Attached files
file | filename |
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EX-32.1 - EX-32.1 - Dex Media, Inc./new | g21087exv32w1.htm |
EX-31.2 - EX-31.2 - Dex Media, Inc./new | g21087exv31w2.htm |
EX-31.1 - EX-31.1 - Dex Media, Inc./new | g21087exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 333-131626
DEX MEDIA, INC.
(Exact name of
registrant as specified in its charter)
Delaware | 20-4059762 | |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
1001 Winstead Drive, Cary, N.C. | 27513 | |
(Address of principal executive offices) | (Zip Code) |
(919) 297-1600
(Registrants telephone number, including area code)
N/A
(Former Name, Former Address and Former
Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ *
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the Registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date:
Title of Class | Shares Outstanding at October 15, 2009 | |
Common Stock, par value $0.01 per share | 1,000 |
THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF R.H. DONNELLEY CORPORATION. THE REGISTRANT MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING
THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
* The Registrant is a voluntary filer and as such is not required to file reports by Section 13 or
15(d) of the Securities Exchange Act of 1934 (Exchange Act); however, the Registrant has
voluntarily filed all Exchange Act reports for the preceding 12 months.
DEX MEDIA, INC.
INDEX TO FORM 10-Q
INDEX TO FORM 10-Q
* | Pursuant to General Instruction H(2)(a) of Form 10-Q: (i) the information called for by Item 2 of Part I, Managements Discussion and Analysis of Financial Condition and Results of Operations has been omitted and (ii) the registrant is providing a Managements Narrative Analysis of Results of Operations. | |
** | Omitted pursuant to General Instruction H(2)(c) of Form 10-Q. | |
*** | Omitted pursuant to General Instruction H(2)(b) of Form 10-Q. |
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Table of Contents
PART I. FINANCIAL INFORMATION
Item I. | Financial Statements |
Dex Media, Inc. and Subsidiaries
Debtor and Debtor-In-Possession as of May 28, 2009
Condensed Consolidated Balance Sheets (Unaudited)
Debtor and Debtor-In-Possession as of May 28, 2009
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except share data) | September 30, 2009 | December 31, 2008 | ||||||
Assets |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 221,403 | $ | 112,362 | ||||
Accounts receivable |
||||||||
Billed |
146,194 | 188,090 | ||||||
Unbilled |
373,340 | 461,750 | ||||||
Allowance for doubtful accounts and sales claims |
(32,294 | ) | (34,166 | ) | ||||
Net accounts receivable |
487,240 | 615,674 | ||||||
Intercompany loan receivable |
125,000 | | ||||||
Due from parent, net |
15,134 | | ||||||
Deferred directory costs |
88,759 | 107,392 | ||||||
Short-term deferred income taxes, net |
| 25,225 | ||||||
Prepaid expenses and other current assets |
35,154 | 52,452 | ||||||
Total current assets |
972,690 | 913,105 | ||||||
Fixed assets and computer software, net |
88,267 | 96,609 | ||||||
Other non-current assets |
52,455 | 64,930 | ||||||
Intangible assets, net |
7,226,973 | 7,505,200 | ||||||
Total assets |
$ | 8,340,385 | $ | 8,579,844 | ||||
Liabilities and Shareholders Equity |
||||||||
Current Liabilities Not Subject to Compromise |
||||||||
Accounts payable and accrued liabilities |
$ | 109,154 | $ | 99,688 | ||||
Due to parent, net |
| 73,391 | ||||||
Accrued interest |
1,800 | 69,513 | ||||||
Deferred directory revenues |
526,395 | 679,983 | ||||||
Current portion of long-term debt |
127,768 | 99,625 | ||||||
Total current liabilities not subject to compromise |
765,117 | 1,022,200 | ||||||
Long-term debt |
2,034,134 | 4,562,206 | ||||||
Deferred income taxes, net |
1,036,748 | 1,017,445 | ||||||
Intercompany debt |
| 300,000 | ||||||
Other non-current liabilities |
87,463 | 184,402 | ||||||
Total liabilities not subject to compromise |
3,923,462 | 7,086,253 | ||||||
Liabilities subject to compromise |
2,938,223 | | ||||||
Commitments and contingencies |
||||||||
Shareholders Equity |
||||||||
Common stock, par value $.01 per share, 1,000 shares
authorized, issued and outstanding |
| | ||||||
Additional paid-in capital |
3,496,257 | 3,580,838 | ||||||
Accumulated deficit |
(1,988,633 | ) | (2,040,807 | ) | ||||
Accumulated other comprehensive loss |
(28,924 | ) | (46,440 | ) | ||||
Total shareholders equity |
1,478,700 | 1,493,591 | ||||||
Total liabilities and shareholders equity |
$ | 8,340,385 | $ | 8,579,844 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Table of Contents
Dex Media, Inc. and Subsidiaries
Debtor and Debtor-In-Possession as of May 28, 2009
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)
Debtor and Debtor-In-Possession as of May 28, 2009
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Net revenues |
$ | 318,588 | $ | 391,201 | $ | 1,023,403 | $ | 1,198,817 | ||||||||
Expenses: |
||||||||||||||||
Production and distribution expenses (exclusive of
depreciation and amortization shown separately below) |
48,104 | 58,474 | 149,164 | 173,615 | ||||||||||||
Selling and support expenses |
89,157 | 102,462 | 280,188 | 304,303 | ||||||||||||
General and administrative expenses |
12,470 | 20,600 | 43,545 | 45,833 | ||||||||||||
Depreciation and amortization |
99,416 | 90,036 | 298,044 | 258,627 | ||||||||||||
Impairment charges |
| | | 2,557,719 | ||||||||||||
Total expenses |
249,147 | 271,572 | 770,941 | 3,340,097 | ||||||||||||
Curtailment gain, net |
| | 13,461 | | ||||||||||||
Operating income (loss) |
69,441 | 119,629 | 265,923 | (2,141,280 | ) | |||||||||||
Interest expense, net |
(35,123 | ) | (91,479 | ) | (205,198 | ) | (285,978 | ) | ||||||||
Income (loss) before reorganization items, net and
income taxes |
34,318 | 28,150 | 60,725 | (2,427,258 | ) | |||||||||||
Reorganization items, net |
(4,491 | ) | | 53,974 | | |||||||||||
Income (loss) before income taxes |
29,827 | 28,150 | 114,699 | (2,427,258 | ) | |||||||||||
(Provision) benefit for income taxes |
(26,127 | ) | (21,970 | ) | (62,525 | ) | 869,369 | |||||||||
Net income (loss) |
$ | 3,700 | $ | 6,180 | $ | 52,174 | $ | (1,557,889 | ) | |||||||
Comprehensive Income (Loss) |
||||||||||||||||
Net income (loss) |
$ | 3,700 | $ | 6,180 | $ | 52,174 | $ | (1,557,889 | ) | |||||||
Unrealized gain (loss) on interest rate swaps, net of tax |
4,120 | (4,422 | ) | 236 | 4,716 | |||||||||||
Benefit plans adjustment, net of tax |
(89 | ) | (1 | ) | 17,280 | (2 | ) | |||||||||
Comprehensive income (loss) |
$ | 7,731 | $ | 1,757 | $ | 69,690 | $ | (1,553,175 | ) | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Table of Contents
Dex Media, Inc. and Subsidiaries
Debtor and Debtor-In-Possession as of May 28, 2009
Condensed Consolidated Statements of Cash Flows (Unaudited)
Debtor and Debtor-In-Possession as of May 28, 2009
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, | |||||||||||
(in thousands) | 2009 | 2008 | |||||||||
Cash Flows from Operating Activities |
|||||||||||
Net income (loss) |
$ | 52,174 | $ | (1,557,889 | ) | ||||||
Reconciliation of net income (loss) to net cash provided by operating activities: |
|||||||||||
Impairment charges |
| 2,557,719 | |||||||||
Loss on extinguishment of debt |
| 2,142 | |||||||||
Curtailment gain, net |
(13,461 | ) | | ||||||||
Depreciation and amortization |
298,044 | 258,627 | |||||||||
Deferred income tax provision (benefit) |
62,285 | (869,428 | ) | ||||||||
Provision for bad debts |
68,508 | 64,463 | |||||||||
Stock-based compensation expense |
5,431 | 12,128 | |||||||||
Change in fair value of interest rate swaps |
6,860 | 8,030 | |||||||||
Amortization of deferred financing costs |
7,675 | 4,924 | |||||||||
Amortization of debt fair value adjustment |
(7,659 | ) | (13,081 | ) | |||||||
Accretion on discount notes |
(623 | ) | 46,427 | ||||||||
Other non-cash items, net |
10,249 | (8,571 | ) | ||||||||
Non-cash reorganization items |
(87,614 | ) | | ||||||||
Changes in assets and liabilities: |
|||||||||||
Decrease (increase) in accounts receivable |
59,928 | (67,776 | ) | ||||||||
Decrease in other assets |
38,737 | 16,318 | |||||||||
Increase (decrease) in accounts payable and accrued liabilities |
11,800 | (44,801 | ) | ||||||||
Increase (decrease) in amounts due to parent |
25,750 | (13,918 | ) | ||||||||
(Decrease) in deferred directory revenues |
(152,399 | ) | (34,419 | ) | |||||||
(Decrease) in other non-current liabilities |
(54,758 | ) | (1,170 | ) | |||||||
Net cash provided by operating activities |
330,927 | 359,725 | |||||||||
Cash Flows from Investing Activities |
|||||||||||
Intercompany loan |
(125,000 | ) | | ||||||||
Additions to fixed assets and computer software |
(11,130 | ) | (35,314 | ) | |||||||
Net cash used in investing activities |
(136,130 | ) | (35,314 | ) | |||||||
Cash Flows from Financing Activities |
|||||||||||
Credit facilities borrowings, net of costs |
| 1,035,103 | |||||||||
Credit facilities repayments |
(176,787 | ) | (1,053,492 | ) | |||||||
Revolver borrowings |
187,000 | 321,900 | |||||||||
Revolver repayments |
(9,811 | ) | (345,950 | ) | |||||||
(Decrease) increase in checks not yet presented for payment |
(1,578 | ) | 3,717 | ||||||||
Contribution to parent |
(84,580 | ) | (258,100 | ) | |||||||
Net cash used in financing activities |
(85,756 | ) | (296,822 | ) | |||||||
Increase in cash and cash equivalents |
109,041 | 27,589 | |||||||||
Cash and cash equivalents, beginning of period |
112,362 | 12,975 | |||||||||
Cash and cash equivalents, end of period |
$ | 221,403 | $ | 40,564 | |||||||
Supplemental Information: |
|||||||||||
Cash paid: |
|||||||||||
Interest, net |
$ | 166,946 | $ | 237,838 | |||||||
Income taxes, net |
$ | 40 | $ | 72 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Table of Contents
Dex Media, Inc. and Subsidiaries
Debtor and Debtor-In-Possession as of May 28, 2009
Notes to Condensed Consolidated Financial Statements (Unaudited)
(tabular amounts in thousands)
Debtor and Debtor-In-Possession as of May 28, 2009
Notes to Condensed Consolidated Financial Statements (Unaudited)
(tabular amounts in thousands)
1. Business and Basis of Presentation
Dex Media, Inc. is a direct wholly-owned subsidiary of R.H. Donnelley Corporation (RHD or
parent). The interim condensed consolidated financial statements of Dex Media, Inc. and its
direct and indirect wholly-owned subsidiaries (the Company, Dex Media, we, us and our)
have been prepared in accordance with the instructions to Quarterly Report on Form 10-Q and should
be read in conjunction with the financial statements and related notes included in our Annual
Report on Form 10-K for the year ended December 31, 2008. The interim condensed consolidated
financial statements include the accounts of Dex Media, Inc. and its direct and indirect
wholly-owned subsidiaries. All intercompany transactions and balances between Dex Media and its
subsidiaries have been eliminated. The results of interim periods are not necessarily indicative
of results for the full year or any subsequent period. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement
of financial position, results of operations and cash flows at the dates and for the periods
presented have been included.
We are a directional marketing company that helps local businesses by distributing their message to
consumers wherever they choose to search, including print, online, mobile and voice. Through our
Dex® Advantage, customers business information is collected and marketed through a single profile
and distributed via a variety of local search products. The Dex Advantage spans multiple media
platforms for local advertisers including print with the Dex directories, which we co-brand with
Qwest, a recognizable brand in the industry, online and mobile devices with
dexknows.com®, voice-activated directory search at 1-800-Call-Dex and leading search
engines and other online sites via DexNet.
Dex Media is the exclusive publisher of the official yellow pages and white pages directories for
Qwest Corporation, the local exchange carrier of Qwest Communications International Inc. (Qwest),
in Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota (collectively,
the Dex East States) and Arizona, Idaho, Montana, Oregon, Utah, Washington and Wyoming
(collectively, the Dex West States and together with the Dex East States, the Dex States). Dex
Media East LLC (Dex Media East) operates the directory business in the Dex East States and Dex
Media West LLC (Dex Media West) operates the directory business in the Dex West States.
Chapter 11 Bankruptcy Proceedings and Plan of Reorganization
Filing of Voluntary Petitions in Chapter 11
On May 28, 2009 (the Petition Date), RHD, the Company and RHDs other subsidiaries (collectively
the RHD Entities) filed voluntary petitions for Chapter 11 relief under Title 11 of the United
States Code (the Bankruptcy Code) in the United States Bankruptcy Court for the District of
Delaware (the Bankruptcy Court) in order to consummate a balance sheet restructuring. The cases
are being jointly administered under the caption In re: R.H. Donnelley, Corporation, et al., Case
No. 09-11833 (KG) (Bankr. D. Del. 2009) (the Chapter 11 Cases). Promptly after filing the Chapter
11 petitions, the Company began notifying all known current or potential creditors of the
commencement of the Chapter 11 Cases.
Through the Chapter 11 Cases, the Company intends to consummate a balance sheet restructuring,
resulting in a less leveraged capital structure that is better aligned with the ongoing cash flows
of our business.
During the pendency of the Chapter 11 Cases, the Company is operating its business as a
debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with
applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. We expect to
continue to operate in the normal course of business during the reorganization process. Unless
otherwise authorized by the Bankruptcy Court, the Bankruptcy Code prohibits the Company from making
payments to creditors on account of pre-petition claims. Vendors are, however, being paid for goods
furnished and services provided after the Petition Date in the ordinary course of business.
However, operating in bankruptcy imposes significant risks on our business and we cannot predict
whether or when we will successfully emerge from bankruptcy.
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Commencement of Chapter 11 Cases
As of the Petition Date, all pending litigation wherein the Company is named as a defendant is
generally stayed by operation of the Bankruptcy Code and absent further order of the Bankruptcy
Court, no party, subject to certain exceptions, may take any action, also subject to certain
exceptions, to recover on pre-petition claims against the Company.
On the same day that the RHD Entities filed the voluntary petitions, the RHD Entities also filed a
motion seeking procedural consolidation of the Chapter 11 Cases for ease of administration, which
order was granted by the Bankruptcy Court on June 1, 2009. The Bankruptcy Court also granted
certain other motions in substantially the manner requested seeking typical first day relief to
ensure that we were able to transition into the Chapter 11 process with as little disruption to our
business as possible and to enable our business to function in the ordinary course while the
Chapter 11 Cases were pending. The most significant of these granted first day motions authorized
us to (i) pay pre-petition wages and other benefits to our employees; (ii) honor pre-petition
customer obligations and continue customer programs; (iii) pay certain pre-petition claims of
shippers, warehouseman and other lien claimants; (iv) make payments to certain pre-petition vendors
that were vital to our uninterrupted operations; (v) pay and set aside amounts to adequately assure
payment to providers of utility service; (vi) pay certain pre-petition tax claims; (vii) pay
certain pre-petition insurance claims; (viii) continue use of our existing cash management system
and bank accounts and (ix) use cash collateral with the consent of our secured lenders.
As required by the Bankruptcy Code, on June 11, 2009, the United States Trustee for the District of
Delaware appointed five creditors to the official committee of unsecured creditors (the Unsecured
Creditors Committee). The United States Trustee subsequently appointed an additional member to
the Unsecured Creditors Committee on each of June 15, 2009 and June 19, 2009. The Unsecured
Creditors Committee currently consists of seven members.
The Company continues to generate positive operating cash flows. If this trend continues,
debtor-in-possession financing is not likely to be required as a result of our Chapter 11
bankruptcy filing. However, the Company has incurred and will continue to incur significant costs
associated with reorganization. These costs are being expensed as incurred and are included in
reorganization items, net on the condensed consolidated statements of operations for the three and
nine months ended September 30, 2009.
Proposed Plan of Reorganization
On July 27, 2009, the RHD Entities filed a proposed joint plan of reorganization with the
Bankruptcy Court (the Plan), together with a disclosure statement in respect of the Plan (the
Disclosure Statement). The RHD Entities filed an amended Plan and an amended Disclosure Statement
on September 18, 2009, October 7, 2009, October 19, 2009 and October 21, 2009. On October 21, 2009,
the Bankruptcy Court held a hearing, during which it approved the Disclosure Statement and granted
the RHD Entities the authority to begin soliciting votes on the Plan. A plan of reorganization sets
forth the treatment of the various classes of claims against and equity interests in each of the
debtors. The confirmation of a plan of reorganization is the principal objective of a Chapter 11
reorganization case. A hearing on the confirmation of the Plan is scheduled for January 12, 2010 in
the Bankruptcy Court.
Certain salient economic terms of the Plan, which are subject in all respects to the specific terms
and definitions set forth in the Plan, include, but are not limited to, the following:
(i) | Elimination of approximately $6.4 billion of the RHD Entities indebtedness, including the payment of $700.0 million of secured indebtedness, and $500.0 million of annual interest expense; | ||
(ii) | The exchange of all pre-petition publicly issued unsecured note debt for (a) 100% of the reorganized RHD equity that is subject to dilution pursuant to a stock-based management incentive plan, which is expected to permit equity-based compensation in an amount of not less than 10% of the fully diluted RHD equity, if approved in accordance with the Plan and (b) in the case of the holders of the Dex Media West 8.5% Senior Notes due 2010 and 5.875% Senior Notes due 2011, $300.0 million of new seven-year RHD unsecured notes on a pro rata basis in addition to their share of the reorganized RHD equity; |
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(iii) | The obligations of the lenders under the R.H. Donnelley Inc. (RHDI) revolving credit facility (the RHDI Revolver) to make additional advances terminated on the Petition Date and the outstanding loans under the RHDI Revolver will be converted to a term loan with a maturity date of October 2014 and an interest rate of LIBOR plus 625 basis points (bps), subject to a reduction upon satisfaction of a specified financial covenant threshold, and the current RHDI term loans will be amended to extend the maturity date to October 2014 with an interest rate of LIBOR plus 625 bps, subject to a reduction upon satisfaction of a specified financial covenant threshold; | ||
(iv) | The obligations of the lenders under the Dex Media East revolving credit facility (Dex Media East Revolver) to make additional advances terminated on the Petition Date, and the outstanding loans under the Dex Media East Revolver will be converted to a term loan with a maturity date of October 2014 and an interest rate of LIBOR plus 250 bps, subject to reductions upon satisfaction of certain financial covenant thresholds, the current Dex Media East Term Loan A will be amended to extend the maturity date to October 2014 and increase the interest rate to LIBOR plus 250 bps, subject to reductions upon satisfaction of certain financial covenant thresholds, and the Dex Media East Term Loan B will be amended to increase the interest rate to LIBOR plus 250 bps, subject to reductions upon satisfaction of certain financial covenant thresholds; | ||
(v) | The obligations of the lenders under the Dex Media West revolving credit facility (Dex Media West Revolver) to make additional advances terminated on the Petition Date and the outstanding loans under the Dex Media West Revolver will be converted to a term loan with a maturity date of October 2014 and an interest rate of LIBOR plus 450 bps, subject to reductions upon satisfaction of certain financial covenant thresholds, the current Dex Media West Term Loan A will be amended to extend the maturity date to October 2014 and increase the interest rate to LIBOR plus 450 bps, subject to reductions upon satisfaction of certain financial covenant thresholds, and the Dex Media West Term Loan B will be amended to increase the interest rate to LIBOR plus 450 bps, subject to reductions upon satisfaction of certain financial covenant thresholds; and | ||
(vi) | Enhancement of the collateral and guarantees of the Dex Media East, Dex Media West and RHDI secured debt. As of emergence, the RHD Entities proposed Plan would, if adopted in its present form, result in consolidated debt of approximately $3.4 billion, of which $3.1 billion would be secured. |
On May 29, 2009, RHD announced that the RHD Entities had reached pre-petition agreements in
principle with a substantial majority of its unsecured noteholders and a substantial majority of
their pre-petition secured lenders on a restructuring plan. The terms of the RHD Entities
restructuring plan are evidenced by (i) Support Agreements dated as of May 21, 2009 and executed by
certain of the RHD Entities and lenders holding in excess of two-thirds in principal amount and
one-half in number of claims under each of the RHDI, Dex Media East, and Dex Media West
pre-petition credit facilities and (ii) the Restructuring Support Agreement dated as of May 28,
2009 executed by the RHD Entities and noteholders holding in excess of a majority of the aggregate
principal amount of the pre-petition unsecured note debt (together, the Plan Support Agreements).
The Plan is consistent with the terms and conditions of the Plan Support Agreements and applicable
related term sheets. The Plan Support Agreements, together with the applicable terms sheets, form
the basis for the Plan. There can be no assurance, however, that the Plan will be approved by all
requisite holders of claims or interests or by the Bankruptcy Court or that all conditions
precedent to the implementation of the Plan will be satisfied. Each Plan Support Agreement is
subject to certain material conditions. Moreover, each Plan Support Agreement may be terminated
upon the occurrence of certain events, including if a plan of reorganization is not confirmed by
January 15, 2010.
Going Concern
The Companys financial statements are prepared using accounting principles generally accepted in
the United States applicable to a going concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. The accompanying historical
consolidated financial statements and interim condensed consolidated financial statements do not
include any adjustments related to the recoverability and classification of recorded assets or to
the amounts classified as liabilities or any other adjustments that might be necessary if the
Company is unable to continue as a going concern.
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The assessment of our ability to continue as a going concern was made by management considering,
among other factors: (i) our Chapter 11 bankruptcy filing on May 28, 2009; (ii) the current global
credit and liquidity crisis; (iii) the significant negative impact on our operating results and
cash flows from the overall downturn in the global economy and an increase in competition and more
fragmentation in the local business search market; (iv) that certain of our credit ratings have
been downgraded; and (v) that RHDs common stock ceased trading on the New York Stock Exchange
(NYSE) on December 31, 2008 and is now traded over-the-counter on the Pink Sheets. These
considerations are further reflected by our goodwill impairment charges of $2.6 billion and
intangible asset impairment charges of $603.0 million recorded for the year ended December 31,
2008. In managements view, these circumstances and events raise substantial doubt as to whether
the Company will be able to continue as a going concern for a reasonable period of time.
Accounting Matters
The filing of the Chapter 11 petitions constituted an event of default under the indentures
governing the Companys senior notes, senior discount notes and senior subordinated notes
(collectively the notes in default) and the debt obligations under those instruments became
automatically and immediately due and payable, although any actions to enforce such payment
obligations are automatically stayed under the applicable bankruptcy law. Based on the bankruptcy
petitions, the notes in default are included in liabilities subject to compromise on the condensed
consolidated balance sheet at September 30, 2009.
The filing of the Chapter 11 petitions also constituted an event of default under RHDIs, Dex Media
Wests, and Dex Media Easts credit facilities. However, based upon the Plan, these secured lenders
would receive 100% principal recovery and scheduled amortization and interest subsequent to the
filing of the Chapter 11 petitions. In addition, substantially all of the assets of Dex Media East
and Dex Media West and their respective subsidiaries, including their equity interests, are pledged
to secure the obligations under their respective credit facilities. The Company has determined that
the fair value of the collateral securing these credit facilities exceeds the book value of such
credit facilities, including accrued interest and interest rate swap liabilities associated with
the credit facilities, and therefore, the credit facilities are excluded from liabilities subject
to compromise on the condensed consolidated balance sheet at September 30, 2009.
As a result of filing the Chapter 11 petitions, certain interest rate swaps with a notional amount
of $500.0 million were terminated by the respective counterparties and, as such, are no longer
deemed financial instruments to be remeasured at fair value. As of September 30, 2009, these
interest rate swaps have not been settled and, as such, a liability of $21.5 million is recognized
in accounts payable and accrued liabilities on the condensed consolidated balance sheet at
September 30, 2009. In addition, as a result of filing the Chapter 11 petitions, Dex Media East
interest rate swaps with a notional amount of $100.0 million at September 30, 2009 are no longer
highly effective in offsetting changes in cash flows. Accordingly, cash flow hedge accounting
treatment is no longer permitted.
For periods subsequent to the Chapter 11 bankruptcy filing, the American Institute of Certified
Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code (Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) 852-10) (SOP 90-7), has been applied in preparing the condensed consolidated
financial statements. SOP 90-7 requires that the financial statements distinguish transactions and
events that are directly associated with the reorganization from the ongoing operations of the
business. Accordingly, certain expenses including professional fees, realized gains and losses and
provisions for losses that are realized from the reorganization and restructuring process will be
classified as reorganization items on the condensed consolidated statement of operations.
Additionally, on the condensed consolidated balance sheet, liabilities are segregated between
liabilities not subject to compromise and liabilities subject to compromise. Liabilities subject
to compromise are reported at their pre-petition amounts or current unimpaired values, even if they
may be settled for lesser amounts.
The accompanying condensed consolidated financial statements do not purport to reflect or provide
for the consequences of the Chapter 11 bankruptcy proceeding. In particular, the financial
statements do not purport to show (i) as to assets, their realizable value on a liquidation basis
or their availability to satisfy liabilities; (ii) as to pre-petition liabilities, the amounts that
may be allowed for claims or contingencies, or the status and priority thereof; (iii) as to
shareholders deficit accounts, the effects of any changes that may be made in the Companys
capitalization; or (iv) as to operations, the effects of any changes that may be made to the
Companys business.
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Other Significant Financing Developments
On May 28, 2009 and in conjunction with the Plan, the Company repaid an aggregate of $122.4 million
in principal on outstanding balances owed under the Dex Media East credit facility and Dex Media
West credit facility. The repayments were made under each of the credit facilities as follows:
Description | Amount | |||
Dex Media West |
||||
Term Loan A |
$ | 6,971 | ||
Term Loan B |
50,941 | |||
Revolver |
4,826 | |||
Dex Media East |
||||
Term Loan A |
34,176 | |||
Term Loan B |
20,454 | |||
Revolver |
4,985 | |||
Total repayment |
$ | 122,353 | ||
On May 14, 2009, the Company exercised a 30-day grace period on $54.0 million in interest payments
due on the following senior notes and senior discount notes:
Description | Amount | |||
Dex Media, Inc. |
||||
8% Senior Notes due 2013 |
$ | 20,000 | ||
9% Senior Discount Notes due 2013 |
33,744 | |||
Dex Media West |
||||
5.875% Senior Notes due 2011 |
256 | |||
Total interest payments |
$ | 54,000 | ||
Exercising the grace period did not constitute an event of default under the bond indentures or any
of the Companys or its subsidiaries other debt agreements. The Company did not make these
interest payments prior to filing the Chapter 11 petitions.
On April 15, 2009, RHD exercised a 30-day grace period on $54.6 million in interest payments due on
its 8.875% Series A-4 Senior Notes due 2017 (Series A-4 Senior Notes). As a result of exercising
the 30-day grace period, certain existing interest rate swaps associated with the Dex Media East
credit facility having a notional amount of $350.0 million were required to be settled on May 28,
2009. Cash settlement payments of $26.4 million were made during the second quarter of 2009
associated with these interest rate swaps.
As a result of the decline in certain of our credit ratings, an existing interest rate swap
associated with the Dex Media West credit facility having a notional amount of $50.0 million was
required to be settled on April 23, 2009. A cash settlement payment of $0.5 million was made
during the second quarter of 2009 associated with this interest rate swap.
On February 13, 2009, the Company borrowed the unused portions under the Dex Media East Revolver
and Dex Media West Revolver totaling $97.0 million and $90.0 million, respectively. The
Company made the borrowings under the revolving credit facilities to preserve its financial
flexibility in light of the continuing uncertainty in the global credit markets.
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2. Summary of Significant Accounting Policies
Identifiable Intangible Assets and Goodwill
As a result of RHDs acquisition of the Company on January 31, 2006 (the RHD Merger), certain
intangible assets were identified and recorded at their estimated fair values. The fair values of
the identifiable intangible assets are being amortized over their estimated useful lives in a
manner that best reflects the economic benefit derived from such assets. Amortization expense was
$92.8 million and $76.8 million for the three months ended September 30, 2009 and 2008,
respectively, and $278.3 million and $230.4 million for the nine months ended September 30, 2009
and 2008, respectively.
In connection with Dex Media Easts and Dex Media Wests impairment testing of their definite-lived
intangible assets and other long-lived assets at December 31, 2008, they evaluated the remaining
useful lives of their intangible assets by considering, among other things, the effects of
obsolescence, demand, competition, which takes into consideration the price premium benefit Dex
Media East and Dex Media West has over competing independent publishers in their markets, and other
economic factors, including the stability of the industry in which they operate, known
technological advances, legislative actions that result in an uncertain or changing regulatory
environment, and expected changes in distribution channels. Based on this evaluation, Dex Media
East and Dex Media West recognized a reduction in the remaining useful lives of all directory
services agreements associated with the RHD Merger due to compression of the price premium benefit
over competing independent publishers in their respective markets as well as a decline in market
share during the year ended December 31, 2008. As a result, the remaining useful lives of these
directory services agreements were reduced to 33 years effective January 1, 2009 in order to better
reflect the period these intangible assets are expected to contribute to their future cash flow.
The increase in amortization expense for the three and nine months ended September 30, 2009 is a
direct result of reducing the remaining useful lives associated with these directory services
agreements, partially offset by a reduction in amortization expense associated with a revision to
the carrying values of the local and national customer relationships subsequent to impairment
charges recorded during the fourth quarter of 2008.
Annual amortization expense for the full year 2009 is expected to increase by approximately $63.3
million as a result of the reduction of remaining useful lives associated with our directory
services agreements and revision to the carrying values of our local and national customer
relationships subsequent to the impairment charges during the fourth quarter of 2008.
Dex Media East and Dex Media West performed impairment tests of their definite-lived intangible
assets and other long-lived assets during the three and nine months ended September 30, 2009. They
utilized the following information and assumptions to complete their impairment evaluation:
| Historical financial information, including revenue, profit margins, customer attrition data and price premiums enjoyed relative to competing independent publishers; | ||
| Long-term financial projections, including, but not limited to, revenue trends and profit margin trends; and | ||
| Intangible asset carrying values. |
The results of these tests indicated no impairment. In connection with Dex Media Easts and Dex
Media Wests impairment testing, they also evaluated the remaining useful lives of their
definite-lived intangible assets and other long-lived assets by evaluating the relevant factors
noted above. Based on this evaluation, Dex Media East and Dex Media West concluded the remaining
useful lives of such assets reflect the period they are expected to contribute to their future cash
flows and are therefore deemed appropriate.
As a result of the decline in the trading value of our debt and RHDs debt and equity securities
during the first and second quarters of 2008 and continuing negative industry and economic trends
that have directly affected RHDs and our business, Dex Media East and Dex Media West performed
impairment tests of their goodwill, definite-lived intangible assets and other long-lived assets.
Dex Media East and Dex Media West used estimates and assumptions in their impairment evaluations,
including, but not limited to, projected future cash flows, revenue growth and customer attrition
rates. Based upon Dex Media Easts and Dex Media Wests impairment test of goodwill, the Company
recognized goodwill impairment charges, based on a discounted cash flow analysis, of $2.1 billion
and $422.2 million during the three months ended March 31, 2008 and June 30, 2008, respectively,
for total goodwill impairment charges of $2.6 billion for the nine months ended September 30, 2008.
As a result of these impairment charges, we have no recorded goodwill at December 31, 2008 or
September 30, 2009. The testing results of the definite-lived intangible assets and other
long-lived assets indicated no impairment as of March 31, 2008, June 30, 2008 or September 30,
2008.
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If industry and economic conditions in our markets and RHDs markets continue to deteriorate,
resulting in further declines in advertising sales and operating results, and if the trading value
of our debt and RHDs debt and equity securities decline further, RHD, Dex Media East and Dex Media
West will be required to again assess the recoverability and useful lives of its long-lived assets
and other intangible assets. This could result in additional impairment charges, a reduction of
remaining useful lives and acceleration of amortization expense.
Interest Expense and Deferred Financing Costs
Contractual interest expense that would have appeared on the condensed consolidated statement of
operations if not for the filing of the Chapter 11 petitions was $88.2 million and $268.3 million
for the three and nine months ended September 30, 2009, respectively.
Certain costs associated with the issuance of debt instruments are capitalized and included in
other non-current assets on the condensed consolidated balance sheets. These costs are amortized to
interest expense over the terms of the related debt agreements. The bond outstanding method is used
to amortize deferred financing costs relating to debt instruments with respect to which we make
accelerated principal payments. Other deferred financing costs are amortized using the effective
interest method. Amortization of deferred financing costs included in interest expense was $2.4
million and $2.5 million for the three months ended September 30, 2009 and 2008, respectively, and
$7.7 million and $7.1 million for the nine months ended September 30, 2009 and 2008, respectively.
Interest expense for the three and nine months ended September 30, 2009 includes a non-cash charge
of $1.0 million and $6.1 million, respectively, associated with the change in fair value of the Dex
Media East interest rate swaps that were required to be settled and interest rate swaps no longer
deemed financial instruments as a result of filing the Chapter 11 petitions. Interest expense for
the three and nine months ended September 30, 2009 also includes a non-cash charge of $4.1 million
and $6.1 million, respectively, resulting from amounts previously charged to accumulated other
comprehensive loss related to these interest rate swaps. The amounts previously charged to
accumulated other comprehensive loss related to the Dex Media East interest rate swaps will be
amortized to interest expense over the remaining life of the interest rate swaps based on future
interest payments, as it is not probable that those forecasted transactions will not occur.
As a result of the refinancing of the former Dex Media West credit facility on June 6, 2008, the
existing interest rate swaps associated with this debt arrangement are no longer highly effective
in offsetting changes in cash flows. Accordingly, cash flow hedge accounting treatment is no longer
permitted. In addition, certain of these interest rate swaps were required to be settled or
terminated during the second quarter of 2009 as noted above. The change in fair value of these
interest rate swaps resulted in a reduction to interest expense of $5.0 million for the three
months ended September 30, 2008, and $5.4 million and $7.0 million for the nine months ended
September 30, 2009 and 2008, respectively. Interest expense for the nine months ended September 30,
2008 includes a non-cash charge of $15.0 million resulting from amounts previously charged to
accumulated other comprehensive loss related to these interest rate swaps.
In conjunction with the RHD Merger and as a result of purchase accounting required under U.S.
generally accepted accounting principles (GAAP), our debt was recorded at its fair value on
January 31, 2006. We recognized an offset to interest expense in each period subsequent to the RHD
Merger through May 28, 2009 for the amortization of the corresponding fair value adjustment. The
offset to interest expense was $7.7 million for the nine months ended September 30, 2009 and $4.5
million and $13.1 million for the three and nine months ended September 30, 2008, respectively.
The offset to interest expense was to be recognized over the life of the respective debt, however
due to filing the Chapter 11 petitions, unamortized fair value adjustments at May 28, 2009 of $78.5
million were written-off and recognized as a reorganization item on the condensed consolidated
statement of operations for the nine months ended September 30, 2009. See Note 3, Reorganization
Items, Net and Liabilities Subject to Compromise for additional information.
Apart from business combinations, it is the Companys policy to recognize losses incurred in
conjunction with debt extinguishments as a component of interest expense. Interest expense for the
nine months ended September 30, 2008 includes the write-off of unamortized deferred financing costs
of $2.1 million associated with the refinancing of the former Dex Media West credit facility, which
has been accounted for as an extinguishment of debt.
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Advertising Expense
We recognize advertising expenses as incurred. These expenses include media, public relations,
promotional, branding and sponsorship costs and on-line advertising. Total advertising expense was
$7.7 million and $4.9 million for the three months ended September 30, 2009 and 2008, respectively,
and $18.0 million and $13.5 million for the nine months ended September 30, 2009 and 2008,
respectively. Total advertising expense includes costs associated with traffic purchased and
distributed to multiple advertiser landing pages of $3.5 million and $2.0 million for the three
months ended September 30, 2009 and 2008, respectively, and $9.0 million and $6.2 million for the
nine months ended September 30, 2009 and 2008, respectively.
Concentration of Credit Risk
Approximately 85% of our advertising revenues are derived from the sale of advertising to local
small- and medium-sized businesses. Most new advertisers and advertisers desiring to expand their
advertising programs are subject to a credit review. We do not require collateral from our
advertisers, although we do charge interest to advertisers that do not pay by specified due dates.
The remaining approximately 15% of our advertising revenues are derived from the sale of
advertising to national or large regional chains. Substantially all of the revenues derived through
national accounts are serviced through certified marketing representatives (CMRs) from which we
accept orders. We receive payment for the value of advertising placed in our directories, net of
the CMRs commission, directly from the CMR. While we are still exposed to credit risk, the amount
of credit losses from these accounts has historically been less than our credit losses on local
accounts because the advertisers, and in some cases, the CMRs tend to be larger companies with
greater financial resources than local advertisers.
We continue to experience adverse bad debt trends attributable to economic challenges in our
markets. Our bad debt expense represented approximately 5.9% and 6.7% of our net revenue for the
three and nine months ended September 30, 2009, respectively, as compared to 5.8% and 5.4% of our
net revenue for the three and nine months ended September 30, 2008, respectively.
At September 30, 2009, we had an interest rate swap agreement with a major financial institution
with a notional amount of $100.0 million. We are exposed to credit risk in the event that the
counterparty to the agreement does not, or cannot, meet their obligation. The notional amount is
used to measure interest to be paid or received and does not represent the amount of exposure to
credit loss. Any loss would be limited to the amount that would have been received over the
remaining life of the swap agreement. The counterparties to the swap agreements are major financial
institutions with credit ratings of AA- or higher.
Stock-Based Awards
RHD allocates compensation expense to its subsidiaries, including the Company, consistent with the
method it utilizes to allocate employee wages and benefits to its subsidiaries. The Company
recorded stock-based compensation expense related to stock-based awards granted under RHDs various
employee and non-employee stock incentive plans of $1.3 million and $3.8 million for the three
months ended September 30, 2009 and 2008, respectively, and $5.4 million and $12.1 million for the
nine months ended September 30, 2009 and 2008, respectively. RHD did not grant any stock-based
awards during the three and nine months ended September 30, 2009.
Long-Term Incentive Program
On March 9, 2009, RHDs Compensation and Benefits Committee of the Board of Directors (the
Committee) approved the 2009 Long-Term Incentive Program (the 2009 LTIP) for the Company. The
2009 LTIP is a cash-based plan designed to provide long-term incentive compensation to participants
based on the achievement of performance goals designated by the Committee pursuant to RHDs 2005
Stock Award and Incentive Plan. The Committee administers the 2009 LTIP in its sole discretion and
may, subject to certain exceptions, delegate some or all of its power and authority under the 2009
LTIP to the Chief Executive Officer or other executive officer of RHD. Participants in the 2009
LTIP consist of (i) such executive officers of RHD and its affiliates as the Committee in its sole
discretion may select from time to time and (ii) such other employees of RHD and its subsidiaries
and affiliates as the Chief Executive Officer in his sole discretion may select from time to time.
The amount of each award under the 2009 LTIP will be paid in cash and is dependent upon the
attainment of certain performance measures related to the amount of RHDs cumulative free cash flow
for the 2009, 2010 and 2011 fiscal years (the Performance Period). Participants who are executive
officers of RHD, and certain other participants designated by the Chief Executive Officer, are also
eligible to receive a payment upon the achievement of a restructuring, reorganization and/or
recapitalization relating to RHDs outstanding indebtedness and liabilities (the Specified
Actions) during the Performance Period. Payments will be made following the end of the Performance
Period or the date of a Specified Action, as the case may be. Awards granted to executive officers
under the 2009 LTIP (and to certain other participants designated by the Chief Executive Officer)
will continue to be paid, subject to the applicable performance conditions, in the event the
participants employment is terminated by the participant with Good Reason (as such term is defined
in the 2009 LTIP), by RHD
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without Cause (as such term is defined in the 2009 LTIP) or as a result of the participants death
or disability. Such payment will be made as if the participant had remained employed with RHD
through the applicable payment date under the 2009 LTIP, subject to the achievement of the
applicable performance conditions. If any participants employment with RHD is terminated under any
other circumstances, any unpaid amount under the 2009 LTIP will be forfeited. These cash-based
awards were granted to participants in April 2009. As a result, the Company recognized compensation
expense related to the 2009 LTIP of $0.9 million and $1.9 million during the three and nine months
ended September 30, 2009, respectively.
Fair Value of Financial Instruments
At September 30, 2009 and December 31, 2008, the fair value of cash and cash equivalents, accounts
receivable, and accounts payable and accrued liabilities approximated their carrying value based on
the short-term nature of these instruments. As a result of filing the Chapter 11 petitions and the
Plan, we do not believe that it is meaningful to present the fair market value of our long-term
debt at September 30, 2009 in Note 5, Long-Term Debt.
The Company has adopted the provisions of Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurements (FASB ASC 820-10) (SFAS No. 157), which defines fair value,
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value and expands disclosures about fair value measurements. SFAS No. 157 defines fair
value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. The fair value hierarchy,
which gives the highest priority to quoted prices in active markets, is comprised of the following
three levels:
Level 1 Unadjusted quoted market prices in active markets for identical assets and
liabilities.
Level 2 Observable inputs, other than Level 1 inputs. Level 2 inputs would typically
include quoted prices in markets that are not active or financial instruments for which all
significant inputs are observable, either directly or indirectly.
Level 3 Prices or valuations that require inputs that are both significant to the
measurement and unobservable.
At September 30, 2009, the Company has an interest rate swap with a notional amount of $100.0
million that continues to be measured at fair value on a recurring basis. The following table
represents our assets and liabilities that were measured at fair value on a recurring basis at
September 30, 2009 and the level within the fair value hierarchy in which the fair value
measurements were included.
Fair Value Measurements at | ||||
September 30, 2009 | ||||
Description | Using Significant Other Observable Inputs (Level 2) | |||
Derivatives Liabilities |
$ | (4,512 | ) |
In conjunction with the classification of our credit facilities, this interest rate swap liability
is excluded from liabilities subject to compromise on the condensed consolidated balance sheet at
September 30, 2009, as both our credit facilities and interest rate swaps are fully collateralized.
Valuation Techniques
Fair value is a market-based measure considered from the perspective of a market participant who
holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when
market assumptions are not readily available, the Companys own assumptions are set to reflect
those that market participants would use in pricing the asset or liability at the measurement date.
The Company uses prices and inputs that are current as of the measurement date.
Fair value for our derivative instruments was derived using pricing models. Pricing models take
into account relevant observable market inputs that market participants would use in pricing the
asset or liability. The pricing models used to determine fair value incorporate contract terms
(including maturity) as well as other inputs including, but not limited to, interest rate yield
curves and the creditworthiness of the counterparty. The impact of our own credit rating is also
considered when measuring the fair value of liabilities. Our credit rating could have a material
impact on the fair value of our derivative instruments, our results of operations or financial
condition in a particular reporting period. For the three and nine months ended September 30, 2009,
the impact of applying our credit rating in determining the fair value of our derivative
instruments was a reduction to our interest rate swap liability of $0.4 million.
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Many pricing models do not entail material subjectivity because the methodologies employed do not
necessitate significant judgment, and the pricing inputs are observed from actively quoted markets,
as is the case for our derivative instruments. The pricing models used by the Company are widely
accepted by the financial services industry. As such and as noted above, our derivative instruments
are categorized within Level 2 of the fair value hierarchy.
Fair Value Control Processes
The Company employs control processes to validate the fair value of its derivative instruments
derived from the pricing models. These control processes are designed to assure that the values
used for financial reporting are based on observable inputs wherever possible. In the event that
observable inputs are not available, the control processes are designed to assure that the
valuation approach utilized is appropriate and consistently applied and that the assumptions are
reasonable.
In February 2008, the FASB issued Staff Position FAS 157-2, Effective Date of FASB Statement No.
157 (FASB ASC 820-10) (FSP No. 157-2), which deferred the effective date of SFAS No. 157 for
non-financial assets and liabilities, except for items that are recognized or disclosed at fair
value on a recurring basis, to fiscal years beginning after November 15, 2008 and interim periods
within those fiscal years. The Company had elected the deferral option permitted by FSP No. 157-2
for its non-financial assets and liabilities initially measured at fair value in prior business
combinations including intangible assets and goodwill. The Company adopted the provisions of FSP
No. 157-2 effective January 1, 2009, resulting in no material impact to our interim condensed
consolidated financial statements.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and
certain expenses and the disclosure of contingent assets and liabilities. Actual results could
differ materially from those estimates and assumptions. Estimates and assumptions are used in the
determination of recoverability of long-lived assets, sales allowances, allowances for doubtful
accounts, depreciation and amortization, employee benefit plans expense, restructuring reserves,
deferred income taxes, certain estimates pertaining to liabilities under FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes: An Interpretation of FASB Statement No. 109 (FASB
ASC 740-10) (FIN No. 48), certain assumptions pertaining to RHDs stock-based awards and certain
estimates associated with liabilities classified as liabilities subject to compromise, among
others.
New Accounting Pronouncements
In September 2009, the Emerging Issues Task Force (EITF) reached final consensus on EITF Issue
No. 08-1, Revenue Arrangements with Multiple Deliverables (EITF 08-1). EITF 08-1 has not yet been
incorporated into the FASBs Codification. EITF 08-1 updates the current guidance pertaining to
multiple-element revenue arrangements included in FASB ASC 605-25, which originated from EITF
00-21, Revenue Arrangements with Multiple Deliverables. EITF 08-1 addresses how to determine
whether an arrangement involving multiple deliverables contains more than one unit of accounting
and how the arrangement consideration should be allocated among the separate units of accounting.
EITF 08-1 will be effective for the Company in the annual reporting period beginning January 1,
2011. EITF 08-1 may be applied retrospectively or prospectively and early adoption is permitted.
The Company is currently evaluating the impact of EITF 08-1 on its financial position, results of
operations, cash flows, and disclosures.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162
(FASB ASC 105-10) (SFAS No. 168). SFAS No. 168 establishes a single source of authoritative
non-governmental GAAP, superseding existing FASB, AICPA, EITF and related accounting literature.
SFAS No. 168 does not amend or replace rules and interpretive releases of the Securities and
Exchange Commission (SEC), which are sources of authoritative GAAP for SEC registrants. SFAS No.
168 is effective for interim and annual periods ending after September 15, 2009 and, as such, the
Company has adopted SFAS No. 168 as of September 30, 2009. Throughout this Quarterly Report on Form
10-Q, the Company has provided citations to the applicable FASB codification in addition to the
original standard type and number.
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In May 2009, the FASB issued SFAS No. 165, Subsequent Events (FASB ASC 855-10) (SFAS No. 165),
the objective of which is to establish general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are issued or are available
to be issued. In particular, SFAS No. 165 sets forth (1) the period after the balance sheet date
during which management of a reporting entity should evaluate events or transactions that may occur
for potential recognition or disclosure in the financial statements, (2) the circumstances under
which an entity should recognize events or transactions occurring after the balance sheet date in
its financial statements and (3) the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim or
annual financial periods ending after June 15, 2009 and as such, we adopted SFAS No. 165 as of June
30, 2009. See Note 12, Subsequent Events for additional
information.
We have reviewed other accounting pronouncements that were issued as of September 30, 2009, which
the Company has not yet adopted, and do not believe that these pronouncements will have a material
impact on our financial position or operating results.
3. Reorganization Items, Net and Liabilities Subject to Compromise
Reorganization Items, Net
For the three and nine months ended September 30, 2009, the Company has recorded $4.5 million and
$54.0 million, respectively, of reorganization items on a separate line item on the condensed
consolidated statement of operations in accordance with SOP 90-7. Reorganization items represent
amounts that are directly associated with the process of reorganizing the business under Chapter 11
of the Bankruptcy Code. The following table displays the details of reorganization items for the
three and nine months ended September 30, 2009:
Three Months Ended | Nine Months Ended | |||||||
September 30, 2009 | September 30, 2009 | |||||||
Write-off of fair value adjustments |
$ | | $ | (78,511 | ) | |||
Write-off of net premiums / discounts on long-term debt |
| (8,311 | ) | |||||
Professional fees |
5,346 | 33,703 | ||||||
Lease rejections, abandoned property and other |
(855 | ) | (855 | ) | ||||
Total reorganization items |
$ | 4,491 | $ | (53,974 | ) | |||
The write-off of unamortized fair value adjustments required by GAAP as a result of the RHD Merger
of $78.5 million and unamortized net premiums / discounts of $8.3 million at May 28, 2009 relate to
long-term debt classified as liabilities subject to compromise at September 30, 2009.
The Company has incurred professional fees associated with filing the Chapter 11 petitions of $5.3
million and $33.7 million during the three and nine months ended September 30, 2009, respectively,
of which $0.8 million and $27.1 million, respectively, have been paid in cash. Professional fees
include financial, legal and valuation services directly associated with the reorganization
process.
The Company has recognized $0.9 million during the three and nine months ended September 30, 2009
associated with rejected leases and abandoned property, which have been approved by the Bankruptcy
Court through September 30, 2009 as part of the Chapter 11 Cases.
As of September 30, 2009, the Company has not received any operating cash receipts as a result of
filing the Chapter 11 petitions.
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Liabilities Subject to Compromise
Liabilities subject to compromise refers to unsecured obligations that will be accounted for under
a plan of reorganization. SOP 90-7 requires pre-petition liabilities, including those that became
known after filing the Chapter 11 petitions, that are subject to compromise to be reported at the
amounts expected to be allowed, even if they may be settled for lesser amounts. These liabilities
represent the estimated amount expected to be resolved on known or potential claims through the
Chapter 11 process, and remain subject to future adjustments from negotiated settlements, actions
of the Bankruptcy Court and non-acceptance of certain executory contracts and unexpired leases.
Liabilities subject to compromise also includes items that may be assumed under the plan of
reorganization, and may be subsequently reclassified to liabilities not subject to compromise. The
Company has classified all of its notes in default as liabilities subject to compromise.
Liabilities subject to compromise also include certain pre-petition liabilities including accrued
interest, accounts payable and accrued liabilities, intercompany liabilities, which includes $300.0
million of intercompany debt, tax related liabilities and lease related liabilities. The Companys
cash flow from operations was favorably impacted by the stay of payment related to accrued
interest.
The table below identifies the principal categories of liabilities subject to compromise at
September 30, 2009:
September 30, 2009 | ||||
Notes in default |
$ | 2,405,227 | ||
Intercompany liabilities |
419,576 | |||
Accrued interest |
88,201 | |||
Accounts payable and accrued liabilities |
12,832 | |||
Lease related liabilities |
12,126 | |||
Tax related liabilities |
261 | |||
Total liabilities subject to compromise |
$ | 2,938,223 | ||
4. Restructuring Charges
The table below shows the activity in our restructuring reserves for the three and nine months
ended September 30, 2009.
Three months ended | ||||||||||||||||||||
September 30, 2009 | 2006 Actions | 2007 Actions | 2008 Actions | 2009 Actions | Total | |||||||||||||||
Balance at June 30, 2009 |
$ | | $ | 49 | $ | 253 | $ | | $ | 302 | ||||||||||
Net increase (decrease) to
reserve charged (credited)
to earnings |
| (49 | ) | 763 | 293 | 1,007 | ||||||||||||||
Payments |
| | (414 | ) | (293 | ) | (707 | ) | ||||||||||||
Balance at September 30, 2009 |
$ | | $ | | $ | 602 | $ | | $ | 602 | ||||||||||
Nine months ended | ||||||||||||||||||||
September 30, 2009 | 2006 Actions | 2007 Actions | 2008 Actions | 2009 Actions | Total | |||||||||||||||
Balance at December 31, 2008 |
$ | 567 | $ | 54 | $ | 7,282 | $ | | $ | 7,903 | ||||||||||
Net increase (decrease) to reserve charged
(credited) to earnings |
| (17 | ) | 5,157 | 1,437 | 6,577 | ||||||||||||||
Payments |
(133 | ) | (37 | ) | (10,168 | ) | (448 | ) | (10,786 | ) | ||||||||||
Reclass to liabilities subject to compromise |
(434 | ) | | (1,669 | ) | (989 | ) | (3,092 | ) | |||||||||||
Balance at September 30, 2009 |
$ | | $ | | $ | 602 | $ | | $ | 602 | ||||||||||
During the second quarter of 2009, RHD initiated a restructuring plan that included vacating leased
facilities (2009 Actions). During the three and nine months ended September 30, 2009, we
recognized a restructuring charge to earnings associated with the 2009 Actions of $0.3 million and
$1.4 million, respectively, and made payments of $0.3 million and $0.4 million, respectively.
Remaining lease obligations of $1.0 million have been reclassed to liabilities subject to
compromise on the condensed consolidated balance sheet at September 30, 2009.
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During the first quarter of 2009, RHD initiated a restructuring plan that included outside
consulting services to assist with the evaluation of our capital structure, including
various balance sheet restructuring alternatives. Professional fees of $1.4 million, which were
previously charged to 2009 Actions during the first quarter of 2009, have been reclassed to
reorganization items, net on the condensed consolidated statement of operations for the nine months
ended September 30, 2009.
During the second quarter of 2008, RHD initiated a restructuring plan that included planned
headcount reductions, consolidation of responsibilities and vacated leased facilities (2008
Actions) that occurred during 2008 and will continue into 2009. During the three months ended
September 30, 2009 and 2008, we recognized a restructuring charge to earnings associated with the
2008 Actions of $0.8 million and $8.1 million, respectively, and $5.2 million and $10.2 million
during the nine months ended September 30, 2009 and 2008, respectively. Payments of $0.4 million
and $7.0 million were made with respect to outside consulting services, severance, and vacated
leased facilities during the three months ended September 30, 2009 and 2008, respectively, and
$10.2 million and $9.1 million during the nine months ended September 30, 2009 and 2008,
respectively. Remaining lease obligations of $1.7 million have been reclassed to liabilities
subject to compromise on the condensed consolidated balance sheet at September 30, 2009.
Restructuring charges that are charged (credited) to earnings are included in general and
administrative expenses on the consolidated statements of operations.
5. Long-Term Debt
The following table presents the carrying value of our long-term debt at September 30, 2009 and
December 31, 2008. As a result of filing the Chapter 11 petitions, unamortized fair value
adjustments required by GAAP as a result of the RHD Merger of $78.5 million and unamortized net
premiums / discounts of $8.3 million at May 28, 2009 were written-off and recognized as
reorganization items on the condensed consolidated statement of operations for the nine months
ended September 30, 2009. Therefore, the carrying value of our long-term debt at September 30, 2009
represents par value. The carrying value of our long-term debt at December 31, 2008 includes $86.2
million of unamortized fair value adjustments.
Notes in Default | Credit Facilities | |||||||||||
September 30, 2009 | December 31, 2008 | |||||||||||
Dex Media, Inc. |
||||||||||||
8% Senior Notes due 2013 |
$ | 500,000 | $ | | $ | 510,408 | ||||||
9% Senior Discount Notes due 2013 |
749,857 | | 771,488 | |||||||||
Dex Media East |
||||||||||||
Credit Facility |
| 1,065,286 | 1,081,500 | |||||||||
Dex Media West |
||||||||||||
Credit Facility |
| 1,096,616 | 1,080,000 | |||||||||
8.5% Senior Notes due 2010 |
385,000 | | 393,883 | |||||||||
5.875% Senior Notes due 2011 |
8,720 | | 8,761 | |||||||||
9.875% Senior Subordinated Notes due 2013 |
761,650 | | 815,791 | |||||||||
Total Dex Media consolidated |
2,405,227 | 2,161,902 | 4,661,831 | |||||||||
Less current portion not subject to compromise |
| 127,768 | 99,625 | |||||||||
Long-term debt subject to compromise |
$ | 2,405,227 | | | ||||||||
Long-term debt not subject to compromise |
$ | 2,034,134 | $ | 4,562,206 | ||||||||
Credit Facilities
As described in Note 1, Business and Basis of Presentation Chapter 11 Bankruptcy Proceedings and
Plan of Reorganization, the Plan includes modifications to certain terms and conditions of the
Companys credit facilities, which are not reflected below.
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Dex Media East
As of September 30, 2009, outstanding balances under the Dex Media East credit facility totaled
$1,065.3 million, comprised of $597.6 million under Term Loan A, $375.7 million under Term Loan B
and $92.0 million under the Dex Media East Revolver, exclusive of $2.6 million utilized under three
standby letters of credit. All Term Loans require quarterly principal and interest payments. The
Dex Media East Revolver and Term Loan A will mature in October 2013, and the Term Loan B will
mature in October 2014. The weighted average interest rate of outstanding debt under the Dex Media
East credit facility was 2.11% and 3.83% at September 30, 2009 and December 31, 2008, respectively.
Dex Media West
As of September 30, 2009, outstanding balances under the Dex Media West credit facility totaled
$1,096.6 million, comprised of $116.9 million under Term Loan A, $894.5 million under Term Loan B
and $85.2 million under the Dex Media West Revolver. All Term Loans require quarterly principal and
interest payments. The Dex Media West Revolver and Term Loan A will mature in October 2013 and the
Term Loan B will mature in October 2014. The weighted average interest rate of outstanding debt
under the Dex Media West credit facility was 6.95% and 7.10% at September 30, 2009 and December 31,
2008, respectively.
6. Derivative Financial Instruments
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities - an amendment of FASB Statement No. 133 (FASB ASC 815-10) (SFAS No. 161). SFAS No.
161 requires enhanced disclosures of derivative instruments and hedging activities such as the fair
value of derivative instruments and presentation of gains or losses in tabular format, as well as
disclosures regarding credit risks and strategies and objectives for using derivative instruments.
SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008
and, as such, the Company adopted the provisions of this standard on January 1, 2009. Although SFAS
No. 161 requires enhanced disclosures, its adoption did not impact the Companys results of
operations or financial condition.
As a result of filing the Chapter 11 petitions, the Company does not have any interest rate swaps
designated as cash flow hedges as of September 30, 2009. We do not use derivative financial
instruments for trading or speculative purposes and our derivative financial instruments are
limited to interest rate swap agreements. Our variable rate debt exposes the Company to variability
in interest payments due to changes in interest rates. Management believes that it is prudent to
mitigate the interest rate risk on a portion of its variable rate borrowings. Additionally, our
credit facilities require that we maintain hedge agreements to provide a fixed rate on at least 33%
of our indebtedness. To satisfy our objectives and requirements, the Company has entered into fixed
interest rate swap agreements to manage fluctuations in cash flows resulting from changes in
interest rates on variable rate debt. The Company has entered into the following interest rate swap
that effectively converts approximately $100.0 million, or 5%, of the Companys variable rate
debt to fixed rate debt as of September 30, 2009. At September 30, 2009, approximately 47% of our
total debt outstanding consists of variable rate debt, excluding the effect of our interest rate
swap. Including the effect of our interest rate swap, total fixed rate debt comprised approximately
55% of our total debt portfolio as of September 30, 2009.
Effective Dates | Notional Amount | Pay Rates | Maturity Dates | |||||||||
(amounts in millions) |
||||||||||||
March 31, 2008 |
$ | 100 | (1) | 3.50 | % | March 29, 2013 |
(1) | Consists of one swap |
The following table presents the fair value of our interest rate swap at September 30, 2009. The
fair value of our interest rate swap is presented in accounts payable and accrued liabilities and
other non-current liabilities on the condensed consolidated balance sheet at September 30, 2009.
The following table also presents the (gain) loss recognized in interest expense from the change in
fair value of our interest rate swaps and (gain) loss recognized in accumulated other
comprehensive loss from effective interest rate swaps for the three and nine months ended September
30, 2009.
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(Gain) Loss Recognized | ||||||||||||||||||||
(Gain) Loss Recognized in | in Accumulated | |||||||||||||||||||
Interest Expense | Other Comprehensive | |||||||||||||||||||
From the Change in Fair Value of | Loss From Effective Interest Rate | |||||||||||||||||||
Interest Rate Swaps | Swaps | |||||||||||||||||||
Fair Value | Three Months | Nine Months | Three Months | Nine Months | ||||||||||||||||
Measurements | Ended | Ended | Ended | Ended | ||||||||||||||||
at September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
2009 | 2009 | 2009 | 2009 | 2009 | ||||||||||||||||
Accounts Payable and Accrued
Liabilities |
$ | (2,798 | ) | $ | 4,097 | $ | 13,323 | $ | (4,120 | ) | $ | 7,930 | ||||||||
Other Non-Current Liabilities |
(1,714 | ) | 979 | (6,463 | ) | | (8,166 | ) | ||||||||||||
Total Liabilities |
$ | (4,512 | ) | $ | 5,076 | $ | 6,860 | $ | (4,120 | ) | $ | (236 | ) | |||||||
During the three and nine months ended September 30, 2009, the Company reclassified $5.9 million
and $24.6 million, respectively, of hedging losses related to our interest rate swaps into
earnings. As of September 30, 2009, $14.1 million of deferred losses, net of tax, on derivative
instruments recorded in accumulated other comprehensive loss are expected to be reclassified into
earnings during the next 12 months. Transactions and events are expected to occur over the next 12
months that will necessitate reclassifying these derivative losses to earnings as the hedged
transactions occur.
Under the terms of the interest rate swap agreements, the Company receives variable interest based
on three-month LIBOR and pays a weighted average fixed rate of 3.50%. The weighted average variable
rate received on our interest rate swaps was 0.28% for the nine months ended September 30, 2009.
These periodic payments and receipts are recorded as interest expense.
On the day a derivative contract is executed, the Company may designate the derivative instrument
as a hedge of the variability of cash flows to be received or paid (cash flow hedge). For all
hedging relationships, the Company formally documents the hedging relationship and its
risk-management objective and strategy for undertaking the hedge, the hedging instrument, the item,
the nature of the risk being hedged, how the hedging instruments effectiveness in offsetting the
hedged risk will be assessed, and a description of the method of measuring ineffectiveness. The
Company also formally assesses, both at the hedges inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in offsetting changes in
cash flows of hedged items.
All derivative financial instruments were recognized as either assets or liabilities on the
condensed consolidated balance sheets with measurement at fair value. On a quarterly basis, the
fair values of the interest rate swaps were determined based on quoted market prices and, to the
extent the swaps provided an effective hedge, the differences between the fair value and the book
value of the swaps were recognized in accumulated other comprehensive loss, a component of
shareholders equity. For derivative financial instruments that were not designated or did not
qualify as hedged transactions, the initial fair value, if any, and any subsequent gains or losses
on the change in the fair value were reported in earnings as a component of interest expense. Any
gains or losses related to the quarterly fair value adjustments were presented as a non-cash
operating activity on the condensed consolidated statements of cash flows.
The Company discontinues hedge accounting prospectively when it is determined that the derivative
is no longer highly effective in offsetting changes in the cash flows of the hedged item, the
derivative or hedged item is expired, sold, terminated, exercised, or management determines that
designation of the derivative as a hedging instrument is no longer appropriate. In situations in
which hedge accounting is discontinued, the Company continues to carry the derivative at its fair
value on the condensed consolidated balance sheet and recognizes any subsequent changes in its fair
value in earnings as a component of interest expense. Any amounts previously recorded to
accumulated other comprehensive loss will be amortized to interest expense in the same period(s) in
which the interest expense of the underlying debt impacts earnings.
By using derivative financial instruments to hedge exposures to changes in interest rates, the
Company exposes itself to credit risk and market risk. Credit risk is the possible failure of the
counterparty to perform under the terms of the derivative contract. When the fair value of a
derivative contract is positive, the counterparty owes the Company, which creates credit risk for
the Company. When the fair value of a derivative contract is negative, the Company owes the
counterparty and, therefore, it is not subject to credit risk. The Company minimizes the credit
risk in derivative financial instruments by entering into transactions with major financial
institutions with credit ratings of AA- or higher.
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Market risk is the adverse effect on the value of a financial instrument that results from a change
in interest rates. The market risk associated with interest-rate contracts is managed by
establishing and monitoring parameters that limit the types and degree of market risk that may be
undertaken.
See Note 2, Summary of Significant Accounting Policies Fair Value of Financial Instruments for
additional information regarding our interest rate swaps.
7. Income Taxes
The effective tax rate on income before income taxes of 87.6% and 54.5% for the three and nine
months ended September 30, 2009, respectively, compares to an effective tax rate of 78.0% and 35.8%
on income (loss) before income taxes for the three and nine months ended September 30, 2008,
respectively. The change in the effective tax rate for the three months ended September 30, 2009
as compared to the three months ended September 30, 2008 is primarily due estimates of
non-deductible reorganization costs during the three months ended September 30, 2009 as well as
changes in estimates of state tax apportionment factors during the three months ended September 30,
2008. The change in the effective tax rate for the nine months ended September 30, 2009 as compared
to the nine months ended September 30, 2008 is primarily due to estimates of non-deductible
reorganization costs as well as the tax consequences of goodwill impairment charges during the nine
months ended September 30, 2008.
8. Benefit Plans
Upon ratification of the new collective bargaining agreement with the International Brotherhood of
Electrical Workers of America (IBEW) on June 15, 2009 and in conjunction with the comprehensive
redesign of RHDs and the Companys employee retirement savings and pension plans approved by the
Compensation & Benefits Committee of RHDs Board of Directors on October 21, 2008, the following
plan changes have been approved for IBEW employees:
| Effective as of December 31, 2009, the Company will freeze the Dex Media, Inc. Pension Plan covering IBEW employees. In connection with the freeze, all pension plan benefit accruals for IBEW plan participants will cease as of December 31, 2009, however, all plan balances remain intact and interest credits on participant account balances, as well as service credits for vesting and retirement eligibility, continue in accordance with the terms of the plan. In addition, supplemental transition credits have been provided to certain plan participants nearing retirement who would otherwise lose a portion of their anticipated pension benefit at age 65 as a result of freezing the current plan. Similar supplemental transition credits have been provided to certain plan participants who were grandfathered under a final average pay formula when the defined benefit plan was previously converted from a traditional pension plan to a cash balance plan. | ||
| The elimination of all non-subsidized access to retiree health care and life insurance benefits effective January 1, 2010. | ||
| The elimination of subsidized retiree health care benefits for any Medicare-eligible retirees effective January 1, 2010. | ||
| The phase out of subsidized retiree health care benefits over a three-year period beginning January 1, 2010. With respect to the phase out of subsidized retiree health care benefits, if an eligible retiree becomes Medicare-eligible at any point in time during the phase out process noted above, such retiree will no longer be eligible for retiree health care coverage. |
As a result of implementing the freeze on the Dex Media, Inc. Pension Plan covering IBEW employees,
we have recognized a one-time net curtailment gain of $2.1 million during the nine months ended
September 30, 2009, which has been entirely offset by losses incurred on plan assets and previously
unrecognized prior service costs that had been charged to accumulated other comprehensive loss. As
a result of eliminating retiree health care and life insurance benefits for IBEW employees, we have
recognized a one-time curtailment gain of $13.5 million during the nine months ended September 30,
2009. As a result of these actions, we will no longer incur funding expenses and administrative
costs associated with this plan for IBEW employees.
On May 31, 2009, settlements of the Dex Media, Inc. Pension Plan occurred and at that time, lump
sum payments to participants exceeded the sum of the service cost plus interest cost component of
the net periodic benefit costs. These settlements resulted in the recognition of an actuarial loss
of $3.6 million for the nine months ended September 30, 2009.
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The following table provides the components of net periodic benefit cost for the three and nine
months ended September 30, 2009 and 2008:
Pension Benefits | ||||||||||||||||
Three Months | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Service cost |
$ | 1,009 | $ | 1,664 | $ | 3,384 | $ | 5,412 | ||||||||
Interest cost |
1,724 | 2,517 | 5,594 | 7,704 | ||||||||||||
Expected return on plan assets |
(2,026 | ) | (2,494 | ) | (6,429 | ) | (7,929 | ) | ||||||||
Amortization of net gain |
(81 | ) | | (108 | ) | | ||||||||||
Settlement loss |
| | 3,593 | | ||||||||||||
Net periodic benefit cost |
$ | 626 | $ | 1,687 | $ | 6,034 | $ | 5,187 | ||||||||
Postretirement Benefits | ||||||||||||||||
Three Months | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Service cost |
$ | 122 | $ | 312 | $ | 525 | $ | 934 | ||||||||
Interest cost |
596 | 1,121 | 1,985 | 3,363 | ||||||||||||
Amortization of net gain |
(63 | ) | | (102 | ) | | ||||||||||
Amortization of prior service cost |
(1 | ) | (2 | ) | (4 | ) | (3 | ) | ||||||||
Curtailment gain |
| | (13,461 | ) | | |||||||||||
Net periodic benefit cost (credit) |
$ | 654 | $ | 1,431 | $ | (11,057 | ) | $ | 4,294 | |||||||
Net periodic pension benefit cost for the three and nine months ended September 30, 2009 has
declined when compared to the prior corresponding periods, excluding the settlement charge, due to
the freeze of the Companys defined benefit plans covering non-union employees. In connection with
the freeze, all pension plan benefit accruals for non-union plan participants have ceased as of
December 31, 2008, however, all plan balances remained intact and interest credits on participant
account balances, as well as service credits for vesting and retirement eligibility, continue in
accordance with the terms of the respective plans. In addition, supplemental transition credits
have been provided to certain plan participants nearing retirement who would otherwise lose a
portion of their anticipated pension benefit at age 65 as a result of freezing the current plans.
Similar supplemental transition credits have been provided to certain plan participants who were
grandfathered under a final average pay formula when the defined benefit plans were previously
converted from traditional pension plans to cash balance plans.
Net periodic postretirement benefit cost for the three and nine months ended September 30, 2009 has
declined when compared to the prior corresponding periods, due to the following curtailment related
to non-union employees: (i) the elimination of all non-subsidized access to retiree health care and
life insurance benefits effective January 1, 2009, (ii) the elimination of subsidized retiree
health care benefits for any Medicare-eligible retirees effective January 1, 2009 and (iii) the
phase out of subsidized retiree health care benefits over a three-year period beginning January 1,
2009 (with all non-union retiree health care benefits terminating January 1, 2012). With respect
to the phase out of subsidized retiree health care benefits, if an eligible retiree becomes
Medicare-eligible at any point in time during the phase out process noted above, such retiree will
no longer be eligible for retiree health care coverage.
During the three months ended September 30, 2009 and 2008, the Company made contributions of $8.5
million and $3.4 million, respectively, to its pension plan. During the nine months ended
September 30, 2009 and 2008, the Company made contributions of $27.0 million and $7.4 million,
respectively, to its pension plan. During the three months ended September 30, 2009 and 2008, the
Company made contributions of $1.0 million and $1.2 million, respectively, to its postretirement
plan. During the nine months ended September 30, 2009 and 2008, the Company made contributions of
$2.7 million and $2.6 million, respectively, to its postretirement plan. The Company expects to
make total contributions of approximately $27.6 million and $5.6 million to its pension plan and
postretirement plan, respectively, in 2009.
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9. Business Segments
Management reviews and analyzes its business of providing local search solutions as one operating
segment.
10. Legal Proceedings
On the Petition Date, the RHD Entities filed voluntary petitions for Chapter 11 relief under the
Bankruptcy Code in the Bankruptcy Court in order to consummate a balance sheet restructuring. The
cases are being jointly administered. The Company continues to operate its businesses as
debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the
applicable provisions of the Bankruptcy Code. As of the Petition Date, all pending litigation
wherein the Company is named as a defendant is generally stayed by operation of federal bankruptcy
law, and absent further order of the Bankruptcy Court, no party, subject to certain exceptions, may
take any action, also subject to certain exceptions, to recover on pre-petition claims against the
Company. At this time, it is not possible to predict the outcome of the Chapter 11 Cases or its
effect on our business or the actions described below.
We are involved in various legal proceedings arising in the ordinary course of our business, as
well as certain litigation and tax matters. In many of these matters, plaintiffs allege that they
have suffered damages from errors or omissions in their advertising or improper listings, in each
case, contained in directories published by us.
We are also exposed to potential defamation and breach of privacy claims arising from our
publication of directories and our methods of collecting, processing and using advertiser and
telephone subscriber data. If such data were determined to be inaccurate or if data stored by us
were improperly accessed and disseminated by us or by unauthorized persons, the subjects of our
data and users of the data we collect and publish could submit claims against the Company. Although
to date we have not experienced any material claims relating to defamation or breach of privacy, we
may be party to such proceedings in the future that could have a material adverse effect on our
business.
We periodically assess our liabilities and contingencies in connection with these matters based
upon the latest information available to us. For those matters where it is probable that we have
incurred a loss and the loss or range of loss can be reasonably estimated, we record a liability in
our condensed consolidated financial statements. In other instances, we are unable to make a
reasonable estimate of any liability because of the uncertainties related to both the probable
outcome and amount or range of loss. As additional information becomes available, we adjust our
assessment and estimates of such liabilities accordingly.
Based on our review of the latest information available, we believe our ultimate liability in
connection with pending or threatened legal proceedings will not have a material adverse effect on
our results of operations, cash flows or financial position. No material amounts have been accrued
in our condensed consolidated financial statements with respect to any such matters.
11. Related Party Transactions
Certain transactions are managed by RHD on a centralized basis. Under the centralized cash
management program, RHD and the Company advance funds and allocate certain operating expenditures
to each other. These net intercompany balances have been classified as a current asset at September
30, 2009 and current liability at December 31, 2008, as the Company intends to settle these
balances with RHD during the next twelve months. Changes in net intercompany balances resulting
from operating transactions have been presented as operating activities on the condensed
consolidated statements of cash flows for the nine months ended September 30, 2009 and 2008.
On March 19, 2009, Dex Media East and Dex Media West each entered into a loan agreement (loan
agreements) with RHD Service LLC (RHD Service), a direct wholly-owned subsidiary of RHD, for
$50.0 million and $75.0 million, respectively. The loan agreements have a stated maturity date
of March 31, 2010 and interest is payable on a quarterly basis commencing June 30, 2009 at an
annual rate of 8.75%. Funds for the loans made to RHD Service were obtained from amounts
borrowed under the unused portions of the Dex Media East Revolver and Dex Media West Revolver on
February 13, 2009. These intercompany loans have been classified as a current asset at September
30, 2009 based on the stated maturity date and are presented as an investing activity on the
condensed consolidated statements of cash flows for the nine months ended September 30, 2009.
Interest income resulting from these loans is included in interest expense, net on the condensed
consolidated statement of operations for the three and nine months ended September 30, 2009.
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In general, substantially all of the net assets of the Company and its subsidiaries are restricted
from being paid as dividends to any third party, and our subsidiaries are restricted from paying
dividends, loans or advances to RHD with very limited exceptions, under the terms of the Dex Media
East and Dex Media West credit facilities. We paid dividends to our parent during the nine months
ended September 30, 2009 and 2008 of $84.6 million and $258.1 million, respectively. These
dividends are presented as a financing activity on the condensed consolidated statements of cash
flows for the nine months ended September 30, 2009 and 2008.
12. Subsequent Events
The Company has evaluated subsequent events having an accounting or reporting impact as of November
6, 2009, which represents the filing date of this Quarterly Report on Form 10-Q.
On October 3, 2009, Dex Media entered into a Memorandum of Agreement with the Communications
Workers of America (CWA) regarding a tentative three year collective bargaining agreement. A
ratification vote by CWA members is expected to be completed in early November 2009.
The RHD Entities filed an amended Plan and an amended Disclosure Statement on October 7, 2009,
October 19, 2009 and October 21, 2009. On October 21, 2009, the Bankruptcy Court held a hearing,
during which it approved the Disclosure Statement and granted the RHD Entities the authority to
begin soliciting votes on the Plan.
On October 23, 2009, a putative securities class action lawsuit was commenced in Delaware Federal
Court on behalf of all persons who purchased or otherwise acquired RHDs publicly traded securities
between July 2007 and the time the RHD Entities filed for bankruptcy at the end of May 2009,
alleging that certain RHD officers issued false and misleading statements regarding RHDs business
and financial condition. RHD believes the allegations set forth in the putative class action
lawsuit are without merit and intends to vigorously defend any such action pursued against RHD and
its officers.
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Item 2. Managements Narrative Analysis of Results of Operations
Pursuant to General Instruction H(2)(a) of Form 10-Q: (i) the information called for by Item 2,
Managements Discussion and Analysis of Financial Condition and Results of Operations, has been
omitted and (ii) we are providing the following Managements Narrative Analysis of Results of
Operations.
Forward-Looking Information
Certain statements contained in this Quarterly Report on Form 10-Q regarding our future operating
results, performance, business plans or prospects and any other statements not constituting
historical fact are forward-looking statements subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. Where possible, words such as believe, expect,
anticipate, should, will, would, planned, estimated, potential, goal, outlook,
may, predicts, could, or the negative of those words and other comparable expressions, are
used to identify such forward-looking statements. All forward-looking statements reflect our
current beliefs and assumptions with respect to our future results, business plans and prospects,
based on information currently available to us and are subject to significant risks and
uncertainties. Accordingly, these statements are subject to significant risks and uncertainties
and our actual results, business plans and prospects could differ significantly from those
expressed in, or implied by, these statements. We caution readers not to place undue reliance on,
and we undertake no obligation to update, other than as imposed by law, any forward-looking
statements. Such risks, uncertainties and contingencies include, but are not limited to,
statements about Dex Media, Inc.s (Dex Media) future financial and operating results, Dex
Medias plans, objectives, expectations and intentions and other statements that are not historical
facts. The following factors, among others, could cause actual results to differ from those set
forth in the forward-looking statements: (1) the impact of the RHD Entities bankruptcy filings and
the related Chapter 11 bankruptcy process on our business, financial condition or results of
operations; (2) changes in directory advertising spend and consumer usage; (3) regulatory and
judicial rulings; (4) competition and other economic conditions; (5) changes in the Companys and
the Companys subsidiaries credit ratings; (6) changes in accounting standards; (7) adverse
results from litigation, governmental investigations or tax related proceedings or audits; (8) the
effect of labor strikes, lock-outs and negotiations; (9) successful integration and realization of
the expected benefits of acquisitions; (10) the continued enforceability of the commercial
agreements with Qwest; (11) our reliance on third-party vendors for various services; and (12)
other events beyond our control that may result in unexpected adverse operating results. Additional
risks and uncertainties are described in detail in Item 1A, Risk Factors of our Annual Report on
Form 10-K for the year ended December 31, 2008 and our Quarterly Report on Form 10-Q for the three
and six months ended June 30, 2009. Unless otherwise indicated, the terms Dex Media, the
Company, we, us and our refer collectively to Dex Media, Inc., its direct and indirect
wholly-owned subsidiaries and its and their predecessors.
Corporate Overview
We are a directional marketing company that helps local businesses by distributing their message to
consumers wherever they choose to search, including print, online, mobile and voice. During 2008,
we generated revenues of approximately $1.6 billion by fulfilling two critical roles that address
the needs of the growing local search marketplace:
| We provide simple, cost effective marketing solutions to our advertisers that generate a large volume of ready-to-buy consumers for their local businesses. | ||
| We provide local search solutions to consumers that are easy to use and deliver highly relevant search results through a variety of print and online media platforms. |
Through our Dex® Advantage, customers business information is collected and marketed through a
single profile and distributed via a variety of local search products. Dex ensures advertisers
business content and messages are found wherever, whenever and however consumers choose to search.
The Dex Advantage spans multiple media platforms for local advertisers including print with the Dex
directories, which we co-brand with Qwest, a recognizable brand in the industry, online and mobile
devices with dexknows.com ®, voice-activated directory search at 1-800-Call-Dex and
leading search engines and other online sites via DexNet.
We believe our ability to effectively compete in our industry is supported and enhanced by our
local marketing consultants, who serve as trusted advisors for marketing support and service in the
local markets we serve. Our local marketing consultants work closely with advertisers to first
discover their needs and goals, assess their unique situations, and then recommend customized,
cost-effective, directional local search solutions to help their businesses grow. Additional
factors that support our ability to effectively compete in our industry include:
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| Brand: Our Dex brand provides differentiation and an ability to leverage the capabilities of our print products into other media, such as online and mobile; | ||
| Advertisers: Strong, long-term relationships with our advertisers; | ||
| Products: Our multiple media local search solutions target consumers who are closer to making purchase decisions; | ||
| Channel: We manage a large, established local sales organization; and | ||
| Content: Our proprietary database contains up-to-date information for national and local businesses in 14 states and an infrastructure to service these national and local advertisers. |
Dex Media, a wholly-owned subsidiary of R.H. Donnelley Corporation (RHD or parent), is the
exclusive publisher of the official yellow pages and white pages directories for Qwest
Corporation, the local exchange carrier of Qwest Communications International Inc. (Qwest), in
Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota (collectively, the
Dex East States) and Arizona, Idaho, Montana, Oregon, Utah, Washington and Wyoming (collectively,
the Dex West States, and, together with the Dex East States, the Dex States). We are the
indirect parent of Dex Media East LLC (Dex Media East) and Dex Media West LLC (Dex Media West).
Dex Media East operates the directory business in the Dex East States and Dex Media West operates
the directory business in the Dex West States.
Chapter 11 Bankruptcy Proceedings and Plan of Reorganization
Filing of Voluntary Petitions in Chapter 11
On May 28, 2009 (the Petition Date), RHD, the Company and RHDs other subsidiaries (collectively
the RHD Entities) filed voluntary petitions for Chapter 11 relief under Title 11 of the United
States Code (the Bankruptcy Code) in the United States Bankruptcy Court for the District of
Delaware (the Bankruptcy Court) in order to consummate a balance sheet restructuring. The cases
are being jointly administered under the caption In re: R.H. Donnelley, Corporation, et al., Case
No. 09-11833 (KG) (Bankr. D. Del. 2009) (the Chapter 11 Cases). Promptly after filing the Chapter
11 petitions, the Company began notifying all known current or potential creditors of the
commencement of the Chapter 11 Cases.
Through the Chapter 11 Cases, the Company intends to consummate a balance sheet restructuring,
resulting in a less leveraged capital structure that is better aligned with the ongoing cash flows
of our business.
During the pendency of the Chapter 11 Cases, the Company is operating its business as a
debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with
applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. We expect to
continue to operate in the normal course of business during the reorganization process. Unless
otherwise authorized by the Bankruptcy Court, the Bankruptcy Code prohibits the Company from making
payments to creditors on account of pre-petition claims. Vendors are, however, being paid for goods
furnished and services provided after the Petition Date in the ordinary course of business.
However, operating in bankruptcy imposes significant risks on our business and we cannot predict
whether or when we will successfully emerge from bankruptcy.
Commencement of Chapter 11 Cases
As of the Petition Date, all pending litigation wherein the Company is named as a defendant is
generally stayed by operation of the Bankruptcy Code and absent further order of the Bankruptcy
Court, no party, subject to certain exceptions, may take any action, also subject to certain
exceptions, to recover on pre-petition claims against the Company.
On the same day that the RHD Entities filed the voluntary petitions, the RHD Entities also filed a
motion seeking procedural consolidation of the Chapter 11 Cases for ease of administration, which
order was granted by the Bankruptcy Court on June 1, 2009. The Bankruptcy Court also granted
certain other motions in substantially the manner requested seeking typical first day relief to
ensure that we were able to transition into the Chapter 11 process with as little disruption to our
business as possible and to enable our business to function in the ordinary course while the
Chapter 11 Cases were pending. The most significant of these granted first day motions authorized
us to (i) pay pre-petition wages and other benefits to our employees; (ii) honor pre-petition
customer obligations and continue customer programs; (iii) pay certain pre-petition claims of
shippers, warehouseman and other lien claimants; (iv) make payments to certain pre-petition vendors
that were vital to our uninterrupted operations; (v) pay and set aside amounts to adequately assure
payment to providers of utility service; (vi) pay certain pre-petition tax claims; (vii) pay
certain pre-petition insurance claims; (viii) continue use of our existing cash management system
and bank accounts and (ix) use cash collateral with the consent of our secured lenders.
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As required by the Bankruptcy Code, on June 11, 2009, the United States Trustee for the District of
Delaware appointed five creditors to the official committee of unsecured creditors (the Unsecured
Creditors Committee). The United States Trustee subsequently appointed an additional member to
the Unsecured Creditors Committee on each of June 15, 2009 and June 19, 2009. The Unsecured
Creditors Committee currently consists of seven members.
The Company continues to generate positive operating cash flows. If this trend continues,
debtor-in-possession financing is not likely to be required as a result of our Chapter 11
bankruptcy filing. However, the Company has incurred and will continue to incur significant costs
associated with reorganization. These costs are being expensed as incurred and are included in
reorganization items, net on the condensed consolidated statements of operations for the three and
nine months ended September 30, 2009.
Proposed Plan of Reorganization
On July 27, 2009, the RHD Entities filed a proposed joint plan of reorganization with the
Bankruptcy Court (the Plan), together with a disclosure statement in respect of the Plan (the
Disclosure Statement). The RHD Entities filed an amended Plan and an amended Disclosure Statement
on September 18, 2009, October 7, 2009, October 19, 2009 and October 21, 2009. On October 21, 2009,
the Bankruptcy Court held a hearing, during which it approved the Disclosure Statement and granted
the RHD Entities the authority to begin soliciting votes on the Plan. A plan of reorganization sets
forth the treatment of the various classes of claims against and equity interests in each of the
debtors. The confirmation of a plan of reorganization is the principal objective of a Chapter 11
reorganization case. A hearing on the confirmation of the Plan is scheduled for January 12, 2010 in
the Bankruptcy Court.
Certain salient economic terms of the Plan, which are subject in all respects to the specific terms
and definitions set forth in the Plan, include, but are not limited to, the following:
(i) | Elimination of approximately $6.4 billion of the RHD Entities indebtedness, including the payment of $700.0 million of secured indebtedness, and $500.0 million of annual interest expense; | ||
(ii) | The exchange of all pre-petition publicly issued unsecured note debt for (a) 100% of the reorganized RHD equity that is subject to dilution pursuant to a stock-based management incentive plan, which is expected to permit equity-based compensation in an amount of not less than 10% of the fully diluted RHD equity, if approved in accordance with the Plan and (b) in the case of the holders of the Dex Media West 8.5% Senior Notes due 2010 and 5.875% Senior Notes due 2011, $300.0 million of new seven-year RHD unsecured notes on a pro rata basis in addition to their share of the reorganized RHD equity; | ||
(iii) | The obligations of the lenders under the R.H. Donnelley Inc. (RHDI) revolving credit facility (the RHDI Revolver) to make additional advances terminated on the Petition Date and the outstanding loans under the RHDI Revolver will be converted to a term loan with a maturity date of October 2014 and an interest rate of LIBOR plus 625 basis points (bps), subject to a reduction upon satisfaction of a specified financial covenant threshold, and the current RHDI term loans will be amended to extend the maturity date to October 2014 with an interest rate of LIBOR plus 625 bps, subject to a reduction upon satisfaction of a specified financial covenant threshold; | ||
(iv) | The obligations of the lenders under the Dex Media East revolving credit facility (Dex Media East Revolver) to make additional advances terminated on the Petition Date, and the outstanding loans under the Dex Media East Revolver will be converted to a term loan with a maturity date of October 2014 and an interest rate of LIBOR plus 250 bps, subject to reductions upon satisfaction of certain financial covenant thresholds, the current Dex Media East Term Loan A will be amended to extend the maturity date to October 2014 and increase the interest rate to LIBOR plus 250 bps, subject to reductions upon satisfaction of certain financial covenant thresholds, and the Dex Media East Term Loan B will be amended to increase the interest rate to LIBOR plus 250 bps, subject to reductions upon satisfaction of certain financial covenant thresholds; | ||
(v) | The obligations of the lenders under the Dex Media West revolving credit facility (Dex Media West Revolver) to make additional advances terminated on the Petition Date and the outstanding loans under the Dex Media West Revolver will be converted to a term loan with a maturity date of October 2014 and an interest rate of LIBOR plus 450 bps, subject to reductions upon satisfaction of certain financial covenant thresholds, the current Dex Media West Term Loan A will be amended to extend the maturity date to October 2014 and increase the interest rate to LIBOR plus 450 bps, subject to reductions upon satisfaction of certain financial covenant thresholds, and the Dex Media West Term Loan B will be amended to increase the interest rate to LIBOR plus 450 bps, subject to reductions upon satisfaction of certain financial covenant thresholds; and | ||
(vi) | Enhancement of the collateral and guarantees of the Dex Media East, Dex Media West and RHDI secured debt. As of emergence, the RHD Entities proposed Plan would, if adopted in its present form, result in consolidated debt of approximately $3.4 billion, of which $3.1 billion would be secured. |
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On May 29, 2009, RHD announced that the RHD Entities had reached pre-petition agreements in
principle with a substantial majority of its unsecured noteholders and a substantial majority of
their pre-petition secured lenders on a restructuring plan. The terms of RHD Entities
restructuring plan are evidenced by (i) Support Agreements dated as of May 21, 2009 and executed by
certain of the RHD Entities and lenders holding in excess of two-thirds in principal amount and
one-half in number of claims under each of the RHDI, Dex Media East, and Dex Media West
pre-petition credit facilities and (ii) the Restructuring Support Agreement dated as of May 28,
2009 executed by the RHD Entities and noteholders holding in excess of a majority of the aggregate
principal amount of the pre-petition unsecured note debt (together, the Plan Support Agreements).
The Plan is consistent with the terms and conditions of the Plan Support Agreements and applicable
related term sheets. The Plan Support Agreements, together with the applicable terms sheets, form
the basis for the Plan. There can be no assurance, however, that the Plan will be approved by all
requisite holders of claims or interests or by the Bankruptcy Court or that all conditions
precedent to the implementation of the Plan will be satisfied. Each Plan Support Agreement is
subject to certain material conditions. Moreover, each Plan Support Agreement may be terminated
upon the occurrence of certain events, including if a plan of reorganization is not confirmed by
January 15, 2010.
Recent Trends Related to Our Business
RHD and the Company have been experiencing lower advertising sales primarily as a result of
declines in new and recurring business, including both renewal and incremental sales to existing
advertisers, mainly driven by (1) declines in overall advertising spending by businesses, (2) the
significant impact of the weaker economy on smaller businesses in the markets in which we do
business and (3) an increase in competition and more fragmentation in the local business search
market. These factors, along with the significant decline in the trading value of our debt and
RHDs debt and equity securities during 2008 and resulting increase in the discount rate, were the
primary drivers in determining the discounted expected future cash flows and resulting goodwill
impairment charges in 2008.
We currently project our future operating results, cash flow and liquidity will be negatively
impacted by the aforementioned conditions. During the nine months ended September 30, 2009, we
experienced a $175.4 million, or 14.6%, decline in total net revenues from the prior corresponding
period. During the nine months ended September 30, 2009, excluding the effects of filing the
Chapter 11 petitions, we also experienced a decrease in operating cash flow from the prior
corresponding period. In addition, we have been experiencing adverse bad debt trends attributable
to many of these same economic challenges in our markets. We expect that these economic challenges
will continue in our markets, and, as such, our advertising sales, bad debt experience and
operating results will continue to be adversely impacted for the foreseeable future. As a result,
our historical operating results will not be indicative of future operating performance, although
our long-term financial forecast currently anticipates a gradual improvement in the economy
commencing in the second half of 2010.
As more fully described below in Item 2, Managements Narrative Analysis of Results of Operations
Net Revenues, our method of recognizing revenue under the deferral and amortization method
results in a delayed recognition of declining advertising sales whereby recognized revenues reflect
the amortization of advertising sales consummated in prior periods as well as advertising sales
consummated in the current period. Accordingly, our projected decline in advertising sales will
result in a decline in revenue recognized in future periods. We expect these negative trends to
continue into the foreseeable future.
In response to these economic challenges, we continue to actively manage expenses and are
considering and acting upon a host of initiatives to streamline operations and contain costs. At
the same time, we are improving the value we deliver to our advertisers by expanding the number of
platforms and media through which we deliver their message to consumers. We are also committing our
sales force to focus on selling the value provided to local businesses through these expanded
platforms, including our Dex directories, online and mobile devices, voice-activated directory
search as well as our network of owned and operated and partner online search sites. In addition,
the Company continues to invest in its future through initiatives such as its overall digital
product and service offerings, sales force automation, an advertiser self service system and
portal, new mobile and voice search platforms and associated employee training. As economic
conditions recover in our markets, we believe these investments will drive future revenue growth.
On October 3, 2009, we entered into a Memorandum of Agreement with the Communications Workers of
America (CWA) regarding a tentative three year collective bargaining agreement. A ratification
vote by CWA members is expected to be completed in early November 2009. On June 15, 2009, we agreed
on a new three year collective bargaining agreement with the International Brotherhood of
Electrical Workers of America (IBEW). The collective bargaining agreement with the IBEW expires
in June 2012.
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Going Concern
Item 1, Financial Statements Unaudited Note 1, Business and Basis of Presentation contains
a statement indicating that certain events could impact our ability to continue as a going concern.
The assessment of our ability to continue as a going concern was made by management considering,
among other factors: (i) our Chapter 11 bankruptcy filing on May 28, 2009; (ii) the current global
credit and liquidity crisis; (iii) the significant negative impact on our operating results and
cash flows from the overall downturn in the global economy and an increase in competition and more
fragmentation in the local business search market; (iv) that certain of our credit ratings have
been downgraded; and (v) that RHDs common stock ceased trading on the New York Stock Exchange
(NYSE) on December 31, 2008 and is now traded over-the-counter on the Pink Sheets. These
considerations are further reflected by our goodwill impairment charges of $2.6 billion and
intangible asset impairment charges of $603.0 million recorded for the year ended December 31,
2008. In managements view, these circumstances and events raise substantial doubt as to whether
the Company will be able to continue as a going concern for a reasonable period of time.
Accounting Matters
The filing of the Chapter 11 petitions constituted an event of default under the indentures
governing the Companys senior notes, senior discount notes and senior subordinated notes
(collectively the notes in default) and the debt obligations under those instruments became
automatically and immediately due and payable, although any actions to enforce such payment
obligations are automatically stayed under the applicable bankruptcy law. Based on the bankruptcy
petitions, the notes in default are included in liabilities subject to compromise on the condensed
consolidated balance sheet at September 30, 2009. See Item 1, Financial Statements Unaudited -
Note 1, Business and Basis of Presentation Accounting Matters for additional information
regarding the notes in default and other accounting matters.
Other Significant Financing Developments
On May 28, 2009 and in conjunction with the Plan, the Company repaid an aggregate of $122.4 million
in principal on outstanding balances owed under the Dex Media East credit facility and Dex Media
West credit facility. The repayments were made under each of the credit facilities as follows:
Description | Amount | |||
Dex Media West |
||||
Term Loan A |
$ | 6,971 | ||
Term Loan B |
50,941 | |||
Revolver |
4,826 | |||
Dex Media East |
||||
Term Loan A |
34,176 | |||
Term Loan B |
20,454 | |||
Revolver |
4,985 | |||
Total repayment |
$ | 122,353 | ||
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On May 14, 2009, the Company exercised a 30-day grace period on $54.0 million in interest payments
due on the following senior notes and senior discount notes:
Description | Amount | |||
Dex Media, Inc. |
||||
8% Senior Notes due 2013 |
$ | 20,000 | ||
9% Senior Discount Notes due 2013 |
33,744 | |||
Dex Media West |
||||
5.875% Senior Notes due 2011 |
256 | |||
Total interest payments |
$ | 54,000 | ||
Exercising the grace period did not constitute an event of default under the bond indentures or any
of the Companys or its subsidiaries other debt agreements. The Company did not make these
interest payments prior to filing the Chapter 11 petitions.
On April 15, 2009, RHD exercised a 30-day grace period on $54.6 million in interest payments due on
its 8.875% Series A-4 Senior Notes due 2017. As a result of exercising the 30-day grace period,
certain existing interest rate swaps associated with the Dex Media East credit facility having a
notional amount of $350.0 million were required to be settled on May 28, 2009. Cash settlement
payments of $26.4 million were made during the second quarter of 2009 associated with these
interest rate swaps.
As a result of the decline in certain of our credit ratings, an existing interest rate swap
associated with the Dex Media West credit facility having a notional amount of $50.0 million was
required to be settled on April 23, 2009. A cash settlement payment of $0.5 million was made
during the second quarter of 2009 associated with this interest rate swap.
On February 13, 2009, the Company borrowed the unused portions under the Dex Media East Revolver
and Dex Media West Revolver totaling $97.0 million and $90.0 million, respectively. The Company
made the borrowings under the revolving credit facilities to preserve its financial flexibility
in light of the continuing uncertainty in the global credit markets.
Employee Retirement Savings and Pension Plans
Upon ratification of the new collective bargaining agreement with the IBEW on June 15, 2009 and in
conjunction with the comprehensive redesign of RHDs and the Companys employee retirement savings
and pension plans approved by the Compensation & Benefits Committee of RHDs Board of Directors on
October 21, 2008, the following plan changes have been approved for IBEW employees:
| Effective as of December 31, 2009, the Company will freeze the Dex Media, Inc. Pension Plan covering IBEW employees. In connection with the freeze, all pension plan benefit accruals for IBEW plan participants will cease as of December 31, 2009, however, all plan balances remain intact and interest credits on participant account balances, as well as service credits for vesting and retirement eligibility, continue in accordance with the terms of the plan. In addition, supplemental transition credits have been provided to certain plan participants nearing retirement who would otherwise lose a portion of their anticipated pension benefit at age 65 as a result of freezing the current plan. Similar supplemental transition credits have been provided to certain plan participants who were grandfathered under a final average pay formula when the defined benefit plan was previously converted from a traditional pension plan to a cash balance plan. | ||
| The elimination of all non-subsidized access to retiree health care and life insurance benefits effective January 1, 2010. | ||
| The elimination of subsidized retiree health care benefits for any Medicare-eligible retirees effective January 1, 2010. | ||
| The phase out of subsidized retiree health care benefits over a three-year period beginning January 1, 2010. With respect to the phase out of subsidized retiree health care benefits, if an eligible retiree becomes Medicare-eligible at any point in time during the phase out process noted above, such retiree will no longer be eligible for retiree health care coverage. |
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As a result of implementing the freeze on the Dex Media, Inc. Pension Plan covering IBEW employees,
we have recognized a one-time net curtailment gain of $2.1 million during the nine months ended
September 30, 2009, which has been entirely offset by losses incurred on plan assets and
previously unrecognized prior service costs that had been charged to accumulated other
comprehensive loss. As a result of eliminating retiree health care and life insurance benefits for
IBEW employees, we have recognized a one-time curtailment gain of $13.5 million for the nine months
ended September 30, 2009. As a result of these actions, we will no longer incur funding expenses
and administrative costs associated with this plan for IBEW employees.
Segment Reporting
Management reviews and analyzes its business of providing local search solutions as one operating
segment.
New Accounting Pronouncements
In September 2009, the Emerging Issues Task Force (EITF) reached final consensus on EITF Issue
No. 08-1, Revenue Arrangements with Multiple Deliverables (EITF 08-1). EITF 08-1 has not yet been
incorporated into the FASBs Codification. EITF 08-1 updates the current guidance pertaining to
multiple-element revenue arrangements included in FASB ASC 605-25, which originated from EITF
00-21, Revenue Arrangements with Multiple Deliverables. EITF 08-1 addresses how to determine
whether an arrangement involving multiple deliverables contains more than one unit of accounting
and how the arrangement consideration should be allocated among the separate units of accounting.
EITF 08-1 will be effective for the Company in the annual reporting period beginning January 1,
2011. EITF 08-1 may be applied retrospectively or prospectively and early adoption is permitted.
The Company is currently evaluating the impact of EITF 08-1 on its financial position, results of
operations, cash flows, and disclosures.
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 168, The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162 (FASB
Accounting Standards Codification (ASC) 105-10) (SFAS No. 168). SFAS No. 168 establishes a
single source of authoritative non-governmental U.S. generally accepted accounting principles
(GAAP), superseding existing FASB, American Institute of Certified Public Accountants (AICPA),
EITF and related accounting literature. SFAS No. 168 does not amend or replace rules and
interpretive releases of the Securities and Exchange Commission (SEC), which are sources of
authoritative GAAP for SEC registrants. SFAS No. 168 is effective for interim and annual periods
ending after September 15, 2009 and, as such, the Company has adopted SFAS No. 168 as of September
30, 2009. Throughout this Quarterly Report on Form 10-Q, the Company has provided citations to the
applicable FASB codification in addition to the original standard type and number.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (FASB ASC 855-10) (SFAS No. 165),
the objective of which is to establish general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are issued or are available
to be issued. In particular, SFAS No. 165 sets forth (1) the period after the balance sheet date
during which management of a reporting entity should evaluate events or transactions that may occur
for potential recognition or disclosure in the financial statements, (2) the circumstances under
which an entity should recognize events or transactions occurring after the balance sheet date in
its financial statements and (3) the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim or
annual financial periods ending after June 15, 2009 and as such, we adopted SFAS No. 165 as of June
30, 2009.
We have reviewed other accounting pronouncements that were issued as of September 30, 2009,
which the Company has not yet adopted, and do not believe that these pronouncements will have a
material impact on our financial position or operating results.
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RESULTS OF OPERATIONS
Nine months ended September 30, 2009 and 2008
Nine months ended September 30, 2009 and 2008
Net Revenues
The components of our net revenues for the nine months ended September 30, 2009 and 2008 were as
follows:
Nine months ended September 30, | ||||||||||||||||
(amounts in millions) | 2009 | 2008 | $ Change | % Change | ||||||||||||
Gross advertising revenues |
$ | 1,034.2 | $ | 1,204.3 | $ | (170.1 | ) | (14.1 | )% | |||||||
Sales claims and allowances |
(26.2 | ) | (25.0 | ) | (1.2 | ) | (4.8 | ) | ||||||||
Net advertising revenues |
1,008.0 | 1,179.3 | (171.3 | ) | (14.5 | ) | ||||||||||
Other revenues |
15.4 | 19.5 | (4.1 | ) | (21.0 | ) | ||||||||||
Total net revenues |
$ | 1,023.4 | $ | 1,198.8 | $ | (175.4 | ) | (14.6 | )% | |||||||
Our advertising revenues are earned primarily from the sale of advertising in yellow pages
directories we publish, net of sales claims and allowances. Advertising revenues also include
revenues for Internet-based advertising products including online directories, such as dexknows.com
and DexNet. Advertising revenues are affected by several factors, including changes in the quantity
and size of advertisements, acquisition of new customers, renewal rates of existing customers,
premium advertisements sold, changes in advertisement pricing, the introduction of new products, an
increase in competition and more fragmentation in the local business search market and general
economic factors. Revenues with respect to print advertising and Internet-based advertising
products that are sold with print advertising are recognized under the deferral and amortization
method. Revenues related to our print advertising are initially deferred when a directory is
published and recognized ratably over the directorys life, which is typically 12 months. Revenues
with respect to our Internet-based advertising products that are sold with print advertising are
initially deferred until the service is delivered or fulfilled and recognized ratably over the life
of the contract. Revenues with respect to Internet-based services that are not sold with print
advertising, such as DexNet, are recognized as delivered or fulfilled.
As a result of the deferral and amortization method of revenue recognition, recognized gross
advertising revenues reflect the amortization of advertising sales consummated in prior periods as
well as advertising sales consummated in the current period. As noted further below, advertising
sales have continued to deteriorate due to the overall economic instability as well as an increase
in competition and more fragmentation in the local business search market, which will result in
lower recognized advertising revenues in future periods because, as noted, such revenues are
recognized ratably over the directorys life.
Gross advertising revenues for the nine months ended September 30, 2009 decreased $170.1 million,
or 14.1%, from the nine months ended September 30, 2008. The decrease in gross advertising revenues
for the nine months ended September 30, 2009 is due to declines in advertising sales over the past
twelve months, primarily as a result of declines in new and recurring business, mainly driven by
(1) declines in overall advertising spending by businesses, (2) the significant impact of the
weaker economy on smaller businesses in the markets in which we do business and (3) an increase in
competition and more fragmentation in the local business search market.
Sales claims and allowances for the nine months ended September 30, 2009 increased $1.2 million, or
4.8%, from the nine months ended September 30, 2008. The increase in sales claims and allowances
for the nine months ended September 30, 2009 is primarily due to higher claims experience
associated with our Internet-based advertising products.
Other revenues for the nine months ended September 30, 2009 decreased $4.1 million, or 21.0%, from
the nine months ended September 30, 2008. Other revenues include late fees received on outstanding
customer balances, barter revenues, commissions earned on sales contracts with respect to
advertising placed into other publishers directories, and sales of directories and certain other
advertising-related products.
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Expenses
The components of total expenses for the nine months ended September 30, 2009 and 2008 were as
follows:
Nine months ended September 30, | ||||||||||||||||
(amounts in millions) | 2009 | 2008 | $ Change | % Change | ||||||||||||
Production and distribution expenses |
$ | 149.2 | $ | 173.6 | $ | (24.4 | ) | (14.1 | )% | |||||||
Selling and support expenses |
280.2 | 304.3 | (24.1 | ) | (7.9 | ) | ||||||||||
General and administrative expenses |
43.5 | 45.8 | (2.3 | ) | (5.0 | ) | ||||||||||
Depreciation and amortization |
298.0 | 258.6 | 39.4 | 15.2 | ||||||||||||
Impairment charges |
| 2,557.7 | (2,557.7 | ) | N/M | |||||||||||
Total |
$ | 770.9 | $ | 3,340.0 | $ | (2,569.1 | ) | (76.9 | )% | |||||||
(N/M: Not Meaningful)
Certain costs directly related to the selling and production of directories are initially
deferred and recognized ratably over the life of the directory under the deferral and amortization
method of accounting to match revenue recognized relating to such directories, with cost
recognition commencing in the month directory distribution is substantially complete. These costs
are specifically identifiable to a particular directory and include sales commissions and print,
paper and initial distribution costs. Sales commissions include amounts paid to employees for
sales to local advertisers and to certified marketing representatives (CMRs), which act as our
channel to national advertisers. All other expenses, such as sales person salaries, sales manager
compensation, sales office occupancy, publishing and information technology services, are not
specifically identifiable to a particular directory and are recognized as incurred. Our costs
recognized in a reporting period consist of: (i) costs incurred in that period and fully recognized
in that period; (ii) costs incurred in a prior period, a portion of which is amortized and
recognized in the current period; and (iii) costs incurred in the current period, a portion of
which is amortized and recognized in the current period and the balance of which is deferred until
future periods. Consequently, there will be a difference between costs recognized in any given
period and costs incurred in the given period, which may be significant.
Production and Distribution Expenses
Total production and distribution expenses for the nine months ended September 30, 2009 and 2008
were $149.2 million and $173.6 million, respectively. The primary components of the $24.4 million,
or 14.1%, decrease in production and distribution expenses for the nine months ended September 30,
2009, were as follows:
Nine months ended | ||||
(amounts in millions) | September 30, 2009 | |||
$ Change | ||||
Decreased print, paper and distribution costs |
$ | (10.8 | ) | |
Decreased information technology (IT) expenses |
(5.5 | ) | ||
Decreased internet production and distribution costs |
(4.1 | ) | ||
All other, net |
(4.0 | ) | ||
Total decrease in production and distribution
expenses for the nine months ended September 30,
2009 |
$ | (24.4 | ) | |
During the nine months ended September 30, 2009, print, paper and distribution costs declined $10.8
million compared to the nine months ended September 30, 2008. This decline is primarily due to
lower page volumes associated with declines in print advertisements. The decrease in print, paper
and distribution costs is also due to improved efficiencies in the display of advertiser content in
our print products, the refinement of our distribution scope across all of our markets and
negotiated price reductions in our print expenses.
During the nine months ended September 30, 2009, production and distribution related IT expenses
declined $5.5 million compared to the nine months ended September 30, 2008. This decline is
primarily due to lower spending associated with our IT infrastructure to support our products and
services and enhancements and technical support of multiple production systems during the nine
months ended September 30, 2009, as compared to the nine months ended September 30, 2008.
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During the nine months ended September 30, 2009, internet production and distribution costs
declined $4.1 million compared to the nine months ended September 30, 2008, primarily due to a
reduction in headcount and outside contractor services.
Selling and Support Expenses
Total selling and support expenses for the nine months ended September 30, 2009 and 2008 were
$280.2 million and $304.3 million, respectively. The primary components of the $24.1 million, or
7.9%, decrease in selling and support expenses for the nine months ended September 30, 2009, were
as follows:
Nine months ended | ||||
(amounts in millions) | September 30, 2009 | |||
$ Change | ||||
Decreased commissions and salesperson costs |
$ | (20.1 | ) | |
Decreased directory publishing costs |
(6.1 | ) | ||
Decreased incentive compensation expense |
(2.5 | ) | ||
Decreased billing, credit, and collection expense |
(2.2 | ) | ||
Increased advertising expenses |
4.4 | |||
Increased bad debt expense |
4.0 | |||
All other, net |
(1.6 | ) | ||
Total decrease in selling and support expenses for the
nine months ended September 30,
2009 |
$ | (24.1 | ) | |
During the nine months ended September 30, 2009, commissions and salesperson costs declined $20.1
million, compared to the nine months ended September 30, 2008, primarily due to lower advertising
sales and its effect on variable-based commissions as well as headcount reductions and
consolidation of responsibilities.
During the nine months ended September 30, 2009, directory publishing costs decreased $6.1 million,
compared to the nine months ended September 30, 2008, primarily due to lower page volumes
associated with declines in print advertisements as well as a reduction in headcount and related
expenses resulting from the consolidation of our publishing and graphics operations.
During the nine months ended September 30, 2009, selling and support related incentive compensation
expense declined $2.5 million compared to the nine months ended September 30, 2008, primarily due
to the fact that RHD did not grant any stock-based awards during the nine months ended September
30, 2009, partially offset by compensation expense associated with RHDs 2009 Long-Term Incentive
Program (the 2009 LTIP).
During the nine months ended September 30, 2009, billing, credit and collection expenses decreased
$2.2 compared to the nine months ended September 30, 2008, primarily due to lower costs resulting
from a change in vendors during the later part of 2008 as well as headcount reductions and
consolidation of responsibilities.
During the nine months ended September 30, 2009, advertising expenses increased $4.4 million
compared to the nine months ended September 30, 2008, primarily due to increased costs associated
with traffic purchased and distributed to multiple advertiser landing pages.
During the nine months ended September 30, 2009, bad debt expense increased $4.0 million, or 6.3%,
compared to the nine months ended September 30, 2008, primarily due to deterioration in accounts
receivable aging categories and increased write-offs, resulting from the adverse impact on our
advertisers from the instability of the overall economy and tightening of the credit markets.
During the nine months ended September 30, 2009, our bad debt expense represented 6.7% of our net
revenue, as compared to 5.4% for the nine months ended September 30, 2008. If advertisers fail to
pay within specified credit terms, we may cancel their advertising in future directories, which
could further impact our ability to collect past due amounts as well as adversely impact our
advertising sales and revenue trends. We expect that these economic challenges will continue in our
markets, and, as such, our bad debt experience will continue to be adversely impacted in the
foreseeable future.
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General and Administrative Expenses
General and administrative (G&A) expenses for the nine months ended September 30, 2009 and 2008
were $43.5 million and $45.8 million, respectively. The primary components of the $2.3 million, or
5.0%, decrease in G&A expenses for the nine months ended September 30, 2009, were as follows:
Nine months ended | ||||
(amounts in millions) | September 30, 2009 | |||
$ Change | ||||
Decrease in restructuring expenses |
$ | (4.2 | ) | |
Increased share of allocated expenses |
2.9 | |||
All other, net |
(1.0 | ) | ||
Total decrease in G&A expenses for the nine months ended September 30,
2009 |
$ | (2.3 | ) | |
During the nine months ended September 30, 2009, restructuring expenses decreased $4.2 million
compared to the nine months ended September 30, 2008, primarily due to lower costs associated with
outside consultants, headcount reductions, consolidation of responsibilities and vacated leased
facilities as well as a reclass of certain previously recognized expenses associated with filing
the Chapter 11 petitions to reorganization items on the condensed consolidated statement of
operations during nine months ended September 30, 2009.
The decrease in G&A expenses for the nine months ended September 30, 2009 is offset by an increase
in share of expenses allocated among RHD and its subsidiaries, resulting in an increase of $2.9
million.
Depreciation and Amortization Expense
Depreciation and amortization (D&A) expense for the nine months ended September 30, 2009 and 2008
was $298.0 million and $258.6 million, respectively. Amortization of intangible assets was $278.3
million for the nine months ended September 30, 2009, compared to $230.4 million reported for the
nine months ended September 30, 2008. In connection with Dex Media Easts and Dex Media Wests
impairment testing of their definite-lived intangible assets and other long-lived assets at
December 31, 2008, they evaluated the remaining useful lives of their intangible assets by
considering, among other things, the effects of obsolescence, demand, competition, which takes into
consideration the price premium benefit they have over competing independent publishers in their
markets, and other economic factors, including the stability of the industry in which they operate,
known technological advances, legislative actions that result in an uncertain or changing
regulatory environment, and expected changes in distribution channels. Based on this evaluation,
Dex Media East and Dex Media West recognized a reduction in the remaining useful lives of all
directory services agreements associated with RHDs acquisition of the Company on January 31, 2006
(the RHD Merger) due to compression of the price premium benefit over competing independent
publishers in their respective markets as well as a decline in market share during the year ended
December 31, 2008. As a result, the remaining useful lives of these directory services agreements
were reduced to 33 years effective January 1, 2009 in order to better reflect the period these
intangible assets are expected to contribute to their future cash flow. The increase in
amortization expense for the nine months ended September 30, 2009 is a direct result of reducing
the remaining useful lives associated with these directory services agreements, partially offset by
a reduction in amortization expense associated with a revision to the carrying values of the local
and national customer relationships subsequent to impairment charges recorded during the fourth
quarter of 2008.
Annual amortization expense for the full year 2009 is expected to increase by approximately $63.3
million as a result of the reduction of remaining useful lives associated with these directory
services agreements and revision to the carrying values of our local and national customer
relationships noted above.
Depreciation of fixed assets and amortization of computer software was $19.5 million and $28.2
million for the nine months ended September 30, 2009 and 2008, respectively. The decrease in
depreciation expense for the nine months ended September 30, 2009 was primarily due to accelerated
amortization during the nine months ended September 30, 2008 associated with software projects that
were retired prior to their initial estimated service life.
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Curtailment Gain, Net
During the nine months ended September 30, 2009, we recognized a one-time curtailment gain of $13.5
million associated with the elimination of certain union retiree health care and life insurance
benefits.
Impairment Charges
As a result of the decline in the trading value of our debt and RHDs debt and equity securities
during the first and second quarters of 2008 and continuing negative industry and economic trends
that have directly affected RHDs and our business, Dex Media East and Dex Media West performed
impairment tests of their goodwill, definite-lived intangible assets and other long-lived assets.
Dex Media East and Dex Media West used estimates and assumptions in their impairment evaluations,
including, but not limited to, projected future cash flows, revenue growth and customer attrition
rates. Based upon Dex Media Easts and Dex Media Wests impairment test of goodwill, the Company
recognized goodwill impairment charges, based on a discounted cash flow analysis, of $2.1 billion
and $422.2 million during the three months ended March 31, 2008 and June 30, 2008, respectively,
for total goodwill impairment charges of $2.6 billion for the nine months ended September 30, 2008.
As a result of these impairment charges, we have no recorded goodwill at December 31, 2008 or
September 30, 2009. The testing results of the definite-lived intangible assets and other
long-lived assets indicated no impairment as of March 31, 2008, June 30, 2008 or September 30,
2008.
Dex Media East and Dex Media West performed impairment tests of their definite-lived intangible
assets and other long-lived assets during the three and nine months ended September 30, 2009. They
utilized the following information and assumptions to complete their impairment evaluation:
| Historical financial information, including revenue, profit margins, customer attrition data and price premiums enjoyed relative to competing independent publishers; | ||
| Long-term financial projections, including, but not limited to, revenue trends and profit margin trends; and | ||
| Intangible asset carrying values. |
The results of these tests indicated no impairment. In connection with Dex Media Easts and Dex
Media Wests impairment testing, they also evaluated the remaining useful lives of their
definite-lived intangible assets and other long-lived assets by considering, among other things,
the effects of obsolescence, demand, competition, which takes into consideration the price premium
benefit Dex Media East and Dex Media West has over competing independent publishers in their
markets, and other economic factors, including the stability of the industry in which Dex Media
East and Dex Media West operates, known technological advances, legislative actions that result in
an uncertain or changing regulatory environment, and expected changes in distribution channels.
Based on this evaluation, Dex Media East and Dex Media West concluded the remaining useful lives of
such assets reflect the period they are expected to contribute to their future cash flows and are
therefore deemed appropriate.
If industry and economic conditions in our markets and RHDs markets continue to deteriorate,
resulting in further declines in advertising sales and operating results, and if the trading value
of our debt and RHDs debt and equity securities decline further, RHD, Dex Media East and Dex Media
West will be required to again assess the recoverability and useful lives of its long-lived assets
and other intangible assets. This could result in additional impairment charges, a reduction of
remaining useful lives and acceleration of amortization expense.
Operating Income (Loss)
Operating income (loss) for the nine months ended September 30, 2009 and 2008 was as follows:
Nine months ended September 30, | ||||||||||||||||
(amounts in millions) | 2009 | 2008 | $ Change | % Change | ||||||||||||
Total |
$ | 265.9 | $ | (2,141.3 | ) | $ | 2,407.2 | N/M | ||||||||
Operating income for the nine months ended September 30, 2009 was $265.9 million, compared to an
operating loss of $2.1 billion for the nine months ended September 30, 2008. The change to
operating income for the nine months ended September 30, 2009 from operating loss for the nine
months ended September 30, 2008 is primarily due to the goodwill impairment charges noted above, as
well as the revenue and expense trends described above.
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Interest Expense, Net
Contractual interest expense that would have appeared on the condensed consolidated statement of
operations if not for the filing of the Chapter 11 petitions was $268.3 million for the nine months
ended September 30, 2009. Net interest expense for the nine months ended September 30, 2009 and
2008 was $205.2 million and $286.0 million, respectively, and includes $7.7 million and $7.1
million, respectively, of non-cash amortization of deferred financing costs.
Interest expense for the nine months ended September 30, 2009 includes a non-cash charge of $6.1
million associated with the change in fair value of the Dex Media East interest rate swaps that
were required to be settled and interest rate swaps no longer deemed financial instruments as a
result of filing the Chapter 11 petitions. Interest expense for the nine months ended September 30,
2009 also includes a non-cash charge of $6.1 million resulting from amounts previously charged to
accumulated other comprehensive loss related to these interest rate swaps. The amounts previously
charged to accumulated other comprehensive loss related to the Dex Media East interest rate swaps
will be amortized to interest expense over the remaining life of the interest rate swaps based on
future interest payments, as it is not probable that those forecasted transactions will not occur.
As a result of the change in fair value of our interest rate swaps associated with the refinancing
of the former Dex Media West credit facility on June 6, 2008 and settlement and termination of
certain of these interest rate swaps during the second quarter of 2009, interest expense includes a
reduction of $5.4 million for the nine months ended September 30, 2009 resulting from the change in
the fair value of these interest rate swaps. Interest expense for the nine months ended September
30, 2008 includes a non-cash charge of $15.0 million resulting from amounts previously charged to
accumulated other comprehensive loss related to these interest rate swaps, offset by a reduction to
interest expense of $7.0 million resulting from the change in the fair value of these interest rate
swaps since June 6, 2008. Interest expense for the nine months ended September 30, 2008 also
includes the write-off of unamortized deferred financing costs of $2.1 million associated with the
refinancing of the former Dex Media West credit facility, which has been accounted for as an
extinguishment of debt.
In conjunction with the RHD Merger and as a result of purchase accounting required GAAP, our debt
was recorded at its fair value on January 31, 2006. We recognized an offset to interest expense in
each period subsequent to the RHD Merger through May 28, 2009 for the amortization of the
corresponding fair value adjustment. The offset to interest expense was $7.7 million and $13.1
million for the nine months ended September 30, 2009 and 2008, respectively. The offset to
interest expense was to be recognized over the life of the respective debt, however due to filing
the Chapter 11 petitions, unamortized fair value adjustments at May 28, 2009 of $78.5 million were
written-off and recognized as a reorganization item on the condensed consolidated statement of
operations for the nine months ended September 30, 2009.
The decrease in net interest expense of $80.8 million, or 28.3%, for the nine months ended
September 30, 2009 is primarily due to (1) ceasing interest expense on our notes in default as a
result of filing the Chapter 11 petitions and (2) the non-cash charge of $15.0 million during the
nine months ended September 30, 2008 resulting from amounts previously charged to accumulated other
comprehensive loss noted above. The decrease in net interest expense for the nine months ended
September 30, 2009 is offset by (1) the non-cash charges associated with the change in fair value
of the Dex Media East interest rate swaps and amounts previously charged to accumulated other
comprehensive loss related to the Dex Media East interest rate swaps noted above, (2) a reduction
in interest income associated with our interest rate swaps due to a decline in interest rates, (3)
additional interest expense associated with borrowing the unused portions of our revolving credit
facilities on February 13, 2009 and (4) a decline in the offset to interest expense associated with
the fair value adjustment of Dex Medias debt noted above.
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Reorganization Items, Net
For the nine months ended September 30, 2009, the Company has recorded $54.0 million of
reorganization items on a separate line item on the condensed consolidated statement of operations
in accordance with SOP 90-7. Reorganization items represent amounts that are directly associated
with the process of reorganizing the business under Chapter 11 of the Bankruptcy Code. The
following table displays the details of reorganization items for the nine months ended September
30, 2009:
Nine months ended | ||||
September 30, 2009 | ||||
Write-off of fair value adjustments |
$ | (78,511 | ) | |
Write-off of net premiums / discounts on long-term debt |
(8,311 | ) | ||
Lease rejections, abandoned property and other |
(855 | ) | ||
Professional fees |
33,703 | |||
Total reorganization items |
$ | (53,974 | ) | |
The write-off of unamortized fair value adjustments required by GAAP as a result of the RHD Merger
of $78.5 million and unamortized net premiums / discounts of $8.3 million at May 28, 2009 relate to
long-term debt classified as liabilities subject to compromise at September 30, 2009.
The Company has recognized $0.9 million during the nine months ended September 30, 2009 associated
with rejected leases and abandoned property, which have been approved by the Bankruptcy Court
through September 30, 2009 as part of the Chapter 11 Cases.
The Company has incurred professional fees associated with filing the Chapter 11 petitions of $33.7
million during the nine months ended September 30, 2009, of which $27.1 million has been paid in
cash. Professional fees include financial, legal and valuation services directly associated with
the reorganization process.
As of September 30, 2009, the Company has not received any operating cash receipts as a result of
filing the Chapter 11 petitions.
Income Taxes
The effective tax rate on income before income taxes of 54.5% for the nine months ended September
30, 2009 compares to an effective tax rate of 35.8% on loss before income taxes for the nine months
ended September 30, 2008. The change in the effective tax rate for the nine months ended September
30, 2009 as compared to the nine months ended September 30, 2008 is primarily due to estimates of
non-deductible reorganization costs as well as the tax consequences of goodwill impairment charges
during the nine months ended September 30, 2008.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Omitted pursuant to General Instruction H(2)(c) of Form 10-Q.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Management conducted an evaluation, under the supervision and with the participation of the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of
the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended) as of September 30, 2009. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures were not effective as of September 30, 2009, due to a material
weakness in internal control over financial reporting related to certain deferred income tax assets
and liabilities and the resulting current and deferred income tax expense and related footnote
disclosures that was identified and reported as a material weakness in our Annual Report on Form
10-K for the year ended December 31, 2008. As of September 30, 2009, this material weakness in
internal control over financial reporting has not been remediated.
(b) Changes in Internal Controls
Other than changes relating to the material weakness in internal control over financial reporting
noted above, there have not been any changes in the Companys internal controls over financial
reporting during the Companys most recent fiscal quarter that materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.
(c) Remediation Plan for Material Weakness in Internal Control Over Financial Reporting
The Companys disclosure controls and procedures were not effective as of September 30, 2009 due to
a material weakness in internal control over financial reporting related to certain deferred income
tax assets and liabilities and the resulting current and deferred income tax expense and related
footnote disclosures that was identified and reported as a material weakness in our Annual Report
on Form 10-K for the year ended December 31, 2008. As of September 30, 2009, this material weakness
in internal control over financial reporting has not been remediated.
The Company has developed the following plan to remediate the material weakness in internal control
over financial reporting described above:
| During 2008, the Company began to implement, and during 2009 it intends to fully implement controls to formalize its evaluation of deferred income tax balances including a comprehensive reconciliation between deferred income tax balances determined on a basis in conformity with U.S. generally accepted accounting principles for financial reporting purposes and those determined for tax reporting purposes; | ||
| During 2008, the Company began to implement, and during 2009 it intends to fully implement an acceleration of the timing of certain tax review activities, including apportionment and allocation for income tax reporting purposes, during the financial statement closing process; | ||
| The Company intends to improve documentation and institute more formalized review of tax positions taken, with senior management and external experts, to ensure proper evaluation and accounting treatment of complex tax issues; and | ||
| The Company intends to evaluate and supplement and/or train internal resources, as necessary, and evaluate external experts. |
We anticipate the actions described above and resulting improvements in controls will strengthen
our internal control over financial reporting and will address the related material weakness
identified as of December 31, 2008 that has remained as a material weakness as of September 30,
2009. However, because the institutionalization of the internal control processes requires
repeatable process execution, and because many of these additional controls rely extensively on
manual review and approval, the successful execution of these controls, for at least several
quarters, may be required prior to management being able to definitively conclude that the material
weakness has been fully remediated.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On the Petition Date, the RHD Entities filed voluntary petitions for Chapter 11 relief under the
Bankruptcy Code in the Bankruptcy Court in order to consummate a balance sheet restructuring. The
cases are being jointly administered. The Company continues to operate its businesses as
debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the
applicable provisions of the Bankruptcy Code. As of the Petition Date, all pending litigation
wherein the Company is named as a defendant is generally stayed by operation of federal bankruptcy
law, and absent further order of the Bankruptcy Court, no party, subject to certain exceptions, may
take any action, also subject to certain exceptions, to recover on pre-petition claims against the
Company. At this time, it is not possible to predict the outcome of the Chapter 11 Cases or its
effect on our business or the actions described below.
We are involved in various legal proceedings arising in the ordinary course of our business, as
well as certain litigation and tax matters. In many of these matters, plaintiffs allege that they
have suffered damages from errors or omissions in their advertising or improper listings, in each
case, contained in directories published by us.
We are also exposed to potential defamation and breach of privacy claims arising from our
publication of directories and our methods of collecting, processing and using advertiser and
telephone subscriber data. If such data were determined to be inaccurate or if data stored by us
were improperly accessed and disseminated by us or by unauthorized persons, the subjects of our
data and users of the data we collect and publish could submit claims against the Company. Although
to date we have not experienced any material claims relating to defamation or breach of privacy, we
may be party to such proceedings in the future that could have a material adverse effect on our
business.
We periodically assess our liabilities and contingencies in connection with these matters based
upon the latest information available to us. For those matters where it is probable that we have
incurred a loss and the loss or range of loss can be reasonably estimated, we record a liability in
our condensed consolidated financial statements. In other instances, we are unable to make a
reasonable estimate of any liability because of the uncertainties related to both the probable
outcome and amount or range of loss. As additional information becomes available, we adjust our
assessment and estimates of such liabilities accordingly.
Based on our review of the latest information available, we believe our ultimate liability in
connection with pending or threatened legal proceedings will not have a material adverse effect on
our results of operations, cash flows or financial position. No material amounts have been accrued
in our condensed consolidated financial statements with respect to any such matters.
On October 23, 2009, a putative securities class action lawsuit was commenced in Delaware Federal
Court on behalf of all persons who purchased or otherwise acquired RHDs publicly traded securities
between July 2007 and the time the RHD Entities filed for bankruptcy at the end of May 2009,
alleging that certain RHD officers issued false and misleading statements regarding RHDs business
and financial condition. RHD believes the allegations set forth in the putative class action
lawsuit are without merit and intends to vigorously defend any such action pursued against RHD and
its officers.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should
carefully consider the factors discussed in Part I, Item 1A. Risk Factors the Companys Annual
Report on Form 10-K for the year ended December 31, 2008 (the 2008 10-K) and Part II, Item 1A.
Risk Factors of our Quarterly Report on Form 10-Q for the three and six months ended June 30,
2009, which could materially affect our business, financial condition or future results. There
have been no material changes or additions to the risk factors disclosed in the 2008 10-K, except
for the risk factors disclosed in the June 30, 2009 Form 10-Q associated with the Chapter 11
filings by the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Omitted pursuant to General Instruction H(2)(b) of Form 10-Q.
Item 3. Defaults Upon Senior Securities
Omitted pursuant to General Instruction H(2)(b) of Form 10-Q.
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Item 4. Submission of Matters to a Vote of Security Holders
Omitted pursuant to General Instruction H(2)(b) of Form 10-Q.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit | ||
Number | Document | |
31.1*
|
Certification of Quarterly Report on Form 10-Q for the period ended September 30, 2009 by David C. Swanson, Chairman and Chief Executive Officer of Dex Media, Inc. under Section 302 of the Sarbanes-Oxley Act. | |
31.2*
|
Certification of Quarterly Report on Form 10-Q for the period ended September 30, 2009 by Steven M. Blondy, Executive Vice President and Chief Financial Officer of Dex Media, Inc. under Section 302 of the Sarbanes-Oxley Act. | |
32.1*
|
Certification of Quarterly Report on Form 10-Q for the period ended September 30, 2009 under Section 906 of the Sarbanes-Oxley Act by David C. Swanson, Chairman and Chief Executive Officer, and Steven M. Blondy, Executive Vice President and Chief Financial Officer of Dex Media, Inc. |
* | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
DEX MEDIA, INC. |
||||
Date: November 6, 2009 | By: | /s/ Steven M. Blondy | ||
Steven M. Blondy | ||||
Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
||||
/s/ Sylvester J. Johnson | ||||
Sylvester J. Johnson | ||||
Vice President, Corporate Controller and Chief
Accounting Officer (Principal Accounting Officer) |
||||
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Exhibit Index
Exhibit No. | Document | |
31.1*
|
Certification of Quarterly Report on Form 10-Q for the period ended September 30, 2009 by David C. Swanson, Chairman and Chief Executive Officer of Dex Media, Inc. under Section 302 of the Sarbanes-Oxley Act. | |
31.2*
|
Certification of Quarterly Report on Form 10-Q for the period ended September 30, 2009 by Steven M. Blondy, Executive Vice President and Chief Financial Officer of Dex Media, Inc. under Section 302 of the Sarbanes-Oxley Act. | |
32.1*
|
Certification of Quarterly Report on Form 10-Q for the period ended September 30, 2009 under Section 906 of the Sarbanes-Oxley Act by David C. Swanson, Chairman and Chief Executive Officer, and Steven M. Blondy, Executive Vice President and Chief Financial Officer of Dex Media, Inc. |
* | Filed herewith |
43