6 5 - RR DONNELLEY FINANCIAL - External Home Login

convertible notes exchanged in 2009, $227 million was allocated to the debt component and the remaining
$137 million was allocated to the equity conversion feature and was recorded as an adjustment to paid-in
capital. The difference between the debt component and value of the common stock exchanged in these
transactions resulted in a $40 million loss (including $5 million of deferred charges associated with the
exchanges).
During 2008, we exchanged approximately $254 million, $272 million and $239 million in aggregate
principal amount of our 2.25% Contingent Convertible Senior Notes due 2038, 2.50% Contingent Convertible
Senior Notes due 2037, and 2.75% Contingent Convertible Senior Notes due 2035, respectively, for an
aggregate of 23,913,212 shares of our common stock valued at approximately $480 million. Through these
transactions, we were able to redeem this debt for common stock valued at approximately 65% of the face
value of the notes. Associated with these exchanges, we recorded a gain of $27 million. Of the combined $765
million principal amount of convertible notes exchanged in 2008, $515 million was allocated to the debt
component and the remaining $250 million was allocated to the equity conversion feature and was recorded as
an adjustment to paid-in-capital. The difference between the debt component and the value of the common
stock exchanged in these transactions resulted in a $35 million gain. This gain was partially offset by the
write-off of $8 million in deferred charges associated with these exchanges.
Also during 2008, we repurchased $300 million of our 7.75% Senior Notes due 2015 in order to re-finance
a portion of our long-term debt at a lower rate of interest. In connection with the transaction, we recorded a $31
million loss, which consisted of a $12 million premium and $19 million of discounts, interest rate derivatives and
deferred charges associated with the notes.
Impairment of Investments. We recorded $16 million, $162 million and $180 million of impairments of
certain investments in 2010, 2009 and 2008, respectively. Each of our investees has been impacted by the
dramatic slowing of the worldwide economy and the freezing of the credit markets in the fourth quarter of 2008
and into 2009 and 2010. The economic weakness has resulted in significantly reduced natural gas and oil
prices leading to a meaningful decline in the overall level of activity in the markets served by our investees.
Associated with the weakness in performance of certain of the investees, as well as an evaluation of their
financial condition and near-term prospects, we recognized that an other than temporary impairment had
occurred on certain investments.
Other Income. Other income was $16 million, $11 million and $27 million in 2010, 2009 and 2008,
respectively. The 2010 income consisted of $8 million of interest income and $8 million of miscellaneous
income. The 2009 income consisted of $8 million of interest income and $3 million of miscellaneous income.
The 2008 income consisted of $22 million of interest income, $10 million of expense related to consent
solicitation fees and $15 million of miscellaneous income.
Income Tax Expense (Benefit). Chesapeake recorded income tax expense of $1.110 billion in 2010
compared to an income tax benefit of $3.483 billion in 2009 and income tax expense of $387 million in 2008.
The entire income tax expense recorded in 2010 is deferred. Of the $4.593 billion increase in 2010, $4.564
billion was the result of the increase in net income before taxes and $29 million was the result of an increase in
the effective tax rate. Our effective income tax rate was 38.5% in 2010 compared to 37.5% in 2009 and 39% in
2008. Our effective tax rate fluctuates as a result of the impact of state income taxes and permanent
differences. We expect our effective income tax rate to be 39% in 2011.
Loss on Conversion/Exchange of Preferred Stock. Loss on conversion/exchange of preferred stock was
$67 million in 2008. There were no losses on conversion/exchange of preferred stock in 2010 and 2009. In
general, the loss on the exchanges represented the excess of the fair value of the common stock issued over
the fair value of the securities issuable pursuant to the original conversion terms. See Note 8 of the notes to
our consolidated financial statements in Item 8 of this report for further detail regarding these transactions.
Application of Critical Accounting Policies
Readers of this report and users of the information contained in it should be aware of how certain events
may impact our financial results based on the accounting policies in place. The three policies we consider to be
the most significant are discussed below. The company’s management has discussed each critical accounting
policy with the Audit Committee of the company’s Board of Directors.
56