grants us exclusive license obligation specified agreement use att brand logo print directories territory noncompetition agreement prohibits att affiliates successors certain limited exceptions 1 producing publishing distributing yellow white pages print directories territory 2 soliciting selling local national yellow white pages advertising inclusion directories 3 soliciting selling local internet yellow pages advertising certain internet yellow pages directories territory licensing att marks third party purpose internet yellow pages reseller agreement grants us exclusive right sell local advertisers within territory internet yellow pages advertising focused upon products services offered within territory b nonexclusive right sell local excluding national advertisers within territory internet yellow pages advertising focused upon products services offered outside territory case onto ypcom platform directory publishing listing agreement gives us right purchase use basic att subscriber listing information updates purpose publishing directories att directory services agreements internet yellow pages reseller agreement initial terms 50 years commencing september 2004 subject automatic renewal early termination specified circumstances internet yellow pages reseller agreement term 5 years commenced september 2004 directory services agreements centurylink company executed may 2006 conjunction sprint’s spinoff local telephone business include directory services license agreement trademark license agreement noncompetition agreement certain affiliates centurylink well noncompetition agreement sprint entered january 2003 collectively “centurylink directory services agreements” centurylink directory services agreements replaced previously existing analogous agreements sprint except sprint remained bound noncompetition agreement directory services license agreement grants us exclusive license obligation specified agreement produce publish distribute yellow white pages directories centurylink successors 18 states centurylink provided local telephone service time agreement trademark license agreement grants us exclusive license obligation specified agreement use certain specified centurylink trademarks markets noncompetition agreements prohibit centurylink sprint respective affiliates successors markets selling local directory advertising certain limited exceptions producing publishing distributing print directories centurylink directory services agreements initial terms 50 years commencing january 2003 subject automatic renewal early termination specified circumstances fixed assets computer software fixed assets computer software recorded cost depreciation amortization provided estimated useful lives assets using straightline method estimated useful lives thirty years buildings five years machinery equipment ten years furniture fixtures three years five years computer equipment computer software leasehold improvements amortized straightline basis shorter term lease estimated useful life improvement fixed assets computer software company december 31 2012 2011 consisted following depreciation amortization expense fixed assets computer software company years ended december 31 2012 2011 eleven months ended december 31 2010 predecessor company one month ended january 31 2010 follows year ended december 31 2012 company identified certain fixed assets longer service resulted acceleration depreciation expense 08 million interest expense deferred financing costs successor company gross interest expense years ended december 31 2012 2011 eleven months ended december 31 2010 1960 million 2269 million 2497 million respectively certain costs associated credit facility repurchases capitalized included noncurrent assets consolidated balance sheets costs amortized interest expense terms related debt agreements using effective interest method amortization deferred financing costs included interest expense 17 million year ended december 31 2012 conjunction adoption fresh start accounting reporting fresh start reporting date adjustment established record outstanding debt fair value fresh start reporting date fair value adjustment amortized increase interest expense remaining term respective debt agreements using effective interest method impact future scheduled interest principal payments amortization fair value adjustment included increase interest expense 245 million 278 million 293 million years ended december 31 2012 2011 eleven months ended december 31 2010 respectively see note 5 “longterm debt” additional information first quarter 2010 entered interest rate swap interest rate cap agreements designated cash flow hedges company’s interest expense includes income 23 million 34 million years ended december 31 2012 2011 respectively expense 82 million eleven months ended december 31 2010 resulting change fair value interest rate swaps interest rate caps predecessor company contractual interest expense would appeared predecessor company’s consolidated statement comprehensive income filing chapter 11 petitions 659 million one month ended january 31 2010 gross interest expense one month ended january 31 2010 197 million certain costs associated issuance debt instruments capitalized included noncurrent assets consolidated balance sheets costs amortized interest expense terms related debt agreements using effective interest method amortization deferred financing costs included interest expense 18 million one month ended january 31 2010 predecessor company’s interest expense one month ended january 31 2010 includes expense 08 million associated change fair value dex media east llc interest rate swaps longer deemed financial instruments result filing chapter 11 petitions predecessor company’s interest expense one month ended january 31 2010 also includes expense 11 million resulting amounts previously charged accumulated comprehensive loss related interest rate swaps amounts previously charged accumulated comprehensive loss related dex media east llc interest rate swaps amortized interest expense remaining life interest rate swaps based future interest payments probable forecasted transactions would occur accordance fresh start accounting reporting unamortized amounts previously charged accumulated comprehensive loss related interest rate swaps 153 million eliminated fresh start reporting date result amendment rhdi credit facility refinancing former dex media west llc credit facility june 6 2008 predecessor company’s interest rate swaps associated two debt arrangements longer highly effective offsetting changes cash flows accordingly cash flow hedge accounting treatment longer permitted addition result filing chapter 11 petitions interest rate swaps required settled terminated 2009 result change fair value interest rate swaps prior effective date predecessor company’s interest expense included expense 04 million one month ended january 31 2010 advertising expense company predecessor company recognize advertising expenses incurred expenses include media public relations promotional branding sponsorship costs online advertising total advertising expense company 85 million 177 million 279 million years ended december 31 2012 2011 eleven months ended december 31 2010 respectively total advertising expense predecessor company 10 million one month ended january 31 2010 concentration credit risk trade receivables approximately 85 advertising revenue derived sale marketing solutions local businesses customers typically enter 12month advertising sales contracts make monthly payments term contract commencing late 2011 company began offer customers ability purchase digital marketing solutions shorter time frames standard one year contract customers prepay full amount portion contract value new customers desiring expand advertising programs subject credit review customers qualify may extend credit form trade receivable advertising purchase local businesses tend fewer financial resources higher failure rates large businesses addition full collection delinquent accounts take extended period time involve significant costs require collateral customers although charge late fees customers pay specified due dates remaining approximately 15 advertising revenue derived sale marketing solutions national large regional chains majority revenue derived national accounts serviced cmrs accept orders cmrs independent third parties act agents national customers cmrs responsible billing national customers advertising receive payment value advertising placed directories net cmr’s commission directly cmr derivative financial instruments december 31 2012 interest rate swap interest rate cap agreements major financial institutions notional amounts 3000 million 2000 million respectively exposed credit risk event one counterparties agreements cannot meet obligation notional amount interest rate swaps used measure interest paid received represent amount exposure credit loss would limited amount would received remaining life interest rate swap agreement terms interest rate cap agreements company receive payments based spread rates threemonth libor rate increases negotiated cap rates loss would limited amount would received based spread rates remaining life interest rate cap agreement counterparties interest rate swap interest rate cap agreements major financial institutions credit ratings higher equivalent dependent upon credit rating agency derivative financial instruments hedging activities use derivative financial instruments economic hedging purposes trading speculative purposes derivative financial instruments limited interest rate swap interest rate cap agreements company utilizes combination fixed rate debt variable rate debt finance operations variable rate debt exposes company variability interest payments due changes interest rates management believes prudent mitigate interest rate risk portion variable rate borrowings satisfy objectives requirements company entered interest rate swap interest rate cap agreements designated cash flow hedges manage exposure interest rate fluctuations variable rate debt derivative financial instruments recognized either assets liabilities consolidated balance sheets measurement fair value quarterly basis fair values interest rate swaps interest rate caps determined based observable inputs derivative instruments designated cash flow hedges initial fair value subsequent gains losses change fair value interest rate swaps interest rate caps reported earnings component interest expense gains losses related quarterly fair value adjustments presented noncash operating activity consolidated statements cash flows using derivative financial instruments hedge exposures changes interest rates company exposes credit risk market risk credit risk possible failure counterparty perform terms derivative contract fair value derivative contract positive counterparty owes company creates credit risk company fair value derivative contract negative company owes counterparty therefore subject credit risk company minimizes credit risk derivative financial instruments entering transactions major financial institutions credit ratings higher equivalent dependent upon credit rating agency market risk adverse effect value financial instrument results change interest rates market risk associated interestrate contracts managed establishing monitoring parameters limit types degree market risk may undertaken see note 6 “derivative financial instruments” additional information regarding interest rate swaps interest rate caps pension postretirement benefits pension postretirement benefits represent estimated amounts paid employees future accounting benefits reflects recognition benefit costs employee’s approximate service period based terms plan investment funding decisions made determination benefit obligation net periodic pension postretirement benefit costs requires management make assumptions regarding discount rate return retirement plan assets healthcare cost trends changes assumptions significant impact projected benefit obligation funding requirement net periodic benefit cost assumed discount rate pension benefits could settled years ended december 31 2012 2011 eleven months ended december 31 2010 one month ended january 31 2010 company predecessor company utilized yield curve determine appropriate discount rate defined benefit pension plans based individual plans’ expected future cash flows expected longterm rate return plan assets based mix assets held plan expected longterm rates return within asset class anticipated trend future healthcare costs based historical experience external factors see note 9 “benefit plans” information regarding benefit plans income taxes account income taxes asset liability method accordance fasb asc 740 income taxes “fasb asc 740” deferred income tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting adjust deferred income tax liabilities assets appropriate reflect changes tax rates expected effect temporary differences reverse establish valuation allowance offset deferred income tax assets based available evidence likely deferred income tax assets realized recognize uncertain income tax positions taken expected taken tax returns largest amount likely sustained upon audit relevant taxing authority uncertain income tax position recognized less 50 likelihood sustained company’s policy recognize interest penalties related unrecognized tax benefits income tax expense see note 7 “income taxes” additional information regarding provision benefit income taxes earnings loss per share calculation basic diluted earnings loss per share “eps” presented diluted eps calculated dividing net income weighted average common shares outstanding plus dilutive potential common stock potential common stock includes stock options restricted stock dilutive effect calculated using treasury stock method due companys reported net loss year ended december 31 2011 eleven months ended december 31 2010 effect stockbased awards antidilutive therefore included calculation eps years ended december 31 2012 2011 eleven months ended december 31 2010 27 million 27 million 13 million shares company’s stockbased awards exercise prices exceeded average market price company’s common stock respective period one month ended january 31 2010 46 million shares predecessor company’s stockbased awards exercise prices exceeded average market price predecessor company’s common stock period stockbased awards company maintains dex one equity incentive plan “eip” whereby certain employees nonemployee directors company eligible receive stock options sars limited stock appreciation rights tandem stock options restricted stock restricted stock units eip 56 million shares common stock originally authorized grant extent shares common stock issued delivered reason expiration termination cancellation forfeiture award certain exceptions shares acquired employees satisfy minimum tax obligations related vesting restricted stock awards ii settlement award cash shares common stock shall available eip stock awards typically granted closing market value common stock date grant become exercisable ratable installments otherwise period one four years date grant may exercised maximum ten years date grant company’s compensation benefits committee determines termination vesting relevant provisions date grant nonemployee directors company eligible receive stockbased awards annual basis grant date value equal 75000 upon emergence chapter 11 pursuant plan outstanding equity securities predecessor company including stock options sars restricted stock cancelled periods prior effective date predecessor company maintained shareholder approved stock incentive plan 2005 stock award incentive plan “2005 plan” whereby certain employees nonemployee directors eligible receive stock options sars limited stock appreciation rights tandem stock options restricted stock prior adoption 2005 plan predecessor company maintained shareholder approved stock incentive plan 2001 stock award incentive plan “2001 plan” 2005 plan 2001 plan 5 million 4 million shares respectively originally authorized grant stock awards typically granted market value predecessor company’s common stock date grant became exercisable ratable installments otherwise period one five years date grant able exercised maximum ten years date grant predecessor company’s compensation benefits committee determined termination vesting relevant provisions date grant predecessor company implemented policy issuing treasury shares satisfy stock issuances associated stockbased award exercises company predecessor company record stockbased compensation expense consolidated statements comprehensive income loss employee stockbased awards based grant date fair values company predecessor company estimate forfeitures requisite service period recognizing compensation expense estimated forfeitures adjusted extent actual forfeitures differ expected materially differ estimates company used estimated weighted average forfeiture rate determining stockbased compensation expense 64 63 89 years ended december 31 2012 2011 eleven months ended december 31 2010 respectively predecessor company used estimated weighted average forfeiture rate determining stockbased compensation expense 102 one month ended january 31 2010 see note 8 “stock incentive plans” additional information regarding company’s predecessor company’s stock incentive plans 2009 longterm incentive plan executive officers company cashbased longterm incentive plan executive officers 2009 longterm incentive plan “2009 ltip” designed provide longterm incentive compensation participants based achievement performance goals 2009 ltip originally approved predecessor company’s compensation benefits committee 2009 bankruptcy proceedings bankruptcy court approved 2009 ltip carried forward company upon emergence chapter 11 company’s compensation benefits committee administered 2009 ltip sole discretion option subject certain exceptions delegate power authority 2009 ltip chief executive officer executive officer company participants 2009 ltip consisted executive officers company predecessor company affiliates ii employees company predecessor company subsidiaries affiliates designated chief executive officer amount award 2009 ltip paid cash dependent upon attainment certain performance measures related amount company’s predecessor company’s cumulative free cash flow 2010 2011 fiscal years “performance period” participants arewere executive officers company predecessor company certain participants designated chief executive officer also received payment upon achievement restructuring reorganization andor recapitalization predecessor company’s outstanding indebtedness liabilities “specified actions” performance period payments made following end performance period date specified action case may upon emergence chapter 11 achievement specified actions company made cash payments associated 2009 ltip 80 million eleven months ended december 31 2010 remaining cash payments associated 2009 ltip 109 million made year ended december 31 2012 related attainment certain performance measures performance period cashbased awards granted participants april 2009 company recognized compensation expense related 2009 ltip 03 million 12 million 48 million years ended december 31 2012 2011 eleven months ended december 31 2010 respectively predecessor company recognized compensation expense related 2009 ltip 05 million one month ended january 31 2010 fair value financial instruments december 31 2012 2011 fair value cash equivalents accounts receivable net accounts payable accrued liabilities approximated carrying value based net shortterm nature instruments company’s assets liabilities fair valued fresh start reporting date connection adoption fresh start accounting see annual report form 10k year ended december 31 2010 detailed information methodology assumptions used value assets liabilities conjunction adoption fresh start accounting estimates fair value may affected assumptions made accordingly necessarily indicative amounts company could realize current market exchange fasb asc 820 fair value measurements disclosures “fasb asc 820” defines fair value establishes fair value hierarchy prioritizes inputs valuation techniques used measure fair value expands disclosures fair value measurements fasb asc 820 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy gives highest priority quoted prices active markets comprised following three levels • level 1 unadjusted quoted market prices active markets identical assets liabilities • level 2 observable inputs level 1 inputs quoted prices similar assets liabilities quoted prices markets insufficient volume infrequent transactions modelderived valuations significant inputs observable derived principally corroborated observable market data substantially full term assets liabilities • level 3 prices valuations require inputs significant measurement unobservable required fasb asc 820 assets liabilities classified based lowest level input significant fair value measurement company’s assessment significance particular input fair value measurement requires judgment may affect valuation fair value assets liabilities placement within fair value hierarchy levels company interest rate swaps notional amount 3000 million 5000 million december 31 2012 2011 respectively interest rate caps notional amount 2000 million 4000 million december 31 2012 2011 respectively measured fair value recurring basis following table presents company’s assets liabilities measured fair value recurring basis december 31 2012 2011 respectively level within fair value hierarchy fair value measurements included transfers assets liabilities levels 1 2 3 fair value hierarchy years ended december 31 2012 2011 company established policy recognizing transfers levels fair value hierarchy end reporting period company’s longterm debt obligations measured fair value recurring basis however present fair value dex one senior subordinated notes credit facilities note 5 “longterm debt” company utilized quoted market prices available compute fair market value longterm debt obligations december 31 2012 2011 dex one senior subordinated notes categorized within level 1 fair value hierarchy credit facilities categorized within level 2 fair value hierarchy valuation techniques interest rate swaps interest rate caps fair value marketbased measure considered perspective market participant holds asset owes liability rather entityspecific measure therefore even market assumptions readily available company’s assumptions set reflect market participants would use pricing asset liability measurement date company uses prices inputs current measurement date fair value derivative instruments derived using pricing models based market approach pricing models take account relevant observable market inputs market participants would use pricing asset liability pricing models used determine fair value derivative instruments incorporate specific contract terms valuation inputs including effective dates maturity dates interest rate swap pay rates interest rate cap rates notional amounts disclosed presented note 6 “derivative financial instruments” interest rate yield curves creditworthiness counterparty company counterparty credit risk company’s credit risk could material impact fair value derivative instruments results operations financial condition particular reporting period december 31 2012 impact applying counterparty credit risk andor companys credit risk determining fair value derivative instruments material many pricing models entail material subjectivity methodologies employed necessitate significant judgment pricing inputs observed actively quoted markets case derivative instruments pricing models used company widely accepted financial services industry noted derivative instruments categorized within level 2 fair value hierarchy fair value control processes interest rate swaps interest rate caps company employs control processes validate fair value derivative instruments derived pricing models control processes designed assure values used financial reporting based observable inputs wherever possible event observable inputs available control processes designed assure valuation approach utilized appropriate consistently applied assumptions reasonable benefit plan assets fair values company’s benefit plan assets disclosures required fasb asc 71520 compensation retirement benefits presented note 9 “benefit plans” estimates preparation financial statements conformity generally accepted accounting principles gaap requires management make estimates assumptions affect reported amounts assets liabilities revenues certain expenses disclosure contingent assets liabilities actual results could differ materially estimates assumptions estimates assumptions used determination recoverability longlived assets sales allowances doubtful accounts depreciation amortization employee benefit plans expense restructuring expense accruals deferred income taxes certain assumptions pertaining stockbased awards certain estimates assumptions used impairment evaluation useful lives assessment definitelived intangible assets longlived assets among others new accounting pronouncements june 2011 fasb issued asu 201105 comprehensive income topic 220 presentation comprehensive income “asu 201105” asu 201105 allows entity option present total comprehensive income components net income components comprehensive income either single continuous statement comprehensive income two separate consecutive statements choices entity required present component net income along total net income component comprehensive income along total comprehensive income total amount comprehensive income asu 201105 eliminates option present components comprehensive income part statement changes shareholders equity asu 201105 change items must reported comprehensive income item comprehensive income must reclassified net income december 2011 fasb issued asu 201112 comprehensive income topic 220 deferral effective date amendments presentation reclassifications items accumulated comprehensive income accounting standards update 201105 asu 201112 asu 201112 defers effective date provisions included asu 201105 require entities present reclassification adjustments accumulated comprehensive income component statement net income presented statement comprehensive income presented interim annual financial statements asu 201112 states entities must continue report reclassification adjustments accumulated comprehensive income consistent presentation requirements effect asu 201105 effective january 1 2012 company adopted applicable provisions included asu 201105 elected present single continuous statement comprehensive income february 2013 fasb issued asu 201302 comprehensive income topic 220 reporting amounts reclassified accumulated comprehensive income asu 201302 asu 201302 change current requirements reporting net income comprehensive income financial statements however asu 201302 requires entity provide information amounts reclassified accumulated comprehensive income component addition entity required present either face statement net income presented separate disclosure notes financial statements provided information presented single location significant amounts reclassified accumulated comprehensive income respective line items net income amount reclassified required gaap reclassified net income entirety reporting period amounts required gaap reclassified entirety net income entity required crossreference disclosures required gaap provide additional detail amounts asu 201302 effective interim annual reporting periods beginning december 15 2012 company adopt asu effective january 1 2013 may 2011 fasb issued asu 201104 fair value measurement topic 820 amendments achieve common fair value measurement disclosure requirements us gaap ifrs “asu 201104’ asu 201104 issued provide consistent definition fair value ensure fair value measurement disclosure requirements similar gaap international financial reporting standards asu 201104 clarifies fasb’s intent application existing fair value measurement disclosure requirements changes certain fair value measurement principles enhances fair value disclosure requirements effective january 1 2012 company adopted disclosure provisions included asu 201104 adoption asu 201104 impact financial position results operations reviewed accounting pronouncements issued december 31 2012 company yet adopted believe pronouncements material impact financial position operating results 3 fresh start accounting reorganization items net company adopted fresh start accounting reporting effective february 1 2010 fresh start reporting date accordance fasb asc 852 reorganizations “fasb asc 852” holders existing voting shares immediately confirmation plan received less 50 voting shares emerging entity reorganization value company’s assets immediately date confirmation less postpetition liabilities allowed claims company required adopt fresh start accounting reporting january 29 2010 effective date however light proximity date accounting period close immediately effective date january 31 2010 well results materiality assessment elected adopt fresh start accounting reporting february 1 2010 financial statements fresh start reporting date report results dex one beginning retained earnings accumulated deficit presentation dex one represents financial position results operations new reporting entity comparable prior periods presented rhd consolidated financial statements periods ended prior fresh start reporting date purport reflect provide consequences chapter 11 proceedings include effect changes predecessor company’s capital structure changes fair value assets liabilities result fresh start accounting fasb asc 852 requires financial statements distinguish transactions events directly associated process reorganizing business chapter 11 ongoing operations business reorganization items include certain expenses professional fees realized gains losses provisions losses realized reorganization restructuring process predecessor company classified items reorganization items net consolidated statement comprehensive income loss predecessor company recorded 78 billion reorganization items one month ended january 31 2010 comprised preemergence gain 45 billion resulting discharge liabilities plan partially offset issuance new dex one common stock establishment additional paidin capital issuance dex one senior subordinated notes ii preemergence charges earnings recorded reorganization items resulting certain costs expenses relating plan becoming effective iii preemergence increase earnings 33 billion resulting aggregate changes net carrying value preemergence assets liabilities reflect fair values fresh start accounting well recognition goodwill following table displays details reorganization items one month ended january 31 2010 1 liabilities subject compromise generally refer prepetition obligations secured unsecured may impaired plan reorganization fasb asc 852 requires liabilities including became known filing chapter 11 petitions reported amounts expected allowed even may settled lesser amounts table identifies principal categories liabilities subject compromise january 31 2010 subsequently discharged plan 2 effective date company issued aggregate amount 500 million shares new common stock par value 001 per share established additional paidin capital 15 billion based fair value equity less par value dex one common stock 3 effective date accordance plan issued dex one senior subordinated notes holders dex media west 85 senior notes due 2010 5875 senior notes due 2011 pro rata basis addition share reorganized dex one equity 4 represents liabilities originally classified liabilities subject compromise assumed plan reclassified liabilities subject compromise 5 predecessor company incurred professional fees associated filing chapter 11 petitions 306 million one month ended january 31 2010 227 million paid cash one month ended january 31 2010 professional fees included financial legal valuation services directly associated reorganization process one month ended january 31 2010 predecessor company receive operating cash receipts resulting filing chapter 11 petitions 6 excess reorganization value fair value identified tangible intangible assets 21 billion recorded goodwill see “enterprise value reorganization value determination” additional information 7 adoption fresh start accounting significant impact results operations company commencing fresh start reporting date result deferral amortization method revenue recognition recognized advertising revenues reflect amortization advertising sales consummated prior periods well current period fresh start accounting precluded us recognizing substantially deferred advertising revenue 7910 million related deferred directory costs 1355 million based minimal obligations subsequent fresh start reporting date associated advertising sales fulfilled prior fresh start reporting date 8 determination fair value intangible assets resulted 4151 million net increase intangible assets reorganized condensed consolidated balance sheet january 31 2010 determination fair value fixed assets computer software resulted 498 million net increase fixed assets computer software reorganized condensed consolidated balance sheet january 31 2010 9 conjunction adoption fresh start accounting adjustment established record outstanding debt fair value fresh start reporting date total discount 1202 million recorded upon adoption fresh start accounting associated credit facilities see note 2 “summary significant accounting policies interest expense deferred financing costs” note 5 “longterm debt” additional information 10 result fresh start accounting deferred financing costs 484 million associated predecessor company’s existing credit facilities eliminated 11 represents various fresh start accounting adjustments including adjustments deferred rent prepaid expenses current assets enterprise value reorganization value determination enterprise value represents fair value entity’s interestbearing debt shareholders’ equity disclosure statement associated plan confirmed bankruptcy court estimated range enterprise values 42 billion 53 billion midpoint 48 billion based current anticipated economic conditions direct impact conditions business deemed appropriate use midpoint low end range overall midpoint range determine final enterprise value 45 billion comprised debt valued 33 billion equity valued 13 billion less cash required hand result plan 1250 million fasb asc 852 provides among things determination value assigned assets reorganized company date selected financial reporting purposes company adjusted enterprise value 45 billion certain items postpetition liabilities deferred income taxes cash hand post emergence determine reorganization value 59 billion fresh start accounting reorganization value allocated dex one’s assets based respective fair values conformity acquisition method accounting business combinations included fasb asc 805 excess reorganization value fair value identified tangible intangible assets 21 billion recorded goodwill see annual report form 10k year ended december 31 2010 detailed information critical estimates assumptions methodologies used determining company’s enterprise value reorganization value fair values assets liabilities fresh start accounting well impact emergence reorganization fresh start accounting financial position results operations cash flows 4 restructuring charges successor company actions fourth quarter 2010 company initiated restructuring plan included headcount reductions consolidation responsibilities vacating leased facilities continued 2011 “restructuring actions” employees impacted restructuring actions notified termination fourth quarter 2010 throughout 2011 addition company vacated certain leased facilities 2011 company recognize restructuring charge earnings related restructuring actions year ended december 31 2012 cash payments 73 million made conjunction restructuring actions year ended december 31 2012 company recognized restructuring charge earnings 250 million 186 million made cash payments 319 million 07 million year ended december 31 2011 eleven months ended december 31 2010 respectively related restructuring actions following table shows activity restructuring reserve associated restructuring actions since inception predecessor company actions 2009 predecessor company initiated restructuring plan included vacating leased facilities headcount reductions “2009 actions” eleven months ended december 31 2010 company relieved remaining restructuring reserve associated 2009 actions 02 million earnings company made payments associated 2009 actions 03 million eleven months ended december 31 2010 one month ended january 31 2010 predecessor company relieved portion restructuring reserve associated 2009 actions 06 million corresponding credit earnings predecessor company make payments associated 2009 actions one month ended january 31 2010 restructuring charges charged credited earnings included production distribution expenses selling support expenses general administrative expenses consolidated statements comprehensive income loss applicable 5 longterm debt following table presents fair market value longterm debt december 31 2012 2011 based quoted market prices date well carrying value longterm debt december 31 2012 2011 includes 1 unamortized fair value adjustments connection company’s adoption fresh start accounting fresh start reporting date 367 million 632 million december 31 2012 2011 respectively 2 year ended december 31 2012 issuance additional 74 million 105 million dex one senior subordinated notes result companys election make paidinkind pik interest payments semiannual interest periods ending september 30 2012 march 31 2012 respectively 3 impact debt repurchases year ended december 31 2012 see note 1 “business basis presentation significant financing developments” additional information debt repurchases companys voluntary filing chapter 11 march 18 2013 triggered event default rendered remaining financial obligations dex one senior subordinated notes credit facilities automatically immediately due payable although believe efforts enforce acceleration financial obligations stayed result filing chapter 11 cases bankruptcy court classified dex one senior subordinated notes credit facilities current obligations consolidated balance sheet december 31 2012 see note 1 business basis presentation going concern additional information outstanding debt december 31 2012 held contractual maturity 1 excluding fair value adjustments result fresh start accounting 2 assuming issuance additional dex one senior subordinated notes result companys election make pik interest payments maturity totals 21227 million credit facilities rhdi amended restated credit facility conjunction credit facility repurchases rhdi repurchased 920 million loans rhdi amended restated credit facility rate 435 par december 31 2012 outstanding carrying value rhdi amended restated credit facility totaled 7760 million rhdi amended restated credit facility requires quarterly principal interest payments option either ◦ highest subject floor 400 prime rate defined rhdi amended restated credit facility ii federal funds effective rate defined rhdi amended restated credit facility plus 050 iii one month libor plus 100 case plus interest rate margin base rate loans interest rate margin base rate loans initially 525 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 525 per annum rhdi’s consolidated leverage ratio greater equal 425 100 equal 500 per annum rhdi’s consolidated leverage ratio less 425 100 ◦ higher libor rate ii 300 case plus interest rate margin eurodollar loans interest rate margin eurodollar loans initially 625 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 625 per annum rhdi’s consolidated leverage ratio greater equal 425 100 equal 600 per annum rhdi’s consolidated leverage ratio less 425 100 rhdi may elect interest periods one two three six months libor borrowings rhdi amended restated credit facility matures october 24 2014 weighted average interest rate outstanding debt rhdi amended restated credit facility 90 december 31 2012 dex media east amended restated credit facility conjunction credit facility repurchases dme inc repurchased 236 million loans dex media east amended restated credit facility rate 530 par december 31 2012 outstanding carrying value dex media east amended restated credit facility totaled 5158 million dex media east amended restated credit facility requires quarterly principal interest payments option either ◦ highest prime rate defined dex media east amended restated credit facility ii federal funds effective rate defined dex media east amended restated credit facility plus 050 iii one month libor plus 100 case plus interest rate margin base rate loans interest rate margin base rate loans initially 150 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 150 per annum dme inc’s consolidated leverage ratio greater equal 275 100 equal 125 per annum dme inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 100 per annum dme inc’s consolidated leverage ratio less 250 100 ◦ libor rate plus interest rate margin eurodollar loans interest rate margin eurodollar loans initially 250 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 250 per annum dme inc’s consolidated leverage ratio greater equal 275 100 equal 225 per annum dme inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 200 per annum dme inc’s consolidated leverage ratio less 250 100 dme inc may elect interest periods one two three six months libor borrowings dex media east amended restated credit facility matures october 24 2014 weighted average interest rate outstanding debt dex media east amended restated credit facility 28 december 31 2012 dex media west amended restated credit facility conjunction credit facility repurchases dmw inc repurchased 266 million loans dex media west amended restated credit facility rate 640 par december 31 2012 outstanding carrying value dex media west amended restated credit facility totaled 4982 million dex media west amended restated credit facility requires quarterly principal interest payments option either ◦ highest subject floor 400 prime rate defined dex media west amended restated credit facility ii federal funds effective rate defined dex media west amended restated credit facility plus 050 iii one month libor plus 100 case plus interest rate margin base rate loans interest rate margin base rate loans initially 350 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 350 per annum dmw inc’s consolidated leverage ratio greater equal 275 100 equal 325 per annum dmw inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 300 per annum dmw inc’s consolidated leverage ratio less 250 100 ◦ higher libor rate ii 300 case plus interest rate margin eurodollar loans interest rate margin eurodollar loans initially 450 per annum interest rate margin adjusts pursuant pricing grid provides margin equal 450 per annum dmw inc’s consolidated leverage ratio greater equal 275 100 equal 425 per annum dmw inc’s consolidated leverage ratio greater equal 250 100 less 275 100 equal 400 per annum dmw inc’s consolidated leverage ratio less 250 100 dmw inc may elect interest periods one two three six months libor borrowings dex media west amended restated credit facility matures october 24 2014 weighted average interest rate outstanding debt dex media west amended restated credit facility 70 december 31 2012 credit facilities require significant balloon payments upon maturity october 24 2014 company unable extend maturity significantly reduce outstanding indebtedness prior maturity either 1 completing mergers associated refinancing credit facilities chapter 11 cases 2 open market repurchases permitted amendments credit facilities 3 obtaining additional financing andor 4 refinancing existing indebtedness separate mergers chapter 11 cases able generate cash flows operations amounts sufficient fund operations capital expenditures andor satisfy debt service requirements time addition company become noncompliant restrictive covenants debt agreements prior october 24 2014 default provisions would triggered credit facilities outstanding balances could become due immediately company continues monitor assess available options opportunities would allow us accomplish financing initiatives however assurances made financing initiatives attained credit facilities described includes uncommitted revolving credit facility available borrowings 400 million availability uncommitted revolving credit facility subject certain conditions including prepayment term loans credit facilities amount equal revolving credit facility credit facilities contain provisions prepayment net proceeds asset dispositions equity issuances debt issuances subject certain exceptions ratable portion net proceeds received company asset dispositions company subject certain exceptions portion excess cash flow credit facilities described contain certain covenants subject exceptions limit restrict borrower subsidiaries’ incurrence liens investments including acquisitions sales assets indebtedness payment dividends distributions payments certain indebtedness sale leaseback transactions swap transactions affiliate transactions capital expenditures mergers liquidations consolidations credit facility also contains certain covenants subject exceptions limit restrict borrower’s incurrence liens indebtedness ownership assets sales assets payment dividends distributions modifications dex one senior subordinated notes borrower required maintain compliance consolidated leverage ratio covenant rhdi dmw inc also required maintain compliance consolidated interest coverage ratio covenant dmw inc also required maintain compliance consolidated senior secured leverage ratio covenant dex media west amended restated credit agreement includes option additional covenant relief senior secured leverage covenant fourth quarter 2011 subject increased amortization loans first quarter 2012 increase excess cash flow sweep 2011 payment 25 basis point fee ratably lenders dex media west amended restated credit agreement march 31 2010 company exercised senior secured leverage ratio election defined dex media west amended restated credit agreement company incurred fee 21 million exercise option obligations credit facilities guaranteed subsidiaries secured lien substantially subsidiaries’ tangible intangible assets including pledge stock respective subsidiaries well mortgage certain real property pursuant shared guaranty collateral agreement subject intercreditor agreement among administrative agents credit facilities company subject certain exceptions certain subsidiaries company guaranty obligations credit facilities obligations secured lien substantially guarantors’ tangible intangible assets company’s subsidiary dex one digital including pledge stock respective subsidiaries well mortgage certain real property notes dex one senior subordinated notes conjunction note repurchases company repurchased 982 million aggregate principal amount dex one senior notes rate 270 par december 31 2012 outstanding carrying value dex one senior subordinated notes totaled 2197 million interest dex one senior subordinated notes payable semiannually march 31st september 30th year commencing march 31 2010 january 29 2017 dex one senior subordinated notes accrue interest annual rate 12 cash interest payments 14 company elects pik interest payments company may elect later two business days prior beginning semiannual interest period whether make interest payment dex one senior subordinated notes entirely cash ii 50 cash 50 pik interest capitalized additional senior subordinated notes absence election subsequent semiannual interest period interest dex one senior subordinated notes payable form interest payment semiannual interest period immediately preceding subsequent semiannual interest period semiannual interest periods ending september 30 2012 march 31 2012 company made interest payments 50 cash 50 pik interest permitted indenture governing dex one senior subordinated notes resulting issuance additional 74 million 105 million respectively dex one senior subordinated notes company continue make interest payments dex one senior subordinated notes 50 cash 50 pik interest semiannual interest period ending march 31 2013 interest rate dex one senior subordinated notes may subject adjustment event company incurs certain specified debt higher effective yield maturity yield maturity dex one senior subordinated notes dex one senior subordinated notes unsecured obligations company effectively subordinated right payment company’s existing future secured debt including dex one’s guarantee borrowings credit facilities structurally subordinated existing future liabilities including trade payables direct indirect subsidiaries indenture governing dex one senior subordinated notes contains certain covenants subject certain exceptions among things limit restrict company’s certain cases company’s restricted subsidiaries’ incurrence indebtedness making certain restricted payments incurrence liens entry transactions affiliates conduct business merger consolidation sale substantially property indenture governing dex one senior subordinated notes also requires company offer repurchase dex one senior subordinated notes par certain changes control involving company sale substantially assets company holders dex one senior subordinated notes also may cause company repurchase dex one senior subordinated notes price 101 principal amount upon incurrence company certain acquisition indebtedness dex one senior subordinated notes redeemable option following prices percentage face value impact fresh start accounting conjunction adoption fresh start accounting adjustment established record outstanding debt fair value fresh start reporting date company required record credit facilities discount result fair value fresh start reporting date therefore carrying amount debt obligations lower principal amount due maturity total discount 1202 million recorded upon adoption fresh start accounting associated credit facilities 367 million remains unamortized december 31 2012 shown following table conjunction credit facility repurchases accelerated amortization fair value adjustments credit facilities 20 million partially offset net gain credit facility repurchases recognized year ended december 31 2012 see note 1 “business basis presentation significant financing developments” additional information 6 derivative financial instruments successor company entered following interest rate swaps effectively convert 3000 million approximately 17 company’s variable rate debt fixed rate debt december 31 2012 since rhdi amended restated credit facility dex media west amended restated credit facility subject libor floor 300 libor rate floor december 31 2012 credit facilities effectively fixed rate debt time libor exceeds stated floor december 31 2012 approximately 89 total debt outstanding consisted variable rate debt excluding effect interest rate swaps including effect interest rate swaps total fixed rate debt comprised approximately 26 total debt portfolio december 31 2012 interest rate swaps dex media east 1 consists one swap terms interest rate swap agreements receive variable interest based threemonth libor pay weighted average fixed rate 17 weighted average rate received interest rate swaps 03 year ended december 31 2012 periodic payments receipts recorded interest expense terms interest rate cap agreements company receive payments based spread rates threemonth libor rate increases cap rates noted table company paid 21 million interest rate cap agreements entered first quarter 2010 required make future payments related interest rate cap agreements interest rate caps rhdi 2 consists one cap following tables present fair value interest rate swaps interest rate caps december 31 2012 2011 fair value interest rate swaps presented accounts payable accrued liabilities noncurrent liabilities fair value interest rate caps presented prepaid expenses current assets noncurrent assets consolidated balance sheets december 31 2012 2011 following tables also present gain loss recognized interest expense change fair value interest rate swaps interest rate caps years ended december 31 2012 2011 eleven months ended december 31 2010 company recognized expense related interest rate swaps interest rate caps including accrued interest 19 million 28 million 132 million years ended december 31 2012 2011 eleven months ended december 31 2010 respectively predecessor company result filing chapter 11 petitions predecessor company interest rate swaps designated cash flow hedges one month ended january 31 2010 predecessor company recognized interest expense 23 million associated change fair value interest rate swaps one month ended january 31 2010 predecessor company recognized expense 30 million related interest rate swaps earnings including accrued interest accordance fresh start accounting unamortized amounts previously charged accumulated comprehensive loss 153 million related predecessor company’s interest rate swaps eliminated fresh start reporting date 7 income taxes current income tax provision benefit represents estimated taxes payable refundable current year based enacted tax laws rates deferred income tax assets liabilities determined based estimated future tax effects temporary differences financial statement carrying amount tax basis assets liabilities measured tax rates temporary differences expected reverse deferred income tax provision benefit result changes deferred income tax assets liabilities valuation allowance recognized reduce gross deferred tax assets amount likely realized components provision benefit income taxes reconciliation statutory federal tax rate effective tax rate components deferred tax assets liabilities reconciliation gross unrecognized tax benefits successor company components provision benefit income taxes income tax provision 69 million year ended december 31 2012 comprised federal tax benefit 14 million state tax provision 83 million federal tax benefit 14 million comprised current tax benefit 47 million primarily related alternative minimum tax relief deferred tax provision 33 million primarily due changes deferred tax liabilities relating stock basis subsidiaries internal revenue code irc section 1245 recapture year ended december 31 2012 state tax provision 83 million comprised current tax provision 45 million primarily related suspension net operating loss carryforwards certain states deferred tax provision 38 million primarily due changes liabilities relating stock basis subsidiaries irc section 1245 recapture year ended december 31 2012 debt repurchases resulted tax gain 1415 million year ended december 31 2012 generally discharge debt obligation amount less adjusted issue price creates cancellation debt income codi must included taxpayers taxable income however accordance irc section 108 lieu recognizing taxable income codi company required reduce existing tax attributes result company recognized estimated decrease deferred tax assets relating net operating losses basis amortizable depreciable property approximately 546 million year ended december 31 2012 decreases offset decrease recorded valuation allowance year ended december 31 2012 company recorded decrease valuation allowance year ended december 31 2012 result debt repurchases discussed addition valuation allowance decreased year ended december 31 2012 result reduction estimated useful lives certain intangible assets discussed note 2 summary significant accounting policies identifiable intangible assets goodwill change circumstances resulted change judgment companys ability realize deferred tax assets future years resulting change income tax expense allocated year ended december 31 2012 relating changes valuation allowance decrease 389 million reduces effective tax rate year ended december 31 2012 approximately 562 company recorded deferred tax liabilities related change excess financial statement carrying amount tax basis investments certain subsidiaries irc section 1245 recapture result debt repurchases reduction existing tax attributes discussed resulting increase income tax expense year ended december 31 2012 100 million increased effective tax rate 145 company recorded income tax provision 56 million related nondeductible interest expense associated credit facilities year ended december 31 2012 increased effective tax rate 81 income tax benefit 1248 million year ended december 31 2011 comprised federal tax benefit 929 million state tax benefit 318 million federal tax benefit 929 million comprised current tax benefit 190 million primarily related decreases liability unrecognized tax benefits deferred tax benefit 740 million due changes temporary differences related goodwill impairment changes deferred tax liabilities relating stock basis subsidiaries irc section 1245 recapture changes recorded valuation allowances year ended december 31 2011 state tax benefit 318 million comprised current tax provision 29 million primarily related suspension net operating loss carryforwards certain states deferred tax benefit 347 million primarily due changes temporary differences related goodwill impairment changes liabilities relating stock basis subsidiaries irc section 1245 recapture year ended december 31 2011 company recorded goodwill impairment charge 8011 million second quarter 2011 4572 million related nondeductible goodwill impairment nondeductible goodwill reduced income tax benefit impairment 1772 million decreased effective tax rate 275 year ended december 31 2011 goodwill impairment charge recognized second quarter 2011 gave rise deferred tax asset whose realization meet morelikelythannot threshold therefore requiring valuation allowance addition changes deferred tax assets liabilities primarily related filing 2010 consolidated federal tax return resulted increases valuation allowance year ended december 31 2011 resulting increase income tax expense year ended december 31 2011 512 million decreased effective tax rate 80 year ended december 31 2011 upon emergence bankruptcy company recorded deferred tax liabilities related excess financial statement carrying amount tax basis investments certain subsidiaries irc section 1245 recapture goodwill impairment charge reduced financial statement carrying amount investments certain subsidiaries also caused reduction deferred tax liabilities resulting reduction income tax expense year ended december 31 2011 related change deferred tax liabilities 811 million increased effective tax rate 126 year ended december 31 2011 discharge debt conjunction emergence chapter 11 resulted tax gain 50166 million conjunction filing consolidated federal tax return year ended december 31 2010 company made election irc section 108b5 first apply reduction certain amortizable depreciable property certain subsidiaries result election adjustments related filing federal consolidated tax return company recognized increase deferred tax assets related net operating losses approximately 3287 million increases primarily offset decreases basis amortizable depreciable property income tax benefit 6201 million eleven months ended december 31 2010 comprised federal tax benefit 5677 million state tax benefit 524 million federal tax benefit 5677 million comprised current tax provision 13 million primarily related unrecognized tax benefits deferred tax benefit 5689 million primarily related current year net operating loss recognition unrecognized tax position goodwill impairment charges eleven months ended december 31 2010 state tax benefit 524 million comprised current tax benefit 38 million primarily related expected state tax refunds deferred tax benefit 487 million primarily related recognition unrecognized tax position eleven months ended december 31 2010 reconciliation statutory federal tax rate effective tax rate effective tax rate provision 100 year ended december 31 2012 differs federal statutory rate 350 primarily due changes recorded valuation allowances impact state income taxes changes deferred tax liabilities related stock basis subsidiaries irc section 1245 recapture impact nondeductible interest expense related credit facilities adjustments related filing consolidated tax return effective tax rate benefit 194 year ended december 31 2011 differs federal statutory rate 350 primarily due state income taxes nondeductible goodwill impairment changes deferred tax liabilities related stock basis subsidiaries irc section 1245 recapture changes recorded valuation allowances decreases liability unrecognized tax benefits adjustments related filing consolidated federal income tax return effective tax rate benefit 402 eleven months ended december 31 2010 higher federal statutory tax rate 350 primarily due increases income tax benefits recognition unrecognized tax position offset part increase income tax expense related nondeductible impairment charge components deferred tax assets liabilities total deferred tax assets valuation allowance 5002 million total deferred tax liabilities 3912 million december 31 2012 deferred tax assets 4341 million represent net operating loss credit carryforwards assessing amount deferred tax assets likely realized established valuation allowance 1238 million representing extent deferred tax assets supported future reversals existing taxable temporary differences total deferred tax assets valuation allowance 5780 million total deferred tax liabilities 4285 million december 31 2011 deferred tax assets 5005 million represent net operating loss credit carryforwards assessing amount deferred tax assets likely realized established valuation allowance 1572 million representing extent deferred tax assets supported future reversals existing taxable temporary differences reconciliation gross unrecognized tax benefits changes liability unrecognized tax benefits material year ended december 31 2012 june 15 2011 federal statute limitations closed tax year prior uncertain tax position related revenue recognition established result company decreased liability unrecognized tax benefits associated federal state uncertain tax position 282 million recorded tax benefit 240 million year ended december 31 2011 resulted increase effective tax rate 37 year ended december 31 2011 year ended december 31 2011 company increased liability unrecognized tax benefits 52 million primarily related uncertainty realization certain tax attributes available reduction irc section 108 reduced income tax benefit 51 million decreased effective tax rate 08 year ended december 31 2011 third quarter 2011 company increased liability unrecognized tax benefits 18 million related exclusion nonbusiness income state illinois fourth quarter 2011 company reached settlement state illinois eliminated related liability unrecognized tax benefits tax years 2009 2011 subject examination internal revenue service “irs” certain state tax returns examination various regulatory authorities state tax return years open examination average three years however certain jurisdictions remain open examination longer three years due existence net operating loss carryforwards statutory waivers continually review issues raised connection ongoing examinations open tax years evaluate adequacy reserves believe accrued tax liabilities fasb asc 740 adequate cover uncertain tax positions related federal state income taxes included balance unrecognized tax benefits december 31 2012 2011 57 million 57 million respectively tax benefits recognized would favorably affect effective tax rate company believes approximately 07 million unrecognized tax benefits december 31 2012 may reverse third quarter 2013 year ended december 31 2012 company recognized de minimis amount related interest penalties due unrecognized tax benefits year ended december 31 2011 eleven months ended december 31 2010 company recognized 48 million 05 million respectively interest penalties due unrecognized tax benefits december 31 2012 accrued de minimis amount related interest december 31 2011 accrue amount related interest amounts accrued tax penalties december 31 2012 2011 eleven months ended december 31 2010 decreased liability unrecognized tax benefits 3706 million primarily related irc section 382 “section 382” limitations see “other” additional information impact decrease liability unrecognized tax benefits effective tax rate eleven months ended december 31 2010 december 31 2012 company federal state net operating loss carryforwards approximately 9853 million 19754 million respectively begin expire 2029 2013 respectively 2009 predecessor company accrued unrecognized tax benefit uncertainty surrounding potential ownership change section 382 occurred prior date made “checkthebox” election two subsidiaries date change ownership question since december 31 2009 balance sheet date predecessor company unable confirm actual date ownership change sec forms 13g filed however based upon closing sec filing period schedules 13g review schedules filed february 15 2010 company determined likely certain “checkthebox” elections effective prior date 2009 ownership change section 382 result company recorded tax benefit reversal liability unrecognized tax benefit 3523 million company’s statement comprehensive income loss eleven months ended december 31 2010 significantly impacted effective tax rate period result goodwill nongoodwill intangible asset impairment charges eleven months ended december 31 2010 recognized nondeductible adjustment effective tax rate 195 2999 million respectively certificate incorporation contains provisions generally prohibiting acquisition 49 common stock one person group persons whose shares would aggregated pursuant section 382 ii acquisition additional common stock persons already owning 49 common stock case february 2 2011 shorter period may determined board directors without restrictions possible certain changes ownership common stock could result imposition limitations ability company subsidiaries fully utilize net operating losses tax attributes currently available us federal state income tax purposes upon emergence bankruptcy company adjusted certain deferred tax assets liabilities reflect estimated future reductions certain tax attributes primarily net operating loss carryforwards intangible asset basis subsidiary stock basis accordance fasb asc 852 company truedup previous attribute reduction estimates january 31 2010 reflect actual attribute reduction december 31 2010 resulting 1584 million decrease deferred tax liabilities goodwill predecessor company components provision income taxes income tax provision 9175 million one month ended january 31 2010 comprised federal tax provision 7928 million state tax provision 1248 million federal current tax provision primarily related increase federal tax accrual related unrecognized tax benefits federal deferred tax provision primarily related reduction predecessor company’s tax attributes accordance irc section 108 state tax provision primarily related reduction predecessor company’s tax attributes accordance irc section 108 reconciliation statutory federal tax rate effective tax rate effective tax rate provision 117 lower statutory federal tax rate 350 primarily due decreases income tax expense nontaxable fresh start adjustments release valuation allowance offset part increases income tax expense estimated loss tax attributes due cancellation debt income emergence impact state taxes reconciliation gross unrecognized tax benefits included balance unrecognized tax benefits january 31 2010 3770 million tax benefits recognized would favorably affect effective tax rate one month ended january 31 2010 predecessor company recognized 04 million interest penalties due unrecognized tax benefits january 31 2010 predecessor company accrued 83 million related interest amounts accrued tax penalties january 31 2010 8 stock incentive plans years ended december 31 2012 2011 eleven months ended december 31 2010 company recognized 46 million 48 million 45 million respectively stockbased compensation expense related stockbased awards prior cancellation equity awards predecessor company recognized stockbased compensation expense related stockbased awards 06 million one month ended january 31 2010 fair value company’s predecessor company’s stock options sars market condition calculated using blackscholes model time stockbased awards granted fair value company’s stock options sars market condition calculated using monte carlo model time stockbased awards granted fair value net estimated forfeitures amortized vesting period respective stockbased award compensation expense related restricted stock granted employees including executive officers nonemployee directors measured fair value date grant based number shares granted quoted market price company’s predecessor company’s common stock time fair value net estimated forfeitures amortized vesting period respective stockbased award company granted 04 million 18 million 21 million stock options sars years ended december 31 2012 2011 eleven months ended december 31 2010 respectively company granted 07 million 06 million 02 million shares restricted stock andor restricted stock units years ended december 31 2012 2011 eleven months ended december 31 2010 respectively predecessor company grant stock options sars restricted stock one month ended january 31 2010 weighted average fair value per share stock options sars granted company years ended december 31 2012 2011 eleven months ended december 31 2010 096 184 813 respectively following assumptions used valuing stockbased awards recognition allocation stockbased compensation expense years ended december 31 2012 2011 eleven months ended december 31 2010 respectively since company recently emerged bankruptcy sufficient companyspecific historical data order determine certain assumptions used valuing stockbased awards utilized companyspecific historical data well peer competitive company data order estimate expected volatility assumption used valuing stockbased awards years ended december 31 2012 2011 eleven months ended december 31 2010 expected life represents period time stockbased awards granted expected outstanding company estimated expected life using simplified method permitted staff accounting bulletin 110 use simplified method developing expected term share options stockbased awards satisfied “plain vanilla” criteria simplified method calculates expected life average vesting contractual terms award riskfree interest rate based applicable us treasury yields approximate expected life stockbased awards granted company years ended december 31 2012 2011 eleven months ended december 31 2010 company used actual voluntary turnover data estimate weighted average forfeiture rate predecessor company used historical data estimate weighted average forfeiture rate one month ended january 31 2010 estimated forfeitures adjusted extent actual forfeitures differ expected materially differ estimates derived service periods associated stockbased awards market condition calculated determining average time company’s stock price reached given exercise price across monte carlo simulations stock price reach exercise price company excluded paths following table presents summary company’s stock options sars activity related information year ended december 31 2012 14 million shares available future grant eip december 31 2012 total intrinsic value company’s stock options sars vested expected vest december 31 2012 2011 02 million 02 million respectively stock options sars exercised years ended december 31 2012 2011 eleven months ended december 31 2010 one month ended january 31 2010 total fair value company’s stock options sars vested years ended december 31 2012 2011 eleven months ended december 31 2010 18 million 30 million 20 million respectively total fair value predecessor company’s stock options sars vested one month ended january 31 2010 37 million following table summarizes information company’s stockbased awards outstanding exercisable december 31 2012 aggregate intrinsic value company’s exercisable stockbased awards december 31 2012 material following table summarizes status company’s nonvested stock awards december 31 2012 changes year ended december 31 2012 december 31 2012 37 million total unrecognized compensation cost related nonvested stockbased awards expected recognized weighted average period approximately 20 years components successor company stockbased compensation expense following table summarizes stockbased awards granted year ended december 31 2012 stockbased compensation expense recognized year ended december 31 2012 related grants grant prices stockbased awards based closing market value company’s common stock date grant stock based awards settled common stock following table summarizes stockbased awards granted years ended december 31 2011 stockbased compensation expense recognized years ended december 31 2012 2011 related grants grant prices stockbased awards based closing market value company’s common stock date grant stock based awards settled common stock following table summarizes stockbased awards granted eleven months ended december 31 2010 stockbased compensation expense recognized years ended december 31 2012 2011 eleven months ended december 31 2010 related grants grant prices stockbased awards based closing market value company’s common stock date grant except otherwise indicated stock based awards settled common stock ceo stockbased awards grant date accounting reporting purposes september 13 2010 represents date grant date determination provisions outlined fasb asc 718 compensation stock compensation satisfied components predecessor company stockbased compensation expense upon emergence chapter 11 pursuant plan outstanding equity securities predecessor company including stock options sars restricted stock cancelled result predecessor company recognized 19 million remaining unrecognized compensation expense related stockbased awards reorganization items net one month ended january 31 2010 march 4 2008 predecessor company granted 22 million sars certain employees including executive officers conjunction annual grant stock incentive awards sars granted grant price 711 per share equal market value predecessor company’s common stock grant date vested ratably three years predecessor company recognized compensation expense related sars 01 million one month ended january 31 2010 february 27 2007 predecessor company granted 11 million sars certain employees including executive officers conjunction annual grant stock incentive awards sars granted grant price 7431 per share equal market value predecessor company’s common stock grant date vested ratably three years predecessor company recognized compensation expense related sars 04 million one month ended january 31 2010 conjunction rhd’s acquisition businesscom 42 million outstanding businesscom equity awards converted 02 million rhd equity awards august 23 2007 one month ended january 31 2010 predecessor company recognized compensation expense related converted equity awards 01 million 9 benefit plans december 31 2012 company two defined benefit pension plans dex one retirement plan dex media inc pension plan defined participate dex one corporation retirement account master trust “master trust” two defined contribution plans dex one 401k savings plan dex media inc employee savings plan summary plans provided businesscom inc 401k plan merged dex one 401k savings plan effective february 1 2011 former employees company able participate two postretirement plans dex one group benefit plan dex media group benefit plan effective january 1 2011 participants elected continue coverage dex one group benefit plan became responsible making individual premium payments associated plan although dex one group benefit plan remains active participants company future benefit obligation associated plan company terminated dex media group benefit plan effective january 1 2012 therefore future benefit obligation associated plan dex one retirement plan dex one cash balance defined benefit pension plan “dex one retirement plan” formerly rhd retirement plan covers substantially legacy dex one employees least one year service benefits paid employees based age years service percentage total annual compensation percentage compensation allocated retirement account ranges 30 125 depending age years service “cash balance benefit” benefits certain employees participants predecessor dun bradstreet corporation “db” defined benefit pension plan also determined based participant’s average compensation years service “final average pay benefit” benefits paid equal greater final average pay benefit cash balance benefit annual pension costs determined using projected unit credit actuarial cost method funding policy contribute amount least equal minimum legal funding requirement company required make contributions 52 million 31 million 10 million dex one retirement plan years ended december 31 2012 2011 eleven months ended december 31 2010 respectively predecessor company required make contributions dex one retirement plan one month ended january 31 2010 underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities measurement date december 31 used plan assets also unfunded nonqualified defined benefit pension plan pension benefit equalization plan “pbep” covers senior executives certain key employees benefits based years service compensation including compensation permitted taken account previously mentioned defined benefit pension plan company made contributions 11 million 06 million 19 million pbep years ended december 31 2012 2011 eleven months ended december 31 2010 respectively predecessor company make contributions pbep one month ended january 31 2010 dex media pension plan noncontributory defined benefit pension plan covering substantially nonunion union employees within dex media “dex media pension plan” annual pension costs determined using projected unit credit actuarial cost method funding policy contribute amount least equal minimum legal funding requirement company required make contributions 90 million 136 million 88 million dex media pension plan years ended december 31 2012 2011 eleven months ended december 31 2010 respectively predecessor company required make contributions dex media pension plan one month ended january 31 2010 underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities measurement date december 31 used plan assets company frozen dex media pension plan covering cwa ibew represented employees dex one retirement plan dex media pension plan covering nonunion employees connection freeze pension plan benefit accruals cwa ibew plan participants ceased december 31 2009 pension plan benefit accruals nonunion plan participants ceased december 31 2008 however plan balances remained intact interest credits participant account balances account balance formula well service credits vesting retirement eligibility continue accordance terms plans addition supplemental transition credits provided certain plan participants nearing retirement would otherwise lose portion anticipated pension benefit age 65 result freezing current plans similar supplemental transition credits provided certain plan participants grandfathered final average pay formula defined benefit plans previously converted traditional pension plans cash balance plans savings plans savings plans contribute 100 dollar contributed participating employees maximum 6 participating employee’s salary including bonus commissions contributions made company fully vested participants completed one year service company made contributions dex one 401k savings plan 76 million 90 million 87 million years ended december 31 2012 2011 eleven months ended december 31 2010 respectively dex media inc employee savings plan 21 million 24 million 47 million years ended december 31 2012 2011 eleven months ended december 31 2010 respectively businesscom inc 401k plan 03 million eleven months ended december 31 2010 contributions made businesscom inc 401k plan year ended december 31 2011 contributions made predecessor company dex one 401k savings plan dex media inc employee savings plan 05 million 04 million respectively one month ended january 31 2010 contributions made predecessor company businesscom inc 401k plan 01 million one month ended january 31 2010 company maintains dex one 401k restoration plan employees compensation excess irs annual limits effective january 1 2011 dex one 401k restoration plan amended eliminate matching credits benefits information union employees • access retiree health care life insurance benefits eliminated ibew represented employees retiring may 8 2009 cwa represented employees retiring october 2 2009 • retiree life insurance benefits eliminated effective january 1 2010 • twoyear phase subsidized retiree health care benefits commenced january 1 2010 • effective january 1 2012 retiree health care benefits eliminated retirees benefits information nonunion employees • nonsubsidized access retiree health care life insurance benefits eliminated effective january 1 2009 • subsidized retiree health care benefits medicareeligible retirees eliminated effective january 1 2009 • threeyear phase subsidized retiree health care benefits commenced january 1 2009 nonunion retiree health care benefits terminating december 31 2011 except continued nonsubsidized access retiree benefits retirees enrolled december 31 2008 respect phase subsidized retiree health care benefits eligible retiree becomes medicareeligible point time phase process noted retiree longer eligible retiree health care coverage benefit obligation funded status summary funded status company’s benefit plans december 31 2012 2011 follows net amounts recognized company’s consolidated balance sheet december 31 2012 2011 follows accumulated benefit obligation qualified defined benefit pension plans company 2559 million 2492 million december 31 2012 2011 respectively components net periodic benefit expense income net periodic benefit expense income company’s pension plans years ended december 31 2012 2011 eleven months ended december 31 2010 predecessor company’s pension plans one month ended january 31 2010 follows net periodic benefit income company’s postretirement plans years ended december 31 2012 2011 eleven months ended december 31 2010 predecessor company’s postretirement plans one month ended january 31 2010 follows accordance fresh start accounting reporting unamortized amounts previously charged accumulated comprehensive loss 447 million eliminated fresh start reporting date december 31 2012 approximately 24 million previously unrecognized actuarial losses accumulated comprehensive loss expected recognized net periodic benefit expense 2013 amounts recognized accumulated comprehensive loss company december 31 2012 2011 consist following assumptions following assumptions used determining benefit obligations companys pension plans postretirement plans years ended december 31 2012 2011 discount rate reflects current rate pension postretirement obligations could effectively settled end year years ended december 31 2012 2011 eleven months ended december 31 2010 one month ended january 31 2010 company predecessor company utilized yield curve determine appropriate discount rate defined benefit pension plans based individual plans’ expected future cash flows since pension plans frozen rate increase future compensation utilized calculate benefit obligations company december 31 2012 2011 december 31 2012 april 30 2012 settlements dex media pension plan pbep occurred result restructuring activities time yeartodate lump sum payments participants exceeded sum service cost plus interest cost components net periodic benefit cost period settlements resulted recognition actuarial loss 37 million year ended december 31 2012 pension expense dex media pension plan pbep recomputed based assumptions december 31 2012 resulting decrease discount rate 438 april 30 2012 422 dex media pension plan 451 april 30 2012 425 pbep pension expense dex media pension plan pbep recomputed based assumptions april 30 2012 resulting decrease discount rate 495 december 31 2011 438 dex media pension plan 530 december 31 2011 451 pbep expected return plan assets assumption also reduced companys benefit plans 80 december 31 2011 75 based review historical performance longterm capital market return forecasts december 31 2011 settlements dex one retirement plan dex media pension plan occurred result restructuring actions may 31 2011 settlements dex media pension plan occurred result restructuring actions settlements resulted recognition actuarial losses 27 million year ended december 31 2011 pension expense dex one retirement plan recomputed based assumptions december 31 2011 resulting decrease discount rate 570 december 31 2010 530 pension expense dex media pension plan recomputed based assumptions december 31 2011 resulting decrease discount rate 506 may 31 2011 495 pension expense dex media pension plan recomputed based assumptions may 31 2011 resulting decrease discount rate 570 december 31 2010 506 second quarter 2010 recognized onetime curtailment gain 38 million associated departure company’s former chief executive officer included general administrative expenses consolidated statement comprehensive income loss eleven months ended december 31 2010 following assumptions used determining company’s net periodic benefit expense income dex one retirement plan dex media pension plan following assumptions used determining predecessor company’s net periodic benefit income dex one retirement plan dex media pension plan following assumptions used determining company’s net periodic benefit income dex one postretirement plan dex media postretirement plan following assumptions used determining predecessor company’s net periodic benefit income dex one postretirement plan dex media postretirement plan assets fair value assets held master trust december 31 2012 2011 asset category follows category includes investments us government bonds government mortgagebacked securities indexlinked government bonds guaranteed commercial paper shortterm treasury bills notes fair value assets determined using bid evaluation process observable market based inputs effective last business day plan year b category includes investments two commoncollective funds 78 invested stocks comprising russell 1000 equity index remaining 22 comprised shortterm investments december 31 2012 82 invested stocks comprising russell 1000 equity index remaining 18 comprised shortterm investments december 31 2011 fair value assets calculated based upon compilation observable market information c category includes investments corporate bonds commercial mortgagebacked assetbacked securities collateralized mortgage obligations fair value assets determined using bid evaluation process observable market based inputs effective last business day plan year category includes investments small cap stocks across diverse industries fair value assets determined using quoted market prices recognized securities exchange last reported trading price last business day plan year e category comprised one mutual fund invests intermediate term fixed income instruments treasuries high grade corporate bonds fair value assets determined using quoted market prices recognized securities exchange last reported trading price last business day plan year f category comprised healthcare real estate investment trust fair value assets determined based traded market prices g category includes investments 5 10 20 year us treasury bond futures equity index futures fair value assets determined based settlement prices recognized active market exchange h category includes investments credit default swaps fair value assets determined based mid evaluation process using observable market based inputs category includes investments passively managed funds composed international stocks across diverse industries fair value assets calculated based upon compilation observable market information companys pension plan weightedaverage asset allocation master trust december 31 2012 2011 asset category weighted average basis follows asset management committee “amc” appointed compensation benefits committee companys board directors named fiduciary plan matters relating plan investments asset management amc authority appoint retain monitor remove custodian investment manager responsible establishing maintaining funding investment policy master trust plans assets invested accordance investment practices emphasize longterm investment fundamentals plans investment objective achieve positive rate return long term capital appreciation growing stream current income would significantly contribute meeting plans current future obligations objectives obtained welldiversified portfolio structure manner consistent plans investment policy statement plans assets invested marketable equity fixed income securities managed professional investment managers plan assets invested using combination active passive indexed investment strategies plans assets broadly diversified asset class investment style number issues issue type factors consistent investment objectives outlined plans investment policy statement plans assets invested prudent levels risk expectation longterm returns maintain contribute increasing purchasing power plans assets net disbursements long term plans assets separately managed accounts may used following purposes short sales purchases letter stock private placements leveraged transactions commodities transactions option strategies investments limited partnerships investments managers securities affiliates subsidiaries investment futures use margin investments derivative explicitly permitted plans investment policy statement plans fixed income manager uses derivative financial instruments normal course investing activities hedge adverse changes fixed income market achieve overall investment portfolio objectives financial instruments include us treasury futures contracts equity futures contracts credit default swaps futures held combination 5 10 20 year futures used manage duration exposure portfolio credit default swaps held hedge declines certain bond markets vehicle take advantage opportunities certain segments fixed income market plans investment policy statements allow use derivatives leverage portfolio speculative purposes addition plans investment managers synthetically invest cash primarily held fund benefit payments use equity fixed income index futures contracts use specific futures contracts guided master trusts asset allocation targets consequently strategy enables master trust achieve asset allocation targets maintaining sufficient liquidity meet benefit payments use derivatives believed materially increase credit market risk plans investments years ended december 31 2012 2011 eleven months ended december 31 2010 one month ended january 31 2010 company predecessor company used rate 750 800 respectively expected longterm rate return assumption plan assets dex one retirement plan dex media pension plan basis used determining rates longterm capital market return forecasts asset mix similar plans asset allocation target 65 equity securities 35 debt securities beginning year basis used determining rates also included opportunity active management assets add value long term active management expectation supported calculating historical returns investment managers actively managed plans assets although review expected longterm rate return assumption annual basis frequently deemed necessary performance one particular year significantly influence evaluation assumption generally revised unless fundamental change one factors upon based target asset allocation longterm capital market return forecasts estimated future benefit payments company’s pension plans benefits expected paid next five fiscal years aggregate five fiscal years thereafter follows expect make total contributions approximately 47 million pension plans 2013 10 commitments lease office facilities equipment operating leases noncancelable lease terms expiring various dates 2018 rent lease expense company years ended december 31 2012 2011 eleven months ended december 31 2010 194 million 227 million 221 million respectively rent lease expense predecessor company one month ended january 31 2010 16 million future noncancelable minimum rental payments applicable operating leases december 31 2012 follows obligated pay outsource service provider approximately 300 million years 2012 2017 datacenter server assessment migration ongoing management administration services december 31 2012 approximately 255 million remains outstanding obligation also obligated pay outsource service provider approximately 220 million years 2012 2015 software licensing related services december 31 2012 approximately 134 million remains outstanding obligation internet yellow pages reseller agreement obligated pay yellowpagescom 98 million 2013 11 legal proceedings subject various lawsuits claims regulatory administrative proceedings arising business covering matters general commercial governmental regulations intellectual property employment tax actions opinion management ultimate resolution matters material adverse effect results operations cash flows financial position 12 business segments periods covered annual report management reviews analyzes business providing marketing solutions one operating segment 13 information february 14 2011 completed sale substantially net assets businesscom including longlived assets domain names trademarks brands intellectual property related content technology platform result recognized gain sale assets 134 million year ended december 31 2011 14 parent company financial statements following condensed parent company financial statements read conjunction consolidated financial statements company predecessor company provided credit facilities company’s operating subsidiaries permitted fund share parent company’s interest obligations dex one senior subordinated notes funds based percentage operating subsidiaries’ excess cash flow defined credit agreement may provided parent company fund specific activities acquisitions addition operating subsidiaries permitted send 5 million annually parent company lastly operating subsidiaries fund proportionate basis expenses paid parent company fund daily operations operating subsidiaries except certain limited situations including noted credit facilities restrict ability company subsidiaries dividend assets third party subsidiaries pay dividends loans advances us see note 5 “longterm debt” description debt instruments 15 valuation qualifying accounts 16 quarterly information unaudited 1 three months ended march 31 2012 recognized gain credit facility repurchases 688 million three months ended june 30 2012 recognized gain note repurchases 708 million see note 1 “business basis presentation significant financing developments” discussion 2 recognized goodwill impairment charge 8011 million three months ended june 30 2011 see note 2 “summary significant accounting policies identifiable intangible assets goodwill” discussion 3 three months ended march 31 2011 recognized gain sale substantially net assets businesscom 134 million see note 13 “other information” discussion item 9item 8 financial statements supplementary data management’s report internal control financial reporting management rh donnelley corporation responsible establishing maintaining adequate internal control company’s financial reporting within meaning rule 13a15f promulgated securities exchange act 1934 inherent limitations internal control financial reporting may prevent detect misstatements financial statements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness rh donnelley corporation’s internal control financial reporting december 31 2007 undertaking assessment management used criteria established committee sponsoring organizations coso treadway commission contained internal control integrated framework based assessment management concluded december 31 2007 company’s internal control financial reporting effective based coso criteria company’s internal control financial reporting december 31 2007 audited kpmg llp independent registered public accounting firm stated report appears page kpmg llp also audited consolidated financial statements rh donnelley corporation subsidiaries year ended december 31 2007 included annual report form 10k stated report appears page report independent registered public accounting firm board directors shareholders rh donnelley corporation audited accompanying consolidated balance sheets rh donnelley corporation subsidiaries december 31 2007 2006 related consolidated statements operations comprehensive income loss cash flows changes shareholders’ equity years ended consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position rh donnelley corporation subsidiaries december 31 2007 2006 results operations cash flows years ended conformity us generally accepted accounting principles discussed note 2 notes consolidated financial statements company adopted provisions statement financial accounting standards 123r sharebased payment january 1 2006 statement financial accounting standards 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r december 31 2006 fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 january 1 2007 also audited accordance standards public company accounting oversight board united states rh donnelley corporation’s internal control financial reporting december 31 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso report dated march 13 2008 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp raleigh north carolina march 13 2008 report independent registered public accounting firm board directors shareholders rh donnelley corporation audited rh donnelley corporation’s internal control financial reporting december 31 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso rh donnelley corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audit also included performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion rh donnelley corporation maintained material respects effective internal control financial reporting december 31 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso also audited accordance standards public company accounting oversight board united states consolidated balance sheets rh donnelley corporation subsidiaries december 31 2007 2006 related consolidated statements operations comprehensive income loss cash flows changes shareholders’ equity years ended report dated march 13 2008 expressed unqualified opinion consolidated financial statements kpmg llp raleigh north carolina march 13 2008 report independent registered public accounting firm board directors shareholders rh donnelley corporation opinion consolidated statements operations comprehensive income loss cash flows changes shareholders’ equity deficit year ended december 31 2005 present fairly material respects results operations cash flows rh donnelley corporation subsidiaries year ended december 31 2005 conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audit conducted audit statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit provides reasonable basis opinion pricewaterhousecoopers llp raleigh north carolina march 15 2006 rh donnelley corporation consolidated balance sheets accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements operations comprehensive income loss accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements cash flows accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements changes shareholders’ equity deficit accompanying notes integral part consolidated financial statements rh donnelley corporation notes consolidated financial statements tabular amounts thousands except per share data percentages 1 business presentation consolidated financial statements include accounts rh donnelley corporation direct indirect whollyowned subsidiaries “company” “rhd” “donnelley” “we” “us” “our” december 31 2007 rh donnelley inc “rhdi” “rhd inc” dex media inc “dex media” businesscom inc “businesscom” local launch inc “local launch” direct whollyowned subsidiaries effective january 1 2008 local launch merged businesscom intercompany transactions balances eliminated one nation’s largest yellow pages online local commercial search companies based revenue 2007 revenues approximately 27 billion publish distribute advertiser content utilizing dex brand three highly recognizable brands industry qwest embarq att 2007 print online solutions helped 600000 national local businesses 28 states reach consumers actively seeking purchase products services 2007 published distributed print directories many country’s attractive markets including albuquerque chicago denver las vegas orlando phoenix reclassifications certain prior period amounts included consolidated statements operations reclassified conform current period’s presentation selling support expenses presented separate expense category consolidated statements operations prior periods certain selling support expenses included cost revenue others included general administrative expenses additionally beginning 2007 began classifying adjustments customer claims sales allowance deducted gross revenue determine net revenue prior periods adjustments customer claims included bad debt expense general administrative expenses bad debt expense included selling support expenses accordingly reclassified adjustments customer claims bad debt expense 2006 bad debt expense 2005 conform current period’s presentation adjustments customer claims prior 2006 material reclassifications impact operating income net income years ended december 31 2006 2005 table summarizes reclassifications addition certain prior period amounts included consolidated statements cash flows reclassified conform current period’s presentation significant business developments acquisition august 23 2007 acquired businesscom leading business search engine directory performance based advertising network disclosed amount 3450 million “businesscom acquisition” purchase price determined accordance generally accepted accounting principles “gaap” 3344 million excludes certain items value unvested equity awards rh donnelley corporation notes consolidated financial statements continued recorded compensation expense vesting period purpose businesscom acquisition expand existing interactive portfolio adding leading internet advertising talent technology strengthen rhd’s position expanding local commercial search market develop online performance based advertising network businesscom operates direct whollyowned subsidiary rhd results businesscom included consolidated results commencing august 23 2007 see note 3 “acquisitions” note 5 “longterm debt credit facilities notes” description businesscom acquisition related financing debt refinancing october 2 2007 issued 10 billion aggregate principal amount 8875 series a4 senior notes due 2017 “series a4 notes” proceeds issuance used repay 328 million rhd credit facility “rhd credit facility” used fund businesscom acquisition b contributed rhdi order provide funding tender offer consent solicitation rhdi’s 600 million aggregate principal amount 10875 senior subordinated notes due 2012 “rhdi senior subordinated notes” c used pay related fees expenses general corporate purposes october 17 2007 issued additional 500 million series a4 notes proceeds issuance transferred dex media east defined order repay 864 million 2136 million term loan term loan b former dex media east credit facility respectively b contributed rhdi order repay 918 million 162 million 830 million term loans a4 d1 d2 rhdi credit facility respectively c used pay related fees expenses october 2007 terms conditions tender offer consent solicitation purchase rhdi’s 600 million senior subordinated notes rhdi commenced september 18 2007 5999 million 999 outstanding rhdi senior subordinated notes repurchased december 2007 remaining 01 million rhdi senior subordinated notes redeemed october 24 2007 replaced former dex media east credit facility new dex media east credit facility consisting 7000 million aggregate principal amount term loan facility 4000 million aggregate principal amount term loan b facility 1000 million aggregate principal amount revolving loan facility 2000 million aggregate principal amount uncommitted incremental facility dex media east would right subject obtaining commitments incremental loans one occasions increase term loan term loan b revolving loan facility amount proceeds new dex media east credit facility used october 24 2007 repay remaining 565 million 1397 million term loan term loan b former dex media east credit facility respectively 325 million former dex media east revolver defined note 5 “longterm debt credit facilities notes” proceeds new dex media east credit facility also used november 26 2007 fund redemption 4497 million dex media east’s outstanding 9875 senior notes due 2009 3413 million dex media east’s outstanding 12125 senior subordinated notes due 2012 december 2007 redeemed rhdi’s remaining 79 million 8875 senior notes due 2010 “rhdi senior notes” see note 5 “longterm debt credit facilities notes” additional information regarding refinancing transactions share repurchases november 2007 company’s board directors authorized 1000 million stock repurchase plan “repurchase plan” authorization permits company purchase shares common stock open market pursuant rule 10b18 securities exchange act 1934 block trades rh donnelley corporation notes consolidated financial statements continued otherwise following twelve months based market conditions factors purchases may made suspended time accordance repurchase plan repurchased 25 million shares cost 957 million december 2007 2 summary significant accounting policies revenue recognition earn revenue principally sale advertising yellow pages directories revenue sale advertising deferred directory published net estimated sales claims recognized ratably life directory typically 12 months “deferral amortization method” company also recognizes revenue internetbased advertising products sold print advertising using deferral amortization method revenue respect internetbased advertising sold print advertising recognized ratably period advertisement appears site revenue respect products services search engine marketing “sem” search engine optimization “seo” services collectively referred “internet marketing” recognized delivered fulfilled revenue deferred revenue sale advertising recorded net allowance sales claims estimated based primarily historical experience increase decrease estimate information circumstances indicate estimate may longer represent amount claims may incur future company recorded sales claims allowances 548 million 419 million 104 million years ended december 31 2007 2006 2005 respectively company enters transactions exclusivity arrangements sponsorships media access transactions company’s products services promoted third party exchange company carries third party’s advertisement company accounts transactions accordance emerging issues task force “eitf” issue 9917 accounting advertising barter transactions revenue expense related transactions included consolidated statements operations consistent extent reasonably similar recent items sold purchased cash certain cases company enters agreements customers involve delivery one product service revenue arrangements allocated separate units accounting using relative fair value method accordance eitf issue 0021 revenue arrangements multiple deliverables deferred directory costs directly related selling production directories initially deferred incurred recognized ratably life directory typically 12 months costs specifically identifiable particular directory include sales commissions print paper initial distribution costs paid prior directory publication classified current assets publication reclassified deferred directory costs cash equivalents cash equivalents include liquid investments maturity less three months time purchase company places investments high quality financial institutions times investments may excess federally insured limits accounts receivable accounts receivable consist balances owed us advertising customers advertisers typically enter twelvemonth contract advertising local advertisers billed pro rata amount contract value monthly basis behalf national advertisers certified marketing representatives “cmrs” pay company total contract value advertising net commission within 60 days publication month billed receivables represent amount billed advertisers billed receivables recorded net allowance doubtful accounts sales claims estimated based historical experience increase decrease estimate information circumstances indicate estimate longer appropriately represents amount bad debts sales rh donnelley corporation notes consolidated financial statements continued claims may incur unbilled receivables represent contractually owed amounts net allowance sales claims published directories yet billed advertisers fixed assets computer software fixed assets computer software recorded cost fixed assets computer software acquired conjunction acquisitions recorded fair value acquisition date depreciation amortization provided estimated useful lives assets using straightline method estimated useful lives thirty years buildings five years machinery equipment ten years furniture fixtures three five years computer equipment computer software leasehold improvements amortized straightline basis shorter term lease estimated useful life improvement fixed assets computer software december 31 2007 2006 consisted following depreciation amortization expense fixed assets computer software years ended december 31 2007 2006 2005 follows identifiable intangible assets goodwill result dex media merger defined att directory acquisition defined embarq acquisition defined businesscom acquisition local launch acquisition defined certain longterm intangible assets identified recorded estimated fair value amortization expense years ended december 31 2007 2006 2005 4083 million 2775 million 721 million respectively amortization expense intangible assets five succeeding years estimated approximately 4158 million 4034 million 3903 million 3762 million 3537 million respectively amortization expense year ended december 31 2007 includes impairment charge 200 million associated tradenames acquired embarq acquisition impairment charge resulted change branding strategy utilize new dex market brand print online products across entire footprint discontinued use tradenames acquired embarq acquisition impairment charge determined using relief royalty valuation method rh donnelley corporation notes consolidated financial statements continued acquired longterm intangible assets respective book values december 31 2007 shown following table acquired longterm intangible assets respective book values december 31 2006 shown following table connection dex media merger acquired directory services agreements collectively “dex directory services agreements” dex media entered qwest defined note 3 “acquisitions” including 1 publishing agreement term 50 years commencing november 8 2002 subject automatic renewal additional oneyear terms grants us right exclusive official directory publisher listings classified advertisements qwest’s telephone customers geographic areas qwest states defined note 3 “acquisitions” qwest successors provided local telephone services november 8 2002 well exclusive right use certain qwest branding directories markets 2 noncompetition agreement term 40 years commencing november 8 2002 pursuant qwest behalf affiliates successors agreed sell directory products consisting principally listings classified advertisements subscribers geographic areas qwest states qwest provided local telephone service november 8 2002 directed primarily consumers geographic areas fair value assigned dex media directory services agreements 73 billion based multiperiod excess rh donnelley corporation notes consolidated financial statements continued earnings method amortized straightline method 42 years multiperiod excess earnings method projected cash flows intangible asset computed indirectly means future cash flows projected deductions made recognize returns appropriate contributory assets leaving excess residual net cash flow indicative intangible asset fair value result dex media merger also acquired 1 advertising commitment agreement whereby qwest agreed purchase aggregate 20 million advertising per year 2017 us pricing terms least favorable offered similar large customers 2 intellectual property contribution agreement pursuant qwest assigned licensed us qwest intellectual property previously used qwest directory services business along 3 trademark license agreement pursuant qwest granted us right november 2007 use qwest dex qwest dex advantage marks connection directory products related marketing material qwest states right use marks connection dexknowscom® intangible assets 2 3 collectively “trade names” fair value assigned dex media advertising commitment based multiperiod excess earnings method amortized straightline method 12 years directory services agreements att company include directory services license agreement noncompetition agreement internet yellow pages reseller agreement directory publishing listing agreement collectively “att directory services agreements” certain affiliates att directory services license agreement designates us official exclusive provider yellow pages directory services att successors illinois northwest indiana “territory” grants us exclusive license obligation specified agreement produce publish distribute white pages directories territory att’s agent grants us exclusive license obligation specified agreement use att brand logo print directories territory noncompetition agreement prohibits att affiliates successors certain limited exceptions 1 producing publishing distributing yellow white pages print directories territory 2 soliciting selling local national yellow white pages advertising inclusion directories 3 soliciting selling local internet yellow pages advertising certain internet yellow pages directories territory licensing att marks third party purpose internet yellow pages reseller agreement grants us exclusive right sell local advertisers within territory internet yellow pages advertising focused upon products services offered within territory b nonexclusive right sell local excluding national advertisers within territory internet yellow pages advertising focused upon products services offered outside territory case onto yellowpagescom platform directory publishing listing agreement gives us right purchase use basic att subscriber listing information updates purpose publishing directories att directory services agreements internet yellow pages reseller agreement initial terms 50 years commencing september 2004 subject automatic renewal early termination specified circumstances internet yellow pages reseller agreement term 5 years commencing september 2004 fair value assigned att directory services agreements internet yellow pages reseller agreement 9500 million 25 million respectively based present value estimated future cash flows amortized straightline method 50 years 5 years respectively directory services agreements embarq company executed may 2006 conjunction sprint’s spinoff local telephone business include directory services license agreement trademark license agreement noncompetition agreement certain affiliates embarq well noncompetition agreement sprint entered january 2003 collectively “embarq directory services agreements” embarq directory services agreements replaced previously existing analogous agreements sprint except sprint remained bound noncompetition agreement directory services license agreement grants us exclusive license obligation specified agreement produce publish distribute yellow white pages directories embarq rh donnelley corporation notes consolidated financial statements continued successors 18 states embarq provided local telephone service time agreement trademark license agreement grants us exclusive license obligation specified agreement use certain specified embarq trademarks markets noncompetition agreements prohibit embarq sprint respective affiliates successors markets selling local directory advertising certain limited exceptions producing publishing distributing print directories embarq directory services agreements initial terms 50 years commencing january 2003 subject automatic renewal early termination specified circumstances fair value embarq directory services agreements 16 billion determined based present value estimated future cash flows time embarq acquisition january 2003 amortized straightline method 50 years fair values local national customer relationships obtained result dex media merger att directory acquisition embarq acquisition determined based present value estimated future cash flows intangible assets amortized “income forecast” method assumes value derived customer relationships greater earlier years steadily declines time weighted average useful life relationships approximately 20 years result cost uplift defined purchase accounting substantially amortized first quarter 2007 commenced amortization local customer relationships obtained result dex media merger result purchase accounting required gaap recorded deferred directory costs related directories scheduled publish subsequent dex media merger fair value determined estimated billable value published directory less b expected costs complete directories plus c normal profit margin refer purchase accounting entry “cost uplift” fair value acquired trade names obtained result dex media merger embarq acquisition determined based “relief royalty” method values trade names based estimated amount company would pay arms length transaction use trade names mentioned recognized impairment charge 200 million year ended december 31 2007 associated trade names acquired embarq acquisition qwest tradenames amortized straightline method 15 years embarq tradenames amortized straightline method 15 years connection businesscom acquisition identified recorded certain intangible assets estimated fair value including 1 advertiser relationships 2 third party contracts 3 technology network platforms 4 trade names trademarks intangible assets amortized remaining useful lives ranging 3 10 years straightline method exception advertiser relationships network platform intangible assets amortized income forecast method connection local launch acquisition identified recorded certain intangible assets estimated fair value including 1 local customer relationships 2 noncompete agreements 3 technology 4 tradenames intangible assets amortized straightline method remaining useful lives ranging 3 7 years embarq tradenames mentioned impairment losses recognized related intangible assets years ended december 31 2007 2006 2005 respectively excess purchase price dex media merger att directory acquisition embarq acquisition businesscom acquisition local launch acquisition net tangible identifiable intangible assets acquired 25 billion 2167 million 970 million 2588 million 68 million respectively recorded goodwill annual amortization goodwill acquired intangible assets tax purposes approximately 6725 million change goodwill year ended december 31 2007 primarily related businesscom acquisition year ended december 31 2007 recorded adjustments goodwill totaling 308 million associated dex media merger primarily related deferred income taxes rh donnelley corporation notes consolidated financial statements continued 2007 reoccupied remaining portion leased facilities chicago illinois vacated conjunction 2005 restructuring actions defined note 4 “restructuring charges” result reversed remaining amount reserve related leased facilities year ended december 31 2007 18 million corresponding offset goodwill total amount goodwill expected deductible tax purposes related dex media merger approximately 21 billion accordance statement financial accounting standards “sfas” 142 goodwill intangible assets “sfas 142” goodwill amortized subject periodic impairment testing impairment losses recorded related goodwill years ended december 31 2007 2006 2005 respectively decline trading value debt equity securities require us continue assess recoverability goodwill negative industry economic trends may indicate carrying values intangible assets recoverable trading value publicly traded debt equity securities continued decline subsequent december 31 2007 value debt equity securities recover required assess fair values assets liabilities company could conclude goodwill long lived assets impaired would result impairment charges 2008 addition worsening economic conditions certain markets may require us assess recoverability intangible assets 2008 could result additional impairment charges interest expense deferred financing costs interest expense years ended december 31 2007 2006 2005 8345 million 7727 million 2650 million respectively certain costs associated issuance debt instruments capitalized included noncurrent assets consolidated balance sheets costs amortized interest expense terms related debt agreements bond outstanding method used amortize deferred financing costs relating debt instruments respect make accelerated principal payments deferred financing costs amortized using effective interest method amortization deferred financing costs included interest expense 400 million 219 million 236 million 2007 2006 2005 respectively apart business combinations company’s policy recognize losses incurred conjunction debt extinguishments component interest expense interest expense 2007 includes tender redemption premium payments 717 million writeoff unamortized deferred financing costs 168 million included amortization deferred financing costs 400 million noted associated refinancing transactions conducted fourth quarter 2007 interest expense 2005 includes 253 million tender premium payment writeoff unamortized deferred financing costs 74 million included amortization deferred financing costs 236 million noted associated december 20 2005 tender offer exit consent solicitation subsidiaries’ 8875 senior notes due 2016 see note 5 “longterm debt credit facilities notes” description debt extinguishments conjunction dex media merger result purchase accounting required generally accepted accounting principles “gaap” recorded dex media’s debt fair value january 31 2006 recognize offset interest expense period subsequent dex media merger amortization corresponding fair value adjustment life respective debt offset interest expense years ended december 31 2007 2006 921 million 264 million respectively offset interest expense year ended december 31 2007 includes 622 million related redemption dex media east’s outstanding 9875 senior notes 12125 senior subordinated notes november 26 2007 advertising expense recognize advertising expenses incurred expenses include media public relations promotional sponsorship costs online advertising total advertising expense 552 million 327 million 181 million 2007 2006 2005 respectively total advertising expense rh donnelley corporation notes consolidated financial statements continued 2007 includes 78 million related traffic acquisition costs associated operations businesscom concentration credit risk approximately 85 directory advertising revenue derived sale advertising local small mediumsized businesses advertisers typically enter 12month advertising sales contracts make monthly payments term contract advertisers prepay full amount portion contract value new advertisers desiring expand advertising programs subject credit review advertisers qualify may extend credit advertising purchase small mediumsized businesses tend fewer financial resources higher failure rates large businesses addition full collection delinquent accounts take extended period time involve significant costs believe extending credit local advertisers material adverse effect results operations financial condition assurances given require collateral advertisers although charge interest advertisers pay specified due dates remaining approximately 15 directory advertising revenue derived sale advertising national large regional chains rental car companies automobile repair shops pizza delivery businesses substantially revenue derived national accounts serviced cmrs accept orders cmrs independent third parties act agents national advertisers cmrs responsible billing national customers advertising receive payment value advertising placed directory net cmr’s commission directly cmr still exposed credit risk amount losses accounts historically less local accounts advertisers cases cmrs tend larger companies greater financial resources local advertisers december 31 2007 interest rate swap agreements major financial institutions notional value 26 billion exposed credit risk event one counterparties agreements cannot meet obligation notional amount used measure interest paid received represent amount exposure credit loss would limited amount would received remaining life swap agreement counterparties swap agreements major financial institutions credit ratings aa higher currently foresee material credit risk associated swap agreements however assurances given derivative financial instruments hedging activities company accounts derivative financial instruments hedging activities accordance sfas 133 accounting derivative instruments hedging activities “sfas 133” amended sfas 138 accounting certain derivative instruments certain hedging activities amendment fas 133 sfas 149 amendment statement 133 derivative instruments hedging activities use derivative financial instruments trading speculative purposes derivative financial instruments limited interest rate swap agreements company utilizes combination fixed rate variable rate debt finance operations variable rate debt exposes company variability interest payments due changes interest rates management believes prudent mitigate interest rate risk portion variable rate borrowings additionally credit facility rhdi requires maintain hedge agreements provide either fixed interest rate interest rate protection least 50 total outstanding debt dex media west defined new dex media east credit facilities require maintain hedge agreements provide fixed rate least 33 respective indebtedness satisfy objectives requirements company entered fixed interest rate swap agreements manage fluctuations cash flows resulting changes interest rates variable rate debt company’s interest rate swap agreements effectively convert 26 billion approximately 69 variable rate debt fixed rate debt mitigating exposure increases interest rates december 31 rh donnelley corporation notes consolidated financial statements continued 2007 approximately 37 total debt outstanding consists variable rate debt excluding effect interest rate swaps including effect interest rate swaps total fixed rate debt comprised approximately 89 total debt portfolio december 31 2007 day derivative contract executed company may designate derivative instrument hedge variability cash flows received paid cash flow hedge hedging relationships company formally documents hedging relationship riskmanagement objective strategy undertaking hedge hedging instrument item nature risk hedged hedging instrument’s effectiveness offsetting hedged risk assessed description method measuring ineffectiveness company also formally assesses hedge’s inception ongoing basis whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged items derivative financial instruments recognized either assets liabilities consolidated balance sheets measurement fair value quarterly basis fair values interest rate swaps determined based quoted market prices extent swaps provide effective hedge differences fair value book value swaps recognized accumulated comprehensive loss component shareholders’ equity derivative financial instruments designated qualify hedged transactions initial fair value subsequent gains losses change fair value reported earnings component interest expense gains losses related quarterly fair value adjustments presented noncash operating activity consolidated statements cash flows company discontinues hedge accounting prospectively determined derivative longer effective offsetting changes cash flows hedged item derivative hedged item expired sold terminated exercised management determines designation derivative hedging instrument longer appropriate situations hedge accounting discontinued company continues carry derivative fair value consolidated balance sheet recognizes subsequent changes fair value earnings component interest expense amounts previously recorded accumulated comprehensive loss amortized interest expense periods interest expense underlying debt impacts earnings please refer note 6 “derivative financial instruments” additional information regarding derivative financial instruments hedging activities pension postretirement benefits pension postretirement benefits represent estimated amounts paid employees future accounting benefits reflects recognition benefit costs employee’s approximate service period based terms plan investment funding decisions made determination benefit obligation net periodic pension postretirement benefit costs requires management make assumptions regarding discount rate return retirement plan assets increase future compensation healthcare cost trends changes assumptions significant impact projected benefit obligation funding requirement net periodic benefit cost assumed discount rate pension benefits could settled 2007 2006 utilized citigroup pension liability index appropriate discount rate defined benefit pension plans 2005 discount rate determined using methodology discounts projected plan cash flows measurement date using spot rates provided citigroup pension discount curve single discount rate computed present value benefit cash flows using single rate equaled present value computed using citigroup pension discount curve expected longterm rate return plan assets based mix assets held plan expected longterm rates return within asset class anticipated trend future healthcare costs based historical experience external factors rh donnelley corporation notes consolidated financial statements continued september 2006 financial accounting standards board “fasb” issued sfas 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r “sfas 158” statement requires recognition overfunded underfunded status defined benefit postretirement plans asset liability statement financial position recognize changes funded status accumulated comprehensive income loss year changes occur sfas 158 also requires measurement funded status plan date statement financial position sfas 158 became effective recognition funded status benefit plans fiscal years ending december 15 2006 effective measurement date provisions fiscal years ending december 15 2008 adopted funded status recognition provisions sfas 158 related defined benefit pension postretirement plans december 31 2006 required complied measurement date provisions sfas 158 december 31 2006 please refer note 10 “benefit plans” addresses financial impact adoption sfas 158 information regarding benefit plans income taxes account income taxes asset liability method accordance sfas 109 accounting income taxes “sfas 109” deferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax assets realized june 2006 fasb issued interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” interpretation clarifies accounting uncertainty income taxes recognized entity’s financial statements accordance sfas 109 fin 48 prescribes recognition threshold measurement principles financial statement recognition measurement tax positions taken expected taken tax return fin 48 impact uncertain income tax position income tax return must recognized largest amount likely sustained upon audit relevant taxing authority uncertain income tax position recognized less 50 likelihood sustained additionally fin 48 provides guidance derecognition classification interest penalties accounting interim periods disclosures transition requirements interpretation effective fiscal years beginning december 15 2006 adopted fin 48 january 1 2007 company’s policy recognize interest penalties related unrecognized tax benefits income tax expense see note 9 “income taxes” information regarding provision benefit income taxes well impact adopting fin 48 earnings loss per share subsequent gs repurchase defined note 7 “redeemable preferred stock warrants other” year ended december 31 2007 accounted earnings loss per share “eps” accordance sfas 128 earnings per share “sfas 128” year ended december 31 2006 january 27 2006 closing date gs repurchase accounted eps accordance eitf 036 participating securities twoclass method fasb statement 128 “eitf 036” established standards regarding computation eps companies issued securities common stock contractually entitle holder participate dividends earnings company eitf 036 requires earnings available common shareholders period deduction preferred stock dividends allocated common preferred stockholders based respective rights receive dividends basic eps calculated dividing loss allocable common shareholders weighted average number shares outstanding eitf 036 require presentation basic diluted eps securities common stock therefore following eps amounts pertain common stock rh donnelley corporation notes consolidated financial statements continued guidance sfas 128 diluted eps calculated dividing loss allocable common shareholders weighted average common shares outstanding plus dilutive potential common stock potential common stock includes stock options stock appreciation rights “sars” restricted stock warrants dilutive effect calculated using treasury stock method prior gs repurchase preferred stock defined note 7 “redeemable preferred stock warrants other” dilutive effect calculated using “ifconverted” method calculation basic diluted eps years ended december 31 2007 2006 2005 respectively presented 1 computing eps using twoclass method allocated net loss reported years ended december 31 2006 2005 respectively common preferred shareholders since preferred shareholders contractual obligation share net loss 2 due loss allocable common shareholders reported years ended december 31 2006 2005 respectively effect stockbased awards warrants assumed conversion preferred stock antidilutive therefore included calculation diluted eps years ended december 31 2007 2006 2005 2593 shares 2263 shares 60 shares respectively stockbased awards exercise prices exceeded average market price company’s common stock respective periods years ended december 31 2006 2005 assumed conversion preferred stock 391 shares 5132 shares respectively common stock antidilutive therefore included calculation diluted eps stockbased awards maintain shareholder approved stock incentive plan 2005 stock award incentive plan “2005 plan” whereby certain employees nonemployee directors eligible receive stock options rh donnelley corporation notes consolidated financial statements continued sars limited stock appreciation rights tandem stock options restricted stock prior adoption 2005 plan maintained shareholder approved stock incentive plan 2001 stock award incentive plan “2001 plan” 2005 plan 2001 plan 5 million 4 million shares respectively originally authorized grant stock awards typically granted market value common stock date grant become exercisable ratable installments otherwise period one five years date grant may exercised maximum ten years date grant compensation committee determines termination vesting relevant provisions date grant implemented policy issuing treasury shares held company satisfy stock issuances associated stockbased award exercises nonemployee directors receive options purchase 1500 shares award 1500 shares restricted stock upon election board nonemployee directors also receive annual basis options purchase 1500 shares award 1500 shares restricted stock nonemployee directors may also elect receive additional equity awards lieu portion cash fees january 1 2006 company adopted provisions sfas 123 r sharebased payment “sfas 123 r” using modified prospective method required record compensation expense consolidated statement operations employee stockbased awards granted modified settled date adoption unvested portion previously granted stock awards remain outstanding beginning period adoption based grant date fair values company estimates forfeitures requisite service period recognizing compensation expense estimated forfeitures adjusted extent actual forfeitures differ expected materially differ estimates years ended december 31 2007 2006 company utilized forfeiture rate 5 determining compensation expense prior adopting sfas 123 r company accounted stockbased awards granted employees nonemployee directors accordance intrinsic valuebased method prescribed accounting principles board opinion 25 accounting stock issued employees “apb 25” related interpretations compensation expense related issuance stock options employees nonemployee directors recognized exercise price stock option less market value underlying common stock date grant compensation expense related sars determined end period amount quoted market value underlying shares covered grant exceeded grant price recognized vesting term accordance modified prospective method financial statement amounts year ended december 31 2005 restated reflect fair value method expensing stockbased compensation following table depicts effect adopting sfas 123 r net loss available common shareholders loss per share year ended december 31 2006 company’s reported net loss available common shareholders basic diluted loss per share year ended december 31 2006 reflect compensation expense related company’s stockbased awards recorded accordance sfas 123 r compared net loss available common shareholders basic diluted loss per share period would reported compensation expense determined apb 25 rh donnelley corporation notes consolidated financial statements continued upon adoption sfas 123 r pro forma disclosure permitted sfas 123 accounting stock based compensation “sfas 123” longer permitted alternative company adopted sfas 123 r january 1 2006 using modified prospective method company provided following pro forma disclosure effect net income loss per share year ended december 31 2005 company accounted employee stock awards granted fair value method sfas 123 weighted average fair value stockbased awards granted 2005 1976 per share pro forma information noted determined based fair value stockbased awards calculated using blackscholes optionpricing model following assumptions rh donnelley corporation notes consolidated financial statements continued accordance apb 25 following table presents changes awards outstanding stock incentive plans year ended december 31 2005 accordance apb 25 following table summarizes information stock awards outstanding exercisable december 31 2005 please refer note 8 “stock incentive plans” additional information regarding stock incentive plans adoption sfas 123 r treasury stock november 2007 company’s board directors authorized 1000 million repurchase plan authorization permits company purchase shares common stock open market pursuant rule 10b18 securities exchange act 1934 block trades otherwise following twelve months based market conditions factors purchases may made suspended time purchases common stock accounted using cost method whereby total cost shares reacquired charged treasury stock contra equity account treasury stock reissued cost shares reissued determined based firstin firstout cost flow assumption charged treasury stock excess reissuance price cost credited additional paidin capital accordance repurchase plan company repurchased total 25 million shares cost 957 million december 2007 fair value financial instruments sfas 107 disclosures fair value financial instruments “sfas 107” requires disclosure fair value financial instruments practicable estimate value december 31 2007 2006 fair value cash equivalents accounts receivable accounts payable accrued liabilities approximated carrying value based shortterm nature instruments company utilized quoted market prices available compute fair value longterm debt disclosed note 5 “longterm debt credit facilities rh donnelley corporation notes consolidated financial statements continued notes” estimates fair value may affected assumptions made accordingly necessarily indicative amounts company could realize current market exchange estimates preparation financial statements conformity gaap requires management make estimates assumptions affect reported amounts assets liabilities revenue certain expenses disclosure contingent assets liabilities actual results could differ materially estimates assumptions estimates assumptions used determination recoverability longlived assets sales allowances doubtful accounts depreciation amortization employee benefit plans expense restructuring reserves certain assumptions pertaining stockbased awards among others new accounting pronouncements december 2007 fasb issued sfas 141r business combinations “sfas 141r” sfas 141r replaces sfas 141 business combinations “sfas 141” establishes principles requirements acquirer business combination recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interest acquiree recognizes measures goodwill acquired business combination gain bargain purchase determines information disclose enable users financial statements evaluate nature financial effects business combination sfas 141 r effective business combinations acquisition date beginning first annual reporting period beginning december 15 2008 earlier adoption prohibited december 2007 securites exchange commission “sec” issued staff accounting bulletin 110 “use simplified method developing expected term share options” “sab 110” sab 110 amends replaces staff accounting bulletin 107 “sab 107” expressed views staff regarding use “simplified” method developing estimate expected life “plain vanilla” share options allowed usage “simplified” method share option grants prior december 31 2007 sab 110 continue permit certain circumstances use simplified method beyond december 31 2007 sab 110 effective january 1 2008 company expect adoption sab 110 material impact consolidated financial statements february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities including amendment fasb statement 115 “sfas 159” sfas 159 permits companies choose measure many financial instruments certain items fair value currently required measured fair value objective sfas 159 provide opportunities mitigate volatility reported earnings caused measuring related assets liabilities differently without apply hedge accounting provisions sfas 159 also establishes presentation disclosure requirements designed facilitate comparisons companies choose different measurement attributes similar types assets liabilities sfas 159 effective fiscal years beginning november 15 2007 adopted sfas 159 effective january 1 2008 adoption sfas 159 material impact consolidated financial position results operations september 2006 fasb issued sfas 157 fair value measurements “sfas 157” defines fair value establishes framework measuring fair value gaap expands disclosures fair value measurements sfas 157 effective fiscal years beginning november 15 2007 interim periods within fiscal years adopted sfas 157 effective january 1 2008 adoption sfas 157 material impact consolidated financial position results operations reviewed new accounting standards identified believe new standards material impact financial position operating results rh donnelley corporation notes consolidated financial statements continued 3 acquisitions businesscom acquisition august 23 2007 completed businesscom acquisition disclosed amount 3450 million purchase price determined accordance gaap 3344 million excludes certain items value unvested equity awards recorded compensation expense vesting period purpose businesscom acquisition expand existing interactive portfolio adding leading internet advertising talent technology strengthen rhd’s position expanding local commercial search market develop online performance based advertising network businesscom also provides established businesstobusiness online properties businesscom workcom businesscom advertising network expect adopt businesscom technology platform serve existing advertiser base dexknowscom internet yellow pages site businesscom operates direct whollyowned subsidiary rhd results businesscom included consolidated results commencing august 23 2007 proceeds rhd credit facility used fund businesscom acquisition conjunction businesscom acquisition terms related stock purchase agreement dated july 27 2007 august 23 2007 jacob winebaum purchased rhd 148372 shares rhd common stock approximately 90 million mr winebaum founder chief executive officer businesscom local launch acquisition september 6 2006 acquired “local launch acquisition” local launch local search products platform fulfillment provider local launch specializes search publishing distribution directory organic marketing solutions purpose local launch acquisition support expansion current local internet marketing offerings provide new innovative solutions enhance local internet marketing capabilities results local launch business included consolidated results commencing september 6 2006 years ended december 31 2007 2006 local launch business operated direct whollyowned subsidiary rhd effective january 1 2008 local launch merged businesscom products services provided local launch continue offered advertisers businesscom local launch brand logo continue utilized internet marketing offerings dex media merger january 31 2006 acquired dex media equity purchase price 41 billion “dex media merger” pursuant agreement plan merger dated october 3 2005 “merger agreement” issued outstanding share dex media common stock converted 1230 cash 024154 share rhd common stock resulting aggregate cash value 19 billion aggregate stock value 22 billion based 36547381 newly issued shares rhd common stock additionally assumed dex media’s outstanding indebtedness january 31 2006 fair value 55 billion total allocable purchase price also included transaction costs 267 million directly related dex media merger severance related costs certain dex media employees 177 million dex media vested equity awards outstanding january 31 2006 estimated fair value 774 million total aggregate purchase price 98 billion dex media exclusive publisher “official” yellow pages white pages directories qwest communications international inc “qwest” qwest primary incumbent local exchange carrier “ilec” november 2002 purpose dex media merger take step transformation rhd leading publisher yellow pages directories well combine complementary strengths companies rh donnelley corporation notes consolidated financial statements continued dex media indirect parent dex media east llc “dex media east” dex media west llc “dex media west” dex media east operates directory business following states colorado iowa minnesota nebraska new mexico north dakota south dakota collectively “dex east states” dex media west operates directory business following states arizona idaho montana oregon utah washington wyoming collectively “dex west states” together dex east states collectively “qwest states” acquired business dex media subsidiaries “dex media business” operates dex media inc one rhd’s direct whollyowned subsidiaries results dex media business included company’s operating results commencing february 1 2006 finance dex media merger issued 660 million 6875 senior discount notes due january 15 2013 gross proceeds 6005 million 121 billion 8875 senior notes due january 15 2016 pay cash portion purchase price dex media stockholders att directory acquisition september 1 2004 completed acquisition directory publishing business “att directory business” att inc “att” formerly known sbc communications inc “sbc” illinois northwest indiana including att’s interests dontech ii partnership “dontech” 5050 general partnership us att collectively “att directory acquisition” 141 billion cash working capital adjustments settlement 30 million liquidation preference owed us related dontech result att directory acquisition became publisher att branded yellow pages directories illinois northwest indiana transaction consummated pursuant purchase agreement dated july 28 2004 amended among rhd ameritech corporation “ameritech” direct whollyowned subsidiary att ameritech publishing inc “api” direct whollyowned subsidiary ameritech results att directory business included consolidated results commencing september 1 2004 acquired att directory business operates rh donnelley publishing advertising illinois partnership one indirect whollyowned subsidiaries embarq acquisition january 3 2003 completed acquisition directory business “embarq directory business” sprint nextel corporation “sprint” formerly known sprint corporation acquiring outstanding capital stock various entities comprising sprint publishing advertising collectively “embarq acquisition” 223 billion cash result publisher embarq formerly sprint branded yellow pages directories 18 states may 2006 sprint spunoff local telephone business embarq corporation “embarq” connection spinoff entered new agreements embarq replaced related agreements sprint except sprint remains bound certain noncompetition obligations results embarq directory business included consolidated results commencing january 3 2003 embarq directory business operates rh donnelley publishing advertising inc one indirect whollyowned subsidiaries purposes acquisitions included following • building rhd leading publisher yellow pages directories provider online commercial search services • adding leading internet advertising talent technology strengthen rhd’s position expanding local commercial search market develop online performance based advertising network • enhancing local internet marketing capabilities offerings rh donnelley corporation notes consolidated financial statements continued acquisitions accounted purchase business combinations accordance sfas 141 purchase price allocated related tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values acquisition dates remaining consideration recorded goodwill certain longterm intangible assets identified recorded estimated fair values identifiable intangible assets acquired primarily include directory services agreements company qwest att embarq respectively noncompetition agreement company sprint established customer relationships third party contracts trademarks trade names advertising commitment technology network platforms resulting dex media merger att directory acquisition embarq acquisition businesscom acquisition local launch acquisition accordance sfas 142 fair values identifiable intangible assets amortized estimated useful lives manner best reflects economic benefits derived assets goodwill amortized subject impairment testing annual basis see note 2 “summary significant accounting policies identifiable intangible assets goodwill” description intangible assets goodwill purchase accounting rules assume record deferred revenue balance associated directories published dex media 1140 million january 31 2006 att directory business 2041 million september 1 2004 amounts represented revenue would recognized subsequent acquisition deferral amortization method absence purchase accounting accordingly record revenue associated directories published prior acquisition well directories published month acquisition completed although deferred revenue balances associated directories published prior acquisition eliminated retained rights associated collection amounts due contractual obligations advertising contracts executed prior acquisitions result billed unbilled accounts receivable balances acquired acquisition became assets company also purchase accounting rules assume record deferred directory costs related directories published prior acquisition well directories published month acquisition completed totaling 2051 million qwestbranded directories 1758 million attbranded directories costs represented cost revenue would recognized subsequent acquisitions deferral amortization method absence purchase accounting following table summarizes estimated fair values assets acquired liabilities assumed dex media merger january 31 2006 following unaudited condensed pro forma information prepared accordance sfas 141 years ended december 31 2006 2005 respectively assumes dex media merger related gs repurchase related financing occurred january 1 2005 following unaudited condensed pro forma information purport represent company’s results rh donnelley corporation notes consolidated financial statements continued operations would actually dex media merger related gs repurchase fact occurred january 1 2005 necessarily representative results operations future period unaudited condensed pro forma financial information year ended december 31 2006 eliminate adverse impact purchase accounting relating dex media merger unaudited condensed pro forma financial information year ended december 31 2005 reflects combination gaap results rhd dex media 4 restructuring charges table shows activity restructuring reserves 2007 2006 2005 year ended december 31 2007 recognized restructuring charge earnings 55 million associated planned headcount reductions consolidation responsibilities effectuated 2008 rh donnelley corporation notes consolidated financial statements continued result dex media merger integration dex media business approximately 120 employees affected restructuring plan 110 terminated 10 relocated corporate headquarters cary north carolina additionally vacated certain leased dex media facilities colorado minnesota nebraska oregon costs associated actions shown table caption “2006 restructuring actions” estimated costs associated terminated employees including dex media executive officers abandonment certain leased facilities net estimated sublease income approximately 189 million costs charged goodwill 2006 january 2007 finalized estimate costs associated terminated employees recognized charge goodwill 01 million payments made respect severance relocation 2007 2006 totaled 16 million 108 million respectively 2007 finalized assessment relocation reserve established result dex media merger result reversed remaining amount reserve 06 million corresponding offset goodwill payments 22 million 05 million made 2007 2006 respectively respect vacated leased dex media facilities remaining lease payments facilities made 2016 first quarter 2005 completed restructuring relating integration att directory business 63 employees affected restructuring 57 terminated first quarter 2005 6 relocated corporate headquarters cary north carolina additionally vacated certain leased facilities chicago illinois costs associated actions shown table caption “2005 restructuring actions” estimated costs associated terminated employees abandonment certain leased facilities approximately 88 million costs charged goodwill first quarter 2005 payments made respect severance relocation 2007 payments made respect severance relocation 2006 2005 01 million 14 million respectively payments 01 million 10 million 10 million net sublease income charged reserve 2007 2006 2005 respectively respect leased facilities chicago illinois 2006 formalized plan reoccupy early 2007 portion leased facilities chicago illinois vacated conjunction att directory acquisition result reduced reserve related leased facilities year ended december 31 2006 35 million corresponding offset goodwill 2007 reoccupied remaining portion leased facilities chicago illinois result reversed remaining amount reserve related leased facilities year ended december 31 2007 18 million corresponding offset goodwill following embarq acquisition january 3 2003 consolidated publishing technology operations sales offices administrative personnel relocated headquarters functions overland park kansas purchase new york cary north carolina approximately 140 people affected relocation headquarters functions overland park kansas purchase new york 75 included restructuring reserve remaining 65 people relocated company costs associated actions shown table caption “2003 restructuring actions” payments 02 million 02 million 04 million net sublease income charged reserve respect former prepress publishing facility 2007 2006 2005 respectively remaining payments made 2012 payments 06 million made 2005 related severance related costs payments 04 million 08 million net sublease income charged reserve respect former headquarters office lease 2006 2005 respectively former headquarters office lease expired 2006 rh donnelley corporation notes consolidated financial statements continued 5 longterm debt credit facilities notes longterm debt company december 31 2007 2006 including fair value adjustments required gaap result dex media merger consisted following credit facilities december 31 2007 total outstanding debt credit facilities 37491 million comprised 15715 million rhdi credit facility 11061 million new dex media east credit facility 10715 million dex media west credit facility rhd finance businesscom acquisition related fees expenses august 23 2007 rhd entered 3280 million credit facility scheduled maturity date december 31 2011 october 2 2007 rhd credit facility paid full proceeds series a4 notes repayment rhd credit facility accounted extinguishment debt resulting loss charged interest expense year ended december 31 2007 08 million related writeoff unamortized deferred financing costs rh donnelley corporation notes consolidated financial statements continued rhdi december 31 2007 outstanding balances rhdi’s senior secured credit facility amended restated “rhdi credit facility” totaled 15715 million comprised 3140 million term loan d1 12575 million term loan d2 amount outstanding 1750 million revolving credit facility “rhdi revolver” additional 03 million utilized standby letter credit prior refinancing transactions october 17 2007 discussed rhdi’s credit facility also consisted term loan a4 paid full term loans require quarterly principal interest payments rhdi credit facility provides new term loan c potential borrowings 4000 million proceeds borrowed used fund acquisitions refinance certain indebtedness make certain restricted payments october 17 2007 918 million 162 million 830 million term loans a4 d1 d2 respectively repaid proceeds series a4 notes issued october 17 2007 repayment term loans accounted extinguishment debt resulting loss charged interest expense year ended december 31 2007 42 million related writeoff unamortized deferred financing costs rhdi revolver matures december 2009 term loans d1 d2 require accelerated amortization beginning 2010 final maturity june 2011 weighted average interest rate outstanding debt rhdi credit facility 650 686 december 31 2007 2006 respectively december 31 2007 rhdi’s credit facility bears interest option either • higher base rate determined administrative agent deutsche bank trust company americas ii federal funds effective rate defined plus 050 case plus 025 margin rhdi revolver 050 margin term loan d1 term loan d2 • libor rate plus 125 margin rhdi revolver 150 margin term loan d1 term loan d2 may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings dex media east october 24 2007 replaced former dex media east credit facility new dex media east credit facility new dex media east credit facility consists 7000 million aggregate principal amount term loan facility 4000 million aggregate principal amount term loan b facility 1000 million aggregate principal amount revolving loan facility “new dex media east revolver” 2000 million aggregate principal amount uncommitted incremental facility dex media east would right subject obtaining commitments incremental loans one occasions increase term loan term loan b revolving loan facility amount new dex media east credit facility secured pledges similar assets similar covenants events default former dex media east credit facility december 31 2007 principal amounts owing term loan term loan b totaled 11000 million comprised 7000 million 4000 million respectively 61 million outstanding new dex media east revolver additional 30 million utilized three standby letters credit new dex media east revolver term loan mature october 2013 term loan b mature october 2014 weighted average interest rate outstanding debt new dex media east credit facility 687 december 31 2007 weighted average interest rate outstanding debt former dex media east credit facility 685 december 31 2006 former dex media east credit facility amended restated connection dex media merger consisted revolving loan commitments “former dex media east revolver” term loan term loan b october 17 2007 864 million 2136 million term loan term rh donnelley corporation notes consolidated financial statements continued loan b former dex media east credit facility respectively repaid proceeds series a4 notes issued october 17 2007 proceeds new dex media east credit facility used october 24 2007 repay remaining 565 million 1397 million term loan term loan b former dex media east credit facility respectively 325 million former dex media east revolver repayment term loans revolving loan commitments outstanding former dex media east credit facility accounted extinguishment debt resulting loss charged interest expense year ended december 31 2007 02 million related writeoff unamortized deferred financing costs proceeds new dex media east credit facility also used november 26 2007 fund redemption 4497 million dex media east’s outstanding 9875 senior notes due 2009 3413 million dex media east’s outstanding 12125 senior subordinated notes due 2012 see details december 31 2007 new dex media east credit facility bears interest option either • higher base rate determined administrative agent jp morgan chase bank na ii federal funds effective rate defined plus 050 case plus 075 050 leverage ratio less 2 1 margin new dex media east revolver term loan 100 margin term loan b • libor rate plus 175 150 leverage ratio less 2 1 margin new dex media east revolver term loan 200 margin term loan b may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings dex media west december 31 2007 dex media west credit facility amended restated connection dex media merger consists revolving loan commitments “dex media west revolver” term loan term loan b1 term loan b2 dex media west revolver consists total principal amount 1000 million available general corporate purposes subject certain conditions december 31 2007 principal amounts owed term loan term loan b1 term loan b2 totaled 10535 million comprised 1529 million 3107 million 5899 million respectively 180 million outstanding dex media west revolver term loan b1 amount 4442 million utilized redeem dex media west’s senior notes put dex media west connection change control offer associated dex media merger fund portion cash consideration paid dex media inc’s stockholders connection dex media merger remaining 588 million longer available term loan dex media west revolver mature september 2009 term loan b1 term loan b2 mature march 2010 weighted average interest rate outstanding debt dex media west credit facility 651 683 december 31 2007 2006 respectively december 31 2007 dex media west credit facility bears interest option either • higher base rate determined administrative agent jp morgan chase bank na ii federal funds effective rate defined plus 050 case plus 025 margin dex media west revolver term loan 050 margin term loan b1 term loan b2 • libor rate plus 125 margin dex media west revolver term loan 150 margin term loan b1 term loan b2 may elect interest periods 1 2 3 6 months rh donnelley corporation notes consolidated financial statements continued 9 12 months time borrowing lenders agree make term available libor borrowings notes december 31 2007 rhd total outstanding notes 64266 million comprised 39629 million outstanding rhd notes 12312 million outstanding dex media inc notes 12325 million outstanding dex media west notes rhd december 31 2007 rhd total outstanding notes 39629 million comprised 3000 million 6875 senior notes 3392 million 6875 series a1 senior discount notes 6137 million 6875 series a2 senior discount notes 12100 million 8875 series a3 senior notes 15000 million 8875 series a4 senior notes october 2 2007 issued 10 billion series a4 notes proceeds series a4 notes used repay 328 million rhd credit facility used fund businesscom acquisition b contributed rhdi order provide funding tender offer consent solicitation rhdi’s 600 million senior subordinated notes c used pay related fees expenses general corporate purposes october 17 2007 issued additional 500 million series a4 notes proceeds issuance transferred dex media east order repay 864 million 2136 million term loan term loan b former dex media east credit facility respectively b contributed rhdi order repay 918 million 162 million 830 million term loans a4 d1 d2 rhdi credit facility respectively c used pay related fees expenses interest series a4 notes payable semiannually april 15th october 15th year commencing april 15 2008 series a4 notes senior unsecured obligations rhd senior right payment rhd’s existing future senior subordinated debt future subordinated obligations rank equally rhd’s existing future senior unsecured debt series a4 notes effectively subordinated rhd’s secured debt including rhd’s guarantee borrowings rhdi credit facility structurally subordinated existing future liabilities including trade payables direct indirect subsidiaries december 31 2007 series a4 notes fair market value 137 billion 8875 series a4 notes face value 15 billion redeemable option beginning 2012 following prices percentage face value series a4 notes issued certain institutional investors offering exempt registration requirements securities act 1933 terms registration rights agreement company agreed file registration statement series a4 notes within 210 days subsequent initial closing issued 300 million 6875 senior notes due january 15 2013 “holdco notes” proceeds used redeem 100303 shares outstanding preferred stock gs funds pay transaction costs repay debt associated rhdi’s credit facility interest payable holdco rh donnelley corporation notes consolidated financial statements continued notes semiannually arrears january 15th july 15th year commencing july 15 2005 december 31 2007 6875 holdco notes fair market value 2655 million 6875 holdco notes face value 300 million redeemable option beginning 2009 following prices percentage face value order fund cash portion dex media merger purchase price issued 660 million aggregate principal amount maturity 6005 million gross proceeds 6875 series a2 senior discount notes due january 15 2013 121 billion principal amount 8875 series a3 senior notes due january 15 2016 interest payable semiannually january 15th july 15th year series a2 senior discount notes series a3 senior notes commencing july 15 2006 also issued 365 million aggregate principal amount maturity 3321 million gross proceeds 6875 series a1 senior discount notes due january 15 2013 fund gs repurchase interest payable semiannually january 15th july 15th year commencing july 15 2006 notes unsecured obligations rhd senior right payment future senior subordinated indebtedness rhd structurally subordinated indebtedness subsidiaries december 31 2007 6875 series a1 series a2 senior discount notes 8875 series a3 senior notes fair market value 3002 million 5431 million 112 billion respectively 6875 series a1 senior discount notes face value 365 million series a2 senior discount notes face value 660 million redeemable option beginning 2009 following prices percentage face value 8875 series a3 senior notes face value 121 billion redeemable option beginning 2011 following prices percentage face value rhdi connection embarq acquisition rhdi issued 325 million rhdi senior notes 600 million rhdi senior subordinated notes december 20 2005 repurchased tender offer exit consent solicitation 3171 million rhdi senior notes proceeds rhdi credit facility’s 350 million term loan d1 used fund partial repurchase rhdi senior notes tender premium 253 million pay transaction costs tender offer partial repurchase rhdi senior notes accounted extinguishment debt resulting loss 327 million charged interest expense year ended december 31 2005 consisting tender premium writeoff unamortized deferred financing costs 74 million december 2007 redeemed rh donnelley corporation notes consolidated financial statements continued remaining 79 million rhdi senior notes proceeds rhdi revolver used fund redemption premium 02 million pay transaction costs redemption rhdi senior notes accounted extinguishment debt resulting loss 02 million charged interest expense year ended december 31 2007 consisting redemption premium writeoff unamortized deferred financing costs less 01 million october 2007 terms conditions tender offer consent solicitation purchase rhdi senior subordinated notes rhdi commenced september 18 2007 5999 million 999 outstanding rhdi senior subordinated notes repurchased proceeds series a4 notes contributed rhd rhdi order fund repurchase rhdi senior subordinated notes tender premium 397 million pay transaction costs tender offer december 2007 remaining 01 million rhdi senior subordinated notes redeemed tender redemption rhdi senior subordinated notes accounted extinguishment debt resulting loss 513 million charged interest expense year ended december 31 2007 consisting tender premium writeoff unamortized deferred financing costs 116 million dex media inc december 31 2007 dex media inc total outstanding notes 12312 million comprised 5121 million 8 senior notes 7191 million 9 senior discount notes dex media inc issued 500 million aggregate principal amount 8 senior notes due 2013 senior notes unsecured obligations dex media inc interest payable may 15th november 15th year december 31 2007 500 million aggregate principal amount outstanding excluding fair value adjustments december 31 2007 8 senior notes fair market value 4663 million 8 senior notes face value 500 million redeemable option beginning 2008 following prices percentage face value dex media inc issued 750 million aggregate principal amount 9 senior discount notes due 2013 two indentures first indenture totaling 389 million aggregate principal amount 9 senior discount notes issued original issue discount interest accruing 9 per annum compounded semiannually senior discount notes unsecured obligations dex media inc interest accrues form increased accreted value november 15 2008 “full accretion date” time accreted value equal full principal amount maturity second indenture totaling 361 million aggregate principal amount interest accrues 837 per annum compounded semiannually creates premium full accretion date amortized remainder term november 15 2008 9 senior discount notes bear cash interest 9 per annum payable semiannually may 15th november 15th year senior discount notes unsecured obligations dex media inc cash interest accrue discount notes prior full accretion date december 31 2007 7499 million aggregate principal amount outstanding excluding fair value adjustments december 31 2007 9 senior discount notes fair market value 6731 million rh donnelley corporation notes consolidated financial statements continued remaining 7499 million face value 9 senior discount notes redeemable option beginning 2008 following prices percentage face value dex media east november 26 2007 proceeds new dex media east credit facility used fund redemption 4497 million dex media east’s outstanding 9875 senior notes due 2009 3413 million dex media east’s outstanding 12125 senior subordinated notes due 2012 redemption premiums associated senior notes senior subordinated notes 111 million 207 million respectively pay transaction costs redemption senior notes senior subordinated notes accounted extinguishment debt resulting loss 318 million charged interest expense year ended december 31 2007 related redemption premiums addition result redeeming senior notes senior subordinated notes interest expense offset 622 million year ended december 31 2007 resulting accelerated amortization remaining fair value adjustment recorded result dex media merger dex media west december 31 2007 dex media west total outstanding notes 12325 million comprised 3987 million 85 senior notes 88 million 5875 senior notes 8250 million senior subordinated notes dex media west issued 385 million aggregate principal amount 85 senior notes due 2010 senior notes unsecured obligations dex media west interest payable february 15th august 15th year december 31 2007 385 million aggregate principal amount outstanding excluding fair value adjustments december 31 2007 85 senior notes fair market value 3898 million 85 senior notes face value 385 million redeemable option beginning 2007 following prices percentage face value dex media west issued 300 million aggregate principal amount 5875 senior notes due 2011 senior notes unsecured obligations dex media west interest payable may 15th november 15th year december 31 2007 87 million aggregate principal amount outstanding excluding fair value adjustments december 31 2007 5875 senior notes fair market value 87 million rh donnelley corporation notes consolidated financial statements continued remaining 87 million face value 5875 senior notes redeemable option beginning 2008 following prices percentage face value dex media west issued 780 million aggregate principal amount 9875 senior subordinated notes due 2013 senior subordinated notes unsecured obligations dex media west interest payable february 15th august 15th year december 31 2007 7617 million aggregate principal amount outstanding excluding fair value adjustments december 31 2007 9875 senior subordinated notes fair market value 7884 million remaining 7617 million face value 9875 senior subordinated notes redeemable option beginning 2008 following prices percentage face value aggregate maturities longterm debt including current portion excluding fair value adjustments purchase accounting december 31 2007 company’s credit facilities indentures governing notes contain usual customary affirmative negative covenants among things place limitations ability incur additional indebtedness ii pay dividends repurchase capital stock iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock subsidiaries vi engage transactions affiliates vii make investments loans advances company’s credit facilities also contain financial covenants relating maximum consolidated leverage minimum interest coverage maximum senior secured leverage defined therein substantially rhdi’s subsidiaries’ assets including capital stock rhdi subsidiaries pledged secure obligations rhdi credit facility substantially assets dex media east dex media west subsidiaries including equity interests pledged secure obligations respective credit facilities impact dex media merger completion dex media merger triggered change control offers dex media outstanding notes requiring us make offers repurchase notes 2913 million 5875 dex media west senior notes due 2011 03 million 9875 dex media east senior notes due 2009 rh donnelley corporation notes consolidated financial statements continued 02 million 9875 dex media west senior subordinated notes due 2013 01 million 9 dex media inc senior discount notes due 2013 tendered applicable change control offer repurchased us result dex media merger adjustment established record acquired debt fair value january 31 2006 fair value adjustment amortized reduction interest expense remaining term respective debt agreements using effective interest method impact future scheduled interest principal payments amortization fair value adjustment included reduction interest expense 921 million including 622 million related redemption dex media east’s senior notes senior subordinated notes 264 million years ended december 31 2007 2006 respectively total premium 2223 million recorded upon consummation dex media merger 1038 million remains unamortized december 31 2007 shown following table connection redemption dex media east’s senior notes senior subordinated notes remaining fair value adjustment related debt obligations fully amortized december 31 2007 rh donnelley corporation notes consolidated financial statements continued 6 derivative financial instruments rhdi credit facility dex media west new dex media east credit facilities bear interest variable rates accordingly earnings cash flow affected changes interest rates company entered following interest rate swaps effectively convert approximately 26 billion company’s variable rate debt fixed rate debt december 31 2007 1 consists one swap 2 consists two swaps 3 consists three swaps 4 consists four swaps using derivative financial instruments hedge exposures changes interest rates company exposes credit risk market risk credit risk possible failure counterparty perform terms derivative contract fair value derivative contract positive counterparty owes company creates credit risk company fair value derivative contract negative company owes counterparty therefore subject credit risk company minimizes credit risk derivative financial instruments entering transactions major financial institutions credit ratings aa higher market risk adverse effect value financial instrument results change interest rates market risk associated interestrate contracts managed establishing monitoring parameters limit types degree market risk may undertaken company’s interest rate swap agreements effectively convert 26 billion variable rate debt fixed rate debt mitigating company’s exposure increases interest rates terms interest rate swap agreements receive variable interest based threemonth libor pay rh donnelley corporation notes consolidated financial statements continued weighted average fixed rate 461 interest rate swaps mature varying dates february 14 2008 november 26 2012 weighted average rate received interest rate swaps 502 year ended december 31 2007 periodic payments receipts recorded interest expense interest rate swaps notional value 26 billion designated cash flow hedges hedge threemonth liborbased interest payments 26 billion bank debt december 31 2007 respective interest rate swaps provided effective hedge threemonth liborbased interest payments 26 billion bank debt may 2006 company entered 10 billion notional value interest rate swaps designated cash flow hedges july 2006 company recorded changes fair value interest rate swaps reduction interest expense 44 million year ended december 31 2006 addition certain interest rate swaps acquired result dex media merger notional amount 425 million designated cash flow hedges years ended december 31 2007 2006 125 million 300 million respectively interest rate swaps settled leaving undesignated swaps december 31 2007 year ended december 31 2007 2006 company recorded additional interest expense 34 million 37 million respectively result change fair value acquired undesignated interest rate swaps years ended december 31 2007 2006 2005 company reclassified 152 million 226 million 06 million hedging gains earnings respectively december 31 2007 28 million deferred losses net tax derivative instruments recorded accumulated comprehensive loss expected reclassified earnings next 12 months transactions events expected occur next 12 months necessitate reclassifying derivative losses earnings 7 redeemable preferred stock warrants 10 million shares preferred stock authorized issuance series transactions related embarq acquisition november 2002 january 2003 issued private placement 200604 shares 8 convertible cumulative preferred stock “preferred stock” warrants purchase 165 million shares common stock investment partnerships affiliated goldman sachs group inc “gs funds” gross proceeds 200 million january 27 2006 completed gs repurchase defined result outstanding shares preferred stock aforementioned warrants remained outstanding following gs repurchase november 2 2006 time repurchased outstanding warrants gs funds prior gs repurchase preferred stock accrued unpaid dividends convertible gs funds common stock time issuance price 2405 per share earned cumulative dividend 8 compounded quarterly could pay cash dividends preferred stock september 30 2005 time dividend accreted accrued cash dividends preferred stock approximately 25 million january 3 2006 included purchase price gs repurchase net proceeds received issuance preferred stock january 2003 november 2002 allocated preferred stock warrants beneficial conversion feature “bcf” preferred stock based relative fair values fair value preferred stock estimated using dividend discount method determines fair value based discounted cash flows security bcf function conversion price preferred stock fair value warrants fair market value underlying common stock date issuance fair value warrants rh donnelley corporation notes consolidated financial statements continued 1218 january 2003 warrants 1043 november 2002 warrants determined based blackscholes model following assumptions connection issuance preferred stock subsequent quarterly dividend date september 30 2005 bcf recorded fair value underlying common stock time issuance greater conversion price preferred stock bcf treated deemed dividend preferred stock convertible common stock immediately issuance commencing october 3 2005 date stock purchase agreement relating gs repurchase preferred stock longer convertible common stock consequently longer recognized bcf preferred stock dividend year ended december 31 2005 117 million consisted stated 8 dividend 101 million including 25 million accrued cash dividends bcf 16 million january 14 2005 repurchased 100303 shares outstanding preferred stock gs funds 2772 million cash order fund repurchase january 14 2005 issued 300 million holdco notes see note 5 “longterm debt credit facilities notes” discussion financing associated transaction connection preferred stock repurchase recorded increase loss available common shareholders consolidated statement operations 1337 million reflect loss repurchase shares year ended december 31 2005 excess cash paid gs funds carrying amount repurchased preferred stock plus amount previously recognized bcf associated shares recognized loss repurchase amount represents return gs funds therefore treated manner similar treatment preferred stock dividend january 27 2006 conjunction dex media merger repurchased remaining 100301 shares preferred stock gs funds 3361 million cash including accrued cash dividends interest “gs repurchase” pursuant terms stock purchase support agreement “stock purchase agreement” dated october 3 2005 order fund gs repurchase issued 365 million aggregate principal amount maturity 3321 million gross proceeds 6875 series a1 senior discount notes due january 15 2013 see note 5 “longterm debt credit facilities notes” discussion financing associated transaction based terms stock purchase agreement recorded value preferred stock accreted redemption value 3341 million december 31 2005 3361 million january 27 2006 accretion redemption value 2110 million 20 million represented accrued dividends interest years ended december 31 2005 2006 respectively recorded increase loss available common shareholders consolidated statements operations conjunction gs repurchase also reversed previously recorded bcf related shares recorded decrease loss available common shareholders consolidated statement operations approximately 312 million year ended december 31 2006 november 2 2006 repurchased outstanding warrants purchase 165 million shares common stock aggregate purchase price approximately 531 million exercise prices related warrants ranged 2628 2862 per share result value warrants removed shareholders’ equity consolidated balance sheet december 31 2006 rh donnelley corporation notes consolidated financial statements continued may 30 2006 rhd redeemed outstanding preferred stock purchase rights issued pursuant company’s stockholder rights plan redemption price one cent per right total redemption payment 07 million payment recorded charge retained earnings year ended december 31 2006 november 9 2006 certain affiliates carlyle group welsh carson anderson stowe “selling shareholders” sold 9424360 shares 9424359 shares respectively rhd common stock selling shareholders former shareholders dex media became shareholders rhd conjunction dex media merger sale selling shareholders longer hold shares rhd common stock acquired connection dex media merger receive proceeds transaction 8 stock incentive plans years ended december 31 2007 2006 company recognized 390 million 433 million respectively stockbased compensation expense related stockbased awards granted various employee nonemployee stock incentive plans prior adoption sfas 123 r company presented tax benefits deductions resulting exercise stockbased awards operating cash flows consolidated statements cash flows sfas 123 r requires cash flows classified financing cash flows years ended december 31 2007 2006 company able utilize tax benefit resulting stockbased award exercises due net operating loss carryforwards neither operating financing cash flows affected tax impact stockbased award exercises years ended december 31 2007 2006 sfas 123 r fair value stock options sars calculated using blackscholes model time stockbased awards granted amount net estimated forfeitures amortized vesting period stockbased award weighted average fair value per share stock options sars granted years ended december 31 2007 2006 2247 2008 respectively following assumptions used valuing stockbased awards years ended december 31 2007 2006 respectively estimate expected volatility based historical volatility price common stock expected life stockbased awards expected life represents period time stockbased awards granted expected outstanding estimated consistent simplified method identified sab 107 simplified method calculates expected life average vesting contractual terms award riskfree interest rate based applicable us treasury yields approximate expected life stockbased awards granted company grants restricted stock certain employees including executive officers nonemployee directors accordance 2005 plan sfas 123 r compensation expense related awards measured fair value date grant based number shares granted quoted market price company’s common stock time rh donnelley corporation notes consolidated financial statements continued year ended december 31 2007 granted 13 million stock options sars following table presents summary company’s stock options sars activity related information year ended december 31 2007 total intrinsic value stockbased awards vested years ended december 31 2007 2006 17 million 344 million respectively total fair value stockbased awards vested years ended december 31 2007 2006 190 million 264 million respectively following table summarizes information stockbased awards outstanding exercisable december 31 2007 aggregate intrinsic value exercisable stockbased awards december 31 2007 222 million rh donnelley corporation notes consolidated financial statements continued following table summarizes status nonvested stock awards december 31 2007 changes year ended december 31 2007 december 31 2007 382 million total unrecognized compensation cost related nonvested stockbased awards cost expected recognized weighted average period approximately two years applying company’s estimated forfeiture rate expect 20 million nonvested stockbased awards vest weighted average period approximately two years intrinsic value december 31 2007 nonvested stockbased awards expected vest 50 million corresponding weighted average grant date exercise price 6495 per share february 27 2007 company granted 11 million sars certain employees including executive officers conjunction annual grant stock incentive awards sars settled common stock granted grant price 7431 per share equal market value company’s common stock grant date vest ratably three years accordance sfas 123 r recognized noncash compensation expense related sars 112 million year ended december 31 2007 result businesscom acquisition 42 million outstanding businesscom equity awards converted 02 million rhd equity awards august 23 2007 year ended december 31 2007 recognized noncash compensation expense related converted equity awards 40 million december 13 2006 company granted 01 million shares restricted stock certain executive officers restricted shares settled common stock granted grant price 6064 per share equal market value company’s common stock date grant vesting restricted shares contingent upon common stock equaling exceeding 6500 per share 20 consecutive trading days continued employment company third anniversary date grant accordance sfas 123 r recognized noncash compensation expense related restricted shares 24 million 01 million years ended december 31 2007 2006 respectively february 21 2006 company granted 01 million shares restricted stock certain employees including executive officers restricted shares settled common stock granted grant price 6426 per share equal market value company’s common stock date grant vest ratably three years accordance sfas 123 r recognized noncash compensation expense related restricted shares 17 million 28 million years ended december 31 2007 2006 respectively february 21 2006 company granted 06 million sars certain employees including executive officers conjunction annual grant stock incentive awards sars rh donnelley corporation notes consolidated financial statements continued settled common stock granted grant price 6426 per share equal market value company’s common stock grant date vest ratably three years february 24 2005 company granted 05 million sars certain employees including executive officers conjunction annual grant stock incentive awards sars settled common stock granted grant price 5900 per share equal market value company’s common stock grant date vest ratably three years july 28 2004 company granted 09 million sars certain employees including executive officers connection att directory acquisition sars settled common stock granted grant price 4158 per share equal market value company’s common stock grant date initially scheduled vest entirely five years maximum appreciation july 28 2004 february 24 2005 sar grants 100 initial grant price recognized noncash compensation expense related smaller sar grants 72 million 139 million 41 million years ended december 31 2007 2006 2005 respectively connection embarq acquisition company granted 15 million options “founders grant” certain employees including executive officers 2002 options granted october 2002 exercise price 2554 equal market value company’s common stock date grant however award options contingent upon successful closing embarq acquisition therefore options subject forfeiture january 3 2003 time market value company’s common stock exceeded exercise price accordingly options accounted compensatory options apb 25 resulted charge 10 million year ended december 31 2005 connection dex media merger company granted october 3 2005 11 million sars certain employees including executive officers sars granted exercise price 6500 prevailing market price common stock vest ratably three years award sars contingent upon successful completion dex media merger therefore identified awards outstanding december 31 2005 recognized noncash compensation expense related sars 70 million 91 million years ended december 31 2007 2006 respectively january 31 2006 stockbased awards outstanding existing dex media equity compensation plans totaled 40 million dex media option shares weighted average exercise price 548 per option share result dex media merger outstanding dex media equity awards converted rhd equity awards february 1 2006 upon conversion rhd equity awards number securities issued upon exercise outstanding awards totaled 17 million shares rhd weighted average exercise price 1273 per share december 31 2007 number rhd shares remaining available future issuance totaled less 01 million dex media inc 2004 incentive award plan years ended december 31 2007 2006 noncash compensation expense related converted awards totaled 26 million 41 million respectively dex media merger triggered change control company’s stock incentive plans accordingly awards granted employees january 31 2006 exception stockbased awards held executive officers members board directors waived change control provisions awards became fully vested addition vesting conditions related july 28 2004 sars grant noted modified result dex media merger sars vest ratably three years date grant years ended december 31 2007 2006 23 million 134 million respectively noncash compensation expense included total noncash compensation expense amounts noted recognized result modifications noncash stockbased compensation expense relating existing stock options held executive officers members board directors january 1 2006 modified result dex media rh donnelley corporation notes consolidated financial statements continued merger well noncash stockbased compensation expense smaller grants issued subsequent dex media merger mentioned totaled 29 million 133 million years ended december 31 2007 2006 respectively 9 income taxes deferred tax assets liabilities determined based estimated future tax effects temporary differences financial statement tax basis assets liabilities measured tax rates temporary differences expected reverse deferred tax expense benefit result changes deferred tax assets liabilities provision benefit income taxes consisted following table summarizes significant differences us federal statutory tax rate effective tax rate applied company’s income loss income taxes rh donnelley corporation notes consolidated financial statements continued certain prior period amounts included following table reclassified conform current period’s presentation deferred tax assets liabilities consisted following december 31 2007 2006 2007 provision income taxes 290 million comprised federal tax provision 275 million resulting current tax provision 118 million relating internal revenue service “irs” settlement deferred tax provision 157 million resulting current year taxable loss 2007 state tax provision 15 million results current tax provision 85 million relating taxes due states subsidiaries company file separate company returns offset deferred state tax benefit 70 million relating apportioned taxable income loss among various states federal net operating loss income tax purposes approximately 3033 million generated 2007 primarily result tax amortization expense recorded respect intangible assets acquired dex media merger att directory acquisition embarq acquisition businesscom acquisition acquired intangible assets resulted deferred tax liability 26 billion december 31 2007 december 31 2007 company federal state net operating loss carryforwards approximately 6183 million net carryback 8013 million respectively begin expire 2026 2008 respectively amounts include consideration net operating losses expected expire unused due internal revenue code section 382 limitation ownership changes related businesscom occurred prior businesscom acquisition portion benefits net operating loss carryforwards reflected additional paidin capital portion net operating loss carryforwards generated deductions related exercise stock awards 2007 2006 deduction stock awards 308 million 834 million respectively included 308 million deduction stock awards 2007 suspended 86 million windfall tax benefit required rh donnelley corporation notes consolidated financial statements continued sfas 123 r benefit recognized financial reporting purposes net operating loss utilized assessing realizability deferred tax assets considered whether likely portion deferred tax assets realized ultimate realization deferred tax assets dependent upon generation future taxable income periods temporary differences become deductible making determination applicable financial reporting standards allowed consider scheduled reversal deferred tax liabilities projected future taxable income tax planning strategies company believes likely deferred tax assets associated capital investments realized contributing valuation allowance 62 million december 31 2007 additionally believe likely state net operating losses various states used expiration resulting valuation allowance 75 million total valuation allowance 137 million december 31 2007 2006 income tax benefit 845 million comprised federal deferred tax benefit 1129 million resulting period’s taxable loss offset state tax provision 284 million 2006 state tax provision 284 million primarily resulted modification apportioned taxable income loss among various states net operating loss tax purposes approximately 2163 million generated 2006 primarily result tax amortization expense recorded respect intangible assets acquired dex media merger att directory acquisition embarq acquisition acquired intangible assets resulted deferred tax liability 22 billion 2005 provision income taxes 432 million comprised deferred tax provision due taxable loss generated period 2005 deferred tax provision resulted effective tax rate 390 net operating losses approximately 1686 million related tax deductions amortization expense recorded tax purposes compared book purposes respect intangible assets acquired embarq acquisition att directory acquisition 2005 effective tax rate reflects decrease state local tax rate due integration embarq acquisition att directory acquisition noted detail july 2007 effectively settled issues consideration irs related audit taxable years 2003 2004 therefore tax years 2005 2006 still subject examination irs certain state tax returns examination various regulatory authorities continuously review issues raised connection ongoing examinations open tax years evaluate adequacy reserves believe accrued tax liabilities fin 48 adequate cover uncertain tax positions related us federal state income taxes adoption fin 48 result implementing fin 48 recognized increase 1601 million liability unrecognized tax benefits january 1 2007 increase liability included reduction deferred tax liabilities 1652 million decrease accumulated deficit 51 million rh donnelley corporation notes consolidated financial statements continued reconciliation beginning ending amount gross unrecognized tax benefits follows included balance unrecognized benefits december 31 2007 january 1 2007 94 million 56 million respectively tax benefits recognized would favorably affect effective tax rate policy recognize interest penalties related unrecognized tax benefits income tax expense year ended december 31 2007 company recognized approximately 15 million interest penalties december 31 2007 january 1 2007 accrued 59 million 38 million respectively related interest accrued 08 million tax penalties december 31 2007 amounts accrued tax penalties january 1 2007 july 2007 effectively settled issues consideration irs related audit taxable years 2003 2004 result settlement unrecognized tax benefits associated uncertain federal tax positions decreased 1670 million year ended december 31 2007 result irs settlement recognized additional interest expense 16 million 12 million related taxable years 2004 2005 respectively recognition interest expense within tax provision net tax benefit increased effective tax rate year ended december 31 2007 unrecognized tax benefits impacted irs audit primarily related items ultimate deductibility highly certain uncertainty regarding timing deductibility reasonably possible amount unrecognized tax benefits could decrease within next twelve months currently audit new york state new york city taxable years 2000 2003 north carolina taxable years 2003 2006 year ended december 31 2007 recorded increase liability unrecognized tax benefits 140 million new york state new york city north carolina audits resolved within next twelve months total amount unrecognized tax benefits could decrease approximately 140 million unrecognized tax benefits related new york state new york city north carolina audits relate apportionment allocation income among various legal entities noted july 2007 effectively settled irs’s federal tax audit taxable years 2003 2004 therefore tax years 2005 2006 still subject examination irs addition certain state tax returns examination various regulatory authorities including new york north carolina state tax return years open examination average three years however certain jurisdictions remain open examination longer three years due existence net operating loss carryforwards statutory waivers 10 benefit plans result dex media merger acquired dex media’s pension plan defined contribution plan postretirement plan result businesscom acquisition acquired businesscom’s defined contribution plan effective january 1 2007 dontech retirement plan merged rhd retirement plan defined two defined benefit pension plans rhd retirement plan dex media pension plan three defined contribution plans rhd 401k savings plan dex rh donnelley corporation notes consolidated financial statements continued media employee savings plan businesscom inc 401k plan postretirement plan rhd group benefit plan became effective january 1 2007 rhd pension plan rhd cash balance defined benefit pension plan “rhd retirement plan” covers substantially legacy rhd employees least one year service benefits paid employees based age years service percentage total annual compensation percentage compensation allocated retirement account ranges 30 125 depending age years service “cash balance benefit” benefits certain employees participants predecessor dun bradstreet corporation “db” defined benefit pension plan also determined based participant’s average compensation years service “final average pay benefit” benefits paid equal greater final average pay benefit cash balance benefit annual pension costs determined using projected unit credit actuarial cost method funding policy contribute amount least equal minimum legal funding requirement required make contributions 36 million rhd retirement plan 2007 required make contributions pension plans 2006 2005 underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities measurement date december 31 used plan assets also unfunded nonqualified defined benefit pension plan pension benefit equalization plan “pbep” covers senior executives certain key employees benefits based years service compensation including compensation permitted taken account previously mentioned defined benefit pension plan dex media pension plan noncontributory defined benefit pension plan covering substantially management occupational union employees within dex media annual pension costs determined using projected unit credit actuarial cost method funding policy contribute amount least equal minimum legal funding requirement required make contributions 128 million dex media pension plan 2007 contributions required made plan 2006 underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities measurement date december 31 used plan assets rhd dex media businesscom savings plans rhd plan contribute 50 dollar contributed participating employee maximum 6 participating employee’s salary including bonus commissions contributions plan 25 million 30 million 25 million years ended december 31 2007 2006 2005 respectively management employees dex media plan contribute 100 first 4 participating employee’s salary 50 next 2 management employees match limited 5 participating employee’s eligible earnings occupational employees dex media plan contribute 81 first 6 participating employee’s salary exceed 486 eligible earnings one pay period matching contributions limited 4860 per occupational employee annually contributions dex media plan 57 million 53 million year ended december 31 2007 eleven months ended december 31 2006 respectively businesscom plan company may make matching contributions discretion board directors company make contributions plan subsequent businesscom acquisition postretirement benefits unfunded postretirement benefit plan provides certain healthcare life insurance benefits certain fulltime employees reach retirement eligibility working respective companies rh donnelley corporation notes consolidated financial statements continued benefit obligation funded status information presented 2006 includes combined amounts legacy rhd benefit plans twelve months ended december 31 2006 acquired dex media plans eleven months ended december 31 2006 summary funded status benefit plans december 31 2007 2006 follows result dex media merger recorded liability associated dex media’s pension postretirement plans fair value january 31 2006 1194 million net amounts recognized consolidated balance sheets december 31 2007 2006 follows accumulated benefit obligation defined benefit pension plans 2710 million 2892 million december 31 2007 2006 respectively rh donnelley corporation notes consolidated financial statements continued projected benefit obligation accumulated benefit obligation unfunded pbep december 31 2007 2006 follows components net periodic benefit expense net periodic benefit expense pension plans years ended december 31 2007 2006 2005 follows net periodic benefit expense postretirement plans years ended december 31 2007 2006 2005 follows adoption sfas 158 upon initial implementation sfas 158 december 31 2006 recorded previously unrecognized prior service costs actuarial gains losses component accumulated comprehensive loss following table presents incremental effect applying sfas 158 individual line items consolidated balance sheet december 31 2006 rh donnelley corporation notes consolidated financial statements continued following table presents amount previously unrecognized actuarial gains losses prior service cost currently accumulated comprehensive loss expected recognized net periodic benefit expense 2008 amounts recognized accumulated comprehensive loss december 31 2007 2006 consist assumptions following assumptions used determining benefit obligations pension plans postretirement plans discount rate reflects current rate pension postretirement obligations could effectively settled end year 2007 2006 utilized citigroup pension liability index “index” appropriate discount rate defined benefit pension plans index widely used companies throughout united states considered one preferred standards establishing discount rate 2005 discount rate determined using methodology discounts projected plan cash flows measurement date using spot rates provided citigroup pension discount curve single discount rate computed present value benefit cash flows using single rate equaled present value computed using citigroup pension discount curve following assumptions used determining net periodic benefit expense rhd pension plans following assumptions used determining net periodic benefit expense dex media pension plan rh donnelley corporation notes consolidated financial statements continued december 1 2007 july 1 2006 thereafter settlements dex media’s pension plan occurred defined sfas 88 “employers’ accounting settlements curtailments defined benefit plans termination benefits” time lump sum payments participants exceeded sum service cost plus interest cost component net periodic benefit costs year settlements resulted recognition actuarial gains 15 million 10 million years ended december 31 2007 2006 respectively pension expense 2006 recomputed based assumptions july 1 2006 settlement date resulting increase discount rate 550 625 based index weighted average discount rate used determine net periodic expense rhd postretirement plan 590 550 575 2007 2006 2005 respectively weighted average discount rate used determine net periodic expense dex media postretirement plan 590 550 2007 2006 respectively following table reflects assumed healthcare cost trend rates used determining net periodic benefit expense postretirement plans following table reflects assumed healthcare cost trend rates used determining benefit obligations postretirement plans assumed healthcare cost trend rates significant effect amounts reported postretirement benefit plans onepercent change assumed healthcare cost trend rate would following effects december 31 2007 rh donnelley corporation notes consolidated financial statements continued plan assets pension plan weightedaverage asset allocation december 31 2007 asset category follows pension plan weightedaverage asset allocation december 31 2006 asset category follows plans’ assets invested accordance investment practices emphasize longterm investment fundamentals plans’ investment objective achieve positive rate return longterm capital appreciation growing stream current income would significantly contribute meeting plans’ current future obligations objectives obtained welldiversified portfolio structure manner consistent plan’s investment policy statement plans’ assets invested marketable equity fixed income securities managed professional investment managers plan assets invested using combination active passive indexed investment strategies plans’ assets broadly diversified asset class investment style number issues issue type factors consistent investment objectives outlined plan’s investment policy statement plans’ assets invested prudent levels risk expectation longterm returns maintain contribute increasing purchasing power plans’ assets net disbursements longterm plans’ assets separately managed accounts may used following purposes short sales purchases letter stock private placements leveraged transactions commodities transactions option strategies purchases real estate investment trusts investments limited partnerships investments managers securities affiliates subsidiaries investment futures use margin investments derivative explicitly permitted plan’s investment policy statement 2007 2006 2005 used rate 825 expected longterm rate return assumption plan assets rhd pension plans basis used determining rate longterm capital market return forecasts asset mix similar plans’ asset allocation target 65 equity securities 35 debt securities 2007 2006 used rate 850 900 respectively expected longterm rate return assumption plan assets dex media pension plan basis used determining rates also included opportunity active management assets add value long term active management expectation supported calculating historical returns seven investment managers actively manage dex media plan’s assets decrease rate rh donnelley corporation notes consolidated financial statements continued 2007 result increasing debt securities portion asset mix held dex media pension plan although review expected longterm rate return assumption annually performance one particular year significantly influence evaluation assumption generally revised unless fundamental change one factors upon based target asset allocation longterm capital market return forecasts estimated future benefit payments pension plans benefits postretirement plans benefits expected paid next five fiscal years aggregate five fiscal years thereafter follows expect make contributions approximately 158 million 68 million pension plans postretirement plan respectively 2008 additional information subsequent events august 17 2006 pension protection act 2006 “act” signed law general act requires singleemployer defined benefit plans fully funded within seven year period beginning 2008 provisions act effective january 1 2006 however new provisions effective january 1 2008 act replaces prior rules funding new standard based plan’s funded status funding must determined using specified interest rates specified mortality assumption time expect adoption new requirements material impact plans’ liabilities however funding requirements act greater previous rules effective january 1 2008 dontech pbep merged rhd pbep amended merger plans streamlines rhd’s administrative processes 11 commitments lease office facilities equipment operating leases noncancelable lease terms expiring various dates 2017 rent lease expense 2007 2006 2005 264 million rh donnelley corporation notes consolidated financial statements continued 253 million 100 million respectively future noncancelable minimum rental payments applicable operating leases december 31 2007 connection att directory acquisition entered internet yellow pages reseller agreement whereby obligated pay att 72 million years 2008 2009 connection software system modernization ongoing support services related amdocs software system obligated pay amdocs 1282 million years 2008 2012 conjunction dex media merger obligated pay qwest approximately 83 million years 2008 2009 certain information technology communications billing collection services entered agreements yahoo whereby yahoo serve maintain local search listings placement webbased electronic local information directory electronic mapping products obligated pay yahoo 188 million years 2008 2010 12 legal proceedings involved various legal proceedings arising ordinary course business well certain litigation tax matters many matters plaintiffs allege suffered damages errors omissions advertising improper listings case contained directories published us also exposed potential defamation breach privacy claims arising publication directories methods collecting processing using advertiser telephone subscriber data determined inaccurate data stored us improperly accessed disseminated us unauthorized persons subjects data users data collect publish could submit claims company although date experienced material claims relating defamation breach privacy may party proceedings future could material adverse effect business periodically assess liabilities contingencies connection matters based upon latest information available us matters probable incurred loss range loss reasonably estimated record liability consolidated financial statements instances unable make reasonable estimate liability uncertainties related probable outcome amount range loss additional information becomes available adjust assessment estimates liabilities accordingly based review latest information available believe ultimate liability connection pending threatened legal proceedings material adverse effect results operations cash flows financial position material amounts accrued consolidated financial statements respect matters rh donnelley corporation notes consolidated financial statements continued 13 business segments management reviews analyzes business providing local commercial search products solutions including publishing yellow pages directories one operating segment 14 rh donnelley corporation “parent company” financial statements following condensed parent company financial statements read conjunction consolidated financial statements rhd general substantially net assets company subsidiaries restricted paid dividends third party subsidiaries restricted paying dividends loans advances us limited exceptions terms credit facilities see note 5 “longterm debt credit facilities notes” description debt instruments rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation condensed parent company balance sheets rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation condensed parent company statements operations rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation condensed parent company statements cash flows rh donnelley corporation notes consolidated financial statements continued 15 valuation qualifying accounts certain prior period amounts reclassified conform current period’s presentation 16 quarterly information unaudited 1 adjustments customer claims reclassified net revenue 2007 2006 see note 1 “business presentation” additional information regarding reclassification 2 revenue sale advertising recognized deferral amortization method whereby revenue advertising sales initially deferred directory published recognized ratably life directory due purchase accounting rules able recognize revenue directories published dex media business att directory business prior acquisition directories published months acquisitions completed rh donnelley corporation notes consolidated financial statements concluded 3 similar deferral amortization method revenue recognition certain costs directly related selling production directories initially deferred recognized ratably life directory due purchase accounting rules able recognize expenses directories published dex media business att directory business prior acquisition directories published months acquisitions completed 4 january 27 2006 repurchased remaining 100301 shares outstanding preferred stock gs funds 3361 million cash including accrued cash dividends interest pursuant terms stock purchase agreement based terms stock purchase agreement repurchase preferred stock became probable event october 3 2005 requiring recorded value preferred stock accreted redemption value 3341 million december 31 2005 result gs repurchase 3361 million january 27 2006 accretion redemption value 20 million represented accrued dividends interest quarter ended march 31 2006 recorded increase loss available common shareholders consolidated statement operations conjunction gs repurchase also reversed previously recorded bcf related shares recorded decrease loss available common shareholders consolidated statement operations approximately 312 million quarter ended march 31 2006 item 9item 8 financial statements supplementary data management’s report internal control financial reporting management rh donnelley corporation responsible establishing maintaining adequate internal control company’s financial reporting within meaning rule 13a15f promulgated securities exchange act 1934 inherent limitations internal control financial reporting may prevent detect misstatements financial statements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness rh donnelley corporation’s internal control financial reporting december 31 2008 undertaking assessment management used criteria established committee sponsoring organizations coso treadway commission contained internal control integrated framework based assessment management identified material weakness rh donnelley corporation’s internal control financial reporting material weakness deficiency combination deficiencies internal control financial reporting reasonable possibility material misstatement company’s annual interim financial statements prevented detected timely basis result material weakness described management concluded company’s internal control financial reporting effective december 31 2008 based coso criteria rh donnelley corporation’s processes procedures controls related financial reporting effective ensure amounts related deferred income tax assets liabilities resulting current deferred income tax expense related footnote disclosures accurate company maintain effective controls review analysis calculations related supporting documentation underlying deferred tax provision ensure complete comprehensive timely review deferred income tax accounts related footnote disclosures material weakness resulted material errors foregoing accounts included company’s preliminary financial statements year ended december 31 2008 corrected prior issuance company’s consolidated financial statements company’s internal control financial reporting december 31 2008 audited kpmg llp independent registered public accounting firm stated report appears page kpmg llp also audited company’s consolidated financial statements r h donnelley subsidiaries year ending december 31 2008 included annual report form 10k stated report appears page report independent registered public accounting firm board directors shareholders rh donnelley corporation audited accompanying consolidated balance sheets rh donnelley corporation subsidiaries december 31 2008 2007 related consolidated statements operations comprehensive income loss cash flows changes shareholders’ equity deficit years three year period ended december 31 2008 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position rh donnelley corporation subsidiaries december 31 2008 2007 results operations cash flows years three year period ended december 31 2008 conformity us generally accepted accounting principles discussed note 2 consolidated financial statements company adopted provisions statement financial accounting standards 157 fair value measurement effective january 1 2008 fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 effective january 1 2007 statement financial accounting standards 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r effective december 31 2006 accompanying consolidated financial statements prepared assuming company continue going concern discussed note 1 consolidated financial statements company significant amounts maturing debt may unable satisfy commencing march 31 2010 significant negative impacts operating results cash flows overall downturn global economy higher customer attrition possible debt covenant violations 2009 raise substantial doubt ability continue going concern management’s plans regard matters also described note 1 consolidated financial statements include adjustments might result outcome uncertainty also audited accordance standards public company accounting oversight board united states rh donnelley corporation’s internal control financial reporting december 31 2008 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission “coso” report dated march 27 2009 expressed adverse opinion effectiveness company’s internal control financial reporting kpmg llp raleigh north carolina march 27 2009 report independent registered public accounting firm board directors shareholders rh donnelley corporation audited rh donnelley corporation’s internal control financial reporting december 31 2008 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission “coso” rh donnelley corporation’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audit also included performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate material weakness deficiency combination deficiencies internal control financial reporting reasonable possibility material misstatement company’s annual interim financial statements prevented detected timely basis material weakness related company’s internal controls financial reporting deferred income tax accounts related footnote disclosures identified included management’s assessment also audited accordance standards public company accounting oversight board united states consolidated balance sheets rh donnelley corporation subsidiaries december 31 2008 2007 related consolidated statements operations comprehensive income loss cash flows changes shareholders’ equity deficit years threeyear period ended december 31 2008 material weakness considered determining nature timing extent audit tests applied audit 2008 consolidated financial statements report affect report dated march 27 2009 expressed unqualified opinion consolidated financial statements opinion effect aforementioned material weakness achievement objectives control criteria rh donnelley corporation maintained effective internal control financial reporting december 31 2008 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission “coso” kpmg llp raleigh north carolina march 27 2009 rh donnelley corporation consolidated balance sheets accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements operations comprehensive income loss accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements cash flows accompanying notes integral part consolidated financial statements rh donnelley corporation consolidated statements changes shareholders’ equity deficit accompanying notes integral part consolidated financial statements rh donnelley corporation notes consolidated financial statements tabular amounts thousands except per share data percentages 1 business presentation consolidated financial statements include accounts rh donnelley corporation direct indirect whollyowned subsidiaries “company” “rhd” “donnelley” “we” “us” “our” december 31 2008 rh donnelley inc “rhdi” “rhd inc” dex media inc “dex media” businesscom inc “businesscom” direct whollyowned subsidiaries intercompany transactions balances eliminated leader local search within markets business triple playtm solutions “triple play” comprised dexbranded solutions include dex yellow pages print directories proprietary dexknowscom® online search site dex search networktm also cobrand print local search solutions recognizable brands industry qwest embarq att order differentiate local search solutions competitors 2008 triple play solutions serviced 600000 national local businesses 28 states going concern company’s financial statements prepared using accounting principles generally accepted united states applicable going concern contemplates realization assets liquidation liabilities normal course business accompanying historical consolidated financial statements include adjustments might necessary company unable continue going concern assessment ability continue going concern made management considering among factors significant amount maturing debt obligations commencing march 31 2010 continuing thereafter ii current global credit liquidity crisis iii significant negative impact operating results cash flows overall downturn global economy increase competition fragmentation local business search space iv certain credit ratings recently downgraded v common stock ceased trading new york stock exchange “nyse” december 31 2008 traded overthecounter pink sheets reflected goodwill impairment charges 31 billion intangible asset impairment charges 7462 million recorded year ended december 31 2008 management also considered projected inability comply certain covenants debt agreements next 12 months circumstances events increased risk unable continue satisfy debt obligations required performed management’s view raise substantial doubt whether company able continue going concern reasonable period time based current financial projections expect able continue generate cash flow operations amounts sufficient satisfy interest principal payment obligations february 2010 however estimates also indicate cash flows operations sufficient satisfy maturing debt obligations commencing march 31 2010 continuing thereafter result ability satisfy debt repayment obligations 2010 thereafter depend large part success refinancing certain obligations issuances debt equity securities ii amending restructuring terms maturities principal amounts obligations iii effecting transactions agreements holders obligations unsuccessful efforts would potentially incur payment andor defaults certain debt obligations waived respective lenders could lead acceleration debt obligations addition credit facilities indentures governing notes contain usual customary representations warranties well affirmative negative covenants among things place limitations ability incur additional indebtedness ii pay dividends repurchase capital rh donnelley corporation notes consolidated financial statements continued stock iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock subsidiaries vi engage transactions affiliates vii make investments loans advances case subject customary negotiated exceptions limitations applicable credit facilities indentures governing notes also contain financial covenants relating among items maximum consolidated leverage minimum interest coverage maximum senior secured leverage defined therein indentures financial covenants generally incurrence tests meaning measured time certain proposed restricted activities failure test simply precluding proposed activity contrast credit facilities covenants generally maintenance tests meaning measured quarter failure meet test constituting event default respective credit agreement ability maintain compliance financial covenants 2009 dependent various factors certain outside control factors include ability generate sufficient revenues cash flows operations ability achieve reductions outstanding indebtedness changes interest rates impact earnings investments liabilities based current forecast absent modification waiver management projects could exceed leverage limit determined debt incurrence test rh donnelley corporation “rhdc” indentures commencing early end first quarter 2009 exceeding leverage limit would event default however rhdc would contractually prohibited engaging following activities paying dividends repurchasing capital stock ii entering mergers joint ventures consolidations acquisitions asset dispositions saleleaseback transactions based current forecast absent modification waiver management projects certain rhdc’s subsidiaries exceed leverage limits determined debt incurrence test indentures early fourth quarter 2009 material impact prohibited activities would restriction paying dividends rhdc restrictions subsidiaries’ ability pay dividends rhdc could result rhdc unable satisfy debt obligations based upon current forecast project rhdc able satisfy cash debt obligations fourth quarter 2009 however based current forecast absent modification waiver minimum interest coverage total leverage covenants dex media west credit facility satisfied measured fourth quarter 2009 first quarter 2010 respectively noted may cause cross default rhdc fourth quarter 2009 substantially rhdi’s subsidiaries’ assets including capital stock rhdi subsidiaries pledged secure obligations rhdi credit facility addition company guarantor obligations rhdi credit facility substantially assets dex media east llc “dex media east” dex media west llc “dex media west” subsidiaries including equity interests pledged secure obligations respective credit facilities failure comply financial covenants contained credit facilities would result one events default cured waived could require applicable borrower repay borrowings thereunder scheduled due dates unable make repayments otherwise refinance borrowings lenders credit facilities could pursue various default remedies set forth credit facility agreements including executing collateral securing credit facilities addition events default credit facilities may trigger events default indentures governing subsidiaries’ notes event default rhdc would create default rhdi conversely event default rhdi would create default rhdc event default dex media would also create default rhdc previously stated would create default rhdi addition event default dex media east dex media west would create default dex media furthermore certain actions dex media would create default dex media east dex media west respective credit rh donnelley corporation notes consolidated financial statements continued agreements event default rhdc would create event default dex media dex media east dex media west reclassifications year ended december 31 2007 recorded net loss debt transactions 263 million included interest expense consolidated statements operations 2007 annual report form 10k “2007 10k” order conform current period’s presentation net loss reclassified gain loss debt transactions net consolidated statements operations see note 2 “summary significant accounting policies gain loss debt transactions net” note 5 “longterm debt credit facilities notes” additional information year ended december 31 2007 recorded intangible asset impairment charge 200 million included depreciation amortization consolidated statements operations 2007 10k order conform current period’s presentation amount reclassified impairment charges consolidated statements operations see note 2 “summary significant accounting policies identifiable intangible assets goodwill” additional information addition certain prior period amounts included consolidated statements cash flows reclassified conform current period’s presentation significant financing developments substantial amount debt significant debt service obligations due large part financings associated prior acquisitions december 31 2008 total outstanding debt 96 billion including fair value adjustments 862 million required generally accepted accounting principles “gaap” result dex media merger defined 3622 million available revolving portion various credit facilities subsidiaries year ended december 31 2008 reduced net debt outstanding 6385 million includes benefit fair value adjustment combination mandatory repayments optional prepayments financing activities noted result financing activities noted reduced outstanding debt 4100 million recorded gain 2652 million year ended december 31 2008 effective october 21 2008 obtained waiver rhdi’s senior secured credit facility “rhdi credit facility” permit rhdi make voluntary prepayments term loan d1 term loan d2 discount par provided discount acceptable lenders choose participate rhdi obligated make prepayments year ended december 31 2008 repaid 98 million term loan d1 459 million term loan d2 rhdi credit facility making voluntary prepayments 355 million including fees discount par result recognized gain 200 million year ended december 31 2008 consisting difference face amount term loans repaid voluntary prepayments made offset writeoff unamortized deferred financing costs 02 million october 2008 repurchased 215 million senior notes collectively senior notes senior discount notes repurchased september 2008 noted referred “notes” purchase price 74 million “october 2008 debt repurchases” result october 2008 debt repurchases recognized gain 136 million year ended december 31 2008 consisting difference par value purchase price notes offset writeoff unamortized deferred financing costs 05 million september 2008 repurchased 1655 million 1599 million accreted value applicable notes purchase price 847 million “september 2008 debt repurchases” result september 2008 debt repurchases recognized gain 724 million year ended december 31 rh donnelley corporation notes consolidated financial statements continued 2008 consisting difference accreted value case senior discount notes par value applicable purchase price notes offset writeoff unamortized deferred financing costs 29 million june 25 2008 rhdi exchanged 5942 million 5857 million accreted value applicable rhd’s senior notes senior discount notes collectively referred “rhd notes” 4129 million aggregate principal amount rhdi’s newly issued 1175 senior notes due may 15 2015 “rhdi senior notes” referred “debt exchanges” result debt exchanges reduced outstanding debt 1728 million recognized gain 1613 million year ended december 31 2008 consisting difference accreted value case senior discount notes par value applicable rhd notes par value rhdi senior notes offset writeoff unamortized deferred financing costs 115 million june 6 2008 conjunction debt exchanges amended rhdi credit facility order among things permit debt exchanges provide additional covenant flexibility addition part amendment rhdi modified pricing extended maturity date 1000 million revolving credit facility “rhdi revolver” june 2011 remaining 750 million rhdi revolver mature december 2009 june 6 2008 refinanced dex media west credit facility new dex media west credit facility consists 1300 million term loan maturing october 2013 9500 million term loan b maturing october 2014 900 million revolving credit facility maturing october 2013 “dex media west revolver” except otherwise noted additional information relating maturities new dex media west credit facility see note 5 “longterm debt credit facilities notes” year ended december 31 2008 recognized charge 22 million writeoff unamortized deferred financing costs associated refinancing former dex media west credit facility portions amended rhdi credit facility accounted extinguishments debt result amendment rhdi credit facility refinancing former dex media west credit facility june 6 2008 existing interest rate swaps associated two debt arrangements notional amount 16 billion december 31 2008 longer highly effective offsetting changes cash flows accordingly cash flow hedge accounting treatment statement financial accounting standards “sfas” 133 accounting derivative instruments hedging activities “sfas 133” longer permitted interest expense year ended december 31 2008 includes noncash charge 210 million resulting amounts charged accumulated comprehensive loss related interest rate swaps prior june 6 2008 interest expense also includes noncash charge 37 million resulting change fair value interest rate swaps june 6 2008 december 31 2008 see note 2 “summary significant accounting policies interest expense deferred financing costs” “summary significant accounting policies gain loss debt transactions net” note 5 “longterm debt credit facilities notes” additional information 2 summary significant accounting policies revenue recognition directory advertising revenues earned primarily sale advertising yellow pages directories publish revenue sale advertising deferred directory published net estimated sales claims recognized ratably life directory typically 12 months “deferral amortization method” directory advertising revenues also include revenues internet rh donnelley corporation notes consolidated financial statements continued based advertising products including proprietary local search site dexknowscom dex search network revenues respect internetbased advertising products sold print advertising initially deferred service delivered fulfilled recognized ratably life contract revenues respect internetbased services sold print advertising recognized delivered fulfilled revenue deferred revenue sale advertising recorded net allowance sales claims estimated based primarily historical experience increase decrease estimate information circumstances indicate estimate may longer represent amount claims may incur future company recorded sales claims allowances 453 million 548 million 419 million years ended december 31 2008 2007 2006 respectively certain cases company enters agreements customers involve delivery one product service revenue arrangements allocated separate units accounting using relative fair value method accordance emerging issues task force “eitf” issue 0021 revenue arrangements multiple deliverables deferred directory costs directly related selling production directories initially deferred incurred recognized ratably life directory typically 12 months costs specifically identifiable particular directory include sales commissions print paper initial distribution costs paid prior directory publication classified current assets publication reclassified deferred directory costs cash equivalents cash equivalents include liquid investments maturity less three months time purchase times investments may excess federally insured limits accounts receivable accounts receivable consist balances owed us advertising customers advertisers typically enter twelvemonth contract advertising local advertisers billed pro rata amount contract value monthly basis behalf national advertisers certified marketing representatives “cmrs” pay company total contract value advertising net commission within 60 days publication month billed receivables represent amount billed advertisers billed receivables recorded net allowance doubtful accounts sales claims estimated based historical experience increase decrease estimate information circumstances indicate estimate longer appropriately represents amount bad debts sales claims probable incurred unbilled receivables represent contractually owed amounts net allowance sales claims published directories yet billed advertisers record allowance doubtful accounts receivables billed identifiable intangible assets goodwill result dex media merger att directory acquisition embarq acquisition businesscom acquisition local launch acquisition collectively defined note 3 “acquisitions” certain longterm intangible assets identified accordance sfas 141 business combinations “sfas 141” recorded estimated fair values excess purchase price dex media merger att directory acquisition embarq acquisition businesscom acquisition local launch acquisition net tangible identifiable intangible assets acquired 25 billion 2167 million 970 million rh donnelley corporation notes consolidated financial statements continued 2588 million 68 million respectively recorded goodwill accordance sfas 142 goodwill intangible assets “sfas 142” fair values identifiable intangible assets amortized estimated useful lives manner best reflects economic benefit derived assets goodwill amortized subject impairment testing annual basis frequently believe indicators impairment exist result decline trading value debt equity securities first quarter 2008 continuing negative industry economic trends directly affected business performed impairment tests march 31 2008 goodwill definitelived intangible assets longlived assets accordance sfas 142 sfas 144 accounting impairment disposal longlived assets “sfas 144” respectively used estimates assumptions impairment evaluations including limited projected future cash flows revenue growth customer attrition rates impairment test definitelived intangible assets longlived assets performed comparing carrying amount intangible assets longlived assets sum undiscounted expected future cash flows accordance sfas 144 impairment exists sum undiscounted expected future cash flows less carrying amount intangible asset related group assets longlived assets testing results definitelived intangible assets longlived assets indicated impairment march 31 2008 impairment test goodwill involved two step process first step involved comparing fair value company carrying amount assets liabilities including goodwill fair value company determined using market based approach reflects market value debt equity securities march 31 2008 result testing determined company’s fair value less carrying amount assets liabilities requiring us proceed second step goodwill impairment test second step testing process impairment loss determined comparing implied fair value goodwill recorded amount goodwill implied fair value goodwill derived discounted cash flow analysis company using discount rate results present value assets liabilities equal current fair value company’s debt equity securities based upon analysis recognized noncash impairment charge 25 billion three months ended march 31 2008 since trading value equity securities declined second quarter 2008 result continuing negative industry economic trends directly affected business performed additional impairment tests goodwill definitelived intangible assets longlived assets june 30 2008 testing results definitelived intangible assets longlived assets indicated impairment june 30 2008 result tests recognized noncash goodwill impairment charge 6602 million three months ended june 30 2008 together impairment charge recognized first quarter 2008 recognized total goodwill impairment charge 31 billion year ended december 31 2008 result impairment charge recorded goodwill december 31 2008 addition noncash goodwill impairment charge recognized change goodwill 05 million related businesscom acquisition year ended december 31 2008 impairment losses recorded related goodwill year ended december 31 2007 given ongoing global credit liquidity crisis significant negative impact financial markets overall economy continued decline advertising sales operating results downward revisions forecasted results recent downgrade certain credit ratings continued decline trading value debt equity securities recent suspension trading common stock nyse performed impairment tests definitelived intangible assets rh donnelley corporation notes consolidated financial statements continued longlived assets accordance sfas 144 december 31 2008 result tests company recognized noncash impairment charge 7440 million fourth quarter 2008 associated local national customer relationships acquired dex media merger att directory acquisition embarq acquisition set forth table fair values intangible assets derived discounted cash flow analysis using discount rate results present value assets liabilities equal current fair value company’s debt equity securities connection launch next version proprietary online search site dexknowscom tradenames technology acquired local launch acquisition discontinued resulted noncash impairment charge 22 million fourth quarter 2008 total impairment charges related intangible assets excluding goodwill 7462 million year ended december 31 2008 shown following table connection impairment testing definitelived intangible assets longlived assets sfas 144 also requires evaluation remaining useful lives assets consider among things effects obsolescence demand competition economic factors including stability industry operate known technological advances legislative actions result uncertain changing regulatory environment expected changes distribution channels based evaluation remaining useful lives directory services agreements qwest att embarq noted reduced 33 years effective january 1 2009 order better reflect period intangible assets expected contribute future cash flow year ended december 31 2007 recorded intangible asset impairment charge 200 million associated tradenames acquired embarq acquisition impairment charge resulted change branding strategy utilize new dex market brand print online products across entire footprint discontinued use tradenames acquired embarq acquisition impairment charge determined using relief royalty valuation method impairment charge impairment losses recorded related definitelived intangible assets longlived assets years ended december 31 2007 2006 respectively accordance sfas 144 carrying value local national customer relationships acquired dex media merger att directory acquisition embarq acquisition adjusted impairment charges noted adjusted carrying amounts intangible assets represent new cost basis accumulated amortization prior impairment charges eliminated new cost basis amortized remaining useful lives intangible assets amortization expense related intangible assets years ended december 31 2008 2007 2006 4159 million 3883 million 2775 million respectively amortization expense intangible assets five succeeding years estimated approximately 5143 million 3548 million 3390 million 3415 million 3311 million respectively amortization expense 2009 expected increase approximately 986 million result reduction remaining useful lives associated directory services agreements revision carrying values local national customer relationships subsequent impairment charges fourth quarter 2008 annual amortization intangible assets tax purposes approximately 6751 million rh donnelley corporation notes consolidated financial statements continued acquired longterm intangible assets respective book values adjusted december 31 2008 shown following table acquired longterm intangible assets respective book values december 31 2007 shown following table connection dex media merger acquired directory services agreements collectively “dex directory services agreements” dex media entered qwest defined note 3 “acquisitions” including 1 publishing agreement term 50 years commencing november 8 2002 subject automatic renewal additional oneyear terms grants us right exclusive official directory publisher listings classified advertisements qwest’s telephone customers geographic areas states dex media east dex media west operate directory business “qwest states” qwest successors provided local telephone services november 8 2002 well exclusive right use certain qwest branding directories markets 2 noncompetition agreement term 40 years commencing november 8 2002 pursuant qwest behalf affiliates successors agreed sell directory products consisting principally listings classified advertisements subscribers geographic areas qwest states qwest provided local telephone service november 8 2002 directed primarily consumers rh donnelley corporation notes consolidated financial statements continued geographic areas fair value assigned dex media directory services agreements 73 billion based multiperiod excess earnings method amortized straightline method 42 years december 31 2008 remaining useful life changed noted multiperiod excess earnings method projected cash flows intangible asset computed indirectly means future cash flows projected deductions made recognize returns appropriate contributory assets leaving excess residual net cash flow indicative intangible asset fair value result dex media merger also acquired 1 advertising commitment agreement whereby qwest agreed purchase aggregate 20 million advertising per year 2017 us pricing terms least favorable offered similar large customers 2 intellectual property contribution agreement pursuant qwest assigned licensed us qwest intellectual property previously used qwest directory services business along 3 trademark license agreement pursuant qwest granted us right november 2007 use qwest dex qwest dex advantage marks connection directory products related marketing material qwest states right use marks connection dexknowscom intangible assets 2 3 collectively “trade names” fair value assigned dex media advertising commitment based multiperiod excess earnings method amortized straightline method 12 years directory services agreements att company include directory services license agreement noncompetition agreement internet yellow pages reseller agreement directory publishing listing agreement collectively “att directory services agreements” certain affiliates att directory services license agreement designates us official exclusive provider yellow pages directory services att successors illinois northwest indiana “territory” grants us exclusive license obligation specified agreement produce publish distribute white pages directories territory att’s agent grants us exclusive license obligation specified agreement use att brand logo print directories territory noncompetition agreement prohibits att affiliates successors certain limited exceptions 1 producing publishing distributing yellow white pages print directories territory 2 soliciting selling local national yellow white pages advertising inclusion directories 3 soliciting selling local internet yellow pages advertising certain internet yellow pages directories territory licensing att marks third party purpose internet yellow pages reseller agreement grants us exclusive right sell local advertisers within territory internet yellow pages advertising focused upon products services offered within territory b nonexclusive right sell local excluding national advertisers within territory internet yellow pages advertising focused upon products services offered outside territory case onto yellowpagescom platform directory publishing listing agreement gives us right purchase use basic att subscriber listing information updates purpose publishing directories att directory services agreements internet yellow pages reseller agreement initial terms 50 years commencing september 2004 subject automatic renewal early termination specified circumstances internet yellow pages reseller agreement term 5 years commencing september 2004 fair value assigned att directory services agreements 9500 million amortized straightline method 50 years december 31 2008 remaining useful life changed noted fair value assigned internet yellow pages reseller agreement 25 million amortized straight line method 5 years directory services agreements embarq company executed may 2006 conjunction sprint’s spinoff local telephone business include directory services license agreement trademark license agreement noncompetition agreement certain affiliates embarq well noncompetition agreement sprint entered january 2003 collectively “embarq directory services agreements” embarq directory services agreements replaced previously existing rh donnelley corporation notes consolidated financial statements continued analogous agreements sprint except sprint remained bound noncompetition agreement directory services license agreement grants us exclusive license obligation specified agreement produce publish distribute yellow white pages directories embarq successors 18 states embarq provided local telephone service time agreement trademark license agreement grants us exclusive license obligation specified agreement use certain specified embarq trademarks markets noncompetition agreements prohibit embarq sprint respective affiliates successors markets selling local directory advertising certain limited exceptions producing publishing distributing print directories embarq directory services agreements initial terms 50 years commencing january 2003 subject automatic renewal early termination specified circumstances fair value embarq directory services agreements 16 billion determined based present value estimated future cash flows time embarq acquisition january 2003 amortized straightline method 50 years december 31 2008 remaining useful life changed noted fair values local national customer relationships obtained result dex media merger att directory acquisition embarq acquisition determined based present value estimated future cash flows intangible assets amortized “income forecast” method assumes value derived customer relationships greater earlier years steadily declines time weighted average useful life relationships subsequent impairment charges noted approximately 20 years fair value acquired trade names obtained result dex media merger determined based “relief royalty” method values trade names based estimated amount company would pay arms length transaction use trade names qwest tradenames amortized straightline method 15 years connection businesscom acquisition identified recorded certain intangible assets estimated fair value including 1 advertiser relationships 2 third party contracts 3 technology network platforms 4 trade names trademarks intangible assets amortized remaining useful lives ranging 3 10 years straightline method exception advertiser relationships network platform intangible assets amortized income forecast method connection local launch acquisition identified recorded certain intangible assets estimated fair value including 1 local customer relationships 2 noncompete agreements 3 technology 4 tradenames intangible assets amortized straightline method remaining useful lives ranging 3 7 years noted company decided discontinue use tradenames technology acquired local launch acquisition result recognized noncash impairment charge 22 million fourth quarter 2008 industry economic conditions markets continue deteriorate trading value debt equity securities decline required assess recoverability useful lives longlived assets intangible assets could result additional impairment charges reduction remaining useful lives acceleration amortization expense fixed assets computer software fixed assets computer software recorded cost fixed assets computer software acquired conjunction acquisitions recorded fair value acquisition date depreciation amortization provided estimated useful lives assets using straightline method estimated useful lives thirty years buildings five years machinery equipment ten years furniture fixtures rh donnelley corporation notes consolidated financial statements continued three five years computer equipment computer software leasehold improvements amortized straightline basis shorter term lease estimated useful life improvement fixed assets computer software december 31 2008 2007 consisted following depreciation amortization expense fixed assets computer software years ended december 31 2008 2007 2006 follows year ended december 31 2008 retired certain computer software fixed assets resulted impairment charge 04 million interest expense deferred financing costs interest expense years ended december 31 2008 2007 2006 8367 million 8082 million 7727 million respectively certain costs associated issuance debt instruments capitalized included noncurrent assets consolidated balance sheets costs amortized interest expense terms related debt agreements bond outstanding method used amortize deferred financing costs relating debt instruments respect make accelerated principal payments deferred financing costs amortized using effective interest method amortization deferred financing costs included interest expense 290 million 232 million 219 million 2008 2007 2006 respectively result ineffective interest rate swaps associated amendment rhdi credit facility refinancing former dex media west credit facility interest expense year ended december 31 2008 includes noncash charge 210 million resulting amounts charged accumulated comprehensive loss related interest rate swaps prior june 6 2008 interest expense year ended december 31 2008 also includes noncash charge 37 million resulting change fair value interest rate swaps june 6 2008 december 31 2008 prospective gains losses change fair value interest rate swaps reported earnings component interest expense rh donnelley corporation notes consolidated financial statements continued conjunction dex media merger result purchase accounting required gaap recorded dex media’s debt fair value january 31 2006 recognize offset interest expense period subsequent dex media merger amortization corresponding fair value adjustment life respective debt offset interest expense years ended december 31 2008 2007 2006 176 million 299 million 264 million respectively gain loss debt transactions net effective october 21 2008 obtained waiver rhdi credit facility permit rhdi make voluntary prepayments term loan d1 term loan d2 discount par provided discount acceptable lenders choose participate result voluntary prepayments made year ended december 31 2008 recognized gain 200 million consisting difference face amount term loans repaid voluntary prepayments made offset writeoff unamortized deferred financing costs 02 million following table presents face amount term loans repaid total voluntary prepayments made net gain recognized year ended december 31 2008 october 2008 repurchased 215 million notes purchase price 74 million result october 2008 debt repurchases recognized gain 136 million year ended december 31 2008 consisting difference par value purchase price notes offset writeoff unamortized deferred financing costs 05 million noted following table september 2008 repurchased 1655 million 1599 million accreted value applicable notes purchase price 847 million result september 2008 debt repurchases recognized gain 724 million year ended december 31 2008 consisting difference accreted value case senior discount notes par value applicable rh donnelley corporation notes consolidated financial statements continued purchase price notes offset writeoff unamortized deferred financing costs 29 million noted following table june 25 2008 rhdi exchanged 5942 million 5857 million accreted value applicable rhd notes 4129 million aggregate principal amount rhdi senior notes following table presents accreted value case senior discount notes par value applicable rhd notes exchanged well gain recognized debt exchanges year ended december 31 2008 recognized charge 22 million writeoff unamortized deferred financing costs associated refinancing former dex media west credit facility portions amended rhdi credit facility accounted extinguishments debt result financing activities noted recorded net gain 2652 million year ended december 31 2008 year ended december 31 2007 recorded net loss debt transactions 263 million resulting tender redemption premium payments 717 million writeoff unamortized deferred financing costs 168 million associated refinancing transactions conducted fourth quarter 2007 offset accelerated amortization fair value adjustment directly attributable redemption dex media east’s outstanding 9875 senior notes 12125 senior subordinated rh donnelley corporation notes consolidated financial statements continued notes november 26 2007 622 million accounted extinguishment debt see note 5 “longterm debt credit facilities notes” additional information advertising expense recognize advertising expenses incurred expenses include media public relations promotional sponsorship costs online advertising total advertising expense 724 million 552 million 327 million 2008 2007 2006 respectively total advertising expense 2008 2007 includes 398 million 78 million respectively costs associated traffic purchased distributed multiple advertiser landing pages proprietary local search site concentration credit risk approximately 85 directory advertising revenue derived sale advertising local small mediumsized businesses advertisers typically enter 12month advertising sales contracts make monthly payments term contract advertisers prepay full amount portion contract value new advertisers desiring expand advertising programs subject credit review advertisers qualify may extend credit advertising purchase small mediumsized businesses tend fewer financial resources higher failure rates large businesses addition full collection delinquent accounts take extended period time involve significant costs require collateral advertisers although charge interest advertisers pay specified due dates remaining approximately 15 directory advertising revenue derived sale advertising national large regional chains rental car companies automobile repair shops pizza delivery businesses substantially revenue derived national accounts serviced cmrs accept orders cmrs independent third parties act agents national advertisers cmrs responsible billing national customers advertising receive payment value advertising placed directory net cmr’s commission directly cmr still exposed credit risk amount losses accounts historically less local accounts advertisers cases cmrs tend larger companies greater financial resources local advertisers year ended december 31 2008 experienced adverse bad debt trends attributable economic challenges markets bad debt expense represented 53 net revenue year ended december 31 2008 compared 30 37 years ended december 31 2007 2006 respectively expect economic challenges continue markets bad debt experience operating results continue adversely impacted foreseeable future december 31 2008 interest rate swap agreements major financial institutions notional amount 24 billion exposed credit risk event one counterparties agreements cannot meet obligation notional amount used measure interest paid received represent amount exposure credit loss would limited amount would received remaining life swap agreement counterparties swap agreements major financial institutions credit ratings aa higher currently foresee material credit risk associated swap agreements however assurances given labor unions approximately 3800 employees approximately 1200 approximately 32 represented labor unions covered two collective bargaining agreements dex media qwest rh donnelley corporation notes consolidated financial statements continued states unionized employees represented either international brotherhood electrical workers america “ibew” represents approximately 400 unionized workforce communication workers america “cwa” represents approximately 800 unionized workforce dex media’s collective bargaining agreement ibew expires may 2009 dex media’s collective bargaining agreement cwa expires october 2009 intend engage good faith bargaining results negotiations cannot yet determined derivative financial instruments hedging activities company accounts derivative financial instruments hedging activities accordance sfas 133 amended sfas 138 accounting certain derivative instruments certain hedging activities amendment fas 133 sfas 149 amendment statement 133 derivative instruments hedging activities use derivative financial instruments trading speculative purposes derivative financial instruments limited interest rate swap agreements company utilizes combination fixed rate variable rate debt finance operations variable rate debt exposes company variability interest payments due changes interest rates management believes prudent mitigate interest rate risk portion variable rate borrowings rhdi credit facility required maintain hedge agreements provide either fixed interest rate interest rate protection least 50 rhdi’s total outstanding debt requirement expired december 31 2008 new dex media west new dex media east credit facilities require maintain hedge agreements provide fixed rate least 33 respective indebtedness satisfy objectives requirements company entered fixed interest rate swap agreements manage fluctuations cash flows resulting changes interest rates variable rate debt company’s interest rate swap agreements effectively convert 24 billion approximately 69 variable rate debt fixed rate debt mitigating exposure increases interest rates december 31 2008 approximately 36 total debt outstanding consists variable rate debt excluding effect interest rate swaps including effect interest rate swaps total fixed rate debt comprised approximately 89 total debt portfolio december 31 2008 day derivative contract executed company may designate derivative instrument hedge variability cash flows received paid cash flow hedge hedging relationships company formally documents hedging relationship riskmanagement objective strategy undertaking hedge hedging instrument item nature risk hedged hedging instrument’s effectiveness offsetting hedged risk assessed description method measuring ineffectiveness company also formally assesses hedge’s inception ongoing basis whether derivatives used hedging transactions highly effective offsetting changes cash flows hedged items derivative financial instruments recognized either assets liabilities consolidated balance sheets measurement fair value quarterly basis fair values interest rate swaps determined based quoted market prices extent swaps provide effective hedge differences fair value book value swaps recognized accumulated comprehensive loss component shareholders’ equity deficit derivative financial instruments designated qualify hedged transactions initial fair value subsequent gains losses change fair value reported earnings component interest expense gains losses related quarterly fair value adjustments presented noncash operating activity consolidated statements cash flows company discontinues hedge accounting prospectively determined derivative longer highly effective offsetting changes cash flows hedged item derivative hedged item expired sold terminated exercised management determines designation derivative rh donnelley corporation notes consolidated financial statements continued hedging instrument longer appropriate situations hedge accounting discontinued company continues carry derivative fair value consolidated balance sheet recognizes subsequent changes fair value earnings component interest expense amounts previously recorded accumulated comprehensive loss amortized interest expense periods interest expense underlying debt impacts earnings see note 6 “derivative financial instruments” additional information regarding derivative financial instruments hedging activities pension postretirement benefits pension postretirement benefits represent estimated amounts paid employees future accounting benefits reflects recognition benefit costs employee’s approximate service period based terms plan investment funding decisions made determination benefit obligation net periodic pension postretirement benefit costs requires management make assumptions regarding discount rate return retirement plan assets increase future compensation healthcare cost trends changes assumptions significant impact projected benefit obligation funding requirement net periodic benefit cost assumed discount rate pension benefits could settled 2008 2007 2006 utilized citigroup pension liability index appropriate discount rate defined benefit pension plans expected longterm rate return plan assets based mix assets held plan expected longterm rates return within asset class anticipated trend future healthcare costs based historical experience external factors september 2006 financial accounting standards board “fasb” issued sfas 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r “sfas 158” statement requires recognition overfunded underfunded status defined benefit postretirement plans asset liability statement financial position recognize changes funded status accumulated comprehensive income loss year changes occur sfas 158 also requires measurement funded status plan date statement financial position sfas 158 became effective recognition funded status benefit plans fiscal years ending december 15 2006 effective measurement date provisions fiscal years ending december 15 2008 adopted funded status recognition provisions sfas 158 related defined benefit pension postretirement plans comply measurement date provisions sfas 158 october 2008 company froze current defined benefit plans covering nonunion employees curtailed nonunion retiree health care life insurance benefits see note 9 “benefit plans” information regarding benefit plans income taxes account income taxes asset liability method accordance sfas 109 accounting income taxes “sfas 109” deferred income tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred income tax assets based upon available evidence likely deferred income tax assets realized june 2006 fasb issued interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” interpretation clarifies accounting rh donnelley corporation notes consolidated financial statements continued uncertainty income taxes recognized entity’s financial statements accordance sfas 109 fin 48 prescribes recognition threshold measurement principles financial statement recognition measurement tax positions taken expected taken tax return fin 48 impact uncertain income tax position income tax return must recognized largest amount likely sustained upon audit relevant taxing authority uncertain income tax position recognized less 50 likelihood sustained additionally fin 48 provides guidance derecognition classification interest penalties accounting interim periods disclosures transition requirements interpretation effective fiscal years beginning december 15 2006 adopted fin 48 january 1 2007 company’s policy recognize interest penalties related unrecognized tax benefits income tax expense see note 7 “income taxes” information regarding benefit provision income taxes well impact adopting fin 48 earnings loss per share years ended december 31 2008 2007 subsequent gs repurchase 2006 defined note 11 “redeemable preferred stock warrants other” accounted earnings loss per share “eps” accordance sfas 128 earnings per share “sfas 128” year ended december 31 2006 january 27 2006 closing date gs repurchase accounted eps accordance eitf 036 participating securities twoclass method fasb statement 128 “eitf 036” established standards regarding computation eps companies issued securities common stock contractually entitle holder participate dividends earnings company eitf 036 requires earnings available common shareholders period deduction preferred stock dividends allocated common preferred stockholders based respective rights receive dividends basic eps calculated dividing loss allocable common shareholders weighted average number shares outstanding eitf 036 require presentation basic diluted eps securities common stock therefore following eps amounts pertain common stock guidance sfas 128 diluted eps calculated dividing income loss allocable common shareholders weighted average common shares outstanding plus dilutive potential common stock potential common stock includes stock options stock appreciation rights “sars” restricted stock warrants dilutive effect calculated using treasury stock method prior gs repurchase preferred stock defined note 11 “redeemable preferred stock warrants other” dilutive effect calculated using “ifconverted” method rh donnelley corporation notes consolidated financial statements continued calculation basic diluted eps years ended december 31 2008 2007 2006 respectively presented 1 computing eps using twoclass method allocated net loss reported year ended december 31 2006 common preferred shareholders since preferred shareholders contractual obligation share net loss 2 due loss allocable common shareholders reported years ended december 31 2008 2006 effect stockbased awards warrants assumed conversion preferred stock applicable antidilutive therefore included calculation diluted eps years ended december 31 2008 2007 2006 4060 shares 2593 shares 2263 shares respectively stockbased awards exercise prices exceeded average market price company’s common stock respective periods year ended december 31 2006 assumed conversion preferred stock 391 shares common stock antidilutive therefore included calculation diluted eps stockbased awards maintain shareholder approved stock incentive plan 2005 stock award incentive plan “2005 plan” whereby certain employees nonemployee directors eligible receive stock options sars limited stock appreciation rights tandem stock options restricted stock prior adoption 2005 plan maintained shareholder approved stock incentive plan 2001 stock award incentive plan “2001 plan” 2005 plan 2001 plan 5 million 4 million shares respectively originally authorized grant stock awards typically granted market value common stock date grant become exercisable ratable installments otherwise period one five years date grant may exercised maximum ten years date grant compensation benefits committee determines termination vesting relevant provisions date grant implemented policy issuing treasury shares held company satisfy stock issuances associated stockbased award exercises rh donnelley corporation notes consolidated financial statements continued december 31 2008 nonemployee directors receive options purchase 1500 shares award 1500 shares restricted stock upon election board nonemployee directors also receive annual basis options purchase 1500 shares award 1500 shares restricted stock nonemployee directors may also elect receive additional equity awards lieu portion cash fees company adopted provisions sfas 123r sharebased payment “sfas 123r” using modified prospective method required record compensation expense consolidated statement operations employee stockbased awards granted modified settled date adoption unvested portion previously granted stock awards remain outstanding beginning period adoption based grant date fair values company estimates forfeitures requisite service period recognizing compensation expense estimated forfeitures adjusted extent actual forfeitures differ expected materially differ estimates year ended december 31 2008 company utilized forfeiture rate 8 determining compensation expense years ended december 31 2007 2006 company utilized forfeiture rate 5 determining compensation expense following table depicts effect adopting sfas 123r net loss available common shareholders loss per share year ended december 31 2006 company’s reported net loss available common shareholders basic diluted loss per share year ended december 31 2006 reflects compensation expense related company’s stockbased awards recorded accordance sfas 123r compared net loss available common shareholders basic diluted loss per share period would reported compensation expense determined accounting principles board opinion 25 accounting stock issued employees “apb 25” see note 8 “stock incentive plans” additional information regarding stock incentive plans adoption sfas 123r treasury stock november 2007 company’s board directors authorized 1000 million stock repurchase plan “repurchase plan” authorization permitted company purchase shares common stock open market pursuant rule 10b18 securities exchange act 1934 block trades otherwise following twelve months based market conditions factors purchases may made suspended time purchases common stock accounted using cost method whereby total cost shares reacquired charged treasury stock contra equity account treasury stock reissued cost shares reissued determined based firstin firstout cost flow assumption charged treasury stock excess reissuance price cost credited additional paidin capital accordance repurchase plan company repurchased total 25 million shares cost 957 million december 2007 61 million funded january 2008 shares rhd common stock repurchased year ended december 31 2008 repurchase plan expired rh donnelley corporation notes consolidated financial statements continued fair value financial instruments sfas 107 disclosures fair value financial instruments “sfas 107” requires disclosure fair value financial instruments practicable estimate value december 31 2008 2007 fair value cash equivalents accounts receivable accounts payable accrued liabilities approximated carrying value based shortterm nature instruments company utilized quoted market prices available compute fair market value longterm debt disclosed note 5 “longterm debt credit facilities notes” estimates fair value may affected assumptions made accordingly necessarily indicative amounts company could realize current market exchange september 2006 fasb issued sfas 157 fair value measurements “sfas 157” defines fair value establishes fair value hierarchy prioritizes inputs valuation techniques used measure fair value expands disclosures fair value measurements sfas 157 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value hierarchy gives highest priority quoted prices active markets comprised following three levels level 1 unadjusted quoted market prices active markets identical assets liabilities level 2 observable inputs level 1 inputs level 2 inputs would typically include quoted prices markets active financial instruments significant inputs observable either directly indirectly level 3 prices valuations require inputs significant measurement unobservable sfas 157 effective fiscal years beginning november 15 2007 interim periods within fiscal years adopted sfas 157 effective january 1 2008 adoption sfas 157 impact consolidated financial position results operations accordance sfas 157 following table represents assets liabilities measured fair value recurring basis december 31 2008 level within fair value hierarchy fair value measurements included valuation techniques fair value marketbased measure considered perspective market participant holds asset owes liability rather entityspecific measure therefore even market assumptions readily available company’s assumptions set reflect market participants would use pricing asset liability measurement date company uses prices inputs current measurement date fair value derivative instruments derived using pricing models pricing models take account relevant observable market inputs market participants would use pricing asset liability pricing models used determine fair value incorporate contract terms including maturity well inputs including limited interest rate yield curves creditworthiness counterparty accordance sfas 157 impact credit rating also considered measuring fair value liabilities credit rating could material impact fair value derivative instruments results operations financial condition particular reporting period rh donnelley corporation notes consolidated financial statements continued year ended december 31 2008 impact applying credit rating determining fair value derivative instruments reduction interest rate swap liability 284 million many pricing models entail material subjectivity methodologies employed necessitate significant judgment pricing inputs observed actively quoted markets case derivative instruments pricing models used company widely accepted financial services industry noted derivative instruments categorized within level 2 fair value hierarchy fair value control processes company employs control processes validate fair value derivative instruments derived pricing models control processes designed assure values used financial reporting based observable inputs wherever possible event observable inputs available control processes designed assure valuation approach utilized appropriate consistently applied assumptions reasonable february 2008 fasb issued staff position fas 1572 effective date fasb statement 157 “fsp 1572” defers effective date sfas 157 nonfinancial assets liabilities except items recognized disclosed fair value recurring basis fiscal years beginning november 15 2008 interim periods within fiscal years company elected deferral option permitted fsp 1572 nonfinancial assets liabilities initially measured fair value prior business combinations including intangible assets goodwill expect adoption fsp 1572 material impact consolidated financial statements estimates preparation financial statements conformity gaap requires management make estimates assumptions affect reported amounts assets liabilities revenue certain expenses disclosure contingent assets liabilities actual results could differ materially estimates assumptions estimates assumptions used determination recoverability longlived assets sales allowances doubtful accounts depreciation amortization employee benefit plans expense restructuring reserves certain assumptions pertaining stockbased awards among others new accounting pronouncements fasb issued fasb staff position “fsp” fas 1423 determination useful life intangible assets “fsp fas 1423” april 2008 fsp fas 1423 amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 intent fsp improve consistency useful life recognized intangible asset determined provisions sfas 142 period expected cash flows used measure fair value asset accordance sfas 141r business combinations “sfas 141r” fsp fas 1423 effective fiscal years beginning december 15 2008 applied prospectively intangible assets acquired subsequent effective date accordingly company plans adopt provisions fsp january 1 2009 impact adoption fsp fas 1423 may company’s results operations financial condition depend nature extent intangible assets acquired subsequent effective date march 2008 fasb issued sfas 161 disclosures derivative instruments hedging activities amendment fasb statement 133 “sfas 161” sfas 161 amends sfas 133 requires enhanced disclosures derivative instruments hedging activities fair value derivative instruments presentation gains losses tabular format well disclosures rh donnelley corporation notes consolidated financial statements continued regarding credit risks strategies objectives using derivative instruments sfas 161 effective fiscal years interim periods beginning november 15 2008 company plans adopt provisions standard january 1 2009 although sfas 161 requires enhanced disclosures adoption impact company’s results operations financial condition december 2007 fasb issued sfas 141r sfas 141r replaces sfas 141 business combinations establishes principles requirements acquirer recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interest acquiree goodwill acquired business combination sfas 141r also establishes disclosure requirements enable evaluation nature financial effects business combination sfas 141r applied prospective basis company would effective business combination transactions acquisition date january 1 2009 impact adoption pronouncement may company’s results operations financial condition depend nature extent business combinations subsequent effective date reviewed accounting pronouncements issued december 31 2008 company yet adopted believe pronouncements material impact financial position operating results 3 acquisitions businesscom acquisition august 23 2007 acquired businesscom leading business search engine directory performance based advertising network disclosed purchase price 3450 million “businesscom acquisition” purchase price determined accordance gaap 3344 million excludes certain items value unvested equity awards recorded compensation expense vesting period purpose businesscom acquisition expand existing interactive portfolio adding leading internet advertising talent technology strengthen rhd’s position expanding local commercial search market develop online performance based advertising network businesscom also provided us established businesstobusiness online properties businesscom workcom businesscom advertising network businesscom operates direct whollyowned subsidiary rhd results businesscom included consolidated results commencing august 23 2007 local launch acquisition september 6 2006 acquired local launch inc “local launch” local search products platform fulfillment provider “local launch acquisition” purpose local launch acquisition support expansion local search engine marketing search engine optimization offerings provide new innovative solutions enhance local search engine marketing search engine optimization capabilities years ended december 31 2007 2006 local launch business operated direct whollyowned subsidiary rhd effective january 1 2008 local launch merged businesscom products services provided local launch continue offered advertisers businesscom results local launch business included consolidated results commencing september 6 2006 dex media merger january 31 2006 acquired dex media equity purchase price 41 billion “dex media merger” additionally assumed dex media’s outstanding indebtedness january 31 2006 fair market value 55 billion together costs total aggregate purchase price 98 billion rh donnelley corporation notes consolidated financial statements continued dex media exclusive publisher “official” yellow pages white pages directories qwest communications international inc “qwest” qwest primary local exchange carrier “lec” november 2002 date original acquisition dex directory business qwest dex media indirect parent dex media east llc “dex media east” dex media west llc “dex media west” purpose dex media merger take step consolidation rhd leading publisher print online yellow pages local online search directories products acquired business dex media subsidiaries “dex media business” operates dex media inc one rhd’s direct whollyowned subsidiaries results dex media business included company’s operating results commencing february 1 2006 att directory acquisition september 1 2004 completed acquisition directory publishing business “att directory business” att inc formerly known sbc communications inc illinois northwest indiana including att’s interest dontech ii partnership “dontech” 5050 general partnership us att collectively “att directory acquisition” 141 billion cash working capital adjustments settlement 30 million liquidation preference owed us related dontech result att directory acquisition became publisher att branded yellow pages illinois northwest indiana acquired att directory business operates r h donnelley publishing advertising illinois partnership one indirect whollyowned subsidiaries results att directory business included consolidated results commencing september 1 2004 embarq acquisition january 3 2003 completed acquisition directory business “embarq directory business” sprint nextel corporation “sprint” formerly known sprint corporation acquiring outstanding capital stock various entities comprising sprint publishing advertising collectively “embarq acquisition” 223 billion cash prior embarq acquisition one largest independent sales agents prepress vendors yellow pages advertising united states purpose embarq acquisition att directory acquisition transform rhd leading publisher yellow pages directories embarq directory business operates rh donnelley publishing advertising inc one indirect whollyowned subsidiaries results embarq directory business included consolidated results commencing january 3 2003 acquisitions accounted purchase business combinations accordance sfas 141 purchase accounting rules assume record deferred revenue balance associated directories published dex media 1140 million january 31 2006 amount represented revenue would recognized subsequent dex media merger deferral amortization method absence purchase accounting accordingly record revenue associated directories published prior dex media merger well directories published month dex media merger completed although deferred revenue balance associated directories published prior dex media merger eliminated retained rights associated collection amounts due contractual obligations advertising contracts executed prior dex media merger result billed unbilled accounts receivable balances acquired dex media merger became assets company also purchase accounting rules assume record deferred directory costs related directories published prior dex media merger well directories published month dex media merger completed totaling 2051 million qwestbranded directories costs represented cost revenue would recognized subsequent dex media merger deferral amortization method absence purchase accounting rh donnelley corporation notes consolidated financial statements continued following unaudited condensed pro forma information prepared accordance sfas 141 year ended december 31 2006 assumes dex media merger related gs repurchase related financing occurred january 1 2006 following unaudited condensed pro forma information purport represent company’s results operations would actually dex media merger related gs repurchase fact occurred january 1 2006 necessarily representative results operations future period unaudited condensed pro forma financial information year ended december 31 2006 eliminate adverse impact purchase accounting relating dex media merger 4 restructuring charges table shows activity restructuring reserves 2008 2007 2006 second quarter 2008 initiated restructuring plan included headcount reductions consolidation responsibilities vacated leased facilities “2008 restructuring actions” occur throughout 2008 2009 year ended december 31 2008 recognized restructuring charge rh donnelley corporation notes consolidated financial statements continued earnings associated 2008 restructuring actions 386 million primarily related outside consulting services severance vacated leased facilities made payments 284 million year ended december 31 2007 recognized restructuring charge earnings 55 million associated headcount reductions consolidation responsibilities effectuated 2008 “2007 restructuring actions” year ended december 31 2008 finalized estimate costs associated headcount reductions reversed portion reserve 19 million corresponding credit earnings 2008 made payments 33 million consist primarily payments severance payments made associated 2007 restructuring actions year ended december 31 2007 result dex media merger completed restructuring relating integration dex media business vacated certain leased dex media facilities colorado minnesota nebraska oregon costs associated actions shown table caption “2006 restructuring actions” estimated costs associated terminated employees including dex media executive officers abandonment certain leased facilities net estimated sublease income approximately 189 million costs charged goodwill 2006 january 2007 finalized estimate costs associated terminated employees recognized charge goodwill 01 million year ended december 31 2007 finalized assessment relocation reserve established result dex media merger result reversed remaining amount reserve 06 million corresponding offset goodwill year ended december 31 2008 reversed portion reserve related severance leased dex media facilities 06 million corresponding credit earnings payments made respect severance relocation 2008 2007 2006 totaled 04 million 16 million 108 million respectively payments 17 million 22 million 05 million made 2008 2007 2006 respectively respect vacated leased dex media facilities remaining lease payments facilities made 2016 connection att directory acquisition completed restructuring relating integration att directory business vacated certain leased facilities chicago illinois estimated costs associated restructuring actions charged goodwill activity related restructuring actions shown table caption “2005 restructuring actions” 2006 formalized plan reoccupy early 2007 portion leased facilities chicago illinois result reduced reserve related leased facilities year ended december 31 2006 35 million corresponding offset goodwill 2007 reoccupied remaining portion leased facilities chicago illinois result reversed remaining amount reserve related leased facilities year ended december 31 2007 18 million corresponding offset goodwill payments 01 million 10 million net sublease income charged reserve 2007 2006 respectively respect leased facilities chicago illinois result att directory acquisition made payments respect severance relocation 01 million 2006 payments made respect severance relocation subsequent 2006 connection embarq acquisition estimated costs associated vacated leased facilities charged goodwill activity related restructuring action shown table caption “2003 restructuring actions” payments 02 million 02 million 06 million net sublease income reflect lease payments associated facilities 2008 2007 2006 respectively remaining lease payments related 2003 restructuring actions made 2012 restructuring charges charged earnings included general administrative expenses consolidated statements operations rh donnelley corporation notes consolidated financial statements continued 5 longterm debt credit facilities notes longterm debt company december 31 2008 2007 including 862 million 1038 million respectively fair value adjustments required gaap result dex media merger consisted following company’s credit facilities indentures governing notes contain usual customary representations warranties well affirmative negative covenants among things place limitations ability incur additional indebtedness ii pay dividends repurchase capital stock iii enter mergers consolidations acquisitions asset dispositions saleleaseback transactions iv make capital expenditures v issue capital stock subsidiaries vi engage transactions affiliates vii make investments loans advances case subject customary negotiated exceptions limitations applicable company’s credit facilities also contain financial covenants relating maximum consolidated leverage minimum interest coverage maximum senior secured leverage defined therein substantially rhdi’s subsidiaries’ assets including capital stock rhdi subsidiaries pledged secure obligations rhdi credit facility substantially assets dex media east dex media west subsidiaries including equity interests pledged secure obligations respective credit facilities rh donnelley corporation notes consolidated financial statements continued rhd october 2 2007 issued 10 billion aggregate principal amount 8875 series a4 senior notes due 2017 “series a4 notes” proceeds issuance used repay 3280 million rhd credit facility “rhd credit facility” used fund businesscom acquisition b contributed rhdi order provide funding tender offer consent solicitation rhdi’s 6000 million aggregate principal amount 10875 senior subordinated notes due 2012 “rhdi senior subordinated notes” c used pay related fees expenses general corporate purposes october 17 2007 issued additional 5000 million series a4 notes proceeds issuance transferred dex media east order repay 864 million 2136 million term loan term loan b former dex media east credit facility respectively b contributed rhdi order repay 918 million 162 million 830 million term loans a4 d1 d2 rhdi credit facility respectively c used pay related fees expenses result refinancing transactions term loan a4 rhdi credit facility paid full december 31 2007 repayment term loans rhdi credit facility accounted extinguishment debt resulting loss debt transactions year ended december 31 2007 42 million related writeoff unamortized deferred financing costs july 2008 registered approximately 12353 million series a4 notes finance businesscom acquisition related fees expenses august 23 2007 rhd entered 3280 million credit facility scheduled maturity date december 31 2011 october 2 2007 rhd credit facility paid full proceeds series a4 notes repayment rhd credit facility accounted extinguishment debt resulting loss debt transactions year ended december 31 2007 08 million related writeoff unamortized deferred financing costs credit facilities december 31 2008 total outstanding debt credit facilities 35026 million comprised 13411 million rhdi credit facility 10815 million dex media east credit facility 10800 million new dex media west credit facility rhdi effective october 21 2008 obtained waiver rhdi credit facility permit us make voluntary prepayments term loan d1 term loan d2 discount par provided discount acceptable lenders choose participate obligated make prepayments may made period 270 days date waiver aggregate amount 4000 million provided prepayment must amount less 100 million year ended december 31 2008 repaid 98 million term loan d1 459 million term loan d2 rhdi credit facility making voluntary prepayments 355 million including fees discount par result unamortized deferred financing costs 02 million written year ended december 31 2008 june 6 2008 conjunction debt exchanges amended rhdi credit facility order among things permit debt exchanges provide additional covenant flexibility addition part amendment rhdi modified pricing extended maturity date 1000 million rhdi revolver june 2011 remaining 750 million rhdi revolver continue mature december 2009 december 31 2008 outstanding balances rhdi credit facility totaled 13411 million comprised 2693 million term loan d1 10718 million term loan d2 amount rh donnelley corporation notes consolidated financial statements continued outstanding rhdi revolver 02 million utilized standby letter credit term loans require quarterly principal interest payments rhdi credit facility provides uncommitted term loan c potential borrowings 4000 million proceeds borrowed used fund acquisitions refinance certain indebtedness make certain restricted payments noted 750 million rhdi revolver matures december 2009 1000 million rhdi revolver matures june 2011 term loans d1 d2 require accelerated amortization beginning 2010 final maturity june 2011 weighted average interest rate outstanding debt rhdi credit facility 677 650 december 31 2008 2007 respectively amended june 6 2008 december 31 2008 rhdi credit facility bears interest option either • highest base rate determined administrative agent deutsche bank trust company americas ii federal funds effective rate defined plus 050 iii 40 case plus 250 margin rhdi revolver 275 margin term loan d1 term loan d2 • higher libor rate ii 30 case plus 350 margin rhdi revolver 375 margin term loan d1 term loan d2 may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings dex media east december 31 2008 principal amounts owed dex media east credit facility totaled 10815 million comprised 6825 million term loan 3990 million term loan b amount outstanding 1000 million aggregate principal amount revolving loan facility “dex media east revolver” additional 26 million utilized two standby letters credit dex media east credit facility also consists 2000 million aggregate principal amount uncommitted incremental facility dex media east would right subject obtaining commitments incremental loans one occasions increase term loan term loan b dex media east revolver amount dex media east revolver term loan mature october 2013 term loan b mature october 2014 weighted average interest rate outstanding debt dex media east credit facility 383 687 december 31 2008 2007 respectively december 31 2008 dex media east credit facility bears interest option either • higher base rate determined administrative agent jp morgan chase bank na ii federal funds effective rate defined plus 050 case plus 075 050 leverage ratio less 2 1 margin dex media east revolver term loan 100 margin term loan b • libor rate plus 175 150 leverage ratio less 2 1 margin dex media east revolver term loan 200 margin term loan b may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings october 24 2007 replaced former dex media east credit facility new dex media east credit facility proceeds new dex media east credit facility used october 24 2007 repay remaining 565 million 1397 million term loan term loan b former dex media east credit facility respectively 325 million former dex media east revolving loan facility repayment term loans revolving loan commitments outstanding former rh donnelley corporation notes consolidated financial statements continued dex media east credit facility accounted extinguishment debt resulting loss debt transactions year ended december 31 2007 02 million related writeoff unamortized deferred financing costs proceeds new dex media east credit facility also used november 26 2007 fund redemption 4497 million dex media east’s outstanding 9875 senior notes due 2009 3413 million dex media east’s outstanding 12125 senior subordinated notes due 2012 see details dex media west june 6 2008 refinanced dex media west credit facility new dex media west credit facility consists 1300 million term loan maturing october 2013 9500 million term loan b maturing october 2014 900 million dex media west revolver event 250 million dex media west’s 9875 senior subordinated notes due 2013 refinancing replacement thereof outstanding dex media west revolver term loan term loan b mature date three months prior final maturity notes new dex media west credit facility includes 4000 million uncommitted incremental facility “incremental facility” may incurred additional revolving loans additional term loans subject obtaining commitments loans incremental facility fully available used refinance dex media west 85 senior notes due 2010 however limited 2000 million used purpose proceeds new dex media west credit facility used refinance former dex media west credit facility pay related fees expenses refinancing former dex media west credit facility accounted extinguishment debt resulting loss debt transactions year ended december 31 2008 21 million related writeoff unamortized deferred financing costs december 31 2008 principal amounts owed new dex media west credit facility totaled 10800 million comprised 1300 million term loan 9500 million term loan b amount outstanding dex media west revolver weighted average interest rate outstanding debt new dex media west credit facility 710 december 31 2008 weighted average interest rate outstanding debt former dex media west credit facility 651 december 31 2007 december 31 2008 new dex media west credit facility bears interest option either • highest base rate determined administrative agent jp morgan chase bank na ii federal funds effective rate defined plus 050 iii 40 case plus 275 250 leverage ratio less 300 100 margin dex media west revolver term loan 30 margin term loan b • higher libor rate ii 30 plus 375 350 leverage ratio less 300 100 margin dex media west revolver term loan 40 margin term loan b may elect interest periods 1 2 3 6 months 9 12 months time borrowing lenders agree make term available libor borrowings notes december 31 2008 total outstanding notes 61197 million comprised 32065 million outstanding rhd notes 4129 million outstanding rhdi notes 12819 million outstanding dex media inc notes 12184 million outstanding dex media west notes rh donnelley corporation notes consolidated financial statements continued rhd december 31 2008 rhd total outstanding notes 32065 million comprised 2068 million 6875 senior notes 3019 million 6875 series a1 senior discount notes 4552 million 6875 series a2 senior discount notes 10128 million 8875 series a3 senior notes 12298 million 8875 series a4 senior notes october 2008 repurchased 215 million notes purchase price 74 million september 2008 repurchased 1655 million 1599 million accreted value applicable notes purchase price 847 million june 25 2008 rhdi exchanged 5942 million 5857 million accreted value applicable rhd notes 4129 million rhdi senior notes resulting reduction debt 1728 million see note 2 “summary significant accounting policies gain loss debt transactions net” additional information related debt transactions issued 15 billion aggregate principal amount 8875 series a4 senior notes due 2017 interest series a4 notes payable semiannually april 15th october 15th year commencing april 15 2008 series a4 notes senior unsecured obligations rhd senior right payment rhd’s existing future senior subordinated debt future subordinated obligations rank equally rhd’s existing future senior unsecured debt series a4 notes effectively subordinated rhd’s secured debt including rhd’s guarantee borrowings rhdi credit facility structurally subordinated existing future liabilities including trade payables direct indirect subsidiaries december 31 2008 series a4 notes fair market value 1599 million 8875 series a4 notes remaining face value 12298 million redeemable option beginning 2012 following prices percentage face value issued 3000 million 6875 senior notes due january 15 2013 “holdco notes” proceeds used redeem 100303 shares outstanding preferred stock gs funds pay transaction costs repay debt associated rhdi’s credit facility interest payable holdco notes semiannually arrears january 15th july 15th year commencing july 15 2005 december 31 2008 6875 holdco notes fair market value 269 million 6875 holdco notes remaining face value 2068 million redeemable option beginning 2009 following prices percentage face value order fund cash portion dex media merger purchase price issued 6600 million aggregate principal amount maturity 6005 million gross proceeds 6875 series a2 senior discount notes due january 15 2013 121 billion principal amount 8875 series a3 senior notes due rh donnelley corporation notes consolidated financial statements continued january 15 2016 interest payable semiannually january 15th july 15th year series a2 senior discount notes series a3 senior notes commencing july 15 2006 also issued 3650 million aggregate principal amount maturity 3321 million gross proceeds 6875 series a1 senior discount notes due january 15 2013 fund gs repurchase interest payable semiannually january 15th july 15th year commencing july 15 2006 notes unsecured obligations rhd senior right payment future senior subordinated indebtedness rhd structurally subordinated indebtedness subsidiaries december 31 2008 6875 series a1 series a2 senior discount notes 8875 series a3 senior notes fair market value 392 million 592 million 1317 million respectively 6875 series a1 senior discount notes remaining face value 3019 million series a2 senior discount notes remaining face value 4552 million redeemable option beginning 2009 following prices percentage face value 8875 series a3 senior notes remaining face value 10128 million redeemable option beginning 2011 following prices percentage face value rhdi june 25 2008 rhdi exchanged 5942 million 5857 million accreted value rhd notes 4129 million rhdi senior notes interest rhdi senior notes payable semiannually may 15th november 15th year commencing november 15 2008 rhdi senior notes senior unsecured obligations rhdi rank equally rhdi’s senior unsecured indebtedness rhdi senior notes fully unconditionally guaranteed rhd rhdi’s subsidiaries guarantee obligations rhdi credit facility general senior unsecured basis rhdi senior notes effectively subordinated right payment rhdi’s existing future secured debt extent value assets securing debt rhdi senior notes also structurally subordinated existing future liabilities including trade payables rhdi’s existing future subsidiaries guarantee rhdi senior notes rhd guarantee respect rhdi senior notes structurally subordinated liabilities rhd’s subsidiaries rhdi subsidiaries guarantee obligations rhdi senior notes claims respect rhdi senior notes structurally senior claims respect outstanding rhd notes december 31 2008 rhdi senior notes fair market value 1012 million rh donnelley corporation notes consolidated financial statements continued rhdi senior notes face value 4129 million redeemable option beginning 2012 following prices percentage face value connection embarq acquisition rhdi issued 3250 million aggregate principal amount 8875 senior notes due 2010 “senior notes” 6000 million senior subordinated notes december 2005 repurchased tender offer exit consent solicitation 3171 million senior notes remaining 79 million senior notes redeemed december 2007 proceeds rhdi revolver used fund december 2007 redemption premium 02 million pay transaction costs redemption senior notes accounted extinguishment debt resulting loss debt transactions 02 million year ended december 31 2007 consisting redemption premium writeoff unamortized deferred financing costs less 01 million october 2007 terms conditions tender offer consent solicitation purchase senior subordinated notes commenced september 18 2007 5999 million 999 outstanding senior subordinated notes repurchased proceeds series a4 notes contributed rhd rhdi order fund repurchase senior subordinated notes tender premium 397 million pay transaction costs tender offer december 2007 remaining 01 million senior subordinated notes redeemed tender redemption senior subordinated notes accounted extinguishment debt resulting loss debt transactions 513 million year ended december 31 2007 consisting tender premium writeoff unamortized deferred financing costs 116 million dex media inc december 31 2008 dex media inc total outstanding notes 12819 million comprised 5104 million 8 senior notes 7715 million 9 senior discount notes dex media inc issued 5000 million aggregate principal amount 8 senior notes due 2013 senior notes unsecured obligations dex media inc interest payable may 15th november 15th year december 31 2008 5000 million aggregate principal amount outstanding excluding fair value adjustments december 31 2008 8 senior notes fair market value 925 million 8 senior notes face value 5000 million redeemable option beginning 2008 following prices percentage face value dex media inc issued 7500 million aggregate principal amount 9 senior discount notes due 2013 two indentures first indenture totaling 3890 million aggregate principal amount 9 senior discount notes issued original issue discount interest accruing 9 per annum compounded semiannually senior discount notes unsecured obligations dex media inc interest accrues form increased accreted value november 15 2008 “full accretion date” time accreted value equal full principal amount maturity second indenture totaling 3610 million aggregate principal amount interest accrues 837 per annum rh donnelley corporation notes consolidated financial statements continued compounded semiannually creates premium full accretion date amortized remainder term november 15 2008 9 senior discount notes bear cash interest 9 per annum payable semiannually may 15th november 15th year senior discount notes unsecured obligations dex media inc cash interest accrue discount notes prior full accretion date december 31 2008 7499 million aggregate principal amount outstanding excluding fair value adjustments december 31 2008 9 senior discount notes fair market value 1388 million 9 senior discount notes remaining face value 7499 million redeemable option beginning 2008 following prices percentage face value dex media east november 26 2007 proceeds new dex media east credit facility used fund redemption 4497 million dex media east’s outstanding 9875 senior notes due 2009 3413 million dex media east’s outstanding 12125 senior subordinated notes due 2012 redemption premiums associated senior notes senior subordinated notes 111 million 207 million respectively pay transaction costs redemption senior notes senior subordinated notes accounted extinguishment debt resulting loss debt transactions 318 million year ended december 31 2007 related redemption premiums addition result redeeming senior notes senior subordinated notes loss debt transactions offset 622 million year ended december 31 2007 resulting accelerated amortization remaining fair value adjustment recorded result dex media merger dex media west december 31 2008 dex media west total outstanding notes 12184 million comprised 3939 million 85 senior notes 87 million 5875 senior notes 8158 million senior subordinated notes dex media west issued 3850 million aggregate principal amount 85 senior notes due 2010 senior notes unsecured obligations dex media west interest payable february 15th august 15th year december 31 2008 3850 million aggregate principal amount outstanding excluding fair value adjustments december 31 2008 85 senior notes fair market value 2310 million 85 senior notes face value 3850 million redeemable option following prices percentage face value dex media west issued 3000 million aggregate principal amount 5875 senior notes due 2011 senior notes unsecured obligations dex media west interest payable may 15th november 15th year december 31 2008 87 million aggregate principal amount outstanding excluding fair value adjustments december 31 2008 5875 senior notes fair market value 52 million rh donnelley corporation notes consolidated financial statements continued 5875 senior notes remaining face value 87 million redeemable option beginning 2008 following prices percentage face value dex media west issued 780 million aggregate principal amount 9875 senior subordinated notes due 2013 senior subordinated notes unsecured obligations dex media west interest payable february 15th august 15th year december 31 2008 7617 million aggregate principal amount outstanding excluding fair value adjustments december 31 2008 9875 senior subordinated notes fair market value 1809 million 9875 senior subordinated notes remaining face value 7617 million redeemable option beginning 2008 following prices percentage face value aggregate maturities longterm debt including current portion excluding fair value adjustments purchase accounting december 31 2008 see note 2 “summary significant accounting policies gain loss debt transactions net” additional information financing activities conducted years ended december 31 2008 2007 impact dex media merger result dex media merger adjustment established record acquired debt fair value january 31 2006 fair value adjustment amortized reduction interest expense remaining term respective debt agreements using effective interest method impact future scheduled interest principal payments amortization fair value adjustment included reduction interest expense loss debt transactions applicable 176 million 921 million including 622 million related redemption dex media east’s senior notes senior subordinated notes recorded loss debt transactions 264 million years ended december 31 2008 2007 2006 respectively total premium 2223 million recorded upon consummation dex media merger 862 million remains unamortized december 31 2008 shown following table connection redemption dex media east’s senior notes rh donnelley corporation notes consolidated financial statements continued senior subordinated notes remaining fair value adjustment related debt obligations fully amortized december 31 2007 6 derivative financial instruments rhdi credit facility new dex media west dex media east credit facilities bear interest variable rates accordingly earnings cash flow affected changes interest rates company entered following interest rate swaps effectively convert approximately 24 billion company’s variable rate debt fixed rate debt december 31 2008 1 consists one swap 2 consists two swaps 3 consists three swaps 4 consists four swaps rh donnelley corporation notes consolidated financial statements continued using derivative financial instruments hedge exposures changes interest rates company exposes credit risk market risk credit risk possible failure counterparty perform terms derivative contract fair value derivative contract positive counterparty owes company creates credit risk company fair value derivative contract negative company owes counterparty therefore subject credit risk company minimizes credit risk derivative financial instruments entering transactions major financial institutions credit ratings aa higher market risk adverse effect value financial instrument results change interest rates market risk associated interestrate contracts managed establishing monitoring parameters limit types degree market risk may undertaken company’s interest rate swap agreements effectively convert 24 billion variable rate debt fixed rate debt mitigating company’s exposure increases interest rates terms interest rate swap agreements receive variable interest based threemonth libor pay weighted average fixed rate 44 interest rate swaps mature varying dates february 2009 march 2013 weighted average rate received interest rate swaps 20 year ended december 31 2008 periodic payments receipts recorded interest expense interest rate swaps notional value 8500 million designated cash flow hedges hedge threemonth liborbased interest payments 8500 million bank debt december 31 2008 respective interest rate swaps provided effective hedge threemonth liborbased interest payments 8500 million bank debt derivative instruments designated qualify hedged transactions initial fair value subsequent gains losses change fair value reported earnings component interest expense result ineffective interest rate swaps associated amendment rhdi credit facility refinancing former dex media west credit facility interest expense year ended december 31 2008 includes noncash charge 210 million resulting amounts charged accumulated comprehensive loss related interest rate swaps prior june 6 2008 interest expense year ended december 31 2008 also includes noncash charge 37 million resulting change fair value interest rate swaps june 6 2008 december 31 2008 may 2006 company entered 10 billion notional value interest rate swaps designated cash flow hedges july 2006 company recorded changes fair value interest rate swaps reduction interest expense 44 million year ended december 31 2006 addition certain interest rate swaps acquired result dex media merger notional amount 425 million designated cash flow hedges years ended december 31 2007 2006 125 million 300 million respectively interest rate swaps settled leaving undesignated swaps december 31 2007 year ended december 31 2007 2006 company recorded additional interest expense 34 million 37 million respectively result change fair value acquired undesignated interest rate swaps years ended december 31 2008 2007 2006 company reclassified 571 million hedging losses 152 million 226 million hedging gains earnings respectively december 31 2008 205 million deferred losses net tax derivative instruments recorded accumulated comprehensive loss expected reclassified earnings next 12 months transactions events expected occur next 12 months necessitate reclassifying derivative losses earnings rh donnelley corporation notes consolidated financial statements continued 7 income taxes deferred income tax assets liabilities determined based estimated future tax effects temporary differences financial statement tax basis assets liabilities measured tax rates temporary differences expected reverse deferred income tax benefit provision result changes deferred income tax assets liabilities benefit provision income taxes consisted following table summarizes significant differences us federal statutory tax rate effective tax rate applied company’s income loss income taxes rh donnelley corporation notes consolidated financial statements continued deferred income tax assets liabilities consisted following december 31 2008 2007 2008 income tax benefit 12777 million comprised federal tax benefit 11287 million state tax benefit 1490 million 2008 federal tax benefit comprised current tax provision 239 million primarily related increase fin 48 liability offset deferred income tax benefit 11526 million primarily related noncash goodwill impairment charges 2008 state tax benefit 1490 million comprised current tax provision 103 million relates taxes due states subsidiaries company file separate tax returns well increase fin 48 liability offset deferred income tax benefit 1593 million primarily related noncash goodwill impairment charges 2008 company utilized federal net operating losses income tax purposes 41 million primarily resulting taxable gains associated certain financing activities conducted 2008 income tax benefit includes income tax benefit 203 million correcting overstated income tax expense fiscal years 2004 2007 evaluated materiality correction concluded material current prior year financial statements accordingly recorded correction fourth quarter 2008 december 31 2008 company federal state net operating loss carryforwards approximately 6228 million net carryback 5676 million respectively begin expire 2026 2009 respectively amounts include consideration net operating losses expected expire unused due internal revenue code section 382 limitation ownership changes related businesscom occurred prior businesscom acquisition portion benefits net operating loss carryforwards reflected additional paidin capital portion net operating rh donnelley corporation notes consolidated financial statements continued loss carryforwards generated deductions related exercise stock awards 2008 2007 deduction stock awards 06 million 308 million respectively addition company alternative minimum tax credit carryforwards approximately 07 million available reduce future federal income taxes indefinite period assessing realizability deferred income tax assets considered whether likely portion deferred income tax assets realized ultimate realization deferred income tax assets dependent upon generation future taxable income periods temporary differences become deductible making determination applicable financial reporting standards allowed consider scheduled reversal deferred income tax liabilities projected future taxable income tax planning strategies company believes likely deferred income tax assets associated capital investments realized contributing valuation allowance 61 million december 31 2008 additionally believe likely state net operating losses various states used expiration resulting valuation allowance 31 million total valuation allowance 92 million december 31 2008 2007 provision income taxes 290 million comprised federal tax provision 275 million resulting current tax provision 118 million relating internal revenue service “irs” settlement deferred income tax provision 157 million resulting current year taxable loss 2007 state tax provision 15 million results current tax provision 85 million relating taxes due states subsidiaries company file separate company returns offset deferred state tax benefit 70 million relating apportioned taxable income loss among various states federal net operating loss income tax purposes approximately 3033 million generated 2007 primarily result tax amortization expense recorded respect intangible assets acquired dex media merger att directory acquisition embarq acquisition businesscom acquisition acquired intangible assets resulted deferred income tax liability 26 billion december 31 2007 2006 income tax benefit 845 million comprised federal deferred income tax benefit 1129 million resulting period’s taxable loss offset state tax provision 284 million 2006 state tax provision 284 million primarily resulted modification apportioned taxable income loss among various states net operating loss tax purposes approximately 2163 million generated 2006 primarily result tax amortization expense recorded respect intangible assets acquired dex media merger att directory acquisition embarq acquisition acquired intangible assets resulted deferred income tax liability 22 billion noted detail july 2007 effectively settled issues consideration irs related audit taxable years 2003 2004 therefore tax years 2005 2006 2007 still subject examination irs certain state tax returns examination various regulatory authorities continuously review issues raised connection ongoing examinations open tax years evaluate adequacy reserves believe accrued tax liabilities fin 48 adequate cover uncertain tax positions related us federal state income taxes rh donnelley corporation notes consolidated financial statements continued fin 48 reconciliation beginning ending amount gross unrecognized tax benefits follows included balance unrecognized tax benefits december 31 2008 2007 346 million 94 million respectively tax benefits recognized would favorably affect effective tax rate policy recognize interest penalties related unrecognized tax benefits income tax expense years ended december 31 2008 2007 company recognized approximately 44 million 15 million respectively interest penalties due unrecognized tax benefits december 31 2008 2007 accrued 118 million 49 million respectively related interest 14 million 08 million respectively tax penalties 2008 company recognized increase liability unrecognized tax benefits 204 million associated uncertainty revenue recognition federal state tax return purposes tax years prior 2005 addition recognized interest expense 62 million associated matter included benefit income taxes year ended december 31 2008 september 2008 effectively settled issues consideration department finance new york city related audit taxable year 2000 result settlement unrecognized tax benefits associated uncertain state tax positions decreased 09 million year ended december 31 2008 decrease unrecognized tax benefits decreased effective tax rate year ended december 31 2008 unrecognized tax benefits impacted new york city audit primarily related allocation income among legal entities july 2007 effectively settled issues consideration irs related audit taxable years 2003 2004 result settlement unrecognized tax benefits associated uncertain federal tax positions decreased 1670 million year ended december 31 2007 result irs settlement recognized additional interest expense 16 million 12 million related taxable years 2004 2005 respectively recognition interest expense within tax provision net tax benefit increased effective tax rate year ended december 31 2007 unrecognized tax benefits impacted irs audit primarily related items ultimate deductibility highly certain uncertainty regarding timing deductibility reasonably possible amount unrecognized tax benefits could decrease within next twelve months currently audit new york state taxable year 2003 north carolina taxable years 2003 2006 years ended december 31 2008 2007 recorded increase liability jurisdictions unrecognized tax benefits 42 million 140 million respectively new york state north carolina audits resolved within next twelve months total amount unrecognized tax benefits could decrease approximately 173 million unrecognized tax benefits related new york state north carolina audits relate apportionment allocation income among various legal entities noted july 2007 effectively settled irs’s federal tax audit taxable years 2003 2004 therefore tax years 2005 2006 2007 still subject examination irs addition certain state tax returns examination various regulatory authorities including new york north carolina state tax return years open examination average three rh donnelley corporation notes consolidated financial statements continued years however certain jurisdictions remain open examination longer three years due existence net operating loss carryforwards statutory waivers 8 stock incentive plans years ended december 31 2008 2007 2006 company recognized 295 million 390 million 433 million respectively stockbased compensation expense related stockbased awards granted various employee nonemployee stock incentive plans years ended december 31 2008 2007 2006 company able utilize tax benefit resulting stockbased award exercises due net operating loss carryforwards neither operating financing cash flows affected tax impact stockbased award exercises years ended december 31 2008 2007 2006 sfas 123r fair value stock options sars calculated using blackscholes model time stockbased awards granted amount net estimated forfeitures amortized vesting period stockbased award weighted average fair value per share stock options sars granted years ended december 31 2008 2007 2006 249 2247 2008 respectively following assumptions used valuing stockbased awards years ended december 31 2008 2007 2006 respectively estimate expected volatility based historical volatility price common stock expected life stockbased awards expected life represents period time stockbased awards granted expected outstanding estimated consistent simplified method permitted staff accounting bulletin 110 use simplified method developing expected term share options “sab 110” simplified method calculates expected life average vesting contractual terms award riskfree interest rate based applicable us treasury yields approximate expected life stockbased awards granted company grants restricted stock certain employees including executive officers nonemployee directors accordance 2005 plan sfas 123r compensation expense related awards measured fair value date grant based number shares granted quoted market price company’s common stock time year ended december 31 2008 granted 37 million stock options sars includes 12 million sars granted connection exchange program defined following table rh donnelley corporation notes consolidated financial statements continued presents summary company’s stock options sars activity related information year ended december 31 2008 total intrinsic value stockbased awards vested years ended december 31 2008 2007 less 01 million 17 million respectively total fair value stockbased awards vested years ended december 31 2008 2007 166 million 190 million respectively following table summarizes information stockbased awards outstanding exercisable december 31 2008 aggregate intrinsic value exercisable stockbased awards december 31 2008 less 01 million rh donnelley corporation notes consolidated financial statements continued following table summarizes status nonvested stock awards december 31 2008 changes year ended december 31 2008 december 31 2008 170 million total unrecognized compensation cost related nonvested stockbased awards cost expected recognized weighted average period approximately two years applying company’s estimated forfeiture rate expect 31 million nonvested stockbased awards vest weighted average period approximately two years intrinsic value december 31 2008 nonvested stockbased awards expected vest less 01 million corresponding weighted average grant date exercise price 745 per share march 4 2008 company granted 22 million sars certain employees including executive officers conjunction annual grant stock incentive awards sars settled common stock granted grant price 711 per share equal market value company’s common stock grant date vest ratably three years accordance sfas 123r recognized noncash compensation expense related sars 43 million year ended december 31 2008 april 2008 company increased estimated forfeiture rate determining compensation expense 5 8 adjustment based review historical forfeiture information resulted reduction compensation expense 18 million year ended december 31 2008 march 2008 company’s board directors approved subject shareholder approval obtained may 2008 program current employees including executive officers permitted surrender certain outstanding stock options sars exercise prices substantially current market price common stock exchange fewer new sars new vesting requirements exercise price equal market value common stock grant date “exchange program” exercise prices outstanding options sars eligible exchange program ranged 1078 7801 outstanding stock awards including restricted stock units eligible exchange program exchange program designed provide eligible employees opportunity exchange deeply underwater options sars new sars covering fewer shares exercise price based current dramatically lower market price exchange program allowed separate exchange ratio outstanding group options sars taking account factors blackscholes value surrendered awards new sars granted exchange program well exercise price remaining life tranche considerations ensure exchange program accomplished intended objectives weighted average exchange ratio eligible awards held senior management members described 1 38 whereas weighted average exchange ratio eligible awards held eligible rh donnelley corporation notes consolidated financial statements continued employees 1 35 senior management members named executive officers three members executive committee three general managers sales nonemployee directors company eligible participate exchange program former employees holding otherwise eligible options sars connection exchange program july 14 2008 company granted 12 million sars certain employees including certain senior management members exchange 42 million outstanding options sars total recapture 30 million shares sars settled common stock granted grant price 169 per share sars granted exchange program sevenyear term new threeyear vesting schedule subject accelerated vesting upon occurrence certain events exercisability sars granted senior management members conditioned upon achievement following stock price appreciation targets addition three year servicebased vesting requirements new sars first vested tranche new sars shall exercisable company’s stock price equals exceeds 20 per share b second vested tranche new sars shall exercisable company’s stock price equals exceeds 30 per share c third final vested tranche new sars shall exercisable company’s stock price equals exceeds 40 per share price appreciation conditions deemed satisfied time life new sars average closing price company’s common stock ten consecutive trading days equals exceeds specified target stock price provided however otherwise vested sars become exercisable prior expiration date due failure achieve performance conditions shall terminate unexercised addition following events effectively accelerate exercisability onethird 100 involuntary termination occurs within two years change control total new sars granted senior management member stock appreciation target yet met time voluntary involuntary termination death disability retirement exchange program accounted modification sfas 123r calculating incremental compensation cost modification fair value modified award compared fair value original award measured immediately terms conditions modified company used blackscholes valuation model determine fair value original stock awards modification fair value modified awards granted nonsenior management members company utilized trinomial valuation model determine fair value modified awards granted senior management members due stock appreciation vesting requirements noted recognize incremental noncash charge 06 million associated exchange program three year vesting period 01 million recognized year ended december 31 2008 february 27 2007 company granted 11 million sars certain employees including executive officers conjunction annual grant stock incentive awards sars settled common stock granted grant price 7431 per share equal market value company’s common stock grant date vest ratably three years accordance sfas 123r recognized noncash compensation expense related sars 55 million 112 million years ended december 31 2008 2007 respectively result businesscom acquisition 42 million outstanding businesscom equity awards converted 02 million rhd equity awards august 23 2007 years ended december 31 2008 2007 recognized noncash compensation expense related converted equity awards 37 million 40 million respectively december 13 2006 company granted 01 million shares restricted stock certain executive officers restricted shares settled common stock granted grant price 6064 per share equal market value company’s common stock date grant rh donnelley corporation notes consolidated financial statements continued vesting restricted shares contingent upon common stock equaling exceeding 6500 per share 20 consecutive trading days continued employment company third anniversary date grant accordance sfas 123r recognized noncash compensation expense related restricted shares 07 million 24 million 01 million years ended december 31 2008 2007 2006 respectively february 21 2006 company granted 01 million shares restricted stock certain employees including executive officers restricted shares settled common stock granted grant price 6426 per share equal market value company’s common stock date grant vest ratably three years accordance sfas 123r recognized noncash compensation expense related restricted shares 16 million 17 million 28 million years ended december 31 2008 2007 2006 respectively february 21 2006 company granted 06 million sars certain employees including executive officers conjunction annual grant stock incentive awards sars settled common stock granted grant price 6426 per share equal market value company’s common stock grant date vest ratably three years february 24 2005 company granted 05 million sars certain employees including executive officers conjunction annual grant stock incentive awards sars settled common stock granted grant price 5900 per share equal market value company’s common stock grant date vest ratably three years july 28 2004 company granted 09 million sars certain employees including executive officers connection att directory acquisition sars settled common stock granted grant price 4158 per share equal market value company’s common stock grant date initially scheduled vest entirely five years maximum appreciation july 28 2004 february 24 2005 sar grants 100 initial grant price recognized noncash compensation expense related smaller sar grants 36 million 72 million 139 million years ended december 31 2008 2007 2006 respectively connection dex media merger company granted october 3 2005 11 million sars certain employees including executive officers sars granted exercise price 6500 prevailing market price common stock vest ratably three years award sars contingent upon successful completion dex media merger therefore identified awards outstanding december 31 2005 recognized noncash compensation expense related sars 54 million 70 million 91 million years ended december 31 2008 2007 2006 respectively january 31 2006 stockbased awards outstanding existing dex media equity compensation plans totaled 40 million dex media option shares weighted average exercise price 548 per option share result dex media merger outstanding dex media equity awards converted rhd equity awards february 1 2006 upon conversion rhd equity awards number securities issued upon exercise outstanding awards totaled 17 million shares rhd weighted average exercise price 1273 per share december 31 2008 number rhd shares remaining available future issuance totaled 05 million dex media inc 2004 incentive award plan years ended december 31 2008 2007 2006 noncash compensation expense related converted awards totaled 18 million 26 million 41 million respectively dex media merger triggered change control company’s stock incentive plans accordingly awards granted employees january 31 2006 exception stockbased awards held executive officers members board directors waived change control provisions awards became fully vested addition vesting conditions related july 28 2004 sars grant noted modified result dex media merger sars vest rh donnelley corporation notes consolidated financial statements continued ratably three years date grant years ended december 31 2008 2007 2006 02 million 23 million 134 million respectively noncash compensation expense included total noncash compensation expense amounts noted recognized result modifications noncash stockbased compensation expense relating existing stock options held executive officers members board directors january 1 2006 modified result dex media merger well noncash stockbased compensation expense smaller grants issued subsequent dex media merger mentioned totaled 28 million 29 million 133 million years ended december 31 2008 2007 2006 respectively 9 benefit plans october 21 2008 compensation benefits committee company’s board directors approved comprehensive redesign company’s employee retirement savings pension plans effective january 1 2009 except described sole retirement benefit available nonunion employees company employed businesscom inc “businesscom” provided single defined contribution plan unified 401k plan replace preexisting rh donnelley dex media inc “dex media” 401k savings plans new unified 401k plan contribute 100 dollar contributed participating employee maximum 6 participating employee’s salary including bonus commissions contributions made company fully vested participants completed one year service company businesscom employees continue eligible participate businesscom 401k plan time company able efficiently transition new unified 401k plan company continue maintain rh donnelley 401k restoration plan employees compensation excess irs annual limits conjunction establishing new unified defined contribution plan company frozen current defined benefit plans covering nonunion employees rh donnelley corporation retirement account dex media inc pension plan rh donnelley pension benefit equalization plan case effective december 31 2008 connection freeze pension plan benefit accruals nonunion plan participants ceased december 31 2008 however plan balances remained intact interest credits participant account balances well service credits vesting retirement eligibility continue accordance terms respective plans addition supplemental transition credits provided certain plan participants nearing retirement would otherwise lose portion anticipated pension benefit age 65 result freezing current plans similar supplemental transition credits provided certain plan participants grandfathered final average pay formula defined benefit plans previously converted traditional pension plans cash balance plans additionally october 21 2008 compensation benefits committee company’s board directors approved nonunion employees elimination nonsubsidized access retiree health care life insurance benefits effective january 1 2009 ii elimination subsidized retiree health care benefits medicareeligible retirees effective january 1 2009 iii phase subsidized retiree health care benefits threeyear period beginning january 1 2009 nonunion retiree health care benefits terminating january 1 2012 respect phase subsidized retiree health care benefits eligible retiree becomes medicareeligible point time phase process noted retiree longer eligible retiree health care coverage result implementing freeze company’s defined benefit plans recognized onetime noncash net curtailment loss 16 million year ended december 31 2008 consisting curtailment gain 136 million entirely offset losses incurred plan assets recognition previously unrecognized prior service costs charged accumulated comprehensive loss rh donnelley corporation notes consolidated financial statements continued result eliminating retiree health care life insurance benefits nonunion employees recognized onetime noncash curtailment gain 396 million year ended december 31 2008 result actions longer incur funding expenses administrative costs associated plans nonunion employees prior redesign company’s employee retirement savings pension plans october 2008 two defined benefit pension plans rhd retirement plan dex media pension plan three defined contribution plans rhd 401k savings plan dex media employee savings plan businesscom inc 401k plan two postretirement plans rhd group benefit plan dex media group benefit plan became effective january 1 2008 effective january 1 2008 dontech pension benefit equalization plan merged rhd pension benefit equalization plan amended summary plans prior redesign provided redesign effective january 1 2009 rhd pension plan rhd cash balance defined benefit pension plan “rhd retirement plan” covers substantially legacy rhd employees least one year service benefits paid employees based age years service percentage total annual compensation percentage compensation allocated retirement account ranges 30 125 depending age years service “cash balance benefit” benefits certain employees participants predecessor dun bradstreet corporation “db” defined benefit pension plan also determined based participant’s average compensation years service “final average pay benefit” benefits paid equal greater final average pay benefit cash balance benefit annual pension costs determined using projected unit credit actuarial cost method funding policy contribute amount least equal minimum legal funding requirement required make contributions 57 million 36 million rhd retirement plan 2008 2007 respectively required make contributions pension plans 2006 underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities measurement date december 31 used plan assets also unfunded nonqualified defined benefit pension plan pension benefit equalization plan “pbep” covers senior executives certain key employees benefits based years service compensation including compensation permitted taken account previously mentioned defined benefit pension plan dex media pension plan noncontributory defined benefit pension plan covering substantially management occupational union employees within dex media annual pension costs determined using projected unit credit actuarial cost method funding policy contribute amount least equal minimum legal funding requirement required make contributions 95 million 128 million dex media pension plan 2008 2007 respectively contributions required made plan 2006 underlying pension plan assets invested diversified portfolios consisting primarily equity debt securities measurement date december 31 used plan assets rhd dex media businesscom savings plans rhd plan contribute 50 dollar contributed participating employee maximum 6 participating employee’s salary including bonus commissions contributions plan 27 million 25 million 30 million years ended december 31 2008 2007 2006 respectively management employees dex media plan contribute 100 first 4 participating employee’s salary 50 next 2 management employees match limited 5 participating employee’s eligible earnings occupational employees dex media plan contribute 81 first 6 participating employee’s salary exceed 486 eligible earnings one pay period matching contributions limited 4860 per occupational employee annually contributions dex rh donnelley corporation notes consolidated financial statements continued media plan 51 million 57 million 53 million years ended december 31 2008 2007 eleven months ended december 31 2006 respectively businesscom plan company may make matching contributions discretion board directors company make contributions businesscom plan 2008 subsequent businesscom acquisition 2007 postretirement benefits unfunded postretirement benefit plan provides certain healthcare life insurance benefits certain fulltime employees reach retirement eligibility working respective companies benefit obligation funded status summary funded status benefit plans december 31 2008 2007 follows net amounts recognized consolidated balance sheets december 31 2008 2007 follows rh donnelley corporation notes consolidated financial statements continued accumulated benefit obligation defined benefit pension plans 2729 million 2710 million december 31 2008 2007 respectively projected benefit obligation accumulated benefit obligation unfunded pbep december 31 2008 2007 follows components net periodic benefit expense net periodic benefit expense pension plans years ended december 31 2008 2007 2006 follows net periodic benefit expense postretirement plans years ended december 31 2008 2007 2006 follows following table presents amount previously unrecognized actuarial gains losses prior service cost credit currently accumulated comprehensive loss expected recognized net periodic benefit expense 2009 rh donnelley corporation notes consolidated financial statements continued amounts recognized accumulated comprehensive loss december 31 2008 2007 consist assumptions following assumptions used determining benefit obligations pension plans postretirement plans discount rate reflects current rate pension postretirement obligations could effectively settled end year 2008 2007 2006 utilized citigroup pension liability index “index” appropriate discount rate defined benefit pension plans index widely used companies throughout united states considered one preferred standards establishing discount rate freeze company’s defined benefit plans october 21 2008 resulted curtailment defined sfas 88 employers’ accounting settlements curtailments defined benefit plans termination benefits “sfas 88” curtailment required remeasurement plans’ liabilities net periodic benefit expense november 1 2008 notification date december 31 2008 october 31 2008 july 1 2008 december 1 2007 july 1 2006 thereafter settlements dex media’s pension plan occurred defined sfas 88 time lump sum payments participants exceeded sum service cost plus interest cost component net periodic benefit costs year settlements resulted recognition actuarial loss 35 million year ended december 31 2008 actuarial gains 15 million 10 million years ended december 31 2007 2006 respectively pension expense 2008 recomputed based assumptions july 1 2008 november 1 2008 settlement dates resulting increase discount rate 648 682 finally 801 pension expense 2006 recomputed based assumptions july 1 2006 settlement date resulting increase discount rate 550 625 based index following assumptions used determining net periodic benefit expense rhd pension plans rh donnelley corporation notes consolidated financial statements continued following assumptions used determining net periodic benefit expense dex media pension plan elimination retiree health care life insurance benefits october 21 2008 resulted curtailment defined sfas 106 employers’ accounting postretirement benefits pensions curtailment required remeasurement plans’ liabilities net periodic benefit expense november 1 2008 notification date weighted average discount rate used determine net periodic benefit expense rhd postretirement plan 801 period november 1 2008 december 31 2008 648 january 1 2008 october 31 2008 590 550 2007 2006 respectively weighted average discount rate used determine net periodic benefit expense dex media postretirement plan 801 period november 1 2008 december 31 2008 648 january 1 2008 october 31 2008 590 550 2007 2006 respectively following table reflects assumed healthcare cost trend rates used determining net periodic benefit expense postretirement plans following table reflects assumed healthcare cost trend rates used determining benefit obligations postretirement plans rh donnelley corporation notes consolidated financial statements continued assumed healthcare cost trend rates significant effect amounts reported postretirement benefit plans onepercent change assumed healthcare cost trend rate would following effects december 31 2008 plan assets pension plan weightedaverage asset allocation december 31 2008 asset category follows pension plan weightedaverage asset allocation december 31 2007 asset category follows plans’ assets invested accordance investment practices emphasize longterm investment fundamentals plans’ investment objective achieve positive rate return longterm capital appreciation growing stream current income would significantly contribute meeting plans’ current future obligations objectives obtained welldiversified portfolio structure manner consistent plan’s investment policy statement plans’ assets invested marketable equity fixed income securities managed professional investment managers plan assets invested using combination active passive indexed investment strategies plans’ assets broadly diversified asset class investment style number issues issue type factors consistent investment objectives outlined plan’s investment policy statement plans’ assets invested prudent levels risk expectation longterm returns maintain contribute increasing purchasing power plans’ assets net disbursements longterm plans’ assets separately managed accounts may used following purposes short sales purchases letter stock private placements leveraged transactions commodities transactions option strategies purchases real estate investment trusts investments limited partnerships investments rh donnelley corporation notes consolidated financial statements continued managers securities affiliates subsidiaries investment futures use margin investments derivative explicitly permitted plan’s investment policy statement 2008 2007 2006 used rate 850 825 respectively expected longterm rate return assumption plan assets rhd pension plans basis used determining rate longterm capital market return forecasts asset mix similar plans’ asset allocation target 65 equity securities 35 debt securities beginning year increase rate 2008 result adding active management assets expected add value long term 2008 2007 2006 used rate 850 900 respectively expected longterm rate return assumption plan assets dex media pension plan basis used determining rates also included opportunity active management assets add value long term active management expectation supported calculating historical returns seven investment managers actively manage dex media plan’s assets decrease rate 2007 result increasing debt securities portion asset mix held dex media pension plan although review expected longterm rate return assumption annually performance one particular year significantly influence evaluation assumption generally revised unless fundamental change one factors upon based target asset allocation longterm capital market return forecasts estimated future benefit payments pension plans benefits postretirement plans benefits expected paid next five fiscal years aggregate five fiscal years thereafter follows expect make contributions approximately 659 million 61 million pension plans postretirement plans respectively 2009 additional information august 17 2006 pension protection act 2006 “act” signed law general act requires singleemployer defined benefit plans fully funded within seven year period beginning 2008 provisions act effective january 1 2006 however new provisions effective january 1 2008 act replaces prior rules funding new standard based plan’s funded status funding must determined using specified interest rates specified mortality assumption 10 commitments lease office facilities equipment operating leases noncancelable lease terms expiring various dates 2019 rent lease expense 2008 2007 2006 268 million rh donnelley corporation notes consolidated financial statements continued 264 million 253 million respectively future noncancelable minimum rental payments applicable operating leases december 31 2008 connection software system modernization ongoing support services related amdocs software system obligated pay amdocs approximately 927 million years 2009 2012 connection att directory acquisition entered internet yellow pages reseller agreement whereby obligated pay att 30 million 2009 entered agreements yahoo whereby yahoo serve maintain local search listings placement webbased electronic local information directory electronic mapping products obligated pay yahoo 132 million 2009 2010 entered directory advertisement agreement cmr cover advertising placed rhd cmr behalf qwest agreement obligated pay cmr approximately 77 million commissions years 2009 2014 11 redeemable preferred stock warrants 10 million shares preferred stock authorized issuance series transactions related embarq acquisition november 2002 january 2003 issued private placement 200604 shares 8 convertible cumulative preferred stock “preferred stock” warrants purchase 165 million shares common stock investment partnerships affiliated goldman sachs group inc “gs funds” gross proceeds 200 million january 27 2006 completed gs repurchase defined result outstanding shares preferred stock aforementioned warrants remained outstanding following gs repurchase november 2 2006 time repurchased outstanding warrants gs funds net proceeds received issuance preferred stock january 2003 november 2002 allocated preferred stock warrants beneficial conversion feature “bcf” preferred stock based relative fair values bcf function conversion price preferred stock fair value warrants fair market value underlying common stock date issuance connection issuance preferred stock subsequent quarterly dividend date september 30 2005 bcf recorded fair value underlying common stock time issuance greater conversion price preferred stock bcf treated deemed dividend preferred stock convertible common stock immediately issuance commencing october 3 2005 date stock purchase agreement relating gs repurchase preferred stock longer convertible common stock consequently longer recognized bcf january 14 2005 repurchased 100303 shares outstanding preferred stock gs funds 2772 million cash january 27 2006 conjunction dex media merger rh donnelley corporation notes consolidated financial statements continued repurchased remaining 100301 shares preferred stock gs funds 3361 million cash including accrued cash dividends interest “gs repurchase” pursuant terms stock purchase support agreement “stock purchase agreement” dated october 3 2005 order fund gs repurchase issued 3650 million aggregate principal amount maturity 3321 million gross proceeds 6875 series a1 senior discount notes due january 15 2013 see note 5 “longterm debt credit facilities notes” discussion financing associated transaction based terms stock purchase agreement recorded value preferred stock accreted redemption value 3361 million january 27 2006 accretion redemption value 20 million represented accrued dividends interest year ended december 31 2006 recorded increase loss available common shareholders consolidated statements operations conjunction gs repurchase also reversed previously recorded bcf related shares recorded decrease loss available common shareholders consolidated statements operations approximately 312 million year ended december 31 2006 november 2 2006 repurchased outstanding warrants purchase 165 million shares common stock aggregate purchase price approximately 531 million may 30 2006 rhd redeemed outstanding preferred stock purchase rights issued pursuant company’s stockholder rights plan redemption price one cent per right total redemption payment 07 million 12 legal proceedings involved various legal proceedings arising ordinary course business well certain litigation tax matters many matters plaintiffs allege suffered damages errors omissions advertising improper listings case contained directories published us also exposed potential defamation breach privacy claims arising publication directories methods collecting processing using advertiser telephone subscriber data determined inaccurate data stored us improperly accessed disseminated us unauthorized persons subjects data users data collect publish could submit claims company although date experienced material claims relating defamation breach privacy may party proceedings future could material adverse effect business periodically assess liabilities contingencies connection matters based upon latest information available us matters probable incurred loss range loss reasonably estimated record liability consolidated financial statements instances unable make reasonable estimate liability uncertainties related probable outcome amount range loss additional information becomes available adjust assessment estimates liabilities accordingly based review latest information available believe ultimate liability connection pending threatened legal proceedings material effect results operations cash flows financial position material amounts accrued consolidated financial statements respect matters 13 business segments management reviews analyzes business providing local search solutions one operating segment rh donnelley corporation notes consolidated financial statements continued 14 rh donnelley corporation “parent company” financial statements following condensed parent company financial statements read conjunction consolidated financial statements rhd general substantially net assets company subsidiaries restricted paid dividends third party subsidiaries restricted paying dividends loans advances us limited exceptions terms credit facilities see note 5 “longterm debt credit facilities notes” description debt instruments rh donnelley corporation condensed parent company balance sheets rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation condensed parent company statements operations rh donnelley corporation notes consolidated financial statements continued rh donnelley corporation condensed parent company statements cash flows rh donnelley corporation notes consolidated financial statements continued 15 valuation qualifying accounts 16 quarterly information unaudited 1 recognized noncash goodwill impairment charges 25 billion 6602 million first second quarters 2008 respectively fourth quarter 2008 recognized noncash impairment charge 7462 million associated certain local national customer relationships acquired dex media merger att directory acquisition embarq acquisition tradenames rh donnelley corporation notes consolidated financial statements continued technology acquired local launch acquisition fourth quarter 2008 also retired certain computer software fixed assets resulted impairment charge 04 million fourth quarter 2007 recorded intangible asset impairment charge 200 million associated tradenames acquired embarq acquisition see note 2 “summary significant accounting policies identifiable intangible assets goodwill” discussion 2 see note 2 “summary significant accounting policies gain loss debt transactions net” details regarding debt transactions related accounting treatment 3 fourth quarter 2008 income tax benefit includes income tax benefit 203 million correcting overstated income tax expense fiscal years 2004 2007 evaluated materiality correction concluded material current prior year financial statements accordingly recorded correction fourth quarter 2008 17 subsequent events february 13 2009 company borrowed unused portions rhdi revolver dex media east revolver dex media west revolver totaling 1740 million 970 million 900 million respectively company made borrowings various revolving credit facilities preserve financial flexibility light continuing uncertainty global credit markets based upon beneficial ownership filings made sec first quarter 2009 company may undergone ownership change within meaning section 382 internal revenue code company perform work necessary confirm determination assess impact upon company’s substantial beneficial tax attributes financial condition results operations prior filing quarterly report form 10q three months ended march 31 2009 time company concluded upon potential impact possible ownership change upon substantial beneficial tax attributes financial condition results operations item 9 nannannannannannannannannanitem 15 exhibits financial statement schedules reports form 8k a1 2 list financial statements financial statement schedules following consolidated financial statements company included item 8 consolidated balance sheets december 31 2002 2001 consolidated statements operations three years ended december 31 2002 consolidated statements cash flows three years ended december 31 2002 consolidated statements changes shareholders’ deficit three years ended december 31 2002 notes consolidated financial statements following combined financial statements dontech included item 8 combined balance sheets december 31 2002 2001 combined statements operations three years ended december 31 combined statements cash flows three years ended december 31 combined statements partners’ capital three years ended december 31 2002 notes combined financial statements following financial statement schedule company included item 8 schedule ii valuation qualifying accounts included footnote 14 valuation qualifying accounts notes consolidated financial statements b reports form 8k march 3 2003 company filed current report form 8k disclosing item 9 march 3 2003 certain members senior management company scheduled make presentation media industry conference sponsored bear stearns co presentation conference management intended present slide presentation company attached copy slide presentation exhibit 991 january 17 2003 company filed current report form 8k disclosing item 2 company completed acquisition spa sprint addition item 5 company disclosed gs funds invested additional 130 million company purchase 130000 shares preferred stock warrants purchase 1072500 shares common stock company replaced existing senior credit facility new senior secured credit facility january 8 2003 company filed current report form 8k disclosing item 9 january 8 2003 certain members senior management company scheduled make presentation investor conference sponsored cjs securities research firm covers company presentation conference management intended present slide presentation company attached copy slide presentation exhibit 991 january 6 2003 company filed current report form 8k disclosing item 5 company rh donnelley inc entered third supplemental indenture dated december 20 2002 operative january 3 2002 among company rh donnelley inc rh donnelley acquisitions inc rh donnelley apil inc rh donnelley cd inc get digital smartcom inc rh donnelley acquisitions ii inc bank new york trustee december 20 2002 company filed current report form 8k disclosing item 5 company rh donnelley inc entered second supplemental indenture dated december 20 2002 among company rh donnelley inc rh donnelley acquisitions inc rh donnelley apil inc rh donnelley cd inc get digital smartcom inc rh donnelley acquisitions ii inc bank new york trustee december 3 2002 company filed current report form 8k disclosing item 5 pursuant letter agreement dated november 25 2002 among company rh donnelley inc gs funds gs funds invested 70 million company though purchase 70000 shares preferred stock warrants purchase 577500 shares common stock connection sale preferred stock warrants gs funds company gs funds entered registration rights agreement dated november 25 2002 december 3 2002 company filed current report form 8k disclosing item 9 unaudited pro forma combined financial statements give effect acquisition company spa related financings historical financial position results operations company spa november 25 2002 company filed current report form 8k disclosing item 5 november 25 2002 rh donnelley inc announced intended offer one subsidiaries 325 million senior notes 600 million senior subordinated notes certain institutional investors offering exempt registration requirements securities act 1933 pursuant rule 135c securities act company filed related press release issued november 25 2002 exhibit 991 november 25 2002 company filed current report form 8k disclosing item 5 company rh donnelley inc entered first supplemental indenture dated november 25 2002 among company rh donnelley inc rh donnelley acquisitions inc rh donnelley apil inc rh donnelley cd inc get digital smartcom inc bank new york trustee november 14 2002 company filed current report form 8k disclosing item 9 unaudited pro forma combined financial statements give effect acquisition company spa related financings historical financial position results operations company spa november 8 2002 company filed current report form 8k disclosing item 9 conference held november 7 2002 representative company stated company intend repay outstanding 918 senior subordinated notes due 2008 rh donnelley inc connection financing company’s acquisition publishing business sprint corporation november 7 2002 company filed current report form 8k disclosing item 5 rh donnelley inc intends offer subsidiary 300 million senior notes 450 million senior subordinated notes certain institutional investors offering exempt registration requirements securities act 1933 pursuant rule 135c securities act company filed press release issued november 6 2002 exhibit 991 october 1 2002 company filed current report form 8k disclosing item 5 pursuant stock purchase agreement dated september 21 2002 among rh donnelley corporation sprint corporation centel directories llc company agreed purchase sprint’s directory publishing business “spa” 223 billion cash company also disclosed gs funds entered definitive agreement invest 200 million company purchase company’s newly issued preferred stock gs funds also receive warrants acquire 165 million shares company’s common stock exercise price equal 30day average common stock closing september 23 2002 company filed current report form 8k disclosing item 9 company posted slide presentation website titled “creating leading public standalone us directory company” connection company’s public announcement related conference call entered definitive agreement purchase sprint corporation’s directory publishing business c exhibits reference exhibit 995 current report form 8k company fka dun bradstreet corporation filed securities exchange commission june 30 1998 commission file 00107155 105 form amended restated transition services agreement among company fka dun bradstreet corporation new dun bradstreet corporation cognizant corporation ims health incorporated acnielsen corporation gartner group inc incorporated reference exhibit 999 current report form 8k company fka dun bradstreet corporation filed securities exchange commission june 30 1998 commission file 00107155 106 dontech ii partnership agreement effective august 19 1997 rh donnelley inc fka reuben h donnelley corporation ameritech publishing illinois inc incorporated reference exhibit 1010 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 107 revenue participation agreement dated august 19 1997 apil partners partnership rh donnelley inc fka reuben h donnelley corporation incorporated reference exhibit 1011 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 108 master agreement executed august 19 1997 among rh donnelley inc fka reuben h donnelley corporation company fka dun bradstreet corporation amdon partnership aka dontech ii ameritech publishing inc ameritech publishing illinois inc ameritech corporation dontech publishing company llc apil partners partnership incorporated reference exhibit 1012 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 109 exclusive sales agency agreement effective august 19 1997 apil partners partnership dontech ii incorporated reference exhibit 1013 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 1010 agreement publishing services dated january 1 2002 ameritech publishing inc rh donnelley inc certain portions exhibit omitted filed separately securities exchange commission pursuant application order granting confidential treatment incorporated reference exhibit 1013 company’s quarterly report form 10q three months ended march 31 2002 filed securities exchange commission may 10 2002 commission file 00107155 1011 second amended restated partnership agreement effective august 19 1997 rh donnelley inc fka reuben h donnelley corporation ameritech publishing illinois incorporated reference exhibit 1014 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 1012 limited liability company agreement cendon llc dated april 27 2000 rh donnelley inc centel directory company certain portions exhibit omitted filed separately securities exchange commission pursuant application order granting confidential treatment incorporated reference exhibit 1014 company’s quarterly report form 10q three months ended june 30 2002 filed securities exchange commission august 14 2002 commission file 00107155 1013 sales agency agreement dated april 27 2000 among rh donnelley inc centel directory company cendon llc incorporated reference exhibit 1015 company’s quarterly report form 10q three months ended june 30 2002 filed securities exchange commission august 14 2002 commission file 00107155 1014 agreement publishing services dated april 27 2000 rh donnelley cendon llc certain portions exhibit omitted filed separately securities exchange commission pursuant application order granting confidential treatment incorporated reference exhibit 1016 company’s quarterly report form 10q three months ended june 30 2002 filed securities exchange commission august 14 2002 commission file 00107155 1015 key employees’ performance unit plan amended restated incorporated reference exhibit 1015 amendment 3 registration statement form s4 filed securities exchange commission september 28 1998 registration 33359287 1016 1991 key employees’ stock option plan amended restated april 25 2000 incorporated reference exhibit 1017 company’s quarterly report form 10q three months ended september 30 2000 filed securities exchange commission november 13 2000 commission file 00107155 1017 amended restated 1998 directors’ stock plan incorporated reference exhibit 1018 company’s annual report form 10k year ended december 31 1999 filed securities exchange commission march 27 2000 commission file 00107155 1018 pension benefit equalization plan incorporated reference exhibit 1016 company’s annual report form 10k year ended december 31 2001 filed securities exchange commission march 27 2002 commission file 00107155 1019 2001 stock award incentive plan incorporated reference exhibit 1017 company’s annual report form 10k year ended december 31 2001 filed securities exchange commission march 27 2002 commission file 00107155 1020 2001 partner share plan incorporated reference exhibit 991 registration statement form s8 filed securities exchange commission april 30 2001 registration 33359790 1021 form nonqualified stock option agreement incorporated reference exhibit 9902 registration statement form s8 filed securities exchange commission july 25 2001 registration 33365822 1022 form annual incentive program award incorporated reference exhibit 9903 registration statement form s8 filed securities exchange commission july 25 2001 registration 33365822 1023 form performance unit program award incorporated reference exhibit 9904 registration statement form s8 filed securities exchange commission july 25 2001 registration 33365822 1024 deferred compensation plan incorporated reference exhibit 401 company’s registration statement form s8 filed securities exchange commission november 24 1999 registration 33391613 1025 amended restated employment agreement dated december 27 2001 company frank r noonan incorporated reference exhibit 1023 company’s annual report form 10k year ended december 31 2001 filed securities exchange commission march 27 2002 commission file 00107155 1026 amended restated employment agreement dated december 27 2001 company philip c danford incorporated reference exhibit 1024 company’s annual report form 10k year ended december 31 2001 filed securities exchange commission march 27 2002 commission file 00107155 1027 employment agreement effective may 1 2002 company david c swanson incorporated reference exhibit 1029 company’s quarterly report form 10q three months ended june 30 2002 filed securities exchange commission august 14 2002 commission file 00107155 1028 employment agreement effective september 21 2002 company peter j mcdonald incorporated reference exhibit 1030 quarterly report form 10q nine months ended september 30 2002 filed securities exchange commission november 12 2002 commission file 00107155 1029 employment agreement effective march 1 2002 company steven blondy incorporated reference exhibit 1030 company’s quarterly report form 10q three months ended june 30 2002 filed securities exchange commission august 14 2002 commission file 00107155 1030 employment agreement dated september 28 1998 company frank colarusso incorporated reference exhibit 1032 company’s annual report form 10k year ended december 31 2000 filed securities exchange commission march 28 2001 commission file 00107155 1031 amendment 1 employment agreement dated july 27 2000 company frank colarusso incorporated reference exhibit 1033 company’s annual report form 10k year ended december 31 2000 filed securities exchange commission march 28 2001 commission file 00107155 1032 amendment 2 employment agreement dated february 27 2001 company frank colarusso incorporated reference exhibit 1034 company’s annual report form 10k year ended december 31 2000 filed securities exchange commission march 28 2001 commission file 00107155 1033 employment agreement dated september 26 2000 company william c drexler incorporated reference exhibit 1035 company’s annual report form 10k year ended december 31 2000 filed securities exchange commission march 28 2001 commission file 00107155 1034 amendment 1 employment agreement dated february 27 2001 company william c drexler incorporated reference exhibit 1036 company’s annual report form 10k year ended december 31 2000 filed securities exchange commission march 28 2001 commission file 00107155 1035 employment agreement dated january 1 2001 company robert j bush incorporated reference exhibit 1037 company’s annual report form 10k year ended december 31 2000 filed securities exchange commission march 28 2001 commission file 00107155 1036 amendment 1 employment agreement dated february 27 2001 company robert j bush incorporated reference exhibit 1038 company’s annual report form 10k year ended december 31 2000 filed securities exchange commission march 28 2001 commission file 00107155 1037 separation agreement release dated march 15 2001 company judith norton incorporated reference exhibit 1029 company’s annual report form 10k year ended december 31 2000 filed securities exchange commission march 28 2001 commission file 00107155 1038 letter agreement dated november 25 2002 among company rh donnelley inc investment partnerships affiliated goldman sachs group inc incorporated reference exhibit 101 current report form 8k filed securities exchange commission december 3 2002 commission file 00107155 1039 letter agreement dated january 3 2003 among company rh donnelley inc investment partnerships affiliated goldman sachs group inc incorporated reference exhibit 108 current report form 8k filed securities exchange commission january 17 2003 commission file 00107155 1040 directory services license agreement dated january 3 2003 among rh donnelley publishing advertising inc fka sprint publishing advertising inc cendon llc rh donnelley directory company fka centel directory company sprint corporation sprint directory trademark company llc sprint local telecommunications division incorporated reference exhibit 101 current report form 8k filed securities exchange commission january 17 2003 commission file 00107155 1041 trademark license agreement dated january 3 2003 among sprint directory trademark company llc rh donnelley publishing advertising inc fka sprint publishing advertising inc cendon llc rh donnelley directory company fka centel directory company incorporated reference exhibit 102 current report form 8k filed securities exchange commission january 17 2003 commission file 00107155 1042 publisher trademark license agreement dated january 3 2003 among rh donnelley publishing advertising inc fka sprint publishing advertising inc rh donnelley directory company fka centel directory company sprint corporation incorporated reference exhibit 103 current report form 8k filed securities exchange commission january 17 2003 commission file 00107155 1043 noncompetition agreement dated january 3 2003 among company rh donnelley publishing advertising inc fka sprint publishing advertising inc cendon llc rh donnelley directory company fka centel directory company sprint corporation sprint local telecommunications division incorporated reference exhibit 104 current report form 8k filed securities exchange commission january 17 2003 commission file 00107155 1044 subscriber listings agreement dated january 3 2003 among rh donnelley publishing advertising inc fka sprint publishing advertising inc cendon llc rh donnelley directory company fka centel directory company sprint corporation sprint local telecommunications division incorporated reference exhibit 105 current report form 8k filed securities exchange commission january 17 2003 commission file 00107155 1045 credit agreement dated december 6 2002 among company rh donnelley inc rh donnelley finance corporation ii subsequently merged rh donnelley inc several lenders time party thereto bear stearns corporate lending inc citicorp north america inc joint syndication agents bnp paribas fleet national bank joint documentation agents deutsche bank trust company americas administrative agent deutsche bank securities inc salomon smith barney inc bear stearns co inc joint lead arrangers joint bookrunners incorporated reference exhibit 1010 current report form 8k filed securities exchange commission january 17 2003 commission file 00107155 21 subsidiaries company 23 consent independent accountants 991 certification annual report form 10k year ended december 31 2002 david c swanson chief executive officer 992 certification annual report form 10k year ended december 31 2002 steven blondy senior vice president chief financial officer 993 certification annual report form 10k year ended december 31 2002 david c swanson chief executive officer rh donnelley inc 994 certification annual report form 10k year ended december 31 2002 steven blondy senior vice president chief financial officer rh donnelley inc management contract compensatory plan signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 19th day march 2003 rh donnelley corporation david c swanson david c swanson chairman chief executive officer pursuant requirements securities exchange act 1934 amended report duly signed following persons capacities date indicated david c swanson chairman chief executive march 19 2003 officer director david c swanson principal executive officer steven blondy senior vice president march 19 2003 chief financial officer steven blondy principal financial officer william c drexler vice president controller march 19 2003 william c drexler principal accounting officer kenneth g campbell kenneth g campbell director march 19 2003 nancy e cooper nancy e cooper director march 19 2003 robert r gheewalla robert r gheewalla director march 19 2003 robert kamerschen robert kamerschen director march 19 2003 terence o’toole director march 19 2003 carol j parry carol j parry director march 19 2003 david veit david veit director march 19 2003 barry lawson williams barry lawson williams director march 19 2003 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 19th day march 2003 rh donnelley inc david c swanson david c swanson chief executive officer pursuant requirements securities exchange act 1934 amended report duly signed following persons capacities date indicated david c swanson david c swanson director chief executive officer principal executive officer march 19 2003 steven blondy steven blondy director senior vice president chief financial officer principal financial officer march 19 2003 william c drexler william c drexler vice president controller principal accounting officer march 19 2003 certifications david c swanson certify 1 reviewed annual report form 10k rh donnelley corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officers disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 19 2003 david c swanson david c swanson president chief executive officer certifications steven blondy certify 1 reviewed annual report form 10k rh donnelley corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officer disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 19 2003 steven blondy steven blondy senior vice president chief financial officer certifications david c swanson certify 1 reviewed annual report form 10k rh donnelley inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officers disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 19 2003 david c swanson david c swanson president chief executive officer certifications steven blondy certify 1 reviewed annual report form 10k rh donnelley inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officer disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 19 2003 steven blondy steven blondy senior vice president chief financial officer exhibit index reference exhibit 995 current report form 8k company fka dun bradstreet corporation filed securities exchange commission june 30 1998 commission file 00107155 105 form amended restated transition services agreement among company fka dun bradstreet corporation new dun bradstreet corporation cognizant corporation ims health incorporated acnielsen corporation gartner group inc incorporated reference exhibit 999 current report form 8k company fka dun bradstreet corporation filed securities exchange commission june 30 1998 commission file 00107155 106 dontech ii partnership agreement effective august 19 1997 rh donnelley inc fka reuben h donnelley corporation ameritech publishing illinois inc incorporated reference exhibit 1010 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 107 revenue participation agreement dated august 19 1997 apil partners partnership rh donnelley inc fka reuben h donnelley corporation incorporated reference exhibit 1011 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 108 master agreement executed august 19 1997 among rh donnelley inc fka reuben h donnelley corporation company fka dun bradstreet corporation amdon partnership aka dontech ii ameritech publishing inc ameritech publishing illinois inc ameritech corporation dontech publishing company llc apil partners partnership incorporated reference exhibit 1012 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 109 exclusive sales agency agreement effective august 19 1997 apil partners partnership dontech ii incorporated reference exhibit 1013 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 1010 agreement publishing services dated january 1 2002 ameritech publishing inc rh donnelley inc certain portions exhibit omitted filed separately securities exchange commission pursuant application order granting confidential treatment incorporated reference exhibit 1013 company’s quarterly report form 10q three months ended march 31 2002 filed securities exchange commission may 10 2002 commission file 00107155 1011 second amended restated partnership agreement effective august 19 1997 rh donnelley inc fka reuben h donnelley corporation ameritech publishing illinois incorporated reference exhibit 1014 amendment 1 registration statement form s4 filed securities exchange commission august 7 1998 registration 33359287 1012 limited liability company agreement cendon llc dated april 27 2000 rh donnelley inc centel directory company certain portions exhibit omitted filed separately securities exchange commission pursuant application order granting confidential treatment incorporated reference exhibit 1014 company’s quarterly report form 10q three months ended june 30 2002 filed securities exchange commission august 14 2002 commission file 00107155 1013 sales agency agreement dated april 27 2000 among rh donnelley inc centel directory company cendon llc incorporated reference exhibit 1015 company’s quarterly report form 10q three months ended june 30 2002 filed securities exchange commission august 14 2002 commission file 00107155 1014 agreement publishing services dated april 27 2000 rh donnelley cendon llc certain portions exhibit omitted filed separately securities exchange commission pursuant application order granting confidential treatment incorporated reference exhibit 1016 company’s quarterly report form 10q three months ended june 30 2002 filed securities exchange commission august 14 2002 commission file 00107155 1015 key employees’ performance unit plan amended restated incorporated reference exhibit 1015 amendment 3 registration statement form s4 filed securities exchange commission september 28 1998 registration 33359287 1016 1991 key employees’ stock option plan amended restated april 25 2000 incorporated reference exhibit 1017 company’s quarterly report form 10q three months ended september 30 2000 filed securities exchange commission november 13 2000 commission file 00107155 1017 amended restated 1998 directors’ stock plan incorporated reference exhibit 1018 company’s annual report form 10k year ended december 31 1999 filed securities exchange commission march 27 2000 commission file 00107155 1018 pension benefit equalization plan incorporated reference exhibit 1016 company’s annual report form 10k year ended december 31 2001 filed securities exchange commission march 27 2002 commission file 00107155 1019 2001 stock award incentive plan incorporated reference exhibit 1017 company’s annual report form 10k year ended december 31 2001 filed securities exchange commission march 27 2002 commission file 00107155 1020 2001 partner share plan incorporated reference exhibit 991 registration statement form s8 filed securities exchange commission april 30 2001 registration 33359790 1021 form nonqualified stock option agreement incorporated reference exhibit 9902 registration statement form s8 filed securities exchange commission july 25 2001 registration 33365822 1022 form annual incentive program award incorporated reference exhibit 9903 registration statement form s8 filed securities exchange commission july 25 2001 registration 33365822 1023 form performance unit program award incorporated reference exhibit 9904 registration statement form s8 filed securities exchange commission july 25 2001 registration 33365822 1024 deferred compensation plan incorporated reference exhibit 401 company’s registration statement form s8 filed securities exchange commission november 24 1999 registration 33391613 1025 amended restated employment agreement dated december 27 2001 company frank r noonan incorporated reference exhibit 1023 company’s annual report form 10k year ended december 31 2001 filed securities exchange commission march 27 2002 commission file 00107155 1026 amended restated employment agreement dated december 27 2001 company philip c danford incorporated reference exhibit 1024 company’s annual report form 10k year ended december 31 2001 filed securities exchange commission march 27 2002 commission file 00107155 1027 employment agreement effective may 1 2002 company david c swanson incorporated reference exhibit 1029 company’s quarterly report form 10q three months ended june 30 2002 filed securities exchange commission august 14 2002 commission file 00107155 1028 employment agreement effective september 21 2002 company peter j mcdonald incorporated reference exhibit 1030 quarterly report form 10q nine months ended september 30 2002 filed securities exchange commission november 12 2002 commission file 00107155 1029 employment agreement effective march 1 2002 company steven blondy incorporated reference exhibit 1030 company’s quarterly report form 10q three months ended june 30 2002 filed securities exchange commission august 14 2002 commission file 00107155 1030 employment agreement dated september 28 1998 company frank colarusso incorporated reference exhibit 1032 company’s annual report form 10k year ended december 31 2000 filed securities exchange commission march 28 2001 commission file 00107155 1031 amendment 1 employment agreement dated july 27 2000 company frank colarusso incorporated reference exhibit 1033 company’s annual report form 10k year ended december 31 2000 filed securities exchange commission march 28 2001 commission file 00107155 1032 amendment 2 employment agreement dated february 27 2001 company frank colarusso incorporated reference exhibit 1034 company’s annual report form 10k year ended december 31 2000 filed securities exchange commission march 28 2001 commission file 00107155 1033 employment agreement dated september 26 2000 company william c drexler incorporated reference exhibit 1035 company’s annual report form 10k year ended december 31 2000 filed securities exchange commission march 28 2001 commission file 00107155 1034 amendment 1 employment agreement dated february 27 2001 company william c drexler incorporated reference exhibit 1036 company’s annual report form 10k year ended december 31 2000 filed securities exchange commission march 28 2001 commission file 00107155 1035 employment agreement dated january 1 2001 company robert j bush incorporated reference exhibit 1037 company’s annual report form 10k year ended december 31 2000 filed securities exchange commission march 28 2001 commission file 00107155 1036 amendment 1 employment agreement dated february 27 2001 company robert j bush incorporated reference exhibit 1038 company’s annual report form 10k year ended december 31 2000 filed securities exchange commission march 28 2001 commission file 00107155 1037 separation agreement release dated march 15 2001 company judith norton incorporated reference exhibit 1029 company’s annual report form 10k year ended december 31 2000 filed securities exchange commission march 28 2001 commission file 00107155 1038 letter agreement dated november 25 2002 among company rh donnelley inc investment partnerships affiliated goldman sachs group inc incorporated reference exhibit 101 current report form 8k filed securities exchange commission december 3 2002 commission file 00107155 1039 letter agreement dated january 3 2003 among company rh donnelley inc investment partnerships affiliated goldman sachs group inc incorporated reference exhibit 108 current report form 8k filed securities exchange commission january 17 2003 commission file 00107155 1040 directory services license agreement dated january 3 2003 among rh donnelley publishing advertising inc fka sprint publishing advertising inc cendon llc rh donnelley directory company fka centel directory company sprint corporation sprint directory trademark company llc sprint local telecommunications division incorporated reference exhibit 101 current report form 8k filed securities exchange commission january 17 2003 commission file 00107155 1041 trademark license agreement dated january 3 2003 among sprint directory trademark company llc rh donnelley publishing advertising inc fka sprint publishing advertising inc cendon llc rh donnelley directory company fka centel directory company incorporated reference exhibit 102 current report form 8k filed securities exchange commission january 17 2003 commission file 00107155 1042 publisher trademark license agreement dated january 3 2003 among rh donnelley publishing advertising inc fka sprint publishing advertising inc rh donnelley directory company fka centel directory company sprint corporation incorporated reference exhibit 103 current report form 8k filed securities exchange commission january 17 2003 commission file 00107155 1043 noncompetition agreement dated january 3 2003 among company rh donnelley publishing advertising inc fka sprint publishing advertising inc cendon llc rh donnelley directory company fka centel directory company sprint corporation sprint local telecommunications division incorporated reference exhibit 104 current report form 8k filed securities exchange commission january 17 2003 commission file 00107155 1044 subscriber listings agreement dated january 3 2003 among rh donnelley publishing advertising inc fka sprint publishing advertising inc cendon llc rh donnelley directory company fka centel directory company sprint corporation sprint local telecommunications division incorporated reference exhibit 105 current report form 8k filed securities exchange commission january 17 2003 commission file 00107155 1045 credit agreement dated december 6 2002 among company rh donnelley inc rh donnelley finance corporation ii subsequently merged rh donnelley inc several lenders time party thereto bear stearns corporate lending inc citicorp north america inc joint syndication agents bnp paribas fleet national bank joint documentation agents deutsche bank trust company americas administrative agent deutsche bank securities inc salomon smith barney inc bear stearns co inc joint lead arrangers joint bookrunners incorporated reference exhibit 1010 current report form 8k filed securities exchange commission january 17 2003 commission file 00107155 21 subsidiaries company 23 consent independent accountants 991 certification annual report form 10k year ended december 31 2002 david c swanson chief executive officer 992 certification annual report form 10k year ended december 31 2002 steven blondy senior vice president chief financial officer 993 certification annual report form 10k year ended december 31 2002 david c swanson chief executive officer rh donnelley inc 994 certification annual report form 10k year ended december 31 2002 steven blondy senior vice president chief financial officer rh donnelley inc management contract compensatory planitem 15 exhibits financial statement schedules reports form 8k a1 2 list financial statements financial statement schedules following consolidated financial statements company included item 8 consolidated balance sheets december 31 2003 2002 consolidated statements operations three years ended december 31 2003 consolidated statements cash flows three years ended december 31 2003 consolidated statements changes shareholders’ deficit three years ended december 31 2003 notes consolidated financial statements following financial statements dontech included item 8 balance sheets december 31 2003 2002 statements partners’ capital three years ended december 31 2003 statements operations three years ended december 31 2003 statements cash flows three years ended december 31 2003 notes financial statements financial statement schedules company prepared required information included company’s consolidated financial statements included item 8 annual report b reports form 8k october 29 2003 company furnished current report form 8k disclosing item 12 certain financial results company three nine months ended september 30 2003 attached copy related press release exhibit 991 november 20 2003 company furnished current report form 8k disclosing item 9 november 20 2003 certain members senior management company scheduled make presentation investors securities analysts new york stock exchange presentation conference management intended present slide presentation company attached copy slide presentation exhibit 991 november 20 2003 company furnished current report form 8k disclosing item 9 november 20 2003 certain members senior management company scheduled make presentation investors securities analysts new york stock exchange presentation conference management intended present slide presentation slide presentation addition slide presentation furnished separate current report form 8k also furnished november 20 2003 company attached copy slide presentation exhibit 991 february 26 2004 company furnished current report form 8k disclosing item 12 certain financial results company three months year ended december 31 2003 attached copy related press release exhibit 991 february 26 2004 company furnished current report form 8k disclosing item 9 management intended discuss certain aspects amendment company’s credit agreement dated december 8 2002 investor teleconference scheduled february 27 2004 company attached copy amendment 1 credit agreement exhibit 991 march 8 2004 company furnished current report form 8k disclosing item 9 certain members senior management company scheduled make presentation media industry conference management intended make slide presentation company attached copy slide presentation exhibit 991 c exhibits management contract compensatory plan signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 12th day march 2004 pursuant requirements securities exchange act 1934 amended report duly signed following persons capacities date indicated signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 12th day march 2004 rh donnelley inc pursuant requirements securities exchange act 1934 amended report duly signed following persons capacities date indicateditem 15 exhibits financial statement schedules a1 2 list financial statements financial statement schedules following consolidated financial statements company included item 8 report independent registered public accounting firm consolidated balance sheets december 31 2004 2003 consolidated statements operations three years ended december 31 2004 consolidated statements cash flows three years ended december 31 2004 consolidated statements changes shareholders’ equity deficit three years ended december 31 2004 notes consolidated financial statements following financial statements company’s 100 owned subsidiaries included item 8 pursuant rule 316 regulation sx senior notes became secured capital stock equity interest subsidiaries connection sbc directory acquisition rh donnelley publishing advertising inc report independent registered public accounting firm balance sheets december 31 2004 2003 statements operations two years ended december 31 2004 statements cash flows two years ended december 31 2004 statements changes shareholders’ equity two years ended december 31 2004 notes financial statements report independent auditors balance sheet december 31 2002 statement operations year ended december 31 2002 statement cash flows year ended december 31 2002 statement changes shareholders’ equity year ended december 31 2002 notes combined consolidated financial statements rh donnelley apil inc report independent registered public accounting firm balance sheets december 31 2004 2003 statements operations three years ended december 31 2004 statements cash flows three years ended december 31 2004 statements changes shareholders’ equity three years ended december 31 2004 notes financial statements dontech ii partnership reports independent registered public accounting firm balance sheets december 31 2004 2003 statements operations four months end december 31 2004 eight months ended august 31 2004 two years ended december 31 2003 statements cash flows four months end december 31 2004 eight months ended august 31 2004 two years ended december 31 2003 statements changes partners’ capital four months end december 31 2004 eight months ended august 31 2004 two years ended december 31 notes financial statements rh donnelley publishing advertising illinois holdings llc report independent registered public accounting firm consolidated balance sheet december 31 2004 consolidated statement operations four months ended december 31 2004 consolidated statement cash flows four months ended december 31 2004 consolidated statement changes partners’ capital four months ended december 31 2004 notes consolidated financial statements rh donnelley publishing advertising illinois partnership report independent auditors statements operations four months ended december 31 2004 balance sheets december 31 2004 statements cash flows four months ended december 31 2004 statements changes partners’ capital four months ended december 31 2004 notes financial statements report independent registered public accounting firm balance sheets august 31 2004 december 31 2003 statements operations eight months ended august 31 2004 two years ended december 31 statements cash flows eight months ended august 31 2004 two years ended december 31 statements changes partners’ capital eight months ended august 31 2004 two years ended december 31 2003 notes combined financial statements financial statement schedules company prepared required information included company’s consolidated financial statements included item 8 annual report c exhibits filed herewith management contract compensatory plan company agrees furnish supplementally copy omitted exhibits schedules securities exchange commission upon request signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 16th day march 2005 rh donnelley corporation david c swanson david c swanson chairman chief executive officer pursuant requirements securities exchange act 1934 amended report duly signed following persons capacities date indicated signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 16th day march 2005 rh donnelley inc david c swanson david c swanson chief executive officer pursuant requirements securities exchange act 1934 amended report duly signed following persons capacities date indicateditem 15 exhibits financial statement schedules a1 2 list financial statements financial statement schedules following consolidated financial statements company included item 8 financial statement schedules company prepared required information included company’s consolidated financial statements included item 8 annual report c exhibits filed herewith management contract compensatory plan company agrees furnish supplementally copy omitted exhibits schedules securities exchange commission upon request signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 15th day march 2006 rh donnelley corporation david c swanson david c swanson chief executive officer director pursuant requirements securities exchange act 1934 report duly signed following persons capacities date indicated signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 15th day march 2006 rh donnelley inc david c swanson david c swanson chief executive officer director pursuant requirements securities exchange act 1934 report duly signed following persons capacities date indicated exhibit index filed herewithitem 15 exhibits financial statement schedules a1 2 list financial statements financial statement schedules following consolidated financial statements company included item 8 financial statement schedules company prepared required information included company’s consolidated financial statements included item 8 annual report c exhibits filed herewith management contract compensatory plan company agrees furnish supplementally copy omitted exhibits schedules securities exchange commission upon request signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 13th day march 2007 rh donnelley corporation david c swanson david c swanson chairman chief executive officer pursuant requirements securities exchange act 1934 report duly signed following persons behalf registrant capacities date indicated exhibit index management contract compensatory plan filed herewithitem 15 exhibits financial statement schedules a1 2 list financial statements financial statement schedules following consolidated financial statements company included item 8 financial statement schedules company prepared required information included company’s consolidated financial statements included item 8 annual report b exhibits filed herewith management contract compensatory plan signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 12th day march 2010 dex one corporation david c swanson david c swanson chairman chief executive officer pursuant requirements securities exchange act 1934 report duly signed following persons behalf registrant capacities date indicated exhibit index filed herewith ˆ management contract compensatory planitem 15 exhibits financial statement schedules a1 2 list financial statements financial statement schedules following consolidated financial statements company predecessor company included item 8 b exhibits filed herewith management contract compensatory plan signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 4th day march 2011 pursuant requirements securities exchange act 1934 report duly signed following persons behalf registrant capacities date indicated alfred mockett chief executive officer president principal executive officer march 4 2011 alfred mockett steven blondy executive vice president march 4 2011 steven blondy chief financial officer principal financial officer sylvester j johnson vice president corporate march 4 2011 sylvester j johnson controller chief accounting officer principal accounting officer jonathan b bulkeley director march 4 2011 jonathan b bulkeley eugene davis director march 4 2011 eugene davis w kirk liddell director march 4 2011 w kirk liddell richard l kuersteiner director march 4 2011 richard l kuersteiner mark mceachen director march 4 2011 mark mceachen alan f schultz director march 4 2011 alan f schultz exhibit index filed herewith management contract compensatory planitem 15 exhibits financial statement schedules a1 2 list financial statements financial statement schedules following consolidated financial statements company predecessor company included item 8 b exhibits filed herewith management contract compensatory plan signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 1st day march 2012 dex one corporation alfred mockett alfred mockett chief executive officer president pursuant requirements securities exchange act 1934 report duly signed following persons behalf registrant capacities date indicated exhibit index filed herewith management contract compensatory planitem 15 exhibits financial statement schedules a1 2 list financial statements financial statement schedules following consolidated financial statements company predecessor company included item 8 b exhibits filed herewith management contract compensatory plan signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 18th day march 2013 dex one corporation alfred mockett alfred mockett chief executive officer president pursuant requirements securities exchange act 1934 report duly signed following persons behalf registrant capacities date indicated exhibit index filed herewith management contract compensatory planitem 15 exhibits financial statement schedules a1 2 list financial statements financial statement schedules following consolidated financial statements company included item 8 financial statement schedules company prepared required information included company’s consolidated financial statements included item 8 annual report b exhibits filed herewith ˆ management contract compensatory plan company agrees furnish supplementally copy omitted exhibits schedules securities exchange commission upon request signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 13th day march 2008 rh donnelley corporation david c swanson david c swanson chairman chief executive officer pursuant requirements securities exchange act 1934 report duly signed following persons behalf registrant capacities date indicated exhibit index ˆ management contract compensatory plan filed herewithitem 15 exhibits financial statement schedules a1 2 list financial statements financial statement schedules following consolidated financial statements company included item 8 financial statement schedules company prepared required information included company’s consolidated financial statements included item 8 annual report b exhibits filed herewith ˆ management contract compensatory plan company agrees furnish supplementally copy omitted exhibits schedules securities exchange commission upon request signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 27th day march 2009 rh donnelley corporation david c swanson david c swanson chairman chief executive officer pursuant requirements securities exchange act 1934 report duly signed following persons behalf registrant capacities date indicated exhibit index ˆ management contract compensatory plan filed herewith