Attached files
file | filename |
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EX-31.2 - EX-31.2 - DEX ONE Corp | g24306exv31w2.htm |
EX-31.1 - EX-31.1 - DEX ONE Corp | g24306exv31w1.htm |
EX-32.1 - EX-32.1 - DEX ONE Corp | g24306exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
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 001-07155
DEX ONE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 13-2740040 | |
(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) |
(919) 297-1600
(Registrants telephone number, including area code)
N/A
(Former Name, Former Address and Former
Fiscal Year, if Changed Since Last Report)Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the Registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (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
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes þ No o
Indicate the number of shares outstanding of the issuers classes of common stock, as of the latest
practicable date:
Title of class | Shares Outstanding at July 31, 2010 | |
Common Stock, par value $.001 per share | 50,015,691 |
DEX ONE CORPORATION
INDEX TO FORM 10-Q
2
Table of Contents
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Dex One Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
Successor Company | Predecessor Company | ||||||||
(in thousands, except share data) | June 30, 2010 | December 31, 2009 | |||||||
Assets |
|||||||||
Current Assets |
|||||||||
Cash and cash equivalents |
$ | 121,755 | $ | 665,940 | |||||
Accounts receivable: |
|||||||||
Billed |
211,492 | 244,048 | |||||||
Unbilled |
599,537 | 636,350 | |||||||
Allowance for doubtful accounts |
(54,557 | ) | (54,612 | ) | |||||
Net accounts receivable |
756,472 | 825,786 | |||||||
Deferred directory costs |
133,084 | 138,061 | |||||||
Prepaid expenses and other current assets |
61,479 | 90,928 | |||||||
Total current assets |
1,072,790 | 1,720,715 | |||||||
Fixed assets and computer software, net |
197,506 | 157,272 | |||||||
Deferred income taxes, net |
| 399,885 | |||||||
Other non-current assets |
4,489 | 62,699 | |||||||
Intangible assets, net |
2,463,363 | 2,158,223 | |||||||
Goodwill, net |
1,344,784 | | |||||||
Total Assets |
$ | 5,082,932 | $ | 4,498,794 | |||||
Liabilities and Shareholders Equity (Deficit) |
|||||||||
Current Liabilities Not Subject to Compromise |
|||||||||
Accounts payable and accrued liabilities |
$ | 119,215 | $ | 168,488 | |||||
Short-term deferred income taxes, net |
47,345 | 108,184 | |||||||
Accrued interest |
33,274 | 4,643 | |||||||
Deferred directory revenues |
564,015 | 848,775 | |||||||
Current portion of long-term debt |
165,524 | 993,528 | |||||||
Total current liabilities not subject to compromise |
929,373 | 2,123,618 | |||||||
Long-term debt |
2,809,480 | 2,561,248 | |||||||
Deferred income taxes, net |
294,803 | | |||||||
Other non-current liabilities |
109,227 | 380,163 | |||||||
Total liabilities not subject to compromise |
4,142,883 | 5,065,029 | |||||||
Liabilities subject to compromise |
| 6,352,813 | |||||||
Commitments and contingencies |
|||||||||
Shareholders Equity (Deficit) |
|||||||||
Successor Company common stock, par value $.001 per share, authorized 300,000,000
shares;
issued and outstanding50,015,691 shares at June 30, 2010 |
50 | | |||||||
Predecessor Company common stock, par value $1 per share, authorized 400,000,000
shares; issued88,169,275 shares and outstanding68,955,674 shares at December 31,
2009 |
| 88,169 | |||||||
Additional paid-in capital |
1,452,704 | 2,442,549 | |||||||
Accumulated deficit |
(512,705 | ) | (9,137,160 | ) | |||||
Predecessor Company treasury stock, at cost, 19,213,601 shares at December 31, 2009 |
| (256,114 | ) | ||||||
Accumulated other comprehensive loss |
| (56,492 | ) | ||||||
Total shareholders equity (deficit) |
940,049 | (6,919,048 | ) | ||||||
Total Liabilities and Shareholders Equity (Deficit) |
$ | 5,082,932 | $ | 4,498,794 | |||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Dex One Corporation and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)
Successor Company | Predecessor Company | ||||||||||||||||||||
Three Months Ended | Five Months Ended | One Month Ended | Three Months Ended | Six Months Ended | |||||||||||||||||
(in thousands, except per share data) | June 30, 2010 | June 30, 2010 | January 31, 2010 | June 30, 2009 | June 30, 2009 | ||||||||||||||||
Net revenues |
$ | 160,891 | $ | 214,035 | $ | 160,372 | $ | 565,628 | $ | 1,167,615 | |||||||||||
Expenses: |
|||||||||||||||||||||
Production and distribution expenses
(exclusive of depreciation and amortization
shown separately below) |
51,476 | 80,485 | 27,069 | 92,739 | 194,640 | ||||||||||||||||
Selling and support expenses |
93,502 | 151,855 | 40,882 | 160,736 | 312,738 | ||||||||||||||||
General and administrative expenses |
40,202 | 61,930 | 8,186 | 25,973 | 67,568 | ||||||||||||||||
Depreciation and amortization |
59,581 | 99,005 | 20,161 | 142,322 | 285,167 | ||||||||||||||||
Impairment charges |
769,674 | 769,674 | | | | ||||||||||||||||
Total expenses |
1,014,435 | 1,162,949 | 96,298 | 421,770 | 860,113 | ||||||||||||||||
Operating income (loss) |
(853,544 | ) | (948,914 | ) | 64,074 | 143,858 | 307,502 | ||||||||||||||
Interest expense, net |
(73,423 | ) | (122,357 | ) | (19,656 | ) | (161,469 | ) | (360,305 | ) | |||||||||||
Income (loss) before reorganization items, net and
income taxes |
(926,967 | ) | (1,071,271 | ) | 44,418 | (17,611 | ) | (52,803 | ) | ||||||||||||
Reorganization items, net |
| | 7,793,132 | (70,781 | ) | (70,781 | ) | ||||||||||||||
Income (loss) before income taxes |
(926,967 | ) | (1,071,271 | ) | 7,837,550 | (88,392 | ) | (123,584 | ) | ||||||||||||
(Provision) benefit for income taxes |
157,044 | 558,566 | (917,541 | ) | 12,910 | (353,108 | ) | ||||||||||||||
Net income (loss) |
$ | (769,923 | ) | $ | (512,705 | ) | $ | 6,920,009 | $ | (75,482 | ) | $ | (476,692 | ) | |||||||
Earnings (loss) per share: |
|||||||||||||||||||||
Basic |
$ | (15.39 | ) | $ | (10.25 | ) | $ | 100.3 | $ | (1.10 | ) | $ | (6.92 | ) | |||||||
Diluted |
$ | (15.39 | ) | $ | (10.25 | ) | $ | 100.2 | $ | (1.10 | ) | $ | (6.92 | ) | |||||||
Shares used in computing earnings (loss) per share: |
|||||||||||||||||||||
Basic |
50,016 | 50,013 | 69,013 | 68,918 | 68,892 | ||||||||||||||||
Diluted |
50,016 | 50,013 | 69,052 | 68,918 | 68,892 | ||||||||||||||||
Comprehensive Income (Loss) |
|||||||||||||||||||||
Net income (loss) |
$ | (769,923 | ) | $ | (512,705 | ) | $ | 6,920,009 | $ | (75,482 | ) | $ | (476,692 | ) | |||||||
Amortization of gain (loss) on interest rate swaps,
net of tax |
| | 1,083 | (4,212 | ) | (3,884 | ) | ||||||||||||||
Benefit plans adjustment, net of tax |
| | (4,535 | ) | 17,215 | 17,232 | |||||||||||||||
Comprehensive income (loss) |
$ | (769,923 | ) | $ | (512,705 | ) | $ | 6,916,557 | $ | (62,479 | ) | $ | (463,344 | ) | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Dex One Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
Successor Company | Predecessor Company | ||||||||||||
Five Months | One Month | Six Months | |||||||||||
Ended | Ended | Ended | |||||||||||
June 30, | January 31, | June 30, | |||||||||||
(in thousands) | 2010 | 2010 | 2009 | ||||||||||
Cash Flows Provided By Operating Activities |
$ | 240,060 | $ | 71,741 | $ | 176,622 | |||||||
Cash Flows from Investing Activities |
|||||||||||||
Additions to fixed assets and computer software |
(15,192 | ) | (1,766 | ) | (9,846 | ) | |||||||
Net cash used in investing activities |
(15,192 | ) | (1,766 | ) | (9,846 | ) | |||||||
Cash Flows from Financing Activities |
|||||||||||||
Credit facilities repayments |
(303,436 | ) | (511,272 | ) | (229,415 | ) | |||||||
Debt issuance and other financing costs |
(2,785 | ) | (22,096 | ) | | ||||||||
Revolver borrowings |
| | 361,000 | ||||||||||
Revolver repayments |
| | (18,749 | ) | |||||||||
Increase (decrease) in checks not yet presented for payment |
3,653 | (3,092 | ) | (3,864 | ) | ||||||||
Net cash provided by (used in) financing activities |
(302,568 | ) | (536,460 | ) | 108,972 | ||||||||
Increase (decrease) in cash and cash equivalents |
(77,700 | ) | (466,485 | ) | 275,748 | ||||||||
Cash and cash equivalents, beginning of year |
199,455 | 665,940 | 131,199 | ||||||||||
Cash and cash equivalents, end of period |
$ | 121,755 | $ | 199,455 | $ | 406,947 | |||||||
Supplemental Information: |
|||||||||||||
Cash paid: |
|||||||||||||
Interest, net |
$ | 69,263 | $ | 15,460 | $ | 282,839 | |||||||
Income taxes, net |
$ | 2,148 | $ | | $ | 1,062 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Dex One Corporation and Subsidiaries
Condensed Consolidated Statements of Changes in Shareholders Equity (Deficit)
Accumulated | ||||||||||||||||||||||||
Other | Total | |||||||||||||||||||||||
Common | Additional | Accumulated | Treasury | Comprehensive | Shareholders | |||||||||||||||||||
(in thousands) | Stock | Paid-in Capital | Deficit | Stock | Income (Loss) | Equity (Deficit) | ||||||||||||||||||
Balance, December 31, 2009 (Predecessor
Company) |
$ | 88,169 | $ | 2,442,549 | $ | (9,137,160 | ) | $ | (256,114 | ) | $ | (56,492 | ) | $ | (6,919,048 | ) | ||||||||
Net income |
| | 6,920,009 | | | 6,920,009 | ||||||||||||||||||
Compensatory stock awards |
| 613 | | | | 613 | ||||||||||||||||||
Other adjustments related to compensatory
stock awards |
| (103 | ) | | 103 | | | |||||||||||||||||
Amortization of gain on interest rate swaps,
net of tax |
| | | | 1,083 | 1,083 | ||||||||||||||||||
Benefit plans adjustment, net of tax |
| | | | (4,535 | ) | (4,535 | ) | ||||||||||||||||
Cancellation of Predecessor Company
common stock |
(88,169 | ) | | | | | (88,169 | ) | ||||||||||||||||
Elimination of Predecessor Company
additional paid-in capital, accumulated
deficit, treasury stock and accumulated
other comprehensive loss |
| (2,443,059 | ) | 2,217,151 | 256,011 | 59,944 | 90,047 | |||||||||||||||||
Balance, January 31, 2010 (Predecessor
Company) |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Issuance of Successor Company Common
Stock |
$ | 50 | $ | | $ | | $ | | $ | | $ | 50 | ||||||||||||
Establishment of Successor Company
additional paid-in capital |
| 1,450,734 | | | | 1,450,734 | ||||||||||||||||||
Balance, February 1, 2010 (Successor Company) |
50 | 1,450,734 | | | | 1,450,784 | ||||||||||||||||||
Net loss |
| | (512,705 | ) | | | (512,705 | ) | ||||||||||||||||
Compensatory stock awards |
| 1,970 | | | | 1,970 | ||||||||||||||||||
Balance, June 30, 2010 (Successor Company) |
$ | 50 | $ | 1,452,704 | $ | (512,705 | ) | $ | | $ | | $ | 940,049 | |||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Table of Contents
Dex One Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(tabular amounts in thousands, except share and per share data and where otherwise indicated)
(tabular amounts in thousands, except share and per share data and where otherwise indicated)
1. Business and Basis of Presentation
The interim condensed consolidated financial statements of Dex One Corporation and its direct and
indirect wholly-owned subsidiaries (Dex One, the Successor Company, the Company, we, us
and our) have been prepared in accordance with the Securities and Exchange Commissions (SEC)
instructions to this Quarterly Report on Form 10-Q and should be read in conjunction with the
financial statements and related notes included in our Annual Report on Form 10-K for the year
ended December 31, 2009. The interim condensed consolidated financial statements include the
accounts of Dex One and its direct and indirect wholly-owned subsidiaries. As of June 30, 2010,
R.H. Donnelley Corporation, R.H. Donnelley Inc. (RHDI), Dex Media, Inc. (Dex Media),
Business.com, Inc. (Business.com) and Dex One Service, Inc. (Dex One Service) were our only
direct wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.
The results of interim periods are not necessarily indicative of results for the full year or any
subsequent period. In the opinion of management, all material adjustments (consisting of normal
recurring adjustments) considered necessary for a fair statement of financial position, results of
operations and cash flows at the dates and for the periods presented have been included.
Dex One became the successor registrant to R.H. Donnelley Corporation (RHD or the Predecessor
Company for operations prior to January 29, 2010, the Effective Date) upon emergence from
Chapter 11 relief under Title 11 of the United States Code (the Bankruptcy Code) on the Effective
Date. References to the Predecessor Company in this Quarterly Report on Form 10-Q pertain to
periods prior to the Effective Date. See Note 3, Fresh Start Accounting for a presentation of the
impact of emergence from reorganization and fresh start accounting on our financial position,
results of operations and cash flows.
Corporate Overview
We are a marketing solutions company that helps local businesses grow by providing marketing
products that help them get found by ready-to-buy consumers and marketing services that help them
get chosen over their competitors. Through our Dex® Advantage, clients business
information is published and marketed through a single profile and distributed via a variety of
both owned and operated products and through other local search products. Dex Advantage spans
multiple media platforms for local advertisers including print with our Dex published directories,
which we co-brand with other brands in the industry such as Qwest, CenturyLink and AT&T, online and
mobile devices with DexKnows.com ® and voice-activated directory search at
1-800-Call-Dex. Our digital affiliate provided solutions are powered by DexNet, which leverages
network partners including the premier search engines, such as Google® and Yahoo!®
and other leading online sites. Our growing list of marketing services include local
business and market analysis, message and image creation, target market identification, advertising
and digital profile creation, keyword and search engine optimization strategies and programs,
distribution strategies, social strategies, and tracking and reporting.
Retirement of Chairman and Chief Executive Officer
Effective May 28, 2010 (the Separation Date), our Chairman and Chief Executive Officer, David C.
Swanson, retired from the Company. The Companys Board of Directors (the Board) has established
an Executive Oversight Committee comprised of three of the Boards current directors, Jonathan B.
Bulkeley, W. Kirk Liddell and Mark A. McEachen, to lead the Company on an interim basis. Mr.
Liddell serves as the Companys Interim Principal Executive Officer and current Board member, Alan
F. Schultz, serves as the non-executive Chairman of the Board.
In connection with Mr. Swansons retirement, the Company entered into a Separation Agreement
with Mr. Swanson (the Separation Agreement) on May 20, 2010. The Separation Agreement provides
that Mr. Swanson will receive severance benefits to which he is entitled under his Amended and
Restated Employment Agreement (the Employment Agreement), in connection with a termination not
for Cause following a Change of Control (as such terms are defined in the Employment Agreement). In
accordance with the Separation Agreement, Mr. Swanson received a lump-sum separation payment of
$6.4 million plus accrued and unpaid salary and vacation days totaling $0.5 million during the
three months ended June 30, 2010 and will receive a pro rata portion of his 2010 annual bonus
totaling $0.4 million no later than March 15, 2011.
7
Table of Contents
In accordance with the Separation Agreement, the Company will reimburse Mr. Swanson for the costs
of obtaining term life insurance coverage from the Separation Date until the earlier of (i)
December 31, 2013 and (ii) the date on which Mr. Swanson becomes employed or self-employed. In
addition, the Company will reimburse Mr. Swanson for costs of obtaining health, medical and dental
insurance and long-term disability insurance benefits from the Separation Date until the earlier of
(i) May 31, 2013 and (ii) the date on which Mr. Swanson becomes employed or self-employed. Mr.
Swanson will also be reimbursed for costs of financial planning and outplacement services, dues for
continuing his health club and country club memberships and executive health expenses during this
period. He will also have access to periodic administrative and technical support through the end
of 2010.
Following the Separation Date, Mr. Swanson has no equity interest in the Company or any of its
affiliates or subsidiaries other than 25,320 previously issued and currently vested stock
appreciation rights in the Company. All other unvested stock appreciation rights held by Mr.
Swanson have terminated. Mr. Swanson will continue to participate in the Companys 2009 Long Term
Incentive Plan (LTIP) and will be eligible to receive payment of up to $3.5 million under the
LTIP subject to satisfaction of the performance standards contained in the LTIP. Mr. Swanson will
also receive $5.7 million in full satisfaction for amounts due to him under certain non-qualified
pension plans and $0.5 million associated with his vested benefits under the Companys qualified
pension plan and under the R.H. Donnelley Corporation Restoration Plan. Pursuant to the Separation
Agreement, Mr. Swanson agreed to release the Company from, among other things, all claims, demands,
damages, actions or rights of action of any nature, arising out of or related to or based upon his
employment with the Company. Mr. Swanson further agreed to comply with and be bound by a 12 month
non-competition and non-solicitation covenant beginning on the Separation Date and covenants
prohibiting disclosure of the Companys confidential information.
Reclassifications
Certain prior period amounts included in the condensed consolidated statements of operations have
been reclassified to conform to the current periods presentation. Purchased traffic costs
incurred to direct traffic to our online properties have been reclassified from advertising
expense, a component of selling and support expenses, to production and distribution expenses in
the condensed consolidated statements of operations. In addition, information technology expenses
have been reclassified from production and distribution expenses to general and administrative
expenses in the condensed consolidated statements of operations. These reclassifications had no
impact on operating income or net loss for the three and six months ended June 30, 2009. The tables
below summarize these reclassifications.
Three Months Ended June 30, 2009 | ||||||||||||
As | ||||||||||||
Previously | As | |||||||||||
Reported | Reclass | Reclassified | ||||||||||
Production and distribution
expenses |
$ | 88,499 | $ | 4,240 | $ | 92,739 | ||||||
Selling and support
expenses |
172,184 | (11,448 | ) | 160,736 | ||||||||
General and administrative
expenses |
18,765 | 7,208 | 25,973 |
Six Months Ended June 30, 2009 | ||||||||||||
As | ||||||||||||
Previously | As | |||||||||||
Reported | Reclass | Reclassified | ||||||||||
Production and distribution
expenses |
$ | 184,651 | $ | 9,989 | $ | 194,640 | ||||||
Selling and support
expenses |
337,068 | (24,330 | ) | 312,738 | ||||||||
General and administrative
expenses |
53,227 | 14,341 | 67,568 |
In addition, certain prior period amounts associated with accounts receivable that are included in
the condensed consolidated balance sheets have been reclassified to conform to the current periods
presentation.
8
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Filing of Voluntary Petitions in Chapter 11
On May 28, 2009 (the Petition Date), the Predecessor Company and its subsidiaries (collectively
with the Predecessor Company, the Debtors) filed voluntary petitions for Chapter 11 relief under
the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the
Bankruptcy Court).
Confirmed Plan of Reorganization and Emergence from the Chapter 11 Proceedings
On January 12, 2010, the Bankruptcy Court entered the Findings of Fact, Conclusions of Law, and
Order Confirming the Joint Plan of Reorganization for the Predecessor Company and its subsidiaries
(the Confirmation Order). On the Effective Date, the Joint Plan of Reorganization for the
Predecessor Company and its subsidiaries (the Plan) became effective in accordance with its
terms.
From the Petition Date until the Effective Date, the Debtors operated their businesses as
debtors-in-possession in accordance with the Bankruptcy Code. The Chapter 11 cases of the Debtors
(collectively, the Chapter 11 Cases) were jointly administered under the caption In re R.H.
Donnelley Corporation, Case No. 09-11833 (KG) (Bankr. D. Del. 2009).
Restructuring
As part of a restructuring that was conducted in connection with the Debtors emergence from
bankruptcy, the Debtors merged, consolidated, dissolved, or terminated, shortly after the Effective
Date, certain of their wholly-owned subsidiaries, as set forth below:
| DonTech Holdings, LLC and R.H. Donnelley Publishing & Advertising of Illinois Holdings, LLC were merged into their sole member, RHDI; | ||
| The DonTech II Partnership and R.H. Donnelley Publishing & Advertising of Illinois Partnership technically terminated their respective partnership agreements due to the loss of a second partner; | ||
| Dex Media East Finance Co. was merged into Dex Media East LLC; | ||
| Dex Media West Finance Co. was merged into Dex Media West LLC; | ||
| Work.com, Inc. was merged into Business.com, Inc.; | ||
| GetDigitalSmart.com, Inc. was merged into RHDI; | ||
| Dex Media East LLC was merged into Dex Media East, Inc. (DME Inc.); | ||
| Dex Media West LLC was merged into Dex Media West, Inc. (DMW Inc.); and | ||
| R.H. Donnelley Publishing & Advertising, Inc. was merged into RHDI. |
After effectuating the restructuring transactions, Dex One became the ultimate parent company of
each of the following surviving subsidiaries: (i) R.H. Donnelley Corporation, a newly formed
subsidiary of Dex One (ii) RHDI, (iii) Dex Media, (iv) DME Inc., (v) DMW Inc., (vi) Dex Media
Service LLC, (vii) Dex One Service LLC (which was subsequently converted into a Delaware
corporation under the name Dex One Service effective March 1, 2010, (viii) Business.com and (ix)
R.H. Donnelley APIL, Inc.
Consummation of the Plan
Issuance of New Common Stock
Upon emergence from Chapter 11 and pursuant to the Plan, all of the issued and outstanding shares
of the Predecessor Companys common stock and any other outstanding equity securities of the
Predecessor Company including all stock options, stock appreciation rights (SARs) and restricted
stock, were cancelled. On the Effective Date, the Company issued an aggregate amount of 50,000,001
shares of new common stock, par value $.001 per share. See Note 10, Capital Stock for additional
information regarding our new common stock.
9
Table of Contents
Distributions Pursuant to the Plan
Since the Effective Date, the Company has substantially consummated the various transactions
contemplated under the confirmed Plan. The Company has made the following distributions of stock
and securities that were required to be made under the Plan to creditors with allowed claims:
| On the Effective Date, in accordance with the Plan, the Company issued the following number of shares of Dex One common stock: (i) approximately 10.5 million shares, representing 21.0% of total outstanding common stock, to all holders of notes issued by RHD; (ii) approximately 11.65 million shares, representing 23.3% of total outstanding common stock, to all holders of notes issued by Dex Media, Inc.; (iii) approximately 12.9 million shares, representing 25.8% of total outstanding common stock, to all holders of notes issued by RHDI; (iv) approximately 6.5 million shares, representing 13.0% of total outstanding common stock, to all holders of senior notes issued by Dex Media West; and (v) approximately 8.45 million shares, representing 16.9% of total outstanding common stock, to all holders of senior subordinated notes issued by Dex Media West. | ||
| On the Effective Date, in accordance with the terms of the Plan, holders of the Dex Media West 8.5% Senior Notes due 2010 and 5.875% Senior Notes due 2011 also received their pro rata share of Dex Ones $300.0 million aggregate principal amount of 12%/14% Senior Subordinated Notes due 2017 (Dex One Senior Subordinated Notes). |
As of June 30, 2010 and pursuant to the Plan, the Company has made distributions in cash on account
of all, or substantially all, of the allowed claims of general unsecured creditors. Allowed claims
of general unsecured creditors that have not been paid as of June 30, 2010 will be paid during the
remainder of 2010.
Pursuant to the terms of the Plan, the Company is also obligated to make certain additional
payments to certain creditors, including certain distributions that may become due and owing
subsequent to the initial distribution date and certain payments to holders of administrative
expense priority claims and fees earned by professional advisors during the Chapter 11 Cases.
Discharge, Releases, and Injunctions Pursuant to the Plan and the Confirmation Order
The Plan and Confirmation Order also contain various discharges, injunctive provisions, and
releases that became operative upon the Effective Date. These provisions are summarized in Sections
M through O of the Confirmation Order and more fully described in Article X of the Plan.
Registration Rights Agreement
On the Effective Date and pursuant to the Plan, the Company entered into a Registration Rights
Agreement (the Agreement), requiring the Company to register with the SEC certain shares of its
common stock and/or the Dex One Senior Subordinated Notes upon the request of one or more Eligible
Holders (as defined in the Agreement), in accordance with the terms and conditions set forth
therein. On April 8, 2010 and pursuant to the Agreement, the Company filed a shelf registration
statement to register for resale by Franklin Advisers, Inc. and certain of its affiliates
15,262,488 shares of our common stock and $116.6 million aggregate principal amount of the Dex One
Senior Subordinated Notes. These securities were registered pursuant to the Agreement to permit the
sale of the securities from time to time at fixed prices, prevailing market prices at the times of
sale, prices related to the prevailing market prices, varying prices determined at the times of
sale or negotiated prices. The shelf registration statement became effective on April 16, 2010.
Impact on Long-Term Debt Upon Emergence from the Chapter 11 Proceedings
On the Effective Date and in accordance with the Plan, $6.1 billion of the Predecessor Companys
senior notes, senior discount notes and senior subordinated notes (collectively the notes in
default) were exchanged for (a) 100% of the reorganized Dex One equity and (b) $300.0 million of
the Dex One Senior Subordinated Notes issued to the holders of the Dex Media West 8.5% Senior Notes
due 2010 and 5.875% Senior Notes due 2011 on a pro rata basis in addition to their share of the
reorganized Dex One equity. See Note 6, Long-Term Debt, Credit Facilities and Notes for further
details of our long-term debt.
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Accounting Matters Resulting from the Chapter 11 Proceedings
The filing of the Chapter 11 petitions constituted an event of default under the indentures
governing the Predecessor Companys notes in default and the debt obligations under those
instruments became automatically and immediately due and payable, although any actions to enforce
such payment obligations were automatically stayed under applicable bankruptcy laws. Based on the
bankruptcy petitions, the notes in default are included in liabilities subject to compromise on the
consolidated balance sheet at December 31, 2009.
The filing of the Chapter 11 petitions also constituted an event of default under the Predecessor
Companys credit facilities. However, pursuant to the Plan, these secured lenders received 100%
principal recovery and scheduled amortization and interest subsequent to the filing of the Chapter
11 petitions. The Predecessor Company has determined that the fair value of the collateral securing
each of its credit facilities exceeded the book value of such credit facilities, including accrued
interest and interest rate swap liabilities associated with each of the credit facilities, and
therefore, the credit facilities are excluded from liabilities subject to compromise on the
consolidated balance sheet at December 31, 2009.
As a result of filing the Chapter 11 petitions, certain interest rate swaps were terminated by the
respective counterparties and, as such, are no longer deemed financial instruments to be measured
at fair value. These interest rate swaps were not settled prior to the Effective Date. In
conjunction with the amendment and restatement of the Predecessor Companys credit facilities on
the Effective Date, these interest rate swaps were converted into a new tranche of term loans under
each of the related credit facilities. See Note 7, Derivative Financial Instruments for
additional information.
For periods subsequent to the Chapter 11 bankruptcy filing, Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 852, Reorganizations (FASB ASC 852), has been
applied in preparing the consolidated financial statements. FASB ASC 852 requires that the
financial statements distinguish transactions and events that are directly associated with the
reorganization from the ongoing operations of the business. Accordingly, certain expenses including
professional fees, realized gains and losses and provisions for losses that are realized from the
reorganization and restructuring process are classified as reorganization items on the condensed
consolidated statement of operations. Additionally, on the condensed consolidated balance sheet at
December 31, 2009, liabilities are segregated between liabilities not subject to compromise and
liabilities subject to compromise. Liabilities subject to compromise are reported at their
pre-petition amounts or current unimpaired values, even if they may be settled for lesser amounts.
The Predecessor Companys financial statements included in this Quarterly Report on Form 10-Q do
not purport to reflect or provide for the consequences of the Chapter 11 bankruptcy proceeding. In
particular, the financial statements do not purport to show (i) as to assets, their realizable
value on a liquidation basis or their availability to satisfy liabilities; (ii) as to pre-petition
liabilities, the amounts that may be allowed for claims or contingencies, or the status and
priority thereof; (iii) as to shareholders deficit accounts, the effects of any changes that may
be made in the Predecessor Companys capitalization; or (iv) as to operations, the effects of any
changes that may be made to the Predecessor Companys business.
Going Concern
As a result of our emergence from the Chapter 11 proceedings and the restructuring of the
Predecessor Companys outstanding debt, we believe that Dex One will generate sufficient cash flow
from operations to satisfy all of its debt obligations according to applicable terms and conditions
for a reasonable period of time. See Note 3, Fresh Start Accounting for information and analysis
on our emergence from the Chapter 11 proceedings and the impact on our financial position. The
Companys goodwill and intangible asset impairment charges recorded during the three months ended
June 30, 2010 do not affect our ability to continue as a going concern, as we are permitted to
exclude such charges from debt covenant evaluations.
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2. Summary of Significant Accounting Policies
Identifiable Intangible Assets and Goodwill
Goodwill of $2.1 billion was recorded in connection with the Companys adoption of fresh start
accounting as discussed in Note 3, Fresh Start Accounting and represented the excess of the
reorganization value of Dex One over the fair value of identified tangible and intangible assets.
Goodwill is not amortized but is subject to impairment testing on an annual basis as of October
31st or more frequently if indicators of potential impairment exist. Goodwill is tested
for impairment at the reporting unit level, which represents one level below an operating segment
in accordance with FASB ASC 350, Intangibles Goodwill and Other (FASB ASC 350). The Companys
reporting units are RHDI, DME Inc., DMW Inc. and Business.com.
The Company and the Predecessor Company review the carrying value of goodwill, definite-lived
intangible assets and other long-lived assets whenever events or circumstances indicate that their
carrying amount may not be recoverable. The Company and the Predecessor Company reviewed the
following information, estimates and assumptions to determine if any indicators of impairment
existed during the three and five months ended June 30, 2010 and the one month ended January 31,
2010, respectively:
| Historical financial information, including revenue, profit margins, customer attrition data and price premiums enjoyed relative to competing independent publishers; | ||
| Long-term financial projections, including, but not limited to, revenue trends and profit margin trends; | ||
| Intangible asset carrying values; | ||
| Trading values of our debt and equity securities; and | ||
| Other Company-specific and Predecessor Company-specific information. |
Based upon the decline in the trading value of our debt and equity securities during the three
months ended June 30, 2010 and the retirement of our Chairman and Chief Executive Officer on May
28, 2010, among others, the Company concluded that there were indicators of impairment during the
three months ended June 30, 2010. The Company and the Predecessor Company concluded that there were
no indicators of impairment during the two months ended March 31, 2010 and the one month ended
January 31, 2010, respectively.
As a result of identifying indicators of impairment, we performed impairment tests as of June 30,
2010 of our goodwill, definite-lived intangible assets and other long-lived assets in accordance
with FASB ASC 350 and FASB ASC 360, Property, Plant and Equipment (FASB ASC 360), respectively,
using estimates and assumptions described above. The Companys definite-lived intangible assets and
other long-lived assets have been assigned to the respective reporting unit they represent for
impairment testing. The fair values of our intangible assets were determined using unobservable
inputs (level 3 in the fair value hierarchy) based on a discounted cash flow valuation technique.
See Note 3, Fresh Start Accounting for additional information on how the fair values of our
intangible assets were determined for our impairment testing, as a similar methodology and process
was used in conjunction with our adoption of fresh start accounting. The impairment test of our
definite-lived intangible assets and other long-lived assets was performed by comparing the
carrying amount of our definite-lived intangible assets and other long-lived assets, including
goodwill, to the sum of their undiscounted expected future cash flows, including goodwill. In
accordance with FASB ASC 360, 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. The testing results of our definite-lived intangible assets and other
long-lived assets resulted in an impairment charge of $17.3 million during the three and five
months ended June 30, 2010 associated with trade names and trademarks, technology, local customer
relationships and other from our Business.com reporting unit.
Our impairment test of goodwill was performed at the reporting unit level and involved a two-step
process. The first step involved comparing the fair value of each reporting unit with the carrying
amount of its assets and liabilities, including goodwill, as goodwill was specifically assigned to
each of the reporting units upon our adoption of fresh start accounting. The fair value was
determined by valuing the Companys debt securities at par value, as the respective debt agreements
include provisions that would require the debt securities to be repaid at par value upon a change
of control, and by using a market based approach for the Companys publicly traded common stock,
which included a trailing 20-day average of the closing market price of our common stock ending
June 30, 2010. The aggregate debt and equity values were used to arrive at a consolidated Business
Enterprise Value (BEV) for the Company. Since our reporting units equity securities are not
publicly traded, there is no observable market information for these securities. As such, we have
calculated a BEV for each reporting unit using unobservable inputs (level 3 in the fair value
hierarchy) based on a discounted cash flow valuation technique. The Company ensured that the sum of
the individual reporting units BEVs using the discounted cash flow valuation technique was
consistent with the Companys consolidated BEV using observable market pricing.
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As a result of our testing, we determined that each reporting units fair value was less than the
carrying amount of its assets and liabilities, requiring us to proceed with the second step of the
goodwill impairment test. In the second step of the testing process, the impairment loss was
determined by comparing the implied fair value of each reporting units goodwill to the recorded
amount of goodwill. Determining the implied fair value of a reporting unit requires judgment and
the use of significant estimates and assumptions noted above as well as other inputs such as
discount rates and terminal growth rates. We believe that the estimates and assumptions used in our
impairment assessments are reasonable and based on available market information, but variations in
any of the assumptions could result in materially different calculations of fair value and
determinations of whether or not an impairment is indicated or the amount of impairment recorded.
The valuation of each of our reporting units was based upon a discounted cash flow methodology.
Under the discounted cash flow method, the Company determined fair value based on the estimated
future cash flows of each reporting unit, discounted to present value using risk-adjusted discount
rates, which reflect the overall level of inherent risk of a reporting unit and the rate of return
an outside investor would expect to earn. Cash flow projections were derived from managements
financial projections for the period 2010 to 2013. Subsequent period cash flows were developed for
each reporting unit using growth rates that the Company believes are reasonably likely to occur
along with a terminal value derived from the reporting units earnings before interest, taxes,
depreciation and amortization. Supporting analyses used to determine each reporting units fair
value included (a) a comparison of selected financial data of the Company with similar data of
other publicly held companies in businesses similar to ours and (b) an assessment of tax
attributes. A detailed discussion of the discounted cash flow methodology, supporting analyses used
and development of the Companys business plan and long-term financial projections is presented in
Note 3, Fresh Start Accounting Methodology, Analysis and Assumptions, as a similar methodology
and process was utilized to value the Company for fresh start accounting on February 1, 2010. Based
upon this analysis, we recognized a goodwill impairment charge of $752.3 million during the three
and five months ended June 30, 2010, which has been recorded at each of our reporting units as
follows:
Reporting Unit | Goodwill Impairment Charge | |||
RHDI |
$ | 243,674 | ||
DME Inc. |
241,512 | |||
DMW Inc. |
225,955 | |||
Business.com |
41,199 | |||
Total |
$ | 752,340 | ||
The following table presents a summary of the Companys goodwill by reporting unit as well as
critical assumptions used in the valuation of the reporting units at June 30, 2010:
Percentage | ||||||||||||||||||||||||||||
By Which | ||||||||||||||||||||||||||||
Reporting | ||||||||||||||||||||||||||||
Unit Fair | ||||||||||||||||||||||||||||
Reporting | Value | |||||||||||||||||||||||||||
Years of Cash | Unit | Exceeds | ||||||||||||||||||||||||||
Terminal | Flow Before | Fair Value | its | |||||||||||||||||||||||||
Goodwill | Percentage of | Discount | Growth | Terminal | at June 30, | Carrying | ||||||||||||||||||||||
Reporting Unit | Balance | Total | Rate | Rate (1) | Value | 2010 | Value | |||||||||||||||||||||
RHDI |
$ | 380,161 | 28.3 | % | 10.5 | % | 0.0 | % | 3.5 years | $ | 1,540,000 | 0.0 | % | |||||||||||||||
DME Inc. |
430,571 | 32.0 | 10.5 | % | 0.0 | % | 3.5 years | 1,180,000 | 0.0 | % | ||||||||||||||||||
DMW Inc. |
527,878 | 39.2 | 10.5 | % | 0.0 | % | 3.5 years | 1,335,000 | 0.0 | % | ||||||||||||||||||
Business.com |
6,174 | 0.5 | 16.0 | % | 1.0 | % | 9.5 years | 15,600 | 0.0 | % | ||||||||||||||||||
Total |
$ | 1,344,784 | 100.0 | % | | | | $ | 4,070,600 | | ||||||||||||||||||
(1) | Terminal growth rate is determined by reconciling the market value of our debt and equity securities as of June 30, 2010 to the Companys long-term financial projections. |
The change in the carrying amount of goodwill for the five months ended June 30, 2010 is as
follows:
Balance at February 1, 2010 |
$ | 2,097,124 | ||
Goodwill impairment charge |
(752,340 | ) | ||
Balance at June 30, 2010 |
$ | 1,344,784 | ||
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The sum of the goodwill and intangible asset impairment charges totaled $769.7 million for the
three and five months ended June 30, 2010.
In connection with the Companys adoption of fresh start accounting, identifiable intangible assets
that were either developed by the Predecessor Company or acquired by the Predecessor Company in
prior acquisitions have been recorded at their estimated fair value and are being amortized over
their estimated useful lives in a manner that best reflects the economic benefit derived from such
assets. See Note 3, Fresh Start Accounting for additional information and how the fair values of
our intangible assets were determined. Our identifiable intangible assets and their respective book
values at June 30, 2010, which are shown in the following table, have been adjusted for the
impairment charge during the three months ended June 30, 2010 noted above. The adjusted book values
of these intangible assets represent their new cost basis. Accumulated amortization prior to the
impairment charge has been eliminated and the new cost basis will be amortized over the remaining
useful lives of the intangible assets.
Technology, | ||||||||||||||||||||||||
Directory | Local | National | Trade | Advertising | ||||||||||||||||||||
Services | Customer | Customer | Names and | Commitments | ||||||||||||||||||||
Agreements | Relationships | Relationships | Trademarks | & Other | Total | |||||||||||||||||||
Net intangible
assets fair value |
$ | 1,330,000 | $ | 561,400 | $ | 175,000 | $ | 381,900 | $ | 88,400 | $ | 2,536,700 | ||||||||||||
Accumulated
amortization |
(36,368 | ) | (22,449 | ) | (2,972 | ) | (8,567 | ) | (2,981 | ) | (73,337 | ) | ||||||||||||
Net intangible
assets at June 30,
2010 |
$ | 1,293,632 | $ | 538,951 | $ | 172,028 | $ | 373,333 | $ | 85,419 | $ | 2,463,363 | ||||||||||||
Amortization expense related to the Companys intangible assets was $46.3 million and $77.1 million
for the three and five months ended June 30, 2010, respectively, and was impacted by the increase
in fair value of our intangible assets and the establishment of the estimated useful lives
resulting from our adoption of fresh start accounting. Amortization expense related to the
Predecessor Companys intangible assets was $15.6 million for the one month ended January 31, 2010
and was impacted by the reduced carrying values of intangible assets resulting from impairment
charges recorded by the Predecessor Company during the fourth quarter of 2009 and the associated
reduction in remaining useful lives effective January 1, 2010. Amortization expense related to the
Predecessor Companys intangible assets was $128.6 million and $257.0 million for the three and six
months ended June 30, 2009, respectively.
The Company expects to recognize amortization expense associated with its intangible assets of
$165.9 million during the eleven months ended December 31, 2010, which includes the affect of
reduced book values of our intangible assets subsequent to the impairment charge during the three
months ended June 30, 2010 noted above.
The combined weighted average useful life of our identifiable intangible assets at June 30, 2010 is
22 years. The weighted average useful lives and amortization methodology for each of our
identifiable intangible assets at June 30, 2010 are shown in the following table:
Weighted Average | Amortization | |||
Intangible Asset | Useful Lives | Methodology | ||
Directory services agreements
|
27 years | Income forecast method (1) | ||
Local customer relationships
|
15 years | Income forecast method (1) | ||
National customer relationships
|
26 years | Income forecast method (1) | ||
Trade names and trademarks
|
15 years | Straight-line method | ||
Technology, advertising commitments and other
|
9 years | Income forecast method (1) |
(1) | The fair value assigned to these identifiable intangible assets is amortized under the income forecast method, which assumes the value derived from these intangible assets is greater in the earlier years and steadily declines over time. |
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The Company and the Predecessor Company evaluate the remaining useful lives of identifiable
intangible assets and other long-lived assets whenever events or circumstances indicate that a
revision to the remaining period of amortization is warranted. If the estimated remaining useful
lives change, the remaining carrying amount of the intangible assets and other long-lived assets
would be amortized prospectively over that revised remaining useful life. In conjunction with our
impairment testing during the three months ended June 30, 2010, the Company evaluated the remaining
useful lives of identifiable intangible assets and other long-lived assets by considering, among
other things, the effects of obsolescence, demand, competition, which takes into consideration the
price premium benefit we have over competing independent publishers in our markets as a result of
directory services agreements acquired in prior acquisitions, 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. In addition, in conjunction with our adoption of fresh start accounting and
the determination of the fair value of our assets and liabilities in the first quarter of 2010, the
Company and the Predecessor Company evaluated the remaining useful lives of identifiable intangible
assets and other long-lived assets by considering the factors noted above. Based on this
evaluation, the Company and the Predecessor Company have determined that the estimated useful lives
of intangible assets presented above reflect the period they are expected to contribute to future
cash flows and are therefore deemed appropriate.
If industry and local business conditions in our markets deteriorate in excess of current
estimates, potentially resulting in further declines in advertising sales and operating results,
and if the trading value of our debt and equity securities decline significantly, we will be
required to once again assess the recoverability of goodwill in addition to our annual evaluation
and recoverability and useful lives of our intangible assets and other long-lived assets. This
could result in future impairment charges, a reduction of remaining useful lives associated with
our intangible assets and other long-lived assets and acceleration of amortization expense.
Interest Expense and Deferred Financing Costs
Certain costs associated with the issuance of debt instruments have been capitalized and were
included in other non-current assets on the condensed consolidated balance sheets. These costs have
been amortized to interest expense over the terms of the related debt agreements. The bond
outstanding method was used to amortize deferred financing costs relating to debt instruments with
respect to which we made accelerated principal payments. Other deferred financing costs were
amortized using the effective interest method. The Company did not record any amortization of
deferred financing costs for the three and five months ended June 30, 2010, as financing costs
associated with our new debt arrangements were included in the fair value determination of our
long-term debt resulting from our adoption of fresh start accounting. Amortization of the
Predecessor Companys deferred financing costs included in interest expense was $1.8 million, $8.3
million and $16.6 million for the one month ended January 31, 2010 and three and six months ended
June 30, 2009, respectively.
In conjunction with our adoption of fresh start accounting and reporting on February 1, 2010
(Fresh Start Reporting Date), an adjustment was established to record our outstanding debt at
fair value on the Fresh Start Reporting Date. This fair value adjustment will be amortized as an
increase to 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 an increase to interest expense was $8.3
million and $13.9 million for the three and five months ended June 30, 2010, respectively. See Note
3, Fresh Start Accounting for additional information.
In connection with the amendment and restatement of the Dex Media East and RHDI credit facilities
on the Effective Date, we entered into interest rate swap and interest rate cap agreements during
the first quarter of 2010, which have not been designated as cash flow hedges. The Companys
interest expense for the three and five months ended June 30, 2010 includes expense of $5.6 million
and $6.7 million, respectively, resulting from the change in fair value of these interest rate
swaps and interest rate caps.
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The Predecessor Companys interest expense for the one month ended January 31, 2010 and three and
six months ended June 30, 2009 includes expense of $0.8 million, $5.1 million and $5.1 million,
respectively, associated with the change in fair value of the Dex Media East LLC interest rate
swaps no longer deemed financial instruments as a result of filing the Chapter 11 petitions. The
Predecessor Companys interest expense for the one month ended January 31, 2010 and three and six
months ended June 30, 2009 also includes expense of $1.1 million, $2.0 million and $2.0 million,
respectively, resulting from amounts previously charged to accumulated other comprehensive loss
related to these interest rate swaps. The amounts previously charged to accumulated other
comprehensive loss related to the Dex Media East LLC interest rate swaps were to be amortized to
interest expense over the remaining life of the interest rate swaps based on future interest
payments, as it was not probable that those forecasted transactions would not occur. In accordance
with fresh start accounting and reporting, unamortized amounts previously charged to accumulated
other comprehensive loss related to these interest rate swaps have been eliminated as of the Fresh
Start Reporting Date. See Note 3, Fresh Start Accounting for additional information.
As a result of the amendment of the RHDI credit facility and the refinancing of the former Dex
Media West LLC credit facility on June 6, 2008, the Predecessor Companys interest rate swaps
associated with these two debt arrangements were no longer highly effective in offsetting changes
in cash flows. Accordingly, cash flow hedge accounting treatment was no longer permitted. In
addition, as a result of filing the Chapter 11 petitions, these interest rate swaps were required
to be settled or terminated during 2009. As a result of the change in fair value of these interest
rate swaps prior to the Effective Date, the Predecessor Companys interest expense includes expense
of $0.4 million for the one month ended January 31, 2010 and a reduction of $2.6 million and $9.3
million for the three and six months ended June 30, 2009, respectively.
In conjunction with the Predecessor Companys acquisition of Dex Media (Dex Media Merger) and as
a result of purchase accounting required under U.S. generally accepted accounting principles
(GAAP), the Predecessor Company recorded Dex Medias debt at its fair value on January 31, 2006.
The Predecessor Company recognized an offset to interest expense in each period subsequent to the
Dex Media Merger through May 28, 2009 for the amortization of the corresponding fair value
adjustment. The offset to interest expense was $3.0 million and $7.7 million for the three and six
months ended June 30, 2009, respectively. The offset to interest expense was to be recognized over
the life of the respective debt, however due to filing the Chapter 11 petitions, unamortized fair
value adjustments at May 28, 2009 of $78.5 million were written-off and recognized as a
reorganization item during 2009.
Contractual interest expense that would have appeared on the Predecessor Companys condensed
consolidated statement of operations if not for the filing of the Chapter 11 petitions was $65.9
million, $202.9 million and $398.1 million for the one month ended January 31, 2010 and three and
six months ended June 30, 2009, respectively.
Advertising Expense
We recognize advertising expenses as incurred. These expenses include media, public relations,
promotional, branding and sponsorship costs and on-line advertising. Total advertising expense for
the Company was $6.8 million and $11.0 million for the three and five months ended June 30, 2010,
respectively. Total advertising expense for the Predecessor Company was $1.0 million, $6.4 million
and $10.1 million for the one month ended January 31, 2010 and three and six months ended June 30,
2009, respectively.
Concentration of Credit Risk
Approximately 85% of our advertising revenues are derived from the sale of our marketing products
and services to local businesses. Most new clients and clients desiring to expand their
advertising programs are subject to a credit review. We do not require collateral from our clients,
although we do charge late fees to clients that do not pay by specified due dates. The remaining
approximately 15% of our advertising revenues are derived from the sale of our marketing products
and services to national or large regional chains. Substantially all of the revenues derived
through national accounts are serviced through certified marketing representatives (CMRs) from
which we accept orders. We receive payment for the value of advertising placed in our directories,
net of the CMRs commission, directly from the CMR. While we are still exposed to credit risk, the
amount of credit losses from these accounts has historically been less than our credit losses on
local accounts because the clients, and in some cases the CMRs, tend to be larger companies with
greater financial resources than local clients.
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At June 30, 2010, we had interest rate swap and interest rate cap agreements with major financial
institutions with a notional amount of $500.0 million and $400.0 million, respectively. 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 for interest rate swaps 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 interest rate swap agreement. Under the terms of the interest rate cap agreements, the
Company will receive payments based on the spread in rates if the three-month LIBOR rate increases
above the negotiated cap rates. Any loss would be limited to the amount that would have been
received based on the spread in rates over the remaining life of the interest rate cap agreement.
The counterparties to the interest rate swap and interest rate cap agreements are major financial
institutions with credit ratings of AA- or higher, or the equivalent dependent upon the credit
rating agency.
Earnings (Loss) Per Share
The calculation of basic and diluted earnings (loss) per share (EPS) is presented below.
Successor Company | ||||||||
Three Months | Five Months | |||||||
Ended | Ended | |||||||
June 30, 2010 | June 30, 2010 | |||||||
Basic EPS |
||||||||
Net loss |
$ | (769,923 | ) | $ | (512,705 | ) | ||
Weighted average common shares outstanding |
50,016 | 50,013 | ||||||
Basic EPS |
$ | (15.39 | ) | $ | (10.25 | ) | ||
Diluted EPS |
||||||||
Net loss |
$ | (769,923 | ) | $ | (512,705 | ) | ||
Weighted average common shares outstanding |
50,016 | 50,013 | ||||||
Dilutive effect of stock awards (1) |
| | ||||||
Weighted average diluted shares outstanding |
50,016 | 50,013 | ||||||
Diluted EPS |
$ | (15.39 | ) | $ | (10.25 | ) | ||
Predecessor Company | ||||||||||||
One Month | Three Months | Six Months | ||||||||||
Ended | Ended | Ended | ||||||||||
January 31, 2010 | June 30, 2009 | June 30, 2009 | ||||||||||
Basic EPS |
||||||||||||
Net income (loss) |
$ | 6,920,009 | $ | (75,482 | ) | $ | (476,692 | ) | ||||
Weighted average common shares outstanding |
69,013 | 68,918 | 68,892 | |||||||||
Basic EPS |
$ | 100.3 | $ | (1.10 | ) | $ | (6.92 | ) | ||||
Diluted EPS |
||||||||||||
Net income (loss) |
$ | 6,920,009 | $ | (75,482 | ) | $ | (476,692 | ) | ||||
Weighted average common shares outstanding |
69,013 | 68,918 | 68,892 | |||||||||
Dilutive effect of stock awards (1) |
39 | | | |||||||||
Weighted average diluted shares outstanding |
69,052 | 68,918 | 68,892 | |||||||||
Diluted EPS |
$ | 100.2 | $ | (1.10 | ) | $ | (6.92 | ) | ||||
(1) | Due to the Companys reported net loss for the three and five months ended June 30, 2010 and the Predecessor Companys reported net loss for the three and six months ended June 30, 2009, the effect of all stock-based awards was anti-dilutive and therefore not included in the calculation of diluted EPS. For the three and five months ended June 30, 2010, 1.0 million shares and 1.0 million shares, respectively, of the Companys stock-based awards had exercise prices that exceeded the average market price of the Companys common stock for the period. For the one month ended January 31, 2010 and three and six months ended June 30, 2009, 4.6 million shares, 5.7 million shares and 5.7 million shares, respectively, of the Predecessor Companys stock-based awards had exercise prices that exceeded the average market price of the Predecessor Companys common stock for the respective period. |
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Stock-Based Awards
On the Effective Date, the Companys Board of Directors ratified the Dex One Equity Incentive Plan
(EIP), which was previously approved as part of the Confirmation Order. Under the EIP, certain
employees and non-employee directors of the Company are eligible to receive stock options, SARs,
limited stock appreciation rights in tandem with stock options, restricted stock and restricted
stock units. Under the EIP, 5.6 million shares of our common stock were authorized for grant. To
the extent that shares of our common stock are not issued or delivered by reason of (i) the
expiration, termination, cancellation or forfeiture of such award, with certain exceptions, or (ii)
the settlement of such award in cash, then such shares of our common stock shall again be available
under the EIP. Stock awards will typically be granted at the market value of our common stock at
the date of the grant, become exercisable in ratable installments or otherwise, over a period of
one to three years from the date of grant, and may be exercised up to a maximum of ten years from
the date of grant. The Companys Compensation & Benefits Committee will determine termination,
vesting and other relevant provisions at the date of the grant.
On March 1, 2010 and pursuant to the Plan, the Company granted 1.3 million SARs to certain
employees, including executive officers, as intended in the Plan and in conjunction with the EIP.
These SARs, which are settled in our common stock, were granted at a grant price of $28.68 per
share, which was equal to the volume weighted average market value of our common stock during the
first thirty calendar days upon emergence from Chapter 11, and vest ratably over three years. On
March 1, 2010, the Company also granted and issued less than 0.1 million shares of common stock to
members of its Board of Directors. These shares of common stock vested immediately upon issuance.
The Company recorded $1.1 million and $2.0 million of stock-based compensation expense related to
the March 1, 2010 grants during the three and five months ended June 30, 2010, respectively.
Upon emergence from Chapter 11 and pursuant to the Plan, all outstanding equity securities of the
Predecessor Company including all stock options, SARs and restricted stock, were cancelled. As a
result, the Predecessor Company recognized $1.9 million of remaining unrecognized compensation cost
related to these stock-based awards as reorganization items, net during the one month ended January
31, 2010.
Prior to the cancellation of its equity awards, the Predecessor Company recorded stock-based
compensation expense related to stock-based awards granted under its various employee and
non-employee stock incentive plans of $0.6 million, $2.8 million and $6.8 million for the one month
ended January 31, 2010 and three and six months ended June 30, 2009, respectively.
Long-Term Incentive Program
The Companys LTIP is a cash-based plan designed to provide long-term incentive compensation to
participants based on the achievement of performance goals. The LTIP was originally approved by the
Predecessor Companys Compensation & Benefits Committee in 2009. During the bankruptcy proceedings,
the Bankruptcy Court approved for the LTIP to be carried forward by the Company upon emergence from
Chapter 11. The amount of each award under the LTIP will be paid in cash and is dependent upon the
attainment of certain performance measures related to the amount of the Companys and Predecessor
Companys cumulative free cash flow for the 2009, 2010 and 2011 fiscal years (the Performance
Period). Participants who are executive officers of the Company and Predecessor Company, and
certain other participants designated by the Chief Executive Officer, were also eligible to receive
a payment upon the achievement of a restructuring, reorganization and/or recapitalization relating
to the Predecessor Companys outstanding indebtedness and liabilities (the Specified Actions)
during the Performance Period. Payments are to be made following the end of the Performance Period
or the date of a Specified Action, as the case may be. Upon emergence from Chapter 11 and the
achievement of the Specified Actions, the Company made cash payments associated with the LTIP of
$8.0 million during the five months ended June 30, 2010.
These cash-based awards were granted to participants in April 2009. The Company recognized
compensation expense related to the LTIP of $3.2 million and $3.9 million during the three and five
months ended June 30, 2010, respectively, which includes $2.3 million of accelerated compensation
expense associated with the retirement of our Chief Executive Officer. The Predecessor Company
recognized compensation expense related to the LTIP of $0.5 million, $1.8 million and $1.8 million
during the one month ended January 31, 2010 and three and six months ended June 30, 2009,
respectively.
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Fair Value of Financial Instruments
At June 30, 2010 and December 31, 2009, the fair value of cash and cash equivalents, accounts
receivable, and accounts payable and accrued liabilities approximated their carrying value based on
the net short-term nature of these instruments. As discussed in Note 3, Fresh Start Accounting,
all of the Companys assets and liabilities were fair valued as of the Fresh Start Reporting Date
in connection with our adoption of fresh start accounting. The Company has utilized quoted market
prices, where available, to compute the fair market value of our long-term debt at June 30, 2010 as
disclosed in Note 6, 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. As a result of filing the Chapter 11
petitions and the Plan, the Predecessor Company does not believe that it is meaningful to present
the fair market value of its long-term debt at December 31, 2009.
FASB ASC 820, Fair Value Measurements and Disclosures (FASB ASC 820) 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. FASB ASC 820 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 such as quoted prices for similar
assets or liabilities, quoted prices in markets with insufficient volume or infrequent
transactions, or model-derived valuations in which all significant inputs are observable or
can be derived principally from or corroborated by observable market data for substantially
the full term of the assets or liabilities.
Level 3 Prices or valuations that require inputs that are both significant to the
measurement and unobservable.
As required by FASB ASC 820, assets and liabilities are classified based on the lowest level of
input that is significant to the fair value measurement. The Companys and the Predecessor
Companys assessment of the significance of a particular input to the fair value measurement
requires judgment, and may affect the valuation of the fair value of assets and liabilities and
their placement within the fair value hierarchy levels. The Company and the Predecessor Company had
interest rate swaps with a notional amount of $500.0 million and $200.0 million at June 30, 2010
and December 31, 2009, respectively, that are and were measured at fair value on a recurring basis.
At June 30, 2010, the Company had interest rate caps with a notional amount of $400.0 million that
are measured at fair value on a recurring basis. The following table presents the Companys and the
Predecessor Companys assets and liabilities that were measured at fair value on a recurring basis
at June 30, 2010 and December 31, 2009, respectively, and the level within the fair value hierarchy
in which the fair value measurements were included.
Fair Value Measurements | |||||||||
Using Significant Other Observable Inputs (Level 2) | |||||||||
Successor Company | Predecessor Company | ||||||||
Derivatives: | June 30, 2010 | December 31, 2009 | |||||||
Interest Rate Swap
Liabilities |
$ | (5,070 | ) | $ | (6,695 | ) | |||
Interest Rate Cap Assets |
$ | 551 | $ | |
There were no transfers of assets or liabilities into or out of Level 2 during the three and five
months ended June 30, 2010 or the one month ended January 31, 2010.
Valuation Techniques Interest Rate Swaps and Interest Rate Caps
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.
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Fair value for our derivative instruments was derived using pricing models based on a market
approach. 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 for each of our derivative instruments incorporate specific contract terms for valuation
inputs, including effective dates, maturity dates, interest rate swap pay rates, interest rate cap
rates and notional amounts, as disclosed and presented in Note 7, Derivative Financial
Instruments, interest rate yield curves such as the London Inter Bank Swap Curve, and the
creditworthiness of the counterparty and the Company. Counterparty credit risk and the Companys
credit risk 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. At June 30, 2010,
the impact of applying counterparty credit risk in determining the fair value of our derivative
instruments was an increase to our derivative instruments liability of less than $0.1 million. At
June 30, 2010, the impact of applying the Companys credit risk in determining the fair value of
our derivative instruments was a decrease to our derivative instruments liability of $0.5 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 Interest Rate Swaps and Interest Rate Caps
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.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and
certain expenses and the disclosure of contingent assets and liabilities. Actual results could
differ materially from those estimates and assumptions. Estimates and assumptions are used in the
determination of recoverability of long-lived assets, sales allowances, allowances for doubtful
accounts, depreciation and amortization, employee benefit plans expense, restructuring reserves,
deferred income taxes, certain estimates pertaining to liabilities under FASB ASC 740, certain
assumptions pertaining to our stock-based awards, certain estimates associated with liabilities
classified as liabilities subject to compromise, and certain estimates and assumptions used in our
impairment evaluation of goodwill, definite-lived intangible assets and other long-lived assets,
among others.
New Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Improving Disclosures
about Fair Value Measurements (ASU 2010-06). ASU 2010-06 amends FASB ASC 820 to clarify existing
disclosure requirements and require additional disclosure about fair value measurements. ASU
2010-06 clarifies existing fair value disclosures about the level of disaggregation presented and
about inputs and valuation techniques used to measure fair value for measurements that fall in
either Level 2 or Level 3 of the fair value hierarchy. The additional disclosure requirements
include disclosure regarding the amounts and reasons for significant transfers in and out of Level
1 and Level 2 of the fair value hierarchy and separate presentation of purchases, sales, issuances
and settlements of items within Level 3 of the fair value hierarchy. ASU 2010-06 is effective for
interim and annual reporting periods beginning after December 15, 2009 except for the disclosures
about Level 3 activity of purchases, sales, issuances and settlements, which is effective for
interim and annual reporting periods beginning after December 15, 2010. Effective January 1, 2010,
we adopted the disclosure provisions of ASU 2010-06 that are effective for interim and annual
reporting periods beginning after December 15, 2009. These disclosures are required to be provided
only on a prospective basis.
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In September 2009, the Emerging Issues Task Force (EITF) reached final consensus on EITF Issue
No. 08-1, Revenue Arrangements with Multiple Deliverables (EITF 08-1). EITF 08-1 has not yet been
incorporated into the FASBs Codification. EITF 08-1 updates the current guidance pertaining to
multiple-element revenue arrangements included in FASB ASC 605-25, which originated from EITF
00-21, Revenue Arrangements with Multiple Deliverables. EITF 08-1 addresses how to determine
whether an arrangement involving multiple deliverables contains more than one unit of accounting
and how the arrangement consideration should be allocated among the separate units of accounting.
EITF 08-1 will be effective for the Company in the annual reporting period beginning January 1,
2011. EITF 08-1 may be applied retrospectively or prospectively and early adoption is permitted.
The Company does not expect the adoption of EITF 08-1 to have an impact on its financial position,
results of operations or cash flows.
We have reviewed other accounting pronouncements that were issued as of June 30, 2010, 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. Fresh Start Accounting
The Company adopted fresh start accounting and reporting effective February 1, 2010, the Fresh
Start Reporting Date, in accordance with FASB ASC 852, as the holders of existing voting shares
immediately before confirmation of the Plan received less than 50% of the voting shares of the
emerging entity and the reorganization value of the Companys assets immediately before the date of
confirmation was less than the post-petition liabilities and allowed claims. The Company was
required to adopt fresh start accounting and reporting as of January 29, 2010, the Effective Date.
However, in light of the proximity of that date to our accounting period close immediately after
the Effective Date, which was January 31, 2010, as well as the results of a materiality assessment
discussed below, we elected to adopt fresh start accounting and reporting on February 1, 2010.
The financial statements as of the Fresh Start Reporting Date will report the results of Dex One
with no beginning retained earnings or accumulated deficit. Any presentation of Dex One represents
the financial position and results of operations of a new reporting entity and is not comparable to
prior periods presented by RHD. The consolidated financial statements for periods ended prior to
the Fresh Start Reporting Date do not include the effect of any changes in capital structure or
changes in the fair value of assets and liabilities as a result of fresh start accounting.
The Company performed a quantitative and qualitative materiality assessment in accordance with
Staff Accounting Bulletin (SAB) No. 99, Materiality, and SAB No. 108, Considering the Effects of
Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements, in
order to determine the appropriateness of choosing the Fresh Start Reporting Date for accounting
and reporting purposes instead of the Effective Date. RHD and Dex One concluded that the
quantitative assessment did not have a material impact on either RHD for the one month ended
January 31, 2010 or Dex One for the two months ended March 31, 2010 and five months ended June 30,
2010 and that there were no qualitative factors that would preclude the use of the Fresh Start
Reporting Date for accounting and reporting purposes.
In accordance with FASB ASC 852, the results of operations of RHD prior to the Fresh Start
Reporting Date include (i) a pre-emergence gain of approximately $4.5 billion resulting from the
discharge of liabilities under the Plan, partially offset by the issuance of new Dex One common
stock and additional paid-in capital and the Dex One Senior Subordinated Notes; (ii) pre-emergence
charges to earnings recorded as reorganization items resulting from certain costs and expenses
relating to the Plan becoming effective; and (iii) a pre-emergence increase in earnings of $3.3
billion resulting from the aggregate changes to the net carrying value of our pre-emergence assets
and liabilities to reflect their fair values under fresh start accounting, as well as the
recognition of goodwill. See Note 4, Reorganization Items, Net for additional information.
Enterprise Value / Reorganization Value Determination
Enterprise value represented the fair value of an entitys interest-bearing debt and shareholders
equity. In the disclosure statement associated with the Plan, which was confirmed by the Bankruptcy
Court, we estimated a range of enterprise values between $4.2 billion and $5.3 billion, with a
midpoint of $4.8 billion. Based on the then current and anticipated economic conditions and the
direct impact these conditions have on our business, we deemed it appropriate to use the midpoint
between the low end of the range and the overall midpoint of the range to determine the final
enterprise value of $4.5 billion, comprised of debt valued at $3.3 billion and equity valued at
$1.3 billion less cash required to be on hand as a result of the Plan of $125.0 million.
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FASB ASC 852 provides for, among other things, a determination of the value to be assigned to the
assets of the reorganized Company as of a date selected for financial reporting purposes. The
Company adjusted its enterprise value of $4.5 billion for certain items such as post-petition
liabilities, deferred income taxes and cash on hand post emergence to determine a reorganization
value of $5.9 billion. Under fresh start accounting, the reorganization value was allocated to Dex
Ones assets based on their respective fair values in conformity with the purchase method of
accounting for business combinations included in FASB ASC 805, Business Combinations. The excess
reorganization value over the fair value of identified tangible and intangible assets of $2.1
billion was recorded as goodwill.
The reorganization value represents the amount of resources available, or that become available,
for the satisfaction of post-petition liabilities and allowed claims, as negotiated between the
Company and its creditors (the Interested Parties). This value, along with other terms of the
Plan, was determined only after extensive arms-length negotiations between the Interested Parties.
Each Interested Party developed its view of what the value should be based upon expected future
cash flows of the business after emergence from Chapter 11, discounted at rates reflecting
perceived business and financial risks. This value is viewed as the fair value of the entity before
considering liabilities and is intended to approximate the amount a willing buyer would pay for the
assets of Dex One immediately after restructuring. The reorganization value was determined using
numerous projections and assumptions that are inherently subject to significant uncertainties and
the resolution of contingencies beyond the control of the Company. Accordingly, there can be no
assurance that the estimates, assumptions and amounts reflected in the valuation will be realized.
Methodology, Analysis and Assumptions
Dex Ones valuation was based upon a discounted cash flow methodology, which included a calculation
of the present value of expected un-levered after-tax free cash flows reflected in our long-term
financial projections, including the calculation of the present value of the terminal value of cash
flows, and supporting analysis that included (a) a comparison of selected financial data of the
Company with similar data of other publicly held companies in businesses similar to ours, (b) an
analysis of comparable valuations indicated by precedent mergers and acquisitions of such companies
and (c) a valuation of post-emergence tax attributes. A detailed discussion of this methodology and
supporting analysis is presented below.
The Companys business plan was the foundation for developing long-term financial projections used
in the valuation of our business. Specific operating and financial metrics that drive or inform the
long-term financial projections include, but are not limited to, customer numbers, customer
behaviors, average spend per customer, product usage, and sales representative productivity. The
business planning and forecasting process also included a review of Company, industry and
macroeconomic factors including, but not limited to, achievement of future financial results,
projected changes associated with our reorganization initiatives, anticipated changes in general
market conditions including variations in market regions, and known new business opportunities and
challenges. Detailed research and forecast materials from leading industry and economic analysts
were also used to form our assumptions and to provide context for the business plan and long-term
financial projections. The planning and forecasting process further included sensitivity analyses
related to key Company, industry and macroeconomic variables.
The following represents a detailed discussion of the methodology and supporting analysis used to
value our business using the business plan and long-term financial projections developed by the
Company:
Discounted Cash Flow Methodology
The Discounted Cash Flow (DCF) analysis is a forward-looking enterprise valuation methodology
that relates the value of an asset or business to the present value of expected future cash flows
to be generated by that asset or business. Under this methodology, projected future cash flows are
discounted by the business weighted average cost of capital (WACC). The WACC reflects the
estimated blended rate of return that debt and equity investors would require to invest in the
business based on its capital structure. Our DCF analysis has three components: (1) the present
value of the expected un-levered after-tax free cash flows for a determined period, (2) the present
value of the terminal value of cash flows, which represents a firm value beyond the time horizon of
the long-term financial projections, and (3) the present value of the below market cost of secured
debt at Dex Media East and Dex Media West through the term of the relevant securities.
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The DCF calculation was based on managements financial projections of un-levered after-tax free
cash flows for the period 2010 to 2014. The Company used a range of WACCs to discount future cash
flows and terminal values between 9.0% and 11.0%, with a midpoint of 10.0%. These ranges were
determined based upon a market cost of debt, rather than the anticipated cost of debt of the
reorganized Company upon emergence from bankruptcy, and a market cost of equity using a capital
asset pricing model. Assumptions used in the DCF analysis, including the appropriate components of
the WACC, were deemed to be those of market participants upon analysis of peer groups capital
structures.
In conjunction with our analysis of publicly traded companies described below, the Company used a
range of exit multiples of 2014 earnings before interest, taxes, depreciation and amortization
(EBITDA) between 4.75 and 6.25, with a marginally lower than midpoint of 5.13 exit multiple
selected, to determine the present value of the terminal value of cash flows. The period of 2014
was chosen as it represents the maturity date of the secured debt held at Dex Media East and Dex
Media West and the period over which the Company will recognize the benefit of recording the
secured debt at below market cost. The present value of the below market cost of secured debt at
Dex Media East and Dex Media West was determined using the pricing of the new RHDI secured debt at
the time the valuation was performed as a proxy for a market cost of similar debt. The Company
measured the difference between the actual cost of debt at Dex Media East and Dex Media West and
the assumed market cost of debt and discounted the difference using a range of WACCs between 9.0%
and 11.0% with a midpoint of 10.0%. Upon emergence, it was determined that the pricing for the new
RHDI secured debt was also at below market cost and has been recorded by the Company accordingly.
The sum of the present value of the projected un-levered after-tax free cash flows was added to the
present value of the terminal value of cash flows and present value of the below market cost of the
secured debt at Dex Media East and Dex Media West to determine the Companys enterprise value.
Publicly Traded Company Analysis
As part of our valuation analysis, the Company identified publicly traded companies whose
businesses are relatively similar to ours and have comparable operational characteristics to derive
comparable revenue and EBITDA multiples for our DCF analysis. Criteria for selecting comparable
companies for the analysis included, among other relevant characteristics, similar lines of
businesses, business risks, growth prospects, maturity of businesses, market presence, size, and
scale of operations. The analysis included a detailed multi-year financial comparison of each
companys income statement, balance sheet and statement of cash flows. In addition, each companys
performance, profitability, margins, leverage and business trends were also examined. Based on
these analyses, a number of financial multiples and ratios were calculated to gauge each companys
relative performance and valuation. The ranges of ratios derived were then applied to the Companys
projected financial results to develop a range of implied values. The selected range of ratios was
4.75 to 6.25, with a marginally lower than midpoint of 5.13 exit multiple selected.
Precedent Transaction Analysis
Additionally, the Company utilized a precedent transaction analysis, which estimates value by
examining public merger and acquisition transactions. The valuations paid in such transactions were
analyzed as ratios of various financial results. These transaction multiples were calculated based
on the purchase price paid to acquire companies that are comparable to us. We also observed
historical expected synergies and enterprise premiums paid in selected transactions.
Analysis of Post-Emergence Tax Attributes
Following our emergence from Chapter 11, the Company was permitted to retain tax attributes to the
extent the Companys tax attributes as of the Petition Date exceeded its cancellation of debt
income. The Company valued these tax attributes by calculating the present value of the tax savings
expected to be provided relative to the taxes the Company would otherwise pay absent the
availability of such attributes. These cash flows were then discounted at a range of discount rates
based on the Companys relevant cost of capital or cost of equity. Furthermore, the Company took
into account a variety of qualitative factors in estimating the value of the tax attributes,
including such factors as implementation and utilization risk.
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Table of Contents
Final Enterprise Value, Accounting Policies and Reorganized Consolidated Balance Sheet
In determining the final enterprise value attributed to the Company of $4.5 billion, we blended our
publicly traded company analysis and precedent transaction analysis with the DCF methodology and
then factored in the post-emergence tax attributes analysis, with more emphasis on the DCF
methodology.
Fresh start accounting and reporting permits the selection of appropriate accounting policies for
Dex One. The Predecessor Companys significant accounting policies that were disclosed in our
Annual Report on Form 10-K for the year ended December 31, 2009 were adopted by Dex One as of the
Fresh Start Reporting Date, though many of the account balances were affected by the reorganization
and fresh start adjustments presented below.
The adjustments presented below were made to the January 31, 2010 condensed consolidated balance
sheet. The condensed consolidated balance sheet, reorganization adjustments and fresh start
adjustments presented below summarize the impact of the Plan and the adoption of fresh start
accounting as of the Fresh Start Reporting Date.
Reorganized Condensed Consolidated Balance Sheet
As of January 31, 2010
(Unaudited)
As of January 31, 2010
(Unaudited)
January 31, 2010 | ||||||||||||||||
Predecessor | Reorganization | Fresh Start | Successor | |||||||||||||
Company | Adjustments(1) | Adjustments(2) | Company(10) | |||||||||||||
Assets | ||||||||||||||||
Current Assets |
||||||||||||||||
Cash and cash equivalents |
$ | 725,955 | $ | (526,500 | )(3) | $ | | $ | 199,455 | |||||||
Net accounts receivable |
798,113 | | (41,156 | )(2) | 756,957 | |||||||||||
Deferred directory costs |
135,479 | | (135,479 | )(2) | | |||||||||||
Prepaid expenses and other current assets |
86,925 | (1,401 | )(4)(7) | 9,657 | (2) | 95,181 | ||||||||||
Total current assets |
1,746,472 | (527,901 | ) | (166,978 | ) | 1,051,593 | ||||||||||
Fixed assets and computer software, net |
154,439 | | 49,814 | (2) | 204,253 | |||||||||||
Other non-current assets |
60,664 | | (57,952 | )(9) | 2,712 | |||||||||||
Deferred income taxes, net |
423,485 | (333,275 | )(7) | (90,210 | )(2) | | ||||||||||
Intangible assets, net |
2,142,668 | | 415,132 | (2) | 2,557,800 | |||||||||||
Goodwill |
| | 2,097,124 | (2) | 2,097,124 | |||||||||||
Total Assets |
$ | 4,527,728 | $ | (861,176 | ) | $ | 2,246,930 | $ | 5,913,482 | |||||||
Liabilities and Shareholders (Deficit) Equity | ||||||||||||||||
Current Liabilities |
||||||||||||||||
Accounts payable and accrued liabilities |
$ | 150,974 | $ | 13,910 | (4)(7) | $ | (3,172 | )(2) | $ | 161,712 | ||||||
Short-term deferred income taxes, net |
134,080 | (66,651 | )(7) | 153,573 | (2) | 221,002 | ||||||||||
Accrued interest |
20,417 | (20,417 | )(3)(4) | | | |||||||||||
Deferred directory revenues |
811,999 | | (791,034 | )(2) | 20,965 | |||||||||||
Current portion of long-term debt |
993,526 | (827,579 | )(3)(4) | (31,575 | )(4)(8) | 134,372 | ||||||||||
Total current liabilities |
2,110,996 | (900,737 | ) | (672,208 | ) | 538,051 | ||||||||||
Long-term debt |
2,561,248 | 657,628 | (3)(4) | (88,670 | )(4)(8) | 3,130,206 | ||||||||||
Deferred income taxes, net |
| 245,025 | (7) | 66,322 | (2) | 311,347 | ||||||||||
Other non-current liabilities |
380,091 | 120,391 | (4)(7) | (17,388 | )(2) | 483,094 | ||||||||||
Liabilities subject to compromise |
6,352,813 | (6,352,813 | )(5) | | | |||||||||||
Total liabilities |
11,405,148 | (6,230,506 | ) | (711,944 | ) | 4,462,698 | ||||||||||
Shareholders (Deficit) Equity |
||||||||||||||||
Common stock Predecessor |
88,169 | (88,169 | )(6) | | | |||||||||||
Additional paid-in capital Predecessor |
2,443,059 | (2,443,059 | )(6) | | | |||||||||||
(Accumulated deficit) retained earnings |
(9,092,693 | ) | 6,133,819 | (6) | 2,958,874 | (2) | | |||||||||
Treasury Stock Predecessor |
(256,011 | ) | 256,011 | (6) | | | ||||||||||
Accumulated other comprehensive loss |
(59,944 | ) | 59,944 | (6) | | | ||||||||||
Common stock Successor |
| 50 | (5) | | 50 | |||||||||||
Additional paid-in capital Successor |
| 1,450,734 | (5) | | 1,450,734 | |||||||||||
Total shareholders (deficit) equity. |
(6,877,420 | ) | 5,369,330 | 2,958,874 | 1,450,784 | |||||||||||
Total Liabilities and Shareholders
(Deficit) Equity |
$ | 4,527,728 | $ | (861,176 | ) | $ | 2,246,930 | $ | 5,913,482 | |||||||
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(1) | Represents amounts to be recorded on the Fresh Start Reporting Date for the implementation of the Plan, including the settlement of liabilities subject to compromise and related payments, distributions of cash and new shares of Dex One common stock to pre-petition creditors, the cancellation of RHD common stock and the elimination of the Predecessor Companys additional paid-in capital, a portion of accumulated deficit, treasury stock and accumulated other comprehensive loss. The reorganization adjustments also include the establishment of Dex One additional paid-in capital of $1.5 billion based on the fair value of equity of $1.5 billion less the par value of Dex One common stock of less than $0.1 million. Common shares outstanding of the Predecessor Company immediately prior to their cancellation on the Effective Date were 69,058,991. | |
(2) | Represents the adjustments for fresh start accounting primarily related to recording goodwill, recording our intangible assets, accounts receivable, fixed assets and computer software and other assets and liabilities at fair value and related deferred income taxes in accordance with ASC 805. Additionally, such fresh start accounting adjustments reflect the elimination of substantially all of our deferred directory revenue of $791.0 million and all of the related deferred directory costs of $135.5 million, based on the minimal obligations we have subsequent to the Fresh Start Reporting Date for advertising sales fulfilled prior to the Fresh Start Reporting Date. The remaining deferred directory revenues of $21.0 million have been recorded at fair value in fresh start accounting and pertain to billings ahead of publications and revenues associated with our internet products and services for which we have future obligations subsequent to the Fresh Start Reporting Date. Prepaid expenses and other current assets include $14.4 million of cost-uplift, which is defined and discussed below. The fresh start accounting adjustments also include the elimination of (1) the remaining portion of the Predecessor Companys accumulated deficit, (2) prepaid director and officer insurance included in prepaid expenses and other current assets and (3) deferred rent included in accounts payable and accrued liabilities as well as other non-current liabilities. |
The following table represents a reconciliation of the enterprise value attributed to Dex One
assets, determination of the total reorganization value to be allocated to these assets and the
determination of goodwill. The table also presents a reconciliation of the total reorganization
value to be allocated to assets to new Dex One common stock and additional paid-in capital:
Enterprise value attributed to Dex One |
$ | 4,515,907 | ||
Plus: cash and cash equivalents |
199,455 | |||
Plus: liabilities (excluding amended and restated credit
facilities and Dex One Senior Subordinated Notes) |
1,198,120 | |||
Total reorganization value to be allocated to assets |
5,913,482 | |||
Less: fair value assigned to tangible and intangible
assets |
(3,816,358 | ) | ||
Value of Dex One assets in excess of fair value (goodwill) |
$ | 2,097,124 | ||
Total reorganization value to be allocated to assets |
$ | 5,913,482 | ||
Less: amended and restated credit facilities and Dex One
Senior Subordinated Notes |
(3,264,578 | ) | ||
Less: other liabilities |
(1,198,120 | ) | ||
New Dex One common stock (less than $0.1 million) and
additional paid-in capital ($1,450.7 million) |
$ | 1,450,784 | ||
The following table represents the impact of fresh start accounting adjustments on retained
earnings:
Fresh start accounting adjustments: |
||||
Goodwill |
$ | 2,097,124 | ||
Write off of deferred revenue and deferred directory costs |
655,555 | |||
Fair value adjustment to intangible assets |
415,132 | |||
Fair value adjustment to the amended and restated credit
facilities |
120,245 | |||
Fair value adjustment to fixed assets and computer
software |
49,814 | |||
Write-off of deferred financing costs |
(48,443 | ) | ||
Other fresh start accounting adjustments |
(20,450 | ) | ||
Impact of fresh start accounting on statement of operations |
3,268,977 | |||
Adjustment to income tax provision |
(310,103 | ) | ||
Total impact on retained earnings for fresh start accounting
adjustments |
$ | 2,958,874 | ||
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The determination of the fair value of our intangible assets resulted in a $415.1 million net
increase in intangible assets on the reorganized condensed consolidated balance sheet at January
31, 2010. The following table presents the increase (decrease) in fair value of intangible assets
by category:
Directory services agreements |
$ | (92,061 | ) | |
Local customer relationships |
303,326 | |||
National customer relationships |
116,976 | |||
Trade names and trademarks |
16,074 | |||
Technology, advertising commitments and other |
70,817 | |||
Total increase in fair value of intangible assets |
$ | 415,132 | ||
(3) | In accordance with the Plan, cash disbursements of $526.5 million were made on the Effective Date related to the repayment of principal and accrued interest on outstanding debt. | |
(4) | Reflects the amendment and restatement of our credit facilities as well as the issuance of the $300.0 million Dex One Senior Subordinated Notes completed on the Effective Date. The following tables present a reconciliation of outstanding debt, including the current portion, at January 31, 2010 to reorganized outstanding debt, including the current portion, at January 31, 2010. |
January 31, 2010 | ||||
Current portion of long-term debt |
$ | 993,526 | ||
Reclass of current portion of long-term debt |
(827,579 | ) | ||
Adjustment to record the current portion of
long-term debt at fair value |
(31,575 | ) | ||
Reorganized current portion of long-term debt |
$ | 134,372 | ||
January 31, 2010 | ||||
Long-term debt |
$ | 2,561,248 | ||
Reorganization adjustments: |
||||
Repayment of long-term debt |
(511,272 | ) | ||
Reclass of current portion of long-term debt |
827,579 | |||
Dex One Senior Subordinated Notes |
300,000 | |||
Interest rate swaps and accrued interest |
41,321 | |||
Total reorganization adjustments |
657,628 | |||
Adjustment to record long-term debt at fair value |
(88,670 | ) | ||
Reorganized long-term debt |
$ | 3,130,206 | ||
(5) | Liabilities subject to compromise generally refer to pre-petition obligations, secured or unsecured, that may be impaired by a plan of reorganization. FASB ASC 852 requires such liabilities, including those that became known after filing the Chapter 11 petitions, be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. These liabilities represented the estimated amount expected to be resolved on known or potential claims through the Chapter 11 process. Liabilities subject to compromise also includes items that may be assumed under the plan of reorganization, and may be subsequently reclassified to liabilities not subject to compromise. The Company has classified all of its notes in default as liabilities subject to compromise at January 31, 2010. Liabilities subject to compromise also include certain pre-petition liabilities including accrued interest, accounts payable and accrued liabilities, tax related liabilities and lease related liabilities. The table below identifies the principal categories of liabilities subject to compromise at January 31, 2010: |
January 31, 2010 | ||||
Notes in default |
$ | 6,071,756 | ||
Accrued interest |
241,585 | |||
Tax related liabilities |
28,845 | |||
Accounts payable and accrued liabilities |
10,627 | |||
Total liabilities subject to compromise |
$ | 6,352,813 | ||
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Liabilities subject to compromise at January 31, 2010 were either settled by the issuance of new
Dex One common stock, the issuance of the Dex One Senior Subordinated Notes, cash disbursements or
reclassified out of liabilities subject to compromise into appropriate balance sheet accounts. As a
result of the extinguishment of liabilities subject to compromise, the Predecessor Company recorded
a gain on reorganization of $4.5 billion for the one month ended January 31, 2010, the components
of which are presented in the following table.
One Month Ended | ||||
January 31, 2010 | ||||
Liabilities subject to compromise |
$ | 6,352,813 | ||
Less: |
||||
Issuance of new Dex One common stock (par value) |
(50 | ) | ||
Dex One additional paid-in capital |
(1,450,734 | ) | ||
Dex One Senior Subordinated Notes |
(300,000 | ) | ||
Reclassified into other balance sheet liability accounts |
(39,471 | ) | ||
Professional fees and other |
(38,403 | ) | ||
Gain on reorganization / settlement of liabilities subject
to compromise |
$ | 4,524,155 | ||
The Predecessor Company has incurred professional fees associated with filing the Chapter 11
petitions of $30.6 million during the one month ended January 31, 2010, of which $22.7 million have
been paid in cash during the one month ended January 31, 2010. Professional fees include
financial, legal and valuation services directly associated with the reorganization process.
Professional fees for post-emergence activities related to Plan implementation and other transition
costs attributable to the reorganization are expected to continue into 2010.
During the one month ended January 31, 2010, the Predecessor Company did not receive any operating
cash receipts resulting from the filing of the Chapter 11 petitions.
(6) | Represents the impact of reorganization adjustments on accumulated deficit: |
Gain on reorganization / settlement of liabilities subject
to compromise |
$ | 4,524,155 | ||
Elimination of Predecessor Company common stock |
88,169 | |||
Elimination of Predecessor Company additional
paid-in capital |
2,443,059 | |||
Elimination of Predecessor Company treasury stock |
(256,011 | ) | ||
Elimination of Predecessor Company accumulated
other comprehensive loss |
(59,944 | ) | ||
Adjustment to income tax provision |
(607,487 | ) | ||
Other charges |
1,878 | |||
Total impact on accumulated deficit for reorganization
adjustments |
$ | 6,133,819 | ||
In connection with the Companys adoption of fresh start accounting, the following table presents
the amounts included in accumulated other comprehensive loss at January 31, 2010 that were
eliminated as part of fresh start accounting adjustments:
Interest rate swaps, net |
$ | 15,278 | ||
Employee benefit plans, net |
44,666 | |||
Total |
$ | 59,944 | ||
(7) | Represents reorganization adjustments associated with the Predecessor Companys deferred income taxes, interest rate swap liabilities and related interest receivables that have been converted into a new tranche of term loans under the amended and restated credit facilities and the reclass of certain liabilities from liabilities subject to compromise. |
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(8) | Represents the adjustment to record our long-term debt, including the current portion, at fair value as of the Fresh Start Reporting Date. See Note 2, Summary of Significant Accounting Policies Interest Expense and Deferred Financing Costs and Note 6, Long-Term Debt, Credit Facilities and Notes for additional information. The following tables present the fair value adjustments to our long-term debt, including the current portion, by issuance: |
Current portion of long-term debt: |
||||
RHDI Amended and Restated Credit Facility |
$ | 4,149 | ||
Dex Media East Amended and Restated Credit Facility |
22,424 | |||
Dex Media West Amended and Restated Credit Facility |
5,002 | |||
Total fair value adjustments |
$ | 31,575 | ||
Long-term debt: |
||||
RHDI Amended and Restated Credit Facility |
$ | 14,224 | ||
Dex Media East Amended and Restated Credit Facility |
63,633 | |||
Dex Media West Amended and Restated Credit Facility |
10,813 | |||
Total fair value adjustments |
$ | 88,670 | ||
(9) | Represents elimination of deferred financing costs associated with the Predecessor Companys existing credit facilities and the write-off of other non-current assets as a result of fresh start accounting. | |
10) | The following table summarizes the allocation of fair values of the Predecessor Companys assets and liabilities as shown in the reorganized condensed consolidated balance sheet at January 31, 2010: |
January 31, 2010 | ||||
Cash and cash equivalents |
$ | 199,455 | ||
Net accounts receivable |
756,957 | |||
Prepaid expenses and other current assets |
95,181 | |||
Fixed assets and computer software, net |
204,253 | |||
Other non-current assets |
2,712 | |||
Goodwill |
2,097,124 | |||
Intangible assets, net |
2,557,800 | |||
Total assets |
5,913,482 | |||
Less: accounts payable and accrued liabilities |
161,712 | |||
Less: short-term deferred income taxes, net |
221,002 | |||
Less: deferred directory revenues |
20,965 | |||
Less: current portion of long-term debt |
134,372 | |||
Less: long-term debt |
3,130,206 | |||
Less: deferred income taxes, net |
311,347 | |||
Less: other non-current liabilities |
483,094 | |||
Net assets acquired |
$ | 1,450,784 | ||
The Company utilized the following methodologies and assumptions to value its assets in connection
with fresh start accounting:
Cash
Cash and cash equivalents of the Predecessor Company have been carried forward to Dex Ones opening
balance sheet. No valuation adjustments were necessary as book value is a reasonable estimate for
fair value.
Accounts Receivable
The accounts receivable balances were valued at fair value using the net realizable value approach.
The net realizable value approach was determined by reducing the gross receivable balance by our
allowance for doubtful accounts and sales claims. Due to the relatively short collection period,
the net realizable value approach was determined to result in a reasonable indication of fair value
of the assets. The Company will re-establish an allowance for doubtful accounts as accounts
receivable are billed in 2010, which will be based upon collection history and an estimate of
uncollectible accounts. Management will exercise judgment in adjusting the allowance for known
items such as current local business conditions and credit trends.
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Deferred Directory Costs
Unamortized deferred directory costs of the Predecessor Company have been eliminated on Dex Ones
opening balance sheet as they do not represent assets to Dex One. These deferred directory costs
relate entirely to directories that have already been published by the Predecessor Company as of
the Fresh Start Reporting Date. Dex One will begin to record deferred directory costs associated
with directories published subsequent to the Fresh Start Reporting Date.
Deferred income taxes, net
Deferred income taxes, net associated with the Predecessor Company have been eliminated on Dex
Ones opening balance sheet as a result of fresh start accounting. Dex One has recorded deferred
taxes, as applicable, related to any temporary differences, tax carry-forwards, and uncertain tax
positions in accordance with ASC 740, Income Taxes, commencing on the Fresh Start Reporting Date.
A summary of the Companys deferred tax balances at February 1, 2010 and the Predecessor Companys
deferred tax balances at December 31, 2009 is as follows:
Successor Company | Predecessor Company | ||||||||
February 1, 2010 | December 31, 2009 | ||||||||
Gross deferred tax assets |
$ | 139,326 | $ | 1,988,997 | |||||
Valuation allowance |
(7,876 | ) | (1,531,905 | ) | |||||
Gross deferred tax liabilities |
(663,799 | ) | (165,391 | ) | |||||
Net deferred tax asset (liability) |
$ | (532,349 | ) | $ | 291,701 | ||||
See Note 8, Income Taxes for additional information.
Prepaid expenses & other current assets
Prepaid directory costs relate to directories that have not yet been published as of the Fresh
Start Reporting Date. Prepaid directory costs have been recorded at fair value, determined as (a)
the estimated billable value of the published directory less (b) the expected costs to complete the
directory, plus (c) a normal profit margin. This incremental adjustment to step up the recorded
value of the prepaid directory costs to fair value is hereby referred to as cost-uplift. The fair
value of these costs was determined to be $14.4 million, which has been recorded as a fresh start
accounting adjustment on Dex Ones opening balance sheet. Cost-uplift will be reclassified from
prepaid expenses and other current assets to deferred directory costs as directories associated
with these costs are published.
Other prepaid expenses and current assets have been carried forward to Dex Ones opening balance
sheet. The nature of these items relate predominantly to prepaid deposits and rents. These amounts
have been paid in advance with cash and will be amortized over a 12 month period to match the
timing of the use of the related assets. No valuation adjustments were necessary for these items as
book value is a reasonable estimate for fair value.
Fixed Assets
Fixed assets were measured at fair value and as such, all amounts in accumulated depreciation were
reduced to zero. In establishing fair value, we used (i) the cost approach, where the current
replacement cost of the fixed asset being appraised is adjusted for the loss in value caused by
physical deterioration, functional obsolescence, and economic obsolescence and (ii) third-party
appraisals of certain fixed assets such as buildings. The Company carried forward the useful lives
for each of the fixed assets of the Predecessor Company, which were reviewed by the Predecessor
Company as of December 31, 2009. This approach was deemed reasonable since the information used and
analysis performed to determine the useful lives did not materially differ as of January 31, 2010.
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Other non-current assets
Historically, other non-current assets were comprised of unamortized deferred financing costs as
well as various other items. Unamortized deferred financing costs associated with the Predecessor
Companys credit facilities have been written off in fresh start accounting. Throughout bankruptcy
and until the adoption of fresh start accounting, these credit facilities were not subject to
compromise on the condensed consolidated balance sheet and therefore the unamortized deferred
financing costs associated with these credit facilities were not written off to reorganization
items, net on the condensed consolidated statement of operations until the Fresh Start Reporting
Date.
Intangible Assets
The financial information and assumptions used to determine the fair value of individual intangible
assets was consistent with the information and assumptions used in estimating the enterprise value
of Dex One. The following is a summary of the methodology used in the valuation of each category of
intangible asset:
Directory Services Agreements The Company has acquired directory services agreements through
prior acquisitions. See Note 2, Summary of Significant Accounting Policies Identifiable
Intangible Assets and Goodwill for additional information on these directory services agreements.
As these directory services agreements have a direct contribution to the financial performance of
the business, the Company utilized the multi-period excess earnings method, which is a variant of
the income approach, to assign a fair value to these assets. The multi-period excess earnings
method uses a discounted cash flow model, whereby the projected cash flows of the intangible asset
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. The multi-period excess earnings method
assumes the value derived from the respective asset is greater in the earlier years and steadily
declines over time.
Local and National Customer Relationships The Company has acquired significant local and
national customer relationships through prior acquisitions and has also developed significant new
local and national customer relationships. These local and national customer relationships provide
ongoing and repeat business for the Company. Given the direct contribution made by these local and
national customer relationships to the financial performance of the business, the Company utilized
the multi-period excess earnings method to assign a fair value to these assets.
Trade Names and Trademarks - The fair value of trade names and trademarks obtained as a result of
prior acquisitions was determined based on an income approach known as the relief from royalty
method, which values the trade names and trademarks based on the estimated amount that a company
would have to pay in an arms length transaction to use them. Significant assumptions utilized to
value these assets were forecasted revenue streams, estimated applicable royalty rates, applicable
income tax rates and appropriate discount rates. Royalty rates were estimated based on the
assessment of risk and return on investment factors of comparable transactions.
Technology, Advertising Commitments and Other The Companys developed software technology and
content, which has a direct contribution to the financial performance of the business, was valued
using the cost approach. The cost approach measures the value of an intangible asset by
quantifying the aggregate expenditures that would be required to replace the asset, given its
future service capability. Advertising Commitments and other, which includes third-party contracts,
were valued using the multi-period excess earnings method.
The Company established useful lives for each of the intangible assets noted above in conjunction
with their fair value determination in fresh start accounting. See Note 2, Summary of Significant
Accounting Policies Identifiable Intangible Assets and Goodwill for information on the useful
lives and the analysis performed.
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4. Reorganization Items, Net
Reorganization items directly associated with the process of reorganizing the business under
Chapter 11 of the Bankruptcy Code have been recorded on a separate line item on the condensed
consolidated statement of operations. The Predecessor Company has recorded $7.8 billion of
reorganization items during the one month ended January 31, 2010 comprised of a $4.5 billion gain
on reorganization / settlement of liabilities subject to compromise and fresh start accounting
adjustments of $3.3 billion. The following table displays the details of reorganization items for
the one month ended January 31, 2010:
Predecessor Company | ||||
One Month Ended | ||||
January 31, 2010 | ||||
Liabilities subject to compromise |
$ | 6,352,813 | ||
Issuance of new Dex One common stock (par value) |
(50 | ) | ||
Dex One additional paid-in capital |
(1,450,734 | ) | ||
Dex One Senior Subordinated Notes |
(300,000 | ) | ||
Reclassified into other balance sheet liability accounts |
(39,471 | ) | ||
Professional fees and other |
(38,403 | ) | ||
Gain on reorganization / settlement of liabilities subject to compromise |
4,524,155 | |||
Fresh start accounting adjustments: |
||||
Goodwill |
2,097,124 | |||
Write off of deferred revenue and deferred directory costs |
655,555 | |||
Fair value adjustment to intangible assets |
415,132 | |||
Fair value adjustment to the amended and restated credit facilities |
120,245 | |||
Fair value adjustment to fixed assets and computer software |
49,814 | |||
Write-off of deferred financing costs |
(48,443 | ) | ||
Other fresh start accounting adjustments |
(20,450 | ) | ||
Total fresh start accounting adjustments |
3,268,977 | |||
Total reorganization items, net |
$ | 7,793,132 | ||
See Note 3 Fresh Start Accounting for information on the gain on reorganization / settlement of
liabilities subject to compromise and the fresh start accounting adjustments presented above.
During the three and six months ended June 30, 2009, the Predecessor Company recorded $70.8 million
of reorganization items on a separate line item on the condensed consolidated statement of
operations. The following table displays the details of reorganization items for the three and six
months ended June 30, 2009:
Predecessor Company | ||||
Three and Six Months | ||||
Ended June 30, 2009 | ||||
Write-off of unamortized deferred financing costs |
$ | 64,475 | ||
Professional fees |
50,463 | |||
Write-off of net premiums / discounts on long-term
debt |
34,886 | |||
Write-off of fair value adjustments |
(78,511 | ) | ||
Lease rejections |
(532 | ) | ||
Total reorganization items |
$ | 70,781 | ||
The write-off of unamortized deferred financing costs of $64.5 million, unamortized net premiums /
discounts of $34.9 million and unamortized fair value adjustments required by GAAP as a result of
the Dex Media Merger of $78.5 million at May 28, 2009 related to long-term debt classified as
liabilities subject to compromise at June 30, 2009.
The Predecessor Company incurred professional fees of $50.5 million during the three and six months
ended June 30, 2009 associated with filing the Chapter 11 petitions, of which $47.0 million have
been paid in cash. Professional fees include financial, legal and valuation services directly
associated with the reorganization process.
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The Predecessor Company reclassified a previously recognized restructuring charge of $0.5 million
to reorganization items, net for leases that have been rejected by the Predecessor Company and
approved by the Bankruptcy Court as part of the Chapter 11 Cases.
5. Restructuring Charges
During 2009, the Predecessor Company initiated a restructuring plan that included vacating leased
facilities and headcount reductions (2009 Actions). During the five months ended June 30, 2010,
the Company relieved the remaining restructuring reserve associated with the 2009 Actions of $0.2
million to earnings. The Company made payments associated with the 2009 Actions of $0.3 million
during the five months ended June 30, 2010. During the one month ended January 31, 2010, the
Predecessor Company relieved a portion of the restructuring reserve associated with the 2009
Actions by $0.6 million with a corresponding credit to earnings. The Predecessor Company did not
make any payments associated with the 2009 Actions during the one month ended January 31, 2010.
During the three and six months ended June 30, 2009, the Predecessor Company recognized a
restructuring charge to earnings associated with the 2009 Actions of $2.1 million and made payments
of $0.3 million.
Restructuring charges that are (credited) charged to earnings are included in production and
distribution expenses, selling and support expenses or general and administrative expenses on the
condensed consolidated statements of operations, as applicable.
6. Long-Term Debt, Credit Facilities and Notes
The following table presents the fair market value of our long-term debt at June 30, 2010 based on
quoted market prices on that date, as well as the carrying value of our long-term debt at June 30,
2010, which includes $106.4 million of unamortized fair value adjustments required by GAAP in
connection with the Companys adoption of fresh start accounting on the Fresh Start Reporting Date.
See Note 3 Fresh Start Accounting for additional information.
Successor Company | ||||||||
Fair Market Value | Carrying Value | |||||||
June 30, 2010 | June 30, 2010 | |||||||
RHDI Amended and Restated Credit Facility |
$ | 986,067 | $ | 1,091,403 | ||||
Dex Media East Amended and Restated Credit Facility |
717,932 | 810,040 | ||||||
Dex Media West Amended and Restated Credit Facility |
708,402 | 773,561 | ||||||
Dex One 12%/14% Senior Subordinated Notes due 2017 |
279,000 | 300,000 | ||||||
Total Dex One consolidated |
2,691,401 | 2,975,004 | ||||||
Less current portion |
165,185 | 165,524 | ||||||
Long-term debt |
$ | 2,526,216 | $ | 2,809,480 | ||||
RHDI Amended and Restated Credit Facility
As of June 30, 2010, the outstanding carrying value under the amended and restated RHDI credit
facility (RHDI Amended and Restated Credit Facility) totaled $1,091.4 million. The RHDI Amended
and Restated Credit Facility requires quarterly principal and interest payments at our option at
either:
| The highest (subject to a floor of 4.00%) of (i) the Prime Rate (as defined in the RHDI Amended and Restated Credit Facility), (ii) the Federal Funds Effective Rate (as defined in the RHDI Amended and Restated Credit Facility) plus 0.50%, and (iii) one month LIBOR plus 1.00% in each case, plus an interest rate margin for base rate loans. The interest rate margin for base rate loans is initially 5.25% per annum, and such interest rate margin adjusts pursuant to a pricing grid that provides for a margin equal to 5.25% per annum if RHDIs consolidated leverage ratio is greater than or equal to 4.25 to 1.00, and equal to 5.00% per annum if RHDIs consolidated leverage ratio is less than 4.25 to 1.00; or | ||
| The higher of (i) LIBOR rate and (ii) 3.00%, in each case, plus an interest rate margin for Eurodollar loans. The interest rate margin for Eurodollar loans is initially 6.25% per annum, and such interest rate margin adjusts pursuant to a pricing grid that provides for a margin equal to 6.25% per annum if RHDIs consolidated leverage ratio is greater than or equal to 4.25 to 1.00, and equal to 6.00% per annum if RHDIs consolidated leverage ratio is less than 4.25 to 1.00. RHDI may elect interest periods of 1, 2, 3 or 6 months for LIBOR borrowings. |
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The RHDI Amended and Restated Credit Facility matures on October 24, 2014. The weighted average
interest rate of outstanding debt under the RHDI Amended and Restated Credit Facility was 9.25% at
June 30, 2010.
Dex Media East Amended and Restated Credit Facility
As of June 30, 2010, the outstanding carrying value under the amended and restated Dex Media East
credit facility (Dex Media East Amended and Restated Credit Facility) totaled $810.0 million. The
Dex Media East Amended and Restated Credit Facility requires quarterly principal and interest
payments at our option at either:
| The highest of (i) the Prime Rate (as defined in the Dex Media East Amended and Restated Credit Facility), (ii) the Federal Funds Effective Rate (as defined in the Dex Media East Amended and Restated Credit Facility) plus 0.50%, and (iii) one month LIBOR plus 1.00% in each case, plus an interest rate margin for base rate loans. The interest rate margin for base rate loans is initially 1.50% per annum, and such interest rate margin adjusts pursuant to a pricing grid that provides for a margin equal to 1.50% per annum if DME Inc.s consolidated leverage ratio is greater than or equal to 2.75 to 1.00, equal to 1.25% per annum if DME Inc.s consolidated leverage ratio is greater than or equal to 2.50 to 1.00 but less than 2.75 to 1.00 and equal to 1.00% per annum if DME Inc.s consolidated leverage ratio is less than 2.50 to 1.00; or | ||
| The LIBOR rate plus an interest rate margin for Eurodollar loans. The interest rate margin for Eurodollar loans is initially 2.50% per annum, and such interest rate margin adjusts pursuant to a pricing grid that provides for a margin equal to 2.50% per annum if DME Inc.s consolidated leverage ratio is greater than or equal to 2.75 to 1.00, equal to 2.25% per annum if DME Inc.s consolidated leverage ratio is greater than or equal to 2.50 to 1.00 but less than 2.75 to 1.00 and equal to 2.00% per annum if DME Inc.s consolidated leverage ratio is less than 2.50 to 1.00. DME Inc. may elect interest periods of 1, 2, 3 or 6 months for LIBOR borrowings. |
The Dex Media East Amended and Restated Credit Facility matures on October 24, 2014. The weighted
average interest rate of outstanding debt under the Dex Media East Amended and Restated Credit
Facility was 2.95% at June 30, 2010.
Dex Media West Amended and Restated Credit Facility
As of June 30, 2010, the outstanding carrying value under the amended and restated Dex Media West
credit facility (Dex Media West Amended and Restated Credit Facility) totaled $773.6 million. The
Dex Media West Amended and Restated Credit Facility requires quarterly principal and interest
payments at our option at either:
| The highest (subject to a floor of 4.00%) of (i) the Prime Rate (as defined in the Dex Media West Amended and Restated Credit Facility), (ii) the Federal Funds Effective Rate (as defined in the Dex Media West Amended and Restated Credit Facility) plus 0.50%, and (iii) one month LIBOR plus 1.00% in each case, plus an interest rate margin for base rate loans. The interest rate margin for base rate loans is initially 3.50% per annum, and such interest rate margin adjusts pursuant to a pricing grid that provides for a margin equal to 3.50% per annum if DMW Inc.s consolidated leverage ratio is greater than or equal to 2.75 to 1.00, equal to 3.25% per annum if DMW Inc.s consolidated leverage ratio is greater than or equal to 2.50 to 1.00 but less than 2.75 to 1.00 and equal to 3.00% per annum if DMW Inc.s consolidated leverage ratio is less than 2.50 to 1.00; or | ||
| The higher of (i) LIBOR rate and (ii) 3.00%, in each case, plus an interest rate margin for Eurodollar loans. The interest rate margin for Eurodollar loans is initially 4.50% per annum, and such interest rate margin adjusts pursuant to a pricing grid that provides for a margin equal to 4.50% per annum if DMW Inc.s consolidated leverage ratio is greater than or equal to 2.75 to 1.00, equal to 4.25% per annum if DMW Inc.s consolidated leverage ratio is greater than or equal to 2.50 to 1.00 but less than 2.75 to 1.00 and equal to 4.00% per annum if DMW Inc.s consolidated leverage ratio is less than 2.50 to 1.00. DMW Inc. may elect interest periods of 1, 2, 3 or 6 months for LIBOR borrowings. |
The Dex Media West Amended and Restated Credit Facility matures on October 24, 2014. The weighted
average interest rate of outstanding debt under the Dex Media West Amended and Restated Credit
Facility was 7.50% at June 30, 2010.
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Each of the amended and restated credit facilities described above includes an uncommitted
revolving credit facility available for borrowings up to $40.0 million. The availability of such
uncommitted revolving credit facility is subject to certain conditions including the prepayment of
the term loans under each of the amended and restated credit facilities in an amount equal to such
revolving credit facility.
The amended and restated credit facilities contain provisions for prepayment from net proceeds of
asset dispositions, equity issuances and debt issuances subject to certain exceptions, from a
ratable portion of the net proceeds received by the Company from asset dispositions by the Company,
subject to certain exceptions, and from a portion of excess cash flow.
Each of the amended and restated credit facilities described above contain certain covenants that,
subject to exceptions, limit or restrict each borrower and its subsidiaries incurrence of liens,
investments (including acquisitions), sales of assets, indebtedness, payment of dividends,
distributions and payments of certain indebtedness, sale and leaseback transactions, swap
transactions, affiliate transactions, capital expenditures and mergers, liquidations and
consolidations. Each amended and restated credit facility also contains certain covenants that,
subject to exceptions, limit or restrict each borrowers incurrence of liens, indebtedness,
ownership of assets, sales of assets, payment of dividends or distributions or modifications of the
Dex One Senior Subordinated Notes. Each borrower is required to maintain compliance with a
consolidated leverage ratio covenant. RHDI and DMW Inc. are also required to maintain compliance
with a consolidated interest coverage ratio covenant. DMW Inc. is also required to maintain
compliance with a consolidated senior secured leverage ratio covenant. The Dex Media West Amended
and Restated Credit Agreement includes an option for additional covenant relief under the senior
secured leverage covenant through the fourth quarter of 2011, subject to increased amortization of
the loans through the first quarter of 2012, an increase in the excess cash flow sweep for 2010 and
2011 and payment of a 25 basis point fee ratably to the lenders under the Dex Media West Amended
and Restated Credit Agreement.
On March 31, 2010, the Company exercised the Senior Secured Leverage Ratio Election, as defined in
the Dex Media West Amended and Restated Credit Agreement. The Company incurred a fee of $2.1
million to exercise this option.
The obligations under each of the amended and restated credit facilities are guaranteed by the
subsidiaries of the borrower and are secured by a lien on substantially all of the borrowers and
its subsidiaries tangible and intangible assets, including a pledge of the stock of their
respective subsidiaries, as well as a mortgage on certain real property, if any.
Pursuant to a shared guaranty and collateral agreement and subject to an intercreditor agreement
among the administrative agents under each of the amended and restated credit facilities, the
Company and, subject to certain exceptions, certain subsidiaries of the Company, guaranty the
obligations under each of the amended and restated credit facilities and the obligations are
secured by a lien on substantially all of such guarantors tangible and intangible assets (other
than the assets of the Companys subsidiary, Business.com), including a pledge of the stock of
their respective subsidiaries, as well as a mortgage on certain real property, if any.
Dex One Senior Subordinated Notes
On the Effective Date, we issued the $300.0 million Dex One Senior Subordinated Notes in exchange
for the Dex Media West 8.5% Senior Notes due 2010 and 5.875% Senior Notes due 2011. Interest on the
Dex One Senior Subordinated Notes is payable semi-annually on March 31st and September
30th of each year, commencing on March 31, 2010 through January 2017. The Dex One Senior
Subordinated Notes accrue interest at an annual rate of 12% for cash interest payments and 14% if
the Company elects paid-in-kind (PIK) interest payments. The Company may elect, prior to the
start of each interest payment period, whether to make each interest payment on the Dex One Senior
Subordinated Notes (i) entirely in cash or (ii) 50% in cash and 50% in PIK interest, which is
capitalized as incremental or additional senior secured notes. The interest rate on the Dex One
Senior Subordinated Notes may be subject to adjustment in the event the Company incurs certain
specified debt with a higher effective yield to maturity than the yield to maturity of the Dex One
Senior Subordinated Notes. The Dex One Senior Subordinated Notes are unsecured obligations of the
Company, effectively subordinated in right of payment to all of the Companys existing and future
secured debt, including Dex Ones guarantee of borrowings under each of the amended and restated
credit facilities and are structurally subordinated to any existing or future liabilities
(including trade payables) of our direct and indirect subsidiaries.
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The indenture governing the Dex One Senior Subordinated Notes contains certain covenants that,
subject to certain exceptions, among other things, limit or restrict the Companys (and, in certain
cases, the Companys restricted subsidiaries) incurrence of indebtedness, making of certain
restricted payments, incurrence of liens, entry into transactions with affiliates, conduct of its
business and the merger, consolidation or sale of all or substantially all of its property. The
indenture governing the Dex One Senior Subordinated Notes also requires the Company to offer to
repurchase the Dex One Senior Subordinated Notes at par after certain changes of control involving
the Company or the sale of substantially all of the assets of the Company. Holders of the Dex One
Senior Subordinated Notes also may cause the Company to repurchase the Dex One Senior Subordinated
Notes at a price of 101% of the principal amount upon the incurrence by the Company of certain
acquisition indebtedness.
The Dex One Senior Subordinated Notes are redeemable at our option beginning in 2011 at the
following prices (as a percentage of face value):
Redemption Year | Price | |||
2011 |
106.000 | % | ||
2012 |
102.000 | % | ||
2013 |
101.000 | % | ||
2014 and thereafter |
100.000 | % |
On the Effective Date and in accordance with the Plan, $6.1 billion of the Predecessor Companys
notes in default, which are presented as long-term debt subject to compromise in the table below,
were exchanged for (a) 100% of the reorganized Dex One equity and (b) $300.0 million of the Dex One
Senior Subordinated Notes issued to the holders of the Dex Media West 8.5% Senior Notes due 2010
and 5.875% Senior Notes due 2011 on a pro rata basis in addition to their share of the reorganized
Dex One equity. In accordance with the Plan, the Predecessor Companys existing credit facilities
were amended and restated on the Effective Date, the terms and conditions of which are noted above.
The following table presents the carrying value of the Predecessor Companys long-term debt at
December 31, 2009. As a result of filing the Chapter 11 petitions and the Plan, we do not believe
that it is meaningful to present the fair market value of our long-term debt at December 31, 2009.
Predecessor Company | ||||||||
Notes in Default | Credit Facilities | |||||||
December 31, 2009 | ||||||||
RHD |
||||||||
6.875% Senior Notes due 2013 |
$ | 206,791 | $ | | ||||
6.875% Series A-1 Senior Discount Notes due 2013 |
320,903 | | ||||||
6.875% Series A-2 Senior Discount Notes due 2013 |
483,365 | | ||||||
8.875% Series A-3 Senior Notes due 2016 |
1,012,839 | | ||||||
8.875% Series A-4 Senior Notes due 2017 |
1,229,760 | | ||||||
R.H. Donnelley Inc. |
||||||||
Credit Facility |
| 1,424,048 | ||||||
11.75% Senior Notes due 2015 |
412,871 | | ||||||
Dex Media, Inc. |
||||||||
8% Senior Notes due 2013 |
500,000 | | ||||||
9% Senior Discount Notes due 2013 |
749,857 | | ||||||
Dex Media East |
||||||||
Credit Facility |
| 1,039,436 | ||||||
Dex Media West |
||||||||
Credit Facility |
| 1,091,292 | ||||||
8.5% Senior Notes due 2010 |
385,000 | | ||||||
5.875% Senior Notes due 2011 |
8,720 | | ||||||
9.875% Senior Subordinated Notes due 2013 |
761,650 | | ||||||
Total Predecessor Company consolidated |
6,071,756 | 3,554,776 | ||||||
Less current portion not subject to compromise |
| 993,528 | ||||||
Long-term debt subject to compromise |
$ | 6,071,756 | | |||||
Long-term debt not subject to compromise |
$ | 2,561,248 | ||||||
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Impact of Fresh Start Accounting
In conjunction with our adoption of fresh start accounting, an adjustment was established to record
our outstanding debt at fair value on the Fresh Start Reporting Date. The Company was required to
record our amended and restated credit facilities at a discount as a result of their fair value on
the Fresh Start Reporting Date. Therefore, the carrying amount of these debt obligations is lower
than the principal amount due at maturity. A total discount of $120.2 million was recorded upon
adoption of fresh start accounting associated with our amended and restated credit facilities, of
which $106.4 million remains unamortized at June 30, 2010, as shown in the following table.
Outstanding Debt at | ||||||||||||
Unamortized Fair | June 30, 2010 Excluding the | |||||||||||
Carrying Value at | Value Adjustments | Impact of Unamortized Fair | ||||||||||
June 30, 2010 | at June 30, 2010 | Value Adjustments | ||||||||||
RHDI Amended and Restated Credit Facility |
$ | 1,091,403 | $ | 16,536 | $ | 1,107,939 | ||||||
Dex Media East Amended and Restated
Credit Facility |
810,040 | 76,296 | 886,336 | |||||||||
Dex Media West Amended and Restated
Credit Facility |
773,561 | 13,552 | 787,113 | |||||||||
Dex One 12%/14% Senior Subordinated
Notes due 2017 |
300,000 | | 300,000 | |||||||||
Total |
$ | 2,975,004 | $ | 106,384 | $ | 3,081,388 | ||||||
7. Derivative Financial Instruments
We do not use derivative financial instruments for trading or speculative purposes and our
derivative financial instruments are limited to interest rate swap and interest rate cap
agreements. The Company utilizes a combination of fixed rate debt and variable rate debt to
finance its operations. The variable rate debt exposes the Company to variability in interest
payments due to changes in interest rates. Management believes that it is prudent to mitigate the
interest rate risk on a portion of its variable rate borrowings. To satisfy our objectives and
requirements, the Company has entered into interest rate swap and interest rate cap agreements,
which have not been designated as cash flow hedges, to manage our exposure to interest rate
fluctuations on our variable rate debt.
Successor Company
The Company has entered into the following interest rate swaps that effectively convert
approximately $500.0 million, or 19%, of the Companys variable rate debt to fixed rate debt as of
June 30, 2010. At June 30, 2010, approximately 90% of our total debt outstanding consisted 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 27% of our total debt portfolio
as of June 30, 2010. The interest rate swaps mature at varying dates from February 2012 through
February 2013.
Interest Rate Swaps Dex Media East
Effective Dates | Notional Amount | Pay Rates | Maturity Dates | |||||||||
(amounts in millions) | ||||||||||||
February 26, 2010 |
$ | 300 | (2) | 1.20% - 1.796 | % | February 29, 2012 February 28, 2013 |
||||||
March 5, 2010 |
100 | (1) | 1.668 | % | January 31, 2013 |
|||||||
March 10, 2010 |
100 | (1) | 1.75 | % | January 31, 2013 |
|||||||
Total |
$ | 500 | ||||||||||
Under the terms of the interest rate swap agreements, we receive variable interest based on the
three-month LIBOR and pay a weighted average fixed rate of 1.5%. The weighted average rate received
on our interest rate swaps was 0.5% for the five months ended June 30, 2010. These periodic
payments and receipts are recorded as interest expense.
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Under the terms of the interest rate cap agreements, the Company will receive payments based on the
spread in rates if the three-month LIBOR rate increases above the cap rates noted in the table
below. The Company paid $2.1 million for the interest rate cap agreements entered into during the
first quarter of 2010. We are not required to make any future payments related to these interest
rate cap agreements.
Interest Rate Caps RHDI
Effective Dates | Notional Amount | Cap Rates | Maturity Dates | |||||||||
(amounts in millions) | ||||||||||||
February 26, 2010 |
$ | 200 | (3) | 3.0% - 3.5% | February 28, 2012 February 28, 2013 |
|||||||
March 8, 2010 |
100 | (4) | 3.5% | January 31, 2013 |
||||||||
March 10, 2010 |
100 | (4) | 3.0% | April 30, 2012 |
||||||||
Total |
$ | 400 | ||||||||||
(1) | Consists of one swap | |
(2) | Consists of three swaps | |
(3) | Consists of two caps | |
(4) | Consists of one cap |
The following tables present the fair value of our interest rate swaps and interest rate caps at
June 30, 2010. The fair value of our interest rate swaps is presented in accounts payable and
accrued liabilities and other non-current liabilities and the fair value of our interest rate caps
is presented in prepaid expenses and other current assets and other non-current assets on the
condensed consolidated balance sheet at June 30, 2010. The following tables also present the loss
recognized in interest expense from the change in fair value of our interest rate swaps and
interest rate caps for the three and five months ended June 30, 2010.
Loss Recognized in | ||||||||||||
Interest Expense | ||||||||||||
From the Change in Fair | ||||||||||||
Value of Interest Rate Swaps |
||||||||||||
Fair Value | Three Months | Five Months | ||||||||||
Measurements | Ended | Ended | ||||||||||
at June 30, 2010 | June 30, 2010 | June 30, 2010 | ||||||||||
Interest Rate Swaps: |
||||||||||||
Other non-current assets |
$ | | $ | 2,511 | $ | | ||||||
Accounts payable and accrued liabilities |
(3,428 | ) | 294 | 3,428 | ||||||||
Other non-current liabilities |
(1,642 | ) | 1,642 | 1,642 | ||||||||
Total |
$ | (5,070 | ) | $ | 4,447 | $ | 5,070 | |||||
Loss Recognized in | ||||||||||||
Interest Expense | ||||||||||||
From the Change in Fair | ||||||||||||
Value of Interest Rate Caps |
||||||||||||
Fair Value | Three Months | Five Months | ||||||||||
Measurements | Ended | Ended | ||||||||||
at June 30, 2010 | June 30, 2010 | June 30, 2010 | ||||||||||
Interest Rate Caps: |
||||||||||||
Prepaid expenses and other current assets |
$ | 1 | $ | 23 | $ | 66 | ||||||
Other non-current assets |
550 | 1,091 | 1,520 | |||||||||
Total |
$ | 551 | $ | 1,114 | $ | 1,586 | ||||||
During the three and five months ended June 30, 2010, the Company reclassified $7.1 million and
$8.7 million, respectively, of hedging losses related to our interest rate swaps and interest rate
caps into earnings, including accrued interest.
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Predecessor Company
As a result of filing the Chapter 11 petitions, the Predecessor Company does not have any interest
rate swaps designated as cash flow hedges. The following table presents the fair value of the
Predecessor Companys interest rate swaps at December 31, 2009. The fair value of the Predecessor
Companys interest rate swaps is presented in accounts payable and accrued liabilities and other
non-current liabilities on the condensed consolidated balance sheet at December 31, 2009. The
following table also presents the (gain) loss recognized in interest expense from the change in
fair value of the Predecessor Companys interest rate swaps for the one month ended January 31,
2010.
(Gain) Loss Recognized in | ||||||||
Interest Expense | ||||||||
From the Change in Fair | ||||||||
Fair Value | Value of Interest Rate Swaps |
|||||||
Measurements at | One Month Ended | |||||||
December 31, 2009 | January 31, 2010 | |||||||
Interest Rate Swaps: |
||||||||
Accounts payable and accrued liabilities |
$ | (5,043 | ) | $ | 3,898 | |||
Other non-current liabilities |
(1,652 | ) | (1,600 | ) | ||||
Total |
$ | (6,695 | ) | $ | 2,298 | |||
During the one month ended January 31, 2010, the Predecessor Company reclassified $3.0 million of
hedging losses related to interest rate swaps into earnings, including accrued interest. In
accordance with fresh start accounting, unamortized amounts previously charged to accumulated other
comprehensive loss of $15.3 million related to the Predecessor Companys interest rate swaps were
eliminated as of the Fresh Start Reporting Date. See Note 3, Fresh Start Accounting for
additional information.
On the Effective Date, liabilities associated with the Predecessor Companys unsettled and
terminated interest rate swaps of $37.8 million, excluding accrued interest, were converted into a
new tranche of term loans under the Companys amended and restated credit facilities as follows:
RHDI Amended and Restated Credit Facility |
$ | 11,346 | ||
Dex Media East Amended and Restated Credit Facility |
26,301 | |||
Dex Media West Amended and Restated Credit Facility |
121 | |||
Total |
$ | 37,768 | ||
On April 15, 2009, the Predecessor Company exercised a 30-day grace period on interest payments due
on its 8.875% Series A-4 Senior Notes due 2017. As a result of exercising the 30-day grace period,
certain existing Dex Media East LLC interest rate swaps were required to be settled on May 28,
2009. Cash settlement payments of $26.4 million were made during the three and six months ended
June 30, 2009 associated with these interest rate swaps.
As a result of the decline in certain of the Predecessor Companys credit ratings, an existing Dex
Media West LLC interest rate swap was required to be settled on April 23, 2009. A cash settlement
payment of $0.5 million was made during the three and six months ended June 30, 2009 associated
with this interest rate swap.
All derivative financial instruments are recognized as either assets or liabilities on the
condensed consolidated balance sheets with measurement at fair value. On a quarterly basis, the
fair values of our interest rate swaps and interest rate caps are determined based on observable
inputs. These derivative instruments have not been designated as cash flow hedges and as such, the
initial fair value and any subsequent gains or losses on the change in the fair value of the
interest rate swaps and interest rate caps 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 condensed consolidated statements of cash flows.
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Table of Contents
On the day a derivative contract is executed, the Company may designate the derivative instrument
as a hedge of the variability of cash flows to be received or paid (cash flow hedge). For all
designated hedging relationships, the Company formally documents the hedging relationship and its
risk-management objective and strategy for undertaking the hedge, the hedging instrument, the item,
the nature of the risk being hedged, how the hedging instruments effectiveness in offsetting the
hedged risk will be assessed, and a description of the method of measuring ineffectiveness. The
Company also formally assesses, both at the hedges inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in offsetting changes in
cash flows of hedged items. For derivative instruments that are designated as cash flow hedges and
that are determined to provide an effective hedge, the differences between the fair value and the
book value of the derivative instruments are recognized in accumulated other comprehensive income
(loss), a component of shareholders equity (deficit).
The Company discontinues hedge accounting prospectively when it is determined that the derivative
is no longer highly effective in offsetting changes in the cash flows of the hedged item, the
derivative or hedged item is expired, sold, terminated, exercised, or management determines that
designation of the derivative as a hedging instrument is no longer appropriate. In situations in
which hedge accounting is discontinued, the Company continues to carry the derivative at its fair
value on the condensed consolidated balance sheet and recognizes any subsequent changes in its fair
value in earnings as a component of interest expense. Any amounts previously recorded to
accumulated other comprehensive income (loss) will be amortized to interest expense in the same
period(s) in which the interest expense of the underlying debt impacts earnings.
By using derivative financial instruments to hedge exposures to changes in interest rates, the
Company exposes itself to credit risk and market risk. Credit risk is the possible failure of the
counterparty to perform under the terms of the derivative contract. When the fair value of a
derivative contract is positive, the counterparty owes the Company, which creates credit risk for
the Company. When the fair value of a derivative contract is negative, the Company owes the
counterparty and, therefore, it is not subject to credit risk. The Company minimizes the credit
risk in derivative financial instruments by entering into transactions with major financial
institutions with credit ratings of AA- or higher, or the equivalent dependent upon the credit
rating agency.
Market risk is the adverse effect on the value of a financial instrument that results from a change
in interest rates. The market risk associated with interest-rate contracts is managed by
establishing and monitoring parameters that limit the types and degree of market risk that may be
undertaken.
See Note 2, Summary of Significant Accounting Policies Fair Value of Financial Instruments for
additional information regarding our interest rate swaps and interest rate caps.
8. Income Taxes
The Companys effective tax rate on loss before income taxes is 16.9% and 52.1% for the three and
five months ended June 30, 2010. The Predecessor Companys effective tax rate on income (loss)
before income taxes for the one month ended January 31, 2010 and three and six months ended June
30, 2009 was 11.7%, 14.6% and (285.7)%, respectively. The following tables summarize the
significant differences between the U.S. Federal statutory tax rate and our effective tax rate,
which has been applied to the Companys and the Predecessor Companys income (loss) before income
taxes.
Successor Company | ||||||||
Three Months Ended | Five Months Ended | |||||||
June 30, 2010 | June 30, 2010 | |||||||
Loss before income taxes |
$ | (926,967 | ) | $ | (1,071,271 | ) | ||
Statutory U.S. Federal tax rate |
35.0 | % | 35.0 | % | ||||
State and local taxes, net of U.S. Federal tax benefit |
3.6 | 3.2 | ||||||
Non-deductible impairment charges |
(21.8 | ) | (18.8 | ) | ||||
Section 382 limitation |
| 32.8 | ||||||
Change in valuation allowance |
0.1 | | ||||||
Change in state tax law |
| (0.1 | ) | |||||
Effective tax rate |
16.9 | % | 52.1 | % | ||||
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Table of Contents
Predecessor Company | ||||||||||||
One Month Ended | Three Months Ended | Six Months Ended | ||||||||||
January 31, 2010 | June 30, 2009 | June 30, 2009 | ||||||||||
Income (loss) before income taxes |
$ | 7,837,550 | $ | (88,392 | ) | $ | (123,584 | ) | ||||
Statutory U.S. Federal tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State and local taxes, net of U.S. Federal tax benefit |
2.6 | (10.5 | ) | (6.8 | ) | |||||||
Tax-exempt reorganization gain |
(28.0 | ) | | | ||||||||
Other non-deductible expenses |
| (7.5 | ) | (5.4 | ) | |||||||
Section 382 limitation |
1.1 | | (303.7 | ) | ||||||||
Section 108 tax attribution reduction |
21.4 | | | |||||||||
Change in valuation allowance |
(19.5 | ) | (1.8 | ) | (1.3 | ) | ||||||
Change in state tax law |
| | (1.9 | ) | ||||||||
Other |
(0.9 | ) | (0.6 | ) | (1.6 | ) | ||||||
Effective tax rate |
11.7 | % | 14.6 | % | (285.7 | )% | ||||||
As a result of the goodwill and intangible asset impairment charges during the three and five
months ended June 30, 2010, we recognized a non-deductible adjustment to our effective tax rate of
$201.8 million for the three and five months ended June 30, 2010.
Internal Revenue Code Section 382 (Section 382) imposes limitations on the availability of net
operating losses and other corporate tax attributes as ownership changes occur. Under Section 382,
potential limitations are triggered when there has been an ownership change, which is generally
defined as a greater than 50% change in stock ownership (by value) over a three-year period. Such
change in ownership will restrict the Companys ability to use certain net operating losses and
other corporate tax attributes in the future. However, the ownership change does not constitute a
change in control under any of the Companys debt agreements or other contracts.
Based upon the closing of the SEC filing period for Schedules 13-G and review of these schedules
filed through February 15, 2010, the Company determined that, more likely than not, a certain
check-the-box election was effective prior to the date of the 2009 ownership change under Section
382. As a result, the Company recorded a tax benefit for the reversal of a liability for
unrecognized tax benefit of $351.9 million in the Companys statement of financial condition and
results of operations for the five months ended June 30, 2010, which was the primary driver of our
effective tax rate for the five months ended June 30, 2010.
Our certificate of incorporation contains provisions generally prohibiting (i) the acquisition of
4.9% or more of our common stock by any one person or group of persons whose shares would be
aggregated pursuant to Section 382 and (ii) the acquisition of additional common stock by persons
already owning 4.9% or more of our common stock, in each case until February 2, 2011, or such
shorter period as may be determined by our board of directors. Without these restrictions, it is
possible that certain changes in the ownership of our common stock could result in the imposition
of limitations on the ability of the Company and its subsidiaries to fully utilize the net
operating losses and other tax attributes currently available to them for U.S. federal and state
income tax purposes.
In connection with the Companys adoption of fresh start accounting, we evaluated all temporary
timing differences. The Company recorded significant deferred tax liabilities associated with
intangible assets and deferred revenue, and reduced our deferred tax liabilities to zero related to
interest costs and deferred tax assets to zero related to deferred financing costs, which were
recognized though the cancellation of our debt. Due to this reduction in tax basis, an incremental
deferred tax liability was created, which can be utilized in the Companys valuation allowance
assessment. As a result, the Company has reduced its valuation allowance and is in a net deferred
tax liability position of $532.3 million at February 1, 2010 and $342.1 million at June 30, 2010.
See Note 3, Fresh Start Accounting for information on fresh start accounting adjustments related
to income taxes.
The discharge of our debt in conjunction with our emergence from Chapter 11 resulted in a tax gain
of $5,031.8 million. Generally, the discharge of a debt obligation for an amount less than the
adjusted issue price creates cancellation of indebtedness income (CODI), which must be included
in the Companys taxable income. However, recognition of CODI is limited for a taxpayer that is a
debtor in a reorganization case if the discharge is granted by the Bankruptcy Court or pursuant to
a plan of reorganization approved by the Bankruptcy Court. The Plan enabled the Predecessor
Company to qualify for this bankruptcy exclusion rule and exclude substantially all of the gain on
the settlement of debt obligations and derivative liabilities from taxable income. Under Internal
Revenue Code Section 108, the Company has reduced its tax attributes primarily in net operating
loss carry-forwards, intangible asset basis, and stock basis.
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Table of Contents
At June 30, 2009, the Predecessor Company recognized an increase in its deferred tax liability of
$375.4 million related to Section 382, which directly impacted our deferred tax expense and
significantly decreased our effective tax rate for the six months ended June 30, 2009.
9. Benefit Plans
The following tables provide the components of the Companys net periodic benefit (credit) cost for
the three and five months ended June 30, 2010 and the Predecessor Companys net periodic benefit
(credit) cost for the one month ended January 31, 2010 and three and six months ended June 30,
2009.
Pension Benefits | ||||||||
Successor Company | ||||||||
Three Months Ended | Five Months Ended | |||||||
June 30, 2010 | June 30, 2010 | |||||||
Interest cost |
$ | 3,425 | $ | 5,660 | ||||
Expected return on plan assets |
(3,328 | ) | (5,751 | ) | ||||
Curtailment (gain) |
(3,754 | ) | (3,754 | ) | ||||
Net periodic benefit (credit) |
$ | (3,657 | ) | $ | (3,845 | ) | ||
Pension Benefits | ||||||||||||
Predecessor Company | ||||||||||||
One Month Ended | Three Months Ended | Six Months Ended | ||||||||||
January 31, 2010 | June 30, 2009 | June 30, 2009 | ||||||||||
Service cost |
$ | | $ | 1,378 | $ | 2,819 | ||||||
Interest cost |
1,124 | 3,844 | 7,452 | |||||||||
Expected return on plan assets |
(1,385 | ) | (4,546 | ) | (9,125 | ) | ||||||
Amortization of prior service cost |
81 | | | |||||||||
Amortization of net loss (gain) |
122 | (57 | ) | (27 | ) | |||||||
Settlement loss |
| 3,546 | 3,546 | |||||||||
Net periodic benefit (credit) cost |
$ | (58 | ) | $ | 4,165 | $ | 4,665 | |||||
Postretirement Benefits | ||||||||
Successor Company | ||||||||
Three Months Ended | Five Months Ended | |||||||
June 30, 2010 | June 30, 2010 | |||||||
Interest cost |
$ | 28 | $ | 53 | ||||
Net periodic benefit cost |
$ | 28 | $ | 53 | ||||
Postretirement Benefits | ||||||||||||
Predecessor Company | ||||||||||||
One Month Ended | Three Months Ended | Six Months Ended | ||||||||||
January 31, 2010 | June 30, 2009 | June 30, 2009 | ||||||||||
Service cost |
$ | | $ | 146 | $ | 414 | ||||||
Interest cost |
10 | 644 | 1,403 | |||||||||
Amortization of prior service cost |
| (2 | ) | (4 | ) | |||||||
Amortization of net (gain) |
(21 | ) | (261 | ) | (261 | ) | ||||||
Curtailment (gain) |
| (13,460 | ) | (13,460 | ) | |||||||
Net periodic benefit (credit) |
$ | (11 | ) | $ | (12,933 | ) | $ | (11,908 | ) | |||
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During the three and five months ended June 30, 2010, we recognized a one-time curtailment gain of
$3.8 million associated with the retirement of the Companys Chief Executive Officer.
In conjunction with our emergence from Chapter 11, the Predecessor Company performed a
remeasurement of its pension and postretirement obligations as of January 31, 2010. The discount
rate reflects the current rate at which the pension and postretirement obligations could
effectively be settled at the end of the year. The Predecessor Company utilized the Mercer Pension
Discount Yield Curve to determine the appropriate discount rate for its defined benefit plans. The
weighted average discount rate used by the Predecessor Company for the remeasurement at January 31,
2010 was 5.70%. The weighted average discount rate used by the Predecessor Company for the year
ended December 31, 2009 was 5.72%.
Upon ratification of a new collective bargaining agreement with the International Brotherhood of
Electrical Workers of America (IBEW) on June 15, 2009 and in conjunction with the comprehensive
redesign of the Predecessor Companys employee retirement savings and pension plans, the
Predecessor Company recognized a one-time curtailment gain as a result of eliminating retiree
health care and life insurance benefits for IBEW employees
of $13.5 million for the three and six months ended June 30, 2009.
On May 31, 2009, settlements of the Dex Media, Inc. Pension Plan occurred. At that time, lump sum
payments to participants exceeded the sum of the service cost plus interest cost component of the
net periodic benefit costs. These settlements resulted in the recognition of an actuarial loss of
$3.5 million for the three and six months ended June 30, 2009.
The Company made contributions to its pension plans of $1.2 million and $7.4 million during the
three and five months ended June 30, 2010, respectively. The Predecessor Company did not make any
contributions to its pension plans during the one month ended January 31, 2010. The Predecessor
Company made contributions of $4.8 million and $26.9 million to its pension plans during the three
and six months ended June 30, 2009, respectively.
During the three and five months ended June 30, 2010, the Company made contributions of $1.4
million and $2.2 million, respectively, to its postretirement plans. During the one month ended
January 31, 2010 and three and six months ended June 30, 2009, the Predecessor Company made
contributions of $0.4 million, $1.3 million and $2.1 million, respectively, to its postretirement
plan. We expect to make total contributions of approximately $9.7 million and $2.9 million to our
pension plans and postretirement plans, respectively, in 2010.
10. Capital Stock
The Company has authority to issue (i) 300,000,000 shares of common stock, $.001 par value per
share (Common Stock), and (ii) 10,000,000 shares of preferred stock, $.001 par value per share
(Preferred Stock). The powers, preferences and rights of holders of shares of our Common Stock
are subject to, and may be adversely affected by, the powers, preferences and rights of the holders
of shares of any series of Preferred Stock that we may designate and issue in the future without
stockholder approval. As of June 30, 2010, the Company had not issued any shares of Preferred
Stock.
11. Business Segments
Management reviews and analyzes its business of providing marketing products and marketing services
as one operating segment.
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12. 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.
Beginning on October 23, 2009, a series of putative securities class action lawsuits were
commenced in the United States District Court for the District of Delaware on behalf of all
persons who purchased or otherwise acquired the Companys publicly traded securities between July
26, 2007 and the time the Company filed for bankruptcy on May 28, 2009, alleging that certain
Company officers issued false and misleading statements regarding the Companys business and
financial condition and seeking damages and equitable relief. On December 7, 2009, a putative
ERISA class action lawsuit was commenced in the United States District Court for the Northern
District of Illinois on behalf of certain participants in or beneficiaries of the R.H. Donnelley
401(k) Savings Plan at any time between July 26, 2007 and the time the lawsuit was filed and
whose plan accounts included investments in R.H. Donnelley common stock. The putative ERISA
class action complaint contains allegations against certain current and former Company directors,
officers and employees similar to those set forth in the putative securities class action lawsuit
as well as allegations of breaches of fiduciary duties under ERISA and seeks damages and
equitable relief. On December 18, 2009, a lawsuit was filed in California state court by certain
former shareholders of the Company alleging that certain Company officers issued false and
misleading statements regarding the Companys business and financial condition and seeking
damages and equitable relief. This case was removed to the United States District Court for the
Central District of California on February 4, 2010. On April 27, 2010, this case was dismissed
for lack of personal jurisdiction over the named defendants. The Company believes the allegations
set forth in all of these lawsuits are without merit and intends to vigorously defend any and all
such actions pursued against the Company and/or its current and former officers, employees and
directors.
We are also exposed to potential defamation and breach of privacy claims arising from our
publication of directories and our methods of collecting, processing and using advertiser and
telephone subscriber data. If such data were determined to be inaccurate or if data stored by us
were improperly accessed and disseminated by us or by unauthorized persons, the subjects of our
data and users of the data we collect and publish could submit claims against the Company. Although
to date we have not experienced any material claims relating to defamation or breach of privacy, we
may be party to such proceedings in the future that could have a material adverse effect on our
business.
We periodically assess our liabilities and contingencies in connection with these matters based
upon the latest information available to us. For those matters where it is probable that we have
incurred a loss and the loss or range of loss can be reasonably estimated, we record a liability in
our 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 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.
13. Dex One Corporation (Parent Company) Financial Statements
The following condensed Parent Company financial statements should be read in conjunction with the
condensed consolidated financial statements of the Company and the Predecessor Company.
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 us with very limited exceptions, under the terms of our amended and
restated credit facilities.
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Condensed Parent Company Balance Sheets
Successor | Predecessor | ||||||||
Company | Company | ||||||||
June 30, | December, 31 | ||||||||
2010 | 2009 | ||||||||
Assets |
|||||||||
Cash and cash equivalents |
$ | 1,189 | $ | 5,007 | |||||
Intercompany, net |
| 109,102 | |||||||
Intercompany loan receivable |
1,900 | 5,000 | |||||||
Prepaid and other current assets |
367 | 8,055 | |||||||
Total current assets |
3,456 | 127,164 | |||||||
Investment in subsidiaries |
1,274,875 | | |||||||
Fixed assets and computer software, net |
| 5,990 | |||||||
Deferred income taxes, net |
286 | 71,878 | |||||||
Intercompany note receivable |
| 300,000 | |||||||
Total assets |
$ | 1,278,617 | $ | 505,032 | |||||
Liabilities and Shareholders Equity (Deficit) |
|||||||||
Accounts payable, accrued liabilities and other |
$ | 93 | $ | 80,061 | |||||
Accrued interest |
9,049 | | |||||||
Intercompany, net |
16,079 | | |||||||
Short-term deferred income taxes, net |
12,307 | | |||||||
Total current liabilities not subject to compromise |
37,528 | 80,061 | |||||||
Long-term debt |
300,000 | | |||||||
Deficit in subsidiaries |
| 3,950,031 | |||||||
Other non-current liabilities |
1,040 | 8,232 | |||||||
Total liabilities not subject to compromise |
338,568 | 4,038,324 | |||||||
Liabilities subject to compromise |
| 3,385,756 | |||||||
Shareholders equity (deficit) |
940,049 | (6,919,048 | ) | ||||||
Total liabilities and shareholders equity (deficit) |
$ | 1,278,617 | $ | 505,032 | |||||
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Condensed Parent Company Statements of Operations
Successor Company | Predecessor Company | ||||||||||||||||||||
Three Months Ended | Five Months Ended | One Month Ended | Three Months Ended | Six Months Ended | |||||||||||||||||
June 30, 2010 | June 30, 2010 | January 31, 2010 | June 30, 2009 | June 30, 2009 | |||||||||||||||||
Expenses |
$ | 9,193 | $ | 12,095 | $ | 891 | $ | 4,947 | $ | 10,253 | |||||||||||
Partnership and equity income (loss) |
(908,838 | ) | (1,043,949 | ) | 643,971 | 57,365 | 92,028 | ||||||||||||||
Operating income (loss) |
(918,031 | ) | (1,056,044 | ) | 643,080 | 52,418 | 81,775 | ||||||||||||||
Interest expense, net |
(8,936 | ) | (15,227 | ) | | (41,487 | ) | (106,036 | ) | ||||||||||||
Income (loss) before reorganization
items, net and income taxes |
(926,967 | ) | (1,071,271 | ) | 643,080 | 10,931 | (24,261 | ) | |||||||||||||
Reorganization items, net |
| | 7,194,470 | (99,323 | ) | (99,323 | ) | ||||||||||||||
Income (loss) before income taxes |
(926,967 | ) | (1,071,271 | ) | 7,837,550 | (88,392 | ) | (123,584 | ) | ||||||||||||
(Provision) benefit for income taxes |
157,044 | 558,566 | (917,541 | ) | 12,910 | (353,108 | ) | ||||||||||||||
Net income (loss) |
$ | (769,923 | ) | $ | (512,705 | ) | $ | 6,920,009 | $ | (75,482 | ) | $ | (476,692 | ) | |||||||
Condensed Parent Company Statements of Cash Flows
Successor Company | Predecessor Company | ||||||||||||
Five Months Ended | One Month Ended | Six Months Ended | |||||||||||
June 30, 2010 | January 31, 2010 | June 30, 2009 | |||||||||||
Cash flow used in operating
activities |
$ | (5,419 | ) | $ | (531 | ) | $ | (120,776 | ) | ||||
Cash flow from investing activities: |
|||||||||||||
Additions to fixed assets and
computer software, net |
| (643 | ) | (134 | ) | ||||||||
Intercompany loan |
(1,900 | ) | | (7,000 | ) | ||||||||
Net cash used in investing activities |
(1,900 | ) | (643 | ) | (7,134 | ) | |||||||
Cash flow from financing activities: |
|||||||||||||
Debt issuance and other
financing costs |
| (370 | ) | | |||||||||
Decrease in checks not yet
presented for payment |
(1,073 | ) | (182 | ) | (905 | ) | |||||||
Dividends from subsidiaries |
6,300 | | 129,600 | ||||||||||
Net cash provided by (used in)
financing activities |
5,227 | (552 | ) | 128,695 | |||||||||
Change in cash |
(2,092 | ) | (1,726 | ) | 785 | ||||||||
Cash at beginning of period |
3,281 | 5,007 | 948 | ||||||||||
Cash at end of period |
$ | 1,189 | $ | 3,281 | $ | 1,733 | |||||||
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Information
Certain statements contained in this Quarterly Report on Form 10-Q regarding Dex One Corporation
and its direct and indirect wholly-owned subsidiaries (Dex One, the Successor Company, the
Company, we, us and our) future operating results, performance, business plans or prospects
and any other statements not constituting historical fact are forward-looking statements subject
to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Where
possible, words such as believe, expect, anticipate, should, will, would, planned,
estimated, potential, goal, outlook, may, predicts, could, or the negative of those
words and other comparable expressions, are used to identify such forward-looking statements. All
forward-looking statements reflect our current beliefs and assumptions with respect to our future
results, business plans and prospects, based on information currently available to us and are
subject to significant risks and uncertainties. Accordingly, these statements are subject to
significant risks and uncertainties and our actual results, business plans and prospects could
differ significantly from those expressed in, or implied by, these statements. We caution readers
not to place undue reliance on, and we undertake no obligation to update, other than as imposed by
law, any forward-looking statements. Such risks, uncertainties and contingencies include, but are
not limited to, statements about Dex Ones future financial and operating results, our plans,
objectives, expectations and intentions and other statements that are not historical facts. The
following factors, among others, could cause actual results to differ from those set forth in the
forward-looking statements: (1) our ability to hire a new chief executive officer; (2) changes in
directory advertising spend and consumer usage; (3) competition and other economic conditions; (4)
our ability to generate sufficient cash to service our debt; (5) our ability to comply with the
financial covenants contained in our debt agreements and the potential impact to operations and
liquidity as a result of restrictive covenants in such debt agreements; (6) our ability to
refinance or restructure our debt on reasonable terms and conditions as might be necessary from
time to time; (7) increasing LIBOR rates; (8) regulatory and judicial rulings; (9) changes in the
Companys and the Companys subsidiaries credit ratings; (10) changes in accounting standards; (11)
adverse results from litigation, governmental investigations or tax related proceedings or audits;
(12) the effect of labor strikes, lock-outs and negotiations; (13) successful realization of the
expected benefits of acquisitions, divestitures and joint ventures; (14) the continued
enforceability of the commercial agreements with Qwest, CenturyLink and AT&T; (15) our reliance on
third-party vendors for various services; and (16) other events beyond our control that may result
in unexpected adverse operating results. Additional risks and uncertainties are described
in detail in Part I Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended
December 31, 2009.
Corporate Overview
We are a marketing solutions company that helps local businesses grow by providing marketing
products that help them get found by ready-to-buy consumers and marketing services that help them
get chosen over their competitors. Through our Dex® Advantage, clients business
information is published and marketed through a single profile and distributed via a variety of
both owned and operated products and through other local search products. Dex Advantage spans
multiple media platforms for local advertisers including print with our Dex published directories,
which we co-brand with other brands in the industry such as Qwest, CenturyLink and AT&T, online and
mobile devices with DexKnows.com ® and voice-activated directory search at
1-800-Call-Dex. Our digital affiliate provided solutions are powered by DexNet, which leverages
network partners including the premier search engines, such as Google® and
Yahoo!® and other leading online sites. Our growing list of marketing services include local
business and market analysis, message and image creation, target market identification, advertising
and digital profile creation, keyword and search engine optimization strategies and programs,
distribution strategies, social strategies, and tracking and reporting.
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Recent Trends Related to Our Business
We have been experiencing lower advertising sales primarily as a result of declines in new and
recurring business, including both renewal and incremental sales to existing advertisers, mainly
driven by (1) declines in overall advertising spending by our clients, (2) the significant impact
of the weak local business conditions on consumer spending in our clients markets and (3) an
increase in competition and more fragmentation in local business search.
The Company currently projects its future operating results, cash flow and liquidity will be
negatively impacted by the aforementioned conditions. This was evidenced by the continued decline
in our net revenues for the three and five months ended June 30, 2010 as compared to the prior
year, excluding the impact of fresh start accounting. The Company expects that these challenging
conditions will continue in our markets, and, as such, our advertising sales and operating results
will continue to be adversely impacted for the foreseeable future. As a result, the Companys
historical operating results will not be indicative of future operating performance. Although our
long-term financial forecast currently anticipates a gradual improvement in the local business
conditions during the second half of 2010, improvement has progressed slower than originally
anticipated.
As more fully described below in Part 1 Item 2, Managements Discussion and Analysis of
Financial Condition and Results of Operations Net Revenues, our method of recognizing revenue
under the deferral and amortization method results in delayed recognition of declining advertising
sales whereby recognized revenues reflect the amortization of advertising sales consummated in
prior periods as well as advertising sales consummated in the current period. Accordingly, the
Companys projected decline in advertising sales will result in a decline in revenue recognized in
future periods. In addition, improvements in local business conditions that are anticipated in our
forecast noted above will not have a significant immediate impact on our revenues.
In response to these challenges, we continue to actively manage expenses and are considering and
acting upon a host of initiatives to streamline operations and contain costs. At the same time, we
are improving the value we deliver to our clients by expanding the number of platforms and media
through which we deliver their message to consumers. We are also committing our sales force to
focus on selling the value provided to local businesses through these expanded platforms, including
our Dex published directories, online and mobile devices, voice-activated directory search as well
as our network of owned and operated and partner online search sites. In addition, the Company
continues to invest in its future through initiatives such as its overall digital product and
service offerings, sales force automation, a client self service system and portal, new mobile and
voice search platforms and associated employee training. As local business conditions recover in
our markets, we believe these investments will drive future revenue.
Impairment Charges
Based upon the decline in the trading value of our debt and equity securities during the three
months ended June 30, 2010 and the retirement of our Chairman and Chief Executive Officer on May
28, 2010, among others, the Company concluded that there were indicators of impairment during the
three months ended June 30, 2010. As a result of identifying indicators of impairment, we performed
impairment tests as of June 30, 2010 of our goodwill, definite-lived intangible assets and other
long-lived assets in accordance with Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) 350, Intangibles Goodwill and Other (FASB ASC 350) and FASB ASC
360, Property, Plant and Equipment (FASB ASC 360). The testing results of our definite-lived
intangible assets and other long-lived assets resulted in an impairment charge of $17.3 million
during the three and five months ended June 30, 2010 associated with trade names and trademarks,
technology, local customer relationships and other from our Business.com reporting unit. The
testing results of our goodwill resulted in an impairment charge of $752.3 million during the three
and five months ended June 30, 2010, which has been recorded in each of our reporting units. The
sum of the goodwill and intangible asset impairment charges totaled $769.7 million for the three
and five months ended June 30, 2010. See Item 1, Financial Statements Unaudited Note 2,
Summary of Significant Accounting Policies Identifiable Intangible Assets and Goodwill for
additional information.
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If industry and local business conditions in our markets deteriorate in excess of current
estimates, potentially resulting in further declines in advertising sales and operating results,
and if the trading value of our debt and equity securities decline significantly, we will be
required to once again assess the recoverability of goodwill in addition to our annual evaluation
and recoverability and useful lives of our intangible assets and other long-lived assets. This
could result in future impairment charges, a reduction of remaining useful lives associated with
our intangible assets and other long-lived assets and acceleration of amortization expense.
Retirement of Chairman and Chief Executive Officer
Effective May 28, 2010 (the Separation Date), our Chairman and Chief Executive Officer, David C.
Swanson, retired from the Company. The Companys Board of Directors (the Board) has established
an Executive Oversight Committee comprised of three of the Boards current directors, Jonathan B.
Bulkeley, W. Kirk Liddell and Mark A. McEachen, to lead the Company on an interim basis. Mr.
Liddell serves as the Companys Interim Principal Executive Officer and current Board member, Alan
F. Schultz, serves as the non-executive Chairman of the Board.
In connection with Mr. Swansons retirement, the Company entered into a Separation Agreement
with Mr. Swanson (the Separation Agreement) on May 20, 2010. The Separation Agreement provides
that Mr. Swanson will receive severance benefits to which he is entitled under his Amended and
Restated Employment Agreement (the Employment Agreement), in connection with a termination not
for Cause following a Change of Control (as such terms are defined in the Employment Agreement). In
accordance with the Separation Agreement, Mr. Swanson received a lump-sum separation payment of
$6.4 million plus accrued and unpaid salary and vacation days totaling $0.5 million during the
three months ended June 30, 2010 and will receive a pro rata portion of his 2010 annual bonus
totaling $0.4 million no later than March 15, 2011.
In accordance with the Separation Agreement, the Company will reimburse Mr. Swanson for the costs
of obtaining term life insurance coverage from the Separation Date until the earlier of (i)
December 31, 2013 and (ii) the date on which Mr. Swanson becomes employed or self-employed. In
addition, the Company will reimburse Mr. Swanson for costs of obtaining health, medical and dental
insurance and long-term disability insurance benefits from the Separation Date until the earlier of
(i) May 31, 2013 and (ii) the date on which Mr. Swanson becomes employed or self-employed. Mr.
Swanson will also be reimbursed for costs of financial planning and outplacement services, dues for
continuing his health club and country club memberships and executive health expenses during this
period. He will also have access to periodic administrative and technical support through the end
of 2010.
Following the Separation Date, Mr. Swanson has no equity interest in the Company or any of its
affiliates or subsidiaries other than 25,320 previously issued and currently vested stock
appreciation rights in the Company. All other unvested stock appreciation rights held by Mr.
Swanson have terminated. Mr. Swanson will continue to participate in the Companys 2009 Long Term
Incentive Plan (LTIP) and will be eligible to receive payment of up to $3.5 million under the
LTIP subject to satisfaction of the performance standards contained in the LTIP. Mr. Swanson will
also receive $5.7 million in full satisfaction for amounts due to him under certain non-qualified
pension plans and $0.5 million associated with his vested benefits under the Companys qualified
pension plan and under the R.H. Donnelley Corporation Restoration Plan. Pursuant to the Separation
Agreement, Mr. Swanson agreed to release the Company from, among other things, all claims, demands,
damages, actions or rights of action of any nature, arising out of or related to or based upon his
employment with the Company. Mr. Swanson further agreed to comply with and be bound by a 12 month
non-competition and non-solicitation covenant beginning on the Separation Date and covenants
prohibiting disclosure of the Companys confidential information.
Filing of Voluntary Petitions in Chapter 11
On May 28, 2009 (the Petition Date), R.H. Donnelley Corporation (RHD or the Predecessor
Company) and its subsidiaries (collectively with the Predecessor Company, the Debtors) filed
voluntary petitions for Chapter 11 relief under Title 11 of the United States Code (the Bankruptcy
Code) in the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court).
Confirmed Plan of Reorganization and Emergence from the Chapter 11 Proceedings
On January 12, 2010, the Bankruptcy Court entered the Findings of Fact, Conclusions of Law, and
Order Confirming the Joint Plan of Reorganization for the Predecessor Company and its subsidiaries
(the Confirmation Order). On January 29, 2010 (the Effective Date), the Joint Plan of
Reorganization for the Predecessor Company and its subsidiaries (the Plan) became effective in
accordance with its terms.
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From the Petition Date until the Effective Date, the Debtors operated their businesses as
debtors-in-possession in accordance with the Bankruptcy Code. The Chapter 11 cases of the Debtors
(collectively, the Chapter 11 Cases) were jointly administered under the caption In re R.H.
Donnelley Corporation, Case No. 09-11833 (KG) (Bankr. D. Del. 2009).
Dex One became the successor registrant to the Predecessor Company for operations prior to the
Effective Date upon emergence from Chapter 11 relief under the Bankruptcy Code on the Effective
Date. References to the Predecessor Company in this Quarterly Report on Form 10-Q pertain to
periods prior to the Effective Date.
Restructuring
As part of a restructuring that was conducted in connection with the Debtors emergence from
bankruptcy, the Debtors merged, consolidated, dissolved, or terminated, shortly after the Effective
Date, certain of their wholly-owned subsidiaries, as set forth below:
| DonTech Holdings, LLC and R.H. Donnelley Publishing & Advertising of Illinois Holdings, LLC were merged into their sole member, RHDI; | ||
| The DonTech II Partnership and R.H. Donnelley Publishing & Advertising of Illinois Partnership technically terminated their respective partnership agreements due to the loss of a second partner; | ||
| Dex Media East Finance Co. was merged into Dex Media East LLC; | ||
| Dex Media West Finance Co. was merged into Dex Media West LLC; | ||
| Work.com, Inc. was merged into Business.com, Inc.; | ||
| GetDigitalSmart.com, Inc. was merged into RHDI; | ||
| Dex Media East LLC was merged into Dex Media East, Inc. (DME Inc.); | ||
| Dex Media West LLC was merged into Dex Media West, Inc. (DMW Inc.); and | ||
| R.H. Donnelley Publishing & Advertising, Inc. was merged into RHDI. |
After effectuating the restructuring transactions, Dex One became the ultimate parent company of
each of the following surviving subsidiaries: (i) R.H. Donnelley Corporation, a newly formed
subsidiary of Dex One (ii) RHDI, (iii) Dex Media, (iv) DME Inc., (v) DMW Inc., (vi) Dex Media
Service LLC, (vii) Dex One Service LLC (which was subsequently converted into a Delaware
corporation under the name Dex One Service effective March 1, 2010, (viii) Business.com and (ix)
R.H. Donnelley APIL, Inc.
Consummation of the Plan
Issuance of New Common Stock
Upon emergence from Chapter 11 and pursuant to the Plan, all of the issued and outstanding shares
of the Predecessor Companys common stock and any other outstanding equity securities of the
Predecessor Company including all stock options, stock appreciation rights (SARs) and restricted
stock, were cancelled. On the Effective Date, the Company issued an aggregate amount of 50,000,001
shares of new common stock, par value $.001 per share.
Distributions Pursuant to the Plan
Since the Effective Date, the Company has substantially consummated the various transactions
contemplated under the confirmed Plan. The Company has made the following distributions of stock
and securities that were required to be made under the Plan to creditors with allowed claims:
| On the Effective Date, in accordance with the Plan, the Company issued the following number of shares of Dex One common stock: (i) approximately 10.5 million shares, representing 21.0% of total outstanding common stock, to all holders of notes issued by RHD; (ii) approximately 11.65 million shares, representing 23.3% of total outstanding common stock, to all holders of notes issued by Dex Media, Inc.; (iii) approximately 12.9 million shares, representing 25.8% of total outstanding common stock, to all holders of notes issued by RHDI; (iv) approximately 6.5 million shares, representing 13.0% of total outstanding common stock, to all holders of senior notes issued by Dex Media West; and (v) approximately 8.45 million shares, representing 16.9% of total outstanding common stock, to all holders of senior subordinated notes issued by Dex Media West. |
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| On the Effective Date, in accordance with the terms of the Plan, holders of the Dex Media West 8.5% Senior Notes due 2010 and 5.875% Senior Notes due 2011 also received their pro rata share of Dex Ones $300.0 million aggregate principal amount of 12%/14% Senior Subordinated Notes due 2017 (Dex One Senior Subordinated Notes). |
As of June 30, 2010 and pursuant to the Plan, the Company has made distributions in cash on account
of all, or substantially all, of the allowed claims of general unsecured creditors. Allowed claims
of general unsecured creditors that have not been paid as of June 30, 2010 will be paid during the
remainder of 2010.
Pursuant to the terms of the Plan, the Company is also obligated to make certain additional
payments to certain creditors, including certain distributions that may become due and owing
subsequent to the initial distribution date and certain payments to holders of administrative
expense priority claims and fees earned by professional advisors during the Chapter 11 Cases.
Discharge, Releases, and Injunctions Pursuant to the Plan and the Confirmation Order
The Plan and Confirmation Order also contain various discharges, injunctive provisions, and
releases that became operative upon the Effective Date. These provisions are summarized in Sections
M through O of the Confirmation Order and more fully described in Article X of the Plan.
Registration Rights Agreement
On the Effective Date and pursuant to the Plan, the Company entered into a Registration Rights
Agreement (the Agreement), requiring the Company to register with the Securities and Exchange
Commission (SEC) certain shares of its common stock and/or the Dex One Senior Subordinated Notes
upon the request of one or more Eligible Holders (as defined in the Agreement), in accordance with
the terms and conditions set forth therein. On April 8, 2010 and pursuant to the Agreement, the
Company filed a shelf registration statement to register for resale by Franklin Advisers, Inc. and
certain of its affiliates 15,262,488 shares of our common stock and $116.6 million aggregate
principal amount of the Dex One Senior Subordinated Notes. These securities were registered
pursuant to the Agreement to permit the sale of the securities from time to time at fixed prices,
prevailing market prices at the times of sale, prices related to the prevailing market prices,
varying prices determined at the times of sale or negotiated prices. The shelf registration
statement became effective on April 16, 2010.
Impact on Long-Term Debt Upon Emergence from the Chapter 11 Proceedings
On the Effective Date and in accordance with the Plan, $6.1 billion of the Predecessor Companys
senior notes, senior discount notes and senior subordinated notes (collectively the notes in
default) were exchanged for (a) 100% of the reorganized Dex One equity and (b) $300.0 million of
the Dex One Senior Subordinated Notes issued to the holders of the Dex Media West 8.5% Senior Notes
due 2010 and 5.875% Senior Notes due 2011 on a pro rata basis in addition to their share of the
reorganized Dex One equity. See Part 1 Item 1, Financial Statements (Unaudited) Note 6,
Long-Term Debt, Credit Facilities and Notes for further details of our long-term debt.
Accounting Matters Resulting from the Chapter 11 Proceedings
The filing of the Chapter 11 petitions constituted an event of default under the indentures
governing the Predecessor Companys notes in default and the debt obligations under those
instruments became automatically and immediately due and payable, although any actions to enforce
such payment obligations were automatically stayed under applicable bankruptcy laws. Based on the
bankruptcy petitions, the notes in default are included in liabilities subject to compromise on the
consolidated balance sheet at December 31, 2009. See Part 1 Item 1, Financial Statements
(Unaudited) Note 1, Business and Basis of Presentation Accounting Matters for additional
information regarding the notes in default and other accounting matters.
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Fresh Start Accounting
The Company adopted fresh start accounting and reporting effective February 1, 2010 (Fresh Start
Reporting Date) in accordance with FASB ASC 852, Reorganizations (FASB ASC 852), as the holders
of existing voting shares immediately before confirmation of the Plan received less than 50% of the
voting shares of the emerging entity and the reorganization value of the Companys assets
immediately before the date of confirmation was less than the post-petition liabilities and allowed
claims. See Part 1 Item 1, Financial Statements (Unaudited) Note 3, Fresh Start Accounting
for additional information.
Goodwill of $2.1 billion was recorded in connection with the Companys adoption of fresh start
accounting and represents the excess of the reorganization value of Dex One over the fair value of
identified tangible and intangible assets. Goodwill is not amortized but is subject to impairment
testing on an annual basis as of October 31st or more frequently if indicators of
potential impairment exist. See Impairment Charges above for information on our impairment
evaluation of goodwill, definite-lived intangible assets and other long-lived assets during the
three months ended June 30, 2010.
Our net revenues and operating results have been and will continue to be significantly impacted by
our adoption of fresh start accounting on the Fresh Start Reporting Date over the twelve month
period ending January 31, 2011. See Part 1 Item 2, Managements Discussion and Analysis of
Financial Condition and Results of Operations Factors Affecting Comparability for additional
information on the impact of fresh start accounting and the Companys presentation of Adjusted and
Combined Adjusted results.
Climate Change
There is a growing concern about global climate change and the contribution of emissions of
greenhouse gases including, most significantly, carbon dioxide. This concern has led to increased
interest in legislative and/or regulatory actions, as well as litigation relating to greenhouse gas
emissions. While we cannot predict the impact of any legislation until final, we do not believe the
proposed regulations and/or current litigation related to global climate change is reasonably
likely to have a material impact on our business, future financial position, results of operations
and cash flow. Our current financial projections do not include any impact of proposed regulations
and/or current litigation related to global climate change.
Going Concern
As a result of our emergence from the Chapter 11 proceedings and the restructuring of the
Predecessor Companys outstanding debt, we believe that Dex One will generate sufficient cash flow
from operations to satisfy all of its debt obligations according to applicable terms and conditions
for a reasonable period of time. See Part 1 Item 1, Financial Statements (Unaudited) Note 3,
Fresh Start Accounting for information and analysis on our emergence from the Chapter 11
proceedings and the impact on our financial position. The Companys goodwill and intangible asset
impairment charges recorded during the three months ended June 30, 2010 do not affect our ability
to continue as a going concern, as we are permitted to exclude such charges from debt covenant
evaluations.
Segment Reporting
Management reviews and analyzes its business of providing marketing products and marketing services
as one operating segment.
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New Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Improving Disclosures
about Fair Value Measurements (ASU 2010-06). ASU 2010-06 amends FASB ASC 820 to clarify existing
disclosure requirements and require additional disclosure about fair value measurements. ASU
2010-06 clarifies existing fair value disclosures about the level of disaggregation presented and
about inputs and valuation techniques used to measure fair value for measurements that fall in
either Level 2 or Level 3 of the fair value hierarchy. The additional disclosure requirements
include disclosure regarding the amounts and reasons for significant transfers in and out of Level
1 and Level 2 of the fair value hierarchy and separate presentation of purchases, sales, issuances
and settlements of items within Level 3 of the fair value hierarchy. ASU 2010-06 is effective for
interim and annual reporting periods beginning after December 15, 2009 except for the disclosures
about Level 3 activity of purchases, sales, issuances and settlements, which is effective for
interim and annual reporting periods beginning after December 15, 2010. Effective January 1, 2010,
we adopted the disclosure provisions of ASU 2010-06 that are effective for interim and annual
reporting periods beginning after December 15, 2009. These disclosures are required to be provided
only on a prospective basis.
In September 2009, the Emerging Issues Task Force (EITF) reached final consensus on EITF Issue
No. 08-1, Revenue Arrangements with Multiple Deliverables (EITF 08-1). EITF 08-1 has not yet been
incorporated into the FASBs Codification. EITF 08-1 updates the current guidance pertaining to
multiple-element revenue arrangements included in FASB ASC 605-25, which originated from EITF
00-21, Revenue Arrangements with Multiple Deliverables. EITF 08-1 addresses how to determine
whether an arrangement involving multiple deliverables contains more than one unit of accounting
and how the arrangement consideration should be allocated among the separate units of accounting.
EITF 08-1 will be effective for the Company in the annual reporting period beginning January 1,
2011. EITF 08-1 may be applied retrospectively or prospectively and early adoption is permitted.
The Company does not expect the adoption of EITF 08-1 to have an impact on its financial position,
results of operations or cash flows.
We have reviewed other accounting pronouncements that were issued as of June 30, 2010, which the
Company has not yet adopted, and do not believe that these pronouncements will have a material
impact on our financial position or operating results.
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RESULTS OF OPERATIONS
Factors Affecting Comparability
Fresh Start Accounting Adjustments
The Company adopted fresh start accounting and reporting effective February 1, 2010, the Fresh
Start Reporting Date. The financial statements as of the Fresh Start Reporting Date will report the
results of Dex One with no beginning retained earnings or accumulated deficit. Any presentation of
Dex One represents the financial position and results of operations of a new reporting entity and
is not comparable to prior periods presented by the Predecessor Company. The financial statements
for periods ended prior to the Fresh Start Reporting Date do not include the effect of any changes
in the Predecessor Companys capital structure or changes in the fair value of assets and
liabilities as a result of fresh start accounting.
We have provided a U.S. generally accepted accounting principles (GAAP) analysis of the Companys
results of operations for the three and five months ended June 30, 2010 and the Predecessor
Companys results of operations for the one month ended January 31, 2010 below. This GAAP analysis
includes a discussion of results for the individual reporting periods, however does not provide a
comparison of the individual reporting periods to the respective prior year reporting periods due
to the reasons discussed above.
As a result of the deferral and amortization method of revenue recognition, recognized gross
advertising revenues reflect the amortization of advertising sales consummated in prior periods as
well as in the current period. The adoption of fresh start accounting has a significant impact on
the financial position and results of operations of the Company commencing on the Fresh Start
Reporting Date. Consistent with the Predecessor Companys historical application of the purchase
method of accounting for business combinations included in FASB ASC 805, Business Combinations,
fresh start accounting precludes us from recognizing advertising revenue and certain expenses
associated with advertising sales fulfilled prior to the Fresh Start Reporting Date. Thus, our
reported results for the three and five months ended June 30, 2010 are not indicative of our
underlying operating and financial performance and are not comparable to any prior period
presentation. The adoption of fresh start accounting did not have any impact on cash flows from
operations.
Accordingly, in addition to providing a GAAP analysis below, management has also provided a
non-GAAP analysis entitled Non-GAAP Financial Information Adjusted and Combined Adjusted
Results. Non-GAAP Financial Information Adjusted Results adjusts GAAP results of the Company
for the three months ended June 30, 2010 to (i) eliminate the fresh start accounting impact on
revenue and certain related expenses noted above and (ii) exclude cost-uplift recorded under fresh
start accounting. Non-GAAP Financial Information Combined Adjusted Results (1) combines GAAP
results of the Company for the five months ended June 30, 2010 and GAAP results of the Predecessor
Company for the one month ended January 31, 2010 and (2) adjusts these combined amounts to (i)
eliminate the fresh start accounting impact on revenue and certain related expenses noted above and
(ii) exclude cost-uplift recorded under fresh start accounting. Deferred directory costs that are
included in prepaid expenses and other current assets on the condensed consolidated balance sheet,
such as print, paper, distribution and commissions, relate to directories that have not yet been
published. Deferred directory costs have been recorded at fair value, determined as (a) the
estimated billable value of the published directory less (b) the expected costs to complete the
directory, plus (c) a normal profit margin. This incremental fresh start accounting adjustment to
step up the recorded value of the deferred directory costs to fair value is hereby referred to as
cost-uplift. Cost-uplift will be amortized over the terms of the applicable directories, not to
exceed twelve months, and has been allocated between production and distribution expenses and
selling and support expenses based upon the category of the deferred directory costs that were fair
valued. Managements non-GAAP analysis compares the Non-GAAP Financial Information Adjusted and
Combined Adjusted Results to the Predecessor Companys GAAP results for the three and six months
ended June 30, 2009 through operating income.
Management believes that the presentation of Non-GAAP Financial Information Adjusted and
Combined Adjusted Results will help financial statement users better understand the material impact
fresh start accounting has on the Companys results of operations for the three and five months
ended June 30, 2010 and also offers a non-GAAP normalized comparison to GAAP results of the
Predecessor Company for the three and six months ended June 30, 2009. The Non-GAAP Financial
Information Adjusted and Combined Adjusted Results presented below are reconciled to the most
comparable GAAP measures. While the Non-GAAP Financial Information Adjusted and Combined
Adjusted Results exclude the effects of fresh start accounting and certain other items, it must be
noted that the Non-GAAP Financial Information Adjusted and Combined Adjusted Results are not
comparable to the Predecessor Companys GAAP results for the three and six months ended June 30,
2009 and should not be treated as such.
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Impairment Charges
The Company has excluded the goodwill and intangible asset impairment charges totaling $769.7
million from Adjusted Results for the three months ended June 30, 2010 and Combined Adjusted
Results for the six months ended June 30, 2010.
Reclassifications
Certain prior period amounts included in the condensed consolidated statements of operations have
been reclassified to conform to the current periods presentation. Purchased traffic costs
incurred to direct traffic to our online properties have been reclassified from advertising
expense, a component of selling and support expenses, to production and distribution expenses in
the condensed consolidated statements of operations. In addition, information technology expenses
have been reclassified from production and distribution expenses to general and administrative
expenses in the condensed consolidated statements of operations. These reclassifications had no
impact on operating income or net loss for the three and six months ended June 30, 2009. The tables
below summarize these reclassifications.
Three Months Ended June 30, 2009 | ||||||||||||
As Previously | ||||||||||||
(amounts in millions) | Reported | Reclass | As Reclassified | |||||||||
Production and
distribution
expenses |
$ | 88.5 | $ | 4.2 | $ | 92.7 | ||||||
Selling and support
expenses |
172.2 | (11.5 | ) | 160.7 | ||||||||
General and
administrative
expenses |
18.7 | 7.3 | 26.0 |
Six Months Ended June 30, 2009 | ||||||||||||
As Previously | ||||||||||||
(amounts in millions) | Reported | Reclass | As Reclassified | |||||||||
Production and
distribution
expenses |
$ | 184.6 | $ | 10.0 | $ | 194.6 | ||||||
Selling and support
expenses |
337.1 | (24.4 | ) | 312.7 | ||||||||
General and
administrative
expenses |
53.2 | 14.4 | 67.6 |
GAAP Reported Results
Successor Company Three and Five Months Ended June 30, 2010
Net Revenues
The components of our net revenues for the three and five months ended June 30, 2010 were as
follows:
Successor Company | ||||||||
Three Months Ended | Five Months Ended | |||||||
(amounts in millions) | June 30, 2010 | June 30, 2010 | ||||||
Gross advertising revenues |
$ | 157.6 | $ | 210.2 | ||||
Sales claims and allowances |
(1.7 | ) | (4.2 | ) | ||||
Net advertising revenues |
155.9 | 206.0 | ||||||
Other revenues |
5.0 | 8.0 | ||||||
Total |
$ | 160.9 | $ | 214.0 | ||||
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Our advertising revenues are earned primarily from the sale of advertising in yellow pages
directories we publish, net of sales claims and allowances. Advertising revenues also include
revenues for Internet-based advertising products including online directories, such as DexKnows.com
and DexNet. Advertising revenues are affected by several factors, including changes in the quantity
and size of advertisements, acquisition of new clients, renewal rates of existing clients, premium
advertisements sold, changes in advertisement pricing, the introduction of new products, an
increase in competition and more fragmentation in the local business search market and general
economic factors. Revenues with respect to print advertising and Internet-based advertising
products that are sold with print advertising are recognized under the deferral and amortization
method. Revenues related to our print advertising are initially deferred when a directory is
published and recognized ratably over the directorys life, which is typically 12 months. Revenues
with respect to our Internet-based advertising products that are sold with print advertising are
initially deferred until the service is delivered or fulfilled and recognized ratably over the life
of the contract. Revenues with respect to Internet-based services that are sold standalone, such as
DexNet, are recognized as delivered or fulfilled.
The adoption of fresh start accounting has a significant impact on the results of operations of the
Company commencing on the Fresh Start Reporting Date. As a result of the deferral and amortization
method of revenue recognition, recognized gross advertising revenues reflect the amortization of
advertising sales consummated in prior periods as well as in the current period. Fresh start
accounting precludes us from recognizing advertising revenue and certain expenses associated with
advertising sales fulfilled prior to the Fresh Start Reporting Date. Thus, our reported results for
the three and five months ended June 30, 2010 are not indicative of our underlying operating and
financial performance and are not comparable to any prior period presentation.
Gross advertising revenues were $157.6 million and $210.2 million for the three and five months
ended June 30, 2010, respectively, and exclude $294.0 million and $551.9 million, respectively, of
gross advertising revenues resulting from our adoption of fresh start accounting. Gross advertising
revenues continue to be impacted by declines in advertising sales primarily as a result of declines
in new and recurring business, mainly driven by (1) declines in overall advertising spending by our
clients, (2) the significant impact of the weak local business conditions on consumer spending in
our clients markets and (3) an increase in competition and more fragmentation in local business
search.
Sales claims and allowances were $1.7 million and $4.2 million for the three and five months ended
June 30, 2010, respectively, and exclude $5.1 million and $9.7 million, respectively, of sales
claims and allowances resulting from our adoption of fresh start accounting. Sales claims and
allowances were affected by lower claims experience due to process improvements and operating
efficiencies, which improved print copy quality in certain of our markets, as well as lower
advertising sales volume.
Other revenues were $5.0 million and $8.0 million for the three and five months ended June 30,
2010, respectively, and exclude $2.0 million and $3.8 million, respectively, of other revenues
resulting from our adoption of fresh start accounting. Other revenues include late fees received on
outstanding customer balances, barter revenues, commissions earned on sales contracts with respect
to advertising placed into other publishers directories, and sales of directories and certain
other advertising-related products.
Expenses
The components of our total expenses for the three and five months ended June 30, 2010 were as
follows:
Successor Company | ||||||||
Three Months Ended | Five Months Ended | |||||||
(amounts in millions) | June 30, 2010 | June 30, 2010 | ||||||
Production and distribution expenses |
$ | 51.5 | $ | 80.5 | ||||
Selling and support expenses |
93.5 | 151.9 | ||||||
General and administrative expenses |
40.2 | 61.9 | ||||||
Depreciation and amortization |
59.6 | 99.0 | ||||||
Impairment charges |
769.7 | 769.7 | ||||||
Total |
$ | 1,014.5 | $ | 1,163.0 | ||||
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Certain costs directly related to the selling and production of directories are initially deferred
and then amortized ratably over the life of the directories under the deferral and amortization
method of accounting to match revenue recognized relating to such directories, with cost
recognition commencing in the month directory distribution is substantially complete. These costs
are specifically identifiable to a particular directory and include sales commissions and print,
paper and initial distribution costs. Sales commissions include amounts paid to employees for
sales to local clients and to certified marketing representatives (CMRs), which act as our
channel to national clients. All other expenses, such as sales person salaries, sales manager
compensation, sales office occupancy, publishing and information technology services, are not
specifically identifiable to a particular directory and are recognized as incurred. Except for
certain expenses associated with advertising sales fulfilled prior to the Fresh Start Reporting
Date, which fresh start accounting precludes us from recognizing, our costs recognized in a
reporting period consist of: (i) costs incurred in that period and fully recognized in that period;
(ii) costs incurred in a prior period, a portion of which is amortized and recognized in the
current period; and (iii) costs incurred in the current period, a portion of which is amortized and
recognized in the current period and the balance of which is deferred until future periods.
Consequently, there will be a difference between costs recognized in any given period and costs
incurred in the given period, which may be significant.
Production and Distribution Expenses
Total production and distribution expenses were $51.5 million and $80.5 million for the three and
five months ended June 30, 2010, respectively. Production and distribution expenses are comprised
of items such as print, paper and distribution expenses, internet production and distribution
expenses and amortization of cost-uplift associated with print, paper and distribution expenses
resulting from our adoption of fresh start accounting. As a result of our adoption of fresh start
accounting, production and distribution expenses for the three and five months ended June 30, 2010
exclude the amortization of deferred directory costs under the deferral and amortization method for
directories published before the Fresh Start Reporting Date totaling $32.6 million and $60.9
million, respectively, and include amortization of cost-uplift of $2.1 million and $3.4 million,
respectively. Print paper and distribution expenses continue to be impacted by lower page volumes
associated with declines in print advertisements and negotiated price reductions in our print and
paper expenses. Internet production and distribution expenses have been affected by a reduction in
DexNet customers, purchasing efficiencies and lower headcount, partially offset by increased
purchased traffic costs incurred to direct traffic to our online properties.
Selling and Support Expenses
Total selling and support expenses were $93.5 million and $151.9 million for the three and five
months ended June 30, 2010, respectively. Selling and support expenses are comprised of items such
as bad debt expense, commissions and salesperson expenses, directory publishing expenses, billing,
credit and collection expense, occupancy expenses, advertising expense and amortization of cost
uplift associated with commissions resulting from our adoption of fresh start accounting. Due to
our adoption of fresh start accounting, selling and support expenses for the three and five months
ended June 30, 2010 exclude the amortization of deferred directory costs under the deferral and
amortization method for directories published before the Fresh Start Reporting Date totaling $29.7
million and $58.3 million, respectively, and include amortization of cost-uplift of $1.2 million
and $1.7 million, respectively. Bad debt expense has been impacted by effective credit and
collections practices, which have driven improvement in our accounts receivable portfolio, as well
as lower billing volumes associated with declines in advertisers and advertisements. If clients
fail to pay within specified credit terms, we may cancel their advertising in future directories,
which could impact our ability to collect past due amounts as well as adversely impact our
advertising sales and revenue trends. Directory publishing expenses continue to be affected by
declines in print advertisements and lower headcount. Billing, credit and collections expense has
been impacted by lower billing volumes associated with declines in advertisers and advertisements.
Occupancy expenses have been impacted by the renegotiation of our leased properties and reduction
in the amount of leased square footage during the bankruptcy process.
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General and Administrative Expenses
General and administrative (G&A) expenses were $40.2 million and $61.9 million for the three and
five months ended June 30, 2010, respectively. G&A expenses are comprised of items such as general
corporate expenses, incentive compensation expense and information technology (IT) expenses. G&A
related incentive compensation expense pertains to expense associated with a stock appreciation
rights (SARs) grant made on March 1, 2010 to certain employees, including executive officers,
common stock granted and issued to members of the Companys Board of Directors on March 1, 2010 and
compensation expense associated with the Companys Long-Term Incentive Program (LTIP), which
includes accelerated compensation expense associated with the retirement of our Chief Executive
Officer.
Depreciation and Amortization
Depreciation and amortization expense was $59.6 million and $99.0 million for the three and five
months ended June 30, 2010, respectively. Amortization of intangible assets was $46.3 million and
$77.1 million for the three and five months ended June 30, 2010, respectively, and was impacted by
the increase in fair value of our intangible assets and the establishment of the estimated useful
lives resulting from our adoption of fresh start accounting. The Company expects to recognize
amortization expense associated with its intangible assets of $165.9 million during the eleven
months ended December 31, 2010, which includes the affect of reduced book values of our intangible
assets subsequent to the impairment charge during the three months ended June 30, 2010 noted below.
The Company and the Predecessor Company anticipate a decrease in amortization expense for the full
year 2010 of $333.2 million as compared to the full year 2009. This decrease is a result of the
reduced carrying values of intangible assets subsequent to the impairment charges recorded by the
Company during the three months ended June 30, 2010 and the Predecessor Company during the fourth
quarter of 2009, partially offset by increased amortization expense resulting from the increase in
fair value of our intangible assets as a result of our adoption of fresh start accounting and the
reduction of the remaining useful lives of intangible assets associated with the impairment charges
recorded by the Predecessor Company during the fourth quarter of 2009.
Depreciation of fixed assets and amortization of computer software was $13.3 million and $21.9
million for the three and five months ended June 30, 2010, respectively. Depreciation of fixed
assets and amortization of computer software was affected by the increase in fair value of our
fixed assets and computer software resulting from our adoption of fresh start accounting as well as
capital projects placed into service during the three and five months ended June 30, 2010.
Impairment Charges
Based upon the decline in the trading value of our debt and equity securities during the three
months ended June 30, 2010 and the retirement of our Chairman and Chief Executive Officer on May
28, 2010, among others, the Company concluded that there were indicators of impairment during the
three months ended June 30, 2010. As a result of identifying indicators of impairment, we performed
impairment tests as of June 30, 2010 of our goodwill, definite-lived intangible assets and other
long-lived assets in accordance with FASB ASC 350 and FASB ASC 360. The testing results of our
definite-lived intangible assets and other long-lived assets resulted in an impairment charge of
$17.3 million during the three and five months ended June 30, 2010 associated with trade names and
trademarks, technology, local customer relationships and other from our Business.com reporting
unit. The testing results of our goodwill resulted in an impairment charge of $752.3 million
during the three and five months ended June 30, 2010, which has been recorded in each of our
reporting units. The sum of the goodwill and intangible asset impairment charges totaled $769.7
million for the three and five months ended June 30, 2010. See Item 1, Financial Statements
Unaudited Note 2, Summary of Significant Accounting Policies Identifiable Intangible Assets
and Goodwill for additional information.
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Operating Loss
Operating loss was $(853.5) million and $(948.9) million for the three and five months ended June
30, 2010, respectively. Under fresh start accounting, most deferred net revenues related to
directories published prior to the Fresh Start Reporting Date have been eliminated however, only
certain deferred direct expenses related to these directories have been eliminated. Expenses that
are not directly associated with net revenues from these directories will continue to be recognized
as period expenses subsequent to the Fresh Start Reporting Date. As such, fresh start accounting
has had a disproportionate adverse effect on reported net revenues versus expenses in determining
operating loss for the three and five months ended June 30, 2010. Each month subsequent to the
Fresh Start Reporting Date until the impact of fresh start accounting expires in the first quarter
of 2011, the ratio of reported net revenue to expense will increase. Operating loss for the three
and five months ended June 30, 2010 was directly impacted by the goodwill and intangible asset
impairment charges noted above, the significant impact of the effects of fresh start accounting as
well as the revenue and expense trends described above.
Interest Expense, Net
Net interest expense was $73.4 million and $122.4 million for the three and five months ended June
30, 2010, respectively. The Company did not record any amortization of deferred financing costs to
interest expense for the three and five months ended June 30, 2010, as financing costs associated
with our new debt arrangements were included in the fair value determination of our long-term debt
resulting from our adoption of fresh start accounting.
In conjunction with our adoption of fresh start accounting and reporting on the Fresh Start
Reporting Date, an adjustment was established to record our outstanding debt at fair value on the
Fresh Start Reporting Date. This fair value adjustment will be amortized as an increase to 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 an increase to interest expense was $8.3 million and $13.9
million for the three and five months ended June 30, 2010, respectively.
In connection with the amendment and restatement of the Dex Media East and RHDI credit facilities
on the Effective Date, we entered into interest rate swap and interest rate cap agreements during
the first quarter of 2010, which have not been designated as cash flow hedges. The Companys
interest expense for the three and five months ended June 30, 2010 includes expense of $5.6 million
and $6.7 million, respectively, resulting from the change in fair value of these interest rate
swaps and interest rate caps.
Income Taxes
The effective tax rate on loss before income taxes is 16.9% and 52.1% for the three and five months
ended June 30, 2010, respectively.
As a result of the goodwill and intangible asset impairment charges during the three and five
months ended June 30, 2010, we recognized a non-deductible adjustment to our effective tax rate of
$201.8 million for the three and five months ended June 30, 2010.
Internal Revenue Code Section 382 (Section 382) imposes limitations on the availability of net
operating losses and other corporate tax attributes as ownership changes occur. Under Section 382,
potential limitations are triggered when there has been an ownership change, which is generally
defined as a greater than 50% change in stock ownership (by value) over a three-year period. Such
change in ownership will restrict the Companys ability to use certain net operating losses and
other corporate tax attributes in the future. However, the ownership change does not constitute a
change in control under any of the Companys debt agreements or other contracts.
Based upon the closing of the SEC filing period for Schedules 13-G and review of these schedules
filed through February 15, 2010, the Company determined that, more likely than not, a certain
check-the-box election was effective prior to the date of the 2009 ownership change under Section
382. As a result, the Company recorded a tax benefit for the reversal of a liability for
unrecognized tax benefit of $351.9 million in the Companys statement of financial condition and
results of operations for the five months ended June 30, 2010, which was the primary driver of our
effective tax rate for the five months ended June 30, 2010.
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Net Loss and Loss Per Share
Net loss was $(769.9) million and $(512.7) million for the three and five months ended June 30,
2010, respectively, and was directly impacted by the goodwill and intangible asset impairment
charges noted above, the significant impact of the effects of fresh start accounting and the
revenue and expense trends described above, partially offset by the income tax benefit recorded for
the three and five months ended June 30, 2010 noted above.
See Item 1, Financial Statements Unaudited Note 2, Summary of Significant Accounting
Policies Earnings (Loss) Per Share for further details and computations of the basic and
diluted earnings (loss) per share (EPS) amounts. For the three and five months ended June 30,
2010, basic and diluted EPS was $(15.39) and $(10.25), respectively.
Predecessor Company One Month Ended January 31, 2010
Net Revenues
The components of the Predecessor Companys net revenues for the one month ended January 31, 2010
were as follows:
Predecessor Company | ||||
One Month Ended | ||||
(amounts in millions) | January 31, 2010 | |||
Gross advertising revenues |
$ | 161.0 | ||
Sales claims and allowances |
(3.5 | ) | ||
Net advertising revenues |
157.5 | |||
Other revenues |
2.9 | |||
Total |
$ | 160.4 | ||
Gross advertising revenues were $161.0 million for the one month ended January 31, 2010. Gross
advertising revenues continue to be impacted by declines in advertising sales over the past twelve
months, primarily as a result of declines in new and recurring business, mainly driven by (1)
declines in overall advertising spending by our clients, (2) the significant impact of the weak
local business conditions on consumer spending in our clients markets and (3) an increase in
competition and more fragmentation in local business search.
Sales claims and allowances were $3.5 million for the one month ended January 31, 2010. Sales
claims and allowances were affected by lower claims experience due to process improvements and
operating efficiencies, which improved print copy quality in certain of our markets, as well as
lower advertising sales volume.
Other revenues were $2.9 million for the one month ended January 31, 2010. Other revenues include
late fees received on outstanding customer balances, barter revenues, commissions earned on sales
contracts with respect to advertising placed into other publishers directories, and sales of
directories and certain other advertising-related products.
Expenses
The components of the Predecessor Companys total expenses for the one month ended January 31, 2010
were as follows:
Predecessor Company | ||||
One Month Ended | ||||
(amounts in millions) | January 31, 2010 | |||
Production and distribution expenses |
$ | 27.0 | ||
Selling and support expenses |
40.9 | |||
General and administrative expenses |
8.2 | |||
Depreciation and amortization |
20.2 | |||
Total |
$ | 96.3 | ||
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Production and Distribution Expenses
Total production and distribution expenses were $27.0 million for the one month ended January 31,
2010. Production and distribution expenses are comprised of items such as print, paper and
distribution expenses and internet production and distribution expenses. Print paper and
distribution expenses continue to be impacted by lower page volumes associated with declines in
print advertisements, negotiated price reductions in our print and paper expenses and favorable
paper inventory expenses. Internet production and distribution expenses have been affected by a
reduction in DexNet customers, purchasing efficiencies and lower headcount, partially offset by
increased purchased traffic costs incurred to direct traffic to our online properties.
Selling and Support Expenses
Total selling and support expenses were $40.9 million for the one month ended January 31, 2010.
Selling and support expenses are comprised of items such as bad debt expense, commissions and
salesperson expenses, directory publishing expenses, billing, credit and collection expense,
occupancy expenses and advertising expense. Bad debt expense has been impacted by effective credit
and collections practices, which have driven improvement in our accounts receivable portfolio, as
well as lower billing volumes associated with declines in advertisers and advertisements.
Directory publishing expenses continue to be affected by declines in print advertisements and lower
headcount. Billing, credit and collections expense has been impacted by lower billing volumes
associated with declines in advertisers and advertisements. Occupancy expenses have been impacted
by the renegotiation of our leased properties and reduction in the amount of leased square footage
during the bankruptcy process.
General and Administrative Expenses
G&A expenses were $8.2 million for the one month ended January 31, 2010. G&A expenses are comprised
of items such as restructuring expenses, general corporate expenses, incentive compensation
expense, and IT expenses. Restructuring expenses have been impacted by lower severance expense and
fees associated with outside consultant services. G&A related incentive compensation expense
includes the remaining unrecognized compensation expense related to stock-based awards that were
cancelled upon emergence from Chapter 11 and pursuant to the Plan, compensation expense associated
with the Predecessor Companys LTIP and the reversal of an accrual associated with the Predecessor
Companys incentive compensation plan.
Depreciation and Amortization
Depreciation and amortization expense was $20.2 million for the one month ended January 31, 2010.
Amortization of intangible assets was $15.6 million for the one month ended January 31, 2010 and
was impacted by the reduced carrying values of intangible assets resulting from impairment charges
recorded by the Predecessor Company during the fourth quarter of 2009 and the associated reduction
in remaining useful lives effective January 1, 2010.
Depreciation of fixed assets and amortization of computer software was $4.6 million for the one
month ended January 31, 2010. Depreciation of fixed assets and amortization of computer software
was impacted by capital projects placed into service during the one month ended January 31, 2010.
Operating Income
Operating income was $64.1 million for the one month ended January 31, 2010 and was determined
based on the revenue and expense trends described above.
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Interest Expense, Net
Contractual interest expense that would have appeared on the Predecessor Companys condensed
consolidated statement of operations if not for the filing of the Chapter 11 petitions was $65.9
million for the one month ended January 31, 2010. Net interest expense for the one month ended
January 31, 2010 was $19.7 million and includes $1.8 million of non-cash amortization of deferred
financing costs.
The Predecessor Companys interest expense for the one month ended January 31, 2010 includes
expense of $0.8 million associated with the change in fair value of the Dex Media East LLC interest
rate swaps no longer deemed financial instruments as a result of filing the Chapter 11 petitions.
The Predecessor Companys interest expense for the one month ended January 31, 2010 also includes
expense of $1.1 million resulting from amounts previously charged to accumulated other
comprehensive loss related to these interest rate swaps. The amounts previously charged to
accumulated other comprehensive loss related to the Dex Media East LLC interest rate swaps were to
be amortized to interest expense over the remaining life of the interest rate swaps based on future
interest payments, as it was not probable that those forecasted transactions would not occur. In
accordance with fresh start accounting and reporting, unamortized amounts previously charged to
accumulated other comprehensive loss related to these interest rate swaps have been eliminated as
of the Fresh Start Reporting Date.
As a result of the amendment of the RHDI credit facility and the refinancing of the former Dex
Media West LLC credit facility on June 6, 2008, the Predecessor Companys interest rate swaps
associated with these two debt arrangements were no longer highly effective in offsetting changes
in cash flows. Accordingly, cash flow hedge accounting treatment was no longer permitted. In
addition, as a result of filing the Chapter 11 petitions, these interest rate swaps were required
to be settled or terminated during 2009. As a result of the change in fair value of these interest
rate swaps prior to the Effective Date, the Predecessor Companys interest expense includes expense
of $0.4 million for the one month ended January 31, 2010.
Reorganization Items, Net
Reorganization items directly associated with the process of reorganizing the business under
Chapter 11 of the Bankruptcy Code have been recorded on a separate line item on the condensed
consolidated statement of operations. The Predecessor Company has recorded $7.8 billion of
reorganization items during the one month ended January 31, 2010 comprised of a $4.5 billion gain
on reorganization / settlement of liabilities subject to compromise and fresh start accounting
adjustments of $3.3 billion. The following table displays the details of reorganization items for
the one month ended January 31, 2010:
Predecessor Company | ||||
One Month Ended | ||||
(amounts in thousands) | January 31, 2010 | |||
Liabilities subject to compromise |
$ | 6,352,813 | ||
Issuance of new Dex One common stock (par value) |
(50 | ) | ||
Dex One additional paid-in capital |
(1,450,734 | ) | ||
Dex One Senior Subordinated Notes |
(300,000 | ) | ||
Reclassified into other balance sheet liability accounts |
(39,471 | ) | ||
Professional fees and other |
(38,403 | ) | ||
Gain on reorganization / settlement of liabilities subject to compromise |
4,524,155 | |||
Fresh start accounting adjustments: |
||||
Goodwill |
2,097,124 | |||
Write off of deferred revenue and deferred directory costs |
655,555 | |||
Fair value adjustment to intangible assets |
415,132 | |||
Fair value adjustment to the amended and restated credit facilities |
120,245 | |||
Fair value adjustment to fixed assets and computer software |
49,814 | |||
Write-off of deferred financing costs |
(48,443 | ) | ||
Other fresh start accounting adjustments |
(20,450 | ) | ||
Total fresh start accounting adjustments |
3,268,977 | |||
Total reorganization items, net |
$ | 7,793,132 | ||
See Part 1 Item 1, Financial Statements (Unaudited) Note 3 Fresh Start Accounting for
information on the gain on reorganization / settlement of liabilities subject to compromise and the
fresh start accounting adjustments presented above.
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Income Taxes
The effective tax rate on income before income taxes is 11.7% for the one month ended January 31,
2010.
In connection with the Companys adoption of fresh start accounting, we evaluated all temporary
timing differences. The Company recorded significant deferred tax liabilities associated with
intangible assets and deferred revenue and reduced our deferred tax liabilities to zero related to
interest costs and deferred tax assets to zero related to deferred financing costs, which were
recognized though the cancellation of our debt. Due to this reduction in tax basis, an incremental
deferred tax liability was created, which can be utilized in the Companys valuation allowance
assessment. As a result, the Company has reduced its valuation allowance and is in a net deferred
tax liability position of $532.3 million at February 1, 2010.
The discharge of our debt in conjunction with our emergence from Chapter 11 resulted in a tax gain
of $5,031.8 million. Generally, the discharge of a debt obligation for an amount less than the
adjusted issue price creates cancellation of indebtedness income (CODI), which must be included
in the Companys taxable income. However, recognition of CODI is limited for a taxpayer that is a
debtor in a reorganization case if the discharge is granted by the Bankruptcy Court or pursuant to
a plan of reorganization approved by the Bankruptcy Court. The Plan enabled the Predecessor
Company to qualify for this bankruptcy exclusion rule and exclude substantially all of the gain on
the settlement of debt obligations and derivative liabilities from taxable income. Under Internal
Revenue Code Section 108, the Company has reduced its tax attributes primarily in net operating
loss carry-forwards, intangible asset basis, and stock basis.
Net Income and Earnings Per Share
Net income of $6,920.0 million for the one month ended January 31, 2010 is primarily due to the
gain on reorganization and fresh start accounting adjustments that comprise reorganization items,
net. In addition, net income for the one month ended January 31, 2010 was determined based on the
revenue and expense trends and income taxes described above.
See Item 1, Financial Statements Unaudited Note 2, Summary of Significant Accounting
Policies Earnings (Loss) Per Share for further details and computations of the basic and
diluted EPS amounts. For the one month ended January 31, 2010, basic EPS was $100.3 and diluted
EPS was $100.2.
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Non-GAAP Financial Information Adjusted and Combined Adjusted Results
Management believes that the presentation of Non-GAAP Financial Information Adjusted and
Combined Adjusted Results will help financial statement users better understand the material impact
fresh start accounting has on the Companys results of operations for the three and five months
ended June 30, 2010 and also offers a non-GAAP normalized comparison to GAAP results of the
Predecessor Company for the three and six months ended June 30, 2009. The Non-GAAP Financial
Information Adjusted and Combined Adjusted Results presented below are reconciled to the most
comparable GAAP measures. While the Non-GAAP Financial Information Adjusted and Combined
Adjusted Results exclude the effects of fresh start accounting and certain other items such as
goodwill and intangible asset impairment charges, it must be noted that the Non-GAAP Financial
Information Adjusted and Combined Adjusted Results are not comparable to the Predecessor
Companys GAAP results for the three and six months ended June 30, 2009 and should not be treated
as such.
Adjusted Results for the Three Months Ended June 30, 2010
compared to Predecessor Company GAAP Results for the Three Months Ended June 30, 2009
compared to Predecessor Company GAAP Results for the Three Months Ended June 30, 2009
Net Revenues
The components of our adjusted net revenues for the three months ended June 30, 2010 and the
Predecessor Company GAAP net revenues for the three months ended June 30, 2009 were as follows:
Successor | Predecessor | |||||||||||||||||||||||
Company | Adjusted | Company | ||||||||||||||||||||||
Three Months Ended | Three Months Ended | Three Months Ended | ||||||||||||||||||||||
June 30, | Fresh Start | June 30, | June 30, | |||||||||||||||||||||
(amounts in millions) | 2010 | Adjustments | 2010 | 2009 | $ Change | % Change | ||||||||||||||||||
Gross advertising
revenues |
$ | 157.6 | $ | 294.0 | (1) | $ | 451.6 | $ | 569.9 | $ | (118.3 | ) | (20.8 | )% | ||||||||||
Sales claims and
allowances |
(1.7 | ) | (5.1 | )(1) | (6.8 | ) | (11.7 | ) | 4.9 | 41.9 | ||||||||||||||
Net advertising revenues |
155.9 | 288.9 | 444.8 | 558.2 | (113.4 | ) | (20.3 | ) | ||||||||||||||||
Other revenues |
5.0 | 2.0 | (1) | 7.0 | 7.4 | (0.4 | ) | 5.4 | ||||||||||||||||
Total |
$ | 160.9 | $ | 290.9 | $ | 451.8 | $ | 565.6 | $ | (113.8 | ) | (20.1 | )% | |||||||||||
(1) | Represents gross advertising revenues, sales claims and allowances and other revenues for advertising sales fulfilled prior to the Fresh Start Reporting Date, which would have been recognized during the three months ended June 30, 2010 absent our adoption of fresh start accounting required under GAAP. |
Adjusted gross advertising revenues for the three months ended June 30, 2010 decreased $118.3
million, or 20.8%, from the Predecessor Company three months ended June 30, 2009. The decline in
adjusted gross advertising revenues for the three months ended June 30, 2010 is primarily due to
declines in advertising sales over the past twelve months, primarily as a result of declines in new
and recurring business, mainly driven by (1) declines in overall advertising spending by our
clients, (2) the significant impact of the weak local business conditions on consumer spending in
our clients markets and (3) an increase in competition and more fragmentation in local business
search. The decline in adjusted gross advertising revenues for the three months ended June 30, 2010
is also due to the timing of publication deliveries.
Adjusted sales claims and allowances for the three months ended June 30, 2010 decreased $4.9
million, or 41.9%, from the Predecessor Company three months ended June 30, 2009. The decline in
adjusted sales claims and allowances for the three months ended June 30, 2010 is primarily due to
lower claims experience as a result of process improvements and operating efficiencies, which
improved print copy quality in certain of our markets, as well as lower advertising sales volume.
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Advertising sales is a non-GAAP statistical measure and consists of sales of advertising in print
directories distributed during the period and Internet-based products and services with respect to
which such advertising first appeared publicly during the period. It is important to distinguish
advertising sales from net revenues, which under GAAP are recognized under the deferral and
amortization method. Adjusted advertising sales for the three months ended June 30, 2010 were
$448.8 million, compared to $518.4 million for the Predecessor Company three months ended June 30,
2009. The $69.6 million, or 13.4%, decrease in adjusted advertising sales for the adjusted three
months ended June 30, 2010 is a result of declines in new and recurring business, mainly driven by
(1) declines in overall advertising spending by our clients, (2) the significant impact of the weak
local business conditions on consumer spending in our clients markets and (3) an increase in
competition and more fragmentation in local business search. Advertising sales in current periods
will be recognized as gross advertising revenues in future periods as a result of the deferral and
amortization method of revenue recognition.
Expenses
The components of our adjusted total expenses for the three months ended June 30, 2010 and the
Predecessor Company GAAP total expenses for the three months ended June 30, 2009 were as follows:
Successor | Predecessor | |||||||||||||||||||||||
Company | Adjusted | Company | ||||||||||||||||||||||
Three Months Ended | Fresh Start | Three Months Ended | Three Months Ended | |||||||||||||||||||||
June 30, | and Other | June 30, | June 30, | |||||||||||||||||||||
(amounts in millions) | 2010 | Adjustments | 2010 | 2009 | $ Change | % Change | ||||||||||||||||||
Production and
distribution expenses |
$ | 51.5 | $ | 30.5 | (1) | $ | 82.0 | $ | 92.7 | $ | (10.7 | ) | (11.5 | )% | ||||||||||
Selling and support
expenses |
93.5 | 28.5 | (1) | 122.0 | 160.7 | (38.7 | ) | (24.1 | ) | |||||||||||||||
General and
administrative
expenses |
40.2 | | 40.2 | 26.0 | 14.2 | 54.6 | ||||||||||||||||||
Depreciation and
amortization |
59.6 | | (2) | 59.6 | 142.3 | (82.7 | ) | (58.1 | ) | |||||||||||||||
Impairment charges |
769.7 | (769.7 | )(3) | | | | | |||||||||||||||||
Total |
$ | 1,014.5 | $ | (710.7 | ) | $ | 303.8 | $ | 421.7 | $ | (117.9 | ) | (28.0 | )% | ||||||||||
(1) | Represents (a) certain deferred expenses for advertising sales fulfilled prior to the Fresh Start Reporting Date, which would have been recognized during the three months ended June 30, 2010 absent our adoption of fresh start accounting required under GAAP, and (b) the exclusion of cost-uplift recorded under fresh start accounting. | |
(2) | Depreciation and amortization expense has not been adjusted for the increase in fair value of our intangible assets and fixed assets and computer software as a result of our adoption of fresh start accounting, the reduced carrying values of intangible assets resulting from impairment charges recorded by the Predecessor Company during the fourth quarter of 2009 and the associated reduction in remaining useful lives effective January 1, 2010. | |
(3) | Goodwill and intangible asset impairment charges have been excluded for the adjusted three months ended June 30, 2010. |
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Production and Distribution Expenses
Total adjusted production and distribution expenses for the three months ended June 30, 2010 were
$82.0 million, compared to $92.7 million for the Predecessor Company three months ended June 30,
2009. The primary components of the $10.7 million, or 11.5%, decrease in adjusted production and
distribution expenses for the three months ended June 30, 2010 were as follows:
Adjusted Three | ||||
Months Ended June | ||||
(amounts in millions) | 30, 2010 | |||
Lower print, paper and distribution expenses |
$ | (8.5 | ) | |
Lower internet production and distribution expenses |
(1.5 | ) | ||
All other, net |
(0.7 | ) | ||
Total decrease in
adjusted production and
distribution expenses for
the three months ended
June 30, 2010 |
$ | (10.7 | ) | |
Adjusted print, paper and distribution expenses for the three months ended June 30, 2010 declined
$8.5 million, compared to the Predecessor Company three months ended June 30, 2009. This decline is
primarily due to lower page volumes associated with declines in print advertisements, negotiated
price reductions in our print and paper expenses and timing of publication deliveries as compared
to the prior year period.
Adjusted internet production and distribution expenses for the three months ended June 30, 2010
declined $1.5 million, compared to the Predecessor Company three months ended June 30, 2009,
primarily due to a reduction in DexNet customers, purchasing efficiencies and lower headcount,
partially offset by increased purchased traffic costs incurred to direct traffic to our online
properties.
Selling and Support Expenses
Total adjusted selling and support expenses for the three months ended June 30, 2010 were $122.0
million, compared to $160.7 million for the Predecessor Company three months ended June 30, 2009.
The primary components of the $38.7 million, or 24.1%, decrease in adjusted selling and support
expenses for the three months ended June 30, 2010 were as follows:
Adjusted Three | ||||
Months Ended June | ||||
(amounts in millions) | 30, 2010 | |||
Lower bad debt expense |
$ | (31.6 | ) | |
Lower commissions and salesperson expenses |
(6.4 | ) | ||
Lower occupancy expenses |
(1.2 | ) | ||
All other, net |
0.5 | |||
Total decrease in
adjusted selling and
support expenses for
the three months ended
June 30, 2010 |
$ | (38.7 | ) | |
Adjusted bad debt expense for the three months ended June 30, 2010 declined $31.6 million, compared
to the Predecessor Company three months ended June 30, 2009, primarily due to effective credit and
collections practices, which have driven improvement in our accounts receivable portfolio, as well
as lower billing volumes associated with declines in advertisers and advertisements. Adjusted bad
debt expense for the three months ended June 30, 2010 represented 2.5% of our net revenue, compared
to 7.6% for the Predecessor Company three months ended June 30, 2009. Bad debt expense can
fluctuate during the year based on changes in projected write-off experience. For the full year
2010, the Company anticipates that bad debt expense as a percentage of net revenue will range
between 3% to 5%.
Adjusted commissions and salesperson expenses for the three months ended June 30, 2010 decreased
$6.4 million, compared to the Predecessor Company three months ended June 30, 2009, primarily due
to lower advertising sales and its effect on variable-based commissions as well as lower headcount
resulting from declines in advertisers.
Adjusted occupancy expenses for the three months ended June 30, 2010 decreased $1.2 million,
compared to the Predecessor Company three months ended June 30, 2009, primarily due to the
renegotiation of our leased properties and reduction in the amount of leased square footage during
the bankruptcy process.
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General and Administrative Expenses
Adjusted G&A expenses for the three months ended June 30, 2010 were $40.2 million, compared to
$26.0 million for the Predecessor Company three months ended June 30, 2009. The primary components
of the $14.2 million, or 54.6%, increase in adjusted G&A expenses for the three months ended June
30, 2010 were as follows:
Adjusted Three | ||||
Months Ended June | ||||
(amounts in millions) | 30, 2010 | |||
Change in net curtailment gains |
$ | 9.7 | ||
One-time expenses associated with retirement of Chief Executive Officer |
9.5 | |||
Lower restructuring expenses |
(2.0 | ) | ||
All other, net |
(3.0 | ) | ||
Total increase in adjusted G&A
expenses for the three months ended
June 30, 2010 |
$ | 14.2 | ||
During the adjusted three months ended June 30, 2010, we recognized a one-time net curtailment gain
of $3.8 million associated with the retirement of the Companys Chief Executive Officer. This
represents a decrease of $9.7 million in net curtailment gains from the three months ended June 30,
2009 during which we recognized $13.5 million associated with the freeze on the Predecessor
Companys defined benefit plans for certain union employees and the elimination of certain union
retiree health care and life insurance benefits.
During the adjusted three months ended June 30, 2010, we recognized one-time expenses of $9.5
million associated with the retirement of the Companys Chief Executive Officer.
Adjusted restructuring expenses for the three months ended June 30, 2010 decreased $2.0 million,
compared to the Predecessor Company three months ended June 30, 2009, primarily due to lower
severance expense and fees associated with outside consultant services.
Depreciation and Amortization
Depreciation and amortization expense for the adjusted three months ended June 30, 2010 was $59.6
million, compared to $142.3 million for the Predecessor Company three months ended June 30, 2009.
Amortization of intangible assets was $46.3 million for the adjusted three months ended June 30,
2010, compared to $128.6 million for the Predecessor Company three months ended June 30, 2009. The
decrease in amortization expense for the adjusted three months ended June 30, 2010 is a result of
the reduced carrying values of intangible assets subsequent to the impairment charges recorded by
the Predecessor Company during the fourth quarter of 2009, partially offset by increased
amortization expense resulting from the increase in fair value of our intangible assets as a result
of our adoption of fresh start accounting and the reduction of the remaining useful lives of
intangible assets associated with the impairment charges recorded by the Predecessor Company during
the fourth quarter of 2009.
Depreciation of fixed assets and amortization of computer software was $13.3 million for the
adjusted three months ended June 30, 2010, compared to $13.7 million for the Predecessor Company
three months ended June 30, 2009. The decrease in depreciation expense for the adjusted three
months ended June 30, 2010 was primarily due to the acceleration of depreciation on fixed assets no
longer in service during the three months ended June 30, 2009, partially offset by the increase in
depreciation expense for the adjusted three months ended June 30, 2010 as a result of the increase
in fair value of our fixed assets and computer software in conjunction with our adoption of fresh
start accounting.
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Operating Income (Loss)
Adjusted operating income (loss) for the three months ended June 30, 2010 and the Predecessor
Company GAAP operating income for the three months ended June 30, 2009 was as follows:
Successor | Predecessor | |||||||||||||||||||||||
Company | Adjusted | Company | ||||||||||||||||||||||
Three Months Ended | Fresh Start | Three Months Ended | Three Months Ended | |||||||||||||||||||||
June 30, | and Other | June 30, | June 30, | |||||||||||||||||||||
(amounts in millions) | 2010 | Adjustments | 2010 | 2009 | $ Change | % Change | ||||||||||||||||||
Total |
$ | (853.5 | ) | $ | 1,001.6 | (1) | $ | 148.1 | $ | 143.9 | $ | 4.2 | 2.9 | % | ||||||||||
(1) | Represents the net effect of (a) eliminating gross advertising revenues, sales claims and allowances, other revenues and certain deferred expenses for advertising sales fulfilled prior to the Fresh Start Reporting Date, which would have been recognized during the three months ended June 30, 2010 absent our adoption of fresh start accounting required under GAAP, (b) the exclusion of cost-uplift recorded under fresh start accounting and (c) excludes the goodwill and intangible asset impairment charges during the three months ended June 30, 2010. |
Adjusted operating income for the three months ended June 30, 2010 of $148.1 million, compares to
operating income of $143.9 million for the Predecessor Company three months ended June 30, 2009.
The increase in adjusted operating income for the three months ended June 30, 2010 is due to the
significant decline in amortization expense associated with our intangible assets and lower
operating expenses described above, partially offset by declines in net revenues described above.
Combined Adjusted Results for the Six Months Ended June 30, 2010
compared to Predecessor Company GAAP Results for the Six Months Ended June 30, 2009
compared to Predecessor Company GAAP Results for the Six Months Ended June 30, 2009
Net Revenues
The components of our combined adjusted net revenues for the six months ended June 30, 2010 and the
Predecessor Company GAAP net revenues for the six months ended June 30, 2009 were as follows:
Successor | Predecessor | Combined | Predecessor | |||||||||||||||||||||||||
Company | Company | Adjusted | Company | |||||||||||||||||||||||||
Five Months Ended | One Month Ended | Six Months Ended | Six Months Ended | |||||||||||||||||||||||||
June 30, | January 31, | Fresh Start | June 30, | June 30, | ||||||||||||||||||||||||
(amounts in millions) | 2010 | 2010 | Adjustments | 2010 | 2009 | $ Change | % Change | |||||||||||||||||||||
Gross advertising
revenues |
$ | 210.2 | $ | 161.0 | $ | 551.9 | (1) | $ | 923.1 | $ | 1,178.1 | $ | (255.0 | ) | (21.6 | )% | ||||||||||||
Sales claims and
allowances |
(4.2 | ) | (3.5 | ) | (9.7 | ) (1) | (17.4 | ) | (25.9 | ) | 8.5 | 32.8 | ||||||||||||||||
Net advertising revenues |
206.0 | 157.5 | 542.2 | 905.7 | 1,152.2 | (246.5 | ) | (21.3 | ) | |||||||||||||||||||
Other revenues |
8.0 | 2.9 | 3.8 | (1) | 14.7 | 15.4 | (0.7 | ) | 4.5 | |||||||||||||||||||
Total |
$ | 214.0 | $ | 160.4 | $ | 546.0 | $ | 920.4 | $ | 1,167.6 | $ | (247.2 | ) | (21.2 | )% | |||||||||||||
(1) | Represents gross advertising revenues, sales claims and allowances and other revenues for advertising sales fulfilled prior to the Fresh Start Reporting Date, which would have been recognized during the six months ended June 30, 2010 absent our adoption of fresh start accounting required under GAAP. |
Combined adjusted gross advertising revenues for the six months ended June 30, 2010 decreased
$255.0 million, or 21.6%, from the Predecessor Company six months ended June 30, 2009. The decline
in combined adjusted gross advertising revenues for the six months ended June 30, 2010 is
primarily due to declines in advertising sales over the past twelve months, primarily as a result
of declines in new and recurring business, mainly driven by (1) declines in overall advertising
spending by our clients, (2) the significant impact of the weak local business conditions on
consumer spending in our clients markets and (3) an increase in competition and more fragmentation
in local business search. The decline in combined adjusted gross advertising revenues for the six
months ended June 30, 2010 is also due to the timing of publication deliveries.
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Combined adjusted sales claims and allowances for the six months ended June 30, 2010 decreased $8.5
million, or 32.8%, from the Predecessor Company six months ended June 30, 2009. The decline in
combined adjusted sales claims and allowances for the six months ended June 30, 2010 is primarily
due to lower claims experience as a result of process improvements and operating efficiencies,
which improved print copy quality in certain of our markets, as well as lower advertising sales
volume.
Combined adjusted advertising sales for the six months ended June 30, 2010 were $904.8 million,
compared to $1,080.3 million for the Predecessor Company six months ended June 30, 2009. The
$175.5 million, or 16.2%, decrease in combined adjusted advertising sales for the combined adjusted
six months ended June 30, 2010 is a result of declines in new and recurring business, mainly driven
by (1) declines in overall advertising spending by our clients, (2) the significant impact of the
weak local business conditions on consumer spending in our clients markets and (3) an increase in
competition and more fragmentation in local business search.
Expenses
The components of our combined adjusted total expenses for the six months ended June 30, 2010 and
the Predecessor Company GAAP total expenses for the six months ended June 30, 2009 were as follows:
Successor | Predecessor | Combined | Predecessor | |||||||||||||||||||||||||
Company | Company | Adjusted | Company | |||||||||||||||||||||||||
Five Months Ended | One Month Ended | Fresh Start | Six Months Ended | Six Months Ended | ||||||||||||||||||||||||
June 30, | January 31, | and Other | June 30, | June 30, | ||||||||||||||||||||||||
(amounts in millions) | 2010 | 2010 | Adjustments | 2010 | 2009 | $ Change | % Change | |||||||||||||||||||||
Production and
distribution expenses |
$ | 80.5 | $ | 27.0 | $ | 57.5 | (1) | $ | 165.0 | $ | 194.6 | $ | (29.6 | ) | (15.2 | )% | ||||||||||||
Selling and support
expenses |
151.9 | 40.9 | 56.6 | (1) | 249.4 | 312.7 | (63.3 | ) | (20.2 | ) | ||||||||||||||||||
General and
administrative expenses |
61.9 | 8.2 | | 70.1 | 67.6 | 2.5 | 3.7 | |||||||||||||||||||||
Depreciation and
amortization |
99.0 | 20.2 | | (2) | 119.2 | 285.2 | (166.0 | ) | (58.2 | ) | ||||||||||||||||||
Impairment charges |
769.7 | | (769.7 | )(3) | | | | | ||||||||||||||||||||
Total |
$ | 1,163.0 | $ | 96.3 | $ | (655.6 | ) | $ | 603.7 | $ | 860.1 | $ | (256.4 | ) | (29.8 | )% | ||||||||||||
(1) | Represents (a) certain deferred expenses for advertising sales fulfilled prior to the Fresh Start Reporting Date, which would have been recognized during the five months ended June 30, 2010 absent our adoption of fresh start accounting required under GAAP, and (b) the exclusion of cost-uplift recorded under fresh start accounting. | |
(2) | Depreciation and amortization expense has not been adjusted for the increase in fair value of our intangible assets and fixed assets and computer software as a result of our adoption of fresh start accounting, the reduced carrying values of intangible assets resulting from impairment charges recorded by the Predecessor Company during the fourth quarter of 2009 and the associated reduction in remaining useful lives effective January 1, 2010. | |
(3) | Goodwill and intangible asset impairment charges have been excluded for the combined adjusted six months ended June 30, 2010. |
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Production and Distribution Expenses
Total combined adjusted production and distribution expenses for the six months ended June 30, 2010
were $165.0 million, compared to $194.6 million for the Predecessor Company six months ended June
30, 2009. The primary components of the $29.6 million, or 15.2%, decrease in combined adjusted
production and distribution expenses for the six months ended June 30, 2010 were as follows:
Combined | ||||
Adjusted Six | ||||
(amounts in millions) | Months Ended June 30, 2010 |
|||
Lower print, paper and distribution expenses |
$ | (18.7 | ) | |
Lower internet production and distribution expenses |
(9.3 | ) | ||
All other, net |
(1.6 | ) | ||
Total decrease in
combined adjusted
production and
distribution expenses for
the six months ended June
30, 2010 |
$ | (29.6 | ) | |
Combined adjusted print, paper and distribution expenses for the six months ended June 30, 2010
declined $18.7 million, compared to the Predecessor Company six months ended June 30, 2009. This
decline is primarily due to lower page volumes associated with declines in print advertisements,
negotiated price reductions in our print and paper expenses, timing of publication deliveries as
compared to the prior year period and favorable paper inventory expenses.
Combined adjusted internet production and distribution expenses for the six months ended June 30,
2010 declined $9.3 million, compared to the Predecessor Company six months ended June 30, 2009,
primarily due to a reduction in DexNet customers, purchasing efficiencies and lower headcount,
partially offset by increased purchased traffic costs incurred to direct traffic to our online
properties.
Selling and Support Expenses
Total combined adjusted selling and support expenses for the six months ended June 30, 2010 were
$249.4 million, compared to $312.7 million for the Predecessor Company six months ended June 30,
2009. The primary components of the $63.3 million, or 20.2%, decrease in combined adjusted selling
and support expenses for the six months ended June 30, 2010 were as follows:
Combined | ||||
Adjusted Six Months | ||||
(amounts in millions) | Ended June 30, 2010 | |||
Lower bad debt expense |
$ | (47.7 | ) | |
Lower commissions and salesperson expenses |
(13.0 | ) | ||
Lower occupancy expenses |
(2.9 | ) | ||
All other, net |
0.3 | |||
Total decrease in
combined adjusted
selling and support
expenses for the six
months ended June 30,
2010 |
$ | (63.3 | ) | |
Combined adjusted bad debt expense for the six months ended June 30, 2010 declined $47.7 million,
compared to the Predecessor Company six months ended June 30, 2009, primarily due to effective
credit and collections practices, which have driven improvement in our accounts receivable
portfolio, as well as lower billing volumes associated with declines in advertisers and
advertisements. Combined adjusted bad debt expense for the six months ended June 30, 2010
represented 3.6% of our net revenue, compared to 6.9% for the Predecessor Company six months ended
June 30, 2009. Bad debt expense can fluctuate throughout the year and as such, the Company
anticipates that bad debt expense as a percentage of net revenue will range between 3% to 5% for
the full year 2010.
Combined adjusted commissions and salesperson expenses for the six months ended June 30, 2010
decreased $13.0 million, compared to the Predecessor Company six months ended June 30, 2009,
primarily due to lower advertising sales and its effect on variable-based commissions as well as
lower headcount resulting from declines in advertisers.
Combined adjusted occupancy expenses for the six months ended June 30, 2010 decreased $2.9 million,
compared to the Predecessor Company six months ended June 30, 2009, primarily due to the
renegotiation of our leased properties and reduction in the amount of leased square footage during
the bankruptcy process.
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General and Administrative Expenses
Combined adjusted G&A expenses for the six months ended June 30, 2010 were $70.1 million, compared
to $67.6 million for the Predecessor Company six months ended June 30, 2009. The primary components
of the $2.5 million, or 3.7%, increase in combined adjusted G&A expenses for the six months ended
June 30, 2010 were as follows:
Combined Adjusted | ||||
Six Months Ended June | ||||
(amounts in millions) | 30, 2010 | |||
Change in net curtailment gains |
$ | 9.7 | ||
One-time expenses associated with retirement of Chief Executive Officer |
9.5 | |||
Lower restructuring expenses |
(11.1 | ) | ||
All other, net |
(5.6 | ) | ||
Total increase in combined adjusted
G&A expenses for the six months
ended June 30, 2010 |
$ | 2.5 | ||
During the combined adjusted six months ended June 30, 2010, we recognized a one-time net
curtailment gain of $3.8 million associated with the retirement of the Companys Chief Executive
Officer. This represents a decrease of $9.7 million in net curtailment gains from the six months
ended June 30, 2009 during which we recognized $13.5 million associated with the freeze on the
Predecessor Companys defined benefit plans for certain union employees and the elimination of
certain union retiree health care and life insurance benefits.
During the combined adjusted six months ended June 30, 2010, we recognized one-time expenses of
$9.5 million associated with the retirement of the Companys Chief Executive Officer.
Combined adjusted restructuring expenses for the six months ended June 30, 2010 decreased $11.1
million, compared to the Predecessor Company six months ended June 30, 2009, primarily due to lower
severance expense and fees associated with outside consultant services.
All other, net primarily consists of the reversal of an accrual associated with the Predecessor
Companys incentive compensation plan during the one month ended January 31, 2010.
Depreciation and Amortization
Combined depreciation and amortization expense for the six months ended June 30, 2010 was $119.2
million, compared to $285.2 million for the Predecessor Company six months ended June 30, 2009.
Combined amortization of intangible assets was $92.7 million for the six months ended June 30,
2010, compared to $257.0 million for the Predecessor Company six months ended June 30, 2009. The
decrease in combined amortization expense for the six months ended June 30, 2010 is a result of the
reduced carrying values of intangible assets subsequent to the impairment charges recorded by the
Predecessor Company during the fourth quarter of 2009, partially offset by increased amortization
expense resulting from the increase in fair value of our intangible assets as a result of our
adoption of fresh start accounting and the reduction of the remaining useful lives of intangible
assets associated with the impairment charges recorded by the Predecessor Company during the fourth
quarter of 2009.
Combined depreciation of fixed assets and amortization of computer software was $26.5 million for
the six months ended June 30, 2010, compared to $28.2 million for the Predecessor Company six
months ended June 30, 2009. The decrease in combined depreciation expense for the six months ended
June 30, 2010 was primarily due to the acceleration of depreciation on fixed assets no longer in
service during the six months ended June 30, 2009, partially offset by the increase in depreciation
expense for the combined six months ended June 30, 2010 as a result of the increase in fair value
of our fixed assets and computer software in conjunction with our adoption of fresh start
accounting.
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Operating Income (Loss)
Combined adjusted operating income (loss) for the six months ended June 30, 2010 and the
Predecessor Company GAAP operating income for the six months ended June 30, 2009 was as follows:
Successor | Predecessor | Combined | Predecessor | |||||||||||||||||||||||||
Company | Company | Adjusted | Company | |||||||||||||||||||||||||
Five Months Ended | One Month Ended | Six Months Ended | Six Months Ended | |||||||||||||||||||||||||
June 30, | January 31, | Fresh Start | June 30, | June 30, | ||||||||||||||||||||||||
(amounts in millions) | 2010 | 2010 | Adjustments | 2010 | 2009 | $ Change | % Change | |||||||||||||||||||||
Total |
$ | (948.9 | ) | $ | 64.1 | $ | 1,201.6 | (1) | $ | 316.8 | $ | 307.5 | $ | 9.3 | 3.0 | % | ||||||||||||
(1) | Represents the net effect of (a) eliminating gross advertising revenues, sales claims and allowances, other revenues and certain deferred expenses for advertising sales fulfilled prior to the Fresh Start Reporting Date, which would have been recognized during the five months ended June 30, 2010 absent our adoption of fresh start accounting required under GAAP, (b) the exclusion of cost-uplift recorded under fresh start accounting (c) excludes the goodwill and intangible asset impairment charges during the five months ended June 30, 2010. |
Combined adjusted operating income for the six months ended June 30, 2010 of $316.8 million,
compares to operating income of $307.5 million for the Predecessor Company six months ended June
30, 2009. The increase in combined adjusted operating income for the six months ended June 30, 2010
is due to the significant decline in amortization expense associated with our intangible assets and
lower operating expenses described above, partially offset by declines in net revenues described
above.
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LIQUIDITY AND CAPITAL RESOURCES
The following table presents the fair market value of our long-term debt at June 30, 2010 based on
quoted market prices on that date, as well as the carrying value of our long-term debt at June 30,
2010, which includes $106.4 million of unamortized fair value adjustments required by GAAP in
connection with the Companys adoption of fresh start accounting on the Fresh Start Reporting Date.
See Part 1 Item 1, Financial Statements (Unaudited) Note 3 Fresh Start Accounting for
additional information.
Successor Company | ||||||||
Fair Market Value | Carrying Value | |||||||
June 30, 2010 | June 30, 2010 | |||||||
RHDI Amended and Restated Credit Facility |
$ | 986,067 | $ | 1,091,403 | ||||
Dex Media East Amended and Restated Credit Facility |
717,932 | 810,040 | ||||||
Dex Media West Amended and Restated Credit Facility |
708,402 | 773,561 | ||||||
Dex One 12%/14% Senior Subordinated Notes due 2017 |
279,000 | 300,000 | ||||||
Total Dex One consolidated |
2,691,401 | 2,975,004 | ||||||
Less current portion |
165,185 | 165,524 | ||||||
Long-term debt |
$ | 2,526,216 | $ | 2,809,480 | ||||
RHDI Amended and Restated Credit Facility
As of June 30, 2010, the outstanding carrying value under the amended and restated RHDI credit
facility (RHDI Amended and Restated Credit Facility) totaled $1,091.4 million. The RHDI Amended
and Restated Credit Facility requires quarterly principal and interest payments and matures on
October 24, 2014. The weighted average interest rate of outstanding debt under the RHDI Amended and
Restated Credit Facility was 9.25% at June 30, 2010.
Dex Media East Amended and Restated Credit Facility
As of June 30, 2010, the outstanding carrying value under the amended and restated Dex Media East
credit facility (Dex Media East Amended and Restated Credit Facility) totaled $810.0 million. The
Dex Media East Amended and Restated Credit Facility requires quarterly principal and interest
payments and matures on October 24, 2014. The weighted average interest rate of outstanding debt
under the Dex Media East Amended and Restated Credit Facility was 2.95% at June 30, 2010.
Dex Media West Amended and Restated Credit Facility
As of June 30, 2010, the outstanding carrying value under the amended and restated Dex Media West
credit facility (Dex Media West Amended and Restated Credit Facility) totaled $773.6 million. The
Dex Media West Amended and Restated Credit Facility requires quarterly principal and interest
payments and matures on October 24, 2014. The weighted average interest rate of outstanding debt
under the Dex Media West Amended and Restated Credit Facility was 7.50% at June 30, 2010.
Dex One Senior Subordinated Notes
On the Effective Date, we issued the $300.0 million Dex One Senior Subordinated Notes in exchange
for the Dex Media West 8.5% Senior Notes due 2010 and 5.875% Senior Notes due 2011. Interest on the
Dex One Senior Subordinated Notes is payable semi-annually on March 31st and September
30th of each year, commencing on March 31, 2010 through January 2017. The Dex One Senior
Subordinated Notes accrue interest at an annual rate of 12% for cash interest payments and 14% if
the Company elects paid-in-kind (PIK) interest payments. The Company may elect, prior to the
start of each interest payment period, whether to make each interest payment on the Dex One Senior
Subordinated Notes (i) entirely in cash or (ii) 50% in cash and 50% in PIK interest, which is
capitalized as incremental or additional senior secured notes. The interest rate on the Dex One
Senior Subordinated Notes may be subject to adjustment in the event the Company incurs certain
specified debt with a higher effective yield to maturity than the yield to maturity of the Dex One
Senior Subordinated Notes. The Dex One Senior Subordinated Notes are
unsecured obligations of the Company, effectively subordinated in right of payment to all of the
Companys existing and future secured debt, including Dex Ones guarantee of borrowings under each
of the amended and restated credit facilities and are structurally subordinated to any existing or
future liabilities (including trade payables) of our direct and indirect subsidiaries.
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The indenture governing the Dex One Senior Subordinated Notes contains certain covenants that,
subject to certain exceptions, among other things, limit or restrict the Companys (and, in certain
cases, the Companys restricted subsidiaries) incurrence of indebtedness, making of certain
restricted payments, incurrence of liens, entry into transactions with affiliates, conduct of its
business and the merger, consolidation or sale of all or substantially all of its property. The
indenture governing the Dex One Senior Subordinated Notes also requires the Company to offer to
repurchase the Dex One Senior Subordinated Notes at par after certain changes of control involving
the Company or the sale of substantially all of the assets of the Company. Holders of the Dex One
Senior Subordinated Notes also may cause the Company to repurchase the Dex One Senior Subordinated
Notes at a price of 101% of the principal amount upon the incurrence by the Company of certain
acquisition indebtedness.
See Part 1 Item 1, Financial Statements (Unaudited) Note 6, Long-Term Debt, Credit
Facilities and Notes for further details of our long-term debt.
Impact of Fresh Start Accounting
In conjunction with our adoption of fresh start accounting, an adjustment was established to record
our outstanding debt at fair value on the Fresh Start Reporting Date. The Company was required to
record our amended and restated credit facilities at a discount as a result of their fair value on
the Fresh Start Reporting Date. Therefore, the carrying amount of these debt obligations is lower
than the principal amount due at maturity. A total discount of $120.2 million was recorded upon
adoption of fresh start accounting associated with our amended and restated credit facilities, of
which $106.4 million remains unamortized at June 30, 2010, as shown in the following table.
Outstanding Debt at | ||||||||||||
Unamortized Fair | June 30, 2010 Excluding | |||||||||||
Carrying Value at | Value Adjustments | the Impact of Unamortized | ||||||||||
June 30, 2010 | at June 30, 2010 | Fair Value Adjustments | ||||||||||
RHDI Amended and Restated Credit Facility |
$ | 1,091,403 | $ | 16,536 | $ | 1,107,939 | ||||||
Dex Media East Amended and Restated
Credit Facility |
810,040 | 76,296 | 886,336 | |||||||||
Dex Media West Amended and Restated
Credit Facility |
773,561 | 13,552 | 787,113 | |||||||||
Dex One 12%/14% Senior Subordinated
Notes due 2017 |
300,000 | | 300,000 | |||||||||
Total |
$ | 2,975,004 | $ | 106,384 | $ | 3,081,388 | ||||||
See Part 1 Item 1, Financial Statements (Unaudited) Note 3, Fresh Start Accounting for a
presentation of the impact of emergence from reorganization and fresh start accounting on our
financial position.
Issuance of New Common Stock
Upon emergence from Chapter 11 and pursuant to the Plan, all of the issued and outstanding shares
of the Predecessor Companys common stock and any other outstanding equity securities of the
Predecessor Company including all stock options, SARs and restricted stock, were cancelled. On the
Effective Date, the Company issued an aggregate amount of 50,000,001 shares of new common stock,
par value $.001 per share. See Part 1 Item 1, Financial Statements (Unaudited) Note 10,
Capital Stock for additional information regarding our new common stock.
Registration Rights Agreement
On the Effective Date and pursuant to the Plan, the Company entered into a Registration Rights
Agreement (the Agreement), requiring the Company to register with the SEC certain shares of its
common stock and/or the Dex One Senior Subordinated Notes upon the request of one or more Eligible
Holders (as defined in the Agreement), in accordance with the terms and conditions set forth
therein. On April 8, 2010 and pursuant to the Agreement, the Company filed a shelf registration
statement to register for resale by Franklin Advisers, Inc. and certain of its affiliates
15,262,488 shares of our common stock and $116.6 million aggregate principal amount of the Dex One
Senior Subordinated Notes. These securities were registered pursuant to the Agreement to permit the
sale of the
securities from time to time at fixed prices, prevailing market prices at the times of sale, prices
related to the prevailing market prices, varying prices determined at the times of sale or
negotiated prices. The shelf registration statement became effective on April 16, 2010.
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Liquidity and Cash Flows
The Companys primary sources of liquidity are existing cash on hand and cash flows generated from
operations. The Companys primary liquidity requirements will be to fund operations and service its
indebtedness.
The Companys ability to meet its debt service requirements will be dependent on its ability to
generate sufficient cash flows from operations. The primary sources of cash flows will consist
mainly of cash receipts from the sale of our marketing products and marketing services and can be
impacted by, among other factors, general local business conditions, an increase in competition and
more fragmentation in the local business search market, consumer confidence and the level of demand
for our advertising products and services.
Based on current financial projections, but in any event for the next 12-15 months, the Company
expects to be able to continue to generate cash flows from operations in amounts sufficient to fund
operations and capital expenditures, as well as meet debt service requirements. However, no
assurances can be made that our business will generate sufficient cash flows from operations to
enable us to fund these prospective cash requirements.
See Part 1 Item 2, Managements Discussion and Analysis of Financial Condition and Results of
Operations Recent Trends Related to Our Business, for additional information related to trends
and uncertainties with respect to our business.
Successor Company
Aggregate outstanding debt at June 30, 2010 was $2,975.0 million, which includes fair value
adjustments of $106.4 million required by GAAP in connection with the Companys adoption of fresh
start accounting. During the five months ended June 30, 2010, we made scheduled and accelerated
principal payments of $303.4 million under our amended and restated credit facilities. For the five
months ended June 30, 2010, we made aggregate net cash interest payments of $69.3 million. At June
30, 2010, we had $121.8 million of cash and cash equivalents before checks not yet presented for
payment of $11.4 million.
Cash provided by operating activities was $240.1 million for the five months ended June
30, 2010 and included net loss, non-cash items such as goodwill and intangible asset impairment
charges and depreciation and amortization, and changes in assets and liabilities primarily driven
by changes in deferred directory revenues, partially offset by other non-cash items, net primarily
related to a deferred income tax benefit.
Cash used in investing activities for the five months ended June 30, 2010 was $15.2
million and relates to the purchase of fixed assets, primarily computer equipment, software
and leasehold improvements.
Cash used in financing activities for the five months ended June 30, 2010 was $302.6
million and includes the following:
| $303.4 million in principal payments on our amended and restated credit facilities. | ||
| $2.8 million in other financing costs. | ||
| $3.6 million in the increased balance of checks not yet presented for payment. |
Predecessor Company
During the one month ended January 31, 2010, the Predecessor Company made principal payments of
$511.3 million under its credit facilities in accordance with the Plan and in conjunction with our
emergence from Chapter 11 and made aggregate net cash interest payments of $15.5 million.
Cash provided by operating activities was $71.7 million for the one month ended January
31, 2010 and included net income, non-cash items, net primarily related to non-cash reorganization
items, net, offset by a deferred income tax provision and depreciation and amortization, and
changes in assets and liabilities primarily driven by changes in deferred income taxes and pension
and postretirement long-term liabilities.
Cash used in investing activities for the one month ended January 31, 2010 was $1.8
million and relates to the purchase of fixed assets, primarily computer equipment, software
and leasehold improvements.
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Cash used in financing activities for the one month ended January 31, 2010 was $536.5
million and includes the following:
| $511.3 million in principal payments on term loans under the Predecessor Companys credit facilities in accordance with the Plan and in conjunction with our emergence from Chapter 11. | ||
| $22.1 million in costs associated with the issuance of the Dex One Senior Subordinated Notes and other financing related costs. | ||
| $3.1 million in the decreased balance of checks not yet presented for payment. |
Cash provided by operating activities was $176.6 million for the six months ended June 30, 2009 and
included net loss, non-cash items, net primarily related to a deferred income tax provision,
depreciation and amortization, the provision for bad debts and changes in assets and liabilities
primarily related to changes in deferred directory revenues, timing of accounts payable and accrued
liabilities and changes in pension and postretirement long-term liabilities.
Cash used in investing activities for the six months ended June 30, 2009 was $9.8 million and
relates to the purchase of fixed assets, primarily computer equipment, software and leasehold
improvements.
Cash provided by financing activities for the six months ended June 30, 2009 was $109.0
million and includes the following:
| $229.4 million in principal payments on term loans under the Predecessor Companys credit facilities. | ||
| $361.0 million in borrowings under the Predecessor Companys revolvers. The Predecessor Company made the borrowings under the various revolving credit facilities to preserve its financial flexibility in light of the continuing uncertainty in the global credit markets. | ||
| $18.7 million in principal payments on the Predecessor Companys revolvers. | ||
| $3.9 million in the decreased balance of checks not yet presented for payment. |
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Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Contractual Obligations
The contractual obligations table presented below sets forth our annual commitments for principal
and interest payments on our debt as of June 30, 2010. The debt repayments as presented in this
table include the scheduled principal payments under the current debt agreements as well as an
estimate of additional debt repayments resulting from cash flow sweep requirements under our
amended and restated credit facilities. Our amended and restated credit facilities require that a
certain percentage of annual excess cash flow, as defined in the debt agreements, be used to repay
amounts under the amended and restated credit facilities. The debt repayments also exclude fair
value adjustments required by GAAP as a result of our adoption of fresh start accounting of $106.4
million, as these adjustments do not impact our payment obligations. There have not been any
material changes to the other contractual obligations disclosed in our Annual Report on Form 10-K
for the year ended December 31, 2009.
Payment Due by Period | ||||||||||||||||||||
Less than | 1-3 | 3-5 | More than 5 | |||||||||||||||||
(amounts in millions) | Total | 1 Year | Years | Years | Years | |||||||||||||||
Long-term debt (1) |
$ | 3,081.4 | $ | 196.0 | $ | 625.9 | $ | 1,959.5 | $ | 300.0 | ||||||||||
Interest on long-term
debt (2) |
1,003.2 | 218.5 | 400.0 | 318.9 | 65.8 | |||||||||||||||
Total long-term debt and
related interest
contractual
obligations |
$ | 4,084.6 | $ | 414.5 | $ | 1,025.9 | $ | 2,278.4 | $ | 365.8 | ||||||||||
(1) | Included in long-term debt are principal amounts owed under the amended and restated credit facilities and the Dex One Senior Subordinated Notes, including the current portion of long-term debt and an estimate of additional debt repayments resulting from cash flow sweep requirements under our amended and restated credit facilities, as of June 30, 2010. | |
(2) | Interest on debt represents cash interest payment obligations assuming all indebtedness as of June 30, 2010 will be paid in accordance with its contractual maturity and assumes interest rates on variable interest debt as of June 30, 2010 will remain unchanged in future periods. |
Please refer to Liquidity and Capital Resources for information on the amended and restated
credit facilities and the Dex One Senior Subordinated Notes.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Risk and Risk Management
The Companys amended and restated credit facilities each bear interest at variable rates and,
accordingly, our earnings and cash flow are affected by changes in interest rates. Management
believes that it is prudent to mitigate the interest rate risk on a portion of its variable rate
borrowings. To satisfy our objectives and requirements, the Company has entered into interest rate
swap and interest rate cap agreements, which have not been designated as cash flow hedges, to
manage our exposure to interest rate fluctuations on our variable rate debt.
The Company has entered into the following interest rate swaps that effectively convert
approximately $500.0 million, or 19%, of the Companys variable rate debt to fixed rate debt as of
June 30, 2010. At June 30, 2010, approximately 90% of our total debt outstanding consisted 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 27% of our total debt portfolio
as of June 30, 2010. The interest rate swaps mature at varying dates from February 2012 through
February 2013.
Interest Rate Swaps Dex Media East
Effective Dates | Notional Amount | Pay Rates | Maturity Dates | |||||||||
(amounts in millions) | ||||||||||||
February 26, 2010 |
$ | 300 | (2) | 1.20% - 1.796 | % | February 29, 2012 February 28, 2013 | ||||||
March 5, 2010 |
100 | (1) | 1.668 | % | January 31, 2013 | |||||||
March 10, 2010 |
100 | (1) | 1.75 | % | January 31, 2013 | |||||||
Total |
$ | 500 | ||||||||||
Under the terms of the interest rate swap agreements, we receive variable interest based on the
three-month LIBOR and pay a weighted average fixed rate of 1.5%. The weighted average rate received
on our interest rate swaps was 0.5% for the five months ended June 30, 2010. These periodic
payments and receipts are recorded as interest expense.
Under the terms of the interest rate cap agreements, the Company will receive payments based on the
spread in rates if the three-month LIBOR rate increases above the cap rates noted in the table
below. The Company paid $2.1 million for the interest rate cap agreements entered into during the
first quarter of 2010. We are not required to make any future payments related to these interest
rate cap agreements.
Interest Rate Caps RHDI
Effective Dates | Notional Amount | Cap Rates | Maturity Dates | |||||||||
(amounts in millions) | ||||||||||||
February 26, 2010 |
$ | 200 | (3) | 3.0% - 3.5 | % | February 28, 2012 February 28, 2013 | ||||||
March 8, 2010 |
100 | (4) | 3.5 | % | January 31, 2013 | |||||||
March 10, 2010 |
100 | (4) | 3.0 | % | April 30, 2012 | |||||||
Total |
$ | 400 | ||||||||||
(1) | Consists of one swap | |
(2) | Consists of three swaps | |
(3) | Consists of two caps | |
(4) | Consists of one cap |
We use derivative financial instruments for hedging purposes only and not for trading or
speculative purposes. By using derivative financial instruments to hedge exposures to changes in
interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the
possible failure of the counterparty to perform under the terms of the derivative contract. When
the fair value of a derivative contract is positive, the counterparty owes the Company, which
creates credit risk for the Company. When the fair value of a derivative contract is negative, the
Company owes the counterparty and, therefore, it is not subject to credit risk. The Company
minimizes the credit risk in derivative financial instruments by entering into transactions with
major financial institutions with credit ratings of AA- or higher, or the equivalent dependent upon
the credit rating agency.
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Market risk is the adverse effect on the value of a financial instrument that results from a change
in interest rates. The market risk associated with interest-rate contracts is managed by
establishing and monitoring parameters that limit the types and degree of market risk that may be
undertaken.
Market Risk Sensitive Instruments
All derivative financial instruments are recognized as either assets or liabilities on the
condensed consolidated balance sheets with measurement at fair value. On a quarterly basis, the
fair values of our interest rate swaps and interest rate caps are determined based on quoted market
prices. These derivative instruments have not been designated as cash flow hedges and as such, the
initial fair value and any subsequent gains or losses on the change in the fair value of the
interest rate swaps and interest rate caps are reported in earnings as a component of interest
expense. Any gains or losses related to the quarterly fair value adjustments are presented as an
operating activity on the condensed consolidated statements of cash flows.
For derivative instruments that are designated as cash flow hedges and that are determined to
provide an effective hedge, the differences between the fair value and the book value of the
derivative instruments are recognized in accumulated other comprehensive income (loss), a component
of shareholders equity (deficit).
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Item 4. | Controls and Procedures |
(a) Evaluation of Disclosure Controls and Procedures
Management conducted an evaluation, under the supervision and with the participation of the Interim
Principal Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2010. Based on that
evaluation, the Interim Principal Executive Officer and Chief Financial Officer concluded that such
disclosure controls and procedures are effective and sufficient to ensure that information required
to be disclosed by the Company in reports that it files or submits under the Securities Act of 1934
is recorded, processed, summarized and reported within the time periods specific in the Securities
and Exchanges Commissions rules and forms.
(b) Changes in Internal Controls
There have not been any changes in the Companys internal controls over financial reporting during
the Companys most recent fiscal quarter that materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. 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.
Beginning on October 23, 2009, a series of putative securities class action lawsuits were
commenced in the United States District Court for the District of Delaware on behalf of all
persons who purchased or otherwise acquired the Companys publicly traded securities between July
26, 2007 and the time the Company filed for bankruptcy on May 28, 2009, alleging that certain
Company officers issued false and misleading statements regarding the Companys business and
financial condition and seeking damages and equitable relief. On December 7, 2009, a putative
ERISA class action lawsuit was commenced in the United States District Court for the Northern
District of Illinois on behalf of certain participants in or beneficiaries of the R.H. Donnelley
401(k) Savings Plan at any time between July 26, 2007 and the time the lawsuit was filed and
whose plan accounts included investments in R.H. Donnelley common stock. The putative ERISA
class action complaint contains allegations against certain current and former Company directors,
officers and employees similar to those set forth in the putative securities class action lawsuit
as well as allegations of breaches of fiduciary duties under ERISA and seeks damages and
equitable relief. On December 18, 2009, a lawsuit was filed in California state court by certain
former shareholders of the Company alleging that certain Company officers issued false and
misleading statements regarding the Companys business and financial condition and seeking
damages and equitable relief. This case was removed to the United States District Court for the
Central District of California on February 4, 2010. On April 27, 2010, this case was dismissed
for lack of personal jurisdiction over the named defendants. The Company believes the allegations
set forth in all of these lawsuits are without merit and intends to vigorously defend any and all
such actions pursued against the Company and/or its current and former officers, employees and
directors.
We are also exposed to potential defamation and breach of privacy claims arising from our
publication of directories and our methods of collecting, processing and using advertiser and
telephone subscriber data. If such data were determined to be inaccurate or if data stored by us
were improperly accessed and disseminated by us or by unauthorized persons, the subjects of our
data and users of the data we collect and publish could submit claims against the Company. Although
to date we have not experienced any material claims relating to defamation or breach of privacy, we
may be party to such proceedings in the future that could have a material adverse effect on our
business.
We periodically assess our liabilities and contingencies in connection with these matters based
upon the latest information available to us. For those matters where it is probable that we have
incurred a loss and the loss or range of loss can be reasonably estimated, we record a liability in
our 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 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.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I Item 1A to
our Annual Report on Form 10-K for the year ended December 31, 2009. The risk factors disclosed in
our Annual Report on Form 10-K, in addition to the other information set forth in this Quarterly
Report on Form 10-Q could materially affect our business, financial condition or results.
Additional risks and uncertainties not currently known to us or that we currently deem immaterial
also may materially adversely affect our business, financial condition or results.
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Item 6. Exhibits
Exhibit No. | Document | |
31.1*
|
Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2010 by W. Kirk Liddell, Interim Principal Executive Officer of Dex One Corporation under Section 302 of the Sarbanes-Oxley Act | |
31.2*
|
Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2010 by Steven M. Blondy, Executive Vice President and Chief Financial Officer of Dex One Corporation under Section 302 of the Sarbanes-Oxley Act | |
32.1*
|
Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2010, under Section 906 of the Sarbanes-Oxley Act by W. Kirk Liddell, Interim Principal Executive Officer, and Steven M. Blondy, Executive Vice President and Chief Financial Officer, for Dex One Corporation |
* | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
DEX ONE CORPORATION |
|||||
Date: August 11, 2010 | By: | /s/ Steven M. Blondy | |||
Steven M. Blondy | |||||
Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
|||||
/s/ Sylvester J. Johnson | |||||
Sylvester J. Johnson | |||||
Vice President, Corporate Controller and Chief
Accounting Officer (Principal Accounting Officer) |
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Exhibit Index
Exhibit No. | Document | |
31.1*
|
Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2010 by W. Kirk Liddell, Interim Principal Executive Officer of Dex One Corporation under Section 302 of the Sarbanes-Oxley Act | |
31.2*
|
Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2010 by Steven M. Blondy, Executive Vice President and Chief Financial Officer of Dex One Corporation under Section 302 of the Sarbanes-Oxley Act | |
32.1*
|
Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2010, under Section 906 of the Sarbanes-Oxley Act by W. Kirk Liddell, Interim Principal Executive Officer, and Steven M. Blondy, Executive Vice President and Chief Financial Officer, for Dex One Corporation |
* | Filed herewith. |
83