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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010
OR
¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 333-152302
Local Insight Regatta Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 20-8046735 | |
(State or other jurisdiction of incorporation) |
(IRS Employer Identification No.) |
188 Inverness Drive West, Suite 800 Englewood, Colorado |
80112 | |
(Address of principal executive offices) | (Zip Code) |
303-867-1600
(Registrants telephone number, including area code)
Not Applicable
(Former name or former address, 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. x Yes ¨ No
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 ¨ No
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 definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes x No
Indicate the number of shares outstanding of the issuers classes of common stock, as of the latest practicable date:
As of August 16, 2010, 195,744.22 shares of the registrants common stock were outstanding.
Table of Contents
Page | ||||
Part I | FINANCIAL INFORMATION | 2 | ||
Item 1. | Financial Statements | 2 | ||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 18 | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 27 | ||
Item 4. | Controls and Procedures | 28 | ||
Part II | OTHER INFORMATION | 28 | ||
Item 1. | Legal Proceedings | 28 | ||
Item 1A. | Risk Factors | 29 | ||
Item 6. | Exhibits | 33 | ||
Signatures | 34 |
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FINANCIAL INFORMATION
Item 1. | Financial Statements |
LOCAL INSIGHT REGATTA HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(In thousands, except share data)
June
30, 2010 |
December
31, 2009 |
|||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 7,116 | $ | 6,439 | ||||
Accounts receivable, net |
26,967 | 25,950 | ||||||
Due from affiliates |
20,457 | 25,867 | ||||||
Deferred directory costs |
53,946 | 50,683 | ||||||
Deferred income taxes |
4,549 | 4,549 | ||||||
Prepaid expenses and other current assets |
703 | 854 | ||||||
Total current assets |
113,738 | 114,342 | ||||||
Property and equipment, net |
26,522 | 25,550 | ||||||
Intangible assets, net |
323,545 | 339,635 | ||||||
Goodwill |
279,090 | 279,090 | ||||||
Tradename intangible asset |
37,900 | 37,900 | ||||||
Assets held for sale |
691 | 691 | ||||||
Deferred financing costs, net |
14,730 | 15,726 | ||||||
Other assets |
54 | 54 | ||||||
Total Assets |
$ | 796,270 | $ | 812,988 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 11,300 | $ | 11,300 | ||||
Line of credit |
16,000 | 11,000 | ||||||
Publishing rights payable |
648 | 77 | ||||||
Accounts payable and accrued liabilities |
31,247 | 25,387 | ||||||
Unearned revenue |
39,316 | 34,682 | ||||||
Accrued interest payable |
2,961 | 2,574 | ||||||
Due to affiliates |
| 964 | ||||||
Total current liabilities |
101,472 | 85,984 | ||||||
Deferred income taxes |
81,892 | 85,793 | ||||||
Long-term debt, net of current portion |
484,791 | 494,064 | ||||||
Other long-term liabilities |
1,457 | 1,415 | ||||||
Total Liabilities |
669,612 | 667,256 | ||||||
Commitments and contingencies (Note 6) |
||||||||
Stockholders equity: |
||||||||
Common stock, $0.01 par value; 200,000 shares authorized; 195,744 shares issued and outstanding |
2 | 2 | ||||||
Additional paid-in capital |
240,332 | 250,249 | ||||||
Accumulated deficit |
(113,676 | ) | (104,519 | ) | ||||
Total Stockholders Equity |
126,658 | 145,732 | ||||||
Total Liabilities and Stockholders Equity |
$ | 796,270 | $ | 812,988 | ||||
Refer to accompanying notes to these condensed consolidated financial statements.
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LOCAL INSIGHT REGATTA HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands)
Three-Months Ended | Six-Months Ended | |||||||||||||||
June 30, 2010 | June 30, 2009 | June 30, 2010 | June 30, 2009 | |||||||||||||
Revenue (inclusive of approximately $42.8 million and $48.5 million in related party revenue for the three months ended June 30, 2010 and 2009, respectively, and $87.1 million and $97.3 million for the six months ended June 30, 2010 and 2009, respectively) |
$ | 131,570 | $ | 144,993 | $ | 266,142 | $ | 290,061 | ||||||||
Operating expenses: |
||||||||||||||||
Cost of revenue (exclusive of certain depreciation and amortization included below) |
24,823 | 22,021 | 50,560 | 51,061 | ||||||||||||
Publishing rights (inclusive of approximately $28.0 million and $32.3 million in related party publishing rights for the three months ended June 30, 2010 and 2009, respectively, and $56.2 million and $65.2 million for the six months ended June 30, 2010 and 2009, respectively) |
60,216 | 71,081 | 123,146 | 142,903 | ||||||||||||
Selling, general and administrative expense |
27,314 | 28,470 | 58,687 | 60,107 | ||||||||||||
Depreciation and amortization |
10,476 | 12,654 | 20,469 | 25,302 | ||||||||||||
Total operating expenses |
122,829 | 134,226 | 252,862 | 279,373 | ||||||||||||
Operating income |
8,741 | 10,767 | 13,280 | 10,688 | ||||||||||||
Other (income) expenses: |
||||||||||||||||
Interest income |
(4 | ) | (3 | ) | (10 | ) | (12 | ) | ||||||||
Interest expense |
12,994 | 13,430 | 26,231 | 27,569 | ||||||||||||
Other expense |
50 | 104 | 117 | 320 | ||||||||||||
Loss before income taxes |
(4,299 | ) | (2,764 | ) | (13,058 | ) | (17,189 | ) | ||||||||
Income tax benefit |
(2,229 | ) | (635 | ) | (3,901 | ) | (5,920 | ) | ||||||||
Net loss |
$ | (2,070 | ) | $ | (2,129 | ) | $ | (9,157 | ) | $ | (11,269 | ) | ||||
Refer to accompanying notes to these condensed consolidated financial statements.
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LOCAL INSIGHT REGATTA HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
Six-Months Ended | ||||||||
June 30, 2010 | June 30, 2009 | |||||||
Operating Activities: |
||||||||
Net loss |
$ | (9,157 | ) | $ | (11,269 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Depreciation and amortization expense |
20,469 | 30,866 | ||||||
Deferred income taxes |
(3,901 | ) | (5,920 | ) | ||||
Share-based compensation |
83 | 300 | ||||||
Amortization of deferred financing costs |
996 | 920 | ||||||
Accretion of discount on subordinated notes |
2,027 | 1,875 | ||||||
Provision for doubtful accounts |
16,693 | 9,438 | ||||||
Other |
| 78 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(17,710 | ) | (2,159 | ) | ||||
Due to/from affiliates |
4,446 | (5,671 | ) | |||||
Deferred directory costs |
(3,263 | ) | (6,158 | ) | ||||
Prepaid expenses and other current assets |
151 | (49 | ) | |||||
Publishing rights payable |
571 | (1,797 | ) | |||||
Accounts payable, accrued liabilities and other |
6,846 | (10,061 | ) | |||||
Accrued interest payable |
387 | | ||||||
Unearned revenue |
4,634 | (50 | ) | |||||
Net cash provided by operating activities |
23,272 | 343 | ||||||
Investing Activities: |
||||||||
Proceeds on sale of property and equipment |
| 815 | ||||||
Acquisition of property and equipment |
(6,295 | ) | (8,178 | ) | ||||
Net cash used in investing activities |
(6,295 | ) | (7,363 | ) | ||||
Financing Activities: |
||||||||
Proceeds from revolving credit facility |
11,000 | | ||||||
Repayments on revolving credit facility |
(6,000 | ) | (1,000 | ) | ||||
Repayments on term loan |
(11,300 | ) | (11,137 | ) | ||||
Dividends |
(10,000 | ) | | |||||
Net cash used in financing activities |
(16,300 | ) | (12,137 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
677 | (19,157 | ) | |||||
Cash and cash equivalents, beginning of period |
6,439 | 19,421 | ||||||
Cash and cash equivalents, end of period |
$ | 7,116 | $ | 264 | ||||
Refer to accompanying notes to these condensed consolidated financial statements.
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LOCAL INSIGHT REGATTA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Local Insight Regatta Holdings, Inc. (Regatta Holdings) (together with its subsidiaries, we, us, our, or the Company) is a leading provider of local search advertising services, offering our core target market of small and medium-sized businesses (SMBs) a complete range of lead-generating solutions that enable consumers to efficiently find the products and services they need. Our integrated suite of local advertising solutions encompasses print Yellow Pages as well as a full range of digital advertising services designed to establish, maintain and optimize our advertising clients online presence.
We are the fifth largest Yellow Pages directory publisher in the United States based on revenue. In addition to serving as the exclusive official publisher of Windstream Corporation (Windstream) branded print and internet directories in the local wireline markets of Windstream as they existed on December 12, 2006, we are the largest provider of outsourced print directory sales, marketing, production and related services in the United States. Our principal operating subsidiary, The Berry Company LLC (The Berry Company), primarily serves non-major metropolitan areas and rural and certain suburban markets in 42 states. The Berry Company publishes print directories on behalf of local exchange carriers (LECs) and other customers, certain of which use The Berry Company for the publication of their Internet Yellow Pages (IYP) directories. Prior to June 30, 2009, we operated through two operating subsidiaries: Local Insight Yellow Pages, Inc. (LIYP) and The Berry Company. On June 30, 2009, LIYP merged with and into The Berry Company, with The Berry Company being the surviving company in the merger.
We are an indirect, wholly-owned subsidiary of Local Insight Media Holdings, Inc. (Local Insight Media Holdings). We are managed as a single business unit and report as one reportable segment. All operations (other than certain services which are outsourced to an affiliate, see Note 8) occur in the United States.
We derive our revenue primarily from the sale of advertising in our print directories, which we refer to as print revenue. For the three and six months ended June 30, 2010, print revenue comprised 88.0% and 88.5% of our revenue, respectively, while other services comprised 12.0% and 11.5% of our revenue, respectively. For the three and six months ended June 30, 2009, print revenue comprised 91.8% and 92.0% of our revenue, respectively, while other services comprised 8.2% and 8.0% of our revenue, respectively.
Basis of Presentation and Consolidation
The condensed consolidated financial statements included herein are unaudited, have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting and Securities and Exchange Commission (SEC) rules and regulations, and reflect all adjustments, consisting only of normal or recurring adjustments, which in the opinion of management are necessary to fairly state the consolidated financial position, results of operations and cash flows of the Company for the periods presented. Certain information and footnote disclosures normally included in audited financial information prepared under GAAP have been condensed or omitted pursuant to the SECs rules and regulations. The results of operations for the three and six months ended June 30, 2010 are not necessarily indicative of the results to be expected for subsequent quarterly periods or for the entire fiscal year ending December 31, 2010. These unaudited condensed consolidated financial statements should be read in conjunction with our audited annual consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009.
We consolidate all of our wholly owned subsidiaries. All intercompany accounts and transactions are eliminated from the financial results.
Earnings per share data has not been presented because we have not issued publicly held common stock, as defined by the Financial Accounting Standards Board (FASB).
Liquidity
Our senior secured credit facilities (the Credit Facilities), consisting of a $335.0 million senior secured term loan facility (the Term Loan) and a $30.0 million senior secured revolving facility (the Revolver), and the indenture governing our 11% Series B Senior Subordinated notes due November 30, 2017 (the Regatta Exchange Notes) require us to comply with customary affirmative and negative covenants. If our business does not generate sufficient cash flows from operations or earnings or we do not realize anticipated cost savings and operating improvements, we may be noncompliant with one or more of these covenants.
The continued effects of the economic downturn, our declining revenue and our continued expenditures in connection with the rollout of Berry Leads, our new business model, have increased pressure on our ability to maintain compliance with our financial covenants during 2010 and beyond. This pressure has further increased because, as required by the terms of our Credit Facilities, the financial covenants contained in our Credit Facilities will become more stringent for the period July 1, 2010 through June 30, 2011 (as compared to the preceding 12-month period). We will be required to meet these more stringent covenants starting with the quarter ending September 30, 2010. As a result of these factors, it is likely that at September 30, 2010, we will: (i) exceed the maximum
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allowable consolidated leverage ratio (i.e., the ratio of consolidated total debt to consolidated EBITDA) and the maximum allowable consolidated senior secured debt ratio (i.e., the ratio of consolidated senior secured debt to consolidated EBITDA) under our Credit Facilities and (ii) fail to meet the minimum consolidated interest coverage ratio (i.e., the ratio of consolidated EBITDA to consolidated interest expense) under our Credit Facilities. We will likely breach the same covenants at December 31, 2010. We may be unable to remain compliant with these same covenants thereafter. We are evaluating various alternatives to address these covenant issues. We may not be successful in our efforts to address these covenant issues.
Noncompliance with the financial covenants in our Credit Facilities constitutes an event of default under our Credit Facility. Upon such an event of default under our Credit Facilities, all amounts owing under our Credit Facilities may be declared to be immediately due and payable. In addition, upon an event of default we would no longer be entitled to draw upon our Revolver. In the event that noncompliance with these financial covenants results in an acceleration of our obligations under the Credit Facilities, the trustee under the indenture governing the Regatta Exchange Notes or holders of 25% of aggregate principal amount of the outstanding Regatta Exchange Notes may declare all of the Regatta Exchange Notes due and payable; provided, however, that such declaration of acceleration of the Regatta Exchange Notes shall be automatically annulled if the events of default under the Credit Facilities are remedied or cured by the Company or waived by the required number of lenders under our Credit Facilities within 30 days after the declaration of acceleration of our obligations under the Credit Facilities and if (a) the annulment of the acceleration of the Regatta Exchange Notes would not conflict with any judgment or decree of a court of competent jurisdiction and (b) all existing events of default under the indenture governing the Regatta Exchange Notes, except nonpayment of principal, premium or interest on the Regatta Exchange Notes that became due solely because of the acceleration of the Regatta Exchange Notes, have been cured or waived.
Should the amounts owing under the Credit Facilities or under the Regatta Exchange Notes be declared to be immediately due and payable, and the underlying circumstances giving rise to the acceleration are not cured or waived, we would not have sufficient liquidity to satisfy those obligations. We may not be able to obtain a waiver or amendment from our lenders under our Credit Facilities or the Regatta Exchange Notes so as to remain compliant with those covenants or avoid an acceleration of our obligations under the Credit Facilities or the Regatta Exchange Notes. Our inability to obtain a waiver or amendment, resulting in the amounts under the Credit Facilities or the Regatta Exchange Notes being declared due and payable immediately, could affect our ability to continue to exist as a going concern. Further, we may not be able to borrow additional funds if it becomes necessary or borrow at costs that are not higher or on more restrictive terms than our current indebtedness.
The accompanying condensed consolidated financial statements for the three and six months ended June 30, 2010 were prepared under the assumption that the Company will continue to operate as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. Our ability to continue as a going concern is dependent upon our ability to generate sufficient cash flows and earnings from operations (including from Berry Leads, our new business model), realize anticipated cost savings and operating improvements, and address the covenant issues described above. The outcome of these matters cannot be predicted at this time. The accompanying condensed consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue its business as a going concern.
2. RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS
In 2009, the FASB issued guidance that modifies the fair value requirements of revenue recognition associated with multiple element arrangements by allowing the use of the best estimate of selling price in addition to Vendor Specific Objective Evidence (VSOE) and third party evidence (TPE) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted. This guidance will be effective for us prospectively for revenue arrangements entered into or materially modified beginning January 1, 2011. Early adoption is permitted. We are in the process of assessing the impact this standard will have on our condensed consolidated financial statements.
In 2009, accounting standards were issued that amend previous derecognition standards related to transfers and servicing of financial assets and extinguishments of liabilities. The standards were effective January 1, 2010. The adoption of these standards did not have a material impact on our condensed consolidated financial statements.
In 2009, accounting standards were issued that amend the consolidation guidance applicable to variable interest entities. The standards were effective January 1, 2010. The adoption of these standards did not have a material impact on our condensed consolidated financial statements.
In 2010, the FASB issued accounting standards that improve disclosures originally required under fair value measurements standards. These standards were effective January 1, 2010 except for the disclosures related to purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. These disclosures are effective for the first reporting period (including interim periods) in 2010, except for the requirement to provide the Level 3 activity of purchases, sales, issuances and
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settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010 (including interim periods within those fiscal years). The adoption of these standards did not have a material impact on our condensed consolidated financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 2010 and December 31, 2009 consists of the following (in thousands):
June 30, 2010 |
December
31, 2009 | |||||
Land |
$ | 791 | $ | 791 | ||
Buildings |
3,288 | 3,288 | ||||
Furniture, fixtures and equipment |
5,070 | 5,070 | ||||
Computer equipment and software |
32,048 | 18,052 | ||||
Other |
223 | 108 | ||||
Leasehold improvements |
455 | 397 | ||||
Construction in progress |
| 8,699 | ||||
41,875 | 36,405 | |||||
Less: Accumulated depreciation and amortization |
15,353 | 10,855 | ||||
Property and equipment, net |
$ | 26,522 | $ | 25,550 | ||
Depreciation and amortization expense was approximately $2.4 million and $4.4 million for the three and six months ended June 30, 2010, respectively, and approximately $1.4 million and $2.9 million for the three and six months ended June 30, 2009, respectively. During the three and six months ended June 30, 2009, we sold certain assets held for sale with a net value of approximately $0.5 million and $0.9 million, respectively. The net loss recognized on these sales was approximately $0.1 million for the three and six months ended June 30, 2009, respectively.
4. GOODWILL AND INTANGIBLE ASSETS
Intangible assets subject to amortization as of June 30, 2010 and December 31, 2009 consist of the following (in thousands, except as to average amortization period remaining in years):
Publishing Agreement |
Independent Publishing Agreements |
Customer Relationships |
Favorable Sales Contracts |
Total | |||||||||||
Cost basis as of December 31, 2009 |
$ | 278,079 | $ | 12,370 | $ | 144,662 | $ | 80,293 | $ | 515,404 | |||||
Accumulated amortization |
11,587 | 6,443 | 77,446 | 80,293 | 175,769 | ||||||||||
Intangible assets, net as of December 31, 2009 |
$ | 266,492 | $ | 5,927 | $ | 67,216 | $ | | $ | 339,635 | |||||
Cost basis as of June 30, 2010 |
$ | 278,079 | $ | 12,370 | $ | 144,662 | $ | 80,293 | $ | 515,404 | |||||
Accumulated amortization |
14,367 | 7,989 | 89,210 | 80,293 | 191,859 | ||||||||||
Intangible assets, net as of June 30, 2010 |
$ | 263,712 | $ | 4,381 | $ | 55,452 | $ | | $ | 323,545 | |||||
Average amortization period remaining in years as of June 30, 2010 |
47 | 1.5 | 18 | | N/A | ||||||||||
We recorded amortization expense of approximately $8.1 million and $16.1 million for the three and six months ended June 30, 2010, respectively, and $11.2 million and $25.2 million for the three and six months ended June 30, 2009, respectively. Amortization expense of $0 million was recorded in cost of revenue related to the amortization of favorable sales contracts for the three and six months ended June 30, 2010, respectively, and $0 million and approximately $2.8 million for the three and six months ended June 30, 2009, respectively.
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The estimated aggregate remaining future amortization expense for intangible assets is as follows (in thousands):
2010 (1) |
$ | 16,090 | |
2011 |
23,688 | ||
2012 |
15,501 | ||
2013 |
12,022 | ||
2014 |
9,761 | ||
2015 |
8,291 | ||
Thereafter |
238,192 | ||
Total |
$ | 323,545 | |
(1) | Represents the period from July 1, 2010 to December 31, 2010. |
There was no change in our recorded goodwill during the three and six months ended June 30, 2010.
5. DEBT
As of June 30, 2010 and December 31, 2009, we had outstanding debt comprised of the following (in thousands):
June 30, 2010 |
December 31, 2009 | |||||
Senior secured term loan facility, variable rates |
$ | 310,888 | $ | 322,188 | ||
Senior secured revolving credit facilityvariable rates |
16,000 | 11,000 | ||||
11% Senior Subordinated Notes |
210,500 | 210,500 | ||||
Total debt |
537,388 | 543,688 | ||||
Less: |
||||||
Current portion |
27,300 | 22,300 | ||||
Debt discount |
25,297 | 27,324 | ||||
Total long-term debt |
$ | 484,791 | $ | 494,064 | ||
On April 7, 2010, we made a mandatory principal prepayment of $11.3 million under our Credit Facilities as a result of our excess cash flow for the year ended December 31, 2009. As a result of such prepayment, the next regularly scheduled principal repayment under our Credit Facilities is now due on June 30, 2013. Our current portion of long-term debt includes an estimate of $11.3 million for the 2010 annual excess cash flow principal payment expected to be paid within the next 12 months.
On June 1, 2010, we made a draw of $11.0 million on our Revolver facility, of which $6.0 million was repaid on June 30, 2010. Subsequent to quarter end, in July 2010, we made additional draws totaling $10.2 million on our Revolver.
Liquidity
As of June 30, 2010, we were in compliance with all covenants associated with the Credit Facilities and the Regatta Exchange Notes.
See Note 1, Description of Business and Basis of Presentation Liquidity above for information regarding the likelihood that we will breach the financial covenants under our Credit Facilities at September 30, 2010 and December 31, 2010 and the consequences of noncompliance with these covenants.
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Fair Value Disclosure
The fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying value due to their short-term nature. The fair value of our variable-rate and fixed-rate debt obligations are estimated using the current rates available based on the average bid and ask prices in effect at the balance sheet date. At June 30, 2010 and December 31, 2009, the carrying values and fair values of our variable-rate and fixed-rate debt instruments were as follows (in thousands):
June 30, 2010 | December 31, 2009 | |||||||||||
Carrying Value |
Fair Value |
Carrying Value |
Fair Value | |||||||||
Senior secured term loan facility |
$ | 285,591 | $ | 255,705 | $ | 294,864 | $ | 256,140 | ||||
Senior secured revolving facility |
16,000 | 12,960 | 11,000 | 8,314 | ||||||||
11% Series B Senior Subordinated Notes |
210,500 | 149,455 | 210,500 | 135,773 | ||||||||
$ | 512,091 | $ | 418,120 | $ | 516,364 | $ | 400,227 | |||||
6. COMMITMENTS AND CONTINGENCIES
Litigation
Various lawsuits and other claims that are ordinary and typical for a business of our size and nature are pending against us, and we may be involved in future claims and legal proceedings incident to the conduct of our business. In some of these matters, plaintiffs allege that they have suffered damages from errors or omissions in their advertising or improper listings, in each case, contained in directories published by us. We are also exposed to claims relating to our extension from time to time of the 12-month publication of certain of our print directories (although our standard terms and conditions specifically allow such extensions) and to defamation and breach of privacy claims arising from our publication of directories and our methods of collecting, processing and using personal data.
In March 2010, a complaint was filed against CBD Media Finance LLC (CBD Media), an affiliate and customer of ours, relating to CBD Medias decision to extend by three months the 12-month publication life of the 2008/2009 editions of its print directories in the Cincinnati metropolitan area. Such lawsuit was brought as a putative class action on behalf of all businesses and persons that bought advertising in the directories in question. No class has been certified in this matter. In May 2010, the plaintiff filed a motion to add The Berry Company as a defendant in this lawsuit. In July 2010, the United States District Court for the Southern District of Ohio, Western Division, denied the plaintiffs motion to add The Berry Company as a defendant in the lawsuit and dismissed the plaintiffs complaint with prejudice. In August 2010, the plaintiff filed a notice of appeal with respect to the courts decision. CBD Media and the Company believe this lawsuit has no merit, and they intend to continue to defend this action vigorously.
The subjects of our data and users of data that we collect and publish could have claims against us if such data were found to be inaccurate, or if personal data stored by us were improperly accessed and disseminated by unauthorized persons. Although to date we have not had notice of any material claims relating to defamation or breach of privacy claims, we may be party to litigation matters that could adversely affect our business.
In addition, from time to time we receive communications from government or regulatory agencies concerning investigations or allegations of noncompliance with laws or regulations in jurisdictions in which we operate. Any potential judgments, fines or penalties relating to these matters, however, may have a material effect on our results of operations in the period in which they are recognized.
Except as relates to the matter addressed in the immediately following paragraph, we believe, based on our review of the latest information available, that our ultimate liability in connection with pending or threatened legal proceedings will not have a material adverse effect on our results of operations, cash flows or financial position.
In July 2010, a complaint was filed against a number of telecommunications and local search companies, including two with which we have a commercial relationship. The complaint alleges that the defendants local search websites infringe a patent held by the plaintiff. The local search websites of the two companies with which we have a commercial relationship are owned (in one case) or managed and hosted (in the other case) by us. We intend to assume these two companies defense in this matter and to indemnify them from and against any losses they may suffer as a result of this lawsuit. Given the early stage of this litigation, we have not been able to develop an assessment of our rights, of the merits of the plaintiffs claims or of our potential liability in this matter.
7. 2010 RESTRUCTURING PLAN
In January 2010, we implemented a restructuring plan (the 2010 Restructuring Plan) which involves the reduction of our employee base by a total of approximately 320 employees, primarily in the areas of operations; sales and field marketing; information technology; and marketing. In connection with the 2010 Restructuring Plan, we have ceased operations in Matthews, North Carolina (effective March 31, 2010) and will cease operations at our facilities in Erie, Pennsylvania (effective December 31, 2010). The 2010 Restructuring Plan is expected to be completed by December 31, 2010. The 2010 Restructuring Plan originally contemplated the closure of our facilities in Hudson, Ohio by December 31, 2010. We are currently in the process of re-examining whether and when to close the Hudson facility. We incurred approximately $0.4 million and $3.2 million in severance and related costs (which is included in selling, general and administrative expense in the accompanying condensed consolidated statements of operations) for the three and six months ended June 30, 2010, respectively, of which approximately $1.6 million remained accrued (and included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets) at June 30, 2010. The remaining amounts accrued
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are expected to be paid out during the remainder of 2010 and the three months ending March 31, 2011. In addition, we expect to accrue up to an additional $0.4 million in severance and related costs in connection with the 2010 Restructuring Plan during the remainder of 2010.
8. RELATED PARTY TRANSACTIONS
The Company and Local Insight Media, Inc. (LIMI), a wholly-owned, indirect subsidiary of Local Insight Media Holdings and an affiliate of ours, are parties to a consulting agreement pursuant to which LIMI provides certain consulting services (including executive, operational, finance and accounting, treasury, legal, human resource, integration and administrative services) to us. On May 13, 2009, the Company and LIMI amended the consulting agreement such that LIMI suspended invoicing us for services rendered under the consulting agreement, effective as of January 1, 2009. Accordingly, no fees were payable under the consulting agreement for the three and six months ended June 30, 2010 and 2009, respectively. The amendment to the consulting agreement also provides that LIMI may, at any time, re-commence invoicing us for services rendered under the consulting agreement. Should LIMI in the future elect to re-commence such invoicing, the amendment also provides that no amounts will be payable for services rendered during the period that LIMIs invoicing was suspended.
In July 2009, we entered into an agreement to provide certain graphics, data entry, customer contact, collection, information technology, quality control and payroll services on behalf of Axesa Servicios de Información, S. en C. (Axesa), an affiliate of ours. We have subcontracted our obligation to provide certain of such services to Caribe Servicios de Información Dominicana, S.A. (CSID), an affiliate of ours. For the three and six months ended June 30, 2010, we were billed $0.4 million and $0.8 million, respectively, for services provided under this agreement.
In June 2010, The Berry Company and CSID entered into an agreement, effective as of January 4, 2010, pursuant to which CSID agreed to provide service order processing, publishing, graphics, pagination, information technology, commission calculation and other services relating to the production of certain print directories published by The Berry Company. For the three and six months ended June 30, 2010, we were billed $0.9 million and $1.6 million, respectively, for services provided under this agreement.
In addition, due to the acquisition of The Berry Company on April 23, 2008 we earn revenue and incur costs associated with arrangements with other affiliated entities of ours, including certain IYP and directories published on behalf of the following affiliates: ACS Media Finance LLC (ACS Media), CBD Media and HYP Media Finance LLC (HYP Media). Such revenue and costs for the three and six months ended June 30, 2010 and 2009, respectively, were as follows (in thousands):
Three Months Ended June 30, 2010 |
Six Months Ended June 30, 2010 |
Three Months Ended June 30, 2009 |
Six Months Ended June 30, 2009 | |||||||||
Revenue: |
||||||||||||
ACS Media |
$ | 9,633 | $ | 19,641 | $ | 10,344 | $ | 20,597 | ||||
CBD Media |
19,305 | 39,000 | 21,663 | 42,577 | ||||||||
HYP Media |
13,346 | 27,484 | 16,525 | 34,137 | ||||||||
Axesa |
520 | 991 | | | ||||||||
$ | 42,804 | $ | 87,116 | $ | 48,532 | $ | 97,311 | |||||
Publishing rights: |
||||||||||||
ACS Media |
$ | 5,295 | $ | 10,921 | $ | 5,411 | $ | 11,328 | ||||
CBD Media |
14,113 | 28,723 | 16,835 | 33,504 | ||||||||
HYP Media |
8,623 | 16,539 | 10,046 | 20,375 | ||||||||
$ | 28,031 | $ | 56,183 | $ | 32,292 | $ | 65,207 | |||||
As of June 30, 2010 and December 31, 2009, ACS Media, CBD Media and HYP Media collectively owed us approximately $4.8 million and $11.6 million, respectively; such amounts related primarily to the services rendered by The Berry Company under its directory publishing agreements with such affiliates. In addition, as of June 30, 2010 and December 31, 2009, LIMI and certain other affiliates owed us approximately $15.7 million and $14.3 million, respectively, which related primarily to management compensation reimbursements and capital expenditures. As of June 30, 2010 and December 31, 2009, we owed certain affiliates of LIMI approximately $0 million and $1.0 million, respectively. Such amounts related primarily to certain operating costs and capital expenditures. Such amounts are considered part of the normal course of business between the affiliated entities and are periodically settled.
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9. INCOME TAXES
We had no unrecognized tax benefits during the year ended December 31, 2009, and as of June 30, 2010, there was an increase in unrecognized tax benefits of approximately $4.1 million. The unrecognized tax benefits from prior periods relate to temporary items which generally reverse within 12 months, and are generally offset by new temporary unrecognized tax benefits. None of the previously reported unrecognized tax benefits, if recognized, would impact our effective tax rate. As of June 30, 2010, our accrued interest expense and penalties related to unrecognized tax benefits was approximately $1.8 million. We are indemnified for tax liabilities for predecessor tax periods pursuant to a Tax Sharing Agreement with Windstream. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Our tax provision for interim periods is determined using an estimate of our annual effective income tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, we update our estimated annual effective income tax rate, and if the estimated income tax rate changes, a cumulative adjustment is made. As of June 30, 2010, our estimated annual effective income tax rate for 2010 is 29.9%.
10. DIVIDENDS
We paid a $5.0 million dividend on March 3, 2010 and an additional $5 million dividend on June 1, 2010. Both dividends were ultimately distributed to Local Insight Media Holdings III, Inc., a wholly owned, indirect subsidiary of Local Insight Media Holdings, our indirect parent.
11. FINANCIAL STATEMENTS OF GUARANTORS
The following information sets forth our condensed consolidating balance sheets as of June 30, 2010 and December 31, 2009, condensed consolidating statements of operations for the three and six months ended June 30, 2010 and 2009, and condensed consolidating statements of cash flows for the six months ended June 30, 2010 and 2009. Prior to June 30, 2009, when LIYP merged with and into The Berry Company, LIYP was our wholly owned subsidiary, and LIYP guaranteed, on a senior subordinated unsecured basis, our obligations under the Regatta Exchange Notes and the Credit Facilities. We formed The Berry Company, a wholly-owned subsidiary, to acquire substantially all the assets of the Independent Line of Business division of L.M. Berry and Company (the Berry ILOB). That acquisition was consummated on April 23, 2008, and prior to that date The Berry Company had no operations. Accordingly, The Berry Company was not a guarantor prior to that date. Following LIYPs merger with and into The Berry Company on June 30, 2009, The Berry Company continues to guarantee, on a senior subordinated unsecured basis, our obligations under the Regatta Exchange Notes and the Credit Facilities. Local Insight Listing Management, Inc., a subsidiary of The Berry Company, also guarantees, on a senior subordinated unsecured basis, our obligations under the Regatta Exchange Notes and our Credit Facilities. There are no non-guarantor subsidiaries of the Company.
The following condensed consolidating financial information is presented for:
i) | Regatta Holdings, the issuer of the guaranteed obligations; |
ii) | The subsidiary guarantors of our obligations under the Regatta Exchange Notes and the Credit Facilities; |
iii) | Consolidating entries and eliminations representing adjustments to: (a) eliminate intercompany transactions between Regatta Holdings and the subsidiary guarantors; (b) eliminate Regatta Holdings investments in its subsidiaries; and (c) record consolidating entries; and |
iv) | Regatta Holdings and the subsidiary guarantors on a consolidated basis. |
Each subsidiary guarantor is (and LIYP was, prior to June 30, 2009) a wholly-owned direct or indirect subsidiary of Regatta Holdings. The Regatta Exchange Notes and the Credit Facilities are fully and unconditionally guaranteed on a joint and several basis by the subsidiary guarantors. Each entity in the condensed consolidating financial information follows the same accounting policies as those described and used in our condensed consolidated financial statements, except for use of the equity method to reflect ownership interests in the subsidiaries and debt issued by Regatta as it was used to purchase the capital stock of LIYP and net assets of the Berry ILOB. In consolidation, we eliminate: (i) guaranteed debt reflected on the subsidiary guarantors balance sheets as guarantors of such debt and (ii) the investment in subsidiaries account.
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Set forth below is our condensed consolidating balance sheet as of June 30, 2010 (in thousands, except share data):
Regatta Holdings |
Subsidiary Guarantor |
Eliminating Entries |
Consolidated | |||||||||||||
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | | $ | 7,116 | $ | | $ | 7,116 | ||||||||
Accounts receivable, net |
| 26,967 | | 26,967 | ||||||||||||
Intercompany receivable |
| 33,658 | (33,658 | ) | | |||||||||||
Due from affiliates |
| 28,871 | (8,414 | ) | 20,457 | |||||||||||
Deferred directory costs |
| 53,946 | | 53,946 | ||||||||||||
Deferred income taxes |
44 | 4,505 | | 4,549 | ||||||||||||
Prepaid expenses and other current assets |
31 | 672 | | 703 | ||||||||||||
Total current assets |
75 | 155,735 | (42,072 | ) | 113,738 | |||||||||||
Property and equipment, net |
17,936 | 8,586 | | 26,522 | ||||||||||||
Assets held for sale |
| 691 | | 691 | ||||||||||||
Equity investments |
609,148 | | (609,148 | ) | | |||||||||||
Intangible assets, net |
| 323,545 | | 323,545 | ||||||||||||
Tradename intangible asset |
| 37,900 | | 37,900 | ||||||||||||
Goodwill |
| 279,090 | | 279,090 | ||||||||||||
Deferred income taxes |
40,776 | | (40,776 | ) | | |||||||||||
Deferred financing costs and other, net |
14,730 | 14,784 | (14,730 | ) | 14,784 | |||||||||||
Total Assets |
$ | 682,665 | $ | 820,331 | $ | (706,726 | ) | $ | 796,270 | |||||||
Liabilities and Stockholders Equity |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Current portion of long-term debt |
$ | 11,300 | $ | 11,300 | $ | (11,300 | ) | $ | 11,300 | |||||||
Line of credit |
16,000 | 16,000 | (16,000 | ) | 16,000 | |||||||||||
Publishing rights payable |
| 648 | | 648 | ||||||||||||
Accounts payable and accrued liabilities |
2,760 | 28,487 | | 31,247 | ||||||||||||
Unearned revenue |
| 39,316 | | 39,316 | ||||||||||||
Accrued interest payable |
2,986 | 2,961 | (2,986 | ) | 2,961 | |||||||||||
Due to affiliates |
8,413 | | (8,413 | ) | | |||||||||||
Intercompany payable |
33,658 | | (33,658 | ) | | |||||||||||
Total current liabilities |
75,117 | 98,712 | (72,357 | ) | 101,472 | |||||||||||
Deferred income taxes |
(3,901 | ) | 126,569 | (40,776 | ) | 81,892 | ||||||||||
Long-term debt, net of current portion |
484,791 | 484,791 | (484,791 | ) | 484,791 | |||||||||||
Other long-term liabilities |
| 1,457 | | 1,457 | ||||||||||||
Total Liabilities |
556,007 | 711,529 | (597,924 | ) | 669,612 | |||||||||||
Stockholders equity: |
||||||||||||||||
Common stock, $0.01 par value; 200,000 shares authorized; 195,744 shares issued and outstanding |
2 | | | 2 | ||||||||||||
Additional paid-in capital |
240,332 | 232,262 | (232,262 | ) | 240,332 | |||||||||||
Accumulated deficit |
(113,676 | ) | (123,460 | ) | 123,460 | (113,676 | ) | |||||||||
Total Stockholders Equity |
126,658 | 108,802 | (108,802 | ) | 126,658 | |||||||||||
Total Liabilities and Stockholders Equity |
$ | 682,665 | $ | 820,331 | $ | (706,726 | ) | $ | 796,270 | |||||||
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Set forth is our condensed consolidating balance sheet as of December 31, 2009 (in thousands, except share data):
Regatta Holdings |
Subsidiary Guarantor |
Eliminating Entries |
Consolidated | |||||||||||||
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | | $ | 6,439 | $ | | $ | 6,439 | ||||||||
Accounts receivable, net |
| 25,950 | | 25,950 | ||||||||||||
Due from affiliates |
732 | 33,021 | (7,886 | ) | 25,867 | |||||||||||
Intercompany receivable |
| 11,452 | (11,452 | ) | | |||||||||||
Deferred directory costs |
| 50,683 | | 50,683 | ||||||||||||
Deferred income taxes |
44 | 4,505 | | 4,549 | ||||||||||||
Prepaid expenses and other current assets |
52 | 802 | | 854 | ||||||||||||
Total current assets |
828 | 132,852 | (19,338 | ) | 114,342 | |||||||||||
Property and equipment, net |
14,369 | 11,181 | | 25,550 | ||||||||||||
Equity investments |
614,740 | | (614,740 | ) | | |||||||||||
Intangible assets, net |
| 339,635 | | 339,635 | ||||||||||||
Goodwill |
| 279,090 | | 279,090 | ||||||||||||
Tradename intangible asset |
| 37,900 | | 37,900 | ||||||||||||
Assets held for sale |
| 691 | | 691 | ||||||||||||
Deferred income taxes |
40,776 | | (40,776 | ) | | |||||||||||
Deferred financing costs and other, net |
15,726 | 15,780 | (15,726 | ) | 15,780 | |||||||||||
Total Assets |
$ | 686,439 | $ | 817,129 | $ | (690,580 | ) | $ | 812,988 | |||||||
Liabilities and Stockholders Equity |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Current portion of long-term debt |
$ | 11,300 | $ | 11,300 | $ | (11,300 | ) | $ | 11,300 | |||||||
Line of credit |
11,000 | 11,000 | (11,000 | ) | 11,000 | |||||||||||
Publishing rights payable |
| 77 | | 77 | ||||||||||||
Accounts payable and accrued liabilities |
2,431 | 22,956 | | 25,387 | ||||||||||||
Unearned revenue |
| 34,682 | | 34,682 | ||||||||||||
Accrued interest payable |
2,574 | 2,574 | (2,574 | ) | 2,574 | |||||||||||
Due to affiliates |
7,886 | 964 | (7,886 | ) | 964 | |||||||||||
Intercompany payable |
11,452 | | (11,452 | ) | | |||||||||||
Total current liabilities |
46,643 | 83,553 | (44,212 | ) | 85,984 | |||||||||||
Deferred income taxes |
| 126,569 | (40,776 | ) | 85,793 | |||||||||||
Long-term debt, net of current portion |
494,064 | 494,064 | (494,064 | ) | 494,064 | |||||||||||
Other long-term liabilities |
| 1,415 | | 1,415 | ||||||||||||
Total liabilities |
540,707 | 705,601 | (579,052 | ) | 667,256 | |||||||||||
Stockholders equity: |
||||||||||||||||
Common stock, $0.01 par value; 200,000 shares authorized; 195,744 shares issued and outstanding |
2 | | | 2 | ||||||||||||
Additional paid-in capital |
250,249 | 269,202 | (269,202 | ) | 250,249 | |||||||||||
Accumulated deficit |
(104,519 | ) | (157,674 | ) | 157,674 | (104,519 | ) | |||||||||
Total stockholders equity |
145,732 | 111,528 | (111,528 | ) | 145,732 | |||||||||||
Total Liabilities and Stockholders Equity |
$ | 686,439 | $ | 817,129 | $ | (690,580 | ) | $ | 812,988 | |||||||
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Set forth is our condensed consolidating statement of operations for the three months ended June 30, 2010 (in thousands):
Regatta Holdings |
Subsidiary Guarantor |
Eliminating Entries |
Consolidated | |||||||||||||
Revenue |
$ | | $ | 131,570 | $ | | $ | 131,570 | ||||||||
Operating expenses: |
||||||||||||||||
Cost of revenue (exclusive of certain depreciation and amortization expense included below) |
| 24,823 | | 24,823 | ||||||||||||
Publishing rights |
| 60,216 | | 60,216 | ||||||||||||
Selling, general and administrative expense |
400 | 26,914 | | 27,314 | ||||||||||||
Depreciation and amortization |
1,067 | 9,409 | | 10,476 | ||||||||||||
Total operating expenses |
1,467 | 121,362 | | 122,829 | ||||||||||||
Operating income (loss) |
(1,467 | ) | 10,208 | | 8,741 | |||||||||||
Other (income) expenses: |
||||||||||||||||
Interest income |
| (4 | ) | | (4 | ) | ||||||||||
Interest expense |
12,994 | 12,994 | (12,994 | ) | 12,994 | |||||||||||
Other expense |
43 | 72 | (65 | ) | 50 | |||||||||||
Income (loss) before income taxes |
(14,504 | ) | (2,854 | ) | 13,059 | (4,299 | ) | |||||||||
Income tax benefit |
(2,229 | ) | (4,183 | ) | 4,183 | (2,229 | ) | |||||||||
Net income (loss) before equity in losses of consolidated subsidiaries |
(12,275 | ) | 1,329 | 8,876 | (2,070 | ) | ||||||||||
Equity in losses of consolidated subsidiaries |
1,329 | | (1,329 | ) | | |||||||||||
Net income (loss) |
$ | (10,946 | ) | $ | 1,329 | $ | 7,547 | $ | (2,070 | ) | ||||||
Set forth is our condensed consolidating statement of operations for the six months ended June 30, 2010 (in thousands):
Regatta Holdings |
Subsidiary Guarantor |
Eliminating Entries |
Consolidated | |||||||||||||
Revenue |
$ | | $ | 266,142 | $ | | $ | 266,142 | ||||||||
Operating expenses: |
||||||||||||||||
Cost of revenue (exclusive of certain depreciation and amortization expense included below) |
| 50,560 | | 50,560 | ||||||||||||
Publishing rights |
| 123,146 | | 123,146 | ||||||||||||
Selling, general and administrative expense |
692 | 57,995 | | 58,687 | ||||||||||||
Depreciation and amortization |
1,719 | 18,750 | | 20,469 | ||||||||||||
Total operating expenses |
2,411 | 250,451 | | 252,862 | ||||||||||||
Operating income (loss) |
(2,411 | ) | 15,691 | | 13,280 | |||||||||||
Other (income) expenses: |
||||||||||||||||
Interest income |
| (10 | ) | | (10 | ) | ||||||||||
Interest expense |
26,231 | 26,231 | (26,231 | ) | 26,231 | |||||||||||
Other expense |
110 | 117 | (110 | ) | 117 | |||||||||||
Income (loss) before income taxes |
(28,752 | ) | (10,647 | ) | 26,341 | (13,058 | ) | |||||||||
Income tax benefit |
(3,901 | ) | (4,688 | ) | 4,688 | (3,901 | ) | |||||||||
Net income (loss) before equity in losses of consolidated subsidiaries |
(24,851 | ) | (5,959 | ) | 21,653 | (9,157 | ) | |||||||||
Equity in losses of consolidated subsidiaries |
(5,959 | ) | | 5,959 | | |||||||||||
Net income (loss) |
$ | (30,810 | ) | $ | (5,959 | ) | $ | 27,612 | $ | (9,157 | ) | |||||
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Set forth is our condensed consolidating statement of operations for the three months ended June 30, 2009 (in thousands):
Regatta Holdings |
Subsidiary Guarantor |
Eliminating Entries |
Consolidated | |||||||||||||
Revenue |
$ | | $ | 144,993 | $ | | $ | 144,993 | ||||||||
Operating expenses: |
||||||||||||||||
Cost of revenue (exclusive of certain depreciation and amortization expense included below) |
| 22,021 | | 22,021 | ||||||||||||
Publishing rights |
| 71,081 | | 71,081 | ||||||||||||
Selling, general and administrative expense |
311 | 28,159 | | 28,470 | ||||||||||||
Depreciation and amortization |
229 | 12,425 | | 12,654 | ||||||||||||
Total operating expenses |
540 | 133,686 | | 134,226 | ||||||||||||
Operating income (loss) |
(540 | ) | 11,307 | | 10,767 | |||||||||||
Other (income) expenses: |
||||||||||||||||
Interest income |
| (3 | ) | | (3 | ) | ||||||||||
Interest expense |
13,430 | 13,430 | (13,430 | ) | 13,430 | |||||||||||
Other expense |
35 | 104 | (35 | ) | 104 | |||||||||||
Income (loss) before income taxes |
(14,005 | ) | (2,224 | ) | 13,465 | (2,764 | ) | |||||||||
Income tax benefit |
(4,494 | ) | (763 | ) | 4,622 | 635 | ||||||||||
Net income (loss) before equity in losses of consolidated subsidiaries |
(9,511 | ) | (1,461 | ) | 8,843 | (2,129 | ) | |||||||||
Equity in losses of consolidated subsidiaries |
(1,461 | ) | | 1,461 | | |||||||||||
Net income (loss) |
$ | (10,972 | ) | $ | (1,461 | ) | $ | 10,304 | $ | (2,129 | ) | |||||
Set forth is our condensed consolidating statement of operations for the six months ended June 30, 2009 (in thousands):
Regatta Holdings |
Subsidiary Guarantor |
Eliminating Entries |
Consolidated | |||||||||||||
Revenue |
$ | | $ | 290,061 | $ | | $ | 290,061 | ||||||||
Operating expenses: |
||||||||||||||||
Cost of revenue (exclusive of certain depreciation and amortization expense included below) |
| 51,061 | | 51,061 | ||||||||||||
Publishing rights |
| 142,903 | | 142,903 | ||||||||||||
Selling, general and administrative expense |
768 | 59,339 | | 60,107 | ||||||||||||
Depreciation and amortization |
593 | 24,709 | | 25,302 | ||||||||||||
Total operating expenses |
1,361 | 278,012 | | 279,373 | ||||||||||||
Operating income (loss) |
(1,361 | ) | 12,049 | | 10,688 | |||||||||||
Other (income) expenses: |
||||||||||||||||
Interest income |
| (12 | ) | | (12 | ) | ||||||||||
Interest expense |
27,569 | 27,569 | (27,569 | ) | 27,569 | |||||||||||
Other expense |
83 | 320 | (83 | ) | 320 | |||||||||||
Income (loss) before income taxes |
(29,013 | ) | (15,828 | ) | 27,652 | (17,189 | ) | |||||||||
Income tax benefit |
(9,993 | ) | (5,450 | ) | 9,523 | (5,920 | ) | |||||||||
Net income (loss) before equity in losses of consolidated subsidiaries |
(19,020 | ) | (10,378 | ) | 18,129 | (11,269 | ) | |||||||||
Equity in losses of consolidated subsidiaries |
(10,378 | ) | | 10,378 | | |||||||||||
Net income (loss) |
$ | (29,398 | ) | $ | (10,378 | ) | $ | 28,507 | $ | (11,269 | ) | |||||
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Set forth is our condensed consolidating statement of cash flows for the six months ended June 30, 2010 (in thousands):
Regatta Holdings |
Subsidiary Guarantor |
Eliminating Entries |
Consolidated | |||||||||||||
Operating Activities: |
||||||||||||||||
Net loss |
$ | (30,810 | ) | $ | (5,959 | ) | $ | 27,612 | $ | (9,157 | ) | |||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||||||||||
Equity in losses of consolidated subsidiaries |
5,959 | | (5,959 | ) | | |||||||||||
Depreciation and amortization expense |
1,719 | 18,750 | | 20,469 | ||||||||||||
Deferred income taxes |
(3,901 | ) | (4,688 | ) | 4,688 | (3,901 | ) | |||||||||
Share-based compensation |
| 83 | | 83 | ||||||||||||
Amortization of deferred financing costs |
996 | 996 | (996 | ) | 996 | |||||||||||
Accretion of discount on subordinated notes |
2,027 | 2,027 | (2,027 | ) | 2,027 | |||||||||||
Provision for doubtful accounts |
| 16,693 | | 16,693 | ||||||||||||
Non-cash interest expense |
| 23,318 | (23,318 | ) | | |||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Accounts receivable |
| (17,710 | ) | | (17,710 | ) | ||||||||||
Due from affiliates |
1,260 | 3,186 | | 4,446 | ||||||||||||
Deferred directory costs |
| (3,263 | ) | | (3,263 | ) | ||||||||||
Prepaid expenses and other current assets |
21 | 130 | | 151 | ||||||||||||
Publishing rights payable |
| 571 | | 571 | ||||||||||||
Accounts payable, accrued liabilities and other |
1,273 | 5,573 | | 6,846 | ||||||||||||
Accrued interest payable |
412 | (25 | ) | | 387 | |||||||||||
Unearned revenue |
| 4,634 | | 4,634 | ||||||||||||
Net cash provided by (used in) operating activities |
(21,044 | ) | 44,316 | | 23,272 | |||||||||||
Investing Activities: |
||||||||||||||||
Intercompany |
26,274 | (26,274 | ) | | | |||||||||||
Acquisition of property and equipment |
(6,230 | ) | (65 | ) | | (6,295 | ) | |||||||||
Net cash provided by (used in) investing activities |
20,044 | (26,339 | ) | | (6,295 | ) | ||||||||||
Financing Activities: |
||||||||||||||||
Distributions to Regatta |
17,300 | (17,300 | ) | | | |||||||||||
Proceeds from revolving credit facility |
11,000 | | | 11,000 | ||||||||||||
Repayments on revolving credit facility |
(6,000 | ) | | | (6,000 | ) | ||||||||||
Dividends |
(10,000 | ) | | | (10,000 | ) | ||||||||||
Repayments on term loan |
(11,300 | ) | | | (11,300 | ) | ||||||||||
Net cash provided by (used in) financing activities |
1,000 | (17,300 | ) | | (16,300 | ) | ||||||||||
Net increase in cash and cash equivalents |
| 677 | | 677 | ||||||||||||
Cash and cash equivalents, beginning of period |
| 6,439 | | 6,439 | ||||||||||||
Cash and cash equivalents, end of period |
$ | | $ | 7,116 | $ | | $ | 7,116 | ||||||||
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Set forth is our condensed consolidating statement of cash flows for the six months ended June 30, 2009 (in thousands):
Regatta Holdings |
Subsidiary Guarantor |
Eliminating Entries |
Consolidated | |||||||||||||
Operating Activities: |
||||||||||||||||
Net loss |
$ | (29,398 | ) | $ | (10,378 | ) | $ | 28,507 | $ | (11,269 | ) | |||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||||||||||
Equity in losses of consolidated subsidiaries |
10,378 | | (10,378 | ) | | |||||||||||
Depreciation and amortization expense |
593 | 30,273 | | 30,866 | ||||||||||||
Deferred income taxes |
(9,993 | ) | (5,450 | ) | 9,523 | (5,920 | ) | |||||||||
Share-based compensation |
| 300 | | 300 | ||||||||||||
Amortization of deferred financing costs |
920 | 920 | (920 | ) | 920 | |||||||||||
Accretion of discount on subordinated notes |
1,875 | 1,875 | (1,875 | ) | 1,875 | |||||||||||
Provision for doubtful accounts |
| 9,438 | | 9,438 | ||||||||||||
Non-cash interest expense |
| 24,857 | (24,857 | ) | | |||||||||||
Other |
| 78 | | 78 | ||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Accounts receivable |
| (2,159 | ) | | (2,159 | ) | ||||||||||
Due to/from affiliates |
1,008 | (6,679 | ) | | (5,671 | ) | ||||||||||
Deferred directory costs |
| (6,158 | ) | | (6,158 | ) | ||||||||||
Prepaid expenses and other current assets |
17 | (66 | ) | | (49 | ) | ||||||||||
Publishing rights payable |
| (1,797 | ) | | (1,797 | ) | ||||||||||
Accounts payable, accrued liabilities and other |
223 | (10,284 | ) | | (10,061 | ) | ||||||||||
Accrued interest |
| | | | ||||||||||||
Unearned revenue |
| (50 | ) | | (50 | ) | ||||||||||
Net cash provided by (used in) operating activities |
(24,377 | ) | 24,720 | | 343 | |||||||||||
Investing Activities: |
||||||||||||||||
Intercompany |
30,594 | (30,594 | ) | | | |||||||||||
Proceeds on sale of property and equipment |
| 815 | | 815 | ||||||||||||
Acquisition of property and equipment |
(6,217 | ) | (1,961 | ) | | (8,178 | ) | |||||||||
Net cash provided by (used in) investing activities |
24,377 | (31,740 | ) | | (7,363 | ) | ||||||||||
Financing Activities: |
||||||||||||||||
Distributions to Regatta |
12,137 | (12,137 | ) | | | |||||||||||
Repayments on revolving credit facility |
(1,000 | ) | | | (1,000 | ) | ||||||||||
Repayments on term loan |
(11,137 | ) | | | (11,137 | ) | ||||||||||
Net cash used in financing activities |
| (12,137 | ) | | (12,137 | ) | ||||||||||
Net decrease in cash and cash equivalents |
| (19,157 | ) | | (19,157 | ) | ||||||||||
Cash and cash equivalents, beginning of period |
| 19,421 | | 19,421 | ||||||||||||
Cash and cash equivalents, end of period |
$ | | $ | 264 | $ | | $ | 264 | ||||||||
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Some of the information in this Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including, without limitation, certain statements under this Managements Discussion and Analysis of Financial Condition and Results of Operations, may constitute forward-looking statements. In some cases you can identify these forward-looking statements by words like may, should, expects, plans, anticipates, believes, estimates, predicts, potential or continue or the negative of those words and other comparable words. All forward-looking statements reflect our current beliefs and assumptions with respect to our future results, business plans and prospects, and are based on information currently available to us. 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. Factors that could cause or contribute to such differences include, but are not limited to, those described under Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2009, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and this Quarterly Report on Form 10-Q. We undertake no obligation to update publicly or publicly revise any forward-looking statement, whether as a result of new information or otherwise.
Unless otherwise indicated, the terms Company, Regatta Holdings, we, us and our refer to Local Insight Regatta Holdings, Inc. and its direct and indirect wholly-owned subsidiaries. You should read this discussion and analysis in conjunction with the condensed consolidated financial statements and notes that appear elsewhere in this Quarterly Report on Form 10-Q. Our financial information may not be indicative of our future performance and does not necessarily reflect what our financial condition and results of operations would have been had we operated as an independent, stand-alone entity during all periods presented.
Overview
We are a leading provider of local search advertising services, offering our core target market of SMBs a comprehensive range of lead-generating solutions that enable consumers to efficiently find the products and services they need. Our integrated suite of local advertising solutions encompasses print Yellow Pages as well as a full range of digital advertising services designed to establish, maintain and optimize our advertising clients online presence.
Our principal operating subsidiary, The Berry Company, primarily serves non-major metropolitan areas, rural and certain suburban markets in 42 states. Our comprehensive set of local search advertising solutions consists of five principal service offerings, or revenue generating units: (i) print directory advertising; (ii) website development, production and maintenance; (iii) search engine marketing, or SEM (including delivery of local advertisements through major search engines, such as Google, Bing and Yahoo!); (iv) IYP advertising (including through YellowPages.com); and (v) internet-based video advertising. In February 2010, we launched Berry Leads, a new business model which we plan to roll out on a market-by-market basis during 2010 and early 2011.
We are the fifth largest Yellow Pages directory publisher in the United States based on revenue. In addition to serving as the exclusive official publisher of Windstream-branded print and internet directories in the Windstream Service Areas, we are the largest provider of outsourced print directory sales, marketing, production and related services in the United States. We publish 215 Windstream-branded print directories and 643 print directories on behalf of 122 customers other than Windstream, which we refer to as LEC Customers, or customers that are a LEC or have either been granted the exclusive right to publish directories on behalf of an incumbent LEC or are the exclusive publisher of one or more LEC-branded directories. We also operate and maintain the WindstreamYellowPages.com website and publish IYP directories on behalf of 31 other LEC Customers.
Our History
Split-Off From Windstream. On November 30, 2007, we were split off from Windstream to certain funds affiliated with Welsh, Carson, Anderson & Stowe (WCAS) in a transaction we refer to as the Split-Off. In connection with the Split-Off, our corporate name was changed from Windstream Regatta Holdings, Inc. to Local Insight Regatta Holdings, Inc. We refer to Windstream Regatta Holdings, Inc. prior to the closing of the Split-Off as our predecessor company.
Acquisition of the Berry ILOB. On April 23, 2008, our wholly-owned subsidiary, The Berry Company, acquired substantially all the assets and certain liabilities of the Berry ILOB from L.M. Berry for a total purchase price of approximately $236.7 million (inclusive of adjustments related to working capital). Prior to its acquisition of the Berry ILOB, The Berry Company had no operations.
Merger of LIYP into The Berry Company. Between April 23, 2008 and June 30, 2009, LIYP and The Berry Company existed as separate wholly owned subsidiaries of Regatta Holdings. On June 30, 2009, LIYP merged with and into The Berry Company, with The Berry Company surviving the merger and succeeding to all of LIYPs rights and obligations, including all of LIYPs publishing agreements and other contracts. We currently do business under the Berry brand and have updated our sales and marketing materials accordingly.
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Basis of Presentation
We are managed as a single business unit and report as one reportable segment, and all operations (other than certain services which are outsourced to an affiliate, see Note 8 to the accompanying condensed consolidated financial statements) occur in the United States.
Consulting Fees
The Company and LIMI, a wholly-owned, indirect subsidiary of Local Insight Media Holdings and an affiliate of ours, are parties to a consulting agreement pursuant to which LIMI provides certain consulting services (including executive, operational, finance and accounting, treasury, legal, human resource, integration and administrative services) to us. On May 13, 2009, the Company and LIMI amended the consulting agreement such that LIMI suspended invoicing us for services rendered under the consulting agreement, effective as of January 1, 2009. Accordingly, no fees were payable under the consulting agreement for the three and six months ended June 30, 2010 and 2009, respectively. The amendment to the consulting agreement also provides that LIMI may, at any time, re-commence invoicing us for services rendered under the consulting agreement. Should LIMI in the future elect to re-commence such invoicing, the amendment also provides that no amounts will be payable for services rendered during the period that LIMIs invoicing was suspended.
Revenue
We derive our revenue primarily from the sale of advertising in our print directories, which we refer to as print revenue. For the three and six months ended June 30, 2010, print revenue comprised 88.0% and 88.5% of our revenue, respectively, while other services comprised 12.0% and 11.5% of our revenue, respectively. For the three and six months ended June 30, 2009, print revenue comprised 91.8% and 92.0% of our revenue, respectively, while other services comprised 8.2% and 8.0% of our revenue, respectively. We anticipate print revenue will continue to represent a significant but declining percentage of our revenue in the foreseeable future. Local advertising has represented a substantial majority of our print revenue. For the three and six months ended June 30, 2010, 79.4% and 79.7% of our print revenue was attributable to local advertisers, respectively, and 14.8% and 15.0% of our print revenue was attributable to national advertisers, respectively. For the three and six months ended June 30, 2009, 89.2% and 89.1% of our print revenue was attributable to local advertisers, respectively, and 10.8% and 10.9% of our print revenue was attributable to national advertisers, respectively.
We also generate revenue from our IYP and other digital services and other revenue from additional services provided to our LEC customers. Other revenue is generally derived from directory enhancements that are billed back to our LEC Customers and fees derived from other sources. Revenue is reported net of sales allowances that are recorded to reduce revenue for customer adjustments that, based on historical experience, are likely to occur subsequent to the initial sale.
Revenue trends can be affected by several factors, including changes in the number of advertising customers, or the pricing of advertising and the amount of advertising purchased per customer related to competitive, economic or other conditions, changes in the size of our sales force and the introduction of additional services, which may generate incremental revenues. We anticipate our total revenue will decline in 2010 compared to 2009 due to the continued effects of the economic downturn, the declining use of print Yellow Pages and other factors. We expect our print revenue will continue to decline beyond 2010 for similar reasons. These expected decreases in our print revenue beyond 2010 may not be offset by increases in revenue from our IYP, website development, SEM and video services (including revenue generated as a result of the rollout of our new business model). Accordingly, our total revenue may also decline beyond 2010.
Operating Expenses
Operating expenses include cost of revenue, publishing rights expense, selling, general and administrative expense and depreciation and amortization.
Cost of Revenue
Cost of revenue includes: (i) costs related to our sales and sales support functions and sales commissions paid to our sales force; (ii) costs of producing and distributing both print and IYP directories, including the cost of publishing operations, directory contractor services, graphics, and distribution; and (iii) for the six months ended June 30, 2009, certain amortization associated with favorable sales contracts acquired in connection with the Split-Off and the Berry ILOB acquisition for which the cash flow streams associated with post-Split-Off and post-Berry ILOB-acquisition customer billings are in excess of our costs to fulfill our obligations under such contracts. We defer and recognize direct and incremental costs over the expected lives of the directories (generally 12 months). All other costs are expensed as incurred. For the three and six months ended June 30, 2010, cost of revenue represented 20.2% and 20.0% of total operating expenses, respectively, and 18.9% and 19.0% of revenue, respectively. For the three and six months ended June 30, 2009, cost of revenue represented 16.4% and 18.3% of total operating expenses, respectively, and 15.2% and 17.6% of revenue, respectively.
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Publishing Rights
Publishing rights expense represents royalties paid to LECs other than Windstream for the right to publish their print directories and other commissions associated with the sale of IYP and digital services. Publishing rights expense is typically determined as a percentage of net advertising revenue on a per contract basis with respect to directories published for our LEC Customers. For the three and six months ended June 30, 2010, publishing rights expense represented 49.0% and 48.7% of total operating expenses, respectively, and 45.8% and 46.3% of revenue, respectively. For the three and six months ended June 30, 2009, publishing rights expense represented 53.0% and 51.2% of total operating expenses, respectively, and 49.0% and 49.3% of revenue, respectively.
Selling, General and Administrative Expense
Selling, general and administrative expense includes the cost of business taxes, bad debt, marketing and business development, sales expenses, sales administration, accounting and administration, systems, billing, executive and legal, advertising and building maintenance. All selling, general and administrative costs are expensed as incurred. For the three and six months ended June 30, 2010, selling, general and administrative expense represented 22.2% and 23.2% of all operating expenses, respectively, and 20.8% and 22.1% of revenue, respectively. For the three and six months ended June 30, 2009, selling, general and administrative expense represented 21.2% and 21.5% of all operating expenses, respectively, and 19.6% and 20.7% of revenue, respectively.
Since mid-2008, we have implemented a number of initiatives to reduce our costs, including the development and implementation of a synergy plan (the Synergy Plan) which included two reductions in force during 2008. In addition, in connection with the Synergy Plan, during 2008 we closed one facility in Birmingham, Alabama and consolidated two sales offices in Lincoln, Nebraska. During 2009, we consolidated a facility in Macedonia, Ohio, into an office in Hudson, Ohio, and closed a sales office in Monroeville, Pennsylvania.
As part of these on-going cost control efforts, we initiated additional reductions in force in April 2009 and August 2009 which were not part of the Synergy Plan and which resulted in the termination of approximately 100 individuals. In addition, in January 2010 we implemented the 2010 Restructuring Plan, which involves the reduction of our employee base by a total of approximately 320 employees and the cessation of operations at our facilities in Matthews, North Carolina (effective March 31, 2010) and Erie, Pennsylvania (effective December 31, 2010). The 2010 Restructuring Plan is expected to be completed by December 31, 2010. The 2010 Restructuring Plan originally contemplated the closure of our facilities in Hudson, Ohio by December 31, 2010. We are currently in the process of re-examining whether and when to close the Hudson facility. During the three and six months ended June 30, 2010, we incurred approximately $0.4 million and $3.2 million in severance and related costs in connection with the 2010 Restructuring Plan, respectively, of which approximately $1.6 million remained accrued at June 30, 2010. The remaining amounts accrued are expected to be paid out during the remainder of 2010 and the three months ending March 31, 2011. We expect to accrue up to an additional $0.4 million in severance and related costs in connection with the 2010 Restructuring Plan during the remainder of 2010.
We continue to actively assess and pursue opportunities to reduce selling, general and administrative cost through measures such as redundancy and overlap analyses and other cost-cutting measures. We expect these activities to result in significant reductions in general and administrative cost in 2010 compared to 2009.
Depreciation and Amortization
As a result of the purchase accounting for the Split-Off and the Berry ILOB acquisition, we recorded amortization expense related to identifiable intangible assets, which consist of publishing agreements with useful lives (at the time of the respective transactions) ranging from four to 50 years and customer relationships with a useful life of 20 years.
Interest Expense, Net
To finance the Split-Off and related fees and expenses, we entered into an $86.0 million credit facility on November 30, 2007, which included a $20.0 million revolving credit facility, and issued $210.5 million aggregate principal amount of 11% Senior Subordinated Notes due November 30, 2017. Effective April 23, 2008, we refinanced the $86.0 million credit facility through the Credit Facilities. The Credit Facilities consisted of a $335.0 million Term Loan and a $30.0 million Revolver. In November 2008, we consummated an offer to exchange all the 11% Senior Subordinated Notes for the Regatta Exchange Notes, which have been registered under the Securities Act of 1933, as amended.
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Results of Operations
Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009
The following table sets forth our operating results for the three months ended June 30, 2010 and 2009 (in thousands, except as to percentages):
Three Months Ended June 30, 2010 |
Three Months Ended June 30, 2009 |
Change | % | ||||||||||||
Revenue |
$ | 131,570 | $ | 144,993 | $ | (13,423 | ) | (9.3 | )% | ||||||
Operating expenses: |
|||||||||||||||
Cost of revenue (exclusive of certain depreciation and amortization included below) |
24,823 | 22,021 | 2,802 | 12.7 | % | ||||||||||
Publishing rights |
60,216 | 71,081 | (10,865 | ) | (15.3 | )% | |||||||||
Selling, general and administrative expense |
27,314 | 28,470 | (1,156 | ) | (4.1 | )% | |||||||||
Depreciation and amortization |
10,476 | 12,654 | (2,178 | ) | (17.2 | )% | |||||||||
Total operating expenses |
122,829 | 134,226 | (11,397 | ) | (8.5 | )% | |||||||||
Operating income (loss) |
8,741 | 10,767 | (2,026 | ) | (18.8 | )% | |||||||||
Interest expense, net |
12,990 | 13,427 | (437 | ) | (3.3 | )% | |||||||||
Other expense |
50 | 104 | (54 | ) | (51.9 | )% | |||||||||
Loss before income taxes |
(4,299 | ) | (2,764 | ) | (1,535 | ) | 55.5 | % | |||||||
Income tax benefit |
(2,229 | ) | (635 | ) | (1,594 | ) | 251.0 | % | |||||||
Net loss |
$ | (2,070 | ) | $ | (2,129 | ) | $ | 59 | (2.8 | )% | |||||
Revenue
Revenue of $131.6 million for the three months ended June 30, 2010 decreased $13.4 million, or 9.3%, compared to $145.0 million for the three months ended June 30, 2009. The decrease was primarily attributable to a decrease in print revenue of approximately $14.3 million, and was partially offset by a $0.9 million increase in other services revenue. During the three months ended June 30, 2010, revenue from Pay4Performance (P4P), a performance-based advertising solution that is marketed primarily to clients who would otherwise cancel or significantly decrease their existing advertising program or who have not previously advertised in our print Yellow Pages directories, served to mitigate our print revenue decline (although the level of mitigation was below our original expectations).
We anticipate our total revenue will decline in 2010 compared to 2009 due to the continued effects of the economic downturn, the declining use of print Yellow Pages and other factors. We expect our print revenue will continue to decline beyond 2010 for similar reasons. These expected decreases in our print revenue beyond 2010 may not be offset by increases in revenue from our IYP, website development, SEM and video services (including revenue generated as a result of the rollout of our new business model). Accordingly, our total revenue may also decline beyond 2010.
Cost of Revenue
Cost of revenue of $24.8 million for the three months ended June 30, 2010 increased $2.8 million, or 12.7%, compared to $22.0 million for the three months ended June 30, 2009. The increase related primarily to increased costs for the three months ended June 30, 2010 associated with the establishment of a new commission structure, the impact of increased digital costs and the fact that the benefits realized for the three months ended June 30, 2009 associated with extending the life of certain publications were not extended to the three months ended June 30, 2010.
Publishing Rights
Publishing rights expense of $60.2 million for the three months ended June 30, 2010 decreased $10.9 million, or 15.3%, compared to $71.1 million for the three months ended June 30, 2009. The decrease in publishing rights expense related primarily to the decrease in revenue subject to publishing rights.
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Selling, General and Administrative Expense
Selling, general and administrative expense of $27.3 million for the three months ended June 30, 2010 decreased $1.2 million, or 4.1%, compared to $28.5 million for the three months ended June 30, 2009. The decrease was primarily due to the benefits of our cost cutting efforts in 2009 and throughout the six months ended June 30, 2010, and was partially offset by an increase in bad debt expense of approximately $5.0 million and $1.3 million in consulting fees incurred in connection with the development and rollout of our new business model.
The continued effects of the economic downturn have caused financial difficulty for many of our advertising customers, which has led to greater challenges in collecting accounts receivable and a corresponding increase in bad debt expense. As a result of the challenging economic and market conditions and other factors, our collection costs and bad debt expense may increase further.
Depreciation and Amortization
Depreciation and amortization expense of $10.5 million for the three months ended June 30, 2010 decreased $2.2 million, or 17.2%, compared to $12.7 million for the three months ended June 30, 2009. The decrease was primarily due to the diminishing amortization expense associated with the decay method of amortization for customer relationships.
Interest Expense
Interest expense of $13.0 million for the three months ended June 30, 2010 decreased $0.4 million, or 3.3%, compared to $13.4 million for the three months ended June 30, 2009. The decrease was primarily due to lower principal amounts of debt outstanding, and was partially offset by an increase in amortization expense associated with deferred financing costs and an increase in the accretion of debt discount for the three months ended June 30, 2010.
Income Taxes
Income tax benefit for the three months ended June 30, 2010 and 2009 is consistent with our loss before income taxes in each of those periods. The estimated tax rate for the three months ended June 30, 2010 was 51.9%. The estimated rate is based upon managements projections for the year. Any changes to the projection would impact the estimated rate.
Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009
The following table sets forth our operating results for the six months ended June 30, 2010 and 2009 (in thousands, except as to percentages):
Six Months Ended June 30, 2010 |
Six Months Ended June 30, 2009 |
Change | % | ||||||||||||
Revenue |
$ | 266,142 | $ | 290,061 | $ | (23,919 | ) | (8.2 | )% | ||||||
Operating expenses: |
|||||||||||||||
Cost of revenue (exclusive of certain depreciation and amortization included below) |
50,560 | 51,061 | (501 | ) | (1.0 | )% | |||||||||
Publishing rights |
123,146 | 142,903 | (19,757 | ) | (13.8 | )% | |||||||||
Selling, general and administrative expense |
58,687 | 60,107 | (1,420 | ) | (2.4 | )% | |||||||||
Depreciation and amortization |
20,469 | 25,302 | (4,833 | ) | (19.1 | )% | |||||||||
Total operating expenses |
252,862 | 279,373 | (26,511 | ) | (9.5 | )% | |||||||||
Operating income (loss) |
13,280 | 10,688 | 2,592 | 24.3 | % | ||||||||||
Interest expense, net |
26,221 | 27,557 | (1,336 | ) | (4.8 | )% | |||||||||
Other expense |
117 | 320 | (203 | ) | (63.4 | )% | |||||||||
Loss before income taxes |
(13,058 | ) | (17,189 | ) | 4,131 | (24.0 | )% | ||||||||
Income tax benefit |
(3,901 | ) | (5,920 | ) | 2,019 | (34.1 | )% | ||||||||
Net loss |
$ | (9,157 | ) | $ | (11,269 | ) | $ | 2,112 | (18.7 | )% | |||||
Revenue
Revenue of $266.1 million for the six months ended June 30, 2010 decreased $23.9 million, or 8.2%, compared to $290.1 million for the six months ended June 30, 2009. The decrease was primarily attributable to a decrease in print revenue of approximately $26.7 million, and was partially offset by a $2.8 million increase in other services revenue. During the six months ended June 30, 2010, P4P revenue served to mitigate our print revenue decline (although the level of mitigation was below our original expectations).
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We anticipate our total revenue will decline in 2010 compared to 2009 due to the continued effects of the economic downturn, the declining use of print Yellow Pages and other factors. We expect our print revenue will continue to decline beyond 2010 for similar reasons. These expected decreases in our print revenue beyond 2010 may not be offset by increases in revenue from our IYP, website development, SEM and video services (including revenue generated as a result of the rollout of our new business model). Accordingly, our total revenue may also decline beyond 2010.
Cost of Revenue
Cost of revenue of $50.6 million for the six months ended June 30, 2010 decreased $0.5 million, or 1.0%, compared to $51.1 million for the six months ended June 30, 2009. The decrease related primarily to $2.8 million of amortization of favorable sales contracts and $1.0 million of amortization of directories in-process margin established in purchase accounting for the six months ended June 30, 2009 compared to zero for the six months ended June 30, 2010, and was partially offset by increased costs for the six months ended June 30, 2010 associated with the establishment of a new commission structure, the impact of increased digital costs and the fact that the benefits realized for the three months ended June 30, 2009 associated with extending the life of certain publications were not extended to the three months ended June 30, 2010.
Publishing Rights
Publishing rights expense of $123.1 million for the six months ended June 30, 2010 decreased $19.8 million, or 13.8%, compared to $142.9 million for the six months ended June 30, 2009. The decrease in publishing rights expense related primarily to the decrease in revenue subject to publishing rights.
Selling, General and Administrative Expense
Selling, general and administrative expense of $58.7 million for the six months ended June 30, 2010 decreased $1.4 million, or 2.4%, compared to $60.1 million for the six months ended June 30, 2009. The decrease was primarily due to the benefits of our cost cutting efforts in 2009 and throughout the six months ended June 30, 2010, and was partially offset by an increase in bad debt expense of approximately $7.3 million and $3.3 million in consulting fees incurred in connection with the development and rollout of our new business model.
The continued effects of the economic downturn have caused financial difficulty for many of our advertising customers, which has led to greater challenges in collecting accounts receivable and a corresponding increase in bad debt expense. As a result of the challenging economic and market conditions and other factors, our collection costs and bad debt expense may increase further.
Depreciation and Amortization
Depreciation and amortization expense of $20.5 million for the six months ended June 30, 2010 decreased $4.8 million, or 19.1%, compared to $25.3 million for the six months ended June 30, 2009. The decrease was primarily due to the diminishing amortization expense associated with the decay method of amortization for customer relationships.
Interest Expense
Interest expense of $26.2 million for the six months ended June 30, 2010 decreased $1.3 million, or 4.8%, compared to $27.6 million for the six months ended June 30, 2009. The decrease was primarily due to lower principal amounts of debt outstanding, and was partially offset by an increase in amortization expense associated with deferred financing costs and an increase in the accretion of debt discount for the six months ended June 30, 2010.
Income Taxes
Income tax benefit for the six months ended June 30, 2010 and 2009 is consistent with our loss before income taxes in each of those periods. The estimated tax rate for the six months ended June 30, 2010 was 29.9%. The estimated rate is based upon managements projections for the year. Any changes to the projection would impact the estimated rate.
Liquidity and Capital Resources
Our principal source of liquidity has historically been cash flow generated from operations. The timing of our cash flows throughout the year is reasonably predictable, as our customers typically pay for their advertisements in equal payments over a 12-month period. From time to time, we have drawn, and may in the future draw, upon the Revolver. Generally, payment of our material expenses is generally based on contractual arrangements and occurs with reasonable predictability throughout the year. Our primary liquidity requirements have historically been for debt service and working capital needs.
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We funded the costs associated with the Split-Off with our prior credit facilities and $210.5 million aggregate principal amount of 11% Senior Subordinated Notes due November 30, 2017 and our acquisition of the Berry ILOB with our Credit Facilities, as described under the captions Prior Credit Facilities, The Regatta Exchange Notes and Senior Secured Credit Facilities below. We have significant debt service obligations under our Credit Facilities and under the Regatta Exchange Notes. In the past, our cash flow from operations, available cash and available borrowings under our Credit Facilities have been adequate to meet our liquidity needs; however, this may not remain the case in the future for a number of reasons, including current economic conditions, declines in print revenue that may not be offset by increases in revenue from other services we provide and continued expenditures in connection with the rollout of Berry Leads, our new business model. In addition, because of restrictions in our Credit Facilities and the indenture governing the terms of the Regatta Exchange Notes, we are restricted in our ability to dispose of material assets and other operations and use the proceeds of such dispositions to meet our liquidity needs. As of the date of this report, we had approximately $3.8 million available borrowing capacity under the Revolver. However, this available borrowing capacity represents the unfunded revolving loan commitment of Woodlands Commercial Bank (formerly known as Lehman Brothers Commercial Bank) under the Revolver. The parent company of Woodlands Commercial Bank has filed for bankruptcy protection; we therefore believe that this amount will be unavailable to us under the Revolver.
Our Credit Facilities and the indenture governing the Regatta Exchange Notes require us to comply with customary affirmative and negative covenants. If our business does not generate sufficient cash flows from operations or earnings or we do not realize anticipated cost savings and operating improvements, we may be noncompliant with one or more of these covenants.
The continued effects of the economic downturn, our declining revenue and our continued expenditures in connection with the rollout of Berry Leads, our new business model, have increased pressure on our ability to maintain compliance with our financial covenants during 2010 and beyond. This pressure has further increased because, as required by the terms of our Credit Facilities, the financial covenants contained in our Credit Facilities will become more stringent for the period July 1, 2010 through June 30, 2011 (as compared to the preceding 12-month period). We will be required to meet these more stringent covenants starting with the quarter ending September 30, 2010. As a result of these factors, it is likely that at September 30, 2010, we will: (i) exceed the maximum allowable consolidated leverage ratio (i.e., the ratio of consolidated total debt to consolidated EBITDA) and the maximum allowable consolidated senior secured debt ratio (i.e., the ratio of consolidated senior secured debt to consolidated EBITDA) under our Credit Facilities and (ii) fail to meet the minimum consolidated interest coverage ratio (i.e., the ratio of consolidated EBITDA to consolidated interest expense) under our Credit Facilities. We will likely breach the same covenants at December 31, 2010. We may be unable to remain compliant with these same covenants thereafter. We are evaluating various alternatives to address these covenant issues. We may not be successful in our efforts to address these covenant issues.
Noncompliance with the financial covenants in our Credit Facilities constitutes an event of default under our Credit Facility. Upon such an event of default under our Credit Facilities, all amounts owing under our Credit Facilities may be declared to be immediately due and payable. In addition, upon an event of default we would no longer be entitled to draw upon our Revolver. In the event that noncompliance with these financial covenants results in an acceleration of our obligations under the Credit Facilities, the trustee under the indenture governing the Regatta Exchange Notes or holders of 25% of aggregate principal amount of the outstanding Regatta Exchange Notes may declare all of the Regatta Exchange Notes due and payable; provided, however, that such declaration of acceleration of the Regatta Exchange Notes shall be automatically annulled if the events of default under the Credit Facilities are remedied or cured by the Company or waived by the required number of lenders under our Credit Facilities within 30 days after the declaration of acceleration of our obligations under the Credit Facilities and if (a) the annulment of the acceleration of the Regatta Exchange Notes would not conflict with any judgment or decree of a court of competent jurisdiction and (b) all existing events of default under the indenture governing the Regatta Exchange Notes, except nonpayment of principal, premium or interest on the Regatta Exchange Notes that became due solely because of the acceleration of the Regatta Exchange Notes, have been cured or waived.
Should the amounts owing under the Credit Facilities or under the Regatta Exchange Notes be declared to be immediately due and payable, and the underlying circumstances giving rise to the acceleration are not cured or waived, we would not have sufficient liquidity to satisfy those obligations. We may not be able to obtain a waiver or amendment from our lenders under our Credit Facilities or the Regatta Exchange Notes so as to remain compliant with those covenants or avoid an acceleration of our obligations under the Credit Facilities or the Regatta Exchange Notes. Our inability to obtain a waiver, resulting in the amounts under the Credit Facilities or the Regatta Exchange Notes being declared due and payable immediately, could affect our ability to continue to exist as a going concern. Further, we may not be able to borrow additional funds if it becomes necessary or borrow at costs that are not higher or on more restrictive terms than our current indebtedness.
The continued economic downturn is causing financial difficulty for many of our advertising customers, which has led to greater challenges in collecting accounts receivable and a corresponding increase in bad debt expense (including bad debt expense of $16.7 million and $9.4 million for the six months ended June 30, 2010 and 2009, respectively) arising in connection with our billing and collection arrangements with Windstream and most of our other LEC Customers, under which the LEC provides billing and collection services for those of its own telephone customers who buy advertising from us.
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The following table sets forth a summary of cash flows for the six months ended June 30, 2010 and 2009 (in thousands):
Six Months Ended June 30, 2010 |
Six Months Ended June 30, 2009 |
|||||||
Net cash provided by operating activities |
$ | 23,272 | $ | 343 | ||||
Net cash used in investing activities |
(6,295 | ) | (7,363 | ) | ||||
Net cash used in financing activities |
(16,300 | ) | (12,137 | ) | ||||
Increase (decrease) in cash and cash equivalents |
$ | 677 | $ | (19,157 | ) | |||
For the six months ended June 30, 2010, net cash provided by operating activities increased $22.9 million compared to the six months ended June 30, 2009. The increase is primarily a function of a $4.7 million increase in the recognition of unearned revenue due to the timing of extended life directories in 2009, a $16.9 million increase in accounts payable, accrued liabilities and other due to the timing of payment of such amounts and a $10.1 million in due to/from affiliates and normal fluctuations in our other working capital accounts, and partially offset by a $10.4 million decrease in depreciation and amortization expense.
For the six months ended June 31, 2010, net cash used in investing activities decreased $1.1 million compared to the six months ended June 30, 2009. The decrease is primarily related to a $1.9 million decrease in acquisition of property and equipment partially offset by $0.8 million in proceeds on the sale of equipment for the six months ended June 30, 2009.
For the six months ended June 30, 2010, net cash used in financing activities increased $4.2 million compared to the six months ended June 30, 2009. The increase is primarily a function of the payment of $10.0 million in dividends which were ultimately distributed to Local Insight Media Holdings III, Inc., and partially offset by an increase of $6.0 million of net proceeds from our Revolver during the six months ended June 30, 2010.
Prior Credit Facilities
To finance the Split-Off and related fees and expenses, we entered into an $86.0 million credit facility on November 30, 2007, including a $20.0 million revolving line of credit, and issued $210.5 million aggregate principal amount of 11% Senior Subordinated Notes due November 30, 2017 (the Notes). Effective April 23, 2008, we refinanced the $86.0 million credit facility through our current Credit Facilities, which were used in part to finance the Berry ILOB acquisition. See the section below entitled Senior Secured Credit Facilities for a description of our Credit Facilities.
The Regatta Exchange Notes
We issued the Notes in conjunction with the Split-Off. In November 2008, we completed an offer to exchange all the Notes for the Regatta Exchange Notes. The terms of the Regatta Exchange Notes are identical in all material respects to the Notes, except that the Regatta Exchange Notes have been registered under the Securities Act of 1933, as amended, on a registration statement that was declared effective by the SEC on October 10, 2008. The Regatta Exchange Notes are redeemable, at our option, in full or in part after December 1, 2012.
The Regatta Exchange Notes are unsecured and subordinated in right of payment to all existing and future secured indebtedness of Regatta Holdings and its subsidiaries, including to our current Credit Facilities. In addition, our current and future domestic subsidiaries have unconditionally guaranteed our obligations under the Regatta Exchange Notes on a senior subordinated unsecured basis, and the guarantees are subordinated in right of payment to the existing and future senior indebtedness of each guarantor, including obligations under our current Credit Facilities.
We are obligated to make interest payments on the Regatta Exchange Notes in June and December of each year. On or after December 1, 2012, we may redeem all or a part of the Regatta Exchange Notes upon not less than 30 nor more than 60 days notice, at redemption prices that vary from 105.5% of the principal amount if redeemed during the 12-month period beginning December 1, 2012 to 100% of the principal amount if redeemed on or after December 1, 2015, plus accrued and unpaid interest on the notes redeemed, to the applicable redemption date. In addition, in connection with certain changes in control of Regatta Holdings, we have certain obligations to offer to repurchase all or any Regatta Exchange Notes that we have not elected to redeem from each holder at a price equal to 101% of the aggregate principal amount of notes repurchased, plus accrued and unpaid interest on the notes repurchased, to the date of purchase.
The Regatta Exchange Notes are subject to certain financial and non-financial covenants, including: restrictions on our ability to pay dividends and make other payments to restricted parties; limitations on incurring additional debt or liens; restrictions on our ability to merge or consolidate with another entity or sell all or substantially all of our assets; limitations on our ability to engage in transactions with our affiliates; and certain other limitations on the business.
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The continued effects of the economic downturn, our declining revenue and our continued expenditures in connection with the rollout of Berry Leads, our new business model, have increased pressure on our ability to maintain compliance with the covenants in the indenture governing the Regatta Exchange Notes during 2010 and beyond. See Liquidity and Capital Resources above for information regarding the likelihood that we will breach the financial covenants under our Credit Facilities at September 30, 2010 and December 31, 2010 and the consequences of noncompliance with these covenants.
Senior Secured Credit Facilities
Concurrently with the consummation of the Berry ILOB acquisition, we entered into the Credit Facilities provided by JPMorgan Chase Bank, N.A. The Credit Facilities refinanced our previous senior secured credit facility with Wachovia Bank, N.A. that provided for a revolving credit facility of up to $20.0 million and a term loan facility of $66.0 million. The Credit Facilities provide for a $335.0 million Term Loan and a $30.0 million Revolver. The Revolver also provides for the issuance of letters of credit. We borrowed the entire $335.0 million Term Loan at the closing of the acquisition of the Berry ILOB to fund that transaction, to pay fees and expenses incurred in connection with the Berry ILOB acquisition and to repay in full all amounts owing under our prior senior secured credit facilities. At the closing of the Berry ILOB acquisition, we also borrowed $20.0 million under the Revolver to fund certain additional fees and expenses in connection with the Berry ILOB acquisition. On September 30, 2008, $13.6 million was drawn under the Revolver to ensure we have access to the funds given the uncertain condition of the financial markets. As of the date of this report, approximately $3.8 million is available for borrowing under the Revolver and may be used for working capital and general corporate purposes. However, this amount represents the unfunded revolving loan commitment of Woodlands Commercial Bank (formerly known as Lehman Brothers Commercial Bank) under the Revolver. The parent company of Woodlands Commercial Bank has filed for bankruptcy protection; we therefore believe this amount will be unavailable under the Revolver. The Term Loan is scheduled to mature on April 23, 2015 and the Revolver is scheduled to mature on April 23, 2014.
In general, borrowings under the Credit Facilities bear interest, at our option, at either the LIBOR rate or a base rate, in each case plus an applicable margin. The LIBOR loans and base rate loans outstanding in excess of 30 days are subject to minimum rates of 3.75% and 4.75%, respectively. The rate of interest under the Term Loan is LIBOR plus 4% or base rate plus 3%. The effective interest rate for the six months ended June 30, 2010 was 7.1%. The applicable margin of the Revolver is based on a pricing grid that is adjusted periodically based on our consolidated leverage ratio. We are also required to pay a commitment fee to the lenders in respect of the unutilized revolving commitments of 0.5% per annum (adjusted periodically based on our consolidated leverage ratio). We can prepay all or any portion of the outstanding borrowings under the Credit Facilities at any time without premium or penalty (other than customary breakage costs in the case of LIBOR loans). Payments of principal under the Credit Facilities are generally due quarterly. The Credit Facilities also require us to prepay outstanding borrowings thereunder with up to 75% of our annual excess cash flow, 100% of the net cash proceeds of certain asset sales or other dispositions of property (including casualty insurance and condemnations) not reinvested in the business, and 100% of the net cash proceeds of any issuance or incurrence of debt, other than specified permitted debt. On April 7, 2010, we made a mandatory principal prepayment of $11.3 million under our Credit Facilities as a result of our excess cash flow for the year ended December 31, 2009. As a result of such prepayment, the next regularly scheduled principal repayment under our Credit Facilities is now due on June 30, 2013. Our current portion of long-term debt comprises an estimate of $11.3 million for the 2010 annual excess cash flow principal payment which is expected to be paid within the next 12 months.
Subject to certain exceptions, our obligations under the Credit Facilities are unconditionally and irrevocably guaranteed by existing and future domestic subsidiaries and are secured by first priority security interests in, and mortgages on, substantially all the assets of our company and each subsidiary guarantor, including a first priority pledge of all the equity interests held by us and each domestic subsidiary guarantor and 65% of the equity interests of any subsidiary guarantor that is a direct first tier foreign entity.
The Credit Facilities contain a number of covenants that, among other things and subject to certain exceptions, identify certain events of default and restrictive covenants which are customary with respect to these types of facilities, including limitations on the incurrence of additional indebtedness, capital expenditures, investments, dividends, repurchases of capital stock and subordinated indebtedness, sales of assets, liens, acquisitions, mergers and transactions with affiliates. In addition, the Credit Facilities require compliance with financial and operating covenants. For the period July 1, 2009 through June 30, 2010, the minimum consolidated interest coverage ratio (i.e., the ratio of consolidated EBITDA to consolidated interest expense) was 1.75 to 1, the maximum consolidated leverage ratio (i.e., the ratio of consolidated total debt to consolidated EBITDA) was 6.00 to 1 and the maximum consolidated senior secured debt ratio (i.e., the ratio of consolidated senior secured debt to consolidated EBITDA) was 3.75 to 1. As defined in the agreement, at June 30, 2010, we had a consolidated interest coverage ratio of 1.93 to 1, a consolidated leverage ratio of 5.87 to 1 and a consolidated senior secured debt ratio of 3.55 to 1.
The financial covenants contained in our Credit Facilities will become more stringent for the period July 1, 2010 through June 30, 2011 (as compared to the preceding 12-month period). For the period July 1, 2010 through June 30, 2011, the minimum consolidated interest coverage ratio will be 1.85 to 1, the maximum consolidated leverage ratio will be 5.75 to 1 and the maximum consolidated senior secured debt ratio will be 3.25 to 1.
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The continued effects of the economic downturn, our declining revenue and our continued expenditures in connection with the rollout of Berry Leads, our new business model, have increased pressure on our ability to maintain compliance with our financial covenants during 2010 and beyond. This pressure has further increased because, as required by the terms of our Credit Facilities, the financial covenants contained in our Credit Facilities will become more stringent for the period July 1, 2010 through June 30, 2011 (as compared to the preceding 12-month period). We will be required to meet these more stringent covenants starting with the quarter ending September 30, 2010. As a result of these factors, it is likely that at September 30, 2010, we will: (i) exceed the maximum allowable consolidated leverage ratio and the maximum allowable consolidated senior secured debt ratio under our Credit Facilities and (ii) fail to meet the minimum consolidated interest coverage ratio under our Credit Facilities. We will likely breach the same covenants at December 31, 2010. We may be unable to remain compliant with these same covenants thereafter. See Liquidity and Capital Resources above for additional information regarding the likelihood that we will breach the financial covenants under our Credit Facilities at September 30, 2010 and December 31, 2010 and the consequences of noncompliance with these covenants.
Noncompliance with the financial covenants in our Credit Facilities constitutes an event of default under our Credit Facility. Upon such an event of default under our Credit Facilities, all amounts owing under our Credit Facilities may be declared to be immediately due and payable. In addition, upon an event of default we would no longer be entitled to draw upon our Revolver. In the event that noncompliance with these financial covenants results in an acceleration of our obligations under the Credit Facilities, the trustee under the indenture governing the Regatta Exchange Notes or holders of 25% of aggregate principal amount of the outstanding Regatta Exchange Notes may declare all of the Regatta Exchange Notes due and payable; provided, however, that such declaration of acceleration of the Regatta Exchange Notes shall be automatically annulled if the events of default under the Credit Facilities are remedied or cured by the Company or waived by the required number of lenders under our Credit Facilities within 30 days after the declaration of acceleration of our obligations under the Credit Facilities and if (a) the annulment of the acceleration of the Regatta Exchange Notes would not conflict with any judgment or decree of a court of competent jurisdiction and (b) all existing events of default under the indenture governing the Regatta Exchange Notes, except nonpayment of principal, premium or interest on the Regatta Exchange Notes that became due solely because of the acceleration of the Regatta Exchange Notes, have been cured or waived.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations
For a summary of our contractual obligations and commitments as of December 31, 2009, please refer to Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations Contractual Obligations in our Annual Report on Form 10-K for the year ended December 31, 2009. There were no significant changes in our contractual obligations during the six months ended June 30, 2010.
Recent Accounting Pronouncements
In 2009, the FASB issued guidance that modifies the fair value requirements of revenue recognition associated with multiple element arrangements by allowing the use of the best estimate of selling price in addition to Vendor Specific Objective Evidence (VSOE) and third party evidence (TPE) for determining the selling price of a deliverable. A vendor is now required to use it best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted. This guidance will be effective for us prospectively for revenue arrangements entered into or materially modified beginning January 1, 2011. Early adoption is permitted. We are in the process of assessing the impact this standard will have on our condensed consolidated financial statements.
In 2009, accounting standards were issued that amend previous derecognition standards related to transfers and servicing of financial assets and extinguishments of liabilities. The standards were effective January 1, 2010. The adoption of these standards did not have a material impact on our condensed consolidated financial statements.
In 2009, accounting standards were issued that amend the consolidation guidance applicable to variable interest entities. The standards were effective January 1, 2010. The adoption of these standards did not have a material impact on our condensed consolidated financial statements.
In 2010, the FASB issued accounting standards that improve disclosures originally required under fair value measurements standards. These standards were effective January 1, 2010 except for the disclosures related to purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. These disclosures are effective in 2011, and for interim periods within those years for the first reporting period (including interim periods) in 2010, except for the requirement to provide the Level 3 activity of purchases, sales, issuances and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010 (including interim periods within those fiscal years). The adoption of these standards did not have a material impact on our condensed consolidated financial statements.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Because we do not hold significant investments in marketable equity securities, we are not subject to material market risk from changes in marketable equity security prices. In addition, because we do not have business operations in foreign countries, we are not subject to foreign currency exchange rate risk.
Our borrowings under our Credit Facilities are floating and therefore subject to interest rate risk. In general, borrowings under our Credit Facilities bear interest, at our option, at either the LIBOR rate or Base Rate, in each case plus an applicable margin. The LIBOR loans and Base Rate loans outstanding in excess of 30 days are subject to minimum rates of 3.75% and 4.75%, respectively.
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The rate of interest under the Term Loan and the rate under the Revolver is LIBOR plus 4% or Base Rate plus 3% for loans outstanding in excess of 30 days. The applicable margin of the Revolver is based on a pricing grid that is adjusted periodically based on our consolidated leverage ratio. The effective interest rate for our variable rate debt outstanding for the six months ended June 30, 2010 was approximately 7.1%. Our indebtedness under the Regatta Exchange Notes is fixed and the effective interest rate on the outstanding notes was 11.0% for the six months ended June 30, 2010. A 0.125% increase or decrease in the variable interest rate applicable to our indebtedness outstanding under the Credit Facilities would currently have no significant impact on our annual interest expense and net income. We are not currently a party to any interest rate swaps or other instruments to hedge interest rates.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The certifications of our principal executive officer and principal financial officer required in accordance with Rule 13a-14(a) promulgated under the Exchange Act and Section 302 of the Sarbanes-Oxley Act are attached as exhibits to this report. The disclosures set forth in this Item 4 contain information concerning the evaluation of our disclosure controls and procedures, and changes in internal control over financial reporting, referred to in paragraph 4 of the certifications. Those certifications should be read in conjunction with this Item 4 for a more complete understanding of the matters covered by the certifications.
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on managements evaluation of the effectiveness of our disclosure controls and procedures, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Inherent Limitations
Disclosure controls and procedures involve processes that entail human diligence and compliance and are subject to lapses in judgment and breakdowns resulting from human failures. As a result, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the three months ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
OTHER INFORMATION
Item 1. | Legal Proceedings |
Various lawsuits and other claims that are ordinary and routine for a business of our size and nature are pending against us, and we may be involved in future claims and legal proceedings incident to the conduct of our business. In some of these matters, plaintiffs allege that they have suffered damages from errors or omissions in their advertising or improper listings, in each case, contained in directories published by us. We are also exposed to claims relating to our extension from time to time of the 12-month publication life of certain of our print directories (although our standard terms and conditions specifically allow such extensions) and to defamation and breach of privacy claims arising from our publication of directories and our methods of collecting, processing and using personal data.
In March 2010, a complaint was filed against CBD Media, an affiliate and customer of ours, relating to CBD Medias decision to extend by three months the 12-month publication life of the 2008/2009 editions of its print directories in the Cincinnati metropolitan area. Such lawsuit was brought as a putative class action on behalf of all businesses and persons that bought advertising in the directories in question. No class has been certified in this matter. In May 2010, the plaintiff filed a motion to add The Berry Company as a defendant in this lawsuit. In July 2010, the United States District Court for the Southern District of Ohio, Western Division, denied the plaintiffs motion to add The Berry Company as a defendant in the lawsuit and dismissed the plaintiffs complaint with prejudice. In August 2010, the plaintiff filed a notice of appeal with respect to the courts decision. CBD Media and the Company believe this lawsuit has no merit, and they intend to continue to defend this action vigorously.
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The subjects of our data and users of data that we collect and publish could have claims against us if such data were found to be inaccurate, or if personal data stored by us were improperly accessed and disseminated by unauthorized persons. Although to date we have not had notice of any material claims relating to defamation or breach of privacy claims, we may be party to litigation matters that could adversely affect our business.
In addition, from time to time we receive communications from government or regulatory agencies concerning investigations or allegations of noncompliance with laws or regulations in jurisdictions in which we operate. Any potential judgments, fines or penalties relating to these matters, however, may have a material effect on our results of operations in the period in which they are recognized.
Except as relates to the matter addressed in the immediately following paragraph, we believe, based on our review of the latest information available, that our ultimate liability in connection with pending or threatened legal proceedings will not have a material adverse effect on our results of operations, cash flows or financial position.
In July 2010, a complaint was filed against a number of telecommunications and local search companies, including two with which we have a commercial relationship. The complaint alleges that the defendants local search websites infringe a patent held by the plaintiff. The local search websites of the two companies with which we have a commercial relationship are owned (in one case) or managed and hosted (in the other case) by us. We intend to assume these two companies defense in this matter and to indemnify them from and against any losses they may suffer as a result of this lawsuit. Given the early stage of this litigation, we have not been able to develop an assessment of our rights, of the merits of the plaintiffs claims or of our potential liability in this matter.
Item 1A. | Risk Factors |
The risk factors set forth below update and supplement those set forth in our Annual Report on Form 10-K for the year ended December 31, 2009 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.
It is likely we will breach the financial covenants under our Credit Facilities at September 30, 2010 and at December 31, 2010. We may be unable to remain compliant with these covenants thereafter.
The continued effects of the economic downturn, our declining revenue and our continued expenditures in connection with the rollout of Berry Leads, our new business model, have increased pressure on our ability to maintain compliance with our financial covenants during 2010 and beyond. This pressure has further increased because, as required by the terms of our Credit Facilities, the financial covenants contained in our Credit Facilities will become more stringent for the period July 1, 2010 through June 30, 2011 (as compared to the preceding 12-month period). We will be required to meet these more stringent covenants starting with the quarter ending September 30, 2010. As a result of these factors, it is likely that at September 30, 2010, we will: (i) exceed the maximum allowable consolidated leverage ratio (i.e., the ratio of consolidated total debt to consolidated EBITDA) and the maximum allowable consolidated senior secured debt ratio (i.e., the ratio of consolidated senior secured debt to consolidated EBITDA) under our Credit Facilities and (ii) fail to meet the minimum consolidated interest coverage ratio (i.e., the ratio of consolidated EBITDA to consolidated interest expense) under our Credit Facilities. We will likely breach the same covenants at December 31, 2010. We may be unable to remain compliant with these same covenants thereafter. We are evaluating various alternatives to address these covenant issues. We may not be successful in our efforts to address these covenant issues.
Noncompliance with the financial covenants in our Credit Facilities constitutes an event of default under our Credit Facility. Upon such an event of default under our Credit Facilities, all amounts owing under our Credit Facilities may be declared to be immediately due and payable. In addition, upon an event of default we would no longer be entitled to draw upon our Revolver. In the event that noncompliance with these financial covenants results in an acceleration of our obligations under the Credit Facilities, the trustee under the indenture governing the Regatta Exchange Notes or holders of 25% of aggregate principal amount of the outstanding Regatta Exchange Notes may declare all of the Regatta Exchange Notes due and payable; provided, however, that such declaration of acceleration of the Regatta Exchange Notes shall be automatically annulled if the events of default under the Credit Facilities are remedied or cured by the Company or waived by the required number of lenders under our Credit Facilities within 30 days after the declaration of acceleration of our obligations under the Credit Facilities and if (a) the annulment of the acceleration of the Regatta Exchange Notes would not conflict with any judgment or decree of a court of competent jurisdiction and (b) all existing events of default under the indenture governing the Regatta Exchange Notes, except nonpayment of principal, premium or interest on the Regatta Exchange Notes that became due solely because of the acceleration of the Regatta Exchange Notes, have been cured or waived.
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Should the amounts owing under the Credit Facilities or under the Regatta Exchange Notes be declared to be immediately due and payable, and the underlying circumstances giving rise to the acceleration are not cured or waived, we would not have sufficient liquidity to satisfy those obligations. We may not be able to obtain a waiver or amendment from our lenders under our Credit Facilities or the Regatta Exchange Notes so as to remain compliant with those covenants or avoid an acceleration of our obligations under the Credit Facilities or the Regatta Exchange Notes. Our inability to obtain a waiver or amendment, resulting in the amounts under the Credit Facilities or the Regatta Exchange Notes being declared due and payable immediately, could affect our ability to continue to exist as a going concern. Further, we may not be able to borrow additional funds if it becomes necessary or borrow at costs that are not higher or on more restrictive terms than our current indebtedness.
Our rights under existing agreements could be impaired as a result of bankruptcy proceedings brought by or against any of the parties to our LEC Customer agreements or certain third parties.
We are party to a publishing agreement and other commercial contracts with Windstream, and directory publishing agreements with CenturyTel, Inc. (CenturyTel), Frontier, ACS Media, CBD Media, HYP Media and other LEC Customers. If a bankruptcy case were to be commenced by or against any of these companies, it is possible that all or part of these agreements could be considered an executory contract and could therefore be subject to rejection by that party or by a trustee appointed in a bankruptcy case. In addition, protections for certain types of intellectual property licenses under the Bankruptcy Code are limited in scope and do not presently extend to trademarks. Accordingly, we could lose our rights to use the trademarks we license in connection with these agreements should we or the party from whom we license these rights become subject to a bankruptcy proceeding. If one or more of these agreements were rejected, the applicable agreement might not be specifically enforceable. The loss of any rights under our agreements with Windstream would have a material adverse effect on our business, financial condition and results of operations. The loss of any rights under any of our directory publishing agreements with CenturyTel, Frontier, ACS Media, CBD Media, HYP Media or our other LEC Customers could also materially harm our business, financial condition and results of operations.
In addition, ACS Media, CBD Media and HYP Media (which are affiliates of ours) are parties to publishing and other agreements with the LECs in the markets they serve (Alaska Communications Systems Group, Inc. in the case of ACS Media, Cincinnati Bell Telephone Company LLC in the case of CBD Media and Hawaiian Telcom, Inc. (HT) in the case of HYP Media). Substantially all the obligations of ACS Media, CBD Media and HYP Media under those publishing agreements are outsourced to us. If a bankruptcy case were commenced by or against any of these LEC Customers, it is possible that all or part of the publishing or other agreements with that LEC could be considered an executory contract and could therefore be subject to rejection by that LEC or a trustee appointed in a bankruptcy case. The loss by ACS Media, CBD Media or HYP Media of its rights under its publishing or other agreements with the relevant LEC could result in a decrease or cessation of payments to us under our directory service agreements with that company, which could have a material adverse effect on our business, financial condition and results of operations.
On December 1, 2008 Hawaiian Telcom Communications, Inc., or HTCI, its parent company, Hawaiian Telcom Holdco, Inc., and certain of its subsidiaries, including HT, or collectively, the (HT Debtors), filed voluntary petitions seeking reorganization relief under the provisions of Chapter 11 of the Bankruptcy Code. The bankruptcy court confirmed the HT Debtors reorganization plan on November 13, 2009, although the HT Debtors have not yet exited Chapter 11. The HT Debtors bankruptcy cases have resulted in the loss by HYP Media of its rights under one of its agreements with HT. In particular, the bankruptcy court granted the HT Debtors motion to reject the co-marketing agreement between HYP Media and HTCI. Under that agreement, HTCI had agreed to purchase from HYP Media, in the aggregate, at least $1.5 million of advertising and related services in 2009 and $1.4 million of advertising and related services during each year from 2010 through 2017. As a result of the rejection of the co-marketing agreement, HYP Media will not receive such amounts, which will result in a decrease of payments to us under our directory services agreement with HYP Media. In addition, recent economic conditions and the HT Debtors bankruptcy cases have caused us to experience increased collection costs and bad debt expense in Hawaii.
The HT Debtors bankruptcy cases could lead to the loss by HYP Media of its rights under certain other of its agreements with HT. This in turn could lead to a decrease or cessation of payments to us under our directory services agreement with HYP Media. To date, HT has not attempted to reject its publishing agreement with HYP Media and has not objected to HYP Medias characterization of that agreement as non-executory.
In December 2008, HT failed to make two payments to HYP Media, totaling approximately $3.6 million, under the billing and collection services agreement between HT and HYP Media. It is the position of HYP Media that HT is using artificial and inappropriate distinctions to justify its non-payment of the amounts due to HYP Media in December 2008, and HYP Media has filed a complaint against HT in the bankruptcy court seeking remittance of those amounts. HYP Media may not prevail in that litigation. While the payments due in December 2008 remain contested, HT resumed making payments to HYP Media under the billing and collection services agreement starting with the payments due in January 2009; such payments have continued through the date of this Quarterly Report on Form 10-Q.
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In April 2010, HYP Media, HT and HTs secured lenders informed the bankruptcy court of their agreement in principle to offset the $3.6 million owing from HT to HYP Media under the billing and collection services agreement against certain bad debt true-up amounts owing from HYP Media to HT with respect to the twelve month periods ended November 30, 2009 and 2008. The agreement to offset such amounts has not yet been formalized; failure to formalize and implement that agreement could adversely affect HYPs, and our, business, financial condition and results of operations.
In May 2010, the term of the billing and collection services agreement between HT and HYP Media was amended to extend its term to June 30, 2010. In June 2010, the billing and collection services agreement was amended to extend its term to May 31, 2013, with HYP having the right, in the exercise of its discretion, to further extend the term to May 31, 2014. HT has informed us that it intends to remove the billing and collection services agreement from the list of executory contract that HT will reject upon its emergence from bankruptcy.
The HT Debtors bankruptcy cases could therefore have a material adverse effect on our business, financial condition and results of operations.
The loss of any of our key LEC Customer agreements could adversely affect our business.
In connection with the Split-Off, we entered into several agreements with Windstream, including a publishing agreement that expires on November 30, 2057. Under the publishing agreement, Windstream, among other things, appointed us the exclusive official publisher of Windstream-branded print directories in the Windstream Service Areas. In connection with the Berry ILOB acquisition, we assumed L.M. Berrys directory service contracts with its LEC Customers, including CenturyTel, Frontier, ACS Media, CBD Media and HYP Media.
Each of these agreements may be terminated prior to its stated term under specified circumstances, some of which are beyond our reasonable control. In addition, we could be required, under these circumstances, to undertake extraordinary efforts or incur material excess costs in order to avoid termination of one or-more of these agreements by the counterparty. The termination or nonrenewal of our publishing agreement with Windstream in accordance with its stated terms or otherwise, or the failure by Windstream to satisfy its obligations under the publishing agreement, could have a material adverse effect on our business, financial condition and results of operations.
In addition, the termination or nonrenewal of our agreements with CenturyTel, Frontier, ACS Media, CBD Media or HYP Media, or the failure by CenturyTel, Frontier, ACS Media, CBD Media or HYP Media to satisfy their obligations under the agreements to which each is a party, would negatively impact our revenue and could materially harm our business, financial condition and results of operations. The term of our directory service agreement with CenturyTel continues through May 1, 2012 (subject to automatic renewals for successive one-year terms unless either party notifies the other of its decision not to so extend the term of that agreement). The term of our master publishing agreement with Frontier continues through December 31, 2010 (subject to an automatic one-year extension unless either party notifies the other of its decision not to so extend the term of that agreement). We have commenced negotiations with Frontier regarding a renewal of our directory publishing agreement with that company. These negotiations, which have been challenging from time to time, may not be successful. The term of our agreement with ACS Media continues through February 2011 (subject to automatic renewals for successive one-year terms unless either party notifies the other of its decision not to so extend the term of that agreement). The term of our agreement with CBD Media continues through November 30, 2010 (subject to automatic renewals for successive one-year terms unless either party notifies the other of its decision not to so extend the term of that agreement). The term of our agreement with HYP Media continues through the publication of HYP Medias Neighbor Islands directories in 2014 (subject to extension upon the mutual written agreement of the parties).
Our directory publishing agreement with TDS Telecom will expire upon the publication of all TDS directories published through December 31, 2010. TDS Telecom has informed us that they will not renew their directory agreement with us. We do not believe the non-renewal of our directory publishing agreement with TDS Telecom will have a material adverse effect on our business, financial condition or results of operations.
Our business, financial condition and results of operations could be adversely affected if we do not realize anticipated savings or efficiencies from our on-going cost optimization efforts, or if the parties to which we outsource certain functions fail to perform such functions at expected quality levels.
Since mid-2008, we have implemented a number of initiatives to reduce our costs. In connection with the acquisition of the Berry ILOB, we developed and implemented an integration and synergy plan, which included two reductions in force in 2008. Under the Synergy Plan, we started to outsource finished graphics work relating to our print directories to Macmillan India Ltd. (Macmillan). By the end of 2009, a majority of all finished graphics work relating to our print directories had been outsourced to Macmillan. As part of our on-going cost control efforts, we initiated additional reductions in force in April 2009 and August 2009, which were not part of the Synergy Plan. In addition, in January 2010 we initiated the 2010 Restructuring Plan, which is designed to enhance efficiency by reducing our cost base and aligning operations with our new business model. The 2010 Restructuring Plan involves a reduction of our employee base by a total of approximately 320 employees, primarily in the areas of operations; sales and field marketing; information technology; and marketing. The 2010 Restructuring Plan is expected to be completed by December 31, 2010. Additionally, other force reductions and facility closures may occur in the future.
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In June 2010, The Berry Company and CSID (an affiliate of ours) entered into an agreement, effective as of January 4, 2010, pursuant to which CSID agreed to provide service order processing, publishing, graphics, pagination, information technology, commission calculation and other services relating to our sales and marketing operations and the production of certain of our print and IYP directories. This agreement, which was entered into as part of our on-going cost control efforts, seeks to take advantage of lower labor and other costs in the Dominican Republic while still maintaining a high level of quality in the production services outsourced to CSID. In the course of implementing this agreement, CSID has encountered certain quality control and other issues relating to the performance of its services under the agreement, which has resulted in increased costs and some disruption to our operations. We and CSID are working actively to remedy these issues, although these efforts may not be successful. CSIDs failure to provide outsourced services to us at expected levels of quality could result in further disruption to our operations; could result in an increased level of claims and adjustments expense due to complaints from our advertising customers; could lead to increased costs as errors are remediated; could lead to an increase in bad debt expense; could damage the perceived value of our print directories; and could have a negative impact on The Berry Companys relationships with its LEC Customers. CSIDs failure to provide outsourced services to us at expected levels of quality could therefore have a material adverse effect on our business, financial condition and results of operations.
We continue to actively assess and pursue opportunities to reduce costs through measures such as outsourcing, Lean process engineering and other cost-cutting measures. If we are unsuccessful in achieving the savings or efficiencies that are expected to result from our cost optimization efforts, or if the parties to which we outsource certain functions fail to perform such functions at expected quality levels, our business, financial condition and results of operations could be adversely affected.
Our conversion to the 3L software platform and our integration of information technology systems is complicated, has been more time consuming and expensive than originally anticipated and has resulted in some disruption to (and may continue to disrupt) our operations.
We are in the process of migrating from our legacy process management, billing and collection and production systems to the 3L Media AB, or 3L, software platform. The conversion to the 3L software platform is complicated and is expected to be fully completed by the first quarter of 2011. In addition, we are in the process of integrating and changing information technology systems and processes. The conversion and integration process has been, and may continue to be, more time-consuming and expensive than originally anticipated. Our systems do not yet fully support certain planned sales execution and other processes designed for Berry Leads, our new business model, which has affected the rollout of Berry Leads and the efficiency of the Berry Leads sales process. Continued failure to successfully operationalize such sales execution and other processes could have an adverse effect on the implementation of Berry Leads. During the conversion and integration process, we have experienced some disruption (and may continue to experience disruption) to our operations. The conversion and integration process may also affect our ability to fully bill and/or collect from our clients and could harm our client relations, reputation and business. In addition, we may not be able to realize the anticipated cost savings as result of our conversion to the 3L software platform and our integration of information technology systems and processes. Failure to successfully convert to the 3L software platform or to integrate our information technology systems and processes could have a material adverse effect on our business, financial condition and results of operations.
Litigation could harm our business.
Various lawsuits and other claims typical for a business of our size and nature are pending against us or may be threatened against us from time to time. In some of these matters, plaintiffs allege that they have suffered damages from errors or omissions in their advertising or improper listings, in each case, contained in directories published by us. We are also exposed to claims relating to our extension from time to time of the 12-month publication life of certain of our print directories (although our standard terms and conditions specifically allow such extensions) and to defamation, breach of privacy claims and other litigation matters relating to our business, as well as methods of collection, processing and use of personal data.
In March 2010, a complaint was filed against CBD Media, an affiliate and customer of ours, relating to CBD Medias decision to extend by three months the 12-month publication life of the 2008/2009 editions of its print directories in the Cincinnati metropolitan area. Such lawsuit was brought as a putative class action on behalf of all businesses and persons that bought advertising in the directories in question. No class has been certified in this matter. In May 2010, the plaintiff filed a motion to add The Berry Company as a defendant in this lawsuit. In July 2010, the United States District Court for the Southern District of Ohio, Western Division, denied the plaintiffs motion to add The Berry Company as a defendant in the lawsuit and dismissed the plaintiffs complaint with prejudice. In August 2010, the plaintiff filed a notice of appeal with respect to the courts decision. CBD Media and the Company believe this lawsuit has no merit, and they intend to continue to defend this action vigorously.
The subjects of our data collection and users of the data collected and processed by us could also have claims against us if our data were found to be inaccurate, or if personal data stored by us were improperly accessed and disseminated by unauthorized persons. The defense of these claims and an adverse outcome of any such lawsuit could be costly, could harm our reputation with our clients and otherwise divert the attention of our management.
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In addition, from time to time we receive communications from government or regulatory agencies concerning investigations or allegations of noncompliance with laws or regulations in jurisdictions in which we operate. Any potential judgments, fines or penalties relating to these matters may harm our results of operations in the period in which they are recognized.
Except as relates to the matter addressed in the following paragraph, we believe, based on our review of the latest information available, that our ultimate liability in connection with pending or threatened legal proceedings will not have a material adverse effect on our results of operations, cash flows or financial position.
In July 2010, a complaint was filed against a number of telecommunications and local search companies, including two with which we have a commercial relationship. The complaint alleges that the defendants local search websites infringe a patent held by the plaintiff. The local search websites of the two companies with which we have a commercial relationship are owned (in one case) or managed and hosted (in the other case) by us. We intend to assume these two companies defense in this matter and to indemnify them from and against any losses they may suffer as a result of this lawsuit. Given the early stage of this litigation, we have not been able to develop an assessment of our rights, of the merits of the plaintiffs claims or of our potential liability in this matter.
Item 6. | Exhibits |
Exhibit No. |
Description | |
10.1 | Second Amendment to Employment Agreement, dated January 2, 2007, by and between Scott A. Pomeroy and Local Insight Media, LLC.* | |
10.2 | Second Amendment to Employment Agreement, dated January 2, 2007, by and between Linda A. Martin and Local Insight Media, LLC.* | |
10.3 | Second Amendment to Employment Agreement, dated January 2, 2007, by and between Richard L. Shaum, Jr. and Local Insight Media, LLC.* | |
10.4 | Second Amendment to Employment Agreement, dated January 2, 2007, by and between Marilyn B. Neal and Local Insight Media, LLC.* | |
10.5 | Second Amendment to Employment Agreement, dated January 2, 2007, by and between John S. Fischer and Local Insight Media, LLC. (1)* | |
31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002. | |
31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002. | |
32.1 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
* | Represents management contract or compensatory plan. |
(1) | Incorporated by reference to our Current Report on Form 8-K filed on July 26, 2010. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant, Local Insight Regatta Holdings, Inc., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LOCAL INSIGHT REGATTA HOLDINGS, INC. | ||||||||
Date: August 16, 2010 | By: | /s/ Scott A. Pomeroy | ||||||
Name: | Scott A. Pomeroy | |||||||
Title: | President and Chief Executive Officer (Principal Executive Officer) | |||||||
Date: August 16, 2010 | By: | /s/ Richard C. Jenkins | ||||||
Name: | Richard C. Jenkins | |||||||
Title: | Interim Chief Financial Officer (Principal Financial Officer) |
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EXHIBIT INDEX
Exhibit No. |
Description | |
10.1 | Second Amendment to Employment Agreement, dated January 2, 2007, by and between Scott A. Pomeroy and Local Insight Media, LLC.* | |
10.2 | Second Amendment to Employment Agreement, dated January 2, 2007, by and between Linda A. Martin and Local Insight Media, LLC.* | |
10.3 | Second Amendment to Employment Agreement, dated January 2, 2007, by and between Richard L. Shaum, Jr. and Local Insight Media, LLC.* | |
10.4 | Second Amendment to Employment Agreement, dated January 2, 2007, by and between Marilyn B. Neal and Local Insight Media, LLC.* | |
10.5 | Second Amendment to Employment Agreement, dated January 2, 2007, by and between John S. Fischer and Local Insight Media, LLC. (1)* | |
31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002. | |
31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002. | |
32.1 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
* | Represents management contract or compensatory plan. |
(1) | Incorporated by reference to our Current Report on Form 8-K filed on July 26, 2010. |
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