Attached files
file | filename |
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EX-31.2 - EX-31.2 - Dex Media, Inc./new | g21479exv31w2.htm |
EX-31.1 - EX-31.1 - Dex Media, Inc./new | g21479exv31w1.htm |
EX-32.1 - EX-32.1 - Dex Media, Inc./new | g21479exv32w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K/A
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the fiscal year ended December 31, 2008
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) | (I.R.S. Employer Identification No.) | |
1001 Winstead Drive, Cary, N.C. | 27513 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code (919) 297-1600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes þ No o
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by
Sections 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. 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 (Do not check if a smaller reporting company) |
Smaller reporting company o |
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
As of
December 11, 2009, R.H. Donnelley Corporation owned all 1,000 outstanding shares of the
registrants common stock, par value $0.01 per share.
THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF R.H. DONNELLEY CORPORATION. THE REGISTRANT MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1)(a) AND (b) OF FORM 10-K 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.
DOCUMENTS INCORPORATED BY REFERENCE
None
None
Table of Contents
EXPLANATORY NOTE
Dex
Media, Inc. (the Company) filed a Form 10-K for the fiscal year ended December 31,
2008 (the Original Filing) with the Securities and Exchange Commission on March 31, 2009. This
Amendment No. 1 is being filed solely for the purpose of adding the signature of KPMG LLP, the
Companys Independent Registered Public Accounting Firm, to KPMGs Report of Independent Registered
Public Accounting Firm (Report) on page F-3 included in this Amendment No. 1, which signature was
inadvertently omitted from the Original Filing.
For purposes of this Amendment No. 1, and in accordance with Rule 12b-15 under the Securities
Exchange Act of 1934, as amended, Item 8 of Part II of the Original Filing has been amended and
restated in its entirety. Other than adding KPMGs signature to its Report, there are no other
changes to Item 8 of Part II of the Original Filing. Except as expressly set forth in this
Amendment No. 1, the Original Filing has not been amended, updated or otherwise modified.
In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended,
new certifications by our principal executive officer and principal financial officer are being
filed as exhibits to this Amendment No. 1.
Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page | ||||
Dex Media, Inc. |
||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
F-8 |
F-1
Table of Contents
Managements Report on Internal Control Over Financial Reporting
The management of Dex Media, Inc. and subsidiaries (a whollyowned subsidiary of R.H. Donnelley
Corporation) (the Company) is responsible for establishing and maintaining adequate internal
control over the Companys financial reporting within the meaning of Rule 13a-15(f) promulgated
under the Securities Exchange Act of 1934. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements in the financial statements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management assessed the effectiveness of Dex Media, Inc.s internal control over financial
reporting as of December 31, 2008. In undertaking this assessment, management used the criteria
established by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission
contained in the Internal Control Integrated Framework.
Based on its assessment, management identified a material weakness in Dex Media, Inc.s internal
control over financial reporting. A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Companys annual or interim financial statements
will not be prevented or detected on a timely basis. As a result of the material weakness described
below, management has concluded that the Companys internal control over financial reporting was
not effective as of December 31, 2008 based on the COSO criteria.
Dex Media, Inc.s processes, procedures and controls related to financial reporting were not
effective to ensure that amounts related to deferred income tax assets and liabilities and the
resulting current and deferred income tax expense and related footnote disclosures were accurate.
The Company did not maintain effective controls over the review and analysis of calculations and
related supporting documentation underlying the deferred tax provision to ensure a complete,
comprehensive and timely review of deferred income tax accounts and
related footnote disclosures. The material weakness resulted in
material errors in the foregoing accounts included in the
Companys preliminary financial statements as of and for the year
ended December 31, 2008 that were corrected prior to the
issuance of the Companys consolidated financial statements.
F-2
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholder
Dex Media, Inc.:
Dex Media, Inc.:
We have audited the accompanying consolidated balance sheets of Dex Media, Inc. and subsidiaries
(the Company) as of December 31, 2008 and 2007, and the related consolidated statements of
operations and comprehensive income (loss), cash flows and changes in shareholders equity for each
of the years in the three-year period ended December 31, 2008. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Dex Media, Inc. and subsidiaries as of December 31,
2008 and 2007, and the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 157, Fair Value Measurement, effective January
1, 2008, FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes: an Interpretation
of FASB Statement No. 109, effective January 1, 2007 and Statement of Financial Accounting
Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R), effective December 31, 2006.
The accompanying consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the consolidated financial statements,
the Company has significant amounts of maturing debt which it may be unable to satisfy commencing
March 31, 2010, significant negative impacts on operating results and cash flows from the overall
downturn in the global economy and higher customer attrition, and possible debt covenant violations
in 2009 that raise substantial doubt about its ability to continue as a going concern.
Managements plans in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ KPMG
LLP
Raleigh, North Carolina
March 31, 2009
March 31, 2009
F-3
Table of Contents
DEX MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
(in thousands, except share data) | 2008 | 2007 | ||||||
Assets |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 112,362 | $ | 12,975 | ||||
Accounts receivable |
||||||||
Billed |
188,090 | 139,686 | ||||||
Unbilled |
461,750 | 509,809 | ||||||
Allowance for doubtful billed accounts and sales claims |
(34,166 | ) | (21,816 | ) | ||||
Net accounts receivable |
615,674 | 627,679 | ||||||
Deferred directory costs |
107,392 | 112,412 | ||||||
Short-term deferred income taxes, net |
25,225 | 39,044 | ||||||
Prepaid expenses and other current assets |
52,452 | 60,855 | ||||||
Total current assets |
913,105 | 852,965 | ||||||
Fixed assets and computer software, net |
96,609 | 83,268 | ||||||
Other non-current assets |
64,930 | 29,458 | ||||||
Intangible assets, net |
7,505,200 | 8,415,404 | ||||||
Goodwill |
| 2,557,719 | ||||||
Total assets |
$ | 8,579,844 | $ | 11,938,814 | ||||
Liabilities and Shareholders Equity |
||||||||
Current Liabilities |
||||||||
Accounts payable and accrued liabilities |
$ | 99,688 | $ | 100,990 | ||||
Due to parent, net |
73,391 | 60,435 | ||||||
Accrued interest |
69,513 | 66,878 | ||||||
Deferred directory revenues |
679,983 | 739,011 | ||||||
Current portion of long-term debt |
99,625 | 161,007 | ||||||
Total current liabilities |
1,022,200 | 1,128,321 | ||||||
Long-term debt |
4,562,206 | 4,480,235 | ||||||
Deferred income taxes, net |
1,017,445 | 2,143,313 | ||||||
Intercompany debt |
300,000 | 300,000 | ||||||
Other non-current liabilities |
184,402 | 127,506 | ||||||
Total liabilities |
7,086,253 | 8,179,375 | ||||||
Commitments and contingencies |
||||||||
Shareholders Equity |
||||||||
Common stock, par value $.01 per share, 1,000 shares
authorized, issued and outstanding |
| | ||||||
Additional paid-in capital |
3,580,838 | 3,884,125 | ||||||
Accumulated deficit |
(2,040,807 | ) | (120,902 | ) | ||||
Accumulated other comprehensive loss |
(46,440 | ) | (3,784 | ) | ||||
Total shareholders equity |
1,493,591 | 3,759,439 | ||||||
Total liabilities and shareholders equity |
$ | 8,579,844 | $ | 11,938,814 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
F-4
Table of Contents
DEX MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Successor Company | Predecessor Company | ||||||||||||||||
Years Ended December 31, | Eleven Months Ended | One Month Ended | |||||||||||||||
(in thousands) | 2008 | 2007 | December 31, 2006 | January 31, 2006 | |||||||||||||
Net revenues |
$ | 1,576,630 | $ | 1,632,150 | $ | 857,215 | $ | 139,895 | |||||||||
Expenses |
|||||||||||||||||
Production, publication and distribution
expenses (exclusive of depreciation and
amortization shown separately below) |
230,260 | 264,122 | 217,720 | 21,194 | |||||||||||||
Selling and support expenses |
403,835 | 416,414 | 358,526 | 33,014 | |||||||||||||
General and administrative expenses |
57,127 | 52,580 | 62,277 | 39,555 | |||||||||||||
Depreciation and amortization |
343,228 | 332,494 | 230,609 | 26,810 | |||||||||||||
Impairment charges |
3,184,295 | | | | |||||||||||||
Total expenses |
4,218,745 | 1,065,610 | 869,132 | 120,573 | |||||||||||||
Operating income (loss) |
(2,642,115 | ) | 566,540 | (11,917 | ) | 19,322 | |||||||||||
Interest expense, net |
(386,538 | ) | (359,390 | ) | (375,892 | ) | (37,494 | ) | |||||||||
Income (loss) before income taxes |
(3,028,653 | ) | 207,150 | (387,809 | ) | (18,172 | ) | ||||||||||
(Provision) benefit for income taxes |
1,108,748 | (87,175 | ) | 147,144 | (1,872 | ) | |||||||||||
Net income (loss) |
$ | (1,919,905 | ) | $ | 119,975 | $ | (240,665 | ) | $ | (20,044 | ) | ||||||
Comprehensive Income (Loss) |
|||||||||||||||||
Net income (loss) |
$ | (1,919,905 | ) | $ | 119,975 | $ | (240,665 | ) | $ | (20,044 | ) | ||||||
Unrealized (loss) gain on interest rate
swaps, net of tax (benefit) provision of
$(5,719), ($6,340), $(1,952) and $57 for
the years ended December 31, 2008 and
2007, the eleven months ended December
31, 2006, and the one month ended
January 31, 2006, respectively |
(7,768 | ) | (10,763 | ) | (3,065 | ) | 90 | ||||||||||
Benefit plans adjustment, net of tax
(benefit) provision of $(20,552) and
$3,697 for the years ended December 31,
2008 and 2007, respectively |
(34,888 | ) | 6,259 | | | ||||||||||||
Comprehensive income (loss) |
$ | (1,962,561 | ) | $ | 115,471 | $ | (243,730 | ) | $ | (19,954 | ) | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-5
Table of Contents
DEX MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Successor Company | Predecessor Company | ||||||||||||||||
Years Ended December 31, | Eleven Months Ended | One Month Ended | |||||||||||||||
(in thousands) | 2008 | 2007 | December 31, 2006 | January 31, 2006 | |||||||||||||
Cash Flows from Operating Activities |
|||||||||||||||||
Net income (loss) |
$ | (1,919,905 | ) | $ | 119,975 | $ | (240,665 | ) | $ | (20,044 | ) | ||||||
Reconciliation of net income (loss) to net cash
provided by operating activities: |
|||||||||||||||||
Impairment charges |
3,184,295 | | | | |||||||||||||
Depreciation and amortization |
343,228 | 332,494 | 230,609 | 26,810 | |||||||||||||
Deferred income tax (benefit) provision |
(1,109,261 | ) | 87,144 | (147,144 | ) | 1,872 | |||||||||||
Provision for bad debts |
84,520 | 44,225 | 33,479 | 8,288 | |||||||||||||
Stock-based compensation expense |
15,466 | 21,019 | 17,507 | 3,872 | |||||||||||||
Interest rate swap ineffectiveness |
7,992 | 1,303 | 550 | 194 | |||||||||||||
Amortization of deferred financing costs |
7,372 | 2,464 | 2,287 | 2,259 | |||||||||||||
Amortization of debt fair value adjustment |
(17,646 | ) | (92,127 | ) | (26,355 | ) | |||||||||||
Accretion on discount notes |
54,275 | 57,464 | 48,435 | 4,229 | |||||||||||||
Loss on extinguishment of debt |
2,142 | 32,020 | | | |||||||||||||
Other non-cash items, net |
(55,263 | ) | (4,409 | ) | 711 | | |||||||||||
Changes in assets and liabilities: |
|||||||||||||||||
(Increase) in accounts receivable, net of
provision for bad debts |
(72,516 | ) | (66,446 | ) | (47,723 | ) | (202 | ) | |||||||||
(Increase) decrease in other assets |
(8,945 | ) | 16,836 | (28,097 | ) | 4,275 | |||||||||||
Increase (decrease) in accounts payable and
accrued liabilities and accrued interest |
79 | 12,354 | (57,194 | ) | 11,448 | ||||||||||||
(Decrease) increase in amounts due to parent |
(3,981 | ) | 26,736 | (13,574 | ) | | |||||||||||
(Decrease) increase in deferred directory revenue |
(59,028 | ) | (19,576 | ) | 654,264 | (3,160 | ) | ||||||||||
Increase in other non-current liabilities |
55,670 | 5,832 | 4,084 | 1,101 | |||||||||||||
Net cash provided by operating activities |
508,494 | 577,308 | 431,174 | 40,942 | |||||||||||||
Cash Flows from Investing Activities |
|||||||||||||||||
Additions to fixed assets and computer software |
(50,116 | ) | (45,448 | ) | (24,931 | ) | (1,144 | ) | |||||||||
Net cash used in investing activities |
(50,116 | ) | (45,448 | ) | (24,931 | ) | (1,144 | ) | |||||||||
Cash Flows from Financing Activities |
|||||||||||||||||
Proceeds from the issuance of debt, net of costs |
| 1,088,822 | 444,193 | | |||||||||||||
Credit facility borrowings, net of costs |
1,035,103 | | | | |||||||||||||
Note and credit facilities repayments |
(1,071,991 | ) | (1,817,453 | ) | (594,228 | ) | | ||||||||||
Revolver borrowings |
321,900 | 403,000 | 567,600 | | |||||||||||||
Revolver repayments |
(345,950 | ) | (406,450 | ) | (552,100 | ) | (10,000 | ) | |||||||||
Premium paid on debt redemption |
| (31,793 | ) | (2,914 | ) | | |||||||||||
Increase (decrease) in checks not yet presented for
payment |
5,097 | (8,600 | ) | 6,812 | (1,224 | ) | |||||||||||
Proceeds from employee stock option exercises |
| | | 2,912 | |||||||||||||
Payment of debt refinance costs |
| | (1,012 | ) | | ||||||||||||
Intercompany debt |
| 300,000 | | | |||||||||||||
Contribution by parent |
| 75,000 | 22,000 | | |||||||||||||
Distributions to parent |
(303,150 | ) | (150,000 | ) | (287,745 | ) | | ||||||||||
Common stock dividends paid |
| | | (13,554 | ) | ||||||||||||
Net cash used in financing activities |
(358,991 | ) | (547,474 | ) | (397,394 | ) | (21,866 | ) | |||||||||
Increase (decrease) in cash and cash equivalents |
99,387 | (15,614 | ) | 8,849 | 17,932 | ||||||||||||
Cash and cash equivalents, beginning of period |
12,975 | 28,589 | 19,740 | 1,808 | |||||||||||||
Cash and cash equivalents, end of period |
$ | 112,362 | $ | 12,975 | $ | 28,589 | $ | 19,740 | |||||||||
Supplemental Information: |
|||||||||||||||||
Cash paid: |
|||||||||||||||||
Interest, net |
$ | 298,951 | $ | 360,995 | $ | 370,398 | $ | 15,126 | |||||||||
Income taxes, net |
$ | 124 | $ | | $ | | $ | |
The accompanying notes are an integral part of the consolidated financial statements.
F-6
Table of Contents
DEX MEDIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS (SHAREHOLDERS) EQUITY
Accumulated | Total | |||||||||||||||||||
Additional | Other | Shareholders | ||||||||||||||||||
Paid-in | Accumulated | Comprehensive | (Shareholders) | |||||||||||||||||
Common Stock | Capital | Deficit | (Loss) Income | Equity | ||||||||||||||||
Predecessor Company |
||||||||||||||||||||
Balance, December 31, 2005 |
$ | 1,507 | $ | 795,253 | $ | (107,133 | ) | $ | 1,313 | $ | 690,940 | |||||||||
Stock based compensation expense |
| 3,872 | | | 3,872 | |||||||||||||||
Common stock option exercise |
6 | 2,906 | | | 2,912 | |||||||||||||||
Other |
| 62 | | | 62 | |||||||||||||||
Net loss |
| | (20,044 | ) | | (20,044 | ) | |||||||||||||
Unrealized gain on interest rate
swaps, net of tax |
| | | 90 | 90 | |||||||||||||||
Balance, January 31, 2006 |
$ | 1,513 | $ | 802,093 | $ | (127,177 | ) | $ | 1,403 | $ | 677,832 | |||||||||
Successor Company |
||||||||||||||||||||
Capitalization at RHD Merger |
$ | | $ | 4,224,870 | $ | | $ | | $ | 4,224,870 | ||||||||||
Contribution by parent |
| 22,000 | | | 22,000 | |||||||||||||||
Distribution to parent |
| (287,745 | ) | | | (287,745 | ) | |||||||||||||
Net loss |
| | (240,665 | ) | | (240,665 | ) | |||||||||||||
Unrealized loss on interest rate
swaps, net of tax |
| | | (3,065 | ) | (3,065 | ) | |||||||||||||
Adjustment to initially apply SFAS
No. 158, net of tax |
| | | 3,785 | 3,785 | |||||||||||||||
Balance, December 31, 2006 |
| 3,959,125 | (240,665 | ) | 720 | 3,719,180 | ||||||||||||||
Contribution by parent |
| 75,000 | | | 75,000 | |||||||||||||||
Distributions to parent |
| (150,000 | ) | | | (150,000 | ) | |||||||||||||
Cumulative effect of FIN No. 48
adoption |
| | (212 | ) | | (212 | ) | |||||||||||||
Net income |
| | 119,975 | | 119,975 | |||||||||||||||
Unrealized loss on interest rate
swaps, net of tax |
| | | (10,763 | ) | (10,763 | ) | |||||||||||||
Benefit plans adjustment, net of tax |
| | | 6,259 | 6,259 | |||||||||||||||
Balance, December 31, 2007 |
| 3,884,125 | (120,902 | ) | (3,784 | ) | 3,759,439 | |||||||||||||
Distribution to parent |
| (303,150 | ) | | | (303,150 | ) | |||||||||||||
Other adjustments related to
compensatory stock awards |
| (137 | ) | | | (137 | ) | |||||||||||||
Net loss |
| | (1,919,905 | ) | | (1,919,905 | ) | |||||||||||||
Unrealized loss on interest rate
swaps, net of tax |
| | | (7,768 | ) | (7,768 | ) | |||||||||||||
Benefit plans adjustment, net of tax |
| | | (34,888 | ) | (34,888 | ) | |||||||||||||
Balance, December 31, 2008 |
$ | | $ | 3,580,838 | $ | (2,040,807 | ) | $ | (46,440 | ) | $ | 1,493,591 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-7
Table of Contents
DEX MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except share and per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except share and per share data)
1. Business and Presentation
The consolidated financial statements include the accounts of Dex Media, Inc. and its direct and
indirect wholly-owned subsidiaries (the Company, Dex Media, we, us and our). Dex Media is
a direct wholly-owned subsidiary of R.H. Donnelley Corporation (RHD). As of December 31, 2008,
Dex Media East LLC (Dex Media East) and Dex Media West LLC (Dex Media West) were our only
indirect wholly-owned subsidiaries. All intercompany transactions and balances have been
eliminated.
We are a leader in local search within the Dex States (defined below). Our Triple Play solutions
(Triple Play) are comprised of our Dex-branded solutions, which include Dex yellow pages print
directories, our proprietary dexknows.com ® online search site, and the Dex Search
Network. We also co-brand our print local search solutions with Qwest, a recognizable brand in the
industry, in order to further differentiate our local search solutions from those of our
competitors. During 2008, our Triple Play solutions serviced more than 400,000 national and local
businesses in 14 states.
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 operates the directory business in the Dex East States and Dex Media West operates the
directory business in the Dex West States.
Certain prior period amounts included in the consolidated statements of cash flows have been
reclassified to conform to the current periods presentation.
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 do not include any adjustments that might be necessary if the
Company is unable 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) the significant amount of maturing debt obligations; (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 space; (iv) that certain of our credit ratings have
been recently 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. This
is 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. Management has
also considered our projected inability to comply with certain covenants under our debt agreements
over the next 12 months. These circumstances and events have increased the risk that we will be
unable to continue to satisfy all of our debt obligations when they are required to be performed,
and, in managements view, raise substantial doubt as to whether the Company will be able to
continue as a going concern for a reasonable period of time.
Based on current financial projections, we expect to be able to continue to generate cash flow from
operations in amounts sufficient to satisfy our interest and principal payment obligations through
March 2010. Our ability to satisfy our debt repayment obligations will depend in large part on our
success in (i) refinancing certain of these obligations through other issuances of debt or equity
securities; (ii) amending or restructuring some of the terms, maturities and principal amounts of
these obligations; or (iii) effecting other transactions or agreements with holders of such
obligations. Should we be unsuccessful in these efforts, we would potentially incur payment and/or
other defaults on certain of our debt obligations, which, if not waived by our respective lenders,
could lead to the acceleration of all or most of our debt obligations.
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In addition, our credit facilities and the indentures governing the notes contain usual and
customary representations and warranties as well as affirmative and negative covenants that, among
other things, place limitations on our ability to (i) incur
additional indebtedness; (ii) pay dividends on our subsidiaries equity interests, repurchase their equity interests or make other
payments to RHD; (iii) enter into mergers, consolidations, acquisitions, asset dispositions and
sale-leaseback transactions; (iv) make capital expenditures; (v) issue capital stock of our
subsidiaries; (vi) engage in transactions with our affiliates; and (vii) make investments, loans
and advances, in each case, subject to customary and negotiated exceptions and limitations, as
applicable. Our credit facilities and the indentures governing the notes also contain financial
covenants relating to, among other items, maximum consolidated leverage, minimum interest coverage
and maximum senior secured leverage, as defined therein. Under the indentures, these financial
covenants are generally incurrence tests, meaning that they are measured only at the time of
certain proposed restricted activities, with failure of the test simply precluding that proposed
activity. In contrast, under the credit facilities, these covenants are generally maintenance
tests, meaning that they are measured each quarter, with failure to meet the test constituting an
event of default under the respective credit agreement. Our ability to maintain compliance with
these financial covenants during 2009 is dependent on various factors, certain of which are outside
of our control. Such factors include our ability to generate sufficient revenues and cash flows
from operations, our ability to achieve reductions in our outstanding indebtedness, changes in
interest rates and the impact on earnings, investments and liabilities.
Based on our current forecast, and absent a modification or waiver, management projects we could
exceed a leverage limit determined under the debt incurrence test of the Dex Media indentures
commencing as early as the end of the fourth quarter of 2009. Exceeding this leverage limit would
not be an event of default; however Dex Media would contractually be prohibited from engaging in
any of the following activities: (i) paying dividends on our subsidiaries equity interests,
repurchase their equity interests or make other payments to RHD; and (ii) entering into mergers,
joint ventures, consolidations, acquisitions, asset dispositions and sale-leaseback transactions.
Based on our current forecast, and absent a modification or waiver, management projects certain of
Dex Medias subsidiaries will exceed leverage limits determined under the debt incurrence test of
their indentures as early as the fourth quarter of 2009. The most material impact of the
prohibited activities would be the restriction of paying dividends to Dex Media. The restrictions
on the subsidiaries ability to pay dividends to Dex Media could result in Dex Media being unable
to satisfy its debt obligations. Based upon our current forecast, we project that Dex Media will
be able to satisfy its cash debt obligations through the fourth quarter of 2009. However, based on
our current forecast, and absent a modification or waiver, the minimum interest coverage and total
leverage covenants of the Dex Media West credit facility will not be satisfied when measured as of
the fourth quarter of 2009 and the first quarter of 2010, respectively. As noted below, this may
cause a cross default at RHD in the fourth quarter of 2009.
Substantially all of the assets of Dex Media East and Dex Media West and their subsidiaries,
including their equity interests, are pledged to secure the obligations under their respective
credit facilities. The failure to comply with the financial covenants contained in the credit
facilities would result in one or more events of default, which, if not cured or waived, could
require the applicable borrower to repay the borrowings thereunder before their scheduled due
dates. If we are unable to make such repayments or otherwise refinance these borrowings, the
lenders under the credit facilities could pursue the various default remedies set forth in the
credit facility agreements, including executing on the collateral securing the credit facilities.
In addition, events of default under the credit facilities may trigger events of default under the
indentures governing Dex Medias and its subsidiaries notes.
An event of default at Dex Media would also create a default at RHD. In addition, an event of
default at Dex Media East or Dex Media West would create a default at Dex Media. Furthermore,
certain actions by Dex Media would create a default at Dex Media East and Dex Media West under
their respective credit agreements. An event of default at RHD would not create an event of
default at Dex Media, Dex Media East or Dex Media West.
Significant Financing Developments
We have a substantial amount of debt and significant debt service obligations due in large part to
the financings associated with the RHD Merger (defined below) and other prior acquisitions. As of
December 31, 2008, we had total outstanding debt of $4.7 billion (including fair value adjustments
of $86.2 million required by generally accepted accounting principles (GAAP) as a result of the
RHD Merger) and had $187.4 million available under the revolving portion of the credit facilities
of our subsidiaries.
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On June 6, 2008, we refinanced the Dex Media West credit facility. The new Dex Media West credit
facility consists of a $130.0 million Term Loan A maturing in October 2013, a $950.0 million Term
Loan B maturing in October 2014 and a $90.0 million revolving credit facility maturing in October
2013 (Dex Media West Revolver), except as otherwise noted. For additional information relating to
the maturities under the new Dex Media West credit facility, see Note 4, Long-Term Debt, Credit
Facilities and Notes.
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 the former Dex Media West credit facility having a
notional amount of $650.0 million at December 31, 2008 are no longer highly effective in offsetting
changes in cash flows. Accordingly, cash flow hedge accounting treatment under Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133) is no longer permitted. Interest expense for the year ended December
31, 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 prior to June 6, 2008.
Interest expense for the year ended December 31, 2008 also includes a reduction of $7.0 million
resulting from the change in the fair value of these interest rate swaps between June 6, 2008 and
December 31, 2008.
See Note 2, Summary of Significant Accounting Policies Interest Expense and Deferred Financing
Costs and Note 4, Long-Term Debt, Credit Facilities and Notes, for additional information.
Historical Overview
Predecessor Company refers to the operations of Dex Media prior to the consummation of the RHD
Merger (defined below) on January 31, 2006. Successor Company refers to the operations of Dex
Media, formerly known as FAC (defined below), subsequent to the consummation of the RHD Merger.
The Predecessor Companys directory business was acquired from Qwest Dex, Inc. (Qwest Dex) in a
two phase purchase between Dex Holdings LLC (Dex Holdings), the former parent of the Predecessor
Company, and Qwest Dex. Dex Holdings and the Predecessor Company were formed by two private equity
firms, The Carlyle Group and Welsh, Carson, Anderson & Stowe (the Selling Shareholders). In the
first phase of the purchase, which was consummated on November 8, 2002, Dex Holdings assigned its
right to purchase the directory business of Qwest Dex in the Dex East States to the Predecessor
Company (the Dex East Acquisition). In the second phase of the purchase, which was consummated on
September 9, 2003, Dex Holdings assigned its right to purchase the directory business of Qwest Dex
in the Dex West States to the Predecessor Company (the Dex West Acquisition). Dex Holdings was
dissolved effective January 1, 2005.
On January 31, 2006, the Predecessor Company merged with and into Forward Acquisition Corporation
(FAC), a wholly-owned subsidiary of RHD. Pursuant to the Agreement and Plan of Merger dated
October 3, 2005 (Merger Agreement), each share of Dex Media, Inc. common stock was converted into
the right to receive $12.30 in cash and 0.24154 of a share of RHD common stock, resulting in an
aggregate cash value of $1.9 billion and aggregate stock value of $2.2 billion, based on 36,547,381
newly issued shares of RHD common stock valued at $61.82 per share, for an equity purchase price of
$4.1 billion. RHD also assumed all of the Predecessor Companys outstanding indebtedness on January
31, 2006 with a fair value of $5.5 billion (together with other costs for a total aggregate
purchase price of $9.8 billion). In addition, all outstanding stock options of the Predecessor
Company, were converted into stock options of RHD at a ratio of 1 to 0.43077 and the Dex Media,
Inc. Stock Option Plan and the Dex Media, Inc. 2004 Incentive Award Plan, which governed those
Predecessor Company stock options, were terminated. In connection with the consummation of this
merger (the RHD Merger), the name of FAC was changed to Dex Media, Inc. As a result of the RHD
Merger, Dex Media became a wholly-owned subsidiary of RHD.
2. Summary of Significant Accounting Policies
Revenue Recognition
Our directory advertising revenues are earned primarily from the sale of advertising in yellow
pages directories we publish. Revenue from the sale of such advertising is deferred when a
directory is published, net of estimated sales claims, and recognized ratably over the life of a
directory, which is typically 12 months (the deferral and amortization method). Directory
advertising revenues also include revenues for Internet-based advertising products, including our
proprietary local search site, dexknows.com, and the Dex Search Network. 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 are
recognized as delivered or fulfilled.
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In the Predecessor Company financial statements, revenue from the sale of local advertising was
recorded net of actual sales claims received. In the Successor Company financial statements,
revenue and deferred revenue from the sale of advertising is recorded net of an allowance for sales
claims, estimated based primarily on historical experience. We increase or decrease this estimate
as information or circumstances indicate that the estimate may no longer represent the amount of
claims we may incur in the future. For the years ended December 31, 2008 and 2007 and the eleven
months ended December 31, 2006, the Company recorded sales claims allowances of $32.6 million,
$41.3 million and $34.7 million, respectively. For the one month ended January 31, 2006, the
Predecessor Company recorded sales claims allowances of less than $0.1 million.
In certain cases, the Company enters into agreements with customers that involve the delivery of
more than one product or service. Revenue for such arrangements is allocated to the separate units
of accounting using the relative fair value method in accordance with EITF Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables.
Deferred Directory Costs
Costs directly related to the selling and production of our directories are initially deferred when
incurred and recognized ratably over the life of a directory, which is typically 12 months. These
costs are specifically identifiable to a particular directory and include sales commissions and
print, paper and initial distribution costs. Such costs that are paid prior to directory
publication are classified as prepaid expenses and other current assets until publication, when
they are then reclassified as deferred directory costs. In the Predecessor Company financial
statements, deferred directory costs also included employee and systems support costs directly
associated with the publication of directories.
Cash and Cash Equivalents
Cash equivalents include liquid investments with a maturity of less than three months at their time
of purchase. At times, such investments may be in excess of federally insured limits.
Accounts Receivable
Accounts receivable consist of balances owed to us by our advertising customers. Advertisers
typically enter into a twelve-month contract for their advertising. Most local advertisers are
billed a pro rata amount of their contract value on a monthly basis. On behalf of national
advertisers, certified marketing representatives (CMRs) pay to the Company the total contract
value of their advertising, net of their commission, within 60 days after the publication month.
Billed receivables represent the amount that has been billed to advertisers. Billed receivables are
recorded net of an allowance for doubtful accounts and sales claims, estimated based on historical
experience. We increase or decrease this estimate as information or circumstances indicate that the
estimate no longer appropriately represents the amount of bad debts and sales claims that are
probable to be incurred. We do not record an allowance for doubtful accounts until receivables are
billed.
Identifiable Intangible Assets and Goodwill
Successor Company
As a result of the RHD Merger, certain long-term intangible assets were identified in accordance
with SFAS No. 141, Business Combinations (SFAS No. 141) and recorded at their estimated fair
values. The excess purchase price over the net tangible and identifiable intangible assets acquired
of $2.6 billion, allocated to Dex Media East and Dex Media West at approximately $1.2 billion and
$1.4 billion, respectively, was recorded as goodwill. In accordance with SFAS No. 142, Goodwill and
Other Intangible Assets (SFAS No. 142), 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. Goodwill is not amortized but is subject to impairment testing on
an annual basis or more frequently if we believe indicators of impairment exist.
As a result of the decline in the trading value of our debt and RHDs debt and equity securities
during the first quarter of 2008 and continuing negative industry and economic trends that directly
affected RHDs and our business, RHD performed impairment tests as of March 31, 2008 of its
goodwill, definite-lived intangible assets and other long-lived assets in accordance with SFAS No.
142 and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No.
144), respectively. RHD used estimates
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and assumptions in its impairment evaluations, including, but not limited to, projected future cash
flows, revenue growth and customer attrition rates.
The impairment test of RHDs definite-lived intangible assets and other long-lived assets was
performed by comparing the carrying amount of its intangible assets and other long-lived assets to
the sum of their undiscounted expected future cash flows. In accordance with SFAS No. 144,
impairment exists if the sum of the undiscounted expected future cash flows is less than the
carrying amount of the intangible asset, or its related group of assets, and other long-lived
assets. RHDs testing results of its definite-lived intangible assets and other long-lived assets
indicated no impairment as of March 31, 2008.
RHDs impairment test for goodwill involved a two step process. The first step involved comparing
the fair value of RHD with the carrying amount of its assets and liabilities, including goodwill.
The fair value of RHD was determined using a market based approach, which reflects the market value
of its debt and equity securities as of March 31, 2008. As a result of RHDs testing, it determined
that its fair value was less than the carrying amount of its assets and liabilities, requiring it
to proceed with the second step of the goodwill impairment test. In the second step of the testing
process, the impairment loss is determined by comparing the implied fair value of RHDs goodwill to
the recorded amount of goodwill. The implied fair value of goodwill is derived from a discounted
cash flow analysis for RHD using a discount rate that results in the present value of assets and
liabilities equal to the then current fair value of RHDs debt and equity securities. Based upon
this analysis, RHD recognized a non-cash impairment charge of $2.5 billion during the three months
ended March 31, 2008. The Companys share of the impairment charge, based on a discounted cash flow
analysis, was $2.1 billion.
Since the trading value of RHDs equity securities further declined in the second quarter of 2008
and as a result of continuing negative industry and economic trends that directly affected RHDs
and our business, RHD performed additional impairment tests of its goodwill, definite-lived
intangible assets and other long-lived assets as of June 30, 2008. RHDs testing results of its
definite-lived intangible assets and other long-lived assets indicated no impairment as of June 30,
2008. As a result of these tests, RHD recognized a non-cash goodwill impairment charge of $660.2
million during the three months ended June 30, 2008, and together with the impairment charge
recognized in the first quarter of 2008, a total impairment charge of $3.1 billion was recognized
by RHD during the year ended December 31, 2008. The Companys share of the impairment charge, based
on a discounted cash flow analysis, was $445.4 million during the three months ended June 30, 2008,
and together with the impairment charge recognized in the first quarter of 2008, a total impairment
charge of $2.6 billion was recognized by the Company during the year ended December 31, 2008. As a
result of this impairment charge, we have no recorded goodwill at December 31, 2008.
No impairment losses were recorded related to our goodwill during the year ended December 31, 2007.
Given the ongoing global credit and liquidity crisis and the significant negative impact on
financial markets, the overall economy and the continued decline in our advertising sales and other
operating results and downward revisions to our forecasted results, the recent downgrade of certain
of our credit ratings, the continued decline in the trading value of our debt and RHDs debt and
equity securities and the recent suspension of trading of RHDs common stock on the NYSE, RHD
performed impairment tests of its definite-lived intangible assets and other long-lived assets in
accordance with SFAS No. 144 as of December 31, 2008. As a result of these tests, we recognized a
non-cash impairment charge of $603.0 million during the fourth quarter of 2008 associated with the
local customer relationships and national customer relationships acquired in the RHD Merger, as set
forth below. The fair values of the intangible assets were derived from a discounted cash flow
analysis using a discount rate that results in the present value of assets and liabilities equal to
the then current fair value of RHDs debt and equity securities. The following table provides a
breakout of the impairment charge between local and national customer relationships recorded by Dex
Media West and Dex Media East for the year ended December 31, 2008:
Local Customer | National CMR | |||||||||||
Relationships | Relationships | Total | ||||||||||
Dex Media West |
$ | 251,000 | $ | 75,000 | $ | 326,000 | ||||||
Dex Media East |
222,000 | 55,000 | 277,000 | |||||||||
Total impairment
charges |
$ | 473,000 | $ | 130,000 | $ | 603,000 | ||||||
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In connection with RHDs impairment testing of its definite-lived intangible assets and other
long-lived assets, SFAS No. 144 also requires an evaluation of the remaining useful lives of these
assets and to consider, among other things, the effects of obsolescence, demand, competition, and
other economic factors, including the stability of the industry in which we 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, the remaining
useful lives of our directory services agreements acquired by RHD in the RHD Merger
(collectively, the Dex Directory Services Agreements) will be reduced to 33 years effective January 1,
2009 in order to better reflect the period these intangible assets are expected to contribute to
our future cash flow.
No impairment losses were recorded related to our definite-lived intangible assets and other
long-lived assets during the year ended December 31, 2007 and the eleven months ended December 31,
2006, respectively.
In accordance with SFAS No. 144, the carrying value of the local and national customer
relationships acquired in the RHD Merger have been adjusted by the impairment charges noted above.
The adjusted carrying amounts of these intangible assets represent their new cost basis.
Accumulated amortization prior to the impairment charges has been eliminated and the new cost basis
will be amortized over the remaining useful lives of the intangible assets. Amortization expense
related to our intangible assets was $307.2 million, $300.3 million and $199.3 million for the
years ended December 31, 2008 and 2007 and the eleven months ended December 31, 2006, respectively.
Amortization for the five succeeding years is estimated to be approximately $371.1 million, $257.7
million, $250.1 million, $249.5 million and $246.9 million, respectively. Amortization expense in
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. Annual amortization of intangible assets for tax
purposes is approximately $453.3 million.
The acquired long-term intangible assets and their respective book values, as adjusted, at December
31, 2008 are shown in the following table.
December 31, 2008 | ||||||||||||||||||||||||
Directory | Local | National | ||||||||||||||||||||||
Services | Customer | CMR | Trade | Advertising | ||||||||||||||||||||
Agreements | Relationships | Relationships | Names | Commitment | Total | |||||||||||||||||||
Fair value |
$ | 7,320,000 | $ | 229,807 | $ | 50,041 | $ | 490,000 | $ | 25,000 | $ | 8,114,848 | ||||||||||||
Accumulated amortization |
(508,333 | ) | | | (95,278 | ) | (6,037 | ) | (609,648 | ) | ||||||||||||||
Net intangible assets |
$ | 6,811,667 | $ | 229,807 | $ | 50,041 | $ | 394,722 | $ | 18,963 | $ | 7,505,200 | ||||||||||||
The acquired intangible assets and their respective book values at December 31, 2007 are shown in
the following table:
December 31, 2007 | ||||||||||||||||||||||||
Directory | Local | National | ||||||||||||||||||||||
Services | Customer | CMR | Trade | Advertising | ||||||||||||||||||||
Agreements | Relationships | Relationships | Names | Commitment | Total | |||||||||||||||||||
Fair value |
$ | 7,320,000 | $ | 875,000 | $ | 205,000 | $ | 490,000 | $ | 25,000 | $ | 8,915,000 | ||||||||||||
Accumulated amortization |
(334,048 | ) | (82,891 | ) | (16,053 | ) | (62,611 | ) | (3,993 | ) | (499,596 | ) | ||||||||||||
Net intangible assets |
$ | 6,985,952 | $ | 792,109 | $ | 188,947 | $ | 427,389 | $ | 21,007 | $ | 8,415,404 | ||||||||||||
In connection with the RHD Merger, RHD acquired the
Dex Directory Services Agreements, which the Predecessor Company had entered into with Qwest,
including, (1) a publishing agreement with a term of 50 years commencing November 8, 2002 (subject
to automatic renewal for additional one-year terms), which grants us the right to be the exclusive
official directory publisher of listings and classified advertisements of Qwests telephone
customers in the geographic areas in the Dex States in which Qwest (and its successors) provided
local telephone services as of November 8, 2002, as well as having the exclusive right to use
certain Qwest branding on directories in those markets and (2) a non-competition agreement with a
term of 40 years commencing November 8, 2002, pursuant to which Qwest (on behalf of itself and its
affiliates and successors) has agreed not to sell directory products consisting principally of
listings and classified advertisements for subscribers in the geographic areas in the Dex States in
which Qwest provided local telephone service as of November 8, 2002 that are directed primarily at
consumers in those geographic areas. The fair value assigned to the Dex Media Directory Services
Agreements of $7.3 billion was based on the multi-period excess earnings method and was amortized
under the straight-line method over 42 years through December 31, 2008. The remaining useful life
has been changed as noted above. Under the multi-period excess earnings method, the projected cash
flows of the intangible assets are computed indirectly, which means that future cash flows are
projected with deductions made to recognize returns on appropriate contributory assets, leaving the
excess, or residual net cash flow, as indicative of the intangible asset fair value.
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As a result of the RHD Merger, RHD also acquired (1) an advertising commitment agreement whereby
Qwest has agreed to purchase an aggregate of $20.0 million of advertising per year through 2017
from us at pricing on terms at least as favorable as those offered to similar large customers and
(2) an intellectual property contribution agreement pursuant to which Qwest assigned and or
licensed to us the Qwest intellectual property previously used in the Qwest directory services
business along with (3) a trademark license agreement pursuant to which Qwest granted to us the
right until November 2007 to use the Qwest Dex and Qwest Dex Advantage marks in connection with
directory products and related marketing material in the Dex States and the right to use these
marks in connection with dexknows.com (the intangible assets in (2) and (3) collectively, Trade
Names). The fair value assigned to the Dex Media advertising commitment was based on the
multi-period excess earnings method and is being amortized under the straight-line method over 12
years.
The fair values of the local and national customer relationships were determined based on the
multi-period excess earnings method. As a result of cost uplift (defined below) from purchase
accounting being substantially amortized, during the first quarter of 2007, we commenced
amortization of local customer relationships established as a result of the RHD Merger. These
intangible assets are being amortized under the income forecast method, which assumes the value
derived from customer relationships is greater in the earlier years and steadily declines over
time. The weighted average useful life of these relationships, subsequent to the impairment charges
noted above, is approximately 20 years.
The fair value of the Trade Names was determined based on the relief from royalty method, which
values the Trade Names based on the estimated amount that a company would have to pay in an arms
length transaction to use these Trade Names. This asset is being amortized under the straight-line
method over 15 years.
If industry and economic conditions in RHDs markets continue to deteriorate and if the trading
value of our debt and RHDs debt and equity securities decline further, RHD will be required to
once again assess the recoverability and useful lives of its long-lived assets and other intangible
assets, which could result in additional impairment charges, a reduction of remaining useful lives
and acceleration of amortization expense.
Predecessor Company
As a result of the Dex East Acquisition and the Dex West Acquisition, certain intangible assets
were identified and recorded at their estimated fair value. Amortization expense was $24.3 million
for the one month ended January 31, 2006.
The fair values of local and national customer relationships were determined based on the present
value of estimated future cash flows and were being amortized using a declining method in relation
to the estimated retention periods of the acquired customers, which was twenty years and
twenty-five years, respectively. The acquired Dex trademark was a perpetual asset and not subject
to amortization. Other intangible assets including non-compete/publishing agreements, the Qwest Dex
trademark agreement and the advertising agreement were amortized on a straightline basis over
thirty-nine to forty years, four to five years, and fourteen to fifteen years, respectively.
In accordance with SFAS No. 142, goodwill was not amortized, but was subject to periodic impairment
testing. No impairment losses were recorded during the one month ended January 31, 2006. The
balances of intangible assets from the Dex East Acquisition and the Dex West Acquisition were
eliminated in purchase accounting as a result of the RHD Merger.
Fixed Assets and Computer Software
Fixed assets and computer software are recorded at cost. Fixed assets and computer software
acquired in conjunction with acquisitions are recorded at fair value on the acquisition date.
Depreciation and amortization are provided over the estimated useful lives of the assets using the
straight-line method. Estimated useful lives are five years for machinery and equipment, ten years
for furniture and fixtures, and three to five years for computer equipment and computer software.
Leasehold improvements are amortized on a straight-line basis over the shorter of the term of the
lease or the estimated useful life of the improvement. Fixed assets and computer software at
December 31, 2008 and 2007 consisted of the following:
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2008 | 2007 | ||||||||
Computer software |
$ | 125,217 | $ | 95,999 | |||||
Computer equipment |
27,385 | 21,185 | |||||||
Machinery and equipment |
1,410 | 1,269 | |||||||
Furniture and fixtures |
8,429 | 4,668 | |||||||
Leasehold improvements |
21,082 | 11,580 | |||||||
Construction in Process Computer software and equipment |
1,146 | 12,189 | |||||||
Total cost |
184,669 | 146,890 | |||||||
Less accumulated depreciation and amortization |
(88,060 | ) | (63,622 | ) | |||||
Net fixed assets and computer software |
$ | 96,609 | $ | 83,268 | |||||
Depreciation and amortization expense on fixed assets and computer software for the years ended
December 31, 2008 and 2007, the eleven months ended December 31, 2006, and the one month ended
January 31, 2006 was as follows:
Successor Company | Predecessor Company | ||||||||||||||||
Year Ended December 31, | Eleven Months Ended | One Month Ended | |||||||||||||||
2008 | 2007 | December 31, 2006 | January 31, 2006 | ||||||||||||||
Depreciation of fixed assets |
$ | 8,312 | $ | 8,488 | $ | 10,545 | $ | 789 | |||||||||
Amortization of computer software |
27,713 | 23,755 | 20,719 | 1,738 | |||||||||||||
Total depreciation and
amortization on fixed assets and
computer software |
$ | 36,025 | $ | 32,243 | $ | 31,264 | $ | 2,527 | |||||||||
During the year ended December 31, 2008, we retired certain computer software fixed assets, which
resulted in an impairment charge of $0.4 million.
Interest Expense and Deferred Financing Costs
Interest expense for the years ended December 31, 2008 and 2007 and the eleven months ended
December 31, 2006 was $387.1 million, $360.5 million and $376.5 million, respectively. Interest
expense for the one month ended January 31, 2006 was $37.6 million. For the Successor Company, the
Predecessor Companys deferred financing costs were eliminated as a result of purchase accounting
required under GAAP. For the Predecessor Company, certain costs associated with the issuance of
debt instruments were capitalized on the consolidated balance sheet. These costs were being
amortized to interest expense over the terms of the related debt agreements. Both the Predecessor
and Successor Company used the bond outstanding method 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 for the Successor Company was $7.4 million,
$2.5 million and $2.3 million for the years ended December 31, 2008 and 2007 and the eleven months
ended December 31, 2006, respectively. Amortization of deferred financing costs included in
interest expense for the Predecessor Company was $2.3 million for the one month ended January 31,
2006. 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 in 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. Interest expense in 2007 includes
redemption premium payments of $31.8 million and write-off of unamortized deferred financing costs
of $0.2 million associated with the refinancing transactions conducted during the fourth quarter of
2007. See Note 4, Long Term Debt, Credit Facilities and Notes for a further description of these
debt extinguishments.
As a result of the ineffective interest rate swaps associated with the refinancing of the former
Dex Media West credit facility, interest expense for the year ended December 31, 2008 includes a
non-cash charge of $15.0 million resulting from amounts charged to accumulated other comprehensive
loss related to these interest rate swaps prior to June 6, 2008. Interest expense for the year
ended December 31, 2008 also includes a reduction of $7.0 million resulting from the change in the
fair value of these interest rate swaps between June 6, 2008 and December 31, 2008. Prospective
gains or losses on the change in the fair value of these interest rate swaps will be reported in
earnings as a component of interest expense.
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In conjunction with the RHD Merger and as a result of purchase accounting required under GAAP, our
debt was recorded at its fair value on January 31, 2006. We recognize an offset to interest expense
in each period subsequent to the RHD Merger for the amortization of the corresponding fair value
adjustment over the life of the respective debt. The offset to interest expense was $17.6 million,
$92.1 million and $26.4 million for the years ended December 31, 2008 and 2007 and the eleven
months ended December 31, 2006, respectively. The offset to interest expense for the year ended
December 31, 2007 includes $62.2 million related to the redemption of Dex Media Easts outstanding
9.875% senior notes and 12.125% senior subordinated notes on November 26, 2007.
Advertising Expense
We recognize advertising expenses as incurred. These expenses include media, public relations,
promotional and sponsorship costs and on-line advertising. Total advertising expense was $20.9
million, $29.3 million and $18.3 million for the years ended December 31, 2008 and 2007 and the
eleven months ended December 31, 2006, respectively. Total advertising expense was $4.5 million for
the one month ended January 31, 2006. Total advertising expense for the year ended December 31,
2008 includes $9.1 million of costs associated with traffic purchased and distributed to multiple
advertiser landing pages on our proprietary local search site, with no comparable expense for the
year ended December 31, 2007 and the eleven months ended December 31, 2006.
Concentration of Credit Risk
Approximately 85% of our directory advertising revenue is derived from the sale of advertising to
local small- and medium-sized businesses. These advertisers typically enter into 12-month
advertising sales contracts and make monthly payments over the term of the contract. Some
advertisers prepay the full amount or a portion of the contract value. Most new advertisers and
advertisers desiring to expand their advertising programs are subject to a credit review. If the
advertisers qualify, we may extend credit to them for their advertising purchase. Small- and
medium-sized businesses tend to have fewer financial resources and higher failure rates than large
businesses. In addition, full collection of delinquent accounts can take an extended period of time
and involve significant costs. We do not require collateral from our advertisers, although we do
charge late fees to advertisers that do not pay by specified due dates.
The remaining approximately 15% of our directory advertising revenue is derived from the sale of
advertising to national or large regional chains, such as rental car companies, automobile repair
shops and pizza delivery businesses. Substantially all of the revenue derived through national
accounts is serviced through CMRs from which we accept orders. CMRs are independent third parties
that act as agents for national advertisers. The CMRs are responsible for billing the national
customers for their advertising. 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 losses from these accounts has been historically less than the local
accounts as the advertisers, and in some cases, the CMRs tend to be larger companies with greater
financial resources than local advertisers.
During the year ended December 31, 2008, we experienced adverse bad debt trends attributable to
economic challenges in our markets. Our bad debt expense represented 5.4% of our net revenue for
the year ended December 31, 2008, as compared to 2.7% for the year ended December 31, 2007 and 3.9%
for the eleven months ended December 31, 2006. We expect that these economic challenges will
continue in our markets, and, as such, our bad debt experience and operating results will continue
to be adversely impacted in the foreseeable future.
At December 31, 2008, we had interest rate swap agreements with major financial institutions with a
notional amount of $1.5 billion. We are exposed to credit risk in the event that one or more of the
counterparties to the agreements 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. We do not currently foresee a material credit
risk associated with these swap agreements; however, no assurances can be given.
Labor Unions
We have approximately 1,800 employees of which approximately 1,200, or approximately 67%, are
represented by labor unions covered by two collective bargaining agreements. The unionized
employees are represented by either the International Brotherhood of Electrical Workers of America
(IBEW), which represents approximately 400 of the unionized workforce, or the Communication
Workers of America (CWA), which represents approximately 800 of the unionized workforce. Our
collective bargaining agreement with the IBEW expires in May 2009 and our collective bargaining
agreement with the CWA expires in October 2009. We intend to engage in good faith bargaining and,
as such, the results of those negotiations cannot yet be determined.
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Derivative Financial Instruments and Hedging Activities
We account for our derivative financial instruments and hedging activities in accordance with SFAS
No. 133, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an Amendment of FAS 133 and SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. We do not use derivative financial instruments for
trading or speculative purposes and our derivative financial instruments are limited to interest
rate swap agreements. We utilize a combination of fixed rate and variable rate debt to finance our
operations. The variable rate debt exposes us 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 their respective indebtedness.
To satisfy this objective, we have entered into fixed interest rate swap agreements to manage
fluctuations in cash flows resulting from changes in interest rates on variable rate debt. Our
interest rate swap agreements effectively convert $1.5 billion, or 69%, of the Companys variable
rate debt to fixed rate debt, mitigating our exposure to increases in interest rates. At December
31, 2008, approximately 46% of our total debt outstanding consists of variable rate debt, excluding
the effect of our interest rate swaps. Including the effect of our interest rate swaps, total fixed
rate debt comprised approximately 86% of our total debt portfolio as of December 31, 2008.
On the day a derivative contract is executed, we 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 we formally document 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. We formally assess, 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 are recognized as either assets or liabilities on the
consolidated balance sheets with measurement at fair value. On a quarterly basis, the fair values
of the interest rate swaps are determined based on quoted market prices and, to the extent the
swaps provide an effective hedge, the differences between the fair value and the book value of the
swaps are recognized in accumulated other comprehensive (loss) income, a component of shareholders
equity. For derivative instruments that are not designated or do not qualify as hedged
transactions, the initial fair value, if any, and any subsequent gains or losses on the change in
the fair value are reported in earnings as a component of interest expense. Any gains or losses
related to the quarterly fair value adjustments are presented as a non-cash operating activity on
the 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, we continue to carry the derivative at its fair value on
the consolidated balance sheet and recognize any subsequent changes in its fair value in earnings
as a component of interest expense. Any amounts previously recorded to accumulated other
comprehensive (loss) income will be amortized to interest expense in the same period(s) in which
the interest expense of the underlying debt impacts earnings.
See Note 5, Derivative Financial Instruments, for additional information regarding our derivative
financial instruments and hedging activities.
Pension and Postretirement Benefits
Pension and postretirement benefits represent estimated amounts to be paid to employees in the
future. The accounting for benefits reflects the recognition of these benefit costs over the
employees approximate service period based on the terms of the plan and the investment and funding
decisions made. The determination of the benefit obligation and the net periodic pension and other
postretirement benefit costs requires management to make assumptions regarding the discount rate,
return on retirement plan assets, increase in future compensation and healthcare cost trends.
Changes in these assumptions can have a significant impact on the projected benefit obligation,
funding requirement and net periodic benefit cost. The assumed discount rate is the rate at which
the pension benefits could be settled. During 2008, 2007 and 2006, we utilized the Citigroup
Pension Liability Index as the appropriate discount rate for our defined benefit pension plan.
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In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of
FASB Statements No. 87, 88, 106, and 132(R) (SFAS No. 158). This statement requires recognition
of the overfunded or underfunded status of defined benefit postretirement plans as an asset or
liability in the statement of financial position and to recognize changes in that funded status in
accumulated other comprehensive loss in the year in which the changes occur. SFAS No. 158 also
requires measurement of the funded status of a plan as of the date of the statement of financial
position. SFAS No. 158 became effective for recognition of the funded status of the benefit plans
for fiscal years ending after December 15, 2006 and is effective for the measurement date
provisions for fiscal years ending after December 15, 2008. We have adopted the funded status
recognition provisions of SFAS No. 158 related to our defined benefit pension and postretirement
plans and comply with the measurement date provisions of SFAS No. 158.
During October 2008, RHD froze all current defined benefit plans covering all non-union employees
and curtailed the non-union retiree health care and life insurance benefits. See Note 8, Benefit
Plans, for further information regarding our benefit plans.
Income Taxes
We account for income taxes under the asset and liability method in accordance with SFAS No. 109,
Accounting for Income Taxes (SFAS No. 109). Deferred income tax liabilities and assets reflect
temporary differences between amounts of assets and liabilities for financial and tax reporting.
Such amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect
when the temporary differences reverse. A valuation allowance is established to offset any
deferred income tax assets if, based upon the available evidence, it is more likely than not that
some or all of the deferred income tax assets will not be realized.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes: An
Interpretation of FASB Statement No. 109 (FIN No. 48). This interpretation clarifies the
accounting for uncertainty in income taxes recognized in an entitys financial statements in
accordance with SFAS No. 109. FIN No. 48 prescribes a recognition threshold and measurement
principles for the financial statement recognition and measurement of tax positions taken or
expected to be taken on a tax return. Under FIN No. 48, the impact of an uncertain income tax
position on an income tax return must be recognized at the largest amount that is more likely than
not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position
will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN
No. 48 provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosures and transition requirements. This interpretation is effective for
fiscal years beginning after December 15, 2006, and, as such, we adopted FIN No. 48 on January 1,
2007.
The Companys policy is to recognize interest and penalties related to unrecognized tax benefits in
income tax expense. See Note 7, Income Taxes, for more information regarding our benefit
(provision) for income taxes as well as the impact of adopting FIN No. 48.
Stock-Based Awards
Successor Company
RHD maintains a shareholder approved stock incentive plan, the 2005 Stock Award and Incentive Plan
(2005 Plan), whereby certain RHD employees and non-employee directors are eligible to receive
stock options, stock appreciation rights (SARs), limited stock appreciation rights in tandem with
stock options and restricted stock. Prior to adoption of the 2005 Plan, RHD maintained a
shareholder approved stock incentive plan, the 2001 Stock Award and Incentive Plan (2001 Plan).
Under the 2005 Plan and 2001 Plan, 5 million and 4 million shares, respectively, were originally
authorized for grant. Stock awards are typically granted at the market value of RHDs common stock
at the date of the grant, become exercisable in ratable installments or otherwise, over a period of
one to five years from the date of grant, and may be exercised up to a maximum of ten years from
the time of grant. RHDs Compensation & Benefits Committee determines termination, vesting and
other relevant provisions at the date of the grant. RHD has implemented a policy of issuing
treasury shares held by RHD to satisfy stock issuances associated with stock-based award exercises.
As of December 31, 2008, non-employee directors of RHD receive options to purchase 1,500 shares and
an award of 1,500 shares of restricted stock upon election to the Board. Non-employee directors
also receive, on an annual basis, options to purchase 1,500 shares and an award of 1,500 shares of
restricted stock. Non-employee directors may also elect to receive additional equity awards in lieu
of all or a portion of their cash fees.
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RHD and the Company adopted the provisions of SFAS No. 123 (R), Share-Based Payment (SFAS No. 123
(R)), using the Modified Prospective Method. Under this method, we are required to record
compensation expense in the consolidated statement of operations for all RHD employee stock-based
awards granted, modified or settled after the date of adoption and for the unvested portion of
previously granted stock awards that remain outstanding as of the beginning of the period of
adoption based on their grant date fair values. RHD estimates forfeitures over the requisite
service period when recognizing compensation expense. Estimated forfeitures are adjusted to the
extent actual forfeitures differ, or are expected to materially differ, from such estimates. For
the year ended December 31, 2008, RHD and the Company utilized a forfeiture rate of 8% in
determining compensation expense. For the year ended December 31, 2007 and the eleven months ended
December 31, 2006, RHD and the Company utilized a forfeiture rate of 5% in determining compensation
expense.
RHD allocates stock-based compensation expense to its subsidiaries, including the Company,
consistent with the method it utilizes to allocate employee wages and benefits to its subsidiaries.
Information presented below related to compensation expense, with the exception of unrecognized
compensation expense, represents what has been allocated to the Company for the years ended
December 31, 2008 and 2007 and the eleven months ended December 31, 2006.
The following table depicts the effect of adopting SFAS No. 123 (R) on net loss for the eleven
months ended December 31, 2006. The Companys reported net loss for the eleven months ended
December 31, 2006, which reflects compensation expense related to RHDs stock-based awards recorded
in accordance with SFAS No. 123 (R), is compared to net loss for the same period that would have
been reported had such compensation expense been determined under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25).
Eleven Months Ended | ||||||||
December 31, 2006 | ||||||||
As Reported | Per APB No. 25 | |||||||
Total stock-based compensation expense |
$ | 17,507 | $ | 5,418 | ||||
Net loss |
(240,665 | ) | (233,163 | ) |
Predecessor Company
For the one month ended January 31, 2006, the Predecessor Company accounted for its stock-based
awards under the recognition and measurement principles of SFAS No. 123 (R).
See Note 6, Stock Incentive Plans, for additional information regarding RHDs and our stock
incentive plans and the adoption of SFAS No. 123 (R).
Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments (SFAS No. 107), requires
disclosure of the fair value of financial instruments for which it is practicable to estimate that
value. At December 31, 2008 and 2007, 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. The Company has utilized quoted market prices, where
available, to compute the fair market value of our long-term debt as disclosed in Note 4,
Long-Term Debt, Credit Facilities and Notes. These estimates of fair value may be affected by
assumptions made and, accordingly, are not necessarily indicative of the amounts the Company could
realize in a current market exchange.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (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.
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SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. As such, we adopted SFAS No. 157 effective January 1, 2008. The adoption
of SFAS No. 157 did not impact our consolidated financial position and results of operations. In
accordance with SFAS No. 157, the following table represents our assets and liabilities that are
measured at fair value on a recurring basis at December 31, 2008 and the level within the fair
value hierarchy in which the fair value measurements are included.
Fair Value | |||||
Measurements at | |||||
December 31, 2008 | |||||
Using Significant | |||||
Other Observable | |||||
Description | Inputs (Level 2) | ||||
Derivatives Liabilities |
$ | (41,326 | ) |
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. In accordance with SFAS No. 157, 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 year ended December 31,
2008, 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 $26.6 million.
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 (FSP No. 157-2), which defers 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 has 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. We do not expect the adoption of FSP No. 157-2 to have a material
impact on our 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, revenue 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,
and certain assumptions pertaining to RHDs stock-based awards, among others.
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Table of Contents
New Accounting Pronouncements
The FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the Useful Life of
Intangible Assets (FSP FAS 142-3), in April 2008. FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142. The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset, as determined under the
provisions of SFAS No. 142, and the period of expected cash flows used to measure the fair value of
the asset in accordance with SFAS No. 141(R), Business Combinations (SFAS No. 141(R)). FSP FAS
142-3 is effective for fiscal years beginning after December 15, 2008 and is to be applied
prospectively to intangible assets acquired subsequent to its effective date. Accordingly, the
Company plans to adopt the provisions of this FSP on January 1, 2009. The impact that the adoption
of FSP FAS 142-3 may have on the Companys results of operations and financial condition will
depend on the nature and extent of any intangible assets acquired subsequent to its effective date.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities - an amendment of FASB Statement No. 133 (SFAS No. 161). SFAS No. 161 amends SFAS No.
133 and 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 plans to adopt the provisions of this standard on
January 1, 2009. Although SFAS No. 161 requires enhanced disclosures, its adoption will not impact
the Companys results of operations or financial condition.
In December 2007, the FASB issued SFAS No. 141(R). SFAS No. 141(R), replaces SFAS No. 141, Business
Combinations, and establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree, and any goodwill acquired in a business combination. SFAS
No. 141(R) also establishes disclosure requirements to enable the evaluation of the nature and
financial effects of a business combination. SFAS No. 141(R) is to be applied on a prospective
basis and, for the Company, would be effective for any business combination transactions with an
acquisition date on or after January 1, 2009. The impact that the adoption of this pronouncement
may have on the Companys results of operations and financial condition will depend on the nature
and extent of any business combinations subsequent to its effective date.
We have reviewed other accounting pronouncements that were issued as of December 31, 2008, 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. Restructuring Charges
The table below shows the activity in our restructuring reserves during the years ended December
31, 2008 and 2007 and the eleven months ended December 31, 2006.
2006 | 2007 | 2008 | ||||||||||||||
Restructuring | Restructuring | Restructuring | ||||||||||||||
Actions | Actions | Actions | Total | |||||||||||||
Balance at January 31, 2006 |
$ | | $ | | $ | | $ | | ||||||||
Additions to reserve charged to
goodwill |
18,914 | | | 18,914 | ||||||||||||
Payments |
(11,299 | ) | | | (11,299 | ) | ||||||||||
Balance at December 31, 2006 |
7,615 | | | 7,615 | ||||||||||||
Additions to reserve charged to goodwill |
96 | | | 96 | ||||||||||||
Additions to reserve charged to earnings |
| 2,036 | | 2,036 | ||||||||||||
Payments |
(3,825 | ) | | | (3,825 | ) | ||||||||||
Reserve reversal credited to goodwill |
(559 | ) | | | (559 | ) | ||||||||||
Balance at December 31, 2007 |
3,327 | 2,036 | | 5,363 | ||||||||||||
Additions to reserve charged to earnings |
| | 21,291 | 21,291 | ||||||||||||
Payments |
(2,145 | ) | (1,952 | ) | (14,009 | ) | (18,105 | ) | ||||||||
Reserve reversal credited to earnings |
(615 | ) | (31 | ) | | (646 | ) | |||||||||
Balance at December 31, 2008 |
$ | 567 | $ | 53 | $ | 7,282 | $ | 7,903 | ||||||||
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During the second quarter of 2008, RHD initiated a restructuring plan that included headcount
reductions, consolidation of responsibilities and vacated leased facilities (2008 Restructuring
Actions) to occur throughout 2008 and into 2009. During the year ended December 31, 2008, we
recognized a restructuring charge to earnings associated with the 2008 Restructuring Actions of
$21.3 million, primarily related to outside consulting services, severance and vacated leased
facilities, and made payments of $14.0 million.
During the year ended December 31, 2007, we recognized a restructuring charge to earnings of $2.0
million associated with headcount reductions and consolidation of responsibilities to be
effectuated during 2008 (2007 Restructuring Actions). During 2008, we finalized our estimate of
costs associated with headcount reductions and reversed a portion of the reserve by less than $0.1
million, with a corresponding credit to earnings. During the year ended December 31, 2008, we made
payments of $1.9 million, which consist primarily of payments for severance. No payments were made
associated with the 2007 Restructuring Actions during the year ended December 31, 2007.
As a result of the RHD Merger, we completed a restructuring that included the termination and
relocation of certain employees as well as vacating certain of our leased facilities in Colorado,
Minnesota, Nebraska and Oregon. We estimated the costs associated with terminated employees,
including Dex Media executive officers, and abandonment of certain of our leased facilities, net of
estimated sublease income, to be approximately $18.9 million and such costs were charged to
goodwill during the eleven months ended December 31, 2006. During January 2007, we finalized our
estimate of costs associated with terminated employees and recognized a charge to goodwill of $0.1
million. During the year ended December 31, 2007, we finalized our assessment of the relocation
reserve established as a result of the RHD Merger and as a result, we reversed the remaining amount
in the reserve of $0.6 million, with a corresponding offset to goodwill. During the year ended
December 31, 2008, we reversed a portion of the reserve related to severance and our leased
facilities by $0.6 million, with the corresponding credit to earnings. Payments made with respect
to severance and relocation during the years ended December 31, 2008 and 2007 and the eleven months
ended December 31, 2006 totaled $0.4 million, $1.6 million and $10.8 million, respectively.
Payments of $1.7 million, $2.2 million and $0.5 million were made during the years ended December
31, 2008 and 2007 and the eleven months ended December 31, 2006, respectively, with respect to our
vacated leased facilities. The remaining lease payments for these facilities will be made through
2016.
The Successor Company recognized merger related expenses of $2.6 million during the eleven months
ended December 31, 2006 with no comparable expense during the years ended December 31, 2008 and
2007. These merger related costs for the eleven months ended December 31, 2006 included $2.1
million for bonuses to retain certain employees through the transition of the RHD Merger. The
Predecessor Company recognized merger related expenses of $27.2 million during the one month ended
January 31, 2006. These costs included legal and financial advisory fees, as well as stock
compensation expense related to the acceleration of vesting of certain stock-based awards upon
consummation of the RHD Merger.
Restructuring charges that are charged to earnings are included in general and administrative
expenses on the consolidated statements of operations.
4. Long-Term Debt, Credit Facilities and Notes
Long-term debt of the Company at December 31, 2008 and 2007, including fair value adjustments
required by GAAP as a result of the RHD Merger, consisted of the following:
December 31, | December 31, | |||||||
2008 | 2007 | |||||||
Dex Media, Inc. |
||||||||
8% Senior Notes due 2013 |
$ | 510,408 | $ | 512,097 | ||||
9% Senior Discount Notes due 2013 |
771,488 | 719,112 | ||||||
Dex Media East |
||||||||
Credit Facility |
1,081,500 | 1,106,050 | ||||||
Dex Media West |
||||||||
New Credit Facility |
1,080,000 | | ||||||
Former Credit Facility |
| 1,071,491 | ||||||
8.5% Senior Notes due 2010 |
393,883 | 398,736 | ||||||
5.875% Senior Notes due 2011 |
8,761 | 8,774 | ||||||
9.875% Senior Subordinated Notes due 2013 |
815,791 | 824,982 | ||||||
Total Dex Media Inc. Consolidated |
4,661,831 | 4,641,242 | ||||||
Less: current portion |
99,625 | 161,007 | ||||||
Long-term debt |
$ | 4,562,206 | $ | 4,480,235 | ||||
F-22
Table of Contents
The Companys credit facilities and the indentures governing the notes contain usual and customary
representations and warranties as well as affirmative and negative covenants that, among other
things, place limitations on our ability to (i) incur additional
indebtedness; (ii) pay dividends
on our subsidiaries equity interests, repurchase their equity interests or make other payments to
RHD; (iii) enter into mergers, consolidations, acquisitions, asset dispositions and sale-leaseback
transactions; (iv) make capital expenditures; (v) issue capital stock of our subsidiaries; (vi)
engage in transactions with our affiliates; and (vii) make investments, loans and advances, in each
case, subject to customary and negotiated exceptions and limitations, as applicable. The Companys
credit facilities also contain financial covenants relating to maximum consolidated leverage,
minimum interest coverage and maximum senior secured leverage as defined therein. Substantially all
of the assets of Dex Media East and Dex Media West and their subsidiaries, including their equity
interests, are pledged to secure the obligations under their respective credit facilities.
Credit Facilities
At December 31, 2008, total outstanding debt under our credit facilities was $2,161.5 million,
comprised of $1,081.5 million under the Dex Media East credit facility and $1,080.0 million under
the new Dex Media West credit facility.
Dex Media East
As of December 31, 2008, the principal amounts owed under the Dex Media East credit facility
totaled $1,081.5 million, comprised of $682.5 million under Term Loan A and $399.0 million under
Term Loan B and no amount was outstanding under the $100.0 million aggregate principal amount
revolving loan facility (Dex Media East Revolver) (with an additional $2.6 million utilized under
two standby letters of credit). The Dex Media East credit facility also consists of a $200.0
million aggregate principal amount uncommitted incremental facility, in which Dex Media East would
have the right, subject to obtaining commitments for such incremental loans, on one or more
occasions to increase the Term Loan A, Term Loan B or the Dex Media East Revolver by such amount.
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 3.83% and 6.87% at December 31, 2008 and 2007, respectively.
As of December 31, 2008, the Dex Media East credit facility bears interest, at our option, at
either:
| The higher of (i) the base rate determined by the Administrative Agent, JP Morgan Chase Bank, N.A. and (ii) the Federal Funds Effective Rate (as defined) plus 0.50%, and in each case, plus a 0.75% (or 0.50% if leverage ratio is less than 2 to 1) margin on the Dex Media East Revolver and Term Loan A and a 1.00% margin on Term Loan B; or | ||
| The LIBOR rate plus a 1.75% (or 1.50% if leverage ratio is less than 2 to 1) margin on the Dex Media East Revolver and Term Loan A and a 2.00% margin on Term Loan B. We may elect interest periods of 1, 2, 3, or 6 months (or 9 or 12 months if, at the time of the borrowing, all lenders agree to make such term available), for LIBOR borrowings. |
On October 17, 2007, RHD issued $500 million aggregate principal amount of 8.875% Series A-4 Senior
Notes due 2017 (Series A-4 Notes). Certain proceeds from this issuance were transferred to Dex
Media East in order to repay $86.4 million and $213.6 million of Term Loan A and Term Loan B under
the former Dex Media East credit facility, respectively, and used to pay related fees and expenses.
On October 24, 2007, we replaced the former Dex Media East credit facility with the new Dex Media
East credit facility. Proceeds from the new Dex Media East credit facility were used on October 24,
2007 to repay the remaining $56.5 million and $139.7 million of Term Loan A and Term Loan B under
the former Dex Media East credit facility, respectively, and $32.5 million under the former Dex
Media East revolving loan facility. The repayment of the term loans and revolving loan commitments
outstanding under the former Dex Media East credit facility was accounted for as an extinguishment
of debt resulting in a loss charged to interest expense during the year ended December 31, 2007 of
$0.2 million related to the write-off of unamortized deferred financing costs.
Proceeds from the new Dex Media East credit facility were also used on November 26, 2007 to fund
the redemption of $449.7 million of Dex Media Easts outstanding 9.875% Senior Notes due 2009
and $341.3 million of Dex Media Easts outstanding 12.125% Senior Subordinated Notes due 2012.
See below for further details.
F-23
Table of Contents
Dex Media West
On June 6, 2008, we refinanced the Dex Media West credit facility. The new Dex Media West credit
facility consists of a $130.0 million Term Loan A maturing in October 2013, a $950.0 million Term
Loan B maturing in October 2014 and a $90.0 million Dex Media West Revolver. In the event that more
than $25.0 million of Dex Media Wests 9.875% Senior Subordinated Notes due 2013 (or any
refinancing or replacement thereof) are outstanding, the Dex Media West Revolver, Term Loan A and
Term Loan B will mature on the date that is three months prior to the final maturity of such notes.
The new Dex Media West credit facility includes an up to $400.0 million uncommitted incremental
facility (Incremental Facility) that may be incurred as additional revolving loans or additional
term loans, subject to obtaining commitments for such loans. The Incremental Facility is fully
available if used to refinance the Dex Media West 8.5% Senior Notes due 2010, however is limited to
$200.0 million if used for any other purpose. The proceeds from the new Dex Media West credit
facility were used to refinance the former Dex Media West credit facility and pay related fees and
expenses. The refinancing of the former Dex Media West credit facility was accounted for as an
extinguishment of debt resulting in a loss charged to interest expense during the year ended
December 31, 2008 of $2.1 million related to the write-off of unamortized deferred financing costs.
As of December 31, 2008, the principal amounts owed under the new Dex Media West credit facility
totaled $1,080.0 million, comprised of $130.0 million under Term Loan A and $950.0 million under
Term Loan B and no amount was outstanding under the Dex Media West Revolver. The weighted average
interest rate of outstanding debt under the new Dex Media West credit facility was 7.10% at
December 31, 2008. The weighted average interest rate of outstanding debt under the former Dex
Media West credit facility was 6.51% at December 31, 2007.
As of December 31, 2008, the new Dex Media West credit facility bears interest, at our option, at
either:
| The highest of (i) the base rate determined by the Administrative Agent, JP Morgan Chase Bank, N.A., (ii) the Federal Funds Effective Rate (as defined) plus 0.50%, and (iii) 4.0%, in each case, plus a 2.75% (or 2.50% if the leverage ratio is less than 3.00 to 1.00) margin on the Dex Media West Revolver and Term Loan A and a 3.0% margin on Term Loan B; or | ||
| The higher of (i) LIBOR rate and (ii) 3.0% plus a 3.75% (or 3.50% if the leverage ratio is less than 3.00 to 1.00) margin on the Dex Media West Revolver and Term Loan A and a 4.0% margin on Term Loan B. We may elect interest periods of 1, 2, 3, or 6 months (or 9 or 12 months if, at the time of the borrowing, all lenders agree to make such term available), for LIBOR borrowings. |
Notes
At December 31, 2008, we had total outstanding notes of $2,500.3 million, comprised of $1,281.9
million outstanding Dex Media notes and $1,218.4 million outstanding Dex Media West notes.
Dex Media, Inc.
At December 31, 2008, Dex Media, Inc. had total outstanding notes of $1,281.9 million, comprised of
$510.4 million 8% Senior Notes and $771.5 million 9% Senior Discount Notes.
Dex Media, Inc. issued $500.0 million aggregate principal amount of 8% Senior Notes due 2013.
These Senior Notes are unsecured obligations of Dex Media, Inc. and interest is payable on May
15th and November 15th of each year. As of December 31, 2008, $500.0 million
aggregate principal amount was outstanding excluding fair value adjustments. At December 31, 2008,
the 8% Senior Notes had a fair market value of $92.5 million.
The 8% Senior Notes with a face value of $500.0 million are redeemable at our option beginning in
2008 at the following prices (as a percentage of face value):
Redemption Year | Price | |||
2009 |
102.667 | % | ||
2010 |
101.333 | % | ||
2011 and thereafter |
100.000 | % |
F-24
Table of Contents
Dex Media, Inc. issued $750.0 million aggregate principal amount of 9% Senior Discount Notes
due 2013, under two indentures. Under the first indenture totaling $389.0 million aggregate
principal amount, the 9% Senior Discount Notes were issued at an original issue discount with
interest accruing at 9%, per annum, compounded semi-annually. These Senior Discount Notes are
unsecured obligations of Dex Media, Inc. and interest accrues in the form of increased accreted
value until November 15, 2008 (Full Accretion Date), at which time the accreted value will be
equal to the full principal amount at maturity. Under the second indenture totaling $361.0 million
aggregate principal amount, interest accrues at 8.37% per annum, compounded semi-annually, which
creates a premium at the Full Accretion Date that will be amortized over the remainder of the term.
After November 15, 2008, the 9% Senior Discount Notes bear cash interest at 9% per annum, payable
semi-annually on May 15th and November 15th of each year. These Senior
Discount Notes are unsecured obligations of Dex Media, Inc. and no
cash interest accrued on the
discount notes prior to the Full Accretion Date. As of December 31, 2008, $749.9 million aggregate
principal amount was outstanding excluding fair value adjustments. At December 31, 2008, the 9%
Senior Discount Notes had a fair market value of $138.8 million.
The 9% Senior Discount Notes with a remaining face value of $749.9 million are redeemable at our
option beginning in 2008 at the following prices (as a percentage of face value):
Redemption Year | Price | |||
2009 |
103.000 | % | ||
2010 |
101.500 | % | ||
2011 and thereafter |
100.000 | % |
Dex Media East
On November 26, 2007, proceeds from the new Dex Media East credit facility were used to fund the
redemption of $449.7 million of Dex Media Easts outstanding 9.875% Senior Notes due 2009, $341.3
million of Dex Media Easts outstanding 12.125% Senior Subordinated Notes due 2012, redemption
premiums associated with these Senior Notes and Senior Subordinated Notes of $11.1 million and
$20.7 million, respectively, and pay transaction costs. The redemption of these Senior Notes and
Senior Subordinated Notes was accounted for as an extinguishment of debt resulting in a loss
charged to interest expense of $31.8 million during the year ended December 31, 2007 related to the
redemption premiums. In addition, as a result of redeeming these Senior Notes and Senior
Subordinated Notes, the loss charged to interest expense was offset by $62.2 million during the
year ended December 31, 2007, resulting from accelerated amortization of the remaining fair value
adjustment recorded as a result of the Dex Media Merger.
Dex Media West
At December 31, 2008, Dex Media West had total outstanding notes of $1,218.4 million, comprised of
$393.9 million 8.5% Senior Notes, $8.7 million 5.875% Senior Notes and $815.8 million Senior
Subordinated Notes.
Dex Media West issued $385.0 million aggregate principal amount of 8.5% Senior Notes due 2010.
These Senior Notes are unsecured obligations of Dex Media West and interest is payable on February
15th and August 15th of each year. As of December 31, 2008, $385.0 million
aggregate principal amount was outstanding excluding fair value adjustments. At December 31, 2008,
the 8.5% Senior Notes had a fair market value of $231.0 million.
The 8.5% Senior Notes with a face value of $385.0 million are now redeemable at our option at the
following prices (as a percentage of face value):
Redemption Year | Price | |||
2009 and thereafter |
100.000 | % |
Dex Media West issued $300.0 million aggregate principal amount of 5.875% Senior Notes due 2011.
These Senior Notes are unsecured obligations of Dex Media West and interest is payable on May
15th and November 15th of each year. As of December 31, 2008, $8.7 million
aggregate principal amount was outstanding excluding fair value adjustments. At December 31, 2008,
the 5.875% Senior Notes had a fair market value of $5.2 million.
F-25
Table of Contents
The 5.875% Senior Notes with a remaining face value of $8.7 million are redeemable at our option
beginning in 2008 at the following prices (as a percentage of face value):
Redemption Year | Price | |||
2009 |
101.469 | % | ||
2010 and thereafter |
100.000 | % |
Dex Media West issued $780 million aggregate principal amount of 9.875% Senior Subordinated Notes
due 2013. These Senior Subordinated Notes are unsecured obligations of Dex Media West and interest
is payable on February 15th and August 15th of each year. As of December 31,
2008, $761.7 million aggregate principal amount was outstanding excluding fair value adjustments.
At December 31, 2008, the 9.875% Senior Subordinated Notes had a fair market value of $180.9
million.
The 9.875% Senior Subordinated Notes with a remaining face value of $761.7 million are redeemable
at our option beginning in 2008 at the following prices (as a percentage of face value):
Redemption Year | Price | |||
2009 |
103.292 | % | ||
2010 |
101.646 | % | ||
2011 and thereafter |
100.000 | % |
Aggregate maturities of long-term debt (including current portion and excluding fair value
adjustments under purchase accounting) at December 31, 2008 were:
2009 |
$ | 99,625 | ||
2010 |
521,375 | |||
2011 |
155,470 | |||
2012 |
212,875 | |||
2013 |
2,302,441 | |||
Thereafter |
1,283,875 | |||
Total |
$ | 4,575,661 | ||
See Note 1, Business and Presentation Significant Financing Activities for additional
information on the financing activities conducted during the year ended December 31, 2008.
Impact of RHD Merger
As a result of the RHD Merger, an adjustment was established to record the acquired debt at fair
market value on January 31, 2006. This fair value adjustment is amortized as a reduction of
interest expense over the remaining term of the respective debt agreements using the effective
interest method and does not impact future scheduled interest or principal payments. Amortization
of the fair value adjustment included as a reduction of interest expense was $17.6 million, $92.1
million (including $62.2 million related to the redemption of Dex Media Easts Senior Notes and
Senior Subordinated Notes) and $26.4 million during the years ended December 31, 2008 and 2007 and
the eleven months ended December 31, 2006, respectively. A total premium of $222.3 million was
recorded upon consummation of the RHD Merger, of which $86.2 million remains unamortized at
December 31, 2008, as shown in the following table. As a result of redeeming Dex Media Easts
Senior Notes and Senior Subordinated Notes, no fair value adjustment related to these debt
obligations remained unamortized at December 31, 2007.
F-26
Table of Contents
Long-Term Debt at | ||||||||||||
Unamortized Fair | Long-Term Debt | December 31, 2008 | ||||||||||
Value Adjustment at | at December 31, | Excluding Unamortized Fair | ||||||||||
December 31, 2008 | 2008 | Value Adjustment | ||||||||||
Dex Media, Inc. |
||||||||||||
Dex Media, Inc. 8% Senior Notes |
$ | 10,408 | $ | 510,408 | $ | 500,000 | ||||||
Dex Media, Inc. 9% Senior Discount Notes |
12,697 | 771,488 | 758,791 | |||||||||
Dex Media West |
||||||||||||
Dex Media West 8.5% Senior Notes |
8,883 | 393,883 | 385,000 | |||||||||
Dex Media West 5.875% Senior Notes |
41 | 8,761 | 8,720 | |||||||||
Dex Media West 9.875% Senior
Subordinated Notes |
54,141 | 815,791 | 761,650 | |||||||||
Total Dex Media Outstanding Debt at
January 31, 2006 |
$ | 86,170 | $ | 2,500,331 | $ | 2,414,161 | ||||||
5. Derivative Financial Instruments
The new Dex Media West and the Dex Media East credit facilities bear interest at variable rates
and, accordingly, our earnings and cash flow are affected by changes in interest rates. The Company
has entered into the following interest rate swaps that effectively convert approximately $1.5
billion of the Companys variable rate debt to fixed rate debt as of December 31, 2008.
Effective Dates | Notional Amount | Pay Rates | Maturity Dates | |||||||||
(amounts in millions) | ||||||||||||
February 14, 2006 |
$ | 200 | (2) (4) | 4.925% 4.93% | February 14, 2009 | |||||||
May 25, 2006 |
100 | (1) (4) | 5.326% | May 26, 2009 | ||||||||
May 26, 2006 |
200 | (2) (4) | 5.2725% 5.275% | May 26, 2009 | ||||||||
June 12, 2006 |
150 | (2) (4) | 5.27% 5.279% | June 12, 2009 | ||||||||
November 26, 2007 |
600 | (3) (5) | 4.1852% 4.604% | November 26, 2010 November 26, 2012 | ||||||||
March 31, 2008 |
100 | (1) (5) | 3.50% | March 29, 2013 | ||||||||
September 30, 2008 |
150 | (1) (5) | 3.955% | September 30, 2011 | ||||||||
Total |
$ | 1,500 | ||||||||||
(1) | Consists of one swap | |
(2) | Consists of two swaps | |
(3) | Consists of four swaps | |
(4) | Dex Media East swaps | |
(5) | Dex Media West swaps |
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, 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.
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.
F-27
Table of Contents
These interest rate swap agreements effectively convert $1.5 billion of variable rate debt to fixed
rate debt, mitigating our exposure to increases in interest rates. Under the terms of the Dex Media
East swap agreements, which have been designated as cash flow hedges, we receive variable interest
based on the three-month LIBOR and as of December 31, 2008, pay a weighted average fixed rate of
4.2%. These interest rate swaps mature at varying dates from February 2009 June 2009. Under the
terms of the Dex Media West swap agreements, which have not been designated as cash flow hedges, we
receive variable interest based on the three-month LIBOR and as of December 31, 2008, pay a
weighted average fixed rate of 5.2%. These interest rate swaps mature at varying dates from
November 2010 March 2013. The weighted average rate received on the Dex Media East interest
rate swaps was 2.0% during the year ended December 31, 2008. The weighted average rate received on
the Dex Media West interest rate swaps was 2.1% during the year ended December 31, 2008.These
periodic payments and receipts are recorded as interest expense.
Interest rate swaps with a notional value of $850.0 million have been designated as cash flow
hedges to hedge three-month LIBOR-based interest payments on $850.0 million of bank debt. As of
December 31, 2008, these respective interest rate swaps provided an effective hedge of the
three-month LIBOR-based interest payments on $850.0 million of bank debt.
For derivative instruments that are not designated or do not qualify as hedged transactions, the
initial fair value, if any, and any subsequent gains or losses in the change in the fair value are
reported in earnings as a component of interest expense. As a result of the refinancing of the
former Dex Media West credit facility, the interest rate swaps associated with this credit facility
were deemed ineffective on June 6, 2008. Interest expense for the year ended December 31, 2008
includes a non-cash charge of $15.0 million resulting from amounts charged to accumulated other
comprehensive loss related to these interest rate swaps prior to June 6, 2008. Interest expense for
the year ended December 31, 2008 also includes a reduction of $7.0 million resulting from the
change in the fair value of these interest rate swaps between June 6, 2008 and December 31, 2008.
For the year ended December 31, 2007 and the eleven months ended December 31, 2006, the Company
recorded an increase to interest expense of $4.3 million and a reduction to interest expense of
$1.5 million, respectively, as a result of the change in fair value of undesignated interest rate
swaps. For the one month ended January 31, 2006, the Company recorded a reduction to interest
expense of $0.2 million as a result of the change in fair value of undesignated interest rate
swaps. During May 2006, the Company entered into $700.0 million notional value of interest rate
swaps, which were not designated as cash flow hedges until July 2006. The Company recorded changes
in the fair value of these interest rate swaps as a reduction to interest expense of $3.2 million
for the year ended December 31, 2006.
During the years ended December 31, 2008 and 2007 and the eleven months ended December 31, 2006,
the Company reclassified $30.5 million and $1.6 million of hedging losses and $1.2 million of
hedging gains into earnings, respectively. During the one month ended January 31, 2008, the Company
reclassified less than $0.1 million of hedging gains into earnings. As of December 31, 2008, $13.6
million of deferred losses, net of tax, on derivative instruments recorded in accumulated other
comprehensive loss are expected to be reclassified to earnings during the next 12 months.
Transactions and events are expected to occur over the next 12 months that will necessitate
reclassifying these net derivative losses to earnings.
6. Stock Incentive Plans
Successor Company
For the years ended December 31, 2008 and 2007 and the eleven months ended December 31, 2006, the
Company recognized $15.5 million, $21.0 million and $17.5 million, respectively, of stock-based
compensation expense related to stock-based awards granted under RHDs various employee and
non-employee stock incentive plans.
RHD allocates stock-based compensation expense to its subsidiaries, including the Company,
consistent with the method it utilizes to allocate employee wages and benefits to its subsidiaries.
Information presented below related to compensation expense, with the exception of unrecognized
compensation expense, represents what has been allocated to the Company for the years ended
December 31, 2008 and 2007 and the eleven months ended December 31, 2006. All other information
presented below, including unrecognized compensation expense, relates to RHDs stock award and
incentive plans in total.
During the years ended December 31, 2008, 2007 and the eleven months ended December 31, 2006. the
Company was not able to utilize the tax benefit resulting from stock-based award exercises due to
net operating loss carryforwards. As such, neither operating nor financing cash flows were affected
by the tax impact of stock-based award exercises for the years ended December 31, 2008 and 2007 and
the eleven months ended December 31, 2006.
F-28
Table of Contents
Under SFAS No. 123 (R), the fair value for RHDs stock options and SARs is calculated using the
Black-Scholes model at the time these stock-based awards are granted. The amount, net of estimated
forfeitures, is then amortized over the vesting period of the stock-based award. The weighted
average fair value per share of stock options and SARs granted during the years ended December 31,
2008, 2007 and 2006 was $2.49, $22.47 and $20.08, respectively. The following assumptions were used
in valuing these stock-based awards for the years ended December 31, 2008, 2007 and 2006,
respectively.
December 31, 2008 | December 31, 2007 | December 31, 2006 | ||||||||||||||
Expected volatility |
58.8 | % | 23.5 | % | 28.2 | % | ||||||||||
Risk-free interest rate |
2.8 | % | 4.5 | % | 4.4 | % | ||||||||||
Expected life |
5 Years | 5 Years | 5 years | |||||||||||||
Dividend yield |
0 | % | 0 | % | 0 | % |
RHD estimates expected volatility based on the historical volatility of the price of its common
stock over the expected life of the stock-based awards. The expected life represents the period of
time that stock-based awards granted are expected to be outstanding, which is estimated consistent
with the simplified method permitted by Staff Accounting Bulletin No. 110, Use of a Simplified
Method in Developing Expected Term of Share Options (SAB No. 110). The simplified method
calculates the expected life as the average of the vesting and contractual terms of the award. The
risk-free interest rate is based on applicable U.S. Treasury yields that approximate the expected
life of stock-based awards granted.
RHD grants restricted stock to certain of its employees, including executive officers, and
non-employee directors in accordance with the 2005 Plan. Under SFAS No. 123 (R), compensation
expense related to these awards is measured at fair value on the date of grant based on the number
of shares granted and the quoted market price of RHDs common stock at such time.
For the year ended December 31, 2008, RHD granted 3.7 million stock options and SARs, which
includes 1.2 million SARs granted in connection with the Exchange Program (defined below). The
following table presents a summary of RHDs stock options and SARs activity and related information
for the year ended December 31, 2008:
Weighted Average |
Aggregate | ||||||||||||
Exercise/Grant | Intrinsic | ||||||||||||
Shares | Price Per Share | Value | |||||||||||
Awards outstanding, January 1, 2008 |
5,863,802 | $ | 48.51 | $ | 3 | ||||||||
Granted |
3,700,469 | 5.38 | | ||||||||||
Exercises |
(18,653 | ) | 5.16 | (1 | ) | ||||||||
Exchanged |
(4,186,641 | ) | 49.57 | | |||||||||
Forfeitures |
(427,716 | ) | 39.02 | | |||||||||
Awards outstanding, December 31, 2008 |
4,931,261 | $ | 15.70 | $ | 2 | ||||||||
Available for future grants at December 31, 2008 |
3,279,565 | ||||||||||||
The total intrinsic value of RHDs stock-based awards vested during the years ended December 31,
2008 and 2007 was less than $0.1 million and $1.7 million, respectively. The total fair value of
RHDs stock-based awards vested during the years ended December 31, 2008 and 2007 was $16.6 million
and $19.0 million, respectively.
F-29
Table of Contents
The following table summarizes information about RHDs stock-based awards outstanding and
exercisable at December 31, 2008:
Stock Awards Outstanding | Stock Awards Exercisable | ||||||||||||||||||||||||
Weighted | Weighted | ||||||||||||||||||||||||
Average | Average | ||||||||||||||||||||||||
Remaining | Weighted | Remaining | Weighted | ||||||||||||||||||||||
Range of | Contractual | Average | Contractual | Average | |||||||||||||||||||||
Exercise/Grant | Life | Exercise/Grant | Life | Exercise/Grant | |||||||||||||||||||||
Prices | Shares | (In Years) | Price Per Share | Shares | (In Years) | Price Per Share | |||||||||||||||||||
$0.22 $7.11
|
3,629,894 | 6.34 | $ | 5.00 | 378,717 | 6.25 | $ | 6.36 | |||||||||||||||||
$10.78 $14.75
|
96,859 | 4.35 | 10.78 | 96,859 | 4.35 | 10.78 | |||||||||||||||||||
$15.22 $19.41
|
66,060 | 6.74 | 18.17 | 34,039 | 5.28 | 18.12 | |||||||||||||||||||
$24.75 $29.59
|
337,049 | .89 | 25.75 | 337,049 | .89 | 25.75 | |||||||||||||||||||
$30.11 $39.21
|
23,798 | 4.33 | 33.81 | 13,598 | 3.08 | 31.81 | |||||||||||||||||||
$41.10 $43.85
|
192,667 | 2.36 | 41.42 | 192,667 | 2.36 | 41.42 | |||||||||||||||||||
$46.06 $55.25
|
23,660 | 3.32 | 50.88 | 20,160 | 3.13 | 50.26 | |||||||||||||||||||
$56.55 $66.23
|
323,865 | 3.85 | 63.63 | 293,843 | 3.77 | 63.78 | |||||||||||||||||||
$70.44 $80.68
|
237,409 | 5.18 | 74.55 | 147,492 | 5.15 | 74.46 | |||||||||||||||||||
4,931,261 | 5.53 | $ | 15.70 | 1,514,424 | 3.76 | $ | 34.96 | ||||||||||||||||||
The aggregate intrinsic value of RHDs exercisable stock-based awards as of December 31, 2008 was
less than $0.1 million.
The following table summarizes the status of RHDs non-vested stock awards as of December 31, 2008
and changes during the year ended December 31, 2008:
Weighted | ||||||||||||||||
Non-vested Stock | Average Grant | Non-Vested | Weighted Average | |||||||||||||
Options | Date Exercise | Restricted | Grant Date Fair | |||||||||||||
and SARs | Price Per Award | Stock | Value Per Award | |||||||||||||
Non-vested at January 1, 2008 |
2,088,640 | $ | 63.96 | $ | 151,564 | $ | 62.67 | |||||||||
Granted |
3,700,469 | 5.38 | 767,649 | 3.81 | ||||||||||||
Vested |
(976,891 | ) | 45.86 | (170,490 | ) | 18.65 | ||||||||||
Unvested exchanged |
(1,035,252 | ) | 66.91 | | | |||||||||||
Forfeitures |
(360,129 | ) | 40.06 | (39,194 | ) | 41.03 | ||||||||||
Non-vested at December 31, 2008 |
3,416,837 | $ | 7.45 | $ | 709,529 | $ | 10.81 | |||||||||
As of December 31, 2008, there was $17.0 million of total unrecognized compensation cost related to
RHDs non-vested stock-based awards. The cost is expected to be recognized over a weighted average
period of approximately two years. After applying RHDs estimated forfeiture rate, RHD expects 3.1
million non-vested stock-based awards to vest over a weighted average period of approximately two
years. The intrinsic value at December 31, 2008 of RHDs non-vested stock-based awards expected to
vest is less than $0.1 million and the corresponding weighted average grant date exercise price is
$7.45 per share.
On March 4, 2008, RHD granted 2.2 million SARs to certain employees, including executive officers,
in conjunction with its annual grant of stock incentive awards. These SARs, which are settled in
RHD common stock, were granted at a grant price of $7.11 per share, which was equal to the market
value of RHDs common stock on the grant date, and vest ratably over three years. In accordance
with SFAS No. 123 (R), we recognized non-cash compensation expense related to these SARs of $2.6
million for the year ended December 31, 2008.
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Table of Contents
In April 2008, RHD increased its estimated forfeiture rate in determining compensation expense from
5% to 8%. This adjustment was based on a review of historical forfeiture information and resulted
in a reduction to compensation expense of $1.1 million during the year ended December 31, 2008.
In March 2008, RHDs Board of Directors approved, subject to shareholder approval, which was
obtained in May 2008, a program under which RHDs current employees, including executive officers,
were permitted to surrender certain then outstanding stock options and stock appreciation rights
(SARs), with exercise prices substantially above the then market price of RHDs common stock, in
exchange for fewer new SARs, with new vesting requirements and an exercise price equal to the
market value of RHDs common stock on the grant date (the Exchange Program). The exercise prices
of the outstanding options and SARs eligible for the Exchange Program ranged from $10.78 to $78.01.
Other outstanding stock awards, including restricted stock units, were not eligible for the
Exchange Program.
The Exchange Program was designed to provide eligible employees with an opportunity to exchange
deeply underwater options and SARs for new SARs covering fewer shares, but with an exercise price
based on the current, dramatically lower market price.
The Exchange Program allowed for a separate exchange ratio for each outstanding group of options or
SARs taking into account such factors as the Black-Scholes value of the surrendered awards and the
new SARs to be granted in the Exchange Program, as well as the exercise price and remaining life of
each tranche, and other considerations to ensure that the Exchange Program accomplished its
intended objectives. The weighted average exchange ratio for eligible awards held by senior
management members (as described below) was 1 to 3.8, whereas the weighted average exchange ratio
for eligible awards held by all other eligible employees was 1 to 3.5. These senior management
members are RHDs named executive officers, three other members of RHDs executive committee and
RHDs three general managers of sales. Non-employee directors of RHD were not eligible to
participate in the Exchange Program, nor were former employees holding otherwise eligible options
and SARs.
In connection with the Exchange Program, on July 14, 2008, RHD granted 1.2 million SARs to certain
employees, including certain senior management members of RHD and the Company, in exchange for 4.2
million outstanding options and SARs for a total recapture of 3.0 million shares. These SARs, which
are settled in RHDs common stock, were granted at a grant price of $1.69 per share. The SARs
granted in the Exchange Program have a seven-year term and a new three-year vesting schedule,
subject to accelerated vesting upon the occurrence of certain events. Exercisability of the SARs
granted to senior management members is conditioned upon the achievement of the following stock
price appreciation targets, in addition to the three year service-based vesting requirements for
all new SARs: (a) the first vested tranche of new SARs shall not be exercisable until RHDs stock
price equals or exceeds $20 per share; (b) the second vested tranche of new SARs shall not be
exercisable until RHDs stock price equals or exceeds $30 per share; and (c) the third and final
vested tranche of new SARs shall not be exercisable until RHDs stock price equals or exceeds $40
per share. These share price appreciation conditions will be deemed satisfied if at any time during
the life of the new SARs the average closing price of RHDs common stock during any ten consecutive
trading days equals or exceeds the specified target stock price, provided, however, that otherwise
vested SARs that do not become exercisable prior to their expiration date due to the failure to
achieve these performance conditions shall terminate unexercised. In addition, the following events
effectively accelerate the exercisability of one-third (100% if an involuntary termination occurs
within two years of change in control) of the total new SARs granted to each senior management
member if any stock appreciation target has yet to have been met at that time: voluntary or
involuntary termination, death, disability or retirement.
The Exchange Program has been accounted for as a modification under SFAS No. 123 (R). In
calculating the incremental compensation cost of a modification, the fair value of the modified
award was compared to the fair value of the original award measured immediately before its terms or
conditions were modified. RHD used the Black-Scholes valuation model to determine the fair value of
all original stock awards before modification and the fair value of the modified awards granted to
non-senior management members. RHD utilized the Trinomial valuation model to determine the fair
value of the modified awards granted to senior management members due to the stock appreciation
vesting requirements noted above.
RHD will recognize an incremental non-cash charge of $0.6 million associated with the Exchange
Program over its three year vesting period, of which less than $0.1 million was recognized during
the year ended December 31, 2008.
On February 27, 2007, RHD granted 1.1 million SARs to certain employees, including executive
officers, in conjunction with its annual grant of stock incentive awards. These SARs, which are
settled in RHD common stock, were granted at a grant price of $74.31 per share, which was equal to
the market value of RHDs common stock on the grant date, and vest ratably over three years. In
accordance with SFAS No. 123 (R), we recognized non-cash compensation expense related to these SARs
of $3.3 million and $6.7 million for the years ended December 31, 2008 and 2007, respectively.
F-31
Table of Contents
On December 13, 2006, RHD granted 0.1 million shares of restricted stock to certain executive
officers. These restricted shares, which are settled in RHDs common stock, were granted at a grant
price of $60.64 per share, which was equal to the market value of RHDs common stock on the date of
grant. The vesting of these restricted shares is contingent upon RHDs common stock equaling or
exceeding $65.00 per share for 20 consecutive trading days and continued employment with RHD
through the third anniversary of the date of grant. In accordance with SFAS No. 123 (R), the
Company recognized non-cash compensation expense related to these restricted shares of $0.4
million, $1.4 million and less than $0.1 million for the years ended December 31, 2008 and 2007 and
the eleven months ended December 31, 2006, respectively.
On February 21, 2006, RHD granted 0.1 million shares of restricted stock to certain employees,
including executive officers. These restricted shares, which are settled in RHDs common stock,
were granted at a grant price of $64.26 per share, which was equal to the market value of RHDs
common stock on the date of grant, and vest ratably over three years. In accordance with SFAS No.
123 (R), the Company recognized non-cash compensation expense related to these restricted shares of
$1.0 million, $1.1 million and $1.6 million for the years ended December 31, 2008 and 2007 and the
eleven months ended December 31, 2006, respectively.
On February 21, 2006, RHD granted 0.6 million SARs to certain employees, not including executive
officers, in conjunction with its annual grant of stock incentive awards. These SARs, which are
settled in RHD common stock, were granted at a grant price of $64.26 per share, which was equal to
the market value of RHDs common stock on the grant date, and vest ratably over three years. On
February 24, 2005, RHD granted 0.5 million SARs to certain employees, not including executive
officers, in conjunction with its annual grant of stock incentive awards. These SARs, which are
settled in RHD common stock, were granted at a grant price of $59.00 per share, which was equal to
the market value of RHDs common stock on the grant date, and vest ratably over three years. On
July 28, 2004, RHD granted 0.9 million SARs to certain employees, including executive officers, in
connection with the AT&T Directory Acquisition. These SARs, which are settled in RHD common stock,
were granted at a grant price of $41.58 per share, which was equal to the market value of RHDs
common stock on the grant date, and initially were scheduled to vest entirely only after five
years. The maximum appreciation of the July 28, 2004 and February 24, 2005 SAR grants is 100% of
the initial grant price. The Company recognized non-cash compensation expense related to these and
other smaller SAR grants of $2.2 million, $4.3 million and $4.4 million for the years ended
December 31, 2008 and 2007 and the eleven months ended December 31, 2006, respectively.
In connection with the RHD Merger, RHD granted on October 3, 2005, 1.1 million SARs to certain
employees, including executive officers. These SARs were granted at an exercise price of $65.00
(above the then prevailing market price of RHDs common stock) and vest ratably over three years.
The award of these SARs was contingent upon the successful completion of the RHD Merger. The
Company recognized non-cash compensation expense related to these SARs of $3.2 million, $4.2
million and $3.3 million for the years ended December 31, 2008 and 2007 and the eleven months ended
December 31, 2006, respectively.
At January 31, 2006, stock-based awards outstanding under the existing Dex Media equity
compensation plans totaled 4.0 million Dex Media option shares and had a weighted average exercise
price of $5.48 per option share. As a result of the RHD Merger, all outstanding Dex Media equity
awards were converted to RHD equity awards on February 1, 2006. Upon conversion to RHD equity
awards, the number of securities to be issued upon exercise of outstanding awards totaled 1.7
million shares of RHD and had a weighted average exercise price of $12.73 per share. At December
31, 2008, the number of RHD shares remaining available for future issuance totaled 0.5 million
under the 2004 Plan. For the years ended December 31, 2008 and 2007 and the eleven months ended
December 31, 2006, the Companys non-cash compensation expense related to these converted awards
totaled $1.1 million, $1.6 million and $2.7 million, respectively.
The RHD Merger triggered a change in control under RHDs stock incentive plans. Accordingly, all
awards granted to employees through January 31, 2006, with the exception of stock-based awards held
by executive officers and members of the Board of Directors (who waived the change of control
provisions of such awards), became fully vested. In addition, the vesting conditions related to the
July 28, 2004 SARs grant, noted above, were modified as a result of the RHD Merger, and the SARs
now vest ratably over three years from the date of grant. For the years ended December 31, 2008 and
2007 and the eleven months ended December 31, 2006, $0.1 million, $1.4 million and $2.9 million,
respectively, of non-cash compensation expense, which is included in the total non-cash
compensation expense amounts noted above, was recognized as a result of these modifications. The
Companys non-cash stock-based compensation expense relating to existing stock options held by
executive officers as of January 1, 2006, which were not modified as a result of the RHD Merger, as
well as non-cash stock-based compensation expense from smaller grants issued subsequent to the RHD
Merger not mentioned above, totaled $1.7 million, $1.7 million and $5.5 million for the years ended
December 31, 2008 and 2007 and the eleven months ended December 31, 2006, respectively.
F-32
Table of Contents
Predecessor Company
For the one month ended January 31, 2006, the Predecessor Company accounted for the stock-based
awards under the recognition and measurement principles of SFAS No. 123 (R). Prior to adopting SFAS
No. 123 (R) on January 1, 2006, the Predecessor Company accounted for stock-based awards granted to
employees and non-employee directors in accordance with the intrinsic value-based method prescribed
by APB No. 25. Compensation expense related to the issuance of stock options to employees or
non-employee directors was only recognized if the exercise price of the stock option was less than
the market value of the underlying common stock on the date of grant. In accordance with the
Modified Prospective Method, financial statement amounts for the prior periods presented in this
annual report on Form 10-K have not been restated to reflect the fair value method of expensing
stock-based compensation.
On October 5, 2005, the Predecessor Company entered into Letter Agreements with its officers which,
among other things, included terms to accelerate the vesting of certain stock options upon
consummation of the RHD Merger (modifications). As a result of the modifications, stock options
to purchase approximately 1.3 million shares of Dex Media common stock became fully exercisable
immediately prior to the consummation of the RHD Merger. The Predecessor Company recorded
stock-based compensation expense for stock options of $2.2 million during the one month ended
January 31, 2006, under the guidance of SFAS No. 123(R), including $2.0 million as a result of
these modifications. Had such compensation expense been determined under APB No. 25, the Company
would have recorded stock-based compensation expense of $23.4 million during the one month ended
January 31, 2006, of which $23.2 million related to the modifications.
Under the terms of the restricted stock agreements, all unvested shares became vested upon
consummation of the RHD Merger. The Predecessor Company recorded stock-based compensation expense
for restricted stock of $1.7 million during the one month ended January 31, 2006, including $1.6
million related to this acceleration of vesting.
7. Income Taxes
Deferred income tax assets and liabilities are determined based on the estimated future tax effects
of temporary differences between the financial statement and tax bases of assets and liabilities,
as measured by tax rates at which temporary differences are expected to reverse. Deferred income
tax benefit (provision) is the result of changes in the deferred income tax assets and liabilities.
Benefit (provision) for income taxes consisted of:
Successor Company | Predecessor Company | ||||||||||||||||
Year Ended December 31, | Eleven Months Ended | One Month Ended | |||||||||||||||
2008 | 2007 | December 31, 2006 | January 31, 2006 | ||||||||||||||
Current provision |
|||||||||||||||||
U.S. Federal |
$ | (411 | ) | $ | (31 | ) | $ | | $ | | |||||||
State and local |
(102 | ) | | | | ||||||||||||
Total current provision |
(513 | ) | (31 | ) | | | |||||||||||
Deferred benefit (provision) |
|||||||||||||||||
U.S. Federal |
984,839 | (61,851 | ) | 137,698 | (1,553 | ) | |||||||||||
State and local |
124,422 | (25,293 | ) | 9,446 | (319 | ) | |||||||||||
Total deferred benefit (provision) |
1,109,261 | (87,144 | ) | 147,144 | (1,872 | ) | |||||||||||
Benefit (provision) for income taxes |
$ | 1,108,748 | $ | (87,175 | ) | $ | 147,144 | $ | (1,872 | ) | |||||||
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Table of Contents
The following table summarizes the significant differences between the U.S. Federal statutory tax
rate and our effective tax rate, which has been applied to the Companys income (loss) before
income taxes.
Successor Company | Predecessor Company | ||||||||||||||||
Year Ended December 31, | Eleven Months Ended | One Month Ended | |||||||||||||||
2008 | 2007 | December 31, 2006 | January 31, 2006 | ||||||||||||||
Statutory U.S. Federal tax rate |
35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | |||||||||
State and local taxes, net of U.S.
Federal tax benefit |
2.8 | 7.7 | 2.4 | 4.3 | |||||||||||||
Non-deductible goodwill impairment charge |
(1.2 | ) | | | | ||||||||||||
Non-deductible expense |
| 0.2 | 0.5 | (0.3 | ) | ||||||||||||
Valuation allowance |
| 0.3 | | (50.1 | ) | ||||||||||||
Other, net |
| (1.1 | ) | | 0.8 | ||||||||||||
Effective tax rate |
36.6 | % | 42.1 | % | 37.9 | % | (10.3 | )% | |||||||||
Deferred income tax assets and liabilities consisted of the
following at December 31, 2008 and 2007:
2008 | 2007 | |||||||
Deferred income tax assets |
||||||||
Allowance for doubtful accounts |
$ | 13,273 | $ | 5,022 | ||||
Deferred and other compensation |
24,312 | 16,971 | ||||||
Deferred directory revenue |
| 25,805 | ||||||
Deferred financing costs |
14,987 | 21,532 | ||||||
Debt and other interest |
51,035 | 47,913 | ||||||
Pension and other retirement benefits |
48,333 | 11,506 | ||||||
Restructuring reserves |
3,688 | 2,239 | ||||||
Net operating loss and credit carryforwards |
134,877 | 148,389 | ||||||
Other |
1,185 | 2,918 | ||||||
Total deferred income tax assets |
291,690 | 282,295 | ||||||
Valuation allowance |
(260 | ) | (596 | ) | ||||
Net deferred income tax assets |
291,430 | 281,699 | ||||||
Deferred income tax liabilities |
||||||||
Fixed assets and capitalized software |
12,647 | 4,762 | ||||||
Purchased goodwill and intangible assets |
1,270,828 | 2,381,206 | ||||||
Other |
175 | | ||||||
Total deferred income tax liabilities |
1,283,650 | 2,385,968 | ||||||
Net deferred income tax liabilities |
$ | 992,220 | $ | 2,104,269 | ||||
Successor Company
The 2008 income tax benefit of $1,108.7 million is comprised of a federal tax benefit of $984.4
million and a state tax benefit of $124.3 million. The 2008 federal tax benefit is comprised of a
current tax provision of $0.4 million, offset by a deferred income tax benefit of $984.8 million
and the 2008 state tax benefit is comprised of a current tax provision of $0.1 million, offset by a
deferred income tax benefit of $124.4 million, primarily related to the non-cash goodwill
impairment charges during 2008.
The Company is included in the consolidated federal income tax return and combined or consolidated
state income tax returns, where permitted, for RHD. For purposes of these financial statements, the
Company calculates and records income taxes as if it filed a separate corporate income tax return
on a stand alone basis. The Company generated income for federal
income tax purposes of approximately $40.6 million during 2008.
The Companys taxable income is offset on a consolidated basis
by losses for tax purposes from other affiliates. The Company has
recorded an intercompany liability related to income taxes of
$0.3 million.
F-34
Table of Contents
At December 31, 2008, the Company had federal net operating loss carryforwards of approximately
$353.8 million, which begin to expire in 2022. A portion of the benefits from the net operating
loss carryforwards will be reflected in additional paid-in capital to the extent that the net
operating loss generated by the exercise of stock awards was utilized during the period to reduce
income taxes payable. The 2008 and 2007 tax deductions for stock awards were $0.3 million and $18.8
million, respectively. In addition, the Company has alternative minimum tax credit carryforwards of
approximately $0.4 million, which are available to reduce future federal income taxes over an
indefinite period.
In assessing the ability to realize our deferred income tax assets, we have considered whether it
is more likely than not that some portion or all of the deferred income tax assets will not be
realized. The ultimate realization of deferred income tax assets is dependent upon the generation
of future taxable income during periods in which those temporary differences become deductible. In
making this determination, under the applicable financial reporting standards, we are allowed to
consider the scheduled reversal of deferred income tax liabilities, projected future taxable
income, and tax planning strategies. The Company believes that it is more likely than not that some
of the deferred income tax assets resulting from state net operating losses will not be realized,
contributing to a valuation allowance of $0.3 million.
The 2007 provision for income taxes of $87.2 million is comprised of a federal deferred income tax
provision of $61.9 million and a state deferred income tax provision of $25.3 million. The 2007
provision for income taxes resulted in an effective tax rate of 42.1%. A federal net operating loss
for income tax purposes of approximately $96.3 million was generated in 2007 primarily as a result
of tax amortization expense recorded with respect to the intangible assets that existed prior to
the RHD Merger and carried over for tax purposes.
The 2006 income tax benefit of $147.1 million is comprised of a deferred income tax benefit
generated in the period. The 2006 tax benefit resulted in an effective tax rate of 37.9% and
generated losses for tax purposes of approximately $113.1 million related to tax deductions
recorded with respect to the intangible assets that existed prior to the RHD Merger and carried
over for tax purposes. A deferred income tax liability in the amount of $2.2 billion has been
recognized in accordance with SFAS No. 109 for the difference between the assigned values for
financial reporting purposes and the tax bases of the assets and liabilities acquired by RHD as a
result of the RHD Merger.
Predecessor Company
In the Predecessor Company, Dex Media East and Dex Media West were included in the consolidated
federal income tax return and combined or consolidated state income tax returns, where permitted,
for Dex Media. Dex Media had no other business operations or investments.
No additional valuation allowance had been provided for, except as described below. In managements
judgment, it was more likely than not that the remaining net operating loss carryforwards would be
utilized before the end of the expiration periods. This presumption was based upon the book and
taxable income expected to be generated by the Company over the next several years.
The provision for income taxes was $1.9 million for the one month ended January 31, 2006. The
January 2006 deferred income tax provision resulted in an effective tax rate of (10.3)%. The
effective rate for the one month ended January 31, 2006 reflects a valuation allowance for deferred
income tax assets associated with capitalized merger costs more likely than not to be unrealizable
in the future.
Dex Media, Inc. had an ownership change under Internal Revenue Code section 382 upon the
consummation of the RHD Merger. The Company determined the limitation for future use for tax
purposes of certain built in losses in accordance with section 382 as of the date of the RHD
Merger. The Company does not expect that the limitation will reduce the utilization of such losses
in the foreseeable future.
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Table of Contents
Adoption of FIN No. 48
As of December 31, 2008 and 2007, the Company has no material liability for unrecognized tax
benefits.
The Companys policy is to recognize interest and penalties related to unrecognized tax benefits in
income tax expense. The Company has not accrued any amount for possible tax penalties.
The Company is subject to tax in the United States and various state jurisdictions. The Companys
federal tax returns through the year ended November 30, 2003 have been audited by the Internal
Revenue Service (IRS). Therefore, tax years 2003 through 2007 are still subject to examination
by the IRS. The Companys major state jurisdictions are open to possible adjustment by state tax
authorities for an average of three years.
8. Benefit Plans
On October 21, 2008, the Compensation & Benefits Committee of RHDs Board of Directors approved a
comprehensive redesign of RHDs and Dex Medias employee retirement savings and pension plans.
Effective January 1, 2009, except as described below, the sole retirement benefit available to all
non-union employees of RHD and the Company will be provided through a single defined contribution
plan. This unified 401(k) plan will replace the pre-existing Dex Media 401(k) savings plan. RHD
will continue to maintain the R.H. Donnelley 401(k) Restoration Plan for those employees with
compensation in excess of the IRS annual limits.
In conjunction with establishing the new unified defined contribution plan, RHD and the Company
have frozen the Dex Media, Inc. Pension Plan covering all non-union employees, effective as of
December 31, 2008. In connection with the freeze, all pension plan benefit accruals for non-union
plan participants 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.
Additionally, on October 21, 2008, the Compensation & Benefits Committee of RHDs Board of
Directors approved for 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.
As a result of implementing the freeze on Dex Medias defined benefit plans, we recognized one-time
non-cash curtailment gains of $3.2 million during the year ended December 31, 2008, entirely offset
by losses incurred on plan assets and recognition of 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 non-union employees, we recognized one-time non-cash
curtailment gains of $20.0 million during the year ended December 31, 2008.
The following represents a summary of our benefit plans prior to the redesign of RHDs employee
retirement savings and pension plans in October 2008, as the redesign was not effective until
January 1, 2009.
Pension Plan. The Company has a noncontributory defined benefit pension plan covering substantially
all management and occupational (union) employees. Annual pension costs are determined using the
projected unit credit actuarial cost method. Our funding policy is to contribute an amount at least
equal to the minimum legal funding requirement. We were required to make contributions to the plan
of $9.5 million and $12.8 million during the years ended December 31, 2008 and 2007, respectively.
No contributions were required or made to the plan for the eleven months ended December 31, 2006 or
the one month ended January 31, 2006. The underlying pension plan assets are invested in
diversified portfolios consisting primarily of equity and debt securities. A measurement date of
December 31 is used for all of our plan assets.
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Savings Plan. The Company offers a defined contribution 401(k) savings plan to substantially all
employees. For management employees, the Company contributes 100% of the first 4% of each
participating employees salary and 50% of the next 2%. For management employees, the Company match
is limited to 5% of each participating employees eligible earnings. For occupational employees,
the Company contributes 81% of the first 6% of each participating employees salary not to exceed
4.86% of eligible earnings for any one pay period. Company matching contributions are limited to
$4,860 per occupational employee annually. Contributions under this plan were $5.1 million, $5.7
million and $5.3 million for the years ended December 31, 2008 and 2007 and the eleven months ended
December 31, 2006. Contributions under this plan were $0.8 million for the one month ended January
31, 2006.
Postretirement Benefits. The Company has an unfunded postretirement benefit plan that provides
certain healthcare and life insurance benefits to certain full-time employees who reach retirement
eligibility while working for the Company.
Benefit Obligations and Funded Status
A summary of the funded status of the benefit plans at December 31, 2008 and 2007 is as follows:
Pension Plan | Postretirement Plan | |||||||||||||||
(in thousands) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Change in benefit obligation |
||||||||||||||||
Benefit obligation, beginning of year |
$ | 168,943 | $ | 186,992 | $ | 71,977 | $ | 68,732 | ||||||||
Service cost |
7,069 | 8,225 | 1,160 | 1,357 | ||||||||||||
Interest cost |
10,142 | 10,309 | 4,333 | 3,999 | ||||||||||||
Actuarial loss (gain) |
15,816 | (16,154 | ) | (1,983 | ) | 1,057 | ||||||||||
Benefits paid |
(1,739 | ) | (1,609 | ) | (3,490 | ) | (3,168 | ) | ||||||||
Curtailment gain |
(3,189 | ) | | (17,444 | ) | | ||||||||||
Plan settlements |
(41,242 | ) | (18,820 | ) | | | ||||||||||
Benefit obligation, end of year |
$ | 155,800 | $ | 168,943 | $ | 54,553 | $ | 71,977 | ||||||||
Change in plan assets |
||||||||||||||||
Fair value of plan assets, beginning of year |
$ | 133,950 | $ | 134,431 | $ | | $ | | ||||||||
Return (loss) on plan assets |
(35,133 | ) | 7,197 | | | |||||||||||
Employer contributions |
9,560 | 12,751 | 3,490 | 3,168 | ||||||||||||
Benefits paid |
(1,739 | ) | (1,609 | ) | (3,490 | ) | (3,168 | ) | ||||||||
Plan settlements |
(41,242 | ) | (18,820 | ) | | | ||||||||||
Fair value of plan assets, end of year |
$ | 65,396 | $ | 133,950 | $ | | $ | | ||||||||
Funded status at end of year |
$ | (90,404 | ) | $ | (34,993 | ) | $ | (54,553 | ) | $ | (71,977 | ) | ||||
Net amounts recognized in the consolidated balance sheets at December 31, 2008 and 2007 are as
follows:
Pension Plan | Postretirement Plan | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Current liabilities |
$ | | $ | | $ | (5,635 | ) | $ | (5,734 | ) | ||||||
Non-current liabilities |
(90,404 | ) | (34,993 | ) | (48,918 | ) | (66,243 | ) | ||||||||
Net amount recognized |
$ | (90,404 | ) | $ | (34,993 | ) | $ | (54,553 | ) | $ | (71,977 | ) | ||||
The accumulated benefit obligation for the defined benefit pension plan was $150.4 million and
$159.6 million at December 31, 2008 and 2007, respectively.
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Components of Net Periodic Benefit Expense
The net periodic benefit expense of the pension plan for the years ended December 31, 2008 and
2007, the eleven months ended December 31, 2006, and the one month ended January 31, 2006 are as
follows:
Successor Company | Predecessor Company | ||||||||||||||||
Year Ended December 31, | Eleven Months Ended | One Month Ended | |||||||||||||||
2008 | 2007 | December 31, 2006 | January 31, 2006 | ||||||||||||||
Service cost |
$ | 7,069 | $ | 8,225 | $ | 7,605 | $ | 708 | |||||||||
Interest cost |
10,142 | 10,309 | 9,866 | 879 | |||||||||||||
Expected return on plan assets |
(10,270 | ) | (10,780 | ) | (10,954 | ) | (1,056 | ) | |||||||||
Amortization of unrecognized net loss |
(250 | ) | | | (17 | ) | |||||||||||
Settlement loss (gain) |
3,504 | (1,543 | ) | (982 | ) | | |||||||||||
Other adjustments |
| (6 | ) | | | ||||||||||||
Net periodic benefit expense |
$ | 10,195 | $ | 6,205 | $ | 5,535 | $ | 514 | |||||||||
The net periodic benefit expense of the postretirement plan for the years ended December 31, 2008
and 2007, the eleven months ended December 31, 2006, and the one month ended January 31, 2006 are
as follows:
Successor Company | Predecessor Company | ||||||||||||||||
Year Ended December 31, | Eleven Months Ended | One Month Ended | |||||||||||||||
2008 | 2007 | December 31, 2006 | January 31, 2006 | ||||||||||||||
Service cost |
$ | 1,160 | $ | 1,357 | $ | 1,991 | $ | 167 | |||||||||
Interest cost |
4,333 | 3,999 | 3,397 | 308 | |||||||||||||
Other adjustments |
| (6 | ) | | | ||||||||||||
Amortization of unrecognized prior service cost |
(8 | ) | (8 | ) | | (39 | ) | ||||||||||
Curtailment gain |
(20,049 | ) | | | | ||||||||||||
Amortization of net gain |
(37 | ) | | | | ||||||||||||
Net periodic benefit expense |
$ | (14,601 | ) | $ | 5,342 | $ | 5,388 | $ | 436 | ||||||||
The following table presents the amount of previously unrecognized actuarial gains and losses and
prior service cost (credit), both currently in accumulated other comprehensive loss, expected to be
recognized as net periodic benefit expense in 2009:
Pension Plan | Postretirement Plan | |||||||
Previously unrecognized actuarial loss (gain) expected to be recognized in 2009 |
$ | | $ | | ||||
Previously unrecognized prior service cost (credit) expected to be recognized in 2009 |
$ | | $ | (7 | ) |
Amounts recognized in accumulated other comprehensive loss at December 31, 2008 and 2007 consist
of:
Pension Plan | Postretirement Plan | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Net actuarial loss (gain) |
$ | 40,933 | $ | (13,844 | ) | $ | (1,442 | ) | $ | (2,095 | ) | |||||
Prior service cost (credit) |
$ | | $ | | $ | (45 | ) | $ | (58 | ) |
Assumptions
The following assumptions were used in determining the benefit obligations for the pension plan:
Year Ended December 31, | ||||||||
2008 | 2007 | |||||||
Weighted average discount rate |
5.87 | % | 6.48 | % | ||||
Rate of increase in future
compensation |
3.66 | % | 3.66 | % |
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Table of Contents
The following assumptions were used in determining the benefit obligations for the postretirement
plan:
Year Ended December 31, | ||||||||
2008 | 2007 | |||||||
Weighted average discount rate |
5.87 | % | 6.48 | % |
The discount rate reflects the current rate at which the pension and post-retirement obligations
could effectively be settled at the end of the year. During 2008, 2007 and 2006, we utilized the
Citigroup Pension Liability Index (the Index) as the appropriate discount rate for our defined
benefit pension plan. This Index is widely used by companies throughout the United States and is
considered to be one of the preferred standards for establishing a discount rate.
The freeze on Dex Medias defined benefit plans on October 21, 2008 resulted in a curtailment as
defined by SFAS No. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit
Plans and for Termination Benefits (SFAS No. 88). This curtailment required a re-measurement of
the plans liabilities and net periodic benefit expense at November 1, 2008, the notification date.
On December 31, 2008, October 31, 2008, July 1, 2008, December 1, 2007 and July 1, 2006 and
thereafter, settlements of Dex Medias pension plan occurred as defined by SFAS No. 88. 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 for the year. These settlements resulted in the
recognition of an actuarial loss of $3.5 million for the year ended December 31, 2008, and
actuarial gains of $1.5 and $1.0 million for the year ended December 31, 2007 and the eleven months
ended December 31, 2006, respectively. Pension expense in 2008 was recomputed based on assumptions
as of the July 1, 2008 and November 1, 2008 settlement dates, resulting in an increase in the
discount rate from 6.48% to 6.82% and finally to 8.01%. Pension expense in 2006 was recomputed
based on assumptions from the July 1, 2006 settlement date, resulting in an increase in the
discount rate from 5.50% to 6.25% based on the Index.
The following assumptions were used in determining the net periodic benefit expense for the pension
plan:
Successor Company | Predecessor Company | ||||||||||||||||||||||||||||||||
November 1, 2008 - | July 1, 2008 - | January 1, 2008 - | July 1, 2006 - | February 1, 2006 - | One Month Ended | ||||||||||||||||||||||||||||
December 31, 2008 | October 31, 2008 | June 30, 2008 | 2007 | December 31, 2006 | June 30, 2006 | January 31, 2006 | |||||||||||||||||||||||||||
Weighted average
discount rate |
8.01 | % | 6.82 | % | 6.48 | % | 5.90 | % | 6.25 | % | 5.50 | % | 5.75 | % | |||||||||||||||||||
Rate of increase in
future compensation |
3.66 | % | 3.66 | % | 3.66 | % | 3.66 | % | 3.66 | % | 3.66 | % | 4.00 | % | |||||||||||||||||||
Expected return on
plan assets |
8.50 | % | 8.50 | % | 8.50 | % | 8.50 | % | 9.00 | % | 9.00 | % | 9.00 | % |
The elimination of the non-union retiree health care and life insurance benefits on October 21,
2008 resulted in a curtailment as defined by SFAS No. 106, Employers Accounting for Postretirement
Benefits Other Than Pensions. This curtailment required a re-measurement of the plans liabilities
and net periodic benefit expense at November 1, 2008, the notification date. The weighted average
discount rate used to determine net periodic expense for the Dex Media postretirement plan was
8.01% for the period of November 1, 2008 to December 31, 2008, 6.48% from January 1, 2008 to
October 31, 2008, 5.90% and 5.50% for 2007 and 2006, respectively.
The following assumptions were used in determining the net periodic benefit expense for the
postretirement plan:
Successor Company | Predecessor Company | ||||||||||||||||||||||||
November 1, 2008 - | January 1, 2008 - | February 1, 2006 - | One Month Ended | ||||||||||||||||||||||
December 31, 2008 | October 31, 2008 | 2007 | December 31, 2006 | January 31, 2006 | |||||||||||||||||||||
Weighted average |
8.01 | % | 6.48 | % | 5.90 | % | 5.50 | % | 5.75 | % | |||||||||||||||
discount rate |
F-39
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The following table reflects assumed healthcare cost trend rates used in determining the net
periodic benefit obligations for our postretirement plan:
Postretirement Plan | ||||||||
2008 | 2007 | |||||||
Healthcare cost trend rate assumed for next year |
||||||||
Under 65 |
10.00 | % | 11.00 | % | ||||
65 and older |
12.00 | % | 13.00 | % | ||||
Rate to which the cost trend rate is assumed to decline |
||||||||
Under 65 |
5.00 | % | 5.00 | % | ||||
65 and older |
5.00 | % | 5.00 | % | ||||
Year ultimate trend rate is reached |
2014 | 2016 |
The following table reflects assumed healthcare cost trend rates used in determining the net
periodic benefit expense for our postretirement plan:
Postretirement Plan | ||||||||
2008 | 2007 | |||||||
Healthcare cost trend rate assumed for next year |
||||||||
Under 65 |
10.00 | % | 9.00 | % | ||||
65 and older |
12.00 | % | 11.00 | % | ||||
Rate to which the cost trend rate is assumed to decline |
||||||||
Under 65 |
5.00 | % | 5.00 | % | ||||
65 and older |
5.00 | % | 5.00 | % | ||||
Year ultimate trend rate is reached |
2014 | 2013 |
Assumed healthcare cost trend rates have a significant effect on the amounts reported for
postretirement benefit plans. A one percent change in the assumed healthcare cost trend rate would
have had the following effects at December 31, 2008:
One Percent Change | ||||||||
Increase | Decrease | |||||||
Effect on the aggregate of the service and interest cost components of net periodic
postretirement benefit cost (Consolidated Statement of Operations) |
$ | 102 | $ | (93 | ) | |||
Effect on accumulated postretirement benefit obligation (Consolidated Balance Sheet) |
$ | 15 | $ | (15 | ) |
Plan Assets
The pension plan weighted-average asset allocation at December 31, 2008 and 2007, by asset
category, is as follows:
Plan Assets at | Asset Allocation | Plan Assets at | Asset Allocation | ||||||||||||||
December 31, | Target | December 31, | Target | ||||||||||||||
2008 | 2007 | ||||||||||||||||
Equity securities |
58 | % | 65 | % | 64 | % | 65 | % | |||||||||
Debt securities |
42 | % | 35 | % | 36 | % | 35 | % | |||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % | |||||||||
The plans assets are invested in accordance with investment practices that emphasize long-term
investment fundamentals. The plans investment objective is to achieve a positive rate of return
over the long-term from capital appreciation and a growing stream of current income that would
significantly contribute to meeting the plans current and future obligations. These objectives can
be obtained through a well-diversified portfolio structure in a manner consistent with the plans
investment policy statement.
The plans assets are invested in marketable equity and fixed income securities managed by
professional investment managers. The plans assets are to be broadly diversified by asset class,
investment style, number of issues, issue type and other factors consistent with the investment
objectives outlined in the plans investment policy statement. The plans assets are to be invested
with prudent levels of risk and with the expectation that long-term returns will maintain and
contribute to increasing purchasing power of the plans assets, net of all disbursements, over the
long-term.
F-40
Table of Contents
We used a rate of 8.5%, 8.5% and 9.0% as the expected long-term rate of return assumption on the
pension plan assets for 2008, 2007 and 2006, respectively. The basis used for determining this rate
was the long-term capital market return forecasts of an asset mix similar to the plan as well as an
opportunity for active management of the assets to add value over the long- term. The active
management expectation was supported by calculating historical returns for the seven investment
managers who actively manage the plans assets. The decrease in the rate for 2007 was a result of
increasing the debt securities portion of the asset mix held by the Plan.
Although we review our expected long-term rate of return assumption annually, our plan performance
in any one particular year does not, by itself, significantly influence our evaluation. Our
assumption is generally not revised unless there is a fundamental change in one of the factors upon
which it is based, such as the target asset allocation or long-term capital market return
forecasts.
Estimated Future Benefit Payments
The pension plan benefits and postretirement plan benefits expected to be paid in each of the next
five fiscal years and in the aggregate for the five fiscal years thereafter are as follows:
Pension Plan | Postretirement Plan | |||||||
2009 |
$ | 26,780 | $ | 5,635 | ||||
2010 |
12,176 | 5,674 | ||||||
2011 |
12,641 | 5,398 | ||||||
2012 |
12,918 | 5,518 | ||||||
2013 |
13,104 | 5,523 | ||||||
Years 2014-2018 |
68,405 | 25,537 |
We expect to make contributions of approximately $48.0 million and $5.6 million to our pension plan
and postretirement plan, respectively, in 2009.
Additional Information
On August 17, 2006, the Pension Protection Act of 2006 (the Act) was signed into law. In general,
the Act requires that all single-employer defined benefit plans be fully funded within a seven-year
period, beginning in 2008. Some provisions of the Act were effective January 1, 2006, however, most
of the new provisions are effective January 1, 2008. The Act replaces the prior rules for funding
with a new standard that is based on the plans funded status. Funding must be determined using
specified interest rates and a specified mortality assumption
9. Commitments
We lease office facilities and equipment under operating leases with non-cancelable lease terms
expiring at various dates through 2019. Rent and lease expense for the years ended December 31,
2008 and 2007 and the eleven months ended December 31, 2006 was $12.1 million, $10.9 million and
$12.5 million, respectively. Rent and lease expense for the one month ended January 31, 2006 was
$1.2 million. The future non-cancelable minimum rental payments applicable to operating leases at
December 31, 2008 are:
2009 |
$ | 18,060 | ||
2010 |
17,732 | |||
2011 |
16,301 | |||
2012 |
15,935 | |||
2013 |
14,911 | |||
Thereafter |
73,206 | |||
Total |
$ | 156,145 | ||
In connection with our software system modernization and on-going support services related to the
Amdocs® software system, we are obligated to pay Amdocs $55.6 million over the periods 2009 through
2012. We have entered into agreements with Yahoo!, whereby Yahoo! will serve and maintain our local
search listings for placement on its web-based electronic local information directory and
electronic mapping products. We are obligated to pay Yahoo! up to $13.2 million during 2009 and
2010. We have entered into a Directory Advertisement agreement with a CMR to cover advertising
placed with us by the CMR on behalf of Qwest. Under this agreement, we are obligated to pay the CMR
approximately $7.7 million for commissions over the years 2009 through 2014.
F-41
Table of Contents
10. Legal Proceedings
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 us. 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 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 consolidated financial statements with respect to any of such matters.
11. Business Segments
Management reviews and analyzes its business of providing local search solutions as one operating
segment.
12. Related Party Transactions and Allocations
After the RHD Merger, certain transactions are managed by RHD on a centralized basis. Under this
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 liability at December 31, 2008, as the Company intends to settle these balances with RHD
during the next twelve months. As the change in net intercompany balances came as a result of
operating transactions, they have been presented as operating activities on the consolidated
statement of cash flows for the year ended December 31, 2008.
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 our Dex Media
East and new Dex Media West credit facilities. We paid dividends to our parent during the years
ended December 31, 2008 and 2007 of $303.2 million and $150.0 million, respectively. Upon
completion of the RHD Merger, a one-time dividend of $287.7 million was paid to our parent during
the eleven months ended December 31, 2006, and classified as financing activities on the
consolidated statement of cash flows for the eleven months ended December 31, 2006. See Note 4,
Long-Term Debt, Credit Facilities and Notes, for a further description of our debt instruments.
F-42
Table of Contents
13. Valuation and Qualifying Accounts
Net Additions | ||||||||||||||||
Balance at | Charged To | Write-offs | Balance at | |||||||||||||
Beginning of | Revenue | Other and | End of | |||||||||||||
(in thousands | Period | and Expense | Deductions | Period | ||||||||||||
Allowance for Doubtful Accounts and Sales Claims |
||||||||||||||||
For the year ended December 31, 2008
|
$ | 21,816 | 117,153 | (104,803 | ) | $ | 34,166 | |||||||||
For the year ended December 31, 2007
|
$ | 17,476 | 85,536 | (81,196 | ) | $ | 21,816 | |||||||||
For the eleven months ended December 31, 2006
|
$ | 57,500 | 68,144 | (108,168 | ) | $ | 17,476 | |||||||||
Deferred Income Tax Asset Valuation Allowance |
||||||||||||||||
For the year ended December 31, 2008
|
$ | 596 | | (336 | ) | $ | 260 | |||||||||
For the year ended December 31, 2007
|
$ | | 596 | | $ | 596 |
14. Subsequent Events
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.
Based upon beneficial ownership filings made with the SEC during
the first quarter of 2009, the Company may have undergone an
ownership change within the meaning of Section 382 of the
Internal Revenue Code. The Company will perform the work
necessary to confirm that determination and to assess its
impact, if any, upon the Companys substantial beneficial
tax attributes, financial condition and results of operations
prior to the filing of our Quarterly Report on Form 10-Q
for the three months ended March 31, 2009. At this time,
the Company has not concluded upon the potential impact, if any,
of any possible ownership change upon its substantial beneficial
tax attributes, financial condition or results of operations.
F-43
Table of Contents
PART IV
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this annual report on Form 10-K/A to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 11th day of December 2009.
DEX MEDIA, INC. |
||||
By: | /s/ Steven M. Blondy | |||
Steven M. Blondy | ||||
Executive Vice President, Chief Financial Officer and Director (Principal Financial Officer) |
||||
Date:
December 11, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly
signed by the following persons on behalf of the Registrant and in the capacities and on the date
indicated.
/s/ David C. Swanson
|
Chairman of the Board of Directors
and Chief Executive Officer (Principal Executive Officer) |
December 11, 2009 | ||
/s/ Steven M. Blondy
|
Executive Vice President, Chief Financial Officer and Director (Principal Financial Officer) |
December 11, 2009 | ||
/s/
Sylvester J. Johnson
|
Vice President Corporate
Controller and Chief Accounting Officer (Principal Accounting Officer) |
December 11, 2009 | ||
/s/ Jenny L. Apker
|
Director | December 11, 2009 |
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Table of Contents
Exhibit Index
Exhibit No. | Document | |
31.1*
|
Certification of Annual Report on Form 10-K/A for the period ended December 31, 2008 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 Annual Report on Form 10-K/A for the period ended December 31, 2008 by Steven M. Blondy, Executive Vice President, Chief Financial Officer and Director of Dex Media, Inc. under Section 302 of the Sarbanes Oxley Act. | |
32.1*
|
Certification of Annual Report on Form 10-K/A for the period ended December 31, 2008 under Section 906 of the Sarbanes Oxley Act by David C. Swanson, Chairman and Chief Executive Officer, and Steven M. Blondy, Executive Vice President, Chief Financial Officer and Director of Dex Media, Inc. |
* | Filed herewith |
2